Dissertation on MF

EQUITY MUTUAL FUNDS – STUDY OF RISK RETURN ANALYSIS

A WINTER PROJECT STUDY SUBMITTED IN PARTIAL FULFILLMENT FOR
THE REQUIREMENT OF THE TWO YEAR POST GRADUATE DIPLOMA IN
MANAGEMENT (FULL-TIME)
Under the Aegis of:

Under the Guidance of:

Dr. Rahul Singh

Report Submitted by:

Piyush Kumar Jain

Birla Institute of Management Technology, Greater Noida

February 2010

stitute of Management Technology


DECLARATION

I hereby declare that this project report titled “Equity Mutual Funds – Study of
Risk Return Analysis” is a record of independent work carried out by me,
towards the partial fulfillment of requirements for MBA course of Birla Institute
of Management Technology, Greater Noida. This has not been submitted in
part or full towards any other degree.

PLACE: Greater Noida Piyush Kumar Jain
DATE: 18th Mar ‘10 08-DM-066

Piyush Kumar Jain, PGDM 08-10 Page 2


AUTHORIZATION

This is to certify that Mr. Piyush Kumar Jain (Roll No. 066/2008) a student of
PGDM Finance at Birla Institute of Management Technology, Greater Noida has
worked on the Winter Project titled “EQUITY MUTUAL FUNDS – STUDY OF RISK
RETURN ANALYSIS” as in partial fulfilment for the requirement of the two year
post graduate diploma in management (full-time).
This is his original work to the best of my knowledge.

Dr. Rahul Singh
Assitant Professor
Advisor -Finance



ACKNOWLEDGEMENT

I take this opportunity to express my deep sense of gratitude to all those who
have contributed significantly by sharing their knowledge and experience in the
completion of this project work.
I am greatly obliged to Dr. H Chaturvedi, Director, BIMTECH, Greater Noida for
providing me the most appropriate opportunity and facilities to complete this
venture.
I am highly indebted to Dr. Rahul Singh – my faculty guide, under whose able
guidance this project was carried out. I thank him for his continuous support and
mentoring during the tenure of the project.
Last but not least, the ones who are always at the top of my heart, my dear family
members whose blessings, inspiration and encouragement have resulted in the
successful completion of this project.

Date: 08-DM-066
Place: New Delhi (Piyush Kumar Jain)



Table of Contents

Research Extract ..................................................................................................... 6
Literature Survey .................................................................................................... 7
Introduction to Mutual Funds ............................................................................... 9
History of MF World Wide .................................................................................. 14
Types of MFs.......................................................................................................... 20
Important Terminologies ...................................................................................... 26
SEBI Regulations on MF ...................................................................................... 31
Comparison of MF with other Investment Products ......................................... 35
Future of MF in India ........................................................................................... 35
Problem Statement of Project .............................................................................. 42
Product Portfolio ................................................................................................... 44
Design of Study ...................................................................................................... 47
Operational Definition of the concept ................................................................. 48
Methodology of Data Collection .......................................................................... 52
Tools & Techniques used for analysis ................................................................. 53
Evaluation of Portfolio Performance .................................................................. 55
Analysis & Interpretations ................................................................................... 60
Findings .................................................................................................................. 80
Conclusion .............................................................................................................. 81
Bibliography........................................................................................................... 82



RESEARCH EXTRACT

Mutual Funds (MF) have become one of the most attractive ways for the average person
to invest their money. It is said that bank investment is the first priority of people to invest
their savings and the second place is for investment is held by mutual funds and
th ere afte r other avenues. A Mutual Fund pools resources from thousands of investors and
then diversifies its investment into many different holdings such as stocks, bonds, or
Government securities in order to provide high relative safety and returns as per the scheme
principles.

The Project is a “FINANCE PROJECT” which tries to explain in layman’s language about the
history, growth, & pros and cons of investing in Mutual Funds and the second part of it
deals with the analysis of risk and returns of equity schemes of different Mutual Fund
Companies.

The main objective of the project was to get an overview of Mutual Fund Industry, its set up,
its working and to find out the risks and returns of equity schemes of different Mutual Fund
Companies.

The project includes a brief idea about the growth of MF industry (History), the broad idea
about the organization and concept of MF and SEBI Guidelines on Mutual Funds. There are
many improvements pending in the field and it has to happen as soon as possible so as to
call the MF industry as an Organized and well-developed sector.

The past performance of MF is not necessarily indicative of future performance of the scheme
and no AMC guarantees Returns and or safety of Principal.



