A PROJECT REPORT ON
PERFORMANCE EVALUATION OF MUTUAL
NAVNIT P. KASUNDRA
IN PARTIAL FULFILLMENT OF
POST GRADUATE PROGRAM IN FINANCIAL
(2009 – 2011)
A summer project is a golden opportunity for learning and self development. It is really a
matter of great pleasure for me to present this creative and practical work. At this stage,
project report is an important part of learning and it is presented by every student to get
practical knowledge. I consider myself very lucky and honored to have so many wonderful
people lead me through in completion of this project
I take this opportunity to express my sincere thanks to all those who helped me in the
preparation of this report. I would like to express my thanks to all those who assisted me in
the preparation of the project.
My grateful thanks to Mr. Raghavendra Poddar, Proprietor who in spite of being
extraordinarily busy with his duties, took time out to hear, guide and keep me on the correct
path. I do not know where I would have been without him. A humble „Thank you‟ Sir.
Prof. Mala Subramaniam whose patience I have probably tested to the limit. She was
always so involved in the entire process, shared her knowledge, and encouraged me to think.
Thank you, Dear Madam.
I would like to thanks Mr. Amit Sir, a placement manager Unitedworld School of
Business, for his efforts and help provided to me to get such an excellent opportunity.
Last but not the least there were so many who shared valuable information that helped in the
successful completion of this project.
I the undersigned, NAVNIT P. KASUNDRA the student of PGPM of Unitedworld School of
Business hereby declare that the project work presented in this report is my own work and
has been carried out under the supervision and guidance of Prof. Mala madam and Project
Gide from JD Financial Services Mr. Raghavedra Podder.
This work has not been previously submitted to any other intuition or university for
Sr. No. Particular Page No.
1 Title Page 1
2 Acknowledgement 2
3 Declaration 3
4 Table of Content 4
5 List of table 4
6 Abstract 5
7 Experience at Internship 5
8 Brief of Mutual Fund 7
9 History of Mutual Fund in India 8
10 Terms of Mutual Funds 12
11 Tax Benefit in Mutual Funds 14
13 Rights of Investors 17
14 Advantages of Mutual Funds 17
15 Selection of Best Mutual Funds 19
16 Risk Involve in Investing in Mutual Funds 21
17 Different Types of Mutual Funds 22
18 Analysis of Mutual Fund Performance 26
19 Data and Data Analysis Methodology 28
20 Analysis of Performance of Sample Funds 29
21 Outcome of Evaluation 30
22 ICICI Prudential Discovery Funds 31
23 Summary and Conclusion 37
24 Recommendation 37
25 Learning 37
26 Bibliography and Reference 37
List of Tables and Graphs
Graph of growth of assets in Mutual Funds 10
Risk Return Graph 21
Performance Measurement Table 30
Rank of Diversified Funds 30
ICICI fund feature and Facts 32
ICICI Graph of Fund Performance Vs. S&P CNX Nifty 33
ICICI History of Return and Risk Measurement Table 34
ICICI Portfolio Allocation Table 36
I prepared these papers as a part of internship. In this report I included activities at internship
Company, mainly general information about Mutual Fund product and evaluate the
performance of 10 Equity Diversified Mutual Funds of India. I gave brief description of
various terms of Mutual Fund. What is Mutual Fund, various types of Mutual Funds,
advantages, risk associated with funds, growth history of Mutual fund, how to select best
mutual fund, tax benefit available, etc. I use risk adjusted performance measures suggested
by Treynor, Sharpe, and Jensen to analyze the selected funds. From the evaluation of funds, I
found that all ratios i.e. Treynor, Sharpe, and Jensen show almost same result. ICICI
Prudential Discovery Fund obtains first rank in all three measurements. So further I give
detail analysis of these funds to help investors in how to evaluate particular fund.
I was as interns in JD Financial Services. I was selected there for Mutual Fund area. There I
evaluate all types of Mutual Funds and select best performing mutual funds to recommend
the investors. Here in this report I describe what I have done to study Mutual Funds.
EXPERIENCE AT INTERNSHIP
Internship is a part of my study of P.G.P.M. I joined JD financial services as summer
internship program. The objective to do internship is to get practical knowledge, in addition
to theoretical knowledge. After joining JD Financial Services as an intern in area of Mutual
Funds, my objective was to study all types of Mutual Funds, advise investors and help them
to invest in Mutual Funds. And I did it.
Activities at SIP
After I got selected in JD Financial Services in area of Mutual Funds, I started
understanding Mutual Fund products by surfing the net. I had basic knowledge of
Mutual Funds before my internship began. I cleared AMFI test which is required
before I started working as mutual fund distributer. This helped me to go ahead.
In the first week, I studied about mutual funds, understood the difference between all
types of funds, became aware about terminologies of mutual funds, studied the
application form for mutual fund investment, understood the available options in
mutual funds, specific benefits of particular fund types and option, etc. Shortly, I
collected general information about mutual funds and how to fill up common
application form in first week.
After I obtained the general information, I started evaluating mutual funds in equity
diversified and ELSS areas. I studied past performance of funds, return for 6 months,
1 year, 3 years, 5 years, etc., after analyzing funds, I selected best performing mutual
funds who are always in top 10 since 6 months, 1 years, 3 years, and 5 years. I did this
to recommend investors, the best possible funds.
Now we began the marketing and actual activities as mutual fund advisors to help
investors and sell mutual fund products. I had a company data base to contact people
who want to invest in mutual funds. Company subscribed mutual fund investor alert
from “Just Dial”. I got contact details from “Just Dial” and approached investors to
invest in mutual funds.
When investors show interest to invest, I request them for an appointment and meet
him/her at the prescribed place.
I got great, valuable experience from conversation with clients. All the persons whom
I call are different. Some don‟t talk with me, some cut call without replying, some
were insurance agents who offer me to join insurance company and sell insurance.
The main part of my learning in internship is how to approach clients and convince
him/her to invest.
I learned that different age group investors demand different mutual fund product
according to risk and return, young prefer equity related product and senior people
prefer balance funds and debt funds. At present, investment through SIP is most
preferable in market scenario.
The company gave me an opportunity to go Rajkot (Gujarat) to study market there for
mutual funds. When I went there I faced following problems:
o Most of people had already invested in ULIPS. They were facing problems
like; low return, high commission to agents, etc. So they didn‟t want to invest
in mutual funds also.
o Many even don‟t know about mutual funds, how it work and what return of
o Trust is main thing to invest earning, people don‟t trust on me who don‟t know
o In Gujarat, many people have money, but they don‟t know how to earn money
on money. Mainly they invest money in business and earn money, but they
don‟t know other options.
o Market showed worst performance in last 2 years, it also one of the hinders for
Mutual funds in India cover tier 1 and metro cities, but there is great opportunity in
tier 2 & 3. There is need of awareness in such small and medium cities. There is big
money in small cities and villages, which is lying idle without any use. Mutual funds
houses should establish their distributors‟ channels in such areas.
As a success, I met 80 people in Gujarat. They don‟t know about mutual funds and
how it works, in spite of that I convinced 18 people to invest.
As a part of finance I learned how to evaluate particular fund and how to give a rank
according to return, risk, performance and diversification. I used performance
measurement ratios of Treynor‟s, Sharpe‟s, and Jensen‟s to evaluate diversified funds
and gave rank accordingly.
As a conclusion, I have learnt the marketing and financial aspect of mutual fund
Here, I prepared report on performance evaluation of mutual funds on the base of
what I have learnt at internship.
