International Journal of Management (IJM) – 6502(Print), ISSN 0976 – 6510(Online)  International Journal of Management (IJ...
International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep ...
International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep ...
International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep ...
International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep ...
International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep ...
International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep ...
International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep ...
International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep ...
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A critical view of undisclosed facts of disclosed fact sheets a case study of benchmarking of mutual funds

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A critical view of undisclosed facts of disclosed fact sheets a case study of benchmarking of mutual funds

  1. 1. International Journal of Management (IJM) – 6502(Print), ISSN 0976 – 6510(Online) International Journal of Management (IJM), ISSN 0976 Volume 1, Number 2, Aug - Sep (2010), © IAEMEISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online) IJMVolume 1, Number 2, Aug - Sep (2010), pp. 44-52© IAEME, http://www.iaeme.com/ijm.html ©IAEME A CRITICAL VIEW OF UNDISCLOSED FACTS OF DISCLOSED FACT SHEETS: A CASE STUDY OF BENCHMARKING OF MUTUAL FUNDS Prof. Abdul Noor Basha Chairman, Board of Studies Commerce (PG) Acharya Nagarjuna Unviersity, Nagarjuna Nagar, Guntur. G.V.satya sekhar Assistant Professor, Dept of Finance GITAM Institute of Management GITAM University, Visakhapatnam- 530 045 Email: gudimetlavss@yahoo.com ABSTRACT: Financial statements should focus on the true and fair view of state of affairs of the corporate entity. It is the responsibility of audit committee to authenticate the true and fair view of financial position. But, there are several undisclosed facts which are to be unearthed by audit committee are ignored. This leads to financial turmoil and loss of investor’s confidence as well as investment made by them In this context, this paper is intended to examine the importance of disclosure practices of financial statements with reference to benchmarking of a select mutual funds’ fact sheets. This paper focuses on the following objectives: • To examine the prevailing disclosure norms of financial statements. • To study on improving efficiency methods in timely reporting of financial statements • To educate the readers about financial statement disclosures in UTI mutual funds Key words: financial statements, disclosure practices, misstatements, benchmarking 44
  2. 2. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep (2010), © IAEMENature of Paper: empirical data based analytical paperINTRODUCTION: Disclosed Financial Statements (DFS) should be replica of financial position ofany corporate entity. But the variability in the quality of reporting is common ascompanies try and take refuge under legal subtleties. DFS can also be called as financialreporting which is the communication of accounting information of an entity to user orgroup of users1. There is a broader view of corporate governance, which views the subject as themethods by which suppliers of finance control managers in order to ensure that theircapital cannot be expropriated and that they earn a return on their investment (Shleiferand Vishny, 1997). Macey and O’Hara (2001) argue that a broader view of corporategovernance should be adopted in the case of banking institutions, arguing that because ofthe peculiar contractual form of banking, corporate governance mechanisms for banksshould encapsulate depositors as well as shareholders. Government-provided guarantees in the form of implicit and explicit depositinsurance might encourage economic agents to deposit their wealth with a bank, as asubstantial part of the moral hazard cost is borne by the government. Nevertheless, evenif the government provides deposit insurance, bank managers still have an incentive toopportunistically increase their risk taking, but now it is mainly at the government’sexpense.1.1. BENCHMARK RETURNS This will give you a standard by which to make the comparison. It basicallyindicates what the fund has earned as against what it should have earned. A fundsbenchmark is an index that is chosen by a fund company to serve as a standard for itsreturns. The market watchdog, the Securities and Exchange Board of India, has made itmandatory for funds to declare a benchmark index. In effect, the fund is saying that thebenchmarks returns are its target and a fund should be deemed to have done well if it1 Ramesh Venkatram (2008), ‘Good Governance can be as strong differentiator as goodstrategy’, The Hindu-Business Line, April, 24, pp 9. 45
  3. 3. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep (2010), © IAEMEmanages to beat the benchmark. Lets say the fund is a diversified equity fund that hasbenchmarked itself against the Sensex. So the returns of this fund will be compared vis-a-viz the Sensex. Now if the markets are doing fabulously well and the Sensex keepsclimbing upwards steadily, then anything less than fabulous returns from the fund wouldactually be a disappointment.1.2. REVIEW OF LITERATURE: Naser Abdelkarim et al (2009)2 carried out a study to investigate the perceptionof users regarding the availability, adequacy, and usefulness of information disclosed inthe financial reports of companies listed on the Palestine Securities Exchange (PSE).Results of the study demonstrated that users perceive reported information as neitheradequate nor relevant to investment decisions. In particular, reported information wasinsufficient, as listed companies did not comply with the minimum disclosurerequirements of international standards. This unfavorable perception, along with poorcredibility and bad timeliness of the disclosures, has prevented information from beingimpounded into stock prices. The study presented a number of recommendations thatmay be helpful in improving the efficiency of the PSE, which in turn will contribute tothe Palestinian economy as a whole. Vrajlal Sapovadia3 critically examined the relevant Accounting Standards andsuch practices in India, to evaluate potency and fairness vis-à-vis Good CorporateGovernance. As per OECD principles of Corporate Governance, Accounting Informationshould be prepared and disclosed in accordance with high quality standards of accountingand financial and non-financial disclosure s. The application of high quality standards isexpected to significantly improve the ability of investors to monitor the company byproviding increased reliability and comparability of reporting, and improved insight into2 Naser Abdelkarim , Yasser. A. Shahin & Bayan M. Arqawi, Investor Perception ofInformation Disclosed in Financial Reports of Palestine Securities Exchange ListedCompanies, Accounting & Taxation, Volume 1, Number 1, 2009.3 Vrajlal Sapovadia (2008), “Critical Analysis of Accounting Standards vis-à-visCorporate Governance Practice in India”, SSRN-ID-712461. 46
  4. 4. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep (2010), © IAEMEcompany performance. The quality of information substantially depends on the standardsunder which it is compiled and disclosed. Shiw Kumar Jiloka (2006)4 mentions that disclosure is regarded as a processthrough which a business enterprise communicates to third parties. Government andother regulating bodies like ICAI, SEBI propagate expanded disclosure in annual reportson the hand, but at the time the Government through section 210 of the companies todisclose the maximum possible information. It may be helpful to the Government inmaking disclosure laws, to the ICAI and SEBI in considering the areas of disclosureregarding which some standards or guidelines need to be issue. Dave (2000) conducted astudy on accounting standards during the period 1990-91 to 1993-94. This study covers50 companies of which 25 from public sector and 25 from private sector. The companiesin both the sector complying with the accounting standards while preparing annualreports differently, but not up to the satisfactory level. Surendar and Manish Khanduri,5 explained that an absolute lack of disclosurenorms- from declaring the Net Asset Value of US-64 to inter-fund transfers- characterizesUTI’s functioning. Unit Scheme, 1964 (US-64), is the Unit Trust of India’s largest andbest known mutual fund scheme. With this scheme there was a trouble of disclosurepolicy. UTI discloses at the end of every quarter where it has invested about only 70% ofUS-64’s corpus.1.3. MEASURES FOR GOOD CORPORATE GOVERNANCE In developed economies, protection of depositors in a deregulated environment istypically provided by a system of prudential regulation, but in developing economiessuch protection is undermined by the lack of well-trained supervisors, inadequatedisclosure requirements, the cost of raising capital and the presence of distributionalcartels. In order to deal with these problems, it was suggested that developing economiesneed to adopt the following measures.4 Shiw Kumar Jiloka (2006), ‘Corporate Financial Disclosure’, The ManagementAccountant, November, 2006, pp 867-871.5 T. Surender & Manish Khanduri, ‘US- 64: Pandora ’s Box opens’- Business world, 6th August,2001. 47