Literature Survey

Investors shy away from equity mutual funds

Source: The Economic Times/ Nishant Kumar / Reuters
Mumbai: Investors are shying away from Indian equity funds as a sustained slump in the stock
market wipes out a major chunk of their stunning gains in 2007, but the industry is not yet
facing pressure from redemptions.
Diversified stock funds delivered returns of nearly 60% in 2007, as the benchmark stock index
rose 47%.
But with the market down about a quarter so far in 2008, investors have seen the value of their
holdings cut by almost a third and have started cutting back on new investments.
“There has been a slowdown in the flows of equity funds in the last two months,” Sanjay
Prakash, chief executive of the Indian fund unit of HSBC, told Reuters.
“We are seeing net inflows every day, but very small amounts,” said Prakash, whose firm saw
its average monthly assets drop 0.95% to Rs184.7 billion ($4.3 billion) in the six months ending
May.
Mesmerised by a six-times rise in the stock market in the five years to the end of 2007,
investors saw a 23% drop in the March quarter as a buying opportunity, pouring in Rs449 billion
into the funds, 67% more than a year earlier.
But as the market slump persists, euphoria has given way to caution. Flows into equity funds
slumped to Rs45.9 billion in April, the lowest since August 2006, and about Rs48 billion in May,
data from the Association of Mutual Funds in India (AMFI) showed.
The money is mainly coming from preset investment plans where a fixed sum is deposited
regularly into the funds. The industry body estimates there are about 3 million such accounts.

“Slowdown is in the high net-worth and institutional segment,” said Vikrant Gugnani, the chief
executive of India’s number one fund firm, Reliance Capital Asset Management.



He said big-ticket investors were no longer looking at stocks, shifting instead to real estate, gold
and fixed-maturity plans, which essentially close-end bond funds are investing in securities in
line with their maturity profile.
Investors may not be topping up their funds, but they are also not in a hurry to pull out of them.
Outflows of Rs36 billion in May were lowest since July 2006, AMFI data showed.
Outflows from equity funds in January, when the stock market hit a record high and before
dropping sharply, were more than two times those of May, but inflows were even higher at a
record Rs212.5 billion.
Equity funds are not likely to see any major redemption pressure if the stock market held above
14,000 as investors would like to wait for a recovery, HSBC’s Prakash said, adding there might
be higher redemptions if the market dropped below 13,000. Indian shares fell to a 2008 low of
14,645 on June 10.
While the market was trading above 15,000 on Thursday, Credit Suisse saw it falling to 13,000
by end-2008.



INTRODUCTION TO MUTUAL FUNDS

MUTUAL FUNDS - THE CONCEPT

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciations realized are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost.

A mutual fund is a professionally managed type of collective investment scheme that
pools money from many investors and invests it in stocks, bonds, short- term money market
instruments, and/or other securities. The mutual fund will have a fund manager that trades
the pooled money on a regular basis. As of early 2008, the worldwide value of all mutual
funds totals more than $26 trillion. In the rest of the world, mutual fund is used as a generic
term for various types of collective investment vehicles, such as unit trusts, open-ended
investment companies (OEICs), unitized insurance funds, and undertakings for collective
investments in transferable securities.

Mutual funds can invest in many kinds of securities. The most common are cash
instruments, stock, and bonds, but there are hundreds of sub-categories. Stock funds, for
instance, can invest primarily in the shares of a particular industry, such as technology or
utilities. These are known as sector funds. Bond funds can vary according to risk (e.g.,
high-yield junk bonds or investment-grade corporate bonds), type of issuers (e.g.,
government agencies, corporations, or municipalities), or maturity of the bonds (short- or
long-term). Both stock and bond funds can invest in primarily U.S. securities (domestic



funds), both U.S. and foreign securities (global funds), or primarily foreign securities
(international funds).

Most mutual funds' investment portfolios are continually adjusted under the supervision of
a professional manager, who forecasts cash flows into and out of the fund by investors, as
well as the future performance of investments appropriate for the fund and chooses those
which he or she believes will most closely match the fund's stated investment objective. A
mutual fund is administered under an advisory contract with a management company, which
may hire or fire fund managers.

Mutual funds are subject to a special set of regulatory, accounting, and tax rules. In the
U.S., unlike most other types of business entities, they are not taxed on their income as
long as they distribute 90% of it to their shareholders and the funds meet certain
diversification requirements in the Internal Revenue Code. Also, the type of income they earn
is often unchanged as it passes through to the shareholders. Mutual fund distributions of tax-
free municipal bond income are tax-free to the shareholder. Taxable distributions can be
either ordinary income or capital gains, depending on how the fund earned those distributions.
Net losses are not distributed or passed through to fund investors.

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. In the last few years Indian
Mutual Fund industry has grown at a rapid pace. Some of the top performing and best mutual
funds in India are: SBI Mutual Funds, UTI Mutual Funds, Prudential ICICI Mutual Funds and
HDFC Mutual Funds.



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



ADVANTAGES OF MUTUAL FUNDS:

Professional Management - The primary advantage of funds (at least theoretically) is the
professional management of your money. Investors purchase funds because they do not have
the time or the expertise to manage their own portfolios. A mutual fund is a relatively
inexpensive way for a small investor to get a full-time manager to make and monitor.