A BRIEF OF MUTUAL FUNDS
Mutual funds are investment companies that pool money from investors at large and offer to
sell and buy back its shares on a continuous basis and use the capital thus raised to invest in
securities of different companies. The stocks these mutual funds have are very fluid and are
used for buying or redeeming and/or selling shares at a net asset value. Mutual funds posses
shares of several companies and receive dividends in lieu of them and the earnings are
distributed among the share holders.
Mutual funds can be either or both of open ended and closed ended investment companies
depending on their fund management pattern. An open-end fund offers to sell its shares
(units) continuously to investors either in retail or in bulk without a limit on the number as
opposed to a closed-end fund. Closed end funds have limited number of shares.
Mutual funds have diversified investments spread in calculated proportions amongst
securities of various economic sectors. Mutual funds get their earnings in two ways. First is
the most organic way, which is the dividend they get on the securities they hold. Second is by
the redemption of their shares by investors will be at a discount to the current NAVs (net
1. Collect money from investors
2. Invest through well diversified portfolio according to investors‟ requirement
3. Earning as dividend, or assets appreciation
4. Redeem whenever investor want in open ended and at certain time in close ended
Above cycle show the process of invest in Mutual Fund
HISTORY OF MUTUAL FUNDS IN INDIA
The mutual fund industry is a lot like the film star of the finance business. Though it is
perhaps the smallest segment of the industry, it is also the most glamorous – in that it is a
young industry where there are changes in the rules of the game everyday, and there are
constant shifts and upheavals.
The mutual fund is structured around a fairly simple concept, the mitigation of risk through
the spreading of investments across multiple entities, which is achieved by the pooling of a
number of small investments into a large bucket. Yet it has been the subject of perhaps the
most elaborate and prolonged regulatory effort in the history of the country.
The mutual fund industry started in India in a small way with the UTI Act creating what was
effectively a small savings division within the RBI. Over a period of 25 years this grew fairly
successfully and gave investors a good
return, and therefore in 1989, as the next logical step, public sector banks and financial
institutions were allowed to float mutual funds and their success emboldened the government
to allow the private sector to foray into this area. The initial years of the industry also saw the
emerging years of the Indian equity market, when a number of mistakes were made and
hence the mutual fund schemes, which invested in lesser-known stocks and at very high
levels, became loss leaders for retail investors. From those days to today the retail investor,
for whom the mutual fund is actually intended, has not yet returned to the industry in a big
way. But to be fair, the industry too has focused on brining in the large investor, so that it can
create a significant base corpus, which can make the retail investor feel more secure.
The last year was extremely eventful for mutual funds. The aggressive competition in the
business took its toll and two more mutual funds bit the dust. Alliance decided to remain in
the ring after a highly public bidding war did not yield an acceptable price, while Zurich has
been sold to HDFC Mutual. The growth of the industry continued to be corporate focused
barring a few initiatives by mutual funds to expand the retail base. Large money brought with
it the problems of low retention and consequently low profitability, which is one of the
problems plaguing the business. But at the same time, the industry did see spectacular growth
in assets, particularly among the private sector players, on the back of the continuing debt
bull run. Equity did not find favor with investors since the market was lack-luster and
performances of funds, barring a few, were quite disappointing for investors. The other aspect
of this issue is that institutional investors do not usually favor equity. It is largely a retail
segment product and without retail depth, most mutual funds have been unable to tap this
market. The tables given below are a snapshot of the AUM story, for the industry as a whole
and for debt and equity separately.
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 of India. 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). 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 – 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
crores. 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, 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 following graph indicates the growth of assets over the years.
Impact of local and international developments
During the year we had two major political developments that affected the mutual fund
industry. The standoff between India and Pakistan at the beginning of the financial year saw
the debt market being extremely volatile. Investors pulled out of funds and this also put
pressure on fund managers to hold returns and at the same time meet redemption
commitments. The equity markets were equally subdued but the industry did not react greatly
to this since equity funds were in any case not a significant part of the mobilization in the last
With the stand down on the Indian side, the debt markets recovered and with that the inflow
of funds into our industry soared once again. But at the end of the year the industry was hit by
another war – the impending US attack on Iraq and consequent oil price pressures once again
made the debt market volatile. It is a mark of the maturing of the Indian investor that
redemptions were only need based and the industry did not see as much outflows as one
With the bond yields plateauing and with the mutual fund industry trying to attract people to
the equity market, the year also saw some remarkable products flavors for Indian investors.
Birla Sunlife Mutual Fund led the pack with an equity fund focused on dividend yield stock,
a bond index fund and a bond-for-units swap product. Some of the other innovative products
were the series of exchange-traded funds from Benchmark, including a liquid index traded
fund. Prudential- ICICI also launched an exchange-traded fund, the SPICE, in association
The industry focused also on making existing products more attractive by adding on a
number of service features and cost control measures. Same day redemption in liquid funds,
“institutional” plans which would reduce the overall cost of investment and bonus units in
lieu of dividend were some of these features.
A new Emphasis on Risk Management
The year also saw a tremendous emphasis on risk management. A number of mutual funds
were already taking steps to mitigate risks not only in operations as in the past, but also in the
area of management of funds. A committee constituted by AMFI carried the initiative taken
under the FIRE Project forward and developed a risk management framework for the
industry. The subsequent circular by SEBI is perhaps one of the most comprehensive
attempts to address the issue of risk in the mutual fund business and carries with it the added
advantage of phase wise escalation starting with mandatory items and moving towards best
AMFI and its role
One of the most effective industry bodies today is probably the Association of Mutual Funds
in India (“AMFI”). It has been a forum where mutual funds have been able to present their
views, debate and participate in creating their own regulatory framework. The association
was created originally as a body that would lobby with the regulator to ensure that the fund
viewpoint was heard. Today, it is usually the body that is consulted on matters long before
regulations are framed, and it often initiates many regulatory changes that prevent
malpractices that emerge from time to time. This year some of the major initiatives were the
framing of the risk management structure, a code of conduct and registration structure for
mutual fund intermediaries, which were subsequently mandated by SEBI. In addition, this
year AMFI was involved in a number of developments and enhancements to the regulatory
AMFI works through a number of committees, some of which are standing committees to
address areas where there is a need for constant vigil and improvements and other which are
ad hoc committees constituted to address specific issues. These committees consist of
industry professionals from among the member mutual funds. There is now some thought that
AMFI should become a self-regulatory organization since it has worked so effectively as an
Overall FY2003 can be summed up as the year of the maturing of the mutual fund industry. It
was a year when fund houses went through turmoil and consolidation and the strong ones
emerged stronger. Investors too became savvier, and began investing based on far more
scientific criteria than in the past, and with clearly defined investment horizons. Distribution
gave way increasingly to intermediation and more and more distributors graduated to
providing technical advice to their clients. Thus the industry has come of age in FY2003, and
we hope that FY2004 and beyond will see us come out of a stormy adolescence to become a
trusted avenue for saving.
TERMS OF MUTUAL FUNDS
Asset Management Company
An Asset Management Company (AMC) is a highly regulated organization that pools money
from investors and invests the same in a portfolio. They charge a small management fee,
which is normally 1.5 per cent of the total funds managed.
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund
net of its liabilities. NAV per unit is simply the net value of assets divided by the number of
units outstanding. Buying and selling into funds is done on the basis of NAV-related prices.
NAV is calculated as follows:
NAV= Market value of the fund's investments + Receivables + Accrued Income- Liabilities- Accrued
Number of Outstanding units
How often is the NAV declared?
The NAV of a scheme has to be declared at least once a week. However many Mutual Fund
declare NAV for their schemes on a daily basis. As per SEBI Regulations, the NAV of a
scheme shall be calculated and published at least in two daily newspapers at intervals not
exceeding one week. However, NAV of a close-ended scheme targeted to a specific segment
or any monthly income scheme (which is not mandatorily required to be listed on a stock
exchange) may be published at monthly or quarterly intervals.
