49262330 Performance Evaluation of Mutual Funds in India Jaiprakash 0478

7/31/2019 49262330 Performance Evaluation of Mutual Funds in India Jaiprakash 0478

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PREFACE

As a Student of MBA IIIrd Sem, the survey on customer

satisfaction on Reinsurance Insurance to Insurers has been

provide to me by my department, under the guidance of Mr.

Anil Mishra.

It presents synoptic review the research methodology.

Objective, limitations and suggestions regarding the existing

product. A field survey was conducted with the help of

questionnaire and personal interview in Sagar City.

This Survey is made to answer the expose above

motioned topies through statistical representation, pie

diagram and graphs.

NEETU YADAVMBA IIIRD SEM.


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ACKNOWLEDGEMENT

Preparing a project of this nature is an arduous task and I was

fortunate enough to get support from a large number o persons. I wish

to express my deep sense of gratitude to all those who generously

helped in successful completion of this report by sharing their

invaluable time and knowledge.

It is my proud and previledge to express my deep regards to

Respected HOD Dr. Anil Mishra , Head of Department,

Department of Business Management , Dr. Hari Singh Gour Central

University Sagar for allowing me to undertake this project.

I feel extremely exhilarated to have completed this project under

the able and inspiring guidance of , Dr. Anil Mishra he rendered me all

possible help me guidance while reviewing the manuscript in finalizing

the report.

I also extend my deep regards to my teachers , family members ,

friends and all those whose encouragement has infused courage in me

to complete to work successfully.

(NEETU YADAV )

MBA III RD SEM.


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DELCLARATION BY THE CANDIDATE

Date :

I declare that the project report titled " A STUDY OF

PERFORMANCE EVALUATION OF MUTAL FUNDS IN INDIA

AND ITS AWARNESS AMONG THE INVESTORS" on Market

Segmentation is nay own work conducted under the supervision of Dr.

Anil Mishra , INFINITY MANAGEMENT & ENGINEERING COLLAGE

SAGAR To the best of my knowledge the report does not contain any

work , which has been submitted for the award of any degree ,

anywhere.

(Neetu Yadav)

MBA IIIRD SEM.


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CERTIFICATE

The project report titled " A STUDY OF

PERFORMANCE EVALUATION OF MUTAL FUNDS IN

INDIA AND ITS AWARNESS AMONG THE INVESTORS "

been prepared by MISS NEETU YADAV MBA IIIRD SEM. under the

guidance and supervision of DR. ANIL MISHRA for the partial

fulfillment of the Degree of B.B.A.

Signature of the Signature of the Signature of the

Supervisor Head of the

Department

Examiner


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ABSTRACT

Financial system in a country plays a dominant role in assets formation and

intermediation, and contributes substantially in macroeconomic development. In this

process of development mutual funds have emerged as strong financial intermediaries

and are playing a very important role in bringing stability to the financial system and

efficiency to resource allocation.

Mutual funds play a crucial role in an economy by mobilizing savings and investing themin the capital market, thus establishing a link between savings and the capital market.

The activities of mutual funds have both short-and long-term impact on the savings and

capital markets, and the national economy.

The Indian Mutual fund Industry has witnessed a structural transformation during the

past few years. Therefore it becomes important to examine the performance of the

mutual fund in the changed environment. This research report has evaluate the

performance of Indian Mutual fund equity scheme by using monthly NAV returns of 10

equity Growth funds of 3 years past data from 1-1-2003 to 31-12-2005. BSE sensex has

been used as a proxy for the market portfolio, while 364 day Treasury bills (T-bills) have

been used as a surrogate for risk free rate of return. The performance of funds has

been computed by using Sharpes ratio, Treynors ratio and Jensens ratio. To evaluate

investment performance of mutual funds in terms of risk and return. TO examine the

funds sensitivity to the market fluctuations in terms of beta. To appraise investment

performance of mutual funds with risk adjustment the theoretical parameters as

suggested by Sharpe, Treynor and Jensen. To rank the funds according to Sharpes,

Treynors and Jensons performance measure. There is no conclusive evidence which

suggests that performance mutual funds superior to the market. However there is some

evidence that some of the funds are performing better than the market.


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INTRODUCTION

MUTUAL FUNDS AN OVERVIEW:

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

common financial goal. The money thus collected is invested by the fund manager in

different types of securities depending upon the objective of the scheme. These couldrange from shares to debentures to money market Instruments. The income earned

through these investments and the capital appreciations realized by the scheme are

shared by its unit holders in proportion to the number of units held by them. Thus a

mutual fund is the most suitable for the common man as it offers an opportunity to

invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody

with an invest able surplus of as little as a few thousand rupees can invest in Mutual

Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

A Mutual Fund is the ideal investment vehicle for todays complex and modern financial

scenario. Markets for Equities, Bonds and other Fixed Income Instruments, real estate,

derivatives and other assets are driven by global events occurring in faraway places. A

typical individual is unlikely to have the knowledge, skills, inclination and the time to

keep track of events, understand their implications and act speedily. An Individual also

finds it difficult to keep track of ownership of his assets, brokerage, dues and bank

transactions etc. A Mutual Fund is the answer to all these situations. It appoints

professionally qualified and experienced staff that manages each of these functions on

full time basis. The large pool of money collected in the fund allows it to hire such staff

at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies

of Scale in all three areas-Research, Investments and Transaction Processing. While


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the concept of coming together to invest money collectively is not new, the mutual funds

in their present form are a 20th century Phenomenon. In fact, mutual funds gained

popularity only after the Second World War. Globally there are thousands of mutual

funds with different investment objectives. Today, mutual funds, collectively managealmost as much as or more money as compared to banks.

M P BIRLA INSTITUTE OF MANAGEMENT -7

A draft offer document is to be prepared at the time of launching the fund. Typically, it

pre-specifies the investment objectives of the fund, the risk associated, the costs

involved in the process and the broad rules for entry into and exit from the fund and

other areas of operation. In India, as in most of the countries, these sponsors need

approval from a regulator, SEBI. SEBI looks at he records of the Sponsor and its

financial strength in granting approval to the fund for commencing operations.