Diversification - By owning shares in a mutual fund instead of owning individual stocks or
bonds, your risk is spread out. The idea behind diversification is to invest in a large number of
assets so that a loss in any particular investment is minimized by gains in others. In other
words, the more stocks and bonds you own, the less any one of them can hurt you (think
about Enron). Large mutual funds typically own hundreds of
different stocks in many different industries. It wouldn't be possible for an investor to build
this kind of a portfolio with a small amount of money.



Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a
time, its transaction costs are lower than what an individual would pay for securities.

Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be
converted into cash at any time.

Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual
funds, and the minimum investment is small. Most companies also have automatic
purchase plans whereby as little as $100 can be invested on a monthly basis.

DISADVANTAGES OF MUTUAL FUNDS

Costs - Mutual funds don't exist solely to make your life easier - all funds are in it for a profit.
The mutual fund industry is masterful at burying costs under layers of jargon. These costs are
so complicated that in this tutorial we have devoted an entire section to the subject.

Dilution - It's possible to have too much diversification. Because funds have small holdings
in so many different companies, high returns from a few investments often don't make
much difference on the overall return. Dilution is also the result of a successful fund
getting too big. When money pours into funds that have had strong success, the manager
often has trouble finding a good investment for all the new money.

Taxes - When making decisions about your money, fund managers don't consider your
personal tax situation. For example, when a fund manager sells a security, a capital-gains
tax is triggered, which affects how profitable the individual is from the sale. It might have
been more advantageous for the individual to defer the capital gains liability.



HISTORY OF MUTUAL FUNDS
(WORLDWIDE):
When three Boston securities executives pooled their money together in 1924 to create the
first mutual fund, they had no idea how popular mutual funds would become.

The idea of pooling money together for investing purposes started in Europe in the mid-1800s.
The first pooled fund in the U.S. was created in 1893 for the faculty and staff of Harvard
University. On March 21st, 1924 the first official mutual fund was born. It was called the
Massachusetts Investors Trust.

After one year, the Massachusetts Investors Trust grew from $50,000 in assets in 1924 to
$392,000 in assets (with around 200 shareholders). In contrast, there are over 10,000
mutual funds in the U.S. today totalling around $7 trillion (with approximately 83 million
individual investors) according to the Investment
Company Institute.

The stock market crash of 1929 slowed the growth of mutual funds. In response to the stock
market crash, Congress passed the Securities Act of 1933 and the Securities Exchange
Act of 1934. These laws require that a fund be registered with the SEC and provide
prospective investors with a prospectus. The SEC (U.S. Securities and Exchange Commission)
helped create the Investment Company Act of 1940, which provides the guidelines that all
funds must comply with today.

With renewed confidence in the stock market, mutual funds began to blossom. By the end of
the 1960s there were around 270 funds with $48 billion in assets.
In 1976, John C. Bogle opened the first retail index fund called the First Index Investment
Trust. It is now called the Vanguard 500 Index fund. In November of 2000 it became the largest
mutual fund ever with $100 billion in assets.



HISTORY OF INDIAN MUTUAL FUND INDUSTRY
The history of Mutual Funds in India can be broadly divided into 4 Phases:

1. First phase (1964-1987)

The Unit Trust of India (UTI) was established in the year 1963 by passing an Act in the
Parliament.
The UTI was setup by the Reserve Bank of India (RBI) and functioned under the Regulatory
and Administrative control of the RBI.
The First scheme in the history of mutual funds was UNIT SCHEME-64, which is popularly
known as US-64.
In 1978, UTI was de-linked from RBI. The Industrial Development Bank of India (IDBI) took
over the Regulatory and Administrative control.
At the end of the year 1988, UTI had Rs.6,700/- Crores of Assets Under Management.

2. Second phase (1987-1993)

Entry of Public Sector Funds.
In the year 1987, public sector Mutual Funds setup by public sector banks.
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC)
came in to existence.
State Bank of India Mutual Fund was the first non-UTI Mutual Fund.
The following are the non-UTI Mutual Funds at initial stages-
• SBI Mutual Fund in June 1987.
• Can Bank Mutual Fund in December 1987.
• LIC Mutual Fund in June 1989.
• Punjab National Bank Mutual Fund in August 1989.
• Indian Bank Mutual Fund in November 1989.
• Bank of India Mutual Fund in June 1990.



• GIC Mutual Fund in December 1990.
• Bank of Baroda Mutual Fund in October 1992.
At the end of 1993, the entire Mutual Fund Industry had Assets under
Management (AUM) of Rs. 47, 004/- Crores.

3. Third phase (1993-2003)

Entry of Private Sector Funds - a wide choice to Indian Mutual Fund investors.
In 1993, the first Mutual Fund Regulations came into existence, 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.
In 1996, the 1993 Securities Exchange Board of India (SEBI) Mutual Funds Regulations were
substituted by a more comprehensive and revised Mutual Fund regulator.
The number of Mutual Fund houses went on increasing, with many foreign mutual funds
setting up funds in India.
In this time, the Mutual Fund industry has witnessed several Mergers & Acquisitions.