What is Exit Load?
The non refundable fee paid to the Asset Management Company at the time of redemption/
transfer of units between schemes of mutual funds is termed as exit load. It is deducted from
the NAV (selling price) at the time of such redemption/ transfer.
What is redemption price?
Redemption price is the price received on selling units of open-ended scheme. If the fund
does not levy an exit load, the redemption price will be same as the NAV. The redemption
price will be lower than the NAV in case the fund levies an exit load.
What is repurchasing price?
Repurchase price is the price at which a close-ended scheme repurchases its units.
Repurchase can either be at NAV or can have an exit load.
What is a Switch?
Some Mutual Funds provide the investor with an option to shift his investment from one
scheme to another within that fund. For this option the fund may levy a switching fee.
Switching allows the Investor to alter the allocation of their investment among the schemes in
order to meet their changed investment needs, risk profiles or changing circumstances during
What is Shut-Out Period?
After the closure of the Initial Offer Period, on an ongoing basis, the Trustee reserves a right
to declare Shut-Out period not exceeding 5 days at the end of each month/quarter/half-year,
as the case may be, for the investors opting for payment of dividend under the respective
Dividends Plans. The declaration of the Shut-Out period is envisaged to facilitate the
AMC/the Registrar to determine the Units of the unit holders eligible for receipt of dividend
under the various Dividend Options. Further, the Shut-Out period will also help in
expeditious processing and dispatch of dividend warrants. During the Shut-Out period
investors may make purchases into the Scheme but the Purchase Price for subscription of
units will be calculated using the NAV as at the end of the first Business Day in the following
month/quarter/half-year as the case may be, depending on the Dividend Plan chosen by the
investor. Therefore, if investments are made during the Shut -Out period, Units to the credit
of the Unit holder's account will be created only on the first Business Day of the following
month/ quarter/half year, as the case may be, depending on the dividend plan chosen by the
investor. The Shut-Out period applies to new investors in the Scheme as well as to Unit
holders making additional purchases of Units into an existing folio. The Trustee reserves the
right to change the Shut-Out period and prescribe new Shut- Out period, from time to time.
Minimum lock-in period for investment
There is no lock-in period in the case of open-ended funds. However in the case of tax saving
funds a minimum lock-in period is applicable. The lock-in period for different tax saving
schemes are as follows:
section minimum lock-in period
U/s 88 3 yrs.
U/s 54EA 3 yrs.
U/s 54EB 7 yrs.
Who are the issuers of Mutual funds in India?
Unit Trust of India was the first mutual fund which began operations in 1964. Other issuers
of Mutual funds are Public sector banks like SBI, Canara Bank, Bank of India, Institutions
like IDBI, ICICI, GIC, LIC, and Foreign Institutions like Alliance, Morgan Stanley,
Templeton and Private financial companies like Kothari Pioneer, DSP Merrill Lynch,
Sundaram, Kotak Mahindra, and Cholamandalam etc. there are many new upcoming fund
houses like Edelweiss, J.P. Morgan, Axis,
SYSTEMATIC INVESTMENT PLAN
SIP is an investment option that is presently available only with mutual funds. The other
investment option comparable to SIPs is the recurring deposit schemes from Post office and
banks. Basically, under an SIP option an investor commits making a regular
(monthly/quarterly) investment in a particular mutual fund/deposit.
Investor can now use auto debit (ECS) facility from Banks to automatically debit SIP amount
from your account. There is no need to give bulk of cheques for SIP. For that you should
have account in nationalized banks. For SIP through ECS, you have to provide bank details
like account no., branch name, MICR no. etc.
TAX BENEFITS IN MUTUAL FUNDS
When we talk about a mutual fund for taxation purposes, we mean the legally constituted
trust that holds the investors‟ money. It is trust that earns and receives income from
investments it makes on behalf of the investors. Most countries do not impose any tax on this
entity – the trust – because the income it earns is meant for the investors. The trust is
considered to be only a pass-through vehicle. It would amount to double taxation if the trust
first pays a tax and then investor also is made to pay. Generally, the trust that is exempted and
the investor pay the taxes on his share of the income. After the 1999-2000 Budget, the
investors are totally exempt from paying any tax on the dividend income they receive from
the mutual funds, while certain types of schemes pay some taxes. This section explains what
the fund or the trust pays by way of tax.
Generally, income earned by mutual fund registered with SEBI is exempt from tax.
However, income distributed to unit-holders by a closed-end debt fund is liable to a
dividend distribution tax at a rate stipulated by the Government. This tax is not
applicable to distributions made by open-end equity-oriented funds.
Impact on the Fund and the Investor
It should be noted that although this tax is payable by the fund on its distributions and
out of its income, the investor are indirectly since the fund‟s NAV, and therefore the
value of his investment will come down by the amount of tax paid by the fund. For
example, if a closed-end or debt fund declares a dividend distribution of Rs. 100, Rs.
10.20, if tax rate is 10.20%) will be the tax in the hands of the fund. While the
investor will get Rs. 100, the fund will have Rs. 10.20 less to invest. The fund‟s
current cash flow will diminish by Rs. 10.20 paid as tax, and its impact will be
reflected in the lower value of the fund‟s NAV and hence investor‟s investment on a
compounded basis in future periods.
Also, the tax bears no relationship to the investor‟s tax bracket and is payable by the
fund even if the investor‟s income does not exceed the taxable limit prescribed by the
Income Tax Act.
In fact, since the tax is on distributions, it makes income schemes less attractive in
comparison to growth schemes, because the objective of income schemes is to pay
The fund cannot avoid the tax eve if the investor chooses to reinvest the distribution
back into the fund. For example, the fund will still pay Rs. 10.20 tax on the
announced distribution, even if the investor chooses to reinvest his dividends in the
Tax benefits to the Investor
Dividends Received From Mutual Funds
Income distributed by a fund is exempted in the hands of investors
No TDS on any income distribution by mutual fund
Capital Gains on Sale of Units
However, if the investor sells his units and earns “Capital Gains”, the investor is subject to
the Capital Gains Tax as under:
If units are held for not more than 12 months, they will be treated as short term capital
asset, otherwise as long term capital asset.
Tax law definition of Capital Gains = Sale consideration – (Cost of Acquisition +
Cost of Improvements + Cost of transfer)
If the units were held for over one year, the investor gets the benefit of “Indexation”,
which means his purchase price is marked up by an inflation index, so his capital
gains amount is less than otherwise. Purchase Price of a long term capital asset after
Indexation is computed as,
Cost of acquisition or improvement = actual cost of acquisition or improvement * cost
inflation index for year of transfer / cost inflation index for year of acquisition or
improvement or for 1981, whichever is less.
Since, April 1, 2003, all dividends, declared by debt-oriented mutual funds (i.e. mutual funds
with less than 50% of assets in equities), are tax-free in the hands of the investor.
A dividend distribution tax of 12.5% (including surcharge) is to be paid by the mutual fund
on the dividends declared by the fund. Long-term debt funds, government securities funds
(G-sec/gilt funds), monthly income plans (MIPs) are examples of debt-oriented funds.
Dividends declared by equity-oriented funds (i.e. mutual funds with more than 50% of assets
in equities) are tax-free in the hands of investor. There is also no dividend distribution tax
applicable on these funds under section 115R. Diversified equity funds, sector funds,
balanced funds are examples of equity-oriented funds.