A sponsor then hires an Asset Management Company to invest the funds according to

the investment objective. It also hires equity to the custodian of the assets of the fund

and perhaps a third one to handle registry work for the unit holders of the fund.

In the Indian concept, the sponsors promote the AMC also, in which it holds a majority

stake. In many cases a Sponsor can hold a 100% stake in the AMC eg. IL&FS is the

sponsor of IL&FS AMC, which has floated different Mutual fund schemes and also acts

as an asset manager or the funds collected under the schemes.

History of mutual funds in India

The history of mutual funds in India can be broadly divided into 5 important phases.

First Phase: 1963-87 Initial Development phase (Unit Trust of India)

In 1963, UTI was established by an Act of Parliament and given a monopoly. UTI

commenced its operations from July 1964 .The impetus for establishing a formal

institution came from the desire to increase the propensity of the middle and lower

groups to save and to invest. UTI came into existence during a period marked by great


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political and economic uncertainty in India. The first and still one of the largest schemes,

launched by UTI was Unit Scheme 1964. UTI created a number of products such as

monthly income plans, childrens plans, equity-oriented schemes and offshore funds

during this period. The total asset under management for the year 1987-88 was 6,700crores.

Second Phase: 1987-93 (Entry of Public Sector Funds)

Second phase witnessed the entry of mutual funds sponsored by state owned banks

and financial institutions. With the opening up of the economy, many public sector and

financial institutions were allowed to establish mutual funds. In November 1987 the

State Bank of India established the first non-UTI mutual fund-SBI Mutual Fund. This

was followed by Canbank Mutual Fund (launched in December, 1987), LIC Mutual Fund

(1989), and Indian Bank Mutual Fund (1990) followed by Bank of India Mutual Fund,

GIC Mutual Fund and PNB Mutual Fund. These mutual funds helped enlarge the

investor community and the invest able funds. During this period, investors were shifting

away from bank deposits to mutual funds. Most funds were growth-oriented closed-ended funds. From 1987 to 1992-93, the fund industry expanded nearly seven times in

terms of Assets under Management. The total asset under management considering

both UTI and Public Sector was 47,004.

Third Phase: 1993-96 (Emergence of Private Funds)

A new era in the mutual fund industry began with the permission granted for the entry of

private sector funds in 1993, both Indian and Foreign. Also Government launched aseries of measures aimed at the financial sector as a part of the economic liberalization

and reform process. This included the setting up of the Securities and Exchange Board

of India (SEBI) as a regulatory body for the financial sector including Mutual Funds,

which issued the SEBI Mutual Fund Regulations in January 1993. During the year 1993-

94, five private sector mutual funds launched their schemes followed by six others in


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1994-95.

Fourth Phase: 1996-1999 (SEBI Regulations for Mutual Funds)

More investor friendly regulatory measures have been taken both by SEBI to protect the

investor and by the Government to enhance investors returns. A comprehensive set of

regulations for all mutual funds operating in India was introduced with SEBI (Mutual

Fund), 1996. These regulations set uniform standards for all funds and will eventually

be applied in full to Unit Trust of India as well, even though UTI is governed by its own

UTI Act. In 1999 Union Government Budget took a big step in exempting all mutual

funds dividends from income tax in the hands of investors. 1999 marks the beginning of

a new phase in the history of the mutual fund industry in India, a phase of significant

growth in terms of both amounts mobilized from investors and assets under

management.

Fifth Phase: 1999-2002

This phase was marked by very rapid growth in the industry, and significant increase inmarket shares of private sector players. Assets crossed Rs. 1,00,000. The tax break

offered to mutual funds in 1999 created arbitrage opportunities for a number of

institutional players. Bond funds and liquid funds registered the highest growth in this

period, accounting for nearly 60% of the assets. UTIs share of the industry dropped to

nearly 50%

MEANING & DEFINITIONS OF MUTUAL FUND:

Mutual Funds are financial intermediaries. They are companies set up to receive your

money, and then having received it, make investments with the money Via an AMC. It is

an ideal tool for people who want to invest but don't want to be bothered with

deciphering the numbers and deciding whether the stock is a good buy or not. A mutual


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fund manager proceeds to buy a number of stocks from various markets and industries.

Depending on the amount you invest, You own part of the overall fund.

The beauty of mutual funds is that anyone with an invest able surplus of a few hundredrupees can invest and reap returns as high as those provided by the equity markets or

have a steady and comparatively secure investment as offered by debt instruments.

A Mutual Fund is an investment tool that allows small investors access to a well-

diversified portfolio of equities, bonds and other securities. Each shareholder

participates in the gain or loss of the fund. Units are issued and can be redeemed as

needed. The fund's Net Asset Value (NAV) is determined each day.

In simple words, a mutual fund is a trust, which collects the savings from small

investors, invest them in government securities and earn through interest, dividends and

capital gains.

For instance, if one has Rs. 1000 to invest, it may not fetch much on its own. But, when

it is pooled with Rs. 1000 each from a lot of other people, then, one could create a !big

fund large enough to invest in wide varieties of shares and debentures on a

commanding scale and thus, to enjoy the economies of large scale operations.

DEFINITIONS:

The SEBI, 1993 defines a Mutual Fund as "a fund established in the form of a trust by a

sponsor, to raise monies by the trustees through the sale of units to the public, under

one or more schemes, for investing in securities in accordance with these regulations .

According to Weston J. Fred and Brigham, Eugene, unit trusts are Corporations

which accept dollars from savers and then use these dollars to buy stocks, long

term bonds and short term debt instruments issued by business or government

units; these corporations pool funds and thus reduce the risk of diversification!.


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OPERATION OF THE FUND:

A mutual fund invites the prospective investors to join the fund by offering various

schemes so as to suit to the requirements of categories of investors. The resources of

individual investors are pooled together and the investors are issued units/shares for the

money invested. The amount so collected is invested in capital market instruments like

treasury bills, commercial papers, etc.