4. Fourth phase (since 2003 February)

Following the repeal of the UTI Act in February 2003, it was (UTI) bifurcated into 2 separate
entities.
One is the specified undertaking of the UTI with asset under management of Rs.29,835/-
Crores as at the end of January 2003.
The second is the UTI Mutual Funds Limited, sponsored by State Bank of India, Punjab
National Bank, Bank of Baroda and Life Insurance Corporation of India.
UTI is functioning under an Administrator and under the Rules framed by the Government of
India and does not come under the purview of the Mutual Fund Regulations.
The UTI Mutual Funds Limited is registered with SEBI and functions under the Mutual Funds
Regulations.



Association of Mutual Funds in India (AMFI)

With the increase in Mutual Fund players in India, a need for Mutual Fund Association in
India was generated to function as a non-profit organization. Association of Mutual
Funds in India (AMFI) was incorporated on 22nd August, 1995.

AMFI is an apex body of all Asset Management Companies (AMC) which has been registered
with Securities Exchange Board of India (SEBI). Till date all the AMCs are that have
launched mutual fund schemes are its members. It functions under the supervision and
guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a
professional and healthy market with ethical lines enhancing and maintaining standards.
It follows the principle of both protecting and promoting the interests of mutual funds as well
as their unit holders.
The Association of Mutual Funds of India works with 30 registered AMCs of the country. It
has certain defined objectives which juxtaposes the guidelines of its Board of Directors.

The objectives are as follows:

• This Mutual Fund Association of India maintains high professional and ethical
standards in all areas of operation of the industry.
• It also recommends and promotes the top class business practices and code of
conduct which is followed by members and related people engaged in the activities of
Mutual Fund and Asset Management. The agencies who are by any means connected or
involved in the field of capital markets and financial
services also involved in this code of conduct of the association.



The sponsors of Association of Mutual Funds in India:

A. Bank Sponsored

1. Joint Ventures - Predominantly Indian
- Canara Robeco Asset Management Company Limited
- SBI Funds Management Private Limited
2. Others
- UTI Asset Management Company Ltd

B. Institutions

- LIC Mutual Fund Asset Management Company Limited

C. Private Sector

1. Indian
- Benchmark Asset Management Company Pvt. Ltd.
- DBS Cholamandalam Asset Management Ltd.
- Deutsche Asset Management (India) Pvt. Ltd.
- Edelweiss Asset Management Limited
- Escorts Asset Management Limited
- IDFC Asset Management Company Private Limited
- JM Financial Asset Management Private Limited
- Kotak Mahindra Asset Management Company Limited (KMAMCL)
- Quantum Asset Management Co. Private Ltd.
- Reliance Capital Asset Management Ltd.
- Religare Asset Management Company Pvt. Ltd.
- Sahara Asset Management Company Private Limited
- Tata Asset Management Limited
- Taurus Asset Management Company Limited



2. Foreign
- AIG Global Asset Management Company (India) Pvt. Ltd.
- FIL Fund Management Private Limited
- Fortis Investment Management (India) Pvt. Ltd.
- Franklin Templeton Asset Management (India) Private Limited
- Goldman Sachs Asset Management (India) Private Limited
- Mirae Asset Global Investments (India) Pvt. Ltd.

3. Joint Ventures - Predominantly Indian
- Birla Sun Life Asset Management Company Limited
- DSP BlackRock Investment Managers Limited
- HDFC Asset Management Company Limited
- ICICI Prudential Asset Mgmt.Company Limited
- Religare AEGON Asset Management Company Pvt. Ltd.
- Sundaram BNP Paribas Asset Management Company Limited

4. Joint Ventures - Predominantly Foreign
- Baroda Pioneer Asset Management Company Limited
- Bharti AXA Investment Managers Private Limited
- HSBC Asset Management (India) Private Ltd.
- ING Investment Management (India) Pvt. Ltd.
- JPMorgan Asset Management India Pvt. Ltd.
- Morgan Stanley Investment Management Pvt.Ltd.
- Principal Pnb Asset Management Co. Pvt. Ltd.
- Shinsei Asset Management (India) Pvt. Ltd.



TYPES OF MUTUAL FUNDS

Open-end fund

The term mutual fund is the common name for what is classified as an open-end
investment company by the SEC. Being open-ended means that, at the end of every day, the
fund issues new shares to investors and buys back shares from investors wishing to leave
the fund.

Mutual funds must be structured as corporations or trusts, such as business trusts, and any
corporation or trust will be classified by the SEC as an investment company if it issues
securities and primarily invests in non-government securities. An investment company will
be classified by the SEC as an open-end investment company if they do not issue undivided
interests in specified securities (the defining characteristic of unit investment trusts or UITs)
and if they issue redeemable securities. Registered investment companies that are not
UITs or open-end investment companies are closed- end funds. Neither UITs nor closed-end
funds are mutual funds (as that term is used in the US).