Amount invested in tax-saving funds (ELSS) would be eligible for deduction under Section
80C, however the aggregate amount deductible under the said section cannot exceed Rs
Section 2(42A): Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short-
term capital asset if the same is held for less than 12 months. The units held for more than
twelve months are treated as long-term capital asset.
Section 10(38): Under Section 10(38) of the Act, long term capital gains arising from
transfer of a unit of mutual fund is exempt from tax if the said transaction is undertaken after
October 1, 2004 and the securities transaction tax is paid to the appropriate authority. This
makes long-term capital gains on equity-oriented funds exempt from tax from assessment
Short-term capital gains on equity-oriented funds are chargeable to tax @10% (plus
education cess, applicable surcharge). However, such securities transaction tax will be
allowed as rebate under Section 88E of the Act, if the transaction constitutes business
Long-term capital gains on debt-oriented funds are subject to tax @20% of capital gain after
allowing indexation benefit or at 10% flat without indexation benefit, whichever is less.
Short-term capital gains on debt-oriented funds are subject to tax at the tax bracket applicable
(marginal tax rate) to the investor.
Section 112: Under Section 112 of the Act, capital gains, not covered by the exemption
under Section 10(38), chargeable on transfer of long-term capital assets are subject to
following rates of tax:
Resident Individual & HUF -- 20% plus surcharge, education cess.
Partnership firms & Indian companies -- 20% plus surcharge.
Foreign companies -- 20% (no surcharge).
Capital gains will be computed after taking into account the cost of acquisition as adjusted by
Cost Inflation Index, notified by the central government.
'Units' are included in the proviso to the sub-section (1) to Section 112 of the Act and hence,
unit holders can opt for being taxed at 10% (plus applicable surcharge, education cess)
without the cost inflation index benefit or 20% (plus applicable surcharge) with the cost
inflation index benefit, whichever is beneficial.
Under Section 115AB of the Income Tax Act, 1961, long term capital gains in respect of
units, purchased in foreign currency by an overseas financial, held for a period of more than
12 months, will be chargeable at the rate of 10%. Such gains will be calculated without
indexation of cost of acquisition. No surcharge is applicable for taxes under section 115AB,
in respect of corporate bodies.
Offset the capital loss on a mutual fund investment after a dividend declaration
This is a practice that is popularly referred to as 'dividend stripping.' The capital loss from a
dividend declaration can be offset if you have remained invested in the mutual fund 3 months
before and 9 months after the dividend declaration.
If you haven't adhered to this guideline then you cannot offset the capital loss arising from a
Avoid payment of capital gains on mutual fund investments
The capital gain, which is not exempt from tax as explained above, can be invested in the
specified asset, mentioned below, within 6 months of the sale.
Specified asset means any bond redeemable after 3 years:
Issued on or after April 1, 2000 by NABARD (National Bank for Agriculture and
Rural Development or NHA (National Highways Authority of India
Issued on or after April 1, 2001 by the Rural Electrification Corporation Ltd.
Issued on or after April 1, 2002 by the National Housing Bank or by the Small
Industries Development Bank of India.
Such capital gains can also be invested in any residential house property in accordance with
Section 54F of the Act and one can claim exemption from capital gains.
THE RIGHTS OF INVESTORS
As per SEBI Regulations on Mutual Funds, an investor is entitled to
1. Receive Unit certificates or statements of accounts confirming your title within 6
weeks from the date your request for a unit certificate is received by the Mutual Fund.
2. Receive information about the investment policies, investment objectives, financial
position and general affairs of the scheme;
3. Receive dividend within 42 days of their declaration and receive the redemption or
repurchase proceeds within 10 days from the date of redemption or repurchase
4. The trustees shall be bound to make such disclosures to the unit holders as are
essential in order to keep them informed about any information which may have an
adverse bearing on their investments
5. 75% of the unit holders with the prior approval of SEBI can terminate the AMC of the
6. 75% of the unit holders can pass a resolution to wind-up the scheme.
7. An investor can send complaints to SEBI, who will take up the matter with the
concerned Mutual Funds and follow up with them till they are resolved.
Are Mutual Funds Risk Free and What are the Advantages?
One must not forget the fundamentals of investment that no investment is insulated from risk.
Then it becomes interesting to answer why mutual funds are so popular. To begin with, we
can say mutual funds are relatively risk free in the way they invest and manage the funds. The
investment from the pool is well diversified across securities and shares from various sectors.
The fundamental understanding behind this is not all corporations and sectors fail to perform
at a time. And in the event of a security of a corporation or a whole sector doing badly then
the possible losses from that would be balanced by the returns from other shares.
This logic has seen the mutual funds to be perceived as risk free investments in the market.
Yes, this is not entirely untrue if one takes a look at performances of various mutual funds.
This relative freedom from risk is in addition to a couple of advantages mutual funds carry
with them. So, if you are a retail investor and planning an investment in securities, you will
certainly want to consider the advantages of investing in mutual funds.
The advantages of investing in a Mutual Fund are:
Investing requires skill. It requires a constant study of the dynamics of the markets and of the
various industries and companies within it. Anybody who has surplus capital to be parked as
investments is an investor, but to be a successful investor, you need to have someone
managing your money professionally.
Just as people who have money but not have the requisite skills to run a company (and hence
must be content as shareholders) hand over the running of the operations to a qualified CEO,
similarly, investors who lack investing skills need to find a qualified fund manager.
Mutual funds help investors by providing them with a qualified fund manager. Increasingly,
in India, fund managers are acquiring global certifications like CFA and MBA which help
them be at the cutting edge of the knowledge in the investing world.
There is an old saying: Don't put all your eggs in one basket. There is a mathematical and
financial basis to this. If you invest most of your savings in a single security (typically
happens if you have ESOPs (employees stock options) from your company, or one
investment becomes very large in your portfolio due to tremendous gains) or a single type of
security (like real estate or equity become disproportionately large due to large gains in the
same), you are exposed to any risk that attaches to those investments.
In order to reduce this risk, you need to invest in different types of securities such that they
do not move in a similar fashion. Typically, when equity markets perform, debt markets do
not yield good returns. Note the scenario of low yields on debt securities over the last three
years while equities yielded handsome returns. Similarly, you need to invest in real estate, or
gold, or international securities for you to provide the best diversification.
If you want to do this on your own, it will take you immense amounts of money and research
to do this. However, if you buy mutual funds -- and you can buy mutual funds of amounts as
low as Rs 500 a month! -- you can diversify across asset classes at very low cost. Within the
various asset classes also, mutual funds hold hundreds of different securities (a diversified
equity mutual fund, for example, would typically have around hundred different shares).
Low cost of asset management:
Since mutual funds collect money from millions of investors, they achieve economies of
scale. The cost of running a mutual fund is divided between a larger pool of money and hence
mutual funds are able to offer you a lower cost alternative of managing your funds.
Equity funds in India typically charge you around 2.25% of your initial money and around
1.5% to 2% of your money invested every year as charges. Investing in debt funds costs even
less. If you had to invest smaller sums of money on your own, you would have to invest
significantly more for the professional benefits and diversification.
Mutual funds are typically very liquid investments. Unless they have a pre-specified lock-in,
your money will be available to you anytime you want. Typically funds take a couple of days
for returning your money to you. Since they are very well integrated with the banking system,
most funds can send money directly to your banking account.
Ease of process:
If you have a bank account and a PAN card, you are ready to invest in a mutual fund: it is as
simple as that! You need to fill in the application form, attach your PAN (typically for
transactions of greater than Rs 50,000) and sign your cheque and you investment in a fund is
In the top 8-10 cities, mutual funds have many distributors and collection points, which make
it easy for them to collect and you to send your application to.