  5. 5. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep (2010), © IAEME Firstly, Liberalizations policies need to be gradual, and should be dependent uponimprovements in prudential regulation. Secondly, developing economies need to expendresources enhancing the quality of their financial reporting systems. Thirdly, given thatcapital plays such an important role in prudential regulatory systems, it may be necessaryto improve investor protection laws, increase financial disclosure and impose fiduciaryduties upon directors so that firms can raise the equity capital required for regulatorypurposes. A further reason as to why this policy needs implemented is the growingrecognition that the corporate governance has an important role to play in assistingsupervisory institutions to perform their tasks, allowing supervisors to have a workingrelationship with bank management, rather than adversarial one. It was suggested thatthe corporate governance in developing economies is severely affected by politicalconsiderations. Firstly, given the trend towards privatization of government-owned firmsin developing economies, there is a need for the managers of such firms to be grantedautonomy and be gradually introduced to the corporate governance practices of theprivate sector prior to divestment. Secondly, where there has only been partial divestmentand governments have not relinquished any control to other shareholders, it may provevery difficult to divest further ownership stakes unless corporate governance isstrengthened. Finally, given that limited entry of foreign firm may lead to increasedcompetition, which in turn encourages domestic banks to emulate the corporategovernance practices of their foreign competitors.1.4. RELEVANCE OF BENCHMARK IN MUTUAL FUNDS: The idea behind investing in a specialized fund, be in diversified or sectoral fund,is to outperform the market benchmark. If he is not able to beat the benchmark, there issomething wanting in investment skills of fund manager. For example if any investorwant to invest in an index fund, where the costs are lower. Also, there is no risk of a greatdownslide. This is because an index fund invests only in stocks in proportion to theirweightage in the index. It is a passive investment strategy. The returns would be intandem with the movement of index, save for a small tracking error. Since these funds donot have to churn their portfolio heavily, the transaction costs are also lower. In addition, 48
  6. 6. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep (2010), © IAEMEinvestor do not have worry about the performance record of the fund manager, asinvesting in an index is not rocket science.1.5. ANALYSIS OF SELECT FACT SHEETS OF MUTUAL FUNDS: The following note is made by this organization is a caution to investors:IISL is not responsible for any errors or omissions or the results obtained from the use ofsuch index and in no event shall IISL have any liability to any party for any damages ofwhatsoever nature (including loss of profit) resulted to such party due to purchase or saleor otherwise of such product benchmarked to such index. For instance, HDFC EquityFund and Capital Builder Fund are benchmarked to S&P CNX 500 Index are notsponsored, endorsed, sold or promoted by India Index & Service Products Ltd (IISL).The following tables 1 to 3 gives a reflection of the performance of HDFC growth fund,equity fund and capital builder fund against its benchmark. Table 1 HDFC GROWTH FUND (As on 28th Feb, 2007) Details NAV per unit Growth Fund Bench Mark: ENSEX % returns % returns Since Inception 10.00 26.20** 16.96** (sept.11.2000) March31,2006 41.236 9.24* 14.70* 36.490 23.45* 24.76** Absolute Returns** Compounded Annualized return Table 2 HDFC EQUITY FUND As on 28th Feb, 2007) Details NAV per unit Growth Fund Bench Mark- % returns S &P CNX 500 % returns Since Inception 10.00 24.31** 10.01** (1ST JAN1995) March31,2006 127.169 11.06* 6.78*Last 1year (2007) 116.84 20.87* 16.88Last year(as at 2003) 22.790 126.30 98.14* Absolute Returns** Compounded Annualized return 49
  7. 7. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep (2010), © IAEME Table 3 HDFC Capital Builder Fund Details NAV per unit Growth Fund Bench Mark- % returns S &P CNX 500 % returns Since Inception 10.00 14.86** 8.55* Feb 1st, 1994 March31,2006 60.169 1.81* 6.78*Last 1year (2007) 55.290 10.80* 16.88*Last year(as at 2003) 0.740 121.91 98.14(due to share rise in stockprise)* Absolute Returns** Compounded Annualized return Table-4: JM Financial Mutual fundScheme Bench MarkJM Equity Fund BSE SENSEXJM Balanced Fund CRISIL Balanced Fund IndexJM Basic Fund BSE Basic Industries IndexJM Auto Sector fund BSE Auto Sector Index JM Health care Sector Fund BSE Health Care IndexJM Emerging Leaders Fund BSE 200 IndexJM Hi fi Fund S&P CNX Nifty Index The above table gives information about JM Financial Mutual Fund. The fundmanager selects BSE Basic Industries Index as a bench mark for JM Basic fund. BSEcautions the investors by the following note: “All rights in the BSE Basic IndustriesIndex vest in BSE. It shall not liable in any manner whatsoever (including in negligence)for any loss arising to any person whosever out of use of a reliance on this fund by anyperson. Table-5 Tata Mutual FundScheme Bench Mark Rate of return Bench mark of the scheme return since since inception inceptionTata Equity Opportunities Fund SENSEX 13.37% 11.95%Tata Pure Equity Fund SENSEX 33.83% 14.62%Tata Select Equity Fund SENSEX 22.26% 12.81%Tata Life Sciences and Technology SENSEX 24.44% 16.71%FundTata Tax Saving Fund SENSEX 27.13% 13.62%Tata Growth Fund SENSEX 11.02% 9.92% 50
  8. 8. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep (2010), © IAEME All the schemes mentioned above listed by Tata Mutual Fund selected ‘Sensex’ astheir bench mark as per their ‘portfolio statement’ released on 30th April, 2007.However, the rate of return for these schemes with reference to benchmark is same forone year duration (15.19%), three year duration (34.87%) and five year duration(32.94%). It varies with respect to rate of return of the bench mark, since inception foreach scheme. It shows that index of bench mark may be different for each scheme. Inpractice, the indices selected as bench mark should be varied according to nature ofscheme.1.6. CONCLUSION: Benchmark Mutual Fund, which specializes in managing exchange traded funds(ETFs), has lined up a scheme that will try to generate returns through investment insecurities represented by a host of sectoral indices. The indices - the offer document sentto SEBI mentions nine of them - are owned by India Index Services & Products Ltd, thejoint venture formed by NSE and CRISIL to provide a variety of indices and index-related services for the capital market. These indices cover the following sectors:Automobiles/four-wheeler, cement, electrical equipment, pharmaceutical, power, steel,telecom, services and information technology. Their names are S&P CNXPharmaceutical Index, S&P CNX Cement and Cement Product Index, S&P CNX PowerIndex and the like. Thus, investors should have awareness of benchmarking of mutual funds as theymay not reveal real risk factors which are undisclosed in disclosed fact sheets.REFERENCES: • Agarwal G.D (1992), ‘Mutual Funds and Investors Interest’, Chartered Secretary, Jan. • Bhatt, Narayana M (1990)., ‘Mutual Funds; Some Regulatory Issues’, The Economic Times, January 7th. • Dave S.A (1994), ‘An Open Ended fund may be more prudent’, The Economic Times, December 20th. • Goyal Madan (1990), ‘Off-shore country funds: The Indian Experience’, State Bank of India Monthly Review, May. 51
  9. 9. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)Volume 1, Number 2, Aug - Sep (2010), © IAEME • Gupta, L.C (1993), ‘Mutual Funds and Assets Preference’, Society for Capital Market Research and Development, New Delhi. • Naser Abdelkarim, Yasser. A. Shahin & Bayan M. Arqawi (2009), Investor Perception of Information Disclosed in Financial Reports of Palestine Securities Exchange Listed Companies, Accounting & Taxation, Volume 1, Number 1, 2. • Ramesh Venkatram (2008), ‘Good Governance can be as strong differentiator as good strategy’, The Hindu-Business Line, April, 24, pp 9. • Shiw Kumar Jiloka (2006), ‘Corporate Financial Disclosure’, The Management Accountant, November, 2006, pp 867-871 • T. Surender & Manish Khanduri (2001), ‘US- 64: Pandora’s Box Opens’- Business world, 6th August. • Vrajlal Sapovadia (2008), “Critical Analysis of Accounting Standards vis-à-vis Corporate Governance Practice in India”, SSRN-ID-712461. 52

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