For managing the fund, a mutual fund gets an annual fee of 1.25% of funds

managed at the maximum as fixed by SEBI (MF) regulations, 1993 and if the funds

exceed Rs. 100 cores , the fee is only 1%. The fee cannot exceed 1%. Offcourse,

regular expenses like custodial fee, cost of dividend warrants, fee for registration, the

asset management fee etc are debited to the respective schemes. These expenses

cannot exceed 3% of the assets in the respective schemes. These expenses cannot

exceed 3% of the assets in the respective schemes each year. The remaining amount is

given back to the investors in full.

The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

ORGANISATION OF A MUTUAL FUND:


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The formation and operations of Mutual Funds in India is solely guided by SEBI (Mutual

Funds) Regulations, 1993, which came into force on 20 th January, 1996, through a

notification on 9th December, 1996. these Regulations make it mandatory for Mutual

Funds to have a three-tier structure of :

1.1. A Sponsor Institution to promote the Fund.2.2. A team of Trustees to oversee the operations and to provide checks for theefficient, profitable and transparent operations of the fund and3.3. An Asset Management Company (AMC) to actually deal with the funds.

Sponsoring Institution:

The Company, which sets up the mutual fund, is called the Sponsor. SEBI has

laid down certain criteria to be met by the sponsor. The criterion mainly deals with

adequate experience, good past track record, net worth etc.

Sponsor appoints the Trustees, Custodian and the AMC with the prior approval of

SEBI, and in accordance with SEBI Regulations.

Sponsor must have at least 5-year track record of business interest in the

Financial Markets.

Trustees:

Trustees are the people with long experience and good integrity in the respective

fields carry the crucial responsibility in safeguarding the interests of the investors .For

this purpose, they monitor the operations of the different schemes. They have wide

ranging powers and they can even dismiss AMC with the approval of SEBI. The Indian

Trust Act governs them.

Rules regarding appointment of the Trustees are:

Appointment of Trustees has to be done with the prior approval of SEBI. There


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must be at least 4 members in the Board of Trustees and at least 2/3 rd of the members of

the Board of Trustees must be independent.

Trustees of one Mutual Fund cannot be a Trustee of another Mutual Fund,

unless he is an independent trustee in both cases, and has the approval ofboth the Boards.

Rights of Trustees:

Trustees appoint the AMC, in consultation with the sponsor and

according to SEBI Regulations. All mutual Fund Schemes

floated by the AMC have to be approved by the Trustees.

Trustees can seek information from the AMC on the operations and

compliance of the Mutual Fund, with the provisions of the trust Deed,

investment management agreement and the SEBI Regulations.

Trustees can review and ensure that Net worth of the AMC is according to

stipulated norms and regulations.Asset Management Company:

The AMC actually manages the funds of the various schemes. The AMC employs a

large number of professionals to make investments, carry out research &to do agent

and investor servicing. Infact, the success of any Mutual Fund depends upon the

efficiency of this AMC. The AMC submits a quarterly report on the functioning of the

mutual fund to the trustees who will guide and control the AMC. The AMC is usually a

private limited company, in which the sponsors and their associations or joint venture

partners are shareholders. The AMC has to be registered by SEBI and should have a

minimum Net worth of Rs.10 cores all times. The role of the AMC is to act as the

Investment Manager of the Trust along with the following functions:

It manages the funds by making investments in accordance with the

provision of the Trust Deed and Regulations The AMC shall disclose

the basis of calculation of NAV and Repurchase price of the schemes


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and disclose the same to the investors. Funds shall be invested as per

Trust Deed and Regulations.

Restrictions on the AMC"s:

AMCs cannot launch a fund scheme without the prior

approval of Trustees. AMCs have to provide full details of

Employees and Board Members, in all cases where such

investments exceed Rs. 1 lakh.

AMC"s cannot take up any activity that is in conflict with the activities of

the mutual funds.Registrars and Transfer Agents:

The Registrars and Transfer Agents are responsible for the investor servicing

functions, as they maintain the records of investors in the mutual funds. They process

investor applications , record details provided by the investors on application forms,

send out periodical information on the performance of the mutual fund; process dividend

pay-out to the investors; incorporate changes in information as communicated byinvestors; and keep the investor record up to date, by recording new investors and

removing investors who have withdrawn their funds.

Custodian:

Custodians are responsible for the securities held in the mutual funds portfolio.

They discharge an important back-office function, by ensuring that securities that are

bought are delivered and transferred to the books of mutual funds, and that funds are

paid-out when mutual fund buys securities. They keep the investment account of the

mutual fund, and also collect the dividends and interest payments due on the mutual

fund investments. Custodians also track corporate actions like bonus, issues, right

offers, offer for sale, buy back and open offers for acquisition.


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ORGANISATION OF A MUTUAL FUND:

There are many entities involved and the diagram below illustrates the organisational

set up of a mutual fund:

Composition of Indian Mutual Fund Industry:

Unit Trust of India Bank sponsored Bank of Baroda AMC Bank of India AMC

Canbank Investment Management Services Ltd. Punjab National Bank AMC Ltd.

SBI Funds Management Ltd. Indfund Management Ltd.

Institutions:

General Insurance Corporation AMC

IDBI Principal Asset Management Co.

Jeevan Bima Sahayog Asset Management Co. Ltd.

Private Sector:

1. India

Benchmark AMC Ltd.


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system and efficiency to resource allocation.

Mutual funds play a crucial role in an economy by mobilizing savings and investing them

in the capital market, thus establishing a link between savings and the capital market.The activities of mutual funds have both short-and long-term impact on the savings and

capital markets, and the national economy. Mutual funds, thus, assist the process of

financial deepening and intermediation. They mobilize funds in the savings market and

act as complementary to banking; at the same time they also compete with banks and

other financial institutions. In the process stock market activities are also significantly

influenced by mutual funds.

There is thus hardly any segment of the financial market, which is not (directly or

indirectly) influenced by the existence and operation of mutual funds. However, the

scope and efficiency of mutual funds are influenced by overall economic fundamentals:

the interrelationship between the financial and real sector, the nature of development of

the savings and capital markets, market structure, institutional arrangements and overall

policy regime.