India mutual funds are regulated by the Securities and Exchange Board of India, which helps
provide comfort to the investors. Sebi forces transparency on the mutual funds, which helps
the investor make an informed choice. Sebi requires the mutual funds to disclose their
portfolios at least six monthly, which helps you keep track whether the fund is investing in
line with its objectives or not.
SELECTION OF BEST MUTUAL FUND
Choice of any scheme would depend to a large extent on the investor preferences. For an
investor willing to undertake risks, equity funds would be the most suitable as they offer the
maximum returns. Debt funds are suited for those investors who prefer regular income and
safety. Gilt funds are best suited for the medium to long-term investors who are averse to
risk. Balanced funds are ideal for medium- to long-term investors willing to take moderate
risks. Liquid funds are ideal for Corporates, institutional investors and business houses who
invest their funds for very short periods. Tax Saving Funds are ideal for those investors who
want to avail tax benefits.
An important aspect while selecting a particular scheme is the duration of the investment.
Depending on your time horizon you can select a particular scheme. Besides all this, factors
like promoter's image, objective of the fund and returns given by the funds on different
schemes should also be taken into account while selecting a particular scheme.
When your investment purpose is for saving for retirement, then risk minimization should be
your mantra. And one of the best avenues for you to invest now is mutual funds as they have
an average of 50 stocks in each portfolio for diversification and cushioning the risks.
Selecting best mutual funds mean a lot more than deciding by indices and their past
performances. However, you need to remember one thing that there is no quick gratification
in investments of any kind.
Let us discuss the dos and don'ts of selecting the best mutual funds. These points should serve
as guidelines for making decision on whether your pick is among the best in the industry or
Dos In Selecting the Best Mutual Fund
1. Draw down your investment objective. There are various schemes suitable for
different needs. For example retirement plan, capital growth etc. Also get clear about
your time frame for investment and returns. Equity funds are not advisable for short
term because of their long term nature. You can consider money market and floating
rate funds for short term gains. This equals asking - What kind of mutual fund is right
2. Once you have decided on a plan or a couple of them, collect as much information as
possible on them from different sources offering them. Funds' prospectus and advisors
may help you in this.
3. Pick out companies consistently performing above average. Mutual funds industry
indices are helpful in comparing different funds as well as different plans offered by
them. Some of the industry standard fund indices are Sensex, Nifty, BSE 500 etc. with
the latter rating the Socially Responsible Funds only. Also best mutual funds draw
good results despite market volatility.
4. Get a clear picture of fees & associated cost, taxes (for non-tax free funds) for all your
short listed funds and how they affect your returns. Best mutual funds have lower cost
5. Best mutual funds maximize returns and minimize risks. A number called as Sharpe
Ratio explains whether a fund is risk free based on its expected returns compared
against a risk free money market fund.
6. Some funds have the advantage of low minimum initial investments. You can start
investing even with Rs. 1000 a month. This is advisable for building asset bases over
a long period with small regular investment
Don'ts In Selecting Best Mutual Funds
Like there are pit falls in every investment sphere you must be careful about even while
investing in mutual funds. Here is a list of don'ts you must consider for selecting best
performing mutual funds
Don't go by the past performance alone. For, an average of performance over a period
will not tell you whether the performance is growing or at least maintained in the
Don't go by hearsay about the reputations of a fund. There are various rating agencies
which index the mutual funds regularly based on multiple factors. It forms your first
step in finding the best performing mutual funds.
Don't invest huge sums of money in a single fund or all the money in one go. Spread
out your investments rationally. For example: Index funds for high returns, bond
funds for lower risks, 401 (k) retirement plans and so on.
Don't ignore absolute returns. NAVs and percentage growths don't factor-in the taxes
and charges. Higher loads can diminish you in absolute returns. Some of the funds
load you at both buying as well as selling. Even no load funds have fees such as Rule
Don't chase a mutual fund because it is performing great in a bull run in the stock
market. Once the market stagnates or the trend reverses these funds will follow suit.
Don't compare a mutual fund across the category. This means a diversified fund
should not be compared with index fund. While choosing a best one compare funds
from the same category regardless of the promoting companies.
It is definitely not easy to pick a few best mutual funds from those in the market. It is
like searching for the proverbial needle in the stack of hay. However, a best mutual
fund is one that charges low fees, that sticks to principles and investment styles,
which puts your interest on top of everything else. The most important character of
best mutual funds is they don't just know how to ride a bull run but also a bear market
Risks involved in investing in Mutual Funds
Mutual Funds do not provide assured returns. Their returns are linked to their performance.
They invest in shares, debentures and deposits. All these investments involve an element of
risk. The unit value may vary depending upon the performance of the company and
companies may default in payment of interest/principal on their debentures/bonds/deposits.
Besides this, the government may come up with new regulation which may affect a particular
industry or class of industries. All these factors influence the performance of Mutual Funds.
Different types of Mutual funds
(a) On the basis of Objective
Equity Funds/ Growth Funds
Funds that invest in equity shares are called equity funds. They carry the principal objective
of capital appreciation of the investment over the medium to long-term. The returns in such
funds are volatile since they are directly linked to the stock markets. They are best suited for
investors who are seeking capital appreciation. There are different types of equity funds such
as Diversified funds, Sector specific funds and Index based funds.
These funds invest in companies spread across sectors. These funds are generally meant for
risk-taking investors who are not bullish about any particular sector.
These funds invest primarily in equity shares of companies in a particular business sector or
industry. These funds are targeted at investors who are extremely bullish about a particular
These funds invest in the same pattern as popular market indices like S&P 500 and BSE
Index. The value of the index fund varies in proportion to the benchmark index.
Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided
under this scheme are in the form of tax rebates U/s 88 as well saving in Capital Gains U/s
54EA and 54EB. They are best suited for investors seeking tax concessions.
Debt / Income Funds
These Funds invest predominantly in high-rated fixed-income-bearing instruments like
bonds, debentures, government securities, commercial paper and other money market
instruments. They are best suited for the medium to long-term investors who are averse to
risk and seek capital preservation. They provide regular income and safety to the investor.
Liquid Funds / Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment
could be as short as a day. They provide easy liquidity. They have emerged as an alternative
for savings and short-term fixed deposit accounts with comparatively higher returns. These
funds are ideal for Corporates, institutional investors and business houses who invest their
funds for very short periods.
These funds invest in Central and State Government securities. Since they are Government
backed bonds they give a secured return and also ensure safety of the principal amount. They
are best suited for the medium to long-term investors who are averse to risk.
These funds invest both in equity shares and fixed-income-bearing instruments (debt) in
some proportion. They provide a steady return and reduce the volatility of the fund while
providing some upside for capital appreciation. They are ideal for medium- to long-term
investors willing to take moderate risks.
These funds adopt highly speculative trading strategies. They hedge risks in order to increase
the value of the portfolio.
(b) On the basis of Flexibility
These funds do not have a fixed date of redemption. Generally they are open for subscription
and redemption throughout the year. Their prices are linked to the daily net asset value
(NAV). From the investors' perspective, they are much more liquid than closed-ended funds.
Investors are permitted to join or withdraw from the fund after an initial lock-in period.
These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter
closed for entry as well as exit. These funds have a fixed date of redemption. One of the
characteristics of the close-ended schemes is that they are generally traded at a discount to
NAV; but the discount narrows as maturity nears. These funds are open for subscription only
once and can be redeemed only on the fixed date of redemption. The units of these funds are
listed (with certain exceptions), are tradable and the subscribers to the fund would be able to
exit from the fund at any time through the secondary market.