Exchange-traded funds

A relatively recent innovation, the exchange-traded fund or ETF, is often structured as an
open-end investment company. ETFs combine characteristics of both mutual funds and
closed-end funds. ETFs are traded throughout the day on a stock exchange, just like closed-
end funds, but at prices generally approximating the ETF's net asset value. Most ETFs are
index funds and track stock market indexes. Shares are issued or redeemed by
institutional investors in large blocks (typically of 50,000). Most investors purchase and
sell shares through brokers in market transactions. Because the institutional investors
normally purchase and redeem in in kind transactions, ETFs are more efficient than
traditional mutual funds (which are continuously issuing and redeeming securities and, to



effect such transactions, continually buying and selling securities and maintaining liquidity
positions) and therefore tend to have lower expenses.
Exchange-traded funds are also valuable for foreign investors who are often able to buy and
sell securities traded on a stock market, but who, for regulatory reasons, are limited in their
ability to participate in traditional U.S. mutual funds.

Equity funds

Equity funds, which consist mainly of stock investments, are the most common type of mutual
fund. Equity funds hold 50 percent of all amounts invested in mutual funds in the United
States. Often equity funds focus investments on particular strategies and certain types of
issuers.

Bond funds

Bond funds account for 18% of mutual fund assets.Types of bond funds include term funds,
which have a fixed set of time (short-, medium-, or long-term) before they mature.
Municipal bond funds generally have lower returns, but have tax advantages and lower risk.
High-yield bond funds invest in corporate bonds, including high-yield or junk bonds. With the
potential for high yield, these bonds also come with greater risk.

Money market funds

Money market funds hold 26% of mutual fund assets in the United States. Money market
funds entail the least risk, as well as lower rates of return. Unlike certificates of deposit (CDs),
money market shares are liquid and redeemable at any time.



Funds of funds

Funds of funds (FoF) are mutual funds which invest in other underlying mutual funds (i.e.,
they are funds comprised of other funds). The funds at the underlying level are typically
funds which an investor can invest in individually. A fund of funds will typically charge a
management fee which is smaller than that of a normal fund because it is considered a fee
charged for asset allocation services. The fees charged at the underlying fund level do not
pass through the statement of operations, but are usually disclosed in the fund's annual
report, prospectus, or statement of additional information. The fund should be
evaluated on the combination of the fund-level expenses and underlying fund expenses, as
these both reduce the return to the investor.

Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor),
although some invest in funds managed by other (unaffiliated) advisors. The cost
associated with investing in an unaffiliated underlying fund is most often higher than
investing in an affiliated underlying because of the investment management research
involved in investing in fund advised by a different advisor. Recently, FoFs have been classified
into those that are actively managed (in which the investment advisor reallocates
frequently among the underlying funds in order to adjust to changing market conditions)
and those that are passively managed (the investment advisor allocates assets on the basis
of on an allocation model which is rebalanced on a regular basis).

The design of FoFs is structured in such a way as to provide a ready mix of mutual funds
for investors who are unable to or unwilling to determine their own asset allocation
model. Fund companies such as TIAA-CREF, American Century Investments, Vanguard, and
Fidelity have also entered this market to provide investors with these options and take the
"guess work" out of selecting funds. The allocation mixes usually vary by the time the
investor would like to retire: 2020, 2030, 2050, etc. The more distant the target retirement
date, the more aggressive the asset mix.



Hedge funds

Hedge funds in the United States are pooled investment funds with loose SEC
regulation and should not be confused with mutual funds. Some hedge fund managers are
required to register with SEC as investment advisers under the Investment Advisers Act. The
Act does not require an adviser to follow or avoid any particular investment strategies, nor
does it require or prohibit specific investments. Hedge funds typically charge a management
fee of 1% or more, plus a "performance fee" of 20% of the hedge fund's profits. There may be
a "lock-up" period, during which an investor cannot cash in shares. A variation of the hedge
strategy is the 130-30 fund for individual investors.

Equity funds

A stock fund or equity fund is a fund that invests in Equities more commonly known as stocks.
Such funds are typically held either in stock or cash, as opposed to Bonds, notes, or other
securities. This may be a mutual fund or exchange-traded fund. The objective of an equity
fund is long-term growth through capital appreciation, although dividends and interest are
also sources of revenue. Specific equity funds may focus on a certain sector of the market or
may be geared toward a certain level of risk.

Stock funds can be distinguished by several properties. Funds may have a specific style, for
example, value or growth. Funds may invest in solely the securities from one country, or from
many countries. Funds may focus on some size of company, that is, small-cap, large-cap, et
cetera. Funds which are managed by professionals are said to be actively managed where as
Index funds try as best as possible to mirror specific market indices.



FUND TYPES

Index Fund

Index funds invest in securities to mirror a market index, such as the S&P 500. An index fund
buys and sells securities in a manner that mirrors the composition of the selected index.
The fund's performance tracks the underlying index's performance. Turnover of securities
in an index fund's portfolio is minimal. As a result, an index
fund generally has lower management costs than other types of funds.