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Regulatory Aspects of Mutual Fund

Schemes of mutual fund:S

The asset management company shall launch no scheme unless the trusteesapprove such scheme and a copy of the offer document has been filed with the Board.a

Every mutual fund shall along with the offer document of each scheme pay filingfees.f

The offer document shall contain disclosures which are adequate in order toenable the investors to make informed investment decision including the disclosure onmaximum investments proposed to be made by the scheme in the listed securities ofthe group companies of the sponsor.t

No one shall issue any form of application for units of a mutual fund unless theform is accompanied by the memorandum containing such information as may bespecified by the Board.s

Every close ended scheme shall be listed in a recognized stock exchange withinsix months from the closure of the subscription.s

The asset management company may at its option repurchase or reissue therepurchased units of a close-ended scheme.r

A close-ended scheme shall be fully redeemed at the end of the maturity period."Unless a majority of the unit holders otherwise decide for its rollover by passing aresolution".

. The mutual fund and asset management company shall be liable to refund theapplication money to the applicants,-.(I) If the mutual fund fails to receive the minimum subscription amount referred to in

clause (a) of sub-regulation.(ii) If the moneys received from the applicants for units are in excess of subscription asreferred to in clause (b) of sub-regulation (1).r

The asset management company shall issue to the applicant whose applicationhas been accepted, unit certificates or a statement of accounts specifying the number ofunits allotted to the applicant as soon as possible but not later than six weeks from thedate of closure of the initial subscription list and or from the date of receipt of therequest from the unit holders in any open ended scheme.

INVESTMENT OBJECTIVES AND VALUATION POLICIES:

The money collected under any scheme of a mutual fund shall be invested only in

transferable securities in the money market or in the capital market or in privately

placed debentures or securitised debts.

Provided that moneys collected under any money market scheme of a mutual fund

shall be invested only in money market instruments in accordance with directions


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issued by the Reserve Bank of India.

The mutual fund shall not borrow except to meet temporary liquidity needs of the

mutual funds for the purpose of repurchase, redemption of units or payment of

interest or dividend to the unit holders. The mutual fund shall not advance any loans for any purpose.

The Net Asset Value of the scheme shall be calculated and published at least in two

daily newspapers at intervals of not exceeding one week.

The price at which the units may be subscribed or sold and the price at which such

units may at any time be repurchased by the mutual fund shall be made available to

the investors.TYPES OF MUTUAL FUNDS:

The open-ended schemes do not have a fixed maturity and are open for

subscription the whole year. One can buy and sell units at the NAV related prices to

the Mutual funds. These schemes are normally not listed on the stock exchanges

and can be redeemed directly to the Mutual Fund.

Close-ended Schemes:

The closed ended schemes can be bought and sold on the stock exchangesubsequent to the initial subscription through the public offer. One can stay invested

in the scheme for a stipulated period ranging from 2 to 15 years. Generally, the

close-ended schemes are traded at a discount to their NAV in the stock exchange.

On the basis of investments objective, there are five different types of schemes:

Growth/Equity Scheme :

Majority of the corpus of such a scheme is invested in equities and equity related

instruments. This kind of scheme is for those investors who are not risk averse and

are willing to hold on to their investment for a long period of time, caring little for


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volatility. In such schemes, dividend may or may not be declared.

Income /Debt Scheme:

The Fund Manager of such schemes invests a substantial portion of their fund in

fixed income securities like debentures, bonds and money market instruments.

This kind of scheme is ideal for risk averse investors who are interested in steady

income.

Balanced Schemes:

Fund Manager of such funds invests in both equity as well as debt markets in

the proportion as that highlighted in the prospectus. The objective of such a scheme

is to provide both growth and income by distributing a part of the income and capital

gains they earn. Such a scheme is suitable for investors who want long-term returns

without taking the entire risk of the equity market.

Money Market/Liquid Schemes:

These are schemes with very low risks. They invest in Zero risk or safer, short

term instruments like treasury bills, certificates of deposit, Commercial Paper and

inter-bank call money. The objective of these schemes is to provide liquidity and

moderate income and also preserve the capital.

Tax Saving Schemes:

The objective of such a scheme is to provide tax benefits to the investors.Two types of schemes fall under this head.

1. ELSS (Equity Linked Savings Schemes:

A Fund Manager of such a scheme invests primarily in stocks. An important


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feature of this scheme is that there is a lock-in period of three years from the date of

investment. During this period unit holders are prohibited from trading, pledging and

transferring the units. Repurchase is permitted only after three years.

2. Pension Schemes:

A unit holder in a Pension Scheme can avail of a tax rebate of 20 per cent for

investments up to Rs 60,000 (tax saving of Rs 12,000).

Benefits of investing in Mutual Funds:

Small investments:

Mutual funds help you to reap the benefit of returns by a portfolio spread across

a wide spectrum of companies with small investments. Such a spread would not

have been possible without their assistance.

Professional Fund Management:

Professionals having considerable expertise, experience and resources managethe pool of money collected by a mutual fund. They thoroughly analyse the markets

and economy to pick good investment opportunities.

Spreading Risk:

An investor with a limited amount of fund might be able to invest in only one or two

stocks / bonds, thus increasing his or her risk. However, a mutual fund will spread its

risk by investing a number of sound stocks or bonds. A fund normally invests in

companies across a wide range of industries, so the risk is diversified at the same

time taking advantage of the position it holds. Also in cases of liquidity crisis where

stocks are sold at a distress, mutual funds have the advantage of the redemption


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option at the NAVs. Transparency and interactivity:

Mutual Funds regularly provide investors with information on the value of their

investments. Mutual Funds also provide complete portfolio disclosure of the investments

made by various schemes and also the proportion invested in each asset type. Mutual

Funds clearly layout their investment strategy to the investor.

Liquidity:

Closed ended funds have their units listed at the stock exchange, thus they can

be bought and sold at their market value. Over and above this the units can be directly

redeemed to the Mutual Fund as and when they announce the repurchase.

Choice:

The large amounts of Mutual Funds offer the investor a wide variety to choose from. An

investor can pick up a scheme depending upon his risk / return profile.

Regulations:

All the mutual funds are registered with SEBI and they function within the provisions

of strict regulation designed to protect the interests of the investor.

