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A REPORT
On
COMPARATIVE ANALYSIS OF INFRASTRUCTURE FUNDS
By
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IBS Gurgaon
Mahindra Finance
Jay Plaza,2nd Floor, Old Dlf Colony, Gurgaon
A REPORT
On
COMPARATIVE ANALYSIS OF INFRASTRUCTURE FUNDS
By
IBS Gurgaon
Mahindra Finance
Jay Plaza,2nd Floor, Old Dlf Colony, Gurgaon
Date of Submission: 18th April 2009
Authorisation
I ----------- hereby state that this final evaluation report of Summer Internship Program (SIP) has been submitted to ICFAI Business School as partial fulfillment of the requirements of MBA Program of IBS Class of 2010.
The empirical information of this report is based on my experience in SIP. Any part of this project has not been reported or copied from any report of the university and others.
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IBS GURGAON
ABSTRACT
“Infrastructure is the buzzword in the present Indian context as there is a huge gap between demand and supply," said Sumit Mehra, business development manager for Lipper's India operations, which is part of the Reuters group.
"That was the reason infrastructure funds were best performers in India in the past two years," he said, adding the investment of $500 billion expected in the country's infrastructure should trigger more money into infrastructure funds.
A lot has been written about large cap funds, mid cap funds, small cap funds and various sectoral funds, but not much is known about infrastructure funds and their performance.
Infrastructure funds are part of a mutual fund category called thematic funds. While sectoral funds invest in particular sectors like, say, information technology, power, metals, oil and gas, etc, thematic funds invests in themes like infrastructure, consumption-led categories like the retail industry and outsourcing companies. But nowadays most of the experts consider thematic funds to be as the sectoral funds.
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The project deals with the comparative analysis of infrastructure funds depending upon their past performances. Infrastructure, as a theme, covers several sectors like power utilities, power equipment and construction companies. Unlike technology sector mutual funds (at best, technology sector funds could buy stocks from telecom and media besides the software stocks it traditionally invests in), infrastructure funds are not restricted to a few sectors.
For the comparison three infrastructure funds have been taken and they would be compared accordingly.
1. Prudential ICICI Infrastructure Fund
2. Tata Infrastructure Fund
3. UTI Thematic Infrastructure Fund
The analysis would include measurement of Standard deviation, Beta Calculation, R square, Sharpe Ratio for the individual funds. Standard Deviation, Alpha, Beta etc are statistical measurements which help investors determine the risk-reward profile of a mutual fund
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About Mahindra Group
The US $6 billion Mahindra Group is among the top 10 industrial houses in India. Mahindra & Mahindra is the only Indian company among the top tractor brands in the world. Mahindra’s Farm Equipment Sector has recently won the Japan Quality Medal, the only tractor company worldwide to be bestowed this honor. It also holds the distinction of being the only tractor company worldwide to win the Deming Prize. Mahindra is the market leader in multi-utility vehicles in India. It made a milestone entry into the passenger car segment with the Logan.
The Group has a leading presence in key sectors of the Indian economy, including the financial services, trade and logistics, automotive components, information technology, and infrastructure development.
With over 62 years of manufacturing experience, the Mahindra Group has built a strong base in technology, engineering, marketing and distribution which are key to its evolution as a customer-centric organization. The Group employs over 50,000 people and has several state-of-the-art facilities in India and overseas.
The Mahindra Group has ambitious global aspirations and has a presence on five continents. Mahindra products are today available on every continent except Antarctica. M&M has one tractor manufacturing plant in China, three assembly plants in the United States and one at Brisbane, Australia. It has made strategic acquisitions across the globe including Stokes Forgings (UK), Jeco Holding AG (Germany) and Schoneweiss & Co GmbH (Germany). Its global subsidiaries include Mahindra Europe Srl. based in Italy, Mahindra USA Inc. and Mahindra South Africa.
M&M has entered into partnerships with international companies like Renault SA, France, and International Truck and Engine Corporation, USA. Forbes has ranked the Mahindra Group in its Top 200 list of the World’s Most Reputable Companies and in the Top 10 list of Most Reputable Indian companies. Mahindra has recently been honoured with the Bombay Chamber Good Corporate Citizen Award for 2006-07.
About Mahindra Finance
A subsidiary of Mahindra & Mahindra Limited, it is one of India’s leading non-banking finance companies. Focused on the rural and semi-urban sector, it provides finance for
utility vehicles, tractors and cars and has the largest network of branches covering these areas. Their goal is to be the preferred provider of retail financing services in
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the ruraland semi-urban areas of India, while their strategy is to provide a range of financial products and services to their customers through their nationwide distribution network.
Company Profile
Mahindra & Mahindra Financial Services Limited, a subsidiary of Mahindra & Mahindra Limited, was established in the year 1991 with a vision to become the number one semi-urban and rural Finance Company. In a short span of 18 years, it has become one of the India's leading non-banking finance company providing finance for acquisition of utility vehicles, tractors and cars. It has more than 450 branches covering the entire India and services over 6,00,000 customer contracts.
Mahindra Group has a leading presence in key sectors of the Indian economy, including trade and financial services (Mahindra Intertrade, Mahindra & Mahindra Financial Services Ltd.), automotive components, information technology & telecom (Tech Mahindra, Bristlecone), and infrastructure development (Mahindra GESCO, Mahindra Holidays & Resorts India Ltd., Mahindra World City). With around 60 years of manufacturing experience, the Mahindra Group has built a strong base in technology, engineering, marketing and distribution. The Group employs around 30,000 people and has eight state-of-the-art manufacturing facilities in India spread over 500,000 square meters.
Group Structure
Mahindra Finance is a company with a strong foundation and a shining legacy, growing every day to create a legacy of their own. Our leading promoter Mahindra & Mahindra holds the majority of their Equity Shares and is also a leading tractor and UV manufacturer with over 60 years’ experience in the Indian market. As a supplement to their business, in May 2004, they started an insurance broking business through our wholly owned subsidiary, Mahindra Insurance Brokers Limited.
Product Portfolio
Mahindra Finance has a wide range of products and services, with something to suit everyone’s needs. Right from finance for two wheelers, tractors, farm equipment, cars and utility vehicles to commercial vehicles and construction equipment, they also have a group of experts providing investment advice, surveying available market products and choosing the most suitable to our customers’ needs.
Investment Advisory Services
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Mahindra Finance is all-encompassing of clients’ needs. So while they believe in making assets easily available, they also believe in catering to those who want to create wealth from these assets. Their Investment Advisory Services act as an avenue to help create and multiply wealth.
Mutual Fund Distribution
Recently they have received the necessary permission from Reserve Bank of India (RBI) to start the distribution of Mutual Fund products through their network. Hitherto they were only participating in the liability requirements of their customers but with a mutual fund distribution business, they can also participate in the customer’s asset allocation.
When it comes to investing, everyone has unique needs based on their own objectives and risk profile. While many investment avenues such as fixed deposits, bonds etc. exist, it is usually seen that equities typically outperform these investments, over a longer period of time. Hence they are of the opinion that, systematic investment in equity allows one to create substantial wealth.
However, investing in equity is not as simple as investing in bonds or bank deposits, because only proper allocation of portfolio gives maximum returns with moderate risk, and this requires expertise and time.