Growth Fund

A growth fund invests in the stocks of companies that are growing rapidly. Growth
companies tend to reinvest all or most of their profits for research and development rather
than pay dividends. Growth funds are focused on generating capital gains rather than income.

Value Fund

This is a fund that invests in "value" stocks. Companies rated as value stocks usually are
older, established businesses that pay dividends.

Sector (Specialized) Fund

A Fund that tracks one area of industry, is called a Sector Fund. Most sector funds have a
minimum of 25% of their assets invested in its specialty. These funds offer high appreciation
potential, but may also pose higher risks to the investor. Examples include gold funds (gold
mining stock), technology funds, and utility funds.



Income Fund

An income fund stresses current income over growth. The funds objective may be
accomplished by investing in the stocks of companies with long histories of dividend
payments, such as utility stocks, blue-chip stocks, and preferred stocks.
Option income funds invest in securities on which options may by written and earn premium
income from writing options. They may also earn capital gains from trading options at a
profit. These funds seek to increase total return by adding income generated by the options
to appreciation on the securities held in the portfolio.

Balanced Fund

Balanced Funds invest in stocks for appreciation and bonds for income. The goal is to provide
a regular income payment to the fund holder, while increasing its principal.

Asset Allocation Fund

These funds split investments between growth stocks, income stocks/bonds, and money market
instruments or cash for stability. Fund advisers switch the percentage of holdings in each
asset category according to the performance of that group. Example: A fund may have 60%
invested in stocks, 20% in bonds, and 20% in cash or money market. If the stock market is
expected to do well, that could switch to 80% stocks, and 10% each in both bond and cash
investments. Conversely, if the stock market is expected to perform poorly, the fund would
decrease its stock holdings.

Dynamic Fund of Funds

Portfolio disclosure will be limited to details of underlying schemes and will not include
investments made by these Schemes. Dynamic asset allocation may result in higher
transaction costs. Since Scheme may invest predominantly in diversified Large Cap



Equity or Liquid Schemes of Mutual Funds registered with SEBI, its performance may
depend on that of these underlying schemes. Dynamic asset allocation may result in higher
transaction costs. The Scheme is closed-ended; investors can redeem units only during the last
three business days of every third month from the date of allotment of units, at NAV-
related prices.
Portfolio disclosure will be limited to details of underlying schemes and will not include
investments made by these Schemes. Dynamic asset allocation may result in higher
transaction costs. Since Scheme may invest predominantly in Diversified Equity schemes
and Liquid/ Short Term / Floating Rate Schemes of Mutual Funds registered with SEBI, its
performance may depend on that of these underlying schemes.

Important Terminologies

Capitalization

Fund managers and other investment professionals have varying definitions of mid-cap, and
large-cap ranges.

Growth vs. Value

Another distinction is made between growth funds, which invest in stocks of
companies that have the potential for large capital gains, and value funds, which
concentrate on stocks that are undervalued. Value stocks have historically produced higher
returns; however, financial theory states this is compensation for their greater risk. Growth
funds tend not to pay regular dividends. Income funds tend to be more conservative
investments, with a focus on stocks that pay dividends. A balanced fund may use a
combination of strategies, typically including some level of investment in bonds, to stay more
conservative when it comes to risk, yet aim for some growth.



Index funds Vs Active Management

An index fund maintains investments in companies that are part of major stock (or bond)
indices, such as the S&P 500, while an actively managed fund attempts to outperform a
relevant index through superior stock-picking techniques. The assets of an index fund are
managed to closely approximate the performance of a particular published index. Since the
composition of an index changes infrequently, an index fund manager makes fewer trades,
on average, than does an active fund manager. For this reason, index funds generally have
lower trading expenses than actively managed funds, and typically incur fewer short-term
capital gains which must be passed on to shareholders. Additionally, index funds do not
incur expenses to pay for selection of individual stocks (proprietary selection techniques,
research, etc.) and deciding when to buy, hold or sell individual holdings. Instead, a fairly
simple computer model can identify whatever changes are needed to bring the fund back
into agreement with its target index.
Certain empirical evidence seems to illustrate that mutual funds do not beat the market and
actively managed mutual funds under-perform other broad-based portfolios with similar
characteristics. One study found that nearly 1,500 U.S. mutual funds under- performed the
market in approximately half of the years between 1962 and 1992. Moreover, funds
that performed well in the past are not able to beat the market again in the future (shown by
Jensen, 1968; Grimblatt and Sheridan Titman, 1989).

Risk Factors

Mutual funds, like securities investments, are subject to market risks and there is no
guarantee against loss in the Scheme or that the Scheme's objectives will be achieved.
As with any investment in securities, the NAV of the Units issued under the Scheme can go
up or down depending on various factors and forces affecting capital markets.
Past performance of the Sponsor or the AMC or the mutual funds managed by the Sponsor
does not indicate the future performance of the Scheme.