Flexibility:

Investors can exchange their units from one scheme to another, which cannot be done

in other kinds of investments. Income units can be exchanged for growth units

depending upon the performance of the funds.

Potential yields:

The pooling of funds from a large number of customers enables the fund to have

large funds at its disposal. Due to these large funds, mutual funds are able to buy

cheaper and sell dearer than the small & medium investors. Thus, they are able to get


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better market rates and lower rates of brokerage. So, they provide better yields to their

customers. They also enjoy the economies of scale and reduce the cost of capital

market participation. The transaction costs of large investments are quite lower than

that of small investments. All the profits are passed on to the investor in the form ofdividends and capital appreciation. Mutual funds have a return ranging from 12-17%

p.a.

Renders expertise service at lower costs:

The management of the fund is generally assigned to professionals who are well

trained and have adequate experience in the field of investment. The investment

decisions of these professionals are backed by informed judgement and experience.Thus, investors are assured of quality services in their best interest. The fee charged

by the mutual funds is 1%.

Risks of investment in Mutual Funds:

Mutual funds are not free from risks as the funds so collected are invested in stock

markets, which are volatile in nature and are not risk free. The following risks are

generally involved in mutual funds

Market risks:

In general, there are many kinds of risks associated with every kind of investment on

shares. They are called market risks. These market risks can be reduced, but not

completely eliminated even by a good investment management. The prices of

shares are subject to wide price fluctuations depending upon market conditions over

which nobody has control. The various phases of business cycle such as Boom,

Recession, Slump and Recovery affects the market conditions to a larger extent. Scheme risks:

There are certain risks inherent in the scheme itself. For instance, in a pure growth


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scheme, risks are greater. It is obvious because if one expects more returns as in the

case of a growth scheme, one has to take more risks.

Investment risk:

Whether the mutual fund makes money in shares or loses depends upon the investment

expertise of the Asset Management Company (AMC). If the investment advice goes

wrong, the fund has to suffer a lot. The investment expertises of various funds are

different and it is reflected on the returns, which they offer to the investors.

Business Risk:

The corpus of a mutual fund might have been invested in a companys shares. If the

business of that company suffers any set back, it cannot declare any dividend. It may

even go to the extent of winding up its business. Though the mutual funds can

withstand such a risk, its income paying capacity is affected.

Political risks:

Every government brings new economic ideologies and policies. It is often said

that many economic decisions are politically motivated. Change of government brings in

the risk of uncertainty, which every player in the finance service industry has to face.MAJOR MUTUAL FUND COMPANIES IN INDIA

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life

Financial. Sun Life Financial is a global organization evolved in 1871 and is being

represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart

from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to

investment. Recently it crossed AUM of Rs. 10,000 cr.

HDFC Mutual Fund


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HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely

Housing Development Finance Corporation Limited and Standard Life Investments

Limited.

HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and

Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual

Fund acts as the Trustee Company of HSBC Mutual Fund.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. Of America, one

of the largest life insurance companies in the USA. Prudential ICICI Mutual Fund was

setup on 13th of October 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The

Trustee Company formed is Prudential ICICI Asset Management Company Limited

incorporated on 22nd of June 1993.

Sahara Mutual Fund

Sahara Mutual Fund was setup on July 18, 1996 with Sahara India Financial

Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited

incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-

up capital of the AMC stands at Rs.25.8 cr.

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. Thesponsors for Tata Mutual Fund are Tata Sons Ltd., and Tata

Investment Corporation Ltd. The investment manager is Tata Asset Management

Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited is

one of the fastest in the country with more than Rs. 7,703 cr. (as on April, 30 2005) of


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AUM.

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary ofKMBL. It is presently having more than 1,99,818 investors in its various schemes.

KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers

schemes catering to investors with varying risk -return profiles. It was the first company

to launch dedicated gilt scheme investing only in government securities.

Franklin Templeton India Mutual Fund

The group, Franklin Templeton Investments is a California (USA) based

company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the

largest financial services in the world. Investors can buy or sell the mutual fund through

their financial advisor or through mail or through their website. They have Open-End

Diversified Equity Scheme, Open-End Sector Equity Schemes, Open-End Hybrid

Schemes, Open-End Tax Savings Schemes, Open-End Income and Liquid Schemes,

Closed-End Income Schemes and Open-End Fund Of Funds Schemes to offer.Morgan Stanley India Mutual Fund

Morgan Stanley is a worldwide financial services company and it is leading in the

market of securities, investment management and credit services.

Morgan Stanley Investment Management (MSIM) was established in the year

1975. It provides customized asset management services and products to governments,

corporations, pension funds and non-profit organization. Its services are also extended

to high net worth individuals and retail investors. In India it is known as Morgan Stanley

Investment Management Private Limited (MSIM) and its AMC is Morgan Stanley Mutual

Fund (MSMF). This is the first close-end diversified equity scheme serving the needs of

Indian retail investors focusing on a long-term capital appreciation.


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Canbank Mutual Fund

Canbank Mutual Fund was setup on Dec 19, 1987 with Canara Bank acting as

the sponsor. Canbank Investment Management Services Ltd. incorporated on March

02, 1993 is the AMC. The corporate office of the AMC is in Mumbai.

LIC Mutual Fund

Life Insurance Corporation of India setup LIC Mutual Funds on 19th June 1989. It

contributed Rs. 2 cr. towards the corpus of the fund. LIC Mutual Fund was constituted

as a trust in accordance with the provisions of the Indian Trust Act 1882. The company

started its business on 29th April 1994. The trustees of LIC Mutual Fund have appointed

Jeevan Bima Sahyog Asset Management Company Ltd. as the investment managers

for LIC Mutual fund.

BACKGROUND OF THE STUDY

Industry and commerce so as to bring about the integration of the Indian economy with

the global economy. With the growth of the economy and the capital market in India, thesize investor has also increased rapidly. Thus the The Government of India introduced

economic reforms in the field of trade involvement of mutual funds in the transformation

Indian economy has made it urgent to view their services not only as financial

intermediary but also as pace setter as they are playing a significant role in spreading

equity culture. In this context close monitoring and evaluation of mutual funds has

become essential for fund managers to make this instrument as the strongest and most

preferred instrument in Indian capital market in the coming years.

