Executive Summary

RISK RETURN ANALYSIS ON MUTUAL FUNDS

EXECUTIVE SUMMARY Primary investment objective of any individual or organisation is to maximize the returns E

and minimizing Market risk and Credit risk through diversifi d iversification cation

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Mutual Funds (MF) have become one of the most attractive ways for the average person to invest their money. It is said that Bank investment is the first priority of people to invest their savings and the second place is for investment in Mutual Funds and other avenues. A Mutual Fund pools resources from thousands of investors and then diversifies its investment into many different holdings such as stocks, bonds, or Government securities in order to provide high relative safety and returns.

C U T I V E S U M M

The Project is a ³FINANCE PROJECT´ which tries to explain in layman¶s language

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about the history, growth, & pros and cons of investing in Mutual Funds and the second part of it

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deals with the analysis of risk and returns of Equity(growth) , ICICI FMCG Fund, Prudential ICICI Technology Fund, Prudential ICICI Growth Plan, Prudential ICICI Tax Plan

The main objective of the project was to get an Overview of Mutual Fund Industry, its set up, its working and to find out the risks and returns of Equity, on various schemes available to customers.

The project includes a brief idea about the growth of MF industry (History), the broad idea about the organization and concept of MF and SEBI Guidelines on Mutual Funds.

There are many improvements pending in the field and it has to happen as soon as possible so as to call the MF industry as an organized and well-developed sector. The

past

performance of MF is not necessarily indicative of future performance of the scheme and no AMC guarantees returns and or safety of principal.

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Here I have done research on ³Mutual Funds´ by considering some equity funds of ICICI mutual funds.

Equity funds provide a better opportunity to achieve financial goals provides a person choose the right fund that matches the risk return profile. Mutual fund is a trust that pools the saving of a number of investors who share common financial goals. Indian Mutual fund industry offers a plethora of schemes and serves broad ly all types of investors.

STATEMENT OF PROBLEM

The problem identified here are, most of the people are unaware of mutual funds, and most of the people consider factors like safety, and returns while going for investments along with these another problem which is identified is peoples are not ready to take risk, they always concentrate on more returns with negligible risk.

OBJECTIVE OF THE STUDY

To find out the average returns, standard deviations and beta for each of selected funds. To calculate Sharpe index, Treynor index and Jensen index for selected funds. To rank the funds based on their performance

Duration of the Study

The study was conducted for a period of 6 weeks


Here I have done research on ³Mutual Funds´ by considering some equity funds of ICICI mutual funds.

Equity funds provide a better opportunity to achieve financial goals provides a person choose the right fund that matches the risk return profile. Mutual fund is a trust that pools the saving of a number of investors who share common financial goals. Indian Mutual fund industry offers a plethora of schemes and serves broad ly all types of investors.

STATEMENT OF PROBLEM

The problem identified here are, most of the people are unaware of mutual funds, and most of the people consider factors like safety, and returns while going for investments along with these another problem which is identified is peoples are not ready to take risk, they always concentrate on more returns with negligible risk.


To find out the average returns, standard deviations and beta for each of selected funds. To calculate Sharpe index, Treynor index and Jensen index for selected funds. To rank the funds based on their performance

Duration of the Study

The study was conducted for a period of 6 weeks


SOURCES OF DATA

Secondary Data

Secondary data was collected from various text books written by experts and data was

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obtained from Magazines and Websites. Websites. The data obtained here was analyzed by using the

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necessary tools and models.

E C U T

SCOPE OF THE STUDY

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The scope of the study is confined only to Prudential ICICI AMC Ltd. The scope is restricted to the extent of the information has been obtained. It helps the asset management company and also students to know the, which fund is performing per forming well in the market.

E S U M M

LIMITATIONS OF THE STUDY

A R Y

Time constraint made it impossible to go deep into the subject. This study considers only equity funds. This is a micro study confined to only ICICI mutual fund. The data has been collected from 2001 to 2007.

FINDINGS

When we compare all the funds, the Index fund has given best performance against benchmark from the last 5 financial years. When we compare all funds by using Sharpe¶s Index, Prudential ICICI Tax Plan, has performing well. Prudential ICICI Infrastructure fund has given low performance. When we compare all funds by using Treynor¶s index, FMCG fund performing well in the market, but Prudential ICICI Growth fund has given low performance. When we compare all funds by using Jenson¶s index, Prudential ICICI FMCG is performing well from the last 5 financial years, but Growth fund has given negative performance.


CONCLUSIONS

The research shows that Equity Funds are performing well, but the investments from investors are less in equity funds, because of unawareness about mutual funds. E

The low level of awareness among investors is the biggest problem to the expansion of

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the industry. Despite the best efforts by mutual funds, SEBI and AMFI and their distributor, the

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investor¶s base is below one percent of the population. Generally, investors react only when

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activity in equity markets reaches a crescendo.

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Therefore company has to take some steps to make aware people of Mutual Funds, through advertisements in Newspaper, Magazine, Commercial advertisement, distributing leaflets, Television, Radios.

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I V E S U

If we consider futures, its better to invest in equity funds, rather than investing in debt

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funds.

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SUGGESTIONS

Investors who able to wait for long time could look at value stocks, which consistently perform over a period of time. Hence, investors could choose in invest in value funds like the Prudential ICICI FMCG Fund. Investors should look at a mix of large and mid cap funds for 3-5 years horizon on systematic investment basis. With the long-term India growth story intact, remain invested in equity with a longer time horizon. In a fair value plus market, maintain a little less than neutral allocation towards equities.


INTRODUCTION A mutual fund industry, initially started with government initiative under UTI initiative under UTI, in 1988 UTI had Rs 6700 Crs of assets under management. In the second phase

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public sector MF entered the market at the end of 1993 the asset under management were RS

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47000 Crs today when put MF are also in operations assets under management stands at Rs

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121805 Crs.

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The prominent UTI scheme (US64) has failed due to following reasons:a) Invest by UTI into divergent sector. b) No proper risk analysis before and during investment period. c) Absence of information¶s to the general investor of US-64. d) No sectoral analysis of the areas in which US-64 fund are invested.

All these have caused the failure of US -64 and scheme has been bailed out by govt. This was possible because the assets under management were of small volume. With today¶s phenomenal growth, it will be disaster if risk analysis is not conduct ed well in advance. This gives importance to the study.

On the other hand, people like to take medium risks. To introduce and promote the various MUTUAL FUND schemes in the potential market risk analysis of this nature also helpful.

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INDUSTRY PROFILE

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases.

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First Phase ± 1964-87

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Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up

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by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial

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Development Bank of India (IDBI) took over the regulatory and administrative control in place

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of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

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Second Phase ± 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

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Third Phase ± 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except

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UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with

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Franklin Templeton) was the first private sector mutual fund reg istered in July 1993.

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The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and

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revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual

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Fund) Regulations 1996. P

The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As

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at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

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The Unit Trust of India with Rs.44,541 crores of assets.

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Fourth Phase ± since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual

RISK RETURN ANALYSIS ON MUTUAL FUNDS Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. I

The graph indicates the growth of assets over the years. ( Note: graph is drawn with unequal time intervals)

N D U S T R Y P R O F I L E


ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)

With the increase in Mutual Fund players in India, a need for Mutual Fund Association in

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India was generated to function as a non-profit organization. Association of Mutual Funds in

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India (AMFI) was incorporated on 22nd August 1995.

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AMFI is an apex body of all Asset Management Companies (AMC) which has been

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registered with Securities Exchange Board of India (SEBI). Till date all the AMCs are that have

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launched mutual fund schemes are its members. It functions under the supervision and guidelines

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of its Board of Directors. Association of Mutual Funds India has brought down the Indian

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Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and

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maintaining standards. It follows the principal of both protecting and promoting the interest of

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mutual funds as well as their unit holders. ho lders.

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The objectives of Association of Mutual Funds in India

The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows: 

This Mutual Fund Association of India maintains high professional and ethical standards in all areas of operation of the industry

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It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of Mutual Fund and Asset Management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association.

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AMFI interacts with SEBI and works according to SEBIs guidelines in the Mutual Fund industry.

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RISK RETURN ANALYSIS ON MUTUAL FUNDS 

Associations of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry.

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It develops a team of well qualified and trained Agent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry.

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AMFI undertakes all India awareness programme for investors in order to promote proper

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understanding of the concept and working of Mutual Funds.

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At last but not the least Association of Mutual Fund of India also disseminate information on Mutual Fund Industry and undertakes studies and research either directly or in association with other bodies.

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SEBI REGULATIONS ON MUTUAL FUNDS

O F

The Government brought Mutual Funds in the Securities market under the regulatory framework of the Securities and Exchange board of India (SEBI) in the year 1993. SEBI issued guidelines in the year 1991 and comprehensive set of regulations relating to the organization and management of Mutual Funds in 1993. SEBI REGULATIONS 1993 (20.1.1993)

The regulations bar Mutual Funds from options trading, short selling and carrying forward transactions in securities. The Mutual Funds have been permitted to invest only in transferable securities in the money and capital markets or any privately placed debentures or securities debt. Restrictions have also been placed on them to ensure that investments under an individual scheme, do not exceed five per cent and investment in all the schemes put together does not exceed 10 per cent of the corpus. Investments under all the schemes cannot exceed 15 per cent of the funds in the shares and debentures of a single company.

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RISK RETURN ANALYSIS ON MUTUAL FUNDS SEBI REGULATIONS, 1996

SEBI announced the amended Mutual Fund Regulations on December 9, 1996 covering Registration of Mutual Funds, Constitution and Management of Mutual funds and Operation of Trustees, Constitution and Management of Asset Management Companies (AMCs) and

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custodian schemes of MFs, investment objectives and valuation policies, general obligations,

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inspection and audit. The revision has been carried out with the objective of improving investor

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protection, imparting a greater degree of flexibility and promoting innovation.

U S T R Y P R O F I L E


COMPANY PROFILE INTRODUCTION:

Way2Wealth is a premier Investment Consultancy Firm, launched with the aim of making investing simpler, more understandable and profitable for the investors. Way2Wealth brings a wide range of product offerings from Equity and Derivatives (NSE), Fixed Income Securities, Insurance (Life & Non-Life), Mutual Funds to Portfolio Management Services

for the convenience and benefit of it customers. Way2Wealth today has over 60 easily accessible 'Investment Outlets' spread across 25 major towns and cities in India.

MISSION: ³To be the pre-eminent destination for personalised financial solutions helping individuals create wealth´.

PHILOSOPHY:

The company believe that ³our knowledge combined with our investors trust and involvement will lead to the growth of wealth and make it an exciting experience´.

HERITAGE:

Sivan Securities started in 1984, has a long and illustrious track record of being amongst the premier Financial Intermediaries in the country as well as being an incubator for IT start-up firms. The Venture Capital division came to be known as 'Global Technology Ventures -GTV' and the Financial Intermediary Division was spun off as 'Way2Wealth' in the year 2000. Way2Wealth is promoted by Sivan Securities and Global Technology Ventures Ltd. Over the years, Sivan has developed a strong reputation for navigating its investors through all the ups and downs in the market. Way2Wealth has inherited these same values in addition to a base of 100,000 individual customers, over 500 corporate/institutional clients.

C O M P A N Y

P R O F I L E


GROUP COMPANIES:

1. Global Technology Ventures - GTV, has provided venture capital to companies such as Kshema Technologies, MindTree, Ivega etc.

2. Amalgamated Bean Coffee Trading Company Ltd. - (ABCTCL), India¶s largest coffee conglomerate and coffee exporter, pioneering India¶s first concept cafe's 'Cafe Coffee Day', a chain of youth hangout coffee parlors. From a handful of cafe's in six cites in the first 5 years, 'Cafe Coffee Day' has today become India's largest and premier retail chain of cafes with 483

C O M P A N Y

cafes in 84 cities around the country. Way2Wealth has a very credible management team, who have well over 100 man-years of experience amongst themselves. MANAGEMENT:

1. Mr. V.G. Siddhartha- Chairman 2. Mr. Shashibhushan - Chief Executive Officer 3. Mr. Sunil Ramrakhiani - Chief Operating Officer 4. Mr. C.K. Nithyanand - Head Operations and Back office 5. Mr. Ketan Sheth ± Director 6. Mr. Kamal Manchanda ± Regional Director

UNIQUE INVESTMENT OUTLETS:

A B-Tech graduate in Chemical Engineering from IIT ± Delhi. He has been with Way2Wealth since June 2000. Has rich and varied experience in the Capital Markets since 1984. He was previously the Director of Sahil Securities Ltd. He has extensive experience in the real estate business. Currently, he is the director of technical research and also spearheading way2wealth's expansion in the North. Easily visible branches set up in the commercial spaces of potential investment zones ranging between 750sft to 1000sft.

P R O F I L E

RISK RETURN ANALYSIS ON MUTUAL FUNDS 

Most branches are located in the ground floor sporting huge glass frontage promoting easy accessibility and reflecting our attitude of comp lete transparency.

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The major portion of the branch area dedicated for customer use. The furniture is in CKD formats to add flexibility in using the branch for Investors purposes.

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Connectivity to NSE for trading facilities.

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TV and other electronic mediums to facilitate real time update and dissemination of information to our customers.

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Each branch comprises of trained and qualified Investment advisors to take care of the needs of the customers.

THE WAY2WEALTH RESEARCH DESK:

C O M P A N Y

Research is at the core of our advice. We believe that sound investment decisions are made on sound analysis of facts, past performance and credible market information. Our research cell focuses on providing data and analysis to help customers make sound investment dec isions.

The Research cell is managed by a highly qualified team that is handpicked and trained extensively in the proprietary Way2Wealth Investment Philosophy centered on finding the best investment solutions for our customers. Based in the co mmercial capital enables the team to have a pulse of the trends allowing dissemination of the most up-to-date and latest information.

THE WAY2WEALTH PLANNER- YOUR PERSONNEL INVESTMENTGUIDE:

Every investor has unique needs. So we have created a wide range of services, where you will always find exactly what you are looking for. Aiding you in this effort is the quintessential Way2Wealth Investment Planner. These hand-selected planners are made up of professionals with the expertise and experience to meet your unique financial needs. These financial planners reflect our commitment to provide financial advice based solely on your objectives without traditional conflicts of interest. When investor chooses a planner from the Way2Wealth network, investor will get professional help in the following areas: -

P R O F I L E

RISK RETURN ANALYSIS ON MUTUAL FUNDS 

Personalized Investment plan for your short term, medium term and long term goals.

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Expert advice on Investment products ranging from the Fixed Return Investments and Life Insurance to the highly volatile Shares and Derivatives.

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Avail Tax saving, Retirement planning and VRS investment services.

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Facilitate Equity and Derivative trading on the National Stock Exchange.

 Make investments in Initial Public offerings (IPO) of Companies, Mutual funds and

Government of India/Infrastructure Bonds.

They also have a specialized team catering to the distinct needs of our Corporate and Institutional clients out of our five regional offices.

C O M P A N Y

THE WAY2WEALTH ADVANTAGE:

1. Personalized Investment Solutions: All our customers receive individual attention. 2. Full choice of Investments: Mutual funds, Life Insurance, Fixed Income Instruments, Equity and Derivatives. 3. Unbiased advice: We do not have any products of our own. 4. Processing support: We take care of all your paper work and provide service at your doorstep. 5. Investor eligibility criteria: Customers with a minimum investment amount as low as Rs. 2500 per month can avail of our services. This unique Way2Wealth concept can be easily experienced through the innovative and customer friendly network of Investment outlets that spans 20 major towns and cities in the country. In addition to the national branch infrastructure, Way2Wealth also has an online presence (http://www.way2wealth.com/) to enhance its value pro position to its customers.

P R O F I L E


UNDERSTAND LOGO:

The word ³Way´ brings focus to the mind. It gives direction. ³Wealth´ denotes stability, discipline and long term.

Blue symbolizes knowledge. We are in a knowledge industry. Knowledge is limitless, so

C O M P A N Y

it is the sky and sea, both of which are in blue colour. Knowledge applied leads to creation of wealth for our investors. Hence the colour blue for knowledge. Red symbolises Trust. Red is the colour of the blood and heart. Trust is the matter of heart. Our knowledge bears fruit only when the investor places his Trust in us.

Yellow symbolises Excitement and also the involvement of the investor. Yellow is a vibrant colour, which evokes feelings of excitement. We strive to make investing an exciting and involving experience for our investors.

Green symbolizes Growth. Growth in Nature is visible in the form of plants and trees; all of which are green. Knowledge, Trust and Excitement should not ultimately lead to Growth of the investors¶ wealth. Hence, the colour of Green has been chosen for Growth.

The logo reflects their philosophy: ³Our knowledge combined with your trust and involvement will lead to growth of the wealth and make it an exciting experience´.

P R O F I L E


DESIGN OF THE STUDY STATEMENT OF THE PROBLEM

D E S

Banks have gone bankrupt because of mismanagement of assets by its management; people have lost faith in private banks. Most of the government employees prefer safer mode of

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investing even though they get fewer returns on investments. They prefer to invest in products having medium returns but with negligible risk.

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y To find out the average returns, standard deviations and beta for each of selected funds. y To calculate Sharpe index, Treynor index and Jensen index for selected funds. y To rank the funds based on their performance RESEARCH METHODOLOGY

A research design is a plan of action to be carried out in connection with a research project. The research design, which was carried out for the study, was descriptive study. It involves the collection of data from both the sources viz. Secondary sources.

The data so

collected was subjected to analysis by using the necessary tools that are relevant and idealistic.

Data Sources

Secondary Data

Secondary data was collected from various textbooks written by experts and data was obtained from various Magazines and Websites. The data obtained here was analyzed by using

D Y

RISK RETURN ANALYSIS ON MUTUAL FUNDS the necessary tools (Co-Variance, Variance, Standard Deviation, Beta and alpha) and models (Sharpe¶s index, Treynor¶s index, Jensen¶s index).

SCOPE OF THE STUDY

D E S

y The scope of the study is confined only to Prudential ICICI AMC Ltd.

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y The scope is restricted to the extent o f the information has been obtained.

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y It helps the asset management company and also students to know the, which fund is performing well in the market.

y The Sharpe, Treynor, and Jensen measures are used to compare the performance of equity funds.

y The study considered for six months NAV, half yearly for the period of five years.

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O F S T U D Y

LIMITATION OF THE STUDY

y

Time constraint made it impossible to go deep into the subject.

y

This study considers only equity funds.

y

This is a micro study confined to only ICICI mutual funds

y

The data has been collected from 2002 to 2007.

y

The study used Sharpe, Treynor and Jensen¶s index calculation of various equity funds returns.

y

Only the four digits have been considered after the decimal point.


THEORETICAL OVERVIEW Mutual Funds - The Concept

T H

A Mutual Fund is a trust that pools the savings of a number of investors who share a

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common financial goal. The money thus collected is then invested in capital market instruments

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such as shares, debentures and other securities. The income earned through these investments

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W and

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the capital appreciations realized are shared by its unit holders in proportion to the number

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of units owned by them. Thus a Mutual Fund is the most suitable investment for the common

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man as it offers an opportunity to invest in a diversified, professionally managed basket of

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securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

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The following simple diagram clearly shows the working of a mutual fund:

E R V I E

Sponsor

The sponsor of a mutual fund is like the promoter of a company. The sponsor may be a bank, a financial institution, or a financial services company. It may be Indian or foreign. The

RISK RETURN ANALYSIS ON MUTUAL FUNDS sponsor is responsible for setting up and establishing the mutual fund. The sponsor is the settler of the mutual fund trust. The sponsor delegates the trustee function to the trustees.

Mutual fund T

The mutual fund is constituted as a trust under the Indian Trust Act, 1881, and registered

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with SEBI. The beneficiaries of the trust are the investors who invest in various schemes of the

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mutual fund.

O R E T

Trustees

I C A

A trust is a notional entity that cannot in its own name. So, the trust enters into contacts in

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the name of the trustees. Appointed by the sponsor, the trustees can be either individuals or a corporate body (a trustee company). Typically it is the latter. To ensure that the trustees are fair and impartial, SEBI rules mandate that at least two ± thirds of the trustees are independent ± this means that they have no association with the sponsor.

O V E R V I

The trustees appoints the asset management company (AMC), secure necessary approves, periodically monitor how the AMC functions, and hold the properties of the various schemes in trust for the benefit of investors. Trustees can be held accountable for the financial irregularities of the mutual fund.

Asset Management Company

The Asset Management Company (AMC), also referred to as the Investment Manager, is a separate company appointed by the trustees to run the mutual fund. In return for its services, the AMC is the form of investment management and advisory fees. Each scheme of the mutual fund pays the AMC an annual investment management and advisory fees which is linked to the size of the scheme.

E

RISK RETURN ANALYSIS ON MUTUAL FUNDS Custodian

The custodian handles the investment back office operations of a mutual fund. Inter alia, it looks after the receipt and delivery of securities, collection of income, distribution of dividends, and segregation of the assets between schemes. The sponsor of a mutual fund cannot T

act as its custodian. This condition is meant to ensure that the assets of the mutual fund are not in

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the hands of its sponsor.

E O R

Registrars and Transfer Agents

E T I

The registrars and transfer agents handle investor ± related services such as issuing units, redeeming units, sending fact sheets and annual reports, and so on. Some funds handle such

C A L

functions in ± house, while others outsource it to SEBI ± approved registrars and transfer agents like Karvy and CAMS.

O V E R

TYPES OF MUTUAL FUND SCHEMES

V I E

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry. By Structure 

Open - Ended Schemes

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Close - Ended Schemes

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Interval Schemes

By Investment Objective 

Growth/Equity Schemes

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General Purpose

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Income/Debt Funds

RISK RETURN ANALYSIS ON MUTUAL FUNDS 

Money Market

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Guilt Funds

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Balanced Schemes

Other Schemes T

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Tax Saving Schemes

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Special Schemes:

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1. Sector Specific Schemes

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2. Index Schemes

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Open Ended Schemes

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The units offered by these schemes are available for sale and repurchase on any business

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day at NAV based prices. Hence, the unit capital of the schemes keeps changing each day. Such

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schemes thus offer very high liquidity to investors and are becoming increasingly popular in

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India. Please note that an open-ended fund is NOT obliged to keep selling/issuing new units at

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all times, and may stop issuing further subscription to new investors. On the other hand, an openended fund rarely denies to its investor the facility to redeem existing units. Close Ended Schemes

The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of units. These schemes are launched with New Fund Offer (NFO) with a stated maturity period after which the units are fully redeemed at NAV linked prices. In the interim, investors can buy or sell units on the stock exchanges where they are generally listed. Unlike open-ended schemes, the unit capital in Close-ended schemes usually remains unchanged. After an initial closed period, the scheme may offer direct repurchase facility to the investors. Close-ended schemes are usually more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. This discount tends towards the NAV closer to the maturity date of the scheme.

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RISK RETURN ANALYSIS ON MUTUAL FUNDS Interval Schemes

These schemes combine the features of open-ended and Close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV based prices. T

Growth/Equity Schemes

H E O

These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. However, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term.

R E T I C A L O V E R V I E

Equity schemes are hence not suitable for investors seeking regular income or needing to use their investments in the short-term. They are ideal for investors who have a long-term investment horizon. The NAV prices of equity fund fluctuates with market value of the underlying stock which are influenced by external factors such as social, political as well as economic. Sahara Growth Fund, ICICI growth fund, JP Morgan equity fund, ING Vysya individual equity fund, Franklin Templeton Asia equity growth fund, Quantum LT equity fund and AIG Global invest equity growth fund are the examples for equity schemes.

RISK RETURN ANALYSIS ON MUTUAL FUNDS General Purpose Equity Schemes

The investment objectives of general-purpose equity schemes do not restrict them to invest in specific industries or sectors. They thus have a diversified portfolio of companies across a large spectrum of industries. While they are exposed to equity price risks, diversified general purpose equity funds seek to reduce the sector or stock specific risks through diversification. They mainly have market risk exposure. Sahara Wealth Plus Fund is an Equity Fund which is a general-purpose equity scheme.

T H E O R

Income /Debt Schemes

E T I

These schemes, also commonly known as Income Schemes, invest in debt securities such as corporate bonds, debentures and government securities. The prices of these schemes tend to be

C A L

more stable compared with equity schemes and most of the returns to the investors are generated through dividends or steady capital appreciation. These schemes are ideal for conservative investors or those who are not in a position to take higher equity risks. However, as compared to the money market schemes they do have a higher price fluctuation risk and compared to a Gilt fund they have a higher credit risk.

O V E R V I E

These schemes invest in money markets, bonds and debentures of corporate companies with medium and long-term maturities. These schemes primarily target current income instead of capital appreciation. Hence, a substantial part of the distributable surplus is given back to the investor by way of dividend distribution. These schemes usually declare quarterly dividends and are suitable for conservative investors who have medium to long-term investment horizon and are looking for regular income through dividend or steady capital appreciation. Sahara Income Fund, BOB Income fund, ICICI Income fund, Sundaram BNP Paribas Income plus fund, TATA income fund, Canara Robeco Income fund and LIC Debt fund are the examples of Income/Debt/Bond scheme.

RISK RETURN ANALYSIS ON MUTUAL FUNDS INCOME-DEBT SCHEMES

T H E O R E T I C A

Money Market Schemes

L O

These schemes invest in short term instruments such as commercial paper ("CP"),

V

certificates of deposit ("CD"), treasury bills ("T-Bill") and overnight money ("Call"). The

E R

schemes are the least volatile of all the types of schemes because of their investments in money

V

market instrument with short-term maturities. These schemes have become popular with

I E

institutional investors and high net-worth individuals having short-term surplus funds. Sahara Short Term Plan, BOB liquid Dividend fund, Escorts Liquid fund, ICICI Liquid fund, ING Liquid fund, Bajaj Liquid fund and AIG Global investment Liquid fund are the examples of Money Market Scheme. Gilt Funds

These primarily invest in Government Debt. Hence, the investor usually does not have to worry about credit risk since Government Debt is generally credit risk free. The investor is open to Interest risk, where the value of the securities changes in relation to the market scenario. Sahara Gilt Fund, Birla Guilt fund, Escorts Guilt fund, ING Guilt fund, ICICI Guilt fund, TATA Guilt fund high and Sundaram BNP Paribas Guilt fund are the examples of one such scheme.

RISK RETURN ANALYSIS ON MUTUAL FUNDS Balanced Schemes

These schemes are also commonly called balanced schemes. These invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation. Such schemes are ideal for investors with T

a conservative, long-term orientation. Tata Balanced Fund, Tata Young Citizen's Fund, BOB

H

Balance fund, Escorts Balance fund, ICICI Prudential Balanced fund, Principal Balance fund and

E

LIC Balance fund are perfect examples of such hybrid schemes.

O R E

Tax Saving Schemes

T I

Investors (individuals and Hindu Undivided Families (µHUFs¶)) are being encouraged to invest in equity markets through Equity Linked Savings Scheme ("ELSS") by offering them a tax rebate. Units purchased cannot be assigned / transferred/ pledged / redeemed / switched - out

C A L O

until completion of 3 years from the date of allotment of the respective Units. The Scheme is

V

subject to Securities & Exchange Board of India (Mutual Funds) Regulations, 1996 and the

E R

notifications issued by the Ministry of Finance (Department of Economic Affairs), Government

V

of India regarding ELSS. Subject to such conditions and limitations, as prescribed under Section

I

80 C of the Income-tax Act, 1961, subscriptions to the Units not exceeding Rs.1,00,000 would be fully tax exempt from income tax. The exemption under section 80 C of IT act is also applicable to other eligible schemes. Sahara Tax Gain Fund, Escorts Tax saver fund, ICICI Tax fund, Lotus India Tax fund, Reliance Tax saver and Sundaram BNP Paribas Tax saving fund are the examples of ELSS. Special Schemes Sector Specific Equity Schemes:

These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector. They depend upon the performance of these select sectors only and are hence inherently more risky than general-purpose equity schemes. Ideally suited for informed investors, who wish to take a view and risk on the concerned sector. The TATA Life Sciences and TATA

E

RISK RETURN ANALYSIS ON MUTUAL FUNDS Technology fund, Franklin Templeton Pharma fund, ICICI Technology fund, SBI MSFU Pharma fund and UTI GSF Software fund are the examples of sector specific equity scheme. Index schemes:

An Index is used as a measure of performance of the market as a whole, or a specific

T

sector of the market. It also serves as a relevant benchmark to evaluate the performance of

H

mutual funds. Some investors are interested in investing in the market in general rather than

E O

investing in any specific fund. Such investors are happy to receive the returns posted by the

R

markets. As it is not practical to invest in each and every stock in the market in proportion to its

E

size, these investors are comfortable investing in a fund that they believe is a good representative of the entire market. Index Funds are launched and managed for such investors. The Tata Index Fund, Franklin Templeton Index Nifty fund, LIC Sensex fund, SBI Mag Index fund and UTI

T I C A L

Nifty Index fund are the examples of Index Scheme. O

Comparison Of Mutual Funds With Other Products/ Investment Opportunities:

V E R

The mutual fund sector operates under stricter regulations as compared to most other investment avenues. Apart from the tax efficiency and legal comfort how do mutual funds compare with other products? Here the investment in Mutual Funds is compared with: 1.

Company Fixed Deposits.

2.

Bank Fixed Deposits.

3.

Bonds and Debentures.

4.

Equity.

5.

Life Insurance

V I E


Comparison of Mutual Funds with Other products/Investment opportunities: Sr

Investment

No:

opportunities

1`

Company

Risk

Moderate

Return

Marketability

Tax

/Liquidity

Shield

High

Nil

Moderate

Convenience T

High

E

Fixed Deposits 2

Bank Fixed

O

Negligible

Moderate

High

Nil

Very High

Bonds &

R E

Deposits 3

H

T

Low

High

Average

Nil

High

I C

Debentures

A

4

Equity Shares

High

High

Fairly High

High

High

L

5

Life Insurance

Nil

Low

Average

Sec 80c

Very High

O

benefit

V E R V I E

1.

MUTUAL FUNDS: WHEN RISK ENTERS THE PERFORMANCE

EQUATION

Selecting the right mutual funds for one¶s portfolio has become quite a challenging exercise in recent times. Not only are equity funds having greater difficulty in beating their bench marks, funds that do well in a secular bull market often to not deliver in bearish or volatile market conditions. This is why evaluating a fund¶s performance on returns alone may not give you the correct picture on the best funds for your portfolio; you need to find funds that deliver the best returns for the risk they assume.

RISK RETURN ANALYSIS ON MUTUAL FUNDS Reshuffle in Rankings

The diversified equity funds in the our sample recorded absolute returns of 105-298 percent over the three year period to March 2007. Ranking the 27 equity funds by performance based only on their point-to-point returns over this period, magnum multiplier plus, Magnum contra and pruICICI Dynamic plan were among the top performing equity funds, each of these notching up a threefold appreciation in value.

T H E O R

Sharpe Ratio

E T I

The first measure considered to evaluate risk-adjusted performance of the equity funds was the Sharpe ratio, a metric that evaluates the return generated by a mutual fund per unit of risk assumed. To calculate the Sharpe ratio, the daily returns of the BSE Sensex were deducted from the daily returns of the equity scheme. The average of this series of daily differential returns was divided by the standard deviation to arrive at the Sharpe ratio. Treynor¶s Index

C A L O V E R V I E

It may thus be a good idea to use this ratio in conjunction with other measure, such as the Treynor¶s index. Treynor¶s index is another measures of risk adjusted performance. The key difference between the Treynor index and the Sharpe ratio is that the former uses a fund¶s beta instead of the standard deviation of its returns to factor in its risk profile. Generally, equity funds that turned up at the top of the ranking on Sharpe ration also aid equally well on the Treynor index.

Highest Alpha

Finally, on to the Alpha, the measure that calculates the value by the fund manager of an equity fund, to pure market returns. Predictably, given their high absolute returns and good

RISK RETURN ANALYSIS ON MUTUAL FUNDS risk-adjusted showing, the Magnum twins ± Contra and Multiplier Plus-recorded the highest alpha generation over the three-year period.

However, other top rankers, such as Birla Sun Life equity, kotak Global, Tata Equity opportunities, HDFC equity and Franklin prima plus, also generated high alpha, adding significant value for their investors. The principal Resurgent India was the only scheme to report a negative alpha from the list of 27 schemes.

T H E

The Right Combination

O R E

No matter what parameters are used, however, it is difficult to recommend one set of funds as suitable for all investors. Instead, investors have to choose products that best fit their risk appetite and time horizon. Based on the analysis, a combination of the Treynor measures and alpha may be more appropriate in choosing the best funds.

T I C A L O

2. LIC MUTUAL PLANS NEW 3 YEARS SCHEME

V E R

Life Insurance Corporation of India¶s mutual and arm LIC MF is planning to launch a new fund for a three-year scheme µprogressive Equity Fund¶ and has field an offer document with the market regulator SEBI. Investment Option

The scheme offers investment under two options, namely dividend and growth. Under dividend option, the unit holder can opt either dividend payout or reinvestment.

3 .

MUTUAL FUNDS PERFORMANCE SHOWS MIXED TREND

Banking and technology funds, each win an average of well over 13 percent, are now the top draws in the performance sweepstakes. Funds dedicated to FMCG and pharma are relatively quite inferior, with negative returns of 7.17 percent and 8.27 percent respectively.

V I E

RISK RETURN ANALYSIS ON MUTUAL FUNDS Other Funds

The past six months have actually hit pharma funds hard, relegating them to the very last slot. There are nearly half a dozen of these: some were launched in 1999 as well. Reliance MF and JM MF had come out with their products in 2004. Like pharma and FMCG, auto sector funds too do not have much to show for themselves.

T H

4 . MFs TO GAIN FROM HIGHER OVERSEAS INVESTMENT

Mutual funds view the increase in overseas investment to $3 billion from $2 billion as a progressive roadmap for foreign investments through MFs in the future.

E O R E T

I C A L

Proactive Step O V

Global funds would now take off, as the guideline from RBI is a proactive step. Mr. Sukumar Rajah, Chief Investment Officer-Equity, Franklin Templeton, said, ³we believe that this is a positive move as it helps Indian investors achieve diversification across currencies and help fund managers like us with a global presence to identify investment opportunities across the world´.

5 .

MUTUAL FUNDS SCALE TECH STOCKS EXPOSURE

Technology stocks are calling the shots in the realm of mutual funds. Allocations to technology by diversified equity funds have generally increased in the last few months, culminating in the quarter ending March 31, 2007, compared to the allocation figures pertaining to the end of the last calendar year. A number of funds, cutting across the asset management industry, have re-jigged allocations, a significant part of it in favour of technology.

E R V I E

RISK RETURN ANALYSIS ON MUTUAL FUNDS The seven players that make up the tech funds space have altered their holding pattern between December and March, plexus has indicated. However, Infosys, TCS and Satyam are among the most popular counter for the fund managers concerned.

Franklin InfoTech, among the largest in the category, has fine-tuned exposures to Infosys (from 37 percent to 40 percent) TCS (21 percent to 22 percent) and HCL Tech (10 percent to

T

7 percent).

H E O

ICICI prudential Technology, which also has a large asset base, has tinkered with Subex

R E

(from 8.8 to 7.1 percent), Tech Mahindra (8.2 percent to 5.8 percent) and Nucleus soft (7.24 percent to 9.34 percent).

T I C A

Tech funds have lately seen an increase in assets, thanks to the perceived turnaround in

L

the sector. Apart from DSP ML Technology.com and Kotak Tech, all the others have well

O

over Rs 100 crore each under management.

V E R V I

6 .

LONDON SEES STRONG INDIAN DEMAND FOR AIM LISTINGS

Indian small and medium enterprise(SME) are likely to maintain the tempo on raising of growth capital through the alternative Investments market (AIM) in the current year too, a top London stock Exchange (LSE) official has said. Second to UK

The amount of capital raised by Indian companies ranked second to the UK companies, which together raised the highest in 2006 in value terms. As many as 16 Indian-related entities have over the last two years listed are the AIM, which is a sub-market of the London Stock Exchange (LSE) and adopts a flexible regulatory approach for smaller growing companies to raise growth capital.

E

RISK RETURN ANALYSIS ON MUTUAL FUNDS There is a very healthy pipeline of companies from India and in a range of sectors including real estate, media and mining that want to tap AIM. Mr. Ibukun Adebayo, Manager-India and International Business Development, LSE.

7 .

BIRLA SUN LIFE MUTUAL PLANS EXPANSION IN RETAIL SPACE T

The mutual fund industry has to focus more on retail clients to expand further, said Mr. Mukul K. Gupta, Chief Executive Officer, Birla Sun Life Mutual Fund.

H E O R E

With at least 10-15 asset management companies looking set up shop in India over the next 12-15 months, the industry would see increased competition with the new players also concentrating on the existing center; hence, there is a need for players to expand geographically especially in the retail space.

T I C A L O

Offshore Funds

V E R

Birla sunlife is also exploring the possibility of launching offshore funds with a feeder

V I

structure. Mr. Guptha said such funds could possibly use the expertise of US based MFs, owned by sunlife, which has experience in emerging market funds.

The company would also promote its existing schemes. ³Among the distinct funds, the companies try to showcase 2 or 3 funds as our flagship schemes. The two which have been identified are Birla Sun-life Equity and Brila Midcap Funds,´ Using the above strategies, the company aims to increase it assets under management over the next 12-15 months.

8 .

INDEX FUNDS BETTER FOR MOST INVESTORS

It was said that most investors are better off putting their money in low ±cost index funds. As it out perform major market indexes.

E


³A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money´ Mr. Buffett said, at a press conference, a day after the annual shareholder meeting for his Berkshire Hatha way Inc insurance and investment companys. Out Gained

T H E

The vanguard 500 index fund, whose $120.2 billion as sets make it one of the largest index funds, has Out gained a majority of its ³large blend´ peers in the last one, three five and 10 years periods, according to Morningstar Inc, a research firm.

O R E T I C

Many funds per form well when they¶re small, but struggle to keep up when investors

A

chase that early performance, and pour in each. ³Successful funds attract a massive amount

L

of money, and the later performance typically gets medicore´, he said. ³Then they keep

O

publishing returns for the whole period for someone who started 20 years ago. The reporting

V

has falsehood and folly in it´.

E R V I

It was cited Fidelity Magellan, a top-performing fund through the 1980s but which has lagged S&P 500 over the trailing one, three, five and 10-year periods.

Its asset base, once over $100 billion, has fallen to $43.4 billion. Morningstar data shows, as many investors sought better returns elsewhere. ³If are take something like Fidelity Magellan, which Mr. Peter Lynch ran terrifically, a lot of results were achieved with smaller amounts.

9. AS INSTITUTIONS GET FANCIER, FUND BUYERS SIMPLIFY

Steady Rise

E

RISK RETURN ANALYSIS ON MUTUAL FUNDS The firm says 36 per cent of institutions had money in these private, multiple- strategy partnerships in 2006, up from 32 per cent in 2005 and 29 per cent in 2004. ³Mean while, US institutions cut allocations to domestic equities to 44.7 per cent of total assets in 2006 from 46.7 per cent in 2005,¶¶ the firm says. ³ Fixed income allocations, while essentially unchanged from year to year, are down nearly 5 per cent from 2002 levels.´ Over in individual-investor land, five of the 15 best-selling categories of US mutual funds so far in

T

2007 are so ±called allocation and target- date funds, according to Boston based consulting

H E

firm Financial Research Corp. Allocation funds mix stocks and bonds together in a variety of

O

styles, including ³moderate´ and ³conservative.´ Target date funds go an extra step,

R E

changing the mix over time with a specified retirement year in mind. Beyond selecting

T

individual securities for the portfolio, managers of these funds take on the job of asset

I

allocation. In theory at funds can serve as an all- purpose holding in a retirement plan.

C A L O

10. 3i PLANS $5-B INDIAN INFRASTRUCTURE FUND¶ µ

V E R

BLOOMBERG

V I E

3i Group Plc, Europe¶s biggest publicly traded buyout and venture capital firm, plans to raise $ 5 billion for a fund to invest in Indian ports, power plants and roads, two people with knowledge of the plan said.

The initial target will be for a $1.5 billion fund, with the remainder to be raised within five years, the people said, asking not to be identified before an announcement. 3i signed an agreement on Thursday with the Government- owned India Infrastructure Finance Co to provide equity and dept financing for projects in the world¶s second- fastestgrowing major economy.

RISK RETURN ANALYSIS ON MUTUAL FUNDS 11. COMMODITY FUTURES: BANKS, MFS MAY BE ALLOWED IN

PHASES Banks and mutual funds may be allowed entry into commodities futures trading in a

phased manner in view of the sensitive nature of the market.

Both the RBI and SEBI are yet to back to the Finance Ministry with their proposals on allowing banks and MFs in commodities derivatives markets, but they are likely to be allowed to participate in the commodity trading in phases.

T H E O R E T I C

Limited Resources

A L

Explaining further, the PSU banks do not have the requisite staff to deal in commodities

O

trading and their remuneration structure might come in the way of hiring a highly skilled

V

staff.

E R V I

The Forward Markets Commission has recommend to the Government to allow banks and MFs to participate in the commodities futures market, but recommended that the entry should be initially confined to bullion and crude oil trade, as agriculture commodities are sensitive.

12. VOLATILITY MAY CONTINUE IN NEAR-TERM:

Volatility may continue in near-term so one should have to learn to live with the market volatility and given threshold limit of the index (14,000 at peak), ups and downs would be quite sudden and large.

The Indian capital market, the Indian economy and Indian businesses are no longer insulated from global geo-political economics events. There is always some link to such

E

RISK RETURN ANALYSIS ON MUTUAL FUNDS global events that impacts market sentiments, capital flows, liquidity ± related issues and as a result the valuation that one would give for investing in equities.

13. SCOPE OF MUTUAL FUNDS AMONG SMALL AND MEDIUM

ENTERPRISES (SMES)

T H

The mutual funds can prove to be a good investment avenue for SMEs in India. The

E O

major concern is time the time frame of investments the SMEs may sometimes require their

R

surplus fund to cater their working capital needs. Thus it will be advisable for them to perk

E T

their funds in more liquid funds that can easily be liquidated and a same time would be prove

I

to lesser market risks. Thus, with this understanding one can consider the scope of mutual

C A

fund among SMEs to be positive.

L O

14. MUTUAL FUNDS IN INDIA ATTAINING MATURITY

V E

Mutual funds industry in India is growing rapidly and is undergoing tremendous changes. The prices of gold and real estate have reached to sky high level not only in India but throughout the world both there traditional investment avenues have been entirely popular with Indian investors. Regulations have also favored there two classes of investment with the securities and exchange board of India introducing norms for gold traded funds and the government relaxing norms for foreign direct investment in real estate ventures.

15. THE MARKET RETURN

The return on Bombay stock exchange sensitive index has been used as a proxy for the market return. It is oldest index of Bombay stock exchange (BSE) which is the first stock exchange in country to have obtained permanent recognition in 1956 from the government of India in the securities contracts (Regulation) Act 1956.

The Bombay stock exchange

sensitive index, popularly called the Sensex reflects the movement of 30 sensitive shares from specified & Non specified groups. The index of any trading reflects the aggregate

R V I E

RISK RETURN ANALYSIS ON MUTUAL FUNDS market value of the sample of 30 shares on that day in relation to the average aggregate market value of these shares in base year 1978-79.

This means that this is the value-

weighted index.

The return on S&P CNX nifty has also been used as a proxy for the market return in order to check the robustness of the result, it is one of the indices of national stock exchange

T

(NSE). The joint venture of between NSE & CRISIL.HSL is India¶s first specialized

H

company focused upon the index as a core product it is a well diversified stock index account

E

for 24 sector of the economy.

O R E T I C A L O V E R V I E


ANALYSIS AND INTERPRETATION A

Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest in shares, debentures and deposits. All these investments involve an element of risk. The unit value may vary depending upon the performance of the company and companies may default in payment of interest/principal on their debentures/bonds/deposits. Besides this, the government may come up with new regulation that may affect a particular industry or class of industries. All these factors influence the performance of Mutual Fu nds.

Net Asset Value

NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAVrelated prices. NAV is calculated as follows: NAV=(Ending price-Beginning price)/Beginning price.

ANALYSIS-1



TO FIND OUT THE AVERAGE RETURN, STANDARD DEVIATION AND BETA OF EACH OF THE SELECTED FUNDS

Using the net asset value of the fun derives the return of the fund. In order to determine the six month NAV of the fund, the formula used-

End NAV- Beginning NAV Beginning NAV

N A L Y S I S


Standard Deviation

It is a measure of the values of the variables around its mean or it is the square root of the sum of squared deviations from the mean divided by the number of observances. The arithmetic mean of returns may be same for two companies but the returns may vary widely. Karl Pearson suggested standard deviation and it is denoted by W. The formula used to calculate standard

A N A L Y S I

deviation is

S

W = §(Rp-Rp1)

or

W2

N

Variance

It refers to the difference between the various values and the mean value; in short it refers to deviation from the standards. It is calculated as follows

W2 = §(Rp-Rp1) N Beta

It is the slope of the characteristic regression line. Beta describes the relationship between the stock return and the index returns. Formula used to find beta is Fi = Cov (Rp* Rm.) / Variance(Rm.)

Where, Rp = return on portfolio Rm = return on market


Covariance

It reflects the degree to which the returns of the two securities vary or change together. A

A N

positive covariance means that the returns of the two securities vary or change in the same

A

direction where as negative covariance implies that the returns of the two securities move in

L Y

opposite direction. It is calculate as follows

S I S


1. ICICI FMCG Fund

The fund indicates that the long-term investment made in capital appreciation from the portfolio that is invested predominantly in equity and equity related security of FMCG companies. The ICICI prudential FMCG fund is open-ended FMCG sector fund.

A N A L Y S

Table 3.1 : Prudential ICICI FMCG Fund

I S

Date

Net Asset

Return on

Index return

Market

Value

port folio

31-12-02

8.03

-

1075.4

-

30-6-03

8.15

0.014944

993.85

-0.07583

31-12-03

7

-0.1411

1041.85

0.048297

30-6-04

8.3

0.185714

1134.15

0.088592

31-12-04

11.05

0.331325

1825.83

0.609866

30-6-05

10.2

-0.07692

1505.6

-0.17539

31-12-05

15.91

0.559804

2057.6

0.366631

30-6-06

19.63

0.233815

2087.55

0.014556

31-12-06

13.3

-0.32247

3001.1

0.437618

30-6-07

27.88

1.096241

3128.2

0.042351

31-12-07

21.82

-0.21736

3965.48

0.267656

return

Total

1.66399

1.624347

Average return of

0.166399

0.162435

fund


Table 3.2 : FMCG Equity Fund A N

Co-Variance

0.0317

A L

Variance of Market Return

0.0869

Y S I

S.D of Market Return

0.0932

Standard Deviation of fund

0.4375

Beta of fund

0.3648

Interpretation

The NAV of the fund during the month of June 2003 is 8.15, which is consistent. The return during the month is 1.49 where as market return is -7.5. The Fund shows a continuous return till December 2007 where the NAV is 21.82. The market return is 26.76 and fund return is ±21.73, which is not favoring to the company. The total return of fund is 1.66 where the total return is 1.62. The Table 3.1 shows prudential ICICI FMCG fund.

The beta is less than one the scheme is proven to less risk. This means the scheme is less volatile. The standard deviation id 0.4375 which means the fund has more variation when compared to market index i.e. 0.0869. Table 3.2 shows FMCG Equity Fund.

S


2. Prudential ICICI Technology Fund

The Technology fund is an open-ended equity fund to generate long-term capital A

appreciation fund by investing in equity and equity related securities of technology intensive

N A

companies.

L

T able 3 .3

Y

: Prudential ICICI T echnology Fund

S I

Date

Net

Return on

Asset

port folio

Index return

Market return

Value

31-12-02

3.1

-

1075.4

-

30-6-03

3.6

0.16129

993.85

-0.07583

31-12-03

2.18

-0.39444

1041.85

0.048297

30-6-04

2.93

0.344037

1134.15

0.088592

31-12-04

5.22

0.78157

1825.83

0.609866

30-6-05

4.83

-0.07471

1505.6

-0.17539

31-12-05

6.56

0.358178

2057.6

0.366631

30-6-06

7.5

0.143293

2087.55

0.014556

31-12-06

10.37

0.382667

3001.1

0.437618

30-6-07

9.55

-0.07907

3128.2

0.042351

31-12-07

10.43

0.092147

3965.48

0.267656

Total

1.71495

1.624347

Average return

0.171495

0.162435

of fund

S


Table 3.4 : Technology Equity Fund A

Co-Variance

0.0829

N A


0.0869

L Y S


0.0932


0.2948

Beta of fund

0.9534

Interpretation

The funds NAV during the month of June 2003 is 3.6, the yield is 16.12 where the market return is -7.5. There is fluctuation in the return i.e., during Dec 2003 it is negative, then till December 2004 it is in positive but during June 2005 it was negative and thereafter it was in positive till Dec 2006. At present the tot al return is 1.71 and the market return is 1.62. Table 3.3 prudential ICICI technology fund. The beta is less than one the scheme is proven to less risk. This means the scheme is less volatile. The standard deviation id 0.2948 which means the fund has more variation when compared to market index i.e. 0.0869. Table 3.4 shows Technology Equity Fund.

I S


3. Prudential ICICI Growth Plan

The growth plan is to generate long-term capital appreciation from a portfolio that is A

invested predominantly in the various equity and equity related securities.

N A L

Table 3.5 : Prudential ICICI Growth Plan

Y S I

Date

Net Asset

Return on port

Index return

Market

Value

folio

31-12-2002

5.864

-

1075.4

-

30-6-2003

5.725

-0.0237

993.85

-0.07583

31-12-2003

5.547

-0.03109

1041.85

0.048297

30-6-2004

6.601

0.190013

1134.15

0.088592

31-12-2004

11.156

0.690047

1825.83

0.609866

30-6-2005

9.086

-0.18555

1505.6

-0.17539

31-12-2005

12.664

0.393793

2057.6

0.366631

30-6-2006

14

0.105496

2087.55

0.014556

31-12-2006

20.95

0.496429

3001.1

0.437618

30-6-2007

19.87

-0.05155

3128.2

0.042351

31-12-2007

20.07

0.010065

3965.48

0.267656

return

Total

1.593945

1.624347

Average

0.159394

0.162435

return of fund

S


Table 3.6 : Growth Equity Fund

Co-Variance

0.0876

A N


0.0869

A L Y


0.0932

S I S


0.3157

Beta of fund

1.0078

Interpretation

The NAV of during the month of Dec 2002 5.864 is consistent. The return during the month -2.37 and the market is negative i.e. -7.58 which is unfavorable. The return will be positive return will start in the year 2004, which is high. The total return in the year 2007 is 1.5939, market return is 1.6243. Table 3.5 shows prudential ICICI Growth Plan.

The beta is more than one the scheme is proven to more risk. This means the scheme is more volatile. The standard deviation is 0.3157 which means the fund has more variation when compared to market index i.e. 0.0869. Table 3.6 growth equity fund.


4. Prudential ICICI Tax Plan

This plan is a open ended linked savings scheme of equity. The long term capital is A

generated from a portfolio for capital appreciation to invest in equity and equity related scheme.

N A L

Table 3.7 : Prudential ICICI tax plan

Y S I

Date

Net Asset

Return on

Index

Value

port folio

return

Market return

31-12-02

4.507

1075.4

30-6-03

5.005

0.110495

993.85

-0.07583

31-12-03

4.626

-0.07572

1041.85

0.048297

30-6-04

6.223

0.345223

1134.15

0.088592

31-12-04

10.59

0.701752

1825.83

0.609866

30-6-05

9.631

-0.09056

1505.6

-0.17539

31-12-05

16.84

0.74852

2057.6

0.366631

30-6-06

20.506

0.217696

2087.55

0.014556

31-12-06

29.13

0.42056

3001.1

0.437618

30-6-07

23.48

-0.19396

3128.2

0.042351

31-12-07

28.01

0.19293

3965.48

0.267656

Total

2.376936

1.624347

Average return of

0.237694

0.162435

fund

S


Table 3.8 : Tax Equity Fund

Co-Variance

0.1006

A N


0.0869

A L Y


0.0932

S I S


0.3874

Beta of fund

1.1575

Interpretation

The NAV return during the month December 2002 is 11.04 whereas the market return is negative i.e. ±7.58. The return in the next six-month is negative and then it in the month December 2005 the return is high which is 74.85. The return in the year 2007 is 19.29 and market return is 26.76. Table 3.7 shows prudential ICICI tax plan.

The beta is more than one the scheme is proven to more risk. This means the scheme is more volatile. The standard deviation id 0.3874 which means the fund has more variation when compared to market index i.e. 0.0869. Table 3.8 shows tax equity fund.


CHART SHOWING THE STATISTICAL COMPARISION OF VARIOUS FUNDS:-

Particulars

Co-Variance

FMCG Equity Fund 0.0317

Technology Equity Fund 0.0829

Growth Equity Fund 0.0876

Tax Equity Fund 0.1006

Variance of Market Return S.D of Market Return

0.0869

0.0869

0.0869

0.0869

0.0932

0.0932

0.0932

0.0932

Standard Deviation of fund Beta of fund

0.4375

0.2948

0.3157

0.3874

0.3648

0.9534

1.0078

1.1575

RISK RETURN ANALYSIS ON MUTUAL FUNDS Conclusion

The prudential ICICI tax fund indicates a higher return of 237.69 when compare to other four funds and 75.26 more than market return. Through the NAV of FMCG, Technology and growth is more than the tax fund the return yield is higher. Growth fund is very less return ie.3.04 compared to the market return.

A N A L Y

ANALYSIS- 2

S I



TO CALCULATE SHARPE S INDEX TREYNOR¶S INDEX AND µ

JENSEN¶S INDEX FOR SELECTED FUNDS

Sharpe, Treynor and Jensen Index

Sharpe Index

In this model, performance of a fund is evaluated on the basis of Sharpe¶s ratio, which is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it. According to the Sharpe¶s, it is the total risk of fund that the investor concerned about, so the model evaluate funds on the basis of reward per unit of total risk.

Sharpe index (Si) = (Ri ± Rf)/

Where, Ri = return on investment Rf = is risk free return While a high and positive Sharpe index ratio shows the superior risk adjusted performance o f a fund, a low and negative Sharpe ratio is an indication of favorable performance.

S

RISK RETURN ANALYSIS ON MUTUAL FUNDS Sharpe Ratio

As the Sharpe index model gives important to return generated by the fund over and above risk free rate of return and the total risk associated with it. According the share it is the A

total risk of the fund that the concerned about that.

N A

From the study the Sharpe Ratio is higher incase of tax fund and it the same time the tax

L Y S

fund return on portfolio is also higher compare into others

I S

The standard deviation is lower in the case of technology fund, which indicates it positive aspects in the case of Sharpe index. Lower the standard deviation is better as the volatility affects that returns. Table 3. 9 shows sharpe index ratios.

Table 3.9 : Sharpe Index Ratio

Fund name

Return on

Standard

Risk free

Sharpe Ratio

fund (RP)

Deviation of fund

rate

FMCG

0.1664

0.4375

0.08

0.1975

Technology

0.1715

0.2948

0.08

0.3104

Growth

0.1594

0.3157

0.08

0.2515

Tax

0.02377

0.3874

0.08

0.4071


Treynor Index

Jack Treynor developed this index. This index is a ratio of return generated by the fund A

over and above risk free rate of return (generally taken to the return on security backed by the

N A

government, as there is no credit risk associated) during a given period and systematic risk

L Y

associated with in Beta.

S I S

Treynor index (Ti) = (Ri ± Rf)/

Where, Ri = return on investment Rf = is risk free return

All risk adverse investors would like to maximize this value. While a high and positive Treynor index shows a superior risk adjusted performance of a fund, a low and negative Treynor index is an indication of unfavorable performance.

Treynor Ratio

From the study it is found that the investors prefer tax fund because they get tax benefit. But in this case the return on investment in all four equity fund resulted high return in tax fund. But as per Treynor ratio the return is comparatively high in the case of FMCG fund and the Beta value also lower, it indicates that high return can be obtain with lowest risk and least in growth fund. Table 3.10 shows Treynor index ratio.


Table 3.10 : Treynor Index Ratio

A

Fund name

Return on fund

Beta

(RP)

Risk free

Treynor Ratio

N A

rate

L Y

FMCG

0.1664

0.3648

0.08

0.2368

S I S

Technology

0.1715

0.9535

0.08

0.0960

Growth

0.1594

1.0078

0.08

0.0788

Tax

0.02377

1.1575

0.08

0.1362

RISK RETURN ANALYSIS ON MUTUAL FUNDS Jensen Index

Jensen index propose another risk adjusted performance measure. Michael Jensen developed this measure and is some time referred as the differential return method. This involves A

evolution of the return that the fund has generated by the return actually expected out of the fund given the level measure the performance of a fund compared with the actual over the period.

N A L

Required of a fund at a given of risk (E) can be calculated as (Rp-Rf) = + (Rm-Rf)

Y S I

Higher alpha represent superior performance of the fund and visa-versa. Limitation of this model is that it conceders only systematic risk not the entire risk associated with the fund an ordinary can investor can not mitigate unsystematic risk.

By analyse Jensen ratio it is found that the alpha in the case of tax fund is higher which is good sighn form the point of view of investor. Because higher alpha results in higher return but the Jensen ratio shows that the return is higher in case of FMCG fund. With minimum risk the investor can maximize the return by investing in FMCG fund. Table 3.11 shows Jensen Index Ratio.