These funds combine the features of both open-ended and close-ended funds wherein the
fund is close-ended for the first couple of years and open-ended thereafter. Some funds allow
fresh subscriptions and redemption at fixed times every year (say every six months) in order
to reduce the administrative aspects of daily entry or exit, yet providing reasonable liquidity.
(b) On the basis of geographic location
These funds mobilize the savings of nationals within the country.
These funds facilitate cross border fund flow. They invest in securities of foreign
companies. They attract foreign capital for investment.
Is there is any tax applicable on the redemption of mutual funds?
Yes. The tax applicable is called as STT i.e. Security transaction tax which is 0.25%.
STT is applicable only in case of redemption of equity linked schemes
Different plans that Mutual Funds offer
Growth Plan and Dividend Plan
A growth plan is a plan under a scheme wherein the returns from investments are reinvested
and very few income distributions, if any, are made. The investor thus only realizes capital
appreciation on the investment. This plan appeals to investors in the high income bracket.
Under the dividend plan, income is distributed from time to time. This plan is ideal to those
investors requiring regular income.
Dividend Reinvestment Plan
Dividend plans of schemes carry an additional option for reinvestment of income distribution.
This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a
fund are reinvested on behalf of the investor, thus increasing the number of units held by the
Automatic Investment Plan
Under the Automatic Investment Plan (AIP) also called Systematic Investment Plan (SIP),
the investor is given the option for investing in a specified frequency of months in a specified
scheme of the Mutual Fund for a constant sum of investment. AIP allows the investors to
plan their savings through a structured regular monthly savings program.
Automatic Withdrawal Plan
Under the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal Plan
(SWP), a facility is provided to the investor to withdraw a pre-determined amount from his
fund at a pre-determined interval.
What are the factors that influence the performance of Mutual Funds
The performances of Mutual funds are influenced by the performance of the stock market as
well as the economy as a whole. Equity Funds are influenced to a large extent by the stock
market. The stock market in turn is influenced by the performance of the companies as well
as the economy as a whole. The performance of the sector funds depends to a large extent on
the companies within that sector. Bond-funds are influenced by interest rates and credit
quality. As interest rates rise, bond prices fall, and vice versa. Similarly, bond funds with
higher credit ratings are less influenced by changes in the economy.
Mutual funds charge fees, sometimes high fees. A mutual fund's EXPENSE RATIO is the
most important fee to understand. And is made up of the following: The investment advisory
fee or management fee is the money used to pay the manager(s) of the mutual fund. This is
usually taken annually as a percentage of the fund's assets.
Administrative costs are the costs of record keeping, mailings, maintaining a customer
service line, etc. These are all necessary costs, though they vary in size from fund to fund.
The thriftiest funds can keep these costs below 0.2 per cent of fund assets.
Distribution fee: This fee is spent on marketing, advertising and distribution services. If
you're in a fund with a 12b-1 fee, you're paying every year for the fund to run commercials
and try to sell it.
Only one third of all equity, mutual funds provided returns greater than the S&P 500, and that
was before fees and expenses which range from 0.5% to 2.0% and 2.0%, respectively. So the
next issue raised was if traditionally used methods of evaluation were accurate indicators of
performance. Academicians criticized the frequently used measures of percentage annual
growth rate of net asset value and absolute dollar value today of an investment made at some
point in the past because these two approaches failed to adjust for the riskiness of a mutual
fund. After adjustments were made for the riskiness of a fund, mutual funds were reported as
being able to perform up to the market on gross returns, but were underperforming, as
compared to the market, after the various expenses were factored in. Many analysts suggested
that the average 1.3% expense ratio of mutual funds and the need for the retainment of cash
as the culprits of such underperformance.
Risk can be a great ally when trying to estimate the reward potential of a stock investment.
The greater the stock volatility, or risk, the greater also is the reward. There are several new
risk measurements that give guidance for selecting mutual stocks that provide higher returns
for lower risk.
The time horizon of an individual will also influence the performance measures he/she will
look at more closely. If you are investing for less than four years, you need a fund with
consistent performance, so all your money will be there when you need it. You also do not
have time to earn back a large commission charge on the front end.
Conversely, if you plan to invest your money for 30 years, neither consistency nor load is
very important: you have plenty of time for the market to recover. With a long-term horizon,
your biggest enemies are poor performance and high annual expenses, both of which can
erode that all-important compounding.
ANALYSIS OF MUTUAL FUND PERFORMANCE
Mutual fund performance can be analyzed through performance measurement ratios which
are use in portfolio analysis. We here are using Treynor, Sharpe, and Jensen ratio to evaluate
mutual funds and rank accordingly. Composite portfolio performance measures have the
flexibility of combining risk and return performance into a single value. The most commonly
used composite measures are: Treynor, Sharpe and Jensen measures. While Treynor
measures only the systematic risk summarized by beta, Sharpe concentrates on total risk of
the mutual fund.
Treynor’s performance index:
Treynor (1965) was the first researcher developing a composite measure of portfolio
performance. He measures portfolio risk with beta, and calculates portfolio‟s market risk
premium relative to its beta:
Ti = Treynor‟s performance index R R
Rp = Portfolio‟s actual return during a specified time period P f
Rf = Risk-free rate of return during the same period Treynor
βp = beta of the portfolio P
Whenever Rp> Rf and βp > 0 a larger T value means a better portfolio for all investors
regardless of their individual risk preferences. In two cases we may have a negative T value:
when Rp < Rf or when βp < 0. If T is negative because Rp < Rf, we judge the portfolio
performance as very poor. However, if the negativity of T comes from a negative beta, fund‟s
performance is superb. Finally when Rp- Rf, and βp are both negative, T will be positive, but
in order to qualify the fund‟s performance as good or bad we should see whether Rp is above
or below the security market line pertaining to the analysis period (Reilly, 1992).
Demonstration of Comparative Treynor Measures:
Assume we have the following data for three mutual funds; ZBY, with their respective annual
rate of return and systematic risk, Beta. The risk free rate is 8 %. The systematic risk for M
(market) is 1.0 and the rate of return for M is 14%.
Manager Rate of Return Beta
Z 0.12 0.90
B 0.16 1.05
Y 0.18 1.2
M 0.14 1.0
We can calculate the T values for each investment manager:
Tm: (0.14-0.08)/1.00 =0.06
TZ: (0.12-0.08)/0.90 =0.044
TB: (0.16-0.08)/1.05 =0.076
TY: (0.18-0.08)/1.20 =0.083
These results show that Z did not even "beat-the-market." Y had the best performance, and
both B and Y beat the market.
2- Sharpe’s Performance index
Sharpe (1966) developed a composite index which is very similar to the Treynor measure, the
only difference being the use of standard deviation, instead of beta, to measure the portfolio
risk, in other words except it uses the total risk of the portfolio rather than just the systematic
Where: P f
Si = Sharpe performance index Sharpe
σp = Portfolio standard deviation
This formula suggests that Sharpe prefers to compare portfolios to the capital market
line(CML) rather than the security market line(SML). Sharpe index, therefore, evaluates
funds performance based on both rate of return and diversification (Sharpe 1967). For a
completely diversified portfolio Treynor and Sharpe indices would give identical rankings.
Demonstration of Comparative Sharpe Measures: Sample returns and SDs for four portfolios
(and the calculated Sharpe Index) are given below:
Portfolio Avg. Annual RofR SD of return Sharpe measure
B 0.13 0.18 0.278
O 0.17 0.22 0.409
P 0.16 0.23 0.348
Market 0.14 0.20 0.30
Thus, portfolio O did the best, and B failed to beat the market. We could draw the CML
given this information.
The trouble with both Sharpe and Treynor techniques for evaluating "risk-adjusted" returns is
that they equate risk with short-term volatility. Therefore these measures may not be
applicable in evaluating the relative merits of long-term investments.
3- Jensen’s Alpha:
Jensen (1968), on the other hand, writes the following formula in terms of realized
rates of return, assuming that CAPM is empirically valid:
Jensen R R R R
Rjt = Rf + βj (Rm - Rf ) + ujt P P f P M
Subtracting Rf from both side he obtains:
Rjt - Rf = βj (Rm - Rf ) + ujt
This formula says that risk premium earned on jth portfolio is equal to the market risk
premium times βj plus a random error term. In this form, one would not expect an intercept
for the regression equation, if all securities are in equilibrium. But if certain superior portfolio
managers can persistently earn positive risk premiums on their portfolios, the error term ujt
will always have a positive value. In such a case, an intercept value which measures positive
differences from the model must be included in the equation as follows:
Rjt - Rf = αj + βj (Rm - Rf) + ujt
Jensen uses αj as his performance measure. A superior portfolio manager would have a
significant positive αj value because of the consistent positive residuals.
Inferior managers, on the other hand, would have a significant negative αj. Average portfolio
managers having no forecasting ability but, still, cannot be considered inferior would earn as
much as one could expect on the basis of the CAPM.
Jensen performance criterion, like the Treynor measure, does not evaluate the ability of
portfolio managers to diversify, since the risk premiums are calculated in terms of β.
If the value is positive, then the portfolio is earning excess returns. In other words, a positive
value for Jensen's alpha means a fund manager has beat the market with his or her stock
While studying the performance measurement of mutual funds, one particular area caught my
attention. The fact that Sharpe uses STDV as a measurement of risk which is the total risk
and Treynor uses Beta or systematic risk, but yet it is claimed that, if we are examining a
well-diversified portfolio, the rankings should be similar for all three methods. This
interesting theory aroused my curiosity and made me think why not test this hypothesis: Are
there funds which are fully diversified? If such funds exist then they ought to be ranked
identically according to all three; Sharpe-, Treynor- and Jensen‟s performance measurement.
For my analysis I have selected 10 mutual funds from Indian market. All funds are in
diversified category. I collect data from money control, value research online, and mutual
fund India web sites. I have selected such funds which are mostly preferable by investors. Fix
deposit return was selected as risk free return, that is 7.5% p.a. I have collected NAV of funds
of each month for 12 months and define return.
DATA ANALYSIS/ METHODOLOGY
Select mostly preferable funds from Indian Market.
Define NAVs for each month of period April- 2009 to March- 2010.
Find return for every month of each funds
Define standard deviation on base of monthly return
Find average return
Define beta of funds and market, S&P CNX Nifty index return take as market return.
Find Treynor, Sharpe and Jensen ratio and performance
Rank according to each ratio
Evaluate ICICI Prudential Discovery Fund individually to show how to select
Analysis of Performance of Sample Funds
Sr. Avg. Treynor Sharpe's
No. NAME OF FUNDS Return S.D. BETA Ratio Ratio Jensen
Icici Prudential Discovery
1 Fund 0.085109 9.933534 0.8865027 0.088955 0.007939 0.039378
2 DSP BR Small and Mid Cap 0.081446 11.02536 0.9618964 0.078175 0.00682 0.032358
3 Icici Prudential Emerging Star 0.077039 10.44761 0.903064 0.078387 0.006776 0.030571
4 IDFC Premier Fund Plan A 0.066173 7.854794 0.6979008 0.085862 0.007629 0.028842
SBI Magnum Emerging
5 Business 0.087394 13.87804 1.2073479 0.067209 0.005847 0.027375
6 Birla SL Midcap Plan A 0.082959 12.72428 1.1264585 0.068097 0.006029 0.026542
7 Birla SL Dividend Yield 0.0638 9.013342 0.8017708 0.071779 0.006385 0.021843
Sundaram BNP Paribas
8 SMILE Fund 0.07684 12.43841 1.1003115 0.064154 0.005675 0.021587
9 UTI dividend Yield Fund 0.055069 7.279117 0.6644231 0.073476 0.006707 0.019229
Reliance Regular Saving
10 Eqity Fund 0.067936 11.05717 0.9934204 0.062094 0.005579 0.017444
Above table shows performance of various funds by using treynor, sharpe and Jensen ratio.
Now we can rank funds according to all ratios, higher ratio of fund get higher rank and so on.
The table on next page shows rank of funds according to each ratio.
k Treynor Rank Sharpe Rank Jensen
1 Icici Dis 1 Icici Dis 1 Icici Dis
2 IDFC Pre 2 IDFC Pre 2 DSP S&M
3 Icici Emer 3 DSP S&M 3 Icici Emer
4 DSP S&M 4 Icici Emer 4 IDFC Pre
5 UTI Div 5 UTI Div 5 SBI Emer
6 Birla Div 6 Birla Div 6 Birla Mid
7 Birla Mid 7 Birla Mid 7 Birla Div
8 SBI Emer 8 SBI Emer 8 E
9 E 9 E 9 UTI Div
10 Reliance RSF 10 Reliance RSF 10 Reliance RSF
Outcome of Evaluation
From above table, we can evaluate that ICICI Pru. Discovery find get highest rank in all three
ratio, and there is also good correlation between all ratio results.
From the above table which shows performance analysis by using measurement ratios, we
can define well diversified funds among all funds. We can use same method for all funds
available in market and rank accordingly. Arrange funds according to ascending order of
Sharpe ratio, Treynor ratio, and Jensen ratio and then give first rank to highest ratio, second
to second highest and so on. Here we can see that well diversified fund rank among top five
funds. Top five funds in ranking are almost same in all three measurements. So as a
conclusion we can say that all three measurement ratios are equally valuable and show actual
and reasonable result.
From my analysis I found that ICICI Prudential Discovery Fund secure highest rank in all
three ratios. So here I further analyze ICICI Discovery fund to so investors that how to
choose particular fund.
ICICI Prudential Discovery Fund
ICICI Prudential Discovery Fund is at top among all analyzed funds. Here I am exploring this
fund to show how to analyze particular fund before investing. There should be harmony
between investor‟s requirement and fund‟s activities. I included fund objective, investment
options , return compare with market return, assets allocation, etc.
To generate return through a combination of dividend income and capital appreciation by
investing primarily in a well diversified portfolio of value stocks. Value stocks are those,
which have attractive valuations in relation to earning or book value or current and/or future
Here, investors should compare their investment objective with fund objective. Both
objectives, of investors and fund should match and should in same direction.
Fund Manager S Naren , Rajat Chandak .
Expense ratio(%) 2.04
Portfolio Turnover Ratio(%) 136
Last Divdend Declared NA
Minimum Investment (Rs) 5000
Purchase Redemptions Daily
NAV Calculation Daily
Entry Load Entry Load is 0%.
Exit Load If redeemed bet. 0 Year to 1 Year; Exit load is 1%.
Fund features show information of investment option, facilities available to invest, transfer
and redeem, minimum investment plan, expense incur to invest, NAV valuation method,
other charges, etc.
Increase/Decrease in Fund Size since Apr 30, 117.26
2010 (Rs. in crores)
Mutual Fund ICICI Prudential Mutual Fund
8th Floor, Peninsula Tower, Ganpatrao
Off Senapati Bapat Marg, Lower Parel
Asset Management Company ICICI Prudential Asset Management
3rd Floor, Hallmark Business Plaza
Sant Dyaneshwar Marg, Bandra (East),
Mumbai - 400051 Tel.- 26428000 ,
Registrar Computer Age Management Services
A&B, Lakshmi Bhavan
609, Anna Salai , Chennai
We can find fund house location, location of AMC and registrar, so we can contact in future
for any help regarding mutual fund, query for repurchase, withdrawal, change in SIP, stop
SIP investment, procedure to redeem, current investment statement, etc.
Fund Performance Vs S & P CNX Nifty
Above graph show the performance against Index performance in term of return. From above
graph of ICICI Discovery Fund, we can tall that this fund is aggressive. When market goes
up, it gives more return than index benchmark and when market goes down, it goes down
more than market. So the investors who are aggressive in investment and want to take high
risk should invest in this fund.
History 2004 2005 2006 2007 2008 2009 2010
NAV (Rs) 12.88 21.09 27.14 37.9 17.22 40.35 44.44
Total Return (%) 63.74 28.69 39.65 -54.56 134.32 10.14
S&P CNX Nifty 27.40 -11.14 -15.12 -2.77 58.56 11.88
Sensex 21.41 -18.01 -7.50 -2.11 53.29 12.67
Rank (Fund/Category) 7/100 101/145 148/162 92/193 3/214 7/256
52 Week High (Rs) 21.09 28.98 37.90 39.66 40.35 -
52 Week Low (Rs) 2.41 18.70 23.52 14.36 14.69 -
Net Assets (Rs.Cr) 932.45 1117.59 613.41 204.96 590.05 1088.60
Expense Ratio (%) 11.95 2.08 2.03 2.23 2.34 2.04
From above table, we can analyze historical NAV movement and fund return as compare to
market return. Total fund value which is invested by investors in this fund show growth in
assets and increase in trust of investors. From last year, this fund rank first by valuable
analyst, so more investors attract to invest in this fund. Expense ratio show the percentage
that fund house charge to maintain investors‟ fund. It charges annually.
Absolute Returns (in %)
Year Qtr 1 Qtr 2 Qtr 3 Qtr 4 Annual
2010 5.6 - - - -
2009 -5.7 62.0 34.5 10.0 128.9
2008 -32.5 -8.5 -4.3 -22.6 -55.8
2007 -11.0 21.9 3.2 26.3 38.8
2006 19.1 -15.2 19.8 3.7 28.1
2005 1.5 9.4 28.8 6.8 60.6
Returns (as on Jun 11, 10)
Period Returns (%) Rank #
1 mth 1.1 55
3 5.9 29
6 13.1 12
1 year 63.9 2
2 year 31.3 2
3 year 17.7 7
5 year 24.3 19
Above two table show return history of Discovery fund. First table show absolute return
quarterly for last five years and second table show annual return for last 1 month, 3 months, 6
months, 1 year, 3 years, and 5 years and rank according to performance among other
Mean -0.48 Treynor -0.71
Standard Deviation 5.13 Sortino -0.19
Sharpe -0.11 Correlation 0.81
Beta 0.82 Fama 0.06
Risk measurement table evaluate fund return, probability of return, deviation in return for
specific time and define standard deviation, measure Beta associate with fund as compare to
market. By using S.D. and Beta of fund, we can find sharpe and treynor ratio which are
measurement of performance of fund.
Portfolio Attributes Style Box
P/E 21.72 as on May -
P/B 2.93 as on May -
Dividend Yield 1.26 as on May -
Market Cap (Rs. 30,716.39 as on
in crores) May - 2010
Large 32.37 as on May -
Mid 43.47 as on May -
Small 10.87 as on May -
Top 5 Holding (%) 22.26 as on May -
No. of Stocks 58
Expense Ratio (%) 2.04
Whats in Whats out
Standard Chartered Bank Maruti Suzuki India Ltd.
ICICI Bank Ltd. State Bank of India
Grasim Industries Ltd. Corporation Bank
Akzo Nobel India Ltd ICI Ltd.
Top 10 Holding
Stock Sector P/E Percentage Qty Value Percentage
of Net of Change
Assets with last
Bharti Airtel Telecom 10.57 5.73 2,372,570 62.37 24.29
Cadila Pharmaceuticals 24.77 4.38 782,948 47.71 9.59
Healthcare & Biotechnology
Standard Banks NA 4.36 NA 47.44 NA
United Fertilizers, 44.24 4.29 2,562,370 46.67 8.76
Phosphorus Pesticides &
Sterlite Non Ferrous 59.77 3.50 574,689 38.07 -1.56
FDC Ltd Pharmaceuticals 12.02 3.32 3,796,140 36.10 6.91
Great Eastern Shipping 19.22 3.07 1,116,580 33.40 -3.47
Oil & Natural Petroleum, Gas 14.89 3.05 284,708 33.25 -24.83
Gas Corpn and
ICICI BANK Banks 24.02 3.03 379,611 32.96 NA
Rain Construction 7.78 3.01 2,386,870 32.75 64.47
Sector Allocation (%)
Auto & Auto Ancillaries 4.90
Computers - Hardware and Peripherals 0.67
Construction and Infrastructure 0.15
Construction materials 7.85
Current Assets 8.43
Engineering and Capital Goods 0.43
Fertilizers, Pesticides & Agrochemicals 7.18
Food & Food Processing, Beverages 2.45
Non Ferrous metals 3.50
Paper and Natural fibre 3.15
Petroleum, Gas and petrochemical products 3.17
Pharmaceuticals & Biotechnology 9.71
Power Generation 3.55
Power Transmission 1.02
Software and Consultancy Services 6.59
Steel and Ferrous Metal 3.31
Telecom Services 5.73
Utilities - Gas, Power 2.60
By portfolio analysis, we can come to know investment objective, major stake, contribution
of top 10 holding, risk associated, investment style, changes in portfolio, contribution of
sectors, dominate sectors, etc.
ICICI Prudential Discovery is:
Well diversified, because it invests almost in all sectors. In addition, top 10 holdings
do not contribute more than 30%, no any sector, other than banking; contribute more
than 10% holding. So it decrease standard deviation i.e. risk.
It invests in all three areas i.e. large, mid, and small cap companies.
Banking, agriculture, pharmaceutical, and I.T. are major contributor in this fund. As
per my opinion, these sectors always show high growth and it will give good return in
SUMMARY & CONCLUSION
Mutual funds are one of the most highly growing products in financial services market.
Mutual funds are suitable for all types of investors from risk adverse to risk bearer. Mutual
funds have many options of return, risk free return, constant return, market associated return,
etc. mutual funds are suitable to all age of investors, businessmen, salary person, etc.
Investors need not to be expert in equity market; mutual funds can satisfy their need. Fund
managers are expert in this area and invest fund in well diversified portfolio, high return with
low risk is possible inn mutual fund.
In today‟s world, investors are showing more trust in mutual fund than any other financial
product. There is no need of a financial consultant, if you have good knowledge of mutual
funds and their type to invest.
Mutual fund is subject to market risk, despite of that it have low risk than stock market. This
is proved in performance evaluation section of this report. Performance evaluation
measurement ratios i.e. Treynor‟s, Sharpe‟s and Jensen‟s are used by fund managers to take
decision of investment and to diversify portfolio.
Mutual Fund is subject to market risk, analyzing particular fund before investing.
Study historical return of funds, risk measurement ratios to evaluate fund.
There should be similarity in your and fund‟s objective.
For high return invest in diversified funds, for tax saving invest in ELSS equity funds,
for moderate risk and return invest in balance funds, for assure return invest in debt
and liquid funds.
As per my opinion, investor should invest around 30% in mutual fund.
Performance measurement of funds
How to choose best funds
How to convince investors
Upto some extend I realize life as an employee
How to recommend suitable fund to investors
BIBILIOGRAPHY AND REFERENCE
AMFI test workbook