Investments in the Scheme will be affected by trading volumes, settlement periods,
volatility, price fluctuations, inability to sell securities, disinvestment of holdings of any
unlisted stocks prior to target date of disinvestment, credit risk and interest rate risk and the
risks associated with investments in derivatives.

Specific Risk Factor

The investors of the Scheme shall bear the recurring expenses of the Scheme in addition to the
expenses of the underlying schemes. Hence the investor under the Scheme may receive lower
pre-tax returns than what they may receive if they had invested directly in the underlying
schemes in the same proportions. The portfolio disclosure of the Scheme will be limited to
providing the particulars of the underlying schemes where the Scheme has invested and will
not include the investments made by the underlying schemes.. Since the Scheme proposes to
invest at least in 5 underlying schemes, the significant underperformance in even one of the
underlying schemes may adversely affect the performance of the Scheme. Investments in
underlying equity/debt schemes will have all the risks associated with such schemes.

Expenses and TER's

Mutual funds bear expenses similar to other companies. The fee structure of a mutual fund
can be divided into two or three main components: management fee, non- management
expense. All expenses are expressed as a percentage of the average daily net assets of the
fund.

Management fees

The management fee for the fund is usually synonymous with the contractual investment
advisory fee charged for the management of a fund's investments. However, as many
fund companies include administrative fees in the advisory fee component, when
attempting to compare the total management expenses of different funds, it is helpful to



define management fee as equal to the contractual advisory fee + the contractual
administrator fee. This "levels the playing field" when comparing management fee
components across multiple funds.
Contractual advisory fees may be structured as "flat-rate" fees, i.e., a single fee charged to the
fund, regardless of the asset size of the fund. However, many funds have contractual fees
which include breakpoints, so that as the value of a fund's assets increases, the advisory
fee paid decreases. Another way in which the advisory fees remain competitive is by
structuring the fee so that it is based on the value of all of the assets of a group or a complex of
funds rather than those of a single fund.

Non-management expenses

Apart from the management fee, there are certain non-management expenses which most
funds must pay. Some of the more significant (in terms of amount) non- management
expenses are: transfer agent expenses (this is usually the person you get on the other end of
the phone line when you want to purchase/sell shares of a fund), custodian expense (the
fund's assets are kept in custody by a bank which charges a custody fee), legal/audit
expense, fund accounting expense, registration expense (the SEC charges a registration fee
when funds file registration statements with it), board of directors/trustees expense (the
disinterested members of the board who oversee the fund are usually paid a fee for their
time spent at meetings), and printing and postage expense (incurred when printing and
delivering shareholder reports).

Investor fees and expenses

Fees and expenses borne by the investor vary based on the arrangement made with the
investor's broker. Sales loads (or contingent deferred sales loads (CDSL)) are not included in
the fund's total expense ratio (TER) because they do not pass through the statement of
operations for the fund. Additionally, funds may charge early redemption fees to
discourage investors from swapping money into and out of the fund quickly, which may force



the fund to make bad trades to obtain the necessary liquidity. For example, Fidelity Diversified
International Fund (FDIVX) charges a 1 percent fee on money removed from the fund in less
than 30 days.

Brokerage commissions

An additional expense which does not pass through the statement of operations and cannot
be controlled by the investor is brokerage commissions. Brokerage commissions are
incorporated into the price of the fund and are reported usually 3 months after the fund's
annual report in the statement of additional information. Brokerage commissions are
directly related to portfolio turnover (portfolio turnover refers to the number of times the
fund's assets are bought and sold over the course of a year). Usually the higher the rate of
the portfolio turnover, the higher the brokerage commissions. The advisors of mutual fund
companies are required to achieve "best execution" through brokerage arrangements so
that the commissions charged to the fund will not be excessive.



SEBI REGULATIONS ON MUTUAL FUNDS:

The Government brought Mutual Funds in the Securities market under the regulatory
framework of the Securities and Exchange board of India (SEBI) in the year 1993. SEBI issued
guidelines in the year 1991 and comprehensive set of regulations relating to the organization
and management of Mutual Funds in 1993.

SEBI REGULATIONS 1993 (20.1.1993)

The regulations bar Mutual Funds from options trading, short selling and carrying forward
transactions in securities. The Mutual Funds have been permitted to invest only in transferable
securities in the money and capital markets or any privately placed debentures or securities
debt. Restrictions have also been placed on them to ensure that investments under an
individual scheme, do not exceed five per cent and investment in all the schemes put together
does not exceed 10 per cent of the corpus. Investments under all the schemes cannot exceed
15 per cent of the funds in the shares and debentures of a single company.

SEBI grants registration to only those mutual funds that can prove an efficient and orderly
conduct of business. The track record of sponsors, a minimum experience of five years in the
relevant field of Investment, financial services, integrity in business transactions and
financial soundness are taken into account. The regulations also prescribe the advertisement
code for the marketing schemes of Mutual Funds, the contents of the trust deed, the
investment management agreement and the scheme-wise balance sheet. Mutual Funds are
required to be formed as trusts and managed by separately formed as trusts and managed by
separately formed Asset Management Companies (AMC). The minimum net worth of such
AMC is stipulated at Rs.5 crores of which, the Mutual Fund should have a custodian who is not
associated in any way with the AMC and registered with the SEBI.