Table 3.11: Jensen Index Ratio

Fund name

Return on portfolio

Alpha

Beta

Risk free

Return on

Jensen

rate

market

index ratio

(RP)

FMCG

0.1664

0.0563

0.3648

0.08

0.0869

0.1543

Technology

0.1715

0.0129

0.9535

0.08

0.0869

0. 0135

Growth

0.1594

-0.0036

0.0078

0.08

0.0869

-0. 0036

Tax

0.02377

0.0623

1.1575

0.08

0.0869

0.0538

S


ANALYSIS - 3

RANKING OF EACH FUNDS BASED ON THEIR PERFORMANCE

I N T

Table : 3.12 : The Performance of the Equity Funds

E R

Various funds

Sharpe¶s index

Treynor¶s index

Jensen¶s index

P R

FMCG

0.1975

0.2368

0.1543

Technology

0.3104

0.0959

0.0135

Growth

0.2515

0.0788

-0.0036

E T A T I O N

Tax plan

0.4071

0.1362

0.0538

Performance of the Equity Funds

Table 3.12 shows and Fig. 3.1 performance of the equity funds of the equity funds.


Ranking of Each Fund Based on their Performance According to Sharpe¶s index I N

Table 3.13 and Fig. 3.2 shows Sharpe¶s performance

T E R

Table 3.13: Sharpe¶s Performance

P R E

Various funds

Sharpe¶s index

T

Ranks

A T I O

FMCG

0.1975

N

IV Technology

0.3104 II

Growth

0.2515 III

Tax plan

0.4071 I


Interpretation

y Tax plan fund have secured 1st rank as the Sharpe ratio is 0.4071 when risk free rate is 8%

y Technology fund have secured 2nd rank as the Sharpe ratio is 0.3104 when risk free rate is 8%

y Growth plan fund secured 3rd rank as the Sharpe ratio is 0.2515 when the risk free rate is 8%

y FMCG fund secured the 4th rank as the Sharpe ratio is 0.1975 when the risk free rate is 8%.

I N T E R P R E T A T I O N

RISK RETURN ANALYSIS ON MUTUAL FUNDS According to Treynor¶s index

Table 3.14 and Fig. 3.3 shows Treynor¶s Performance

Table 3.14 : Treynor¶s Performance I N

V arious

funds

T reynor

index

Ranks

T E R P R

FMCG

E

0.2368

T

I Technology

T

0.0959

I

III Growth

O N

0.0788 IV

Tax plan

A

0.1362 II


Interpretation

y FMCG fund have secured 1st rank as the Treynor ratio is 0.2368 when risk free rate is 8%

I

y Tax plan fund have secured 2 rank as the Treynor ratio is 0.1362 when risk free rate is

N

nd

T

8%

E

y Technology fund secured 3 rank as the Treynor ratio is 0.09596 when the risk free rate rd

P

is 8%

R

y Growth plan fund secured the 4 rank as the Treynor ratio is 0.0788 when the risk free th

rate is 8%.

R

E T A T I O N


According to Jensen¶s index

I

Table 3.15 and Fig. 3.3 show Jensen¶s performance.

N T E

Table 3.15 : Jensen¶s Performance

R P R

Various funds

Jensen¶s index

FMCG

0.1543

Technology

0.0135

Growth

-0.0036

Tax plan

0.0538

Ranks

E T A

I III IV II

T I O N


Interpretation

y FMCG fund have secured 1st rank as the Jensen ratio is 0.1543 when risk free rate is 8% y Tax plan fund have secured 2nd rank as the Jensen ratio is 0.0538 when risk free rate is 8%

y Technology fund secured 3rd rank as the Jensen ratio is 0.0135 when the risk free rate is 8%

y Growth plan fund secured the 4th rank when the risk free rate is 8%.

I N T E R P R E T

Conclusion

A T I

There is a variation in the ranks of each individual i.e. sharp index Treynor¶s index and Jensen index. By observing the overall ranking we can rank FMCG fund is more favorable for the investor to invest where the FMCG funds a secure first rank in both Treynor¶s and Jensen index. But in the Sharpe index the tax plan has secure the first rank.

O N


FINDINGS AND CONCLUSIONS FINDINGS 1. Prudential ICICI Growth Plan

The NAV of during the month of Dec 2002 5.864 is consistent. The return during the month -2.37 and the market is negative i.e. -7.58 which is unfavorable. the return will be positive return will start in the year 2004 which is high. The return in the year 2007 is, 1.59, market return is 1.62.

2. Prudential ICICI Tax Plan

The NAV return during the month December 2002 is 1.104 whereas the market return is negative i.e. -0.75. The return in the next six month is negative and then it in the month December 2005 the return is high which is 7.48. The return in the year 2007 is 1.92 and market return is 2.67.

3. Prudential ICICI FMCG Fund

The NAV of the fund during the month of June 2003 is 8.03, which is consistent. The return during the month is 14.94 where as market return is -7.5. The Fund shows a continuous return till December 2007 where the NAV is 21.82. The market return is 26.76 and fund return is -0.21 which is unfavour to the company. The total return of fund is 1.66 where the total return is 1.62.

4. Prudential ICICI Technology Fund

The funds NPV during the month of June 2003 is 3.6, the yield is 16.12 where the market return is -7.5. There is fluctuation in the return i.e., during Dec 2003 it is negative, then till

F I N D I N G S

RISK RETURN ANALYSIS ON MUTUAL FUNDS December 2004 it is in positive but during June 2005 it was negative and thereafter it was in positive till Dec 2006. At present the total return is 1.71 and the market return is 1.62.

5. When we compare all the funds, the Index fund has given best performance against

benchmark from the last 5 financial years.

6.

When we compare all funds by using Sharpe¶s Index, Prudential ICICI Tax Plan, has

performing well. Prudential ICICI Infrastructure fund has given low performance.

7. When we compare all funds by using Treynor¶s index, FMCG fund performing well in the

market, but Prudential ICICI Growth fund has given low performance.

8. When we compare all funds by using Jenson¶s index, Prudential ICICI FMCG is performing

well from the last 5 financial years, but Growth fund has given negative performance.

Some times analysis of individual schemes does not clear the scenario to the general investor. Hence a composite study of all the schemes is also done. The risk is calculated by using beta and the return is calculated using the NAV's of the fund. The calculation of risk and return determines the volatility of the fund. All funds beta value is more than 1% except, technology and FMCG fund that is less than 1%.

The various measures are used to derive at the performance of the fund. Each fund is ranked based on Sharpe index, Treynor index and Jensen index. The Sharpe index determines the reward per unit of total risk. This index ranks FMCG fund as the 2nd. The Treynor index measures the return over the systematic risk. According to this the FMCG fund is ranked 1st. Jensen index determines the actual return generated over the systematic risk, the difference is identified as alpha. According to it, FMCG fund is ranked 1st. This as a whole can be said that FMCG fund is said to the best fund according to performance. The aggressive person can take up FMCG fund and cautious person can take up Growth fund as it yield average return with less risk.

F I N D I N G S


CONCLUSIONS

The research shows that Equity Funds are performing well, but the investments from investors are less in equity funds, because of unawareness about mutual funds.

The low level of awareness among investors is the biggest problem to the expansion of the industry. Despite the best efforts by mutual funds, SEBI and AMFI and their distributor, the investor¶s base is below one percent of the population. Generally, investors react only when activity in equity markets reaches a crescendo. Some are caught up by catchy advertisements and invest in belief that the party is going to lost forever. Only when the market tanks and they burn their fingers do investors suddenly realize their ignorance and even then not all. Many do not know how to track their portfolio.

Therefore company has to take some steps to make aware people of Mutual Funds, through advertisements in Newspaper, Magazine, Commercial advertisement, distributing leaflets, Television, Radios.

As per budget of 2007-08, the dividends from MF units¶ continue to be tax-free for its investors. Debt-oriented Mutual Funds schemes continue to pay distribution tax amounting to 12.5 percent on the dividends declared, while equity-oriented mutual funds schemes will not be required to pay distribution tax. Long-term capital gains tax on equity funds remains nil while for debt funds it would be taxed at the prevailing rates- 10% without indexation or 20% with indexation.

So, if we consider futures its better to invest in equity funds, rather than investing in debt funds.

C O N C L U S I O N S


SUGGESTIONS Suggestion to Investors

y Both- the economy and the corporate sector are doing well but the valuations are fair but still it needs perfection.

y Asset allocation and Systematic Investment Plans are the best way to safeguard against volatility. They insure optimal returns and not the maximum return in volatile markets.

y Investors who able to wait for long time could look at value stocks, which consistently perform over a period of time. Hence, investors could choose to invest in value funds like the Prudential ICICI FMCG Fund.

y With the long-term India growth story intact, remain invested in equity with a longer time horizon.

y In a fair value plus market, maintain a little less than neutral allocation towards equities.

S U G G E S T

I O N S

Executive Summary

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