It has been established that the single most important factor that has a strong bearing

on investors interest and growth of mutual fund industry is its superior financial

performance. The financial performance may be defined in terms of !rates of return, !

risk-adjusted returns or !benchmark comparison. !Jensens alpha is another widely used


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measure of portfolio performance: It indicates the abilities of fund managers to identify

and select superior stocks for the portfolio. This constitutes the subject matter of the

present study.

In India, very little work has been done to investigate fund managers forecasting

abilities. Active fund managers are expected to reward higher return. If the fund

manager feels that market on the whole overvalued, then he would get out of the

market. Hence the present study has the objective of finding out the necessary facts

which can benefit the investors and fund managers. This paper evaluates the

performance evaluation of mutual fund in the framework of risk and return.

LITERATURE REIEW

An Empirical Analysis on Performance Evaluation of Mutual Funds in India (Nalini

Prava Tripathy)

The Government of India introduced economic reforms in the field of trade industry and

commerce so as to bring about the integration of the Indian economy with the global

economy. With the growth of the economy and the capital market in India, the size

investor has also increased rapidly. Thus the involvement of mutual funds in thetransformation Indian economy has made it urgent to view their services not only as

financial intermediary but also as pace setter as they are playing a significant role in

spreading equity culture. In this context close monitoring and evaluation of mutual funds

has become essential for fund managers to make this instrument as the strongest and

most preferred instrument in Indian capital market in the coming years.




market. Hence the present study has the objective of finding out the necessary facts

which can benefit the investors and fund managers. This paper evaluates the

performance of mutual fund schemes in the framework of risk and return.


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The study tests the following hypothesis in respect of performance evaluation of the

Indian mutual funds

The sample mutual funds are earning higher returns than the market portfolio returns in

terms of risk. The sample mutual funds are offering the advantages of diversification

and superior returns due to selectivity to their investors. The investment objectives of

the mutual fund schemes are related to their systematic risk and total variability.

Generally investors invest in mutual fund by considering capital appreciation, better

liquidity less risk and tax liability. So, the study makes a comprehensive evaluation of

equity linked schemes. For the purpose of the study, schemes have been taken from

1994-95 to 2001-02. A total of 31 schemes offer are selected bank mutual funds havetaken for study. The risk is calculated on the basis of month end Net Asset Values.

Further, BSE national index was assessed as market index or benchmark. The returns

are computed on the basis of the Net Asset Values of the different schemes and returns

in the market index are computed on the basis of the BSE National Index on the

respective date.

The performance sample mutual fund scheme has been evaluated by using the six

performance measures. A brief description of these measures as

Rate of Return measure, Treynor measure, Sharpe measure, Jensen measure, Sharpe

differential return, Famas Decomposition measure.

According to the modern portfolio policy, the risk and return are to be in the linear form.

So the risk and return are expected to be in tandem with the investment policy. As the

tax planning schemes are expected to earn higher returns with higher risk. So, it is

highly essential to examine if the risk characteristics of these schemes are consistent

with their stated objectives. The risk return analysis indicates that some of the schemes

are not in con format with their stated objectives. The sated objections of the funds with

their average betas and average total risk.

This paper has examined the investment performance of Indian mutual funds in terms of


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six performance measures. The empirical results reported here do not lend support to

the hypothesis taken in the study. . All other schemes do not demonstrate this

relationship. On the whole, 13 schemes have an alone average beta which indicates

that mutual fund returns are highly volatile. About 10 schemes have outperformed bothin terms of Treynor measure and Sharpe measure. However, four schemes exhibited

superior performance in terms of systematic risk but did not do so in respect of total risk.

The analysis made by the application of famas measure indicates that the return out of

diversification is very less. All other schemes show lack of net selectivity and

diversification. So, it was found that proper balance between selectivity and

diversification is not maintained. This is due to fund managers acumen of selectivity and

poor investment planning of the fund.

Performance Evaluation of Select Indian Mutual Fund Schemes (O P Gupta and

Amitabh Gupta)

During the past one and a half decade, the Indian mutual fund industry has witnessed a

major structural transformation and growth as result of policy initiatives taken by the

Government of India to break the monolithic structure of the Industry. Therefore, it

becomes important to examine the performance of the industry in the changed

environment. This paper aims at evaluating the investment performance of select Indianmutual fund schemes during the recent four years period.

He has used a sample of 57 equity funds including 10 tax planning funds to study their

investment performance. The choice of the sample is largely based on the availability of

the necessary data. Weekly returns, based on Net Asset Values, have been used for

performance evaluation. The study period is a recent four year period from April 1, 1999

to March 31, 2003. It is during this period that a major structural change has taken place

in the Indian mutual fund industry. The study has used the weekly yields on 91 day

Treasury bills as a surrogate for the risk free rate of return. The value data collected

from Value Research India Pvt. Ltd., while Treasury bill data has been collected from

PNB Gilts ltd.

The study tests the following hypotheses in respect of performance evaluation of mutual


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fund schemes: The investment performance of schemes is superior to the relevant

benchmark portfolio. The mutual fund schemes are well diversified. There is a

relationship between investment objectives of the schemes and their risk

characteristics. We have utilized the following six measures to evaluate performance;

Rate of Return, Sharpe Ratio, Treynor Ratio, Jensen Differential Return Measure,

Sharpe Differential Return Measure. We have computed the weekly returns for each of

the sample. Weekly returns for the market index viz.

This paper has aimed at testing the investment performance of select Indian mutual

funds during a recent four year period from April 1, 1999 to March 31, 2003. Using

weekly returns, based on NAVs for 57 funds, the results reported here indicate that, ingeneral, fund managers have not outperformed the relevant benchmark during the

study period. After measuring in Sharpe, Treynor, Jenson measures only three funds

reflect superior performance. In terms of Famas components of Investment

performance, all the funds suffered negative performance on account of risk bearing

activity of their fund managers. Only one ffund earned a positive return on

diversification. Though 30 funds showed some net selectivity skills. It appears that

Indian fund managers do not appear to possess sock selection skills.

Thus, on the whole, it can be concluded that there is no conclusive evidence, which

suggests that performance of mutual funds is superior to the market during the study

period. However, there is some evidence that the sample funds are not adequately

diversified. However, the diversification level seems to have changed over time. In

addition, the average beta for the funds has increased over time. Overall the results

reported here are similar to the ones reported earlier for the Indian Market.

Empirical Investigation on the Indian Managers Stock Selection Abilities (Ramesh

Chander)

Investment decision making encompasses a variety of activities such as stock selection,

market timing, diversification and risk bearing. Stock selection and market timing are


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prime activities that contribute widely in the return generation process while

diversification and risk bearing supplement as subsidiary activities. Professional

managers are heftily paid for a judious amalgam of these performances. Investment

performance on the stock selection pertains to successful micro forecasting forcompany specific events. It refers to the managers ability to identify under or over

valued securities. Such performance attribution may be constructed as an indicator of

the investment decision making quality. It may even delineate the superior ex post

investment performance.

Study of investment managers stock selection skills is very important as it enables the

fund managers to understand how they have fared in achieving desired return targets

and how much risk has been controlled in the process. Second it enables the investors

to assess how well the fund manager has achieved these targets in comparison with

other managers or with some benchmark indices. In this sense it may even be viewed

as a feedback mechanism for improving investment mangers forecasting skills.

The study under performance outcomes obtained in this regard shall be analysed

across fund characteristics such as, nature, investment objectives and sponsorship

categories to identify any performance bias in regard thereto. Taking these objectives

into consideration, the present study test the following null hypotheses. Investment

managers lack superior stock selection abilities. Managers stock selection performance

is maintained across the measurement criteria. Stock selection performance is not

influenced by the fund characteristics. Stock selection performance is not influence by

the choice of benchmark indices. The study under consideration is based on the

performance outcomes obtained for 80 samples for the five year period. Monthly

investment returns derived above are further annualized through geometric averaging.

The yield on the 91 day treasury bills issued by Government of India has been used as

surrogate for risk less return. Jensen and Fama is used for measuring the performance

of stock selectivity.

Managers stock selection performance obtained in relation to the fund characteristics

viz., nature, size investment objectives and sponsorship as well as benchmark indices


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such as BSE Sensex, BSE-100, CNX Nifty 50.

Performance persistence is another vital dimension widely acknowledged and

investigated world over better comprehend portfolio performance evaluation. The

information inputs reported that to the absence of persistence of the stock selection

performance for the sample investment schemes, as the sample funds having

registered average positive performance in the period first came to realize negative

performance in the subsequent period second. Similar tendencies wer obtained for the

sample funds across all the quartiles. The results are equally robust for the positive

persistence as well as for the negative persistence.

Investment performance depends on the stock selection and pertains to the successfulmicro forecasting for company specific events. It refers to the managers ability to

identify under or over valued securities. Such a performance attribution may be

construed as an indicator of the investment decision making quality as it delineates the

superior investment performance from that attributed to pure chance or luck. This study

examined the stock selection abilities across fund characteristics as well as the

performance persistence. The results reported in the study have wider implications for

the investment decision making in the sense that signify the vital relevance of stock

selection ability in the return generation process. The absence of performance

persistence signifies that past performance is in no way implicated for the future. The

outcomes thus obtained also have ramifications for the efficient market theory and

rational expectations in the performance.

An Empirical Analysis of Performance Evaluation of Mutual Fund schemes in

India(Sanjay j Bhayani and Vishal G Patidar)

Mutual funds play a vital role in mobilization of resources and their effective allocation.

These funds play a significant role in financial intermediation, development capital

markets and growth of the financial sector as a whole. The active involvement of mutual

funds in economic development can be seen by their dominant presence in the money

and capital market. The present study distinguishes itself from standard mutual fund


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literature by making several unique contributions. First, it finds the trends of the mutual

fund industry in India second it uses risk return method to evaluate the various funds

and schemes outperform the market with the same level of risk or not.

The major objectives of the study are; To evaluate investment performance of mutual

funds in terms of risk and return. TO examine the funds sensitivity to the market

fluctuations in terms of beta. To find out the financial performance of mutual fund

schemes. To appraise investment performance of mutual funds with risk adjustment the

theoretical parameters as suggested by Sharpe, Treynor and Jensen. The period of

study was 5 years. The sample consists of top performer schemes and funds of mutual

fund companies in India based on average return during the last five years.

The main purpose of this analysis is to evaluate whether an organization uses its

resources effectively and efficiently or not. The overall objective of a business is to earn

satisfactory return on the funds invested in it consistent with maintaining sound financial

position. Performance of mutual fund schemes has been evaluated by using the

following measures; Risk, Standard Deviation, Beta, Jensen Alpha, Sharpe Ratio and

Treynor Index.

The results indicate that all the schemes have earned better return in comparison to the

market returns. Most of the schemes have beta less than one, there by implying that

these schemes tended to hold portfolios that were less risky than the market portfolio.

Higher positive value of alpha indicates its better performance. The analysis of the

alpha of all schemes as being positive, there by indicating superior performance of

these funds.

The performances of Balanced Fund schemes have been evaluated in terms of average

return. A majority of the sample mutual fund schemes have a recorded superior

performance as compared to the benchmark index. In the case of Equity Diversified

schemes, the performance of schemes have shown better returns and most of the

schemes have outperformed the benchmark.


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The results of Gilt Fund Schemes indicated that all the schemes earned a slightly higher

return in comparison to the market return. The performances of Tax Planning Fund

Schemes have generated superior return as compared to the market. The performance

of schemes was better in case of returns and has earned returns on lower risk ascompared to the market


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RESEARCH METHODOLOGY

PROBLEM STATEMENT




market. Hence the present study has the objective of finding out. The performance of

mutual fund schemes in the framework of risk and return.

OBJECTIVES OF THE STUDY

The present study has been undertaken to meet the following specific objectives,

To evaluate investment performance of mutual funds in terms of risk and return.

TO examine the funds sensitivity to the market fluctuations in terms of beta. To

appraise investment performance of mutual funds with risk adjustment the

theoretical parameters as suggested by Sharpe, Treynor and Jensen. To

rank the funds according to Sharpes, Treynors and Jensons performance

measure.

LIMITATIONS

The study is confined to only to ten asset management companies.

The study considers only for equity funds

The ranks are assigned on the basis of only three measures & data is considered

for three years The historical data was not easily available. Findings of this

study may change due to time constraint. The study is mainly limited to 10 equity

diversified funds for a period of three .


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. Years starting from January-03 to December-05

STUDY DESIGN

The type of research being followed here is the Empirical Research. The

objective of this research work is to test the stock selective ability of equity fund

manager & evaluate the performance based on their return. It is a Secondary Research

as the data or information required is collected through secondary sources. It is a

Quantitative Research as the study involves a collection of secondary data of nine

equity mutual funds of different asset management companies for a term of 3 years and

applying statistical tools to get the results. The time frame of the research is the past 3

years and hence the information between the time periods January 2003 to Dec 2005 is

relevant for the purpose of the study.

STUDY TYPE

This research is an Empirical Research which is carried out on

the Ten equity fund schemes of different asset management companies.

STUDY POPULATION, SAMPLE, SAMPLING FRAME

The study population is the whole of the Indian Equity funds. But it is

infeasible to incorporate all of the Equity funds for the research mainly due to two

reasons:

Large Volumes of Data: There are a very large number of equity funds with

huge volume of data.

Time Constraint: The time duration of the research is from April 2006 to June

2006. Hence to overcome these problems, a sample of equity funds was

selected from equity mutual funds.


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DATA GATHERING PROCEDURES

The major data relevant for this research is secondary data which has

been collected from different means.

DATA COLLECTION

NAV: The monthly NAV data of various mutual funds are collected from

WWW.INDIAINFOLINE.COM. www.amfiindia.com and MARKET INDEX: The monthly BSE

sensex data are collected from www.bseindia.com.

RATE OF RETURN OF 364 DAYS T-BILL:

The weighted average return of 364 days T-Bill is taken for risk free return. The data are

collected from www.rbi.org.in (which has been extracted from var ious directories of

statistics of Reserve Bank of India).

DATA

The various mathematical, statistical and logical operations performed on the data

obtained from the www.amfiindia.com are as fo llows: Mean Standard

Deviation Calculation of yearly Highs and Lows by using MAX and MIN

functions in the spreadsheet. These were some of the tools and

techniques applied on the data, collected for the Ten equity funds in order touse the data as different variables in the research. All of these operations have

been done using the Microsoft Excel and the SPSS for windows software.
http://www.indiainfoline.com./http://www.amfiindia.com/http://www.bseindia.com./http://www.rbi.org.in/http://www.amfiindia.com/http://www.amfiindia.com/http://www.bseindia.com./http://www.rbi.org.in/http://www.amfiindia.com/http://www.indiainfoline.com./


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SUMMARY OF FINDINGSS

From the research it is found that most of the returns of equity fund is above the

market index BSE Sensex. Over the period of three years, out of 10 equity funds HDFC

fund shows the highest return of 0.4574,followed by Birla sun life ,Tata, JM Equity, ICICI

, LIC,SUNDRAM, KOTAK CANBANK and BSE SENSEX has given a return of 0.3801,

. Out of 10 equity funds HDFC shows the highest monthly return of 45.74%

compared to others. In case of mean return also, HDFC shows the highest mean return

3.81%.3 Beta is defined as the measure of risk. Canbank tops with a beta of .093

compared to other funds and Franklin with the least beta of 0.67.c

KOTAK shows the highest standard deviation of 0.073 followed by others and

Franklin with the lowest standard deviation of 0.057.F

Systematic risk in Franklin mutual fund is more compare to other funds.S

The alpha values varied widely, the highest being HDFC and the lowest Kotak.

Return per unit of unsystematic risk sundram as the highest systematic riskcompared to other funds and Tata mutual fund as the lowest unsystematic

risk.


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CONCLUSION SUMMARY:

It is examined that investment performance of Indian Mutual funds in terms of

performance measure, some funds shows conformity with the linear relationship of

return and risk. Some funds do not demonstrate this relationship. Some funds have out

performed both in terms of Treynor measure and Sharpe measure. However some

funds exhibited superior performance in terms of systematic risk but did not do so in

respect of total risk. According to Jensen measure funds have positive alpha values

indicating superior performance of the scheme. The alpha values varied widely, the

highest being HDFC and the lowest Kotak. Such large variation of alpha values show

that stock selection abilities of fund manager vary for different mutual funds. Positivealpha values of mutual fund may be a result of adopting better forecast techniques by

the fund managers; they seem to have been able to pick up undervalued stocks

enabling them to post better performance during the period under consideration

For the same reason, it becomes increasingly necessary to periodically monitor

and evaluate performance as objectively as can. More importantly, such evaluation

should provide meaningful feedback for improving the quality of the investment

management process on a continuing basis. In particular, it should help in articulating

the investment objectives with greater clarity, sharpening the investment strategy and

refining the methods of security selection. Value of experience that matters.


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BIBLIOGRAPHY: WEBSITES

www.amfiindia.com

www.bseindia.com

www.rbi.org.in

www.investopedia.com

www.google.com

www.valuepro.net

BOOKS

INVESTMENT MANAGEMENT ,SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT BY V.K.BHALLA

STATISTICS FOR MANAGEMENT BY LEVIN & RUBIN

JOURNAL

THE ICFAI JOURNAL OF FINANCE.

VALUE RESEARCH ONLINE
http://www.amfiindia.com/http://www.bseindia.com/http://www.rbi.org.in/http://www.investopedia.com/http://www.google.com/http://www.valuepro.net/http://www.amfiindia.com/http://www.bseindia.com/http://www.rbi.org.in/http://www.investopedia.com/http://www.google.com/http://www.valuepro.net/

Documents

49262330 Performance Evaluation of Mutual Funds in India Jaiprakash 0478