Their Investment Advisory Services helps one to invest his money in equity through different Mutual Fund Schemes. They ensure the best for their clients by identifying products best suited to individual needs.
Offers Available
Personalized Service: They believe in providing personalized service and individual attention to each client to ensure that they understand their investment goals and help them achieve it.
Professional Advice: Offer expert advice on equity and debt portfolios with an objective to provide consistent long-term return while taking calculated market risks. Their approach helps their clients build a proper mix of products, and not concentrate on just one individual product. Hence, serving their long-term objectives in the best way.
Long-term Relationship: They believe that long-term vision is the only means to steady wealth creation. However to achieve this, one also needs to take advantage of short-term market opportunities while not losing sight of long-term objectives. Hence they partner all their clients in realizing their long-term vision.
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Access to Research Reports: They provide their clients with access to the expert opinion of economists and analysts from CRISIL, one of the leading financial research and rating companies of India. This is because they believe that unbiased research is the key to providing sound advice in making informed investment decisions.
Transparency and Confidentiality: Their clients receive regular portfolio statements, via email. They can also view the detailed performance of their investment portfolio on the web, the access to which is restricted to the client only. Moreover, their monitoring system enables them to detect any unauthorized access to the portfolio.
Flexibility: To facilitate smooth dealing and consistent attention, all their clients are serviced by their individual Relationship Executives. Relationship Executives provide them with completely hassle-free, customized services taking care of all the administrative aspects of their investments. This includes submission of application forms to fund houses and a monthly report on the overall performance of their investment portfolio.
Hassle-free investment: They ensure that the process of investing remains hassle-free. They also want to offer complete customized service to their clients. It is for these reasons that their Relationship Executives take care of all the administrative aspects of investments like helping them to submit the application forms to fund houses and other such formalities like monthly reports on the overall state of investments of the clients and performance of portfolios.
Their clients also enjoy
Information updates on a daily basis through email
Ease of viewing their portfolio on the internet
Investment advice at their convenience
Weekly, fortnightly and monthly reports sent to them via email, on request
The freedom to contact us, anywhere in India
Access to the multiple products offered by Mahindra Finance through their Relationship Executive.
Mutual Funds
A mutual fund is a pool of money that is professionally managed for the benefit of all shareholders. As an investor in a mutual fund, one owns a portion of the fund, sharing in any increase or decrease in the value of the fund. A mutual fund may focus on stocks, bonds, cash, or a combination of these asset classes.
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The income earned through these investments and its unit holders in proportion to the number of units owned by them (pro rata) shares the capital appreciation realized by the scheme. Thus, a Mutual Fund is the most suitable investment for the common person as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an investible 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. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing.
Like most developed and developing countries the mutual fund cult has been catching on in India. The important reasons for this interesting occurrence are:
Mutual funds make it easy and less costly for investors to satisfy their need for capital growth, income and/or income preservation.
Mutual fund brings the benefits of diversification and money management to the individual investor, providing an opportunity for financial success that was once available only to a select few.
A mutual fund, by its very nature, is diversified -- its assets are invested in many different securities. Beyond that, there are many different types of mutual funds with different objectives and levels of growth potential, furthering your odds to diversify.
THE SECURITY AND EXCHANGE BOARD OF INDIA (Mutual Funds) REGULATIONS,1996 defines a mutual fund as a " a fund establishment in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments."
History of mutual funds
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.
First Phase – Establishment and Growth of Unit Trust of India - 1964-87: Unit Trust of India (UTI) established on 1963 by an Act of Parliament. Set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the RBI.
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In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place 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.
Second Phase - Entry of Public Sector Funds – 1987-1993: 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.
Third Phase – Entry of Private Sector Funds - 1993-2003:
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 UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.At the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.
Fourth Phase – Growth and SEBI Regulation - 1996-2004:The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilisation of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Investors’' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India.
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The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industryIn February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutal fund players on the same level. UTI was re-organised into two parts: 1. The Specified Undertaking, 2. The UTI Mutual Fund Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry.At the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
Phase V - Growth and Consolidation - 2004 Onwards
The industry also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutal fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.
Structure of the Indian mutual fund industry
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The Indian mutual fund industry is dominated by the Unit Trust of India, which has a total corpus of Rs700bn collected from more than 20 million investors. The UTI has many funds/schemes in all categories i.e. equity, balanced, income etc with some being open-ended and some being closed-ended. The Unit Scheme 1964 commonly referred to as US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs200bn. Most of its investors believe that the UTI is government owned and controlled, which, while legally incorrect, is true for all practical purposes.
The second largest category of mutual funds is the ones floated by nationalized banks. Can bank Asset Management floated by Canara Bank and SBI Funds Management floated by the State Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the other prominent ones.
Working of mutual funds
A mutual fund is set up by a sponsor. However, the sponsor cannot run the fund directly. He has to set up two arms: a trust and Asset Management Company. The trust is expected to assure fair business practice, while the AMC manages the money. All mutual funds except UTI functions under Sebi (Mutual Fund) regulations 1996. The mutual fund collects money directly or through brokers from investors. The money is invested in various instruments depending on the objective of the scheme. The income generated by selling securities or capital appreciation of these securities is passed on to the investors in proportion to their investment in the scheme. The investments are divided into units and the value of the units will be reflected in Net Asset Value or NAV of the unit. NAV is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation date. Mutual fund companies provide daily net asset value of their schemes to their investors. NAV is important, as it will determine the price at which you buy or redeem the units of a scheme. Depending on the load structure of the scheme, you have to pay entry or exit load.
Classification of mutual funds in India
Various Mutual Fund schemes and their implications
Mutual fund schemes are classified on the basis of its structure and investment objective.
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By Structure
Open ended funds: Investors can buy and sell units of open-ended funds at NAV-related price every day. Open-end funds do not have a fixed maturity and it is available for subscription every day of the year. Open-end funds also offer liquidity to investments, as one can sell units whenever there is a need for money.
Close-ended funds: These funds have a stipulated maturity period, which may vary from three to 15 years. They are open for subscription only during a specified period. Investors have the option of investing in the scheme during initial public offer period or buy or sell units of the scheme on the stock exchanges. Some close-ended funds repurchase the units at NAV-related prices periodically to provide an exit route to the investors.
Interval Funds: These funds combine the features of both open and close-ended funds. They are open for sale and repurchase at a predetermined period.
By Investment objective
Growth funds: They normally invest most of their corpus in equities, as their objective is to provide capital appreciation over the medium-to-long term. Growth schemes are ideal for investors with risk appetite.
Income funds: As the name suggests, the aim of these funds is to provide regular and steady income to investors. They generally invest their corpus in fixed income securities like bonds, corporate debentures, and government securities. Income funds are ideal for those looking for capital stability and regular income.
Balanced funds: The objective of balanced funds is to provide growth along with regular income. They invest their corpus in both equities and fixed income securities as indicated in the offer documents. Balanced funds are ideal for those looking for income and moderate growth.
Money market funds: These funds strive to provide easy liquidity, preservation of capital and modest income. MMFs generally invest the corpus in safer short-term instruments like treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes hinges on the interest rates prevailing in the market. MMFs are ideal for corporate and individual investors looking to park funds for short periods.
Other schemes
Tax saving schemes: Tax saving schemes or equity-linked savings schemes offer tax rebates to investors under section 88 of the Income Tax Act. They generally have a lock-in period of three years. They are ideal for investors looking to exploit tax rebates as well as growth in investments.