The minimum amount raised in closed-ended scheme should be Rs.20 Crores and for the open-
ended scheme, Rs.50 Crores. In case, the amount collected falls short of the minimum
prescribed, the entire amount should be refunded not later than six weeks from the date of
closure of the scheme. If this is not done, the fund is required to pay an interest at the rate
of15 per cent per annum from the date of expiry of six weeks. In addition to these, the Mutual
Funds are obliged to maintain books of accounts and provision for depreciation and bad debts.
Further, the Mutual Funds are now under the obligation to publish scheme-wise annual
reports, furnish six month un-audited accounts, quarterly statements of the movements of the
net asset value and quarterly portfolio statements to the SEBI. There is also a stipulation that
the Mutual Funds should ensure adequate disclosures to the investors. SEBI has agreed to
let the Mutual Funds buy back the units of their schemes.

However, the funds cannot advertise this facility in their prospectus. SEBI is also empowered to
appoint an auditor to investigate into the books of accounts or the affairs of the Mutual Funds.
SEBI can suspend the registration of Mutual Funds in the case of deliberate manipulation, price
rigging or deterioration of the financial position of Mutual Funds.

SEBI REGULATIONS, 1996

SEBI announced the amended Mutual Fund Regulations on December 9, 1996 covering
Registration of Mutual Funds, Constitution and Management of Mutual funds and Operation
of Trustees, Constitution and Management of Asset Management Companies (AMCs) and
custodian schemes of MFs, investment objectives and valuation policies, general obligations,
inspection and audit. The revision has been carried out with the objective of improving
investor protection, imparting a greater degree of flexibility and promoting innovation.

The increase in the number of MFs and the types of schemes offered by them necessitated
uniform norms for valuation of investments and accounting practices in order to enable the
investors to judge their performance on a comparable basis. The Mutual Fund regulations



issued in December 1996 provide for a scheme-wise report and justification of performance,
disclosure of large investments which constitute a significant portion of the portfolio and
disclosure of the movements in the unit capital. The existing Asset Management Companies are
required to increase their net worth from Rs.10 crores within one year from the date of
notification of the amended guidelines. AMCs are also allowed to do other fund-based
businesses such as providing investment management services to offshore funds, other
Mutual Funds, Venture Capital Funds and Insurance Companies. The amended guidelines
retained the former fee structure of the AMCs of 1.25% of weekly average Net Asset Value
(NAV) up to Rs.100 crores and 1% of NAV for net assets in excess of Rs.100 crores.

The consent of the investors has to be obtained for bringing about any change in the
fundamental attributes of the scheme on the basis of which the unit holders had made initial
investments. The regulation empowers the investor. The amended guidelines require
portfolio disclosure, standardization of accounting policies, valuation norms for NAV and
pricing. The regulations also sought to address the areas of misuse of funds by introducing
prohibitions and restrictions on affiliate transactions and investment exposures to companies
belonging to the group of sponsors of mutual funds. The payment of early bird incentive for
various schemes has been allowed provided they are viewed as interest payment of early
bird incentive for early investment with full disclosure.

The various Mutual Funds are allowed to mention an indicative return for schemes for fixed
income securities. In 1998-99 the Mutual Funds Regulation were amended to permit Mutual
Funds to trade in derivatives for the purpose of hedging and portfolio balancing. SEBI
registered Mutual Funds and Fund managers are permitted to invest in overseas markets,
initially within an overall limit of US $500 million and a ceiling for an individual fund at US$ 50
million.



SEBI made (October 8, 1999) investment guidelines for MFs more stringent. The new guidelines
restrict MFs to invest no more than 10% of NAV of a scheme in share or share related
instruments of a single company. MFs in rated debt instruments of a single issue is restricted to
15% of NAV of the scheme (up to 20% with prior approval of Board of Trustees or AMC),
restrictions in un- rated debt instruments and in shares of unlisted companies.

The new norms also specify a maximum limit of 25% of NAV for any scheme for investment in
listed group companies as against an umbrella limit of 25% of NAV of all schemes taken
together earlier. SEBI increased (June 7, 2000) the maximum investment limit for MFs in listed
companies from 5% to 10% of NAV in respect of open-ended funds. Changes in fundamental
attributes of a scheme was also allowed without the consent of three fourths of unit holders
provided the unit holders are given the exit option at NAV without any exit load.

MFs are also not to make assurance or claim that is likely to mislead investors. They are also
banned from making claims in advertisement based on past performance.



Comparison of Mutual Funds with other
products/investment opportunities:

The mutual fund sector operates under stricter regulations as compared to most other
investment avenues. Apart from the tax efficiency and legal comfort how do mutual funds
compare with other products? Here the investment in Mutual Funds is compared with:

1. Company Fixed Deposits.

2. