PROJECT REPORT

ON

MUTUAL FUND SCHEME WITH OTHER INVESTMENT AVENUE

Submitted in Partial Fulfilment of the Requirement for the Award of the Degree of

Master of Business Administration (2012-2014)

Supervised by: Submitted by:

Mr. Sachin Kumar (Assistant professor) Divya Sapra

1228111

Department of Management

Punjab Institute of Management, Kapurthala (PITK)

Punjab Technical University (PTU) Main Campus

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DECLARATION

I hereby declare that project entitled Comparative Analysis of Mutual Fund Scheme.

Submitted to Punjab Technical University; Kapurthala in partial fulfilment of the requirement

for Master Degree of Business Administration (SEM-4th) is my original work.

DIVYA SAPRA

MBA 3rd Semester

Roll No: 1228111

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ACKNOWLEDGMENTI would like to thank my teacher’s team for extending their valuable time and cooperation .It is

really a matter of pleasure for me to get an opportunity to thank all the persons who contributed

directly or indirectly for the successful completion of the project report Comparitive analysis of

mutual fund scheme. First of all I am extremely thankful to Punjab Technical University (PTU)

for providing me with this opportunity and for all its cooperation and contribution. I also express

my gratitude to my project mentor and guide Prof.Sachin Kumar. I am highly thankful to my

project guide for giving me the encouragement and freedom to conduct my project. I am also

grateful to all my faculty members for their valuable guidance and suggestions for my entire

study.

Divya sapra

1228111

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INDEX

Sr.no Particulars Page.no

Introduction 3-5

Review of literature 5-6

Needs of the study 6-7

Objectives of the study 6-7

Scope of the study 6-7

Research methodology 6-7

Biblography 7-8

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REVIEW OF LTERATURE

The present study deals with the review of literature on ‘Evaluating the Performance of

Indian Mutual Fund Schemes’. A number of studies on evaluating the performance of Indian

Mutual Fund Schemes have been conducted in India and foreign countries. Review of some

of the studies is presented in the following discussion: -

Jayadev (1996) evaluated the performance of two growth-oriented mutual funds namely

Mastergain and Magnum express by using monthly returns. Jensen, Sharpe and Treynor

measures have been applied in the study and the pointed out that according to Jensen and

Treynor measure Mastergain have performed better and the performance of Magnum was

poor according to all three measures. Afza and Rauf (2009) in their study of open-ended

Pakistani mutual funds performance using the quarterly data for the period of 1996-2006. The

study measure the fund performance by using Sharpe ratio with the help of pooled time-series

and cross sectional data and also focused on different attributes such as fund size, expenses,

age, turnover and liquidity. The results found significant impact on fund performance.

Debasish (2009) studied the performance of selected schemes of mutual funds based on risk

and return models and measures. The study covered the period from April 1996 to March

2005 (nine years). The study revealed that Franklin Templeton and UTI were the best

performers and Birla Sun life, HDFC and LIC mutual funds showed poor performance.

Dr. B. Nimalathasan, Mr. R. Kumar Ghandhi (2012) studied the financial performance

analysis of mutual fund schemes (equity diversified schemes and equity mid-cap schemes) of

selected banks. The objective of this research work is to analysis the financial performance of

selected mutual fund schemes through the statistical parameters (Standard Deviation, Beta

and Alpha) and ratio analysis.

Treynor (1965) and Sharpe (1966) have provided the conceptual framework of relative

measure of performance of equity mutual funds while Treynor used systematic risk. Sharpe

used total risk to evaluate the mutual fund portfolio performance higher value of Treynor's

index indicates better performance of portfolio and vice versa.

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Gupta LC (1981) presented a detailed and well-based estimate of "Portfolio" rate of return

on equities. This pioneering study in the Indian context has been a major contribution in this

field and is regarded as the benchmark on the rate of return on equities for the specified time.

He laid the basis of rate of return concept in performance evaluation.

Henriksson (1984) evaluated performance in terms of market timing abilities with sample of

116 open ended investment schemes during the period, February 1968, June 1980. The

empirical results obtained indicated unsatisfactory timing skills of the fund managers.

Jain (1982) evaluated performance of unit trust of India (UTI) during 1964-65 to 1979-80,

including the profitability aspects of unit scheme 1964, unit scheme 1971 and unit scheme

1976. He concluded that its real rate of return have been low indicating overall poor,

performance of UTI Schemes. There has been so significant increase in the profitability over

the years.

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NEEDS OF THE STUDY

The study first tries to understand the composition of the selected funds which determines the

scope of performance for the funds, followed by use of ratios that are relevant in quantifying

and understanding the risk and return relationships for each mutual fund scheme under

consideration. Then a comparative analysis of the mutual fund schemes is done to see which

fund has performed the best.

This study is significant to the company as it looks into the minute details that differentiate

the performances of funds of different companies with same theme or sector under similar

market conditions. This would help the company to develop.

OBJECTIVES OF THE STUDY

To make a comparative analysis of equity based mutual fund in India.

To understand the Functions of an Asset Management Company.

To understand the performances of various schemes using various tools to measure the

performances.

To measure and compare the performance of selected mutual fund schemes of different

mutual fund companies and other Asset Management Companies.

METHODOLOGY

Data collection: The data required for the study may be collected either from primary

sources or from secondary sources. A major portion of the data in this study has been

collected through secondary sources of data.

Secondary data sources include:

Published material and annual reports of mutual fund companies

Other published material of mutual funds.

Research based online portals.

Unpublished sources also.

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CHAPTER-1

INTRODUCTION

A mutual fund is a form of collective investment. It is a pool of money collected from various

investors which is invested according to the stated investment objective. The fund manager is

the person who invests the money in different types of securities according to the

predetermined objectives. The portfolio of a mutual fund is decided taking into consideration

this investment objective. Mutual fund investors are like shareholders and they own the fund.

The income earned through these investments and the capital appreciation realized by the

scheme is shared by its unit holders in proportion to the number of units owned by them. The

value of the investments can go up or down, changing the value of the investors holding.

Mutual funds are one of the best investments ever created because they are very cost efficient

and very easy to invest in.

The investment in securities through mutual funds is spread across wide range of industries

and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks

may not move in the same direction at the same time. Various fund houses issue units to the

investors in accordance with the quantum of money invested by them. Investors of mutual

funds are known as unit holders.

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In India a mutual fund is required to be registered with Securities Exchange Board of India

[SEBI] which regulates the securities market.

ADVANTAGES OF INVESTING IN MUTUAL FUND

There are several that can be attributed to the growing popularities and suitability of mutual

funds as an investment vehicle especially for retail investors

Professional management: Mutual funds provide the services of experienced and skilled

professionals, backed by a dedicated investment research team that analysis the performance

and prospects of companies and selects suitable investments to achieve the objectives of the

scheme.

Diversification: Mutual funds invest in a number of companies across a broad cross- section

of industries and sectors. This diversification reduces the risk because seldom do all stocks

decline at the same time and in the same proportion. You achieve this diversification through

a mutual fund with far less money than you can do on your own.

Convenient administration: Investing in a mutual fund reduces paperwork and helps you

avoid many problems such as bad deliveries, delayed payment and follow up with brokers

and companies. Mutual funds save your time and make investing easy and convenient.

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Return potential: Over a medium to long term, mutual funds have the potential to provide a

higher return as they invest in a diversified basket of selected securities.

Low costs: Mutual funds are a relatively less expensive way to invest compared to directly

investing in the capital markets because the benefits of scale in brokerage, custodial and other

fees translate into lower costs for investors.

Liquidity: In open ended schemes, the investors get the money back promptly at net asset

value related prices from the mutual fund. In closed end schemes, the units can be sold on a

stock exchange at the prevailing market price or the investor can avail of the facility of direct

repurchase at NAV related prices by mutual fund.

Transparency: You get regular information on the value of your investment in addition to

disclosure on the specific investments made by your scheme, the proportion invested in each

class of assets and the fund manager’s investment strategy and outlook.

Flexibility: Through features such as regular investment plans, regular withdrawal plans and

dividend reinvestment plans, you can systematically invest or withdraw funds according to

your needs and convenience.

Affordability: Investors individually may lack sufficient funds to invest in high-grade

stocks. A mutual fund because of its large corpus allows even a small investor to take the

benefit of its investment strategy.

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DISADVANTAGES OF MUTUAL FUNDS

No Guarantee: 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 you don't use a broker or other financial

adviser, you will pay a sales commission if you buy shares in a Load Fund. The loads are of

two types: Entry Load and Taxes.

Management Risk: When one invests in a mutual fund, he depends on the fund's manager to

make the right decisions regarding the fund's portfolio. If the manager does not perform as

well as he had hoped, investor might not make as much money on his investment as he had

expected. Of course, if he had invested in Index Funds, he foregoes management risk,

because these funds do not employ managers.

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Importance of Mutual Fund:

Small investors face a lot of problems in the share market, limited resources, lack of

professional advice, lack of information etc. Mutual funds have come as a much needed help

to these investors. It is a special type of institutional device or an investment vehicle through

which the investors pool their savings which are to be invested under the guidance of a team

of experts in wide variety of portfolios of corporate securities in such a way, so as to

minimize risk, while ensuring safety and steady return on investment. It forms an important

part of the capital market, providing the benefits of a diversified portfolio and expert fund

management to a large number, particularly small investors. Now days, mutual fund is

gaining its popularity due to the following reasons.

With the emphasis on increase in domestic savings and improvement in deployment of

investment through markets, the need and scope for mutual fund operation has increased

tremendously.

The basic purpose of reforms in the financial sector was to enhance the generation of

domestic (Tripathy, Mutual Fund in India: A Financial Service in Capital . . . 87) resources

by reducing the dependence on outside funds. This calls for a market based institution which

can tap the vast potential of domestic savings and channelize them for profitable investments.

Mutual funds are not only best suited for the purpose but also capable of meeting this

challenge.

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An ordinary investor who applies for share in a public issue of any company is not assured of

any firm allotment. But mutual funds who subscribe to the capital issue made by companies

get firm allotment of shares. Mutual fund latter sell these shares in the same market and to the

Promoters of the company at a much higher price. Hence, mutual fund creates the investors

confidence.

History of Mutual Funds in India

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 history of mutual funds in

India can be broadly divided into four distinct phases:

First Phase – 1964-87: Unit Trust of India (UTI) was established on 1963 by an Act of

Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory

and administrative control of the Reserve Bank of India. In 1978, UTI was de-linked from the

RBI and the Industrial 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 – 1987-1993 (Entry of Public Sector Funds): 1987 marked the entry of non-

UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation

of India (LIC) and General Insurance Corporation of India (GIC). At the end of 1993, the

mutual fund industry had assets under management of Rs.47, 004 crores.

SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987

followed by:

Can bank 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 mutual fund (June 1989)

GIC mutual fund (December 1990.)

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Third Phase – 1993-2003 (Entry of Private Sector Funds): With the entry of private sector

funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian

investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual

Fund Regulations came into being, under which all mutual funds, except 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. The number of mutual fund houses went on increasing,

with many foreign mutual funds setting up funds in India and also the industry has witnessed

several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds

with total assets of Rs. 1, 21,805 cores. The Unit Trust of India with Rs.44, 541 Crores of

assets under management was way ahead of other mutual funds.

Fourth Phase – Since February 2003: In February 2003, following the repeal of the Unit

Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified

Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 Crores as

at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return

and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning

under an administrator and under the rules framed by Government of India and does not

come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund

Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under

the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March

2000 more than Rs.76, 000 crores of assets under management and with the setting up of a

UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent

mergers taking place among different private sector funds, the mutual fund industry has

entered its current phase of consolidation and growth. As at the end of march 2006, there

were 40 funds, which manage assets of Rs.231862 Crores under more than 500 schemes.

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was

bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of

India with assets under management of Rs. 29,835 crores as at the end of January 2003,

representing broadly, the assets of US 64 scheme, assured return and certain other schemes.

The Specified Undertaking of Unit Trust of India, functioning under an administrator and

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under the rules framed by Government of India and does not come under the purview of the

Mutual Fund Regulations.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered

with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the

erstwhile UTI which had in March 2000 more than Rs. 76,000 crores of assets under

management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual

Fund Regulations, and with recent mergers taking place among different private sector funds,

the mutual fund industry has entered its current phase of consolidation and growth.

The graph indicates the growth of assets over the years.

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Note:

Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.

Figure 1.2: Growth of Mutual funds Industry in India

Schemes March 2006

March 2007

March 2008

March 2009

March 2010

March 2011

Open-ended

463 (78.21) 480 (64) 592 (61.92) 589 (63.13) 641 (76.04) 727 (66.39)

Close-ended

129 (21.79) 270 (36) 364 (38.08) 344 (36.87) 202 (23.96) 368 (33.61)

Total 592 (100) 750 (100) 956 (100) 933 (100) 843 (100) 1095 (100)

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Constituents of a Mutual Fund

The various constituents of a fund are as follows:

Sponsor

Trust/ Board of Trustees

Fund Manager or Investment Managers/ Asset Management Companies (AMC)

Custodian

Registrar and transfer agents

Brokers

Selling agents and distributors

Depository Participants

Bankers

Legal Advisors

Auditors

Sponsor: The sponsor initiates the idea to set up a mutual fund. It could be a registered

company, scheduled bank or financial institution.

A sponsor has to satisfy certain conditions, such as on capital, track record (at least five years'

operation in financial services), default-free dealings and a general reputation of fairness, has

to be ascertained. The sponsor appoints the trustees, AMC and custodian. Once the AMC is

formed, the sponsor is just a stakeholder.

Trust/Board of Trustees: Trustees hold a fiduciary responsibility towards unit holders by

protecting their interests. Sometimes, as with Canara Bank, the trustee and the sponsor are the

same. For others, like SBI Funds Management, State Bank of India is the sponsor and SBI

Capital Markets the trustee.

Trustees float and market schemes; and also they secure necessary approvals. They check

whether the investments of the AMC are within defined limits, whether the fund's assets are

protected, and also whether the unit holders get their due returns.

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Fund Managers/AMC: They are the ones who manage the investor’s money. An AMC

takes investment decisions, compensates investors through dividends, maintains proper

accounting and information for pricing of units, calculates the NAV, and provides

information on listed schemes and secondary market unit transactions. It also exercises due

diligence on investments, and submits quarterly reports to the trustees.

Custodian: It is often an independent organization, and it takes custody of securities and

other assets of a mutual fund. Among public sector mutual funds, the sponsor or trustee

generally also acts as the custodian.

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Classification and Types of Mutual Funds

Any mutual fund has an objective of earning income for the investors and/ or getting

increased value of their investments. To achieve these objectives mutual funds adopt different

strategies and accordingly offer different schemes of investments. On these bases the simplest

way to categorize schemes would be to group these into two broad classifications:

Operational classification highlights the two main types of schemes, i.e., open-ended and

close-ended which are offered by the mutual funds.

Portfolio classification projects the combination of investment instruments and investment

avenues available to mutual funds to manage their funds. Any portfolio scheme can be either

open ended or close ended.

Figure 1.4 Types of Mutual Funds

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Types of mutual funds

By Structure By Investment Objectives Other Schemes

Open-ended Funds Close-ended Funds

Growth funds Income Funds Balanced Funds

Money Market Funds

Tax-Saving Schemes Special Schemes Index Schemes

Operational Classification

1. Open Ended Schemes: As the name implies the size of the scheme (Fund) is open – i.e.,

not specified or pre-determined. Entry to the fund is always open to the investor who can

subscribe at any time. Such fund stands ready to buy or sell its securities at any time. It

implies that the capitalization of the fund is constantly changing as investors sell or buy their

shares. Further, the shares or units are normally not traded on the stock exchange but are

repurchased by the fund at announced rates. Open-ended schemes have comparatively better

liquidity despite the fact that these are not listed. The reason is that investor can any time

approach mutual fund for sale of such units. No intermediaries are required. Moreover, the

realizable amount is certain since repurchase is at a price based on declared net asset value

(NAV).

No minute to minute fluctuations in rates haunt the investors. The portfolio mix of such

schemes has to be investments, which are actively traded in the market. Otherwise, it will not

be possible to calculate NAV. This is the reason that generally open-ended schemes are

equity based. Moreover, desiring frequently traded securities, open-ended schemes hardly

have in their portfolio shares of comparatively new and smaller companies since these are not

generally traded. In such funds, option to reinvest its dividend is also available. Since there is

always a possibility of withdrawals, the management of such funds becomes more tedious as

managers have to work from crisis to crisis. Crisis may be on two fronts, one is, that

unexpected withdrawals require funds to maintain a high level of cash available every time

implying thereby idle cash. Fund managers have to face questions like ‘what to sell’. He

could very well have to sell his most liquid assets. Second, by virtue of this situation such

funds may fail to grab favourable opportunities. Further, to match quick cash payments, funds

cannot have matching realization from their portfolio due to intricacies of the stock market.

Thus, success of the open-ended schemes to a great extent depends on the efficiency of the

capital market. As a matter of fact all the schemes that HDFC mutual funds offer are open

ended in nature.

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2. Closed Ended Schemes: Such schemes have a definite period after which their shares/

units are redeemed. Unlike open-ended funds, these funds have fixed capitalization, i.e., their

corpus normally does not change throughout its life period. Close ended fund units trade

among the investors in the secondary market since these are to be quoted on the stock

exchanges. Their price is determined on the basis of demand and supply in the market. Their

liquidity depends on the efficiency and understanding of the engaged broker. Their price is

free to deviate from NAV, i.e., there is every possibility that the market price may be above

or below its NAV.

If one takes into account the issue expenses, conceptually close ended fund units cannot be

traded at a premium or over NAV because the price of a package of investments, i.e., cannot

exceed the sum of the prices of the investments constituting the package. Whatever premium

exists that may exist only on account of speculative activities. In India as per SEBI (MF)

Regulations every mutual fund is free to launch any or both types of schemes.

Portfolio Classification

Following are the portfolio classification of funds, which may be offered. This classification

may be on the basis of (a) Return, (b) Investment Pattern.

Return Based Classificatio: To meet the diversified needs of the investors, the mutual fund

schemes are made to enjoy a good return. Returns expected are in form of regular dividends

or capital appreciation or a combination of these two.

(a) Income Funds: For investors who are more curious for returns, Income funds are floated.

Their objective is to maximize current income. Such funds distribute periodically the income

earned by them. These funds can further be split up into categories: those that stress constant

income at relatively low risk and those that attempt to achieve maximum income possible,

even with the use of leverage. Obviously, the higher the expected returns, the higher the

potential risk of the investment.

HDFC Growth fund is the largest operating fund in India .It on the 27th of May 2003 has

crossed the corpus of Rs 4000 crore mark. In fact it is the largest scheme operating in India.

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The date of its inception is September 11, 2000.There are two more plans under this fund

namely: Premium Plan and Premium Plus Plan.

(b) Growth funds: Such funds aim to achieve increase in the value of the underlying

investments through capital appreciation. Such funds invest in growth oriented securities

which can appreciate through the expansion production facilities in long run. An investor

who selects such funds should be able to assume a higher than normal degree of risk. The

date of inception of HDFC Growth fund was the 11th of September 2000.It predominantly

invests in equity and equity related instruments.

(c) Conservative Funds: The fund with a philosophy of “all things to all” issue offer

document announcing objectives as: (i) to provide a reasonable rate of return, (ii) To protect

the value of investment and, (iii) to achieve capital appreciation consistent with the

fulfillment of the first two objectives. Such funds which offer a blend of immediate average

return and reasonable capital appreciation are known as “middle of the road” funds. Such

funds divide their portfolio in common stocks and bonds in a way to achieve the desired

objectives. Such funds have been most popular and appeal to the investors who want both

growth and income.

HDFC Floating rate income funds are an excellent example of such funds. Since its inception

on Jan 16th 2003 it has been performing consistently.

Investment Based Classification

Mutual funds may also be classified on the basis of securities in which they invest. Basically,

it is renaming the subcategories of return based classification.

(a) Equity Fund: Such funds, as the name implies, invest most of their investible shares in

equity shares of companies and undertake the risk associated with the investment in equity

shares. Such funds are clearly expected to outdo other funds in rising market, because these

have almost all their capital in equity. Equity funds again can be of different categories

varying from those that invest exclusively in high quality ‘blue chip’ companies to those that

invest solely in the new, unestablished companies. The strength of these funds is the expected

capital appreciation. Naturally, they have a higher degree of risk.

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Stock funds can also be classified as per their market capitalization i.e., the company size (of

stocks purchased). Accordingly there may be small capitalization growth fund, mid-cap fund

or large-cap fund.

HDFC Index Funds are an example of such funds wherein the fund’s asset is allocated amidst

the scrip’s of BSE Index and Nifty.

(b) Debt Funds: Such funds have their portfolio consisted of bonds, debentures, etc. this type

of fund is expected to be very secure with a steady income and little or no chance of capital

appreciation. Obviously risk is low in such funds. In this category we may come across the

funds called ‘Liquid Funds’ which specialize in investing short-term money market

instruments. The emphasis is on liquidity and is associated with lower risks and low returns.

There can be a number of types of Debt Funds:

Gilt Funds: These funds carry no credit risk but are associated with Interest Rate risk.

These schemes are safer as they invest in short and long-term securities issued by the

government. For example, DSP ML Govt. sec. fund, Templeton India Govt. sec. fund

etc.

Income Funds: These funds invest into debt instruments like bonds, corporate

debentures and Government securities. For example Birla income plus-D, HDFC

income, Chola Freedom Income-D etc.

Monthly Income Plans (MIPs): These invest about 80% of their total portion in debt

instruments and the remaining in equities. Such funds enjoy benefit of both equity and

debt market.

Short Term Plans (STPs): These plans are for investors with an investment period of

3-6 months. These funds predominantly invest in Certificate of Deposits (CDs) and

Commercial Papers (CPs). Some part of the fund is also invested in corporate

debentures.

Liquid Funds or Money Market Schemes: These funds are meant to provide easy

liquidity and preservation of capital. These schemes invest in short-term papers like

Treasury Bills, inter-bank call money market, CPs and CDs.

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(c) Balanced Fund: The funds, which have in their portfolio a reasonable mix of equity

and bonds, are known as balanced funds. Such funds will put more emphasis on equity share

investments when the outlook is bright and will tend to switch to debentures when the future

is expected to be poor for shares.

Figure 1.5 Risk-Return Relationships in the Various Types of Funds

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1.7 Players in the Indian Mutual Fund

INDIAN MUTUAL FUND INDUSTRY

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UTI

Public Sector

SBI MF

Canra bank MF

BOI MF

Indian Bank MF

PNB MF

Other Banks

Private Sector

ICICI Prudential

Franklin Templeton

HDFC MF

TATA MF

RELIANCE MF

Insurance Corporation

LIC MF

GIC MF

Investing Options

Automatic Reinvestment plans (ARPs): many funds offer 2 options under the same scheme

– the dividend option and the growth option. The automatic reinvestment plan allows the

investor to reinvest the amount of dividends or other distributions made by the fund in the

same fund and receive additional units, instead of receiving them in cash. Reinvestment takes

place at the ex-dividend NAV. The ARP ensures that the investor reaps the benefit of

compounding in his investments.

Systematic Investment Plans (SIPs): almost all the funds now allow one to invest in a fund

by putting in a fixed sum monthly / quarterly, in the chosen fund, for a preset number of

periods.

The key benefits of SIP are given below:

SIP helps to reduce the load of liability which is subjected to the Indian consumers

today

It helps investors deal with the market volatility

The purchase cost is averaged out if the same amount is invested at regular time.

Average cost of purchasing of units is less when Net asset value (NAV) of the scheme

is increasing.

It provides the benefit of compounding

The amount of savings can be decided as per investor’s ease.

Systematic Withdrawal Plans (SWPs): many funds also allow an investor to withdraw

money from a debt or an equity fund in equal installments at periodic intervals. It is

similar to SIP in the sense that a systematic withdrawal plan reduces the impact of timing

when one liquidates investments in a fund. Through SWP one can redeem sums at a

monthly or quarterly frequency An SWP allows one to choose the quantum and

periodicity of withdrawals from the fund. One has to leave instructions with the fund on

the periodicity of withdrawal, which comprises of giving a date for each withdrawal and

the delivery instructions for the money.

This facility is appropriate for the following kinds of investors

Investors, who desire regular funds inflow from their investments.

Investors who are interested in booking their gains at a regular interval.

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Dividend Transfer Plan (DTPs): A DTP allows an investor to move the dividends declared

by a debt scheme into the equity or other hybrid products. DTP helps the investors to gain

equity exposure by using their debt returns. The fund house Franklin Templeton offers this

kind of a plan.

TAX Saver Fund Analysis

Mutual funds can be a tax efficient instrument for investing. Equity Linked Saving Schemes

provide tax exemptions to the investors. In such schemes, whatever investments, the investors

do, is entirely tax exempted for the investment of the value up to 1 lakh. In equity schemes

Long Term Capital gains are Nil.

The union budget 2005 is expected to go a long way in bringing retail investors to the capital

markets and transforming the traditional Indian savers into investors. Consequently, this

change could set the traditional investors into the habit of market-linked returns, rather than

sticking only to traditional investment avenues of assured returns.

An introduction of section 80C, in the Union Budget 2005, would allow an assessed to save

tax by investing in ELSS schemes up to Rs.100, 000 and at the same time avail the potential

of equity markets. The robust state of Indian capital markets today deserve much higher retail

participation than the current 2.5% of the India’s total household financial savings.

In the last quarter of the financial year, tax-planning is a top priority for most investors.

Investments in designated avenues are eligible for a deduction (of up to Rs 100,000) from

gross total income under Section 80C of the Income Tax Act. Some of the popular investment

avenues are National Savings Certificate (NSC), Public Provident Fund (PPF) and tax-saving

funds (also referred to as Equity-Linked Saving Schemes – ELSS).

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EQUITY LINKED SAVINGS SCHEMES (ELSS)

ELSS is an open-ended equity growth scheme that is offered by mutual funds in line with

existing ELSS guidelines. The investments under this type of scheme are subject to a lock-in

period of 3 years and, as per the Finance Act 2005, are allowed the benefit of income

deduction up to Rs.1,00,000. There is a series of advantages that an ELSS scheme provides

to its investors through features that are exclusive to it.

With various investment avenues on hand, where should one invest? Among all the

“eligible” investment avenues, tax-saving funds are likely to emerge as favorites with

investors with an appetite for risk. Tax-saving funds offer risk-taking investors the

opportunity to invest in line with their risk profiles, while conducting the tax-saving exercise. 

The idea of locking into an investment for three years in a volatile equity market is surely not

too appealing to the average investor. Equally, the tax benefits from the investment may not

be attractive enough for the really big-ticket investors. Whatever the reason, `tax-saving'

funds, or `equity-linked savings schemes', have never really found many takers, as their

average fund size indicates. At a time when some diversified equity funds are coping with

corpuses exceeding Rs1,000 crore, the tax-saving funds still have a small asset base - usually

Rs 50-100 crore.

Tax-saving funds have, however, fared well in recent years, easing concerns over investing in

them. These funds gained prominence over the past year, topping the mutual fund

performance charts almost every quarter. During this period, they recorded average returns of

35-40 per cent.

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Tax saving options under section 80C: A comparison snapshot

The table below highlights some of the investment avenues available under Section 80C.

What is 80c Tax deduction?

Under Section 80C of the Income Tax Act, 1961, there is a total investment limit of Rs. 1

lakh to avail tax benefit. Please do remember that one or more items taken together the total

investment amount should be a maximum of Rs. 1 lakh to entitle you to a deduction u/s 80C.

The benefit of Rs. 1 lakh on tax saving instruments is available to everyone, irrespective of

his or her income levels. Thus, in the highest tax bracket of 30%, some tax can be saved by

investing Rs. 1 lakh before the financial year ends.

However, there is a minimum lock in of three years for availing income tax deduction. It

means if you wish to avail tax deduction u/s 80C by investing in any of the following

investments, you cannot withdraw the money within three years of investment.

What are the various tax saving investment options?

There are many permissible investment opportunities

Reasons for choosing Tax Saver Fund for comparative analysis

Equity Funds 1Year 3Years 5Years

Diversified Large Cap Equity Funds 60.2 54.61 23.44

Equity Linked Tax Saving Scheme (ELSS) 75.99 63.6 27.61

It is evident that ELSS scheme as a category has outperformed Diversified Equity schemes,

across most periods. Most of the tax saving funds has outperformed their diversified equity-

fund counterparts which have made even those investors not seeking tax benefits sit up and

take notice.

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These funds gained prominence over the past year, topping the mutual fund performance

charts almost every quarter. During this period, they recorded average returns of 35-40 per

cent. Hence an attempt has been made in the project to analyze those factors which have

made tax saving funds more interesting than the diversified equity funds.

Mutual funds Vs ELSS (difference between ELSS and Mutual fund)

a, Tax Free: - There is no ceiling for investments in ELSS however investments in ELSS

qualify for tax deductions under sec 80C of the income tax act subject to a maximum of Rs

100000 in a financial year whereas investments under normal mutual fund do not qualify for

income tax deductions. Any dividend received or long term capital gain earned by the

investor is tax free. Long term capital gain arises on selling units of mutual fund after 1 year

of purchase. Since there is a lock in period of 3 years every investor will realize long term

capital gain/loss on selling their holdings.

B, Lock – In: - ELSS has a lock in period of 3 years unlike other kinds of mutual funds.

3. Options while making an investment in an ELSS

Growth option –

In growth option income earned by the fund is not distributed to unit holders, Investor do not

earn any dividend during the time it holds the fund. Any income/profit earned by the fund

increases the NAV of the fund and vice versa. Whenever the investor sells its holdings he

will realize long term capital gain/loss. 

Dividend option –

In this option the fund distributes income earned by the fund to the investors as dividends.

The date of distribution is declared by the fund, however if the fund has negative income it

will not distribute any dividend. Any dividend received by the investor is not liable for tax in

the hands of investors.

Dividend reinvestments option –

If the investors choose this option the dividends declared by the fund are reinvested. For

example an investor is holding 10000 units of a fund and the fund declares dividend @ 1.5

per unit, the total dividend of 15000 (10000*1.5) will be reinvested on behalf of the investor

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as a fresh purchase. The investor can claim deductions to the tune of dividend received which

is Rs 15000 in this case .

Monthly investment in ELSS

Monthly investments on a pre specified date in mutual funds is possible through systematic

investment plan (SIP). An investor has the option of investing monthly in equity linked

savings schemes with a minimum investment of Rs 500. This type of investment is better

suited to small investors who cannot invest a lump sum amount. SIP has the benefit of

averaging out the cost of investors. As the amount of investment is fixed the units purchases

every month varies depending upon the NAV of the fund. At a higher NAV the investor gets

fewer units and more number of units at a lower price thus averaging out the cost of

investors.

Advantages of ELSS over PPF and NSC

PPF and NSC are popular tax savings instruments issued by the Government of India. Public

provident fund (PPF) has a lock in period of 15 years; National savings certificate has a lock

in period of 6 years in comparison to ELSS which has a lock in period of 3 years only. PPF

and NSC have a fixed rate of return somewhere close to 8% to 9% whereas return in ELSS

varies depending upon the market fluctuation, however past performance of some ELSS

funds shows an average return of 15% to 25% over a period of time.

Key points to remember

A – Equity linked savings schemes is a type of mutual fund with 3 years lock in period and

tax benefits attached,

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B - There are three types of options in ELSS, dividend option growth option and dividend

reinvestment option.

C – Tax benefits on investment in ELSS may soon be phased out with the introduction of

direct tax code.

D – Investors can opt for systematic investment plan. Minimum investment required in SIP is

Rs 500. An investment through SIP has a disadvantage as every monthly investment carries a

lock in period.

E - If an investor chooses dividend reinvestment plan the dividend reinvested is considered as

a fresh purchase and has a lock in period of 3 years from the date of purchase so the dividend

reinvested is further locked for a period of 3 years.

F – ELSS has the potential to give higher returns as these funds invest in equity market which

have given an average return of 15 years in a long term scenario. Returns in ELSS also

fluctuate depending upon the stock selection decision of the fund manager.

G – SIP helps in averaging out the cost of investors, however if the investor backs out from

SIP when the markets are falling he won’t be able to average out his cost.

Top 5 ELSSThe top 5 ELSS funds presently are

 Equity Tax Saving

3 months 6 months 1 yr 3 yrAxis Tax Saver Fund (G) 1.3 8.5 4.7 -

Religare Tax Plan (G) -0.4 7.1 0.1 16ICICI Pru Tax Plan (G) -5.7 -0.1 -3.4 12.5

Can Robeco Eqty TaxSaver (G) -1.5 5 -1.1 19.4

HDFC Tax Saver (G) -3.4 1.2 -2.5 14.8

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How to Apply for ELSS

To apply for ELSS an investor needs to comply with KYC regulations, Know your customer

(KYC) is mandatory whereby investor needs to provide some personal details like PAN no

etc. KYC helps in reducing financial fraud. After complying with KYC the investor can

approach to Asset management companies for subscribing to ELSS, Investor has to provide a

photocopy of PAN Card along with the subscription form; the form should be filled properly

and signed by the investor. The subscription form and a cheque leaf of the investment amount

should be submitted with the AMC. In case of SIP (systematic investment plan) one

additional form should be filled and signed by the investor. The Investor has to select a date

of SIP from the options provided in the form. The Installment amount will be deducted from

the investor’s bank account on that day of every month till further notice from the investor.

Criteria’s to chose ELSS

a)  AUM – Asset under management is the amount of money the fund is managing. Higher

AUM implies that the fund has many investors and has a good reputation.

b) Past performance – If the fund is performing well in the past, it is expected that the fund

will keep performing well in the future. Generally we look at the past 3 yrs 5 yrs and 10 yrs

return of the fund.

c)  Sharpe ratio – Sharpe ratio is used to calculate risk factor of the fund’s portfolio. Sharpe

ratio of the fund should be near 1.

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Variables considered for measurement

Beta: It describes the relationship between the stock’s return and the index returns. The beta

value may be interpreted in the following manner, ‘a 1% change in Nifty index would cause a

1.042% (beta) change in the particular fund. It is the slope of characteristic regression line.

It signifies that a fund with a beta of more than 1 will rise more than the market and also fall

more than market. Thus, if one likes to beat the market on the upside, it is best to invest in a

high-beta fund. But one must keep in mind that such a fund will also fall more than the

market on the way down. So, over an entire cycle, returns may not be much higher than the

market.

Similarly, a low-beta fund will rise less than the market on the way up and lose less on the

way down. When safety of investment is important, a fund with a beta of less than one is a

better option. Such a fund may not gain more than the market on the upside, but it will protect

returns better when market falls.

Where,

n – Number of days

x – Returns of the index

y – Returns of the fund

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β = nΣxy – (Σx)( Σy) nΣx2 – (Σx)2

Alpha: It indicates that the stock return is independent of the market return. If the portfolio

is well diversified, the alpha value would turn out to be zero. The intercept of characteristic

regression line is alpha.

Alpha shows whether the particular fund has produced returns justifying the risks it is taking

by comparing its actual return to the one 'predicted' by the beta.

Alpha can be seen as a measure of a fund manager's performance. This is what the fund has

earned over and above (or under) what it was expected to earn. Thus, this is the value added

(or subtracted) by the fund manager's investment decisions. This can be clearly seen from the

fact that Index funds always have—or should have, if they track their index perfectly—an

alpha of zero.

Thus, a passive fund has an alpha of zero and an active fund's alpha is a measure of what the

fund manager's activity has contributed to the fund's returns. On the whole a positive alpha

implies that a fund has performed better than expected, given its level of risk. So higher the

alpha better are returns.

Where,

y – Mean value of returns of the fund

x – Mean value of returns of the index

β – Beta value of the fund

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α = y - βx

Correlation Co-efficient:

It measures the nature and the extent of relationship between the stock market index returns

and a fund’s return in a particular period.

Co-efficient of Determination:

The square of correlation of co-efficient is the co-efficient of determination. It gives the

percentage variation in the stock’s return explained by the variation in the market return.

r2

Treynor’s Ratio:

The Treynor Ratio, named after Jack L. Treynor, one of the fathers of modern portfolio

theory, helps analyze returns in relation to the market risk of the fund. The Ratio, also known

as the reward-to-volatility ratio, provides a measure of performance adjusted for market risk.

Higher the Treynor Ratio, the better the performance under analysis.

It is a ratio that helps the portfolio managers to determine the excess return generated as the

difference between the fund’s return and the risk free return. The excess return to beta ratio

measures the additional return on a fund per unit of systematic risk. Ranking of the funds is

done based on this ratio.

Where,

R – Return on investment.

RFR – Risk Free Return

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r = nΣxy – (Σx)( Σy) . √nΣx2 – (Σx)2 √nΣy2 – (Σy)2

T = R – RFR

β

Sharpe’s Ratio:

Sharpe’s ratio is similar to treynor’s ratio the difference being, instead of beta here we take

standard deviation. As standard deviation represents the total risk experienced by the fund, it

reflects the returns generated by undertaking all possible risks. A higher Sharpe’s ratio is

better as it represents a higher return generated per unit of risk.

Return

A return is a measurement of how much an investment has increased or decreased in value

over any given time period. In particular, an annual return is the percentage by which it

increased or decreased over any twelve-month period.

Formula:

(P1-p0)P0

Mean:

The mean average is a quick mathematical measure of a number of data points as a unit. It

will tell you important information about a group of data in your business. It is almost a

summary of all the data in your dataset.

Mean: Mean = Sum of X values / N (Number of values).

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S = R – RFR

σ

Standard Deviation:

The degree that a single value in a group of values varies from the mean (average) of the

distribution. Standard deviation is a statistical measure that uses past performance of an

investment or portfolio to determine the potential range of future performance and assess the

probability of that performance. Standard deviations can be calculated for an individual

security or for the entire portfolio

Variance: Variance: Variance = s2

Jensen Ratio (JR):

A risk-adjusted performance measure that represents the average return on a portfolio over

and above that predicted by the capital asset pricing model (CAPM), given the portfolio's

beta and the average market return. This is the portfolio's alpha. In fact, the concept is

sometimes referred to as "Jensen's alpha."

Jensen Ratio (JR) = α

-----------------

β

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If the value is positive, then the portfolio is earning excess returns to cover the risk. In other

words, a positive value for Jensen's alpha means a fund manager has beat the market with his

or her stock picking skills.

Fund size: fund size is another factor which seems important from the point of the

view that if the fund is too small, the benefit of lower transaction costs doesn’t come

our way and if the fund becomes too large the transaction costs itself become too

large to allow churning of funds.

Expense Ratio: Expense ratio states how much you pay a fund in percentage term

every year to manage your money. For example, if you invest Rs 10,000 in a fund

with an expense ratio of 1.5 per cent, then you are paying the fund Rs 150 to manage

your money. In other words, if a fund earns 10 per cent and has a 1.5 percent expense

ratio, it would mean an 8.5 per cent return for an investor.

Since the expense ratio is charged regularly (every year), a high expense ratio may eat into

your returns massively over the long-term through the power of compounding. For example,

Rs 1 lakh over 10 years at the rate of 15 per cent will grow to Rs 4.05 lakh. But if we

consider an expense ratio of 1.5 per cent, your actual total returns would be Rs 3.55 lakh,

nearly 14 per cent less than what would have been achieved without any expense charge.

Age of the Fund: Age of the fund is the time period (in years) between the date

of the launch of the fund and the current date. This is a very important factor as it

shows the Market consistency and performance of the fund. Higher the age of the

fund, the higher is the fund management’s experience in successfully handling the

returns and investor’s expectations.

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6: INSURANCE IN INDIA

The insurance sector in India has come a full circle from being an open competitive market to

nationalization and back to a liberalized market again. Tracing the developments in the Indian

insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries.

A brief history of the Life Insurance sector

Insurance in India has its history dating back till 1818, when Oriental Life Insurance

Company started was started by Europeans in Kolkata to cater to the needs of European

community. Pre-independent era in India saw discrimination among the life of foreigners and

Indians with higher premiums being charged for the latter. It was only in the year 1870,

Bombay Mutual Life Assurance Society, the first Indian insurance company covered Indian

lives at normal rates.

At the dawn of the twentieth century, insurance companies started mushrooming up. In the

year 1912, the Life Insurance Companies Act, and the Provident Fund Act were passed to

regulate the insurance business. The Life Insurance Companies Act, 1912 made it necessary

that the premium rate tables and periodical valuations of companies should be certified by an

actuary. However, the disparage still existed as discrimination between Indian and foreign

companies. Some of the important milestones in the life insurance business in India are:

1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the

life insurance business.

1928: The Indian Insurance Companies Act enacted to enable the government to collect

statistical information about both life and non-life insurance businesses.

1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective

of protecting the interests of the insuring public.

1956: 245 Indian and foreign insurers and provident societies taken over by the central

government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with

a capital contribution of Rs.5crore from the Government of India.

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The Insurance Act, 1938

The Insurance Act, 1938 was the first legislation governing all forms of insurance to provide

strict state control over insurance business.

Life Insurance Corporation Act, 1956

Even though the first legislation was enacted in 1938, it was only in 19th of January, 1956,

that life insurance in India was completely nationalized, through the Life Insurance

Corporation Act, 1956. There were 245 insurance companies of both Indian and foreign

origin in 1956. Nationalization was accomplished by the govt. acquisition of the management

of the companies. The Life Insurance Corporation of India was created on 1st September,

1956, as a result and has grown to be the largest insurance company in India as of 2006

Insurance Regulatory and Development Authority (IRDA) Act, 1999

Till 1999, there were not any private insurance companies in Indian insurance sector. The

Govt. of India then introduced the Insurance Regulatory and Development Authority Act

in 1999, thereby de-regulating the insurance sector and allowing private companies into the

insurance. Further, foreign investment was also allowed and capped at 26% holding in the

Indian insurance companies.

Source: IRDA Journal April 2008

IRDA home page

(Sources are mentioned after each individual topic to be more specific and clear from where

the data has been obtained before being reframed to suit the project requirements)

6.1 Functions of Insurance

The functions of Insurance can be bifurcated into following parts:

1. Primary Functions

2. Secondary Functions

3. Other Functions

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The primary functions of insurance include the following

Provide Protection - The primary function of insurance is to provide protection against

future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but

can certainly provide for the losses of risk. Insurance is actually a protection against

economic loss, by sharing the risk with others.

Collective bearing of risk - Insurance is a device to share the financial loss of few among

many others. Insurance is a mean by which few losses are shared among larger number of

people. All the insured contribute the premiums towards a fund and out of which the persons

exposed to a particular risk is paid.

Assessment of risk - Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also.

Provide Certainty - Insurance is a device, which helps to change from uncertainty to certainty. Insurance is device whereby the uncertain risks may be made more certain

The secondary functions of insurance include the following:

Prevention of Losses - Insurance cautions individuals and businessmen to adopt suitable

device to prevent unfortunate consequences of risk by observing safety instructions;

installation of automatic sparkler or alarm systems, etc. Prevention of losses causes lesser

payment to the assured by the insurer and this will encourage for more savings by way of

premium. Reduced rate of premiums stimulate for more business and better protection to the

insured.

Small capital to cover larger risks - Insurance relieves the businessmen from security

investments, by paying small amount of premium against larger risks and uncertainty.

Contributes towards the development of larger industries - Insurance provides

development opportunity to those larger industries having more risks in their setting up. Even

the financial institutions may be prepared to give credit to sick industrial units which have

insured their assets including plant and machinery.

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The other functions of insurance include the following:

Means of savings and investment - Insurance serves as savings and investment, insurance is

a compulsory way of savings and it restricts the unnecessary expenses by the insured's For

the purpose of availing income-tax exemption also, invest in insurance.

Source of earning foreign exchange - Insurance is an international business. The country

can earn foreign exchange by way of issue of marine insurance policies and various other

ways.

Risk Free trade - Insurance promotes exports insurance, which makes the foreign trade risk

free with the help of different types of policies under marine insurance cover.

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BIBLOGRAPHY

Books: “Security Analysis and portfolio Management” by Donald Fischer & Ronald Jordan, 6th edition published by prentice Hall 1995.

Web sites:

www.amfi .com Www. Money control.com www.historical nifty.yahoofinancial.com www.sundaram BNP Paribas. in www.sharekan.com www.thinkrupee.com www.studygalaxy.com

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