Special schemes: These schemes invest only in the industries specified in the offer document. Examples are Infotech funds, FMCG funds, pharma funds, etc. These schemes are meant for aggressive and well-informed investors.
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Index funds: Index Funds invest their corpus on the specified index such as BSE Sensex, NSE index, etc. as mentioned in the offer document. They try to mimic the composition of the index in their portfolio. Not only the shares, even their weightage is replicated. Index funds are a passive investment strategy and the fund manager has a limited role to play here. The NAVs of these funds move along with the index they are trying to mimic save for a few points here and there. This difference is called tracking error.
Sector specific schemes: These funds invest only specified sectors like an industry or a group of industries or various segments like ‘A’ Group shares or initial public offerings.
Selecting a Mutual Fund
Selection parameters
Your objective: The first point to note before investing in a fund is to find out whether your objective matches with the scheme. It is necessary, as any conflict would directly affect your prospective returns. For example, a scheme that invests heavily in mid-cap stocks is not suited for a conservative equity investor. He should be better off in a scheme, which invests mainly in blue chips. Similarly, you should pick schemes that meet your specific needs. Examples: pension plans, children’s plans, sector-specific schemes, etc.
Your risk capacity and capability:
This dictates the choice of schemes. Those with no risk tolerance should go for debt schemes, as they are relatively safer. Aggressive investors can go for equity investments. Investors that are even more aggressive can try schemes that invest in specific industry or sectors.
Fund Manager’s and scheme track record: Since you are giving your hard earned money to someone to manage it, it is imperative that he manages it well. It is also essential that the fund house you choose has excellent track record. It also should be professional and maintain high transparency in operations. Look at the performance of the scheme against relevant market benchmarks and its competitors. Look at the performance of a longer period, as it will give you how the scheme fared in different market conditions.
Cost factor:
Though the AMC fee is regulated, you should look at the expense ratio of the fund before investing. This is because the money is deducted from your investments. A higher entry load or exit load also will eat into your returns. A higher expense ratio can be justified only by superlative returns. It is very crucial in a debt fund, as it will devour a few percentages from your modest returns.
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Purchasing mutual funds
Purchasing during IPO:
Like companies, even mutual funds offer initial public offering. It is when they launch the scheme for the first time. You can buy units at par on this occasion. However, it is not always advantageous to buy a mutual fund during IPO. You can always wait and see the performance before investing in it.
Purchasing existing mutual fund units:
You can buy units of an open-end scheme anytime at NAV-related price. Most mutual funds charge an entry load of up to 2%. That means you have to pay an additional 2% of the NAV to get into the scheme. You can buy the plan directly from the mutual fund or brokerage. You can even buy them via the Internet.
Selling mutual funds
You can sell or redeem units very easily. As per Sebi guidelines, a mutual fund unit holder has the right to receive redemption or repurchase proceeds within 10 days of the redemption or repurchase. Most funds do not charge an exit load these days.
When should you sell a mutual fund unit is a crucial question. Ideally, you should sell it when you have met your target profit. The other reason is that you need the money or your profile has changed due to some changes in your life. Other than this, you should sell the units if you find that the fund has been taken over by another fund, which you do not approve of. Any major changes in the objective of the fund or a sharp rise in expenses could also be valid reasons to redeem units. Following a favorite fund manager is also a usual practice. However, it need not be always rewarding.
Income from mutual funds: the options
Mutual funds distribute their income as dividend. An investor has the option of receiving the dividend or opting for the dividend reinvestment. If an investor needs the income, he can opt for dividend payout option. However, if you do not need the money, he can opt for dividend reinvestment. Another choice before him is the growth or cumulative option. Here the income generated from sale of securities or capital appreciation is automatically reinvested. Speedy investment, redemption and income receipts
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Thanks to the Electronic Clearing Services (ECS), mutual fund investor now has the option of automatic credit of dividends and redemptions into bank account. This will save a lot of paperwork, for both you and the fund. You can also instruct your bank to automatically withdraw a certain sum towards systematic investment plan. Alternatively, you can also directly receive systematic withdrawal proceeds in your bank account.
Tracking mutual funds performance
Objective parameters
The NAV of the scheme will reflect the performance of the scheme. The fund will also give you returns for various periods such as one month, three months, six months, one year, three years, since inception, etc. This will give you an idea about the performance of the fund.
Funds also provide comparison with relevant benchmarks. This should tell you whether the fund manager has performed better than the benchmark. However, financial experts believe that these returns do not give the complete picture. They believe that the return should be risk-adjusted. Various publications and Internet sites provide such returns. The computation is complicated and they use various formulas for this purpose.
Subjective parameters
The performance alone does not make a fund house a winner. Equally important is the service standards and transparency in actions. It is also essential that the fund offer speedy solutions to grievances of investors. The reputation of the fund house among its investors and public at large indicates how well the fund scores on this front. Information sources
Every financial daily offers daily NAV of all mutual fund schemes. Magazines also come out with annual survey of mutual funds. There are even magazines dedicated entirely towards mutual fund industry. Internet is also a great place for information. There are dedicated sites as well as financial sites, which offer information on mutual funds. Association of Mutual Funds of India (AMFI) home page is also a great place for information.
Resolving grievances
Mutual funds are regulated by Sebi (mutual fund) regulation 1996. Therefore, an investor always has the recourse to approach the watchdog. Various investor forums also take up the case of individual investors. You can also turn to judiciary as a last resort.
Benefits of investing in Mutual Funds
One can invest in stocks, in bonds, Treasury bills, or real estate, but in the end the resources will limit him to one or maybe two securities which increase the risk to about the
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level of going to the local casino or buying a lottery ticket. The reason Mutual Funds are so popular is because they decrease the risk and increase the probability of enjoying high returns. Following are the top five big benefits of investing in Mutual Funds.
1. The Advantage of Professional Investment Management.
Mutual funds provide full-time, high quality professional management services by pooling the resources of many hundreds of investors. The high level of professional management is a vital key to profoundly satisfying results mutual funds enjoy in today’s complicated and volatile markets. The fund manager’s goals and interests are tied to your success because their paycheck is based on how well the fund performs rather than on sales commissions. The fund manager has instant access to real market information and is able to make trades on very large and therefore cost effective securities packages.
2. Diversification.
A major advantage of mutual funds is that they invest in a wide range of options from stocks to bonds to money market securities. This diversification limits risk because a decline in the value of any specific security is offset by the stability or increasing value of other securities in the package. Shareholders benefit from a level of diversification made possible by the amount of pooled investment dollars that most individual investors would not be able to achieve.
3. Low Cost, High Quality Investing
An average investor could not create a well balanced portfolio holding a meager 50 stocks. It would be too expensive. The investments alone would be about $150,000 and then there would be fees and commissions and accountants compensations on top of that. A mutual fund lets you buy into a diversified portfolio for as little as $50. in some circumstances. Typically you can get started in a well managed fund for under $1000.
4. Convenience and Flexibility
Mutual Fund managers study the market, analyze the securities, make all the decisions on what to buy and sell, clip the coupons, collect all the interest payments and make sure dividends on the fund's securities are received, recorded and disbursed. They protect the interest of the shareholder (you) and are available to answer questions or to buy and redeem fund shares either online or on the telephone. While you own just one security you have all the benefits of a widely diversified portfolio.
Other services may include automatic reinvestment of dividends and exchange privileges.
5. Mutual Fund Investments are Liquid and Easy to Withdraw
Mutual Funds can be traded in (redeemed) at anytime so cash is available in an emergency. You can request (redeem) funds by electronic transfer, letter, phone, or simply by writing a check against the shares depending on the type of fund you are invested in. The money will be in your hand in about three business days.
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Drawbacks of mutual funds
Mutual funds have their drawbacks and may not be for everyone:
No Guarantees
No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
Fees and commissions
All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if one doesn't use a broker or other financial adviser, one will have to pay a sales commission if he buys shares in a Load Fund.
Taxes
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.
Management risk
When one invests in a mutual fund, then they depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as they had hoped, one might not make as much money on their investment as they have expected. Of course, if he invests in Index Funds, he’ll forego management risk, because these funds do not employ managers
Mutual Fund Risk
Risk
Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that one will lose money (both principal and any earnings) or fail to make money on an investment. A fund's investment objective and its holdings are influential factors in determining how risky a fund is.
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Generally speaking, risk and potential return are related. This is the risk/return trade-off. Higher risks are usually taken with the expectation of higher returns at the cost of increased volatility. While a fund with higher risk has the potential for higher return, it also has the greater potential for losses or negative returns. The school of thought when investing in mutual funds suggests that the longer your investment time horizon is the less affected you should be by short-term volatility. Therefore, the shorter your investment time horizon, the more concerned you should be with short-term volatility and higher risk.
Defining Mutual fund risk
Different mutual fund categories as previously defined have inherently different risk characteristics and should not be compared side by side. A bond fund with below-average risk, for example, should not be compared to a stock fund with below average risk. Even though both funds have low risk for their respective categories, stock funds overall have a higher risk/return potential than bond funds.
Of all the asset classes, cash investments (i.e. money markets) offer the greatest price stability but have yielded the lowest long-term returns. Bonds typically experience more short-term price swings, and in turn have generated higher long-term returns. However, stocks historically have been subject to the greatest short-term price fluctuations—and have provided the highest long-term returns.
Investors looking for a fund which incorporates all asset classes may consider a balanced or hybrid mutual fund. These funds can be very conservative or very aggressive. Asset allocation portfolios are mutual funds that invest in other mutual funds with different asset classes. At the discretion of the manager(s), securities are bought, sold, and shifted between funds with different asset classes according to market conditions.
Mutual funds face risks based on the investments they hold. For example, a bond fund faces interest rate risk and income risk. Bond values are inversely related to interest rates. If interest rates go up, bond values will go down and vice versa. Bond income is also affected by the change in interest rates. Bond yields are directly related to interest rates falling as interest rates fall and rising as interest rise. Income risk is greater for a short-term bond fund than for a long-term bond fund.
Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is at risk that its price will decline due to developments in its industry. A stock fund that invests across many industries is more sheltered from this risk defined as industry risk.
The Role of Risk in Mutual Fund Strategies
Identifying individual risk tolerance is one of the basic factors in determining an optimum investment strategy for a mutual fund portfolio. Regardless of the return objectives and time horizon within a portfolio, risk tolerance affects both asset
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allocation and especially the selection of fund categories (i.e., large value, small growth, international, short-term bond, intermediate-term bond, etc.).
As the level of risk increases, both volatility and total return potential proportionately increase; conversely, as the level of risk decreases, both volatility and total return potential proportionately decrease. This standard risk/reward rule is often illustrated with risk and reward both escalating over a broad spectrum beginning with cash reserves, changing to bonds and then ending with stocks:
Risks involved while investing in Mutual Funds.
Call Risk. The possibility that falling interest rates will cause a bond issuer to redeem—or call—its high-yielding bond before the bond's maturity date.
Country Risk. The possibility that political events (a war, national elections), financial problems (rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a country's economy and cause investments in that country to decline.
Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk.
Currency Risk. The possibility that returns could be reduced for Americans investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk.
Income Risk. The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates.
Industry Risk. The possibility that a group of stocks in a single industry will decline in price due to developments in that industry.
Inflation Risk. The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns.
Interest Rate Risk. The possibility that a bond fund will decline in value because of an increase in interest rates.
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Manager Risk. The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives.
Market Risk. The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall.
Principal Risk. The possibility that an investment will go down in value, or "lose money," from the original or invested amount.
Five Stats That Showcase Risk
There are five main indicators of investment risk that apply to the analysis of stocks, bonds and mutual fund portfolios. They are Alpha, Beta, R-square, Standard Deviation and Sharpe Ratio. These statistical measures are historical predictors of investment risk/volatility and are all major components of Modern Portfolio Theory (MPT).
The MPT is a standard financial and academic methodology used for assessing the performance of equity, fixed-income and mutual fund investments by comparing them to market benchmarks.
AlphaAlpha is a measure of an investment's performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or fund portfolio and compares its risk-adjusted performance to a benchmark index. The excess return of the investment relative to the return of the benchmark index is its "alpha".
Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. For investors, the more positive an alpha is, the better it is.
Beta
Beta, also known as the "beta coefficient," is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is calculated using regression analysis, and you can think of it as the tendency of an investment's return to respond to swings in the market. By definition, the market has a beta of 1.0. Individual security and portfolio values are measured according to how they deviate from the market.
A beta of 1.0 indicates that the investment's price will move in lock-step with the market. A beta of less than 1.0 indicates that the investment will be less volatile than the
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market , and , correspondingly, a beta of more than 1.0 indicates that the investment's price will be more volatile than the market. For example, if a fund portfolio's beta is 1.2, it's theoretically 20% more volatile than the market.
Conservative investors looking to preserve capital should focus on securities and fund portfolios with low betas, whereas those investors willing to take on more risk in search of higher returns should look for high beta investments.
R-Squared
R-Squared is a statistical measure that represents the percentage of a fund portfolio's or security's movements that can be explained by movements in a benchmark index.
R-squared values range from 0 to 100. According to Morningstar, a mutual fund with an R squared value between 85 and 100 has a performance record that is closely correlated to the index. A fund rated 70 or less would not perform like the index.
Mutual fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as being "closet” index funds. In these cases, why pay the higher fees for so-called professional management when you can get the same or better results from an index fund.
Standard Deviation
Standard deviation measures the dispersion of data from its mean. In layman terms, the more that data is spread apart, the higher the difference is from the norm. In finance, standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A volatile stock would have a high standard deviation.
With mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance.
Sharpe Ratio
Developed by Nobel laureate economist William Sharpe, this ratio measures risk - adjusted performance. It is calculated by subtracting the risk-free rate of return from the rate of return for an investment and dividing the result by the investment's standard deviation of its return.
The Sharpe ratio tells investors whether an investment's returns are due to smart investment decisions or the result of excess risk. This measurement is very useful because although one portfolio or security can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater an investment's Sharpe ratio, the better its risk-adjusted performance.
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The Risk- Return Trade Off
The risk-return tradeoff is the balance an investor must decide on between the desire for the lowest possible risk for the highest possible returns. It’s a fact that low levels of uncertainty (low risk) are associated with low potential returns and high levels of uncertainty (high risk) are associated with high potential returns.
The following chart shows an example of the risk/return tradeoff for investing. A higher standard deviation means a higher risk:
Risk Return Grid
We can figure out from the above diagram that, Liquid funds are the least risky and hence the expected returns are also the least. Whereas the equity sector funds are the most risky and hence the returns offered are also the maximum.
Relation between Diversification and Risk
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Proper levels of diversification can be used to minimize risk while still allowing appreciating securities to dominate a portfolio. Diversification can eliminate non-market risk from a portfolio, that is, risk associated with owning a particular company. Diversification is not the same as the number of investments held in a portfolio. Diversification is minimizing the correlation between each investment held in a portfolio. This is usually accomplished in a stock portfolio by holding stocks of differing industries.
What is proper diversification, as opposed to over or under diversification?
The graph below shows the maximum reduction in portfolio risk for each security added to a portfolio. As can be seen, the level of risk is reduced from 50% to 20.3% with as little as ten properly diversified securities. Adding another 1000 securities to the portfolio would reduce the risk to 20.1%. The first ten securities in a portfolio diversify away over 97% of the non-market risk. Diversification, or elimination of the non-market risk, can lower the risk of a common stock portfolio to 20%, which is the level of market risk that every portfolio holds. Market risk, the risk associated with the stock market in general, can never be eliminated or reduced.
Under-Diversification Produces Large Amounts of Unnecessary Non-Market Risk
Holding five or fewer securities allows for a high level of non-market risk in a portfolio and is generally not recommended. An example of an exception to this rule is company founders and officers that hold vast amounts of a single security. They can afford the high levels of non-market risk because of their wealth.
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Most industry specific mutual funds are quite under-diversified in spite of the high numbers of securities owned by each mutual fund. Each security in an industry specific mutual fund is quite susceptible to common industry factors which create a high level of non-market risk, even if the fund has close to 1000 companies represented.
Therefore it makes little sense for the investor to pay the high management fees of an industry specific fund , because in order to be properly diversified the investor must pick nine other industry funds from other industries.
True Diversification
To achieve true diversification that you need to buy funds that are different from each other whether by company size, industry, sector, country, etc. This means you are buying funds that are uncorrelated – funds that move in different directions during different times. A person's overall portfolio should also diversify among different asset classes, meaning allocating a certain percentage to bonds, commodities, real estate, alternative assets and so on. Owning a mutual fund that invests in 100 companies doesn't necessarily mean that you are at optimum diversification. Many mutual funds are sector specific, so owning a telecom or health care mutual fund means you are diversified within that industry, but because of the high correlation between movements in stocks prices within an industry, you are not diversified to the extent you could be by investing across various industries and sectors. Balanced funds offer better risk protection than a sector-specific mutual fund because they own 100 or more stocks across the entire market.
Many mutual fund holders also suffer from being over-diversified. Some funds, especially the larger ones, have so many assets (i.e. cash to invest) that they have to hold literally hundreds of stocks. In some cases this makes it nearly impossible for the fund to outperform indexes.
Over diversification
Many mutual funds hold close to a thousand securities in their portfolio, which reduces non-market risk a small fraction more than a portfolio of 10 securities. But the question must be raised as to whether the costs of holding a thousand securities are worth the small reduction in risk. The personnel, equipment, and administrative costs associated with analyzing, following and holding large numbers of securities are passed on to the mutual fund investor. And for what? Basically, for attaining the same returns as the market in general minus the extra expenses mentioned.
Drawbacks of Over Diversification:
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Unforeseen taxes and turnover costs. Mediocre performance due to broad-based exposure. Lack of adequate supervision over each asset class.
How can over diversification hurt returns?
Unfortunately, many investors overdo diversification because there is a tendency to believe that if more is good, even more is better. Taken to an extreme, diversification can diminish returns simply because, if you have too many investments, the positive contribution of one won't be big enough to make a difference. For example, if a fund or security only makes up 1 percent or 2 percent of your portfolio, even a significant gain in that investment won't have a material difference in the overall portfolio.
High costs
Overall performance can be further eroded by unforeseen trading costs or taxes associated with a portfolio that has too many holdings. If you are paying for trades or sales charges, managing an excessive number of stocks or funds can be expensive or prevent you from missing breakpoints.
Management problems
Having too many securities or funds creates a real management problem. It is essential that either the investor or his or her adviser knows every security or fund in the portfolio. If neither understand it, then it shouldn't be in there."
How much is enough? Generally 10 to 15 funds Or funds in four to five asset classes (essentially top fund in each asset class).
Small cap, Mid cap and Large cap domestic stocks, and some international exposure
Mutual Fund Expenses
Expenses
Because mutual funds are professionally managed investments, there are management fees and operating expenses associated with investing in a fund. These fees and expenses charged by the fund are passed onto shareholders and deducted from the fund's return.
These expenses are typically expressed as the expense ratio - the percent of fund assets spent (annually) on day-to-day operations. Expense ratios can vary widely among funds.
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Expense ratios for mutual funds commonly range from 0.2% to 2.0%, depending on the fund.
Defining Mutual Fund costs
All mutual funds have costs, but some funds are more expensive to own than others. Be conscious of the effect of seemingly minor cost differences which can significantly affect the growth of your investment assets, especially over longer periods of time.
Mutual fund costs fall into two main categories: One-time fees and ongoing annual expenses. Not all funds charge one-time fees, but all funds charge ongoing annual fees of some sort.
One-Time Fees
Loads
Loads come in three forms:
Front-End Loado Charged when you purchase fund shares-usually class A shares, effectively
reducing your purchase amount.
o May be charged on reinvested distributions.
o Can be as high as 8.5%.
Back-End Load
o Charged when you sell fund shares. o Usually assessed based on the length of time you have held your shares, and
declines over time.
o Maximum allowed is 8.5%, but this is rarely seen. According to Lipper Inc., back-end loads can be as high as 6% if you sell shares within one year.
Level Load o Deducted annually from fund assets as marketing and distribution costs.
o Used to pay commissions to brokers and the fund's financial adviser, and is generally reported as part of a fund's operating expenses.
o Can be as high as 0.75% per year, according to Lipper Inc.
Funds that have no sales charges are known as "no-load," while funds that charge loads of 1% to 3% are called "low-load." Keep in mind, funds that have lower loads or no-loads
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tend to have higher operating expenses. Again, read each fund's prospectus and compare "net" returns.
Ongoing Annual Expenses
Management Fees Distribution and Service Fees
Other Expenses
Underlying Fund Expenses
Other fees
In addition to sales loads, fund companies and brokerages may charge other fees when you buy or sell fund shares.
A transaction fee is charged by some brokerage firms for purchasing or selling shares. Transaction fees are sometimes referred to as commissions but are extra costs not normally paid if you were to purchase your fund directly with the fund family.
Some fund companies and brokerages may charge a redemption fee if the fund is held for less than a certain period of time, generally between 90 and 180 days. These charges are intended to discourage short-term trading that can raise a fund's administrative costs.
Not all funds assess these "extra" fees. In fact, funds and brokerages may not charge a sales load, transaction fees or redemption fees.
Mutual Funds and Taxes
Different types of Mutual Funds attract different types of taxes. Here is the information about taxes applicable on Mutual Funds in India.
TaxationEquity Funds
Liquid funds/Money Market Funds
Debt fund/liquid plus Funds
Short Term Capital Gain Tax
*16.995%As per Income Tax Slab
As per Income Tax Slab
Long Term Capital Gain Tax
NilLess of 10% without indexation or 20% with indexation
Less of 10% without indexation or 20% with indexation
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Dividend Distribution Tax
Nil **28.325% **14.163%
80C benefits through ELSS: Under the current tax laws, you can get an annual income tax benefit of up to Rs. 1Lakh if you invest in Equity Linked Savings Schemes, ELSS. However, the minimum term for these schemes is 3 years and you cannot withdraw your money before that time
*There would be an additional surcharge of 10% of Short Term Capital Gain Tax if the individuals’ income is more than 10 lacs per annum. Further, the education cess of 3% shall be levied on all investors.
*Short Term Capital Gain Tax indicated above is inclusive of surcharge and education cess
**Dividend Distribution Taxes indicated above are inclusive of additional surcharge and cess.
INCOME TAX IMPLICATIONS ON MUTUAL FUND GAINS
We all invest in mutual funds and get the returns either in the form of dividends or get capital appreciation benefits under growth option. But do we know how is this income taxed in India? What are the tax implications on the income arising out of mutual fund investments? Will try and answer this today.We will look at how income arising from mutual funds are taxed for an individual investor. The income from mutual funds can arise out of dividend received from the fund or from the capital gains (short term or long term).Let us understand how is the income arising out of dividend and capital gains taxed as per Income Tax Act in India.
1. DIVIDEND
a. On units of equity oriented funds (funds having more than 65% investments in Indian equity instruments): Income in the form of dividend is tax free in the hands of the investor. Moreover such a fund house is exempt from paying Dividend Distribution Tax also.
b. On units of funds other than equity oriented fund: Income in the form of dividends is tax free. However, the fund house needs to pay Dividend Distribution Tax (DDT) at the time of distributing the dividend. The rate of dividend distribution tax depends on who is the recipient of the dividend and is calculated as under- Individual and HUF - 14.025%- Others like corporate - 22.44%
2. CAPITAL GAINS
Capital gain is classified into 2 categories i.e. Short term and long term capital gains. Short term capital gains arises out of sale of units held for less than 12 months and long term
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capital gains arises out of sale of units held for more than 12 months.
a Short Term capital Gains
-On units of equity oriented funds (funds having more than 65% investments in Indian equity instruments): The income arising out of short term capital gains in mutual funds is to be taxed at the rate of 10% plus applicable surcharges.
-On units of funds other than equity oriented funds: Short term capital gains is added back to your income and then your total income is taxed as per the IT slab i.e. 10% or 20% or 30% for the ones falling in the highest bracket.
b. Long Term capital Gains
-On units of equity oriented funds (funds having more than 65% investments in Indian equity instruments): Tax free
--On units of funds other than equity oriented funds : There are 2 methods for this.
The investor can calculate capital gains taking the benefit of indexation and pay tax at the rate of 20% plus surcharge. or
The investor can calculate the capital gains without the benefit of indexation and pay tax at 10%.
Infrastructure Funds
Mutual funds constantly come out with different schemes. A lot has been written about large cap funds, mid cap funds, small cap funds and various sectoral funds, but not much is known about infrastructure funds and their performance.
Infrastructure funds are part of a mutual fund category called thematic funds. While sectoral funds invest in particular sectors like, say, information technology, power, metals, oil and gas, etc, thematic funds invests in themes like infrastructure, consumption-led categories like the retail industry and outsourcing companies. But nowadays most of the experts consider thematic funds to be as the sectoral funds.
Infrastructure funds have caught the fancy of a lot of mutual funds; many new funds have been launched in this category in the last couple of years. But there are only five that have sizeable money under management; and these five were launched before 2006:
These funds include:
1. DSP ML TIGER Fund
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2. Prudential ICICI Infrastructure Fund
3. Tata Infrastructure Fund
4. UTI Thematic Infrastructure Fund
5. Sundaram BNP Paribas Capex Opportunities Fund
These are are open-ended funds; this means one can invest in them whenever they like. There are some more infrastructure funds currently available in the market but most of them are close-ended (in open-ended funds, investors are free to sell their units anytime; in close-ended funds, investors cannot sell their units for a minimum period of time this minimum period is decided by the fund).
Infrastructure, as a theme, covers several sectors like power utilities, power equipment and construction companies. Unlike technology sector mutual funds (at best, technology sector funds could buy stocks from telecom and media besides the software stocks it traditionally invests in), infrastructure funds are not restricted to a few sectors.
In 2006, infrastructure funds shot to prominence by topping the performance rankings. Among the five best performing diversified equity funds, three were infrastructure funds. So it comes as a bit of a surprise to know that infrastructure was not even recognized as a separate theme a few years ago.
It was the government's planned infrastructure expenditure of $320 billion during the eleventh 5-year plan (2007-2012) that did the trick. Even if half of it materializes, infrastructure funds will be able to generate great returns.
UTI Infrastructure was the first to grab the opportunity in April 2004. Talk about the early bird getting the worm, it was the best performing equity fund in 2006 with a 61.5 per cent return. Tata Infrastructure and ICICI Prudential Infrastructure delivered 61.5 per cent and 60.3 per cent respectively.
This was no mean feat considering that in 2005, no infrastructure fund featured in the top 10 return generators. Currently, there are 12 funds dedicated to this sector. The latest entry into the fold is DBS Cholamandalam with a three-year, close-ended fund.
Analysis of Infrastructure Funds
The project deals with the analysis of three of the infrastructure funds viz.
1. Prudential ICICI Infrastructure Fund
2. Tata Infrastructure Fund
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3. UTI Thematic Infrastructure Fund
Till date only individual analysis has been taken into consideration the comparison between the funds will be carried on further.
1. Prudential ICICI Infrastructure Fund
Objective: To generate capital appreciation and income distribution to unit holders by investing predominantly in equity/equity related securities of the company belonging to the infrastructure industries and balance in debt securities and money market instruments including call money.
Structure: Open-ended equity Fund
Inception Date: August 16, 2005
Plans and Options under the Plan: Growth Option & Dividend Option.
Face Value (Rs/Unit): Rs. 10
Minimum Investment: Rs. 5000
Entry Load: For investments of less than Rs. 5 Crores, Entry load is 2.25% of applicable NAV. For investments of Rs. 5 crores and above, Entry Load is Nil.
Portfolio Analysis:
Current Stats & Profile
Latest NAV 19.61 (15/04/09)
52-Week High 29.49 (02/05/08)
52-Week Low 14.11 (27/10/08)
Fund Category Equity: Diversified
Type Open End
Launch Date August 2005
Risk Grade Average
Return Grade High
Trailing Returns
As on 15 Apr 2009 Fund Category
Year to Date 13.62 11.00
1-Month 23.64 25.55
3-Month 20.97 17.84
1-Year -28.14 -32.30
3-Year 9.27 -4.38
5-Year -- 14.70
Return Since Launch
20.17 --
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Net Assets (Cr) 2,481.02 (31/03/09)
Benchmark S&P CNX Nifty
Returns upto 1 year are absolute and over 1 year are annualised.
As from the current statistics we see that the latest NAV of the fund has been much more inclined towards the 52- week Low i.e. it has increased only 5 points from the lowest NAV which was 14.11 so the fund has greater prospects and in the near future may show an increase in NAV resulting into the investor a profit of 10 Rs on each unit. Moreover the return grade of the fund is high whereas the risk grade is average.
Comparing it with the similar category fund we find that it has always given better returns as compared to them. As where the fund has given a return of 13.62% the similar category funds have given only 11% of return
Returns and Risk Aggregates
Rating & Risk Modern Portfolio Stat
Volatility Measures
Fund Rating R-Squared 0.94 Mean 11.98 Fund Risk Grade
Average Alpha 11.32
Standard Deviation
35.79
Fund Return High Beta 1.11 Sharpe Ratio 0.19
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Portfolio Summary
Top Holdings As on 31 Mar
Name of Holding % Net Assets
Reliance Industries 9.64
Bharti Airtel 8.49
HDFC Bank 6.51
State Bank of India 4.36
ICICI Bank 3.09
Top 5 Sectors % Net Asset
As on 31/03/2009
Financial 17.19
Energy 12.25
Metals 8.78
Communication 8.49
Diversified 4.92 Indicates an increase or decrease or no change in holding since last
portfolio
Grade
Standard Deviation:
The standard deviation essentially reports a fund's volatility, which indicates the tendency of the returns to rise or fall drastically in a short period of time. The standard deviation of a fund measures this risk by measuring the degree to which the fund fluctuates in relation to its mean return, the average return of a fund over a period of time.
According to the table we see that the standard deviation of the fund is much higher. This fund is therefore more risky because it fluctuates widely between negative and positive returns within a short period.
The fund with the lower standard deviation would be more optimal because it is maximizing the return received for the amount of risk acquired
Beta:
While standard deviation determines the volatility of a fund according to the disparity of its returns over a period of time, beta, another useful statistical measure, determines the volatility, or risk, of a fund in comparison to that of its index or benchmark.
A fund with a beta very close to 1 means the fund's performance closely matches the index or benchmark. A beta greater than 1 indicates greater volatility than the overall market, and a beta less than 1 indicates less volatility than the benchmark.
Here we see that the beta of fund is 1.11 in relation to the S&P CNX Nifty, i.e. the fund is moving 11% more than the index. . Therefore, if the S&P CNX Nifty increased 15%, the fund would be expected to increase 16.65%.
R-Square:
The R-squared of a fund advises investors if the beta of a mutual fund is measured against an appropriate benchmark. Measuring the correlation of a fund's movements to that of an index, R-squared describes the level of association between the fund's volatility and market risk, or more specifically, the degree to which a fund's volatility is a result of the day-to-day fluctuations experienced by the overall market.
R-squared values range between 0 and 100, where 0 represents the least correlation and 100 represents full correlation. If a fund's beta has an R-squared value that is close to 100, the beta of the fund should be trusted. On the other hand, an R-squared value that is close to 0 indicates that the beta is not particularly useful because the fund is being compared against an inappropriate benchmark.
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From the table we see that the R- Square of the fund is 0.94 i.e. 94 which is much closer to 100 hence the beta of the fund should be trusted as it has been measured against an appropriate benchmark.
Alpha
Using beta, alpha's computation compares the fund's performance to that of the benchmark's risk-adjusted returns and establishes if the fund's returns outperformed the market's, given the same amount of risk.
For example, if a fund has an alpha of 1, it means that the fund outperformed the benchmark by 1%. Negative alphas are bad in that they indicate that the fund underperformed for the amount of extra, fund-specific risk that the fund's investors undertook.
The alpha of the fund is 11.32 which state that the fund outperformed the benchmark by 11.32%.
Sharpe ratio
The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk.
The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed. A ratio of 1 or better is considered good, 2 and better is very good, and 3 and better is considered excellent.
Since the Sharpe ratio here of the fund is only 0.19 hence we see that the returns are due to excess risk undertaken and not due to astute investment decision.
Best and Worst Performance
Best (Period) Worst (Period)Month 26.07 (14/09/2007 - 16/10/2007) -38.80 (24/09/2008 - 24/10/2008) Quarter 54.25 (21/08/2007 - 20/11/2007) -42.13 (28/07/2008 - 27/10/2008) Year 103.61 (12/12/2006 - 12/12/2007) -55.81 (03/12/2007 - 02/12/2008)
The year 2007 proved to be quite significant from the investment point of view as it gave the highest return, as on Dec 2007 the scheme posted 46.53% of returns outperforming the
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category average of 29.08%. It outperformed the sensex posted 28.07% returns during the same period.
Whereas the fund gave its worst return during 2008 due to the turbulent changes in the market conditions.
Trailing Returns
As of 15 Apr 2009
Fund Return Category Return
S&P CNX Nifty
Sensex
Year-to-Date 13.62 11.00 17.74 16.97
1-Week 4.92 5.79 4.22 5.05
1-Month 23.64 25.55 28.13 28.87
3-Month 20.97 17.84 27.31 24.74
1-Year -28.14 -32.30 -28.60 -30.14
2-Year 3.60 -10.04 -5.69 -8.18
3-Year 9.27 -4.38 1.36 0.14
5-Year -- 14.70 13.35 14.07
Return less than 1-year are absolute and over 1 year are annualized
From the above table of trailing returns we see that the fund has given better returns as compared to its benchmark as well as the category returns
Annual Returns
2008 2007 2006 2005 2004
Fund Return -51.64 92.92 58.53 -- --
Rank In Category 66/193 6/162 4/145 -- --
Category Average -55.08 59.27 34.73 46.58 26.38
S&P CNX Nifty -51.79 54.77 39.83 36.34 10.68
Sensex -52.45 47.15 46.70 42.33 13.08
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In the annualized return table we can see that though the return for the fund is negative but much better than its benchmark as well as the category. Whereas in the year 2006 and 2007 it was amongst the best performers.
As on 31/03/09 % Net Assets
Equity 89.32
Debt 0.00
Others 10.68
Portfolio Concentration
As on 31/03/09 % Net Assets
Top 3 Sectors 38.21
Top 5 Holdings 32.10
Top 10 Holdings 42.54
The fund has completely allocated its assets on equity with only 10.68% issued to others which can act as a hindrance while revising the portfolio of the fund. A larger amount of cash in hand would help the fund manager buy fruitful and performing stocks.
Investment Details
Basics
Min Investment (Rs) 5000
Subsequent Investment (Rs)
500
Min Withdrawal (Rs) 500
Min Balance (Rs) 5000
Systematic Investment Plan
SIP Yes
Initial Investment (Rs) 1000
Additional Investment (Rs) 1000
No of Cheques 5
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Pricing Method Forward
Purchase Cut-off Time (hrs)
15
Redemption Cut-off Time (hrs)
15
Redemption Time (days) 3
Lock-in --
Cheque Writing --
Note
The scheme also offers a quarterly SIP with minimum investment of Rs 5000 and 4 post-dated cheques of Rs 5000 each.
The different investment plans and its details is provided in the above table.
2. Tata Infrastructure Fund
Objective: Tata Infrastructure Fund seeks to provide income distribution and / or medium to long term capital gains by investing predominantly in equity / equity related instrument of companies in infrastructure sector.
Structure: Open-ended Equity Fund
Inception Date: November 25, 2005
Plans and Options under the Plan: Growth, Dividend
Face Value (Rs/Unit): Rs. 10
Minimum Investment: Rs.5000
Entry Load: For investment amount greater than or equal to Rs.2 crores: Nil. For investment amount less than Rs.2 crores: 2.25%.
Exit Load: For each investment amount of less than Rs. 2crores: 1% if redeemed on or before expiry of 6 months from the date of allotment.
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Trailing Returns
As on 15 Apr 2009 Fund Category
Year to Date 9.68 11.00
1-Month 25.86 25.55
3-Month 19.94 17.84
1-Year -35.48 -32.30
3-Year 0.08 -4.38
5-Year -- 14.70
Return Since Launch
18.21 --
Returns upto 1 year are absolute and over 1 year are annualised.
Portfolio Analysis:
Returns and Risk Aggregates
Rating & Risk Modern Portfolio Stat
Volatility Measures
Fund Rating R-Squared 0.92 Mean 2.62 Fund Risk Grade
Average Alpha 1.76 Standard Deviation
34.62
Fund Return Grade
Average Beta 1.06 Sharpe Ratio -0.07
Here we see that the fund has both average
return and risk
simultaneously. The standard deviation is high hence we can say that the fund is risky.
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Portfolio Summary
Top Holdings As on 31 Mar
Name of Holding % Net Assets
BHEL 6.05
HDFC Bank 5.66
Reliance Industries 5.62
ONGC 4.31
Bharti Airtel 4.24
Top 5 Sectors % Net Asset
As on 31/03/2009
Energy 26.36
Financial 15.12
Engineering 9.72
Communication 5.44
Metals 4.34
Current Stats & Profile
Latest NAV 20.5842 (15/04/09)
52-Week High 34.3221 (02/05/08)
52-Week Low 15.6997 (09/03/09)
Fund Category Equity: Diversified
Type Open End
Launch Date December 2004
Risk Grade Average
Return Grade Average
Net Assets (Cr) 1,357.69 (31/03/09)
Benchmark Sensex
Here we see that the fund’s latest NAV has increased only 5 points from the 52 week low and hence has a great prospect because if in the near future it reaches its high it would instantly fetch an increase of about 13.7379 with every unit.
The return till 15th April 09 lags behind the category return a bit. Otherwise it has given much better return than the category
The above table gives us the information about the top 5 holdings of the company as on 31st March 09
Here the top 5 sectors of the funds has been listed depending upon their asset allocation. The AUMs 26.36% of the asset has been allocated to the energy sector only.
Beta of the fund is 1.06 i.e. it would give 6% higher returns as compared to its benchmark.
The R- Square of the fund is approaching near 100 i.e. has a higher degree of co relation with the benchmark and hence beta can be trusted.
Alpha of the fund is 1.76 i.e. the returns of the fund is 1.76% higher than its benchmark.
As already discussed a negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed. Hence the funds negative Sharpe ratio shows that the fund performance has been mainly due to excess risk undertaken and not due to wise investment decisions.
Best and Worst Performance
Best (Period) Worst (Period)Month 27.34 (14/09/2007 - 16/10/2007) -36.33 (24/09/2008 - 24/10/2008) Quarter 57.56 (21/08/2007 - 20/11/2007) -43.50 (02/09/2008 - 02/12/2008) Year 109.10 (02/05/2005 - 02/05/2006) -61.05 (03/12/2007 - 02/12/2008)
Similarly here also we see that the fund has given its best performance in the year 2007 with 27.34% of return in a single month and its worst performance in the year 2008.
Annual Returns
2008 2007 2006 2005 2004
Fund Return -57.58 84.31 60.32 -- --
Rank In Category 125/193 15/162 3/145 -- --
Category Average -55.08 59.27 34.73 46.58 26.38
S&P CNX Nifty -51.79 54.77 39.83 36.34 10.68
Sensex -52.45 47.15 46.70 42.33 13.08
The annualized returns of the fund as compared to the category as well as its benchmark have been slightly less in the year 2008. But in 2006 and 2007 it had outperformed both of them.
Asset Allocation
As on 31/03/09 % Net Assets
Equity 81.15
Debt 0.11
Portfolio Concentration
As on 31/03/09 % Net Assets
Top 3 Sectors 51.20
Top 5 Holdings 25.88
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Others 18.74 Top 10 Holdings 40.42
Here we see that the major portion of the total asset has been allocated to equity whereas about 18.74% has been provided to others being cash and cash derivatives. Hence the fund manager still has a major portion of liquidity with which it can easily help at the time of churning of the portfolio of the fund for better performance i.e. it can buy well performing stocks.
Investment Details
Basics
Min Investment (Rs) 5000
Subsequent Investment (Rs)
1000
Min Withdrawal (Rs) 1000
Min Balance --
Pricing Method Forward
Purchase Cut-off Time 15
Systematic Investment Plan
SIP Yes
Initial Investment (Rs) --
Additional Investment (Rs)
500
No of Cheques 12
Note
The scheme also offers quarterly SIP with minimum of 6 cheques of Rs 1000
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(hrs)
Redemption Cut-off Time (hrs)
15
Redemption Time (days) --
Lock-in --
Cheque Writing --
each. For SIP, an entry load of 1% will be charged and an exit load of 1.25% if redeemed within 2 yrs. for investment upto Rs 10 lakhs and for investment greater than Rs 10 lakhs the prevailing load structure for investment other than SIP will be applicable.
Different investment modes of the fund have been described above.
3. UTI Thematic Infrastructure Fund
Objective: To provide Capital appreciation through investing in the stocks of the companies engaged in the sectors like Metals, Building materials, oil and gas, power, chemicals, engineering etc.
Structure: Open Ended Equity Fund
Inception Date: March 09, 2004
Plans and Options under the Plan: Income Option, Growth Option
Face Value (Rs/Unit): Rs. 10
Minimum Investment: Rs. 5,000/-
Entry Load: Nil for investments made after 10.10.2004 and amount >=Rs 2 crore., Entry load 2.25% for investments made after 10.10.2004 and amount < Rs 25 lakhs
Exit Load: Nil.
Portfolio Analysis:
The latest NAV of the fund has increased 3.93 in less than 5 weeks hence if the same trend continues the investor who might had invested in this fund would virtually make profit. As its highest in 52 weeks was 37.27 which is about 14.08 Rs higher than the current NAV. Hence the investor can make a profit of this much amount for every unit he has purchased.
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The trailing returns of the fund lags behind its category returns.
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Current Stats & Profile
Latest NAV
23.18 (16/04/09)
52-Week High
37.27 (02/05/08)
52-Week Low
19.25 (09/03/09)
Fund Category
Equity: Diversified
Type
Open End
Launch Date
April 2004
Risk Grade
Average
Return Grade
Average
Net Assets (Cr)
1,121.13 (31/03/09)
Benchmark
BSE 100
Trailing Returns
As on 16 Apr 2009 Fund Category
Year to Date 8.07 8.32
1-Month 16.02 20.43
3-Month 11.98 13.39
1-Year -34.37 -34.33
3-Year -1.15 -5.18
5-Year -- 14.07
Return Since Launch 20.35 --
Returns upto 1 year are absolute and over 1 year are annualised.
Portfolio Summary
Top Holdings As on
31 Mar
Name of Holding % Net Assets
Top 5 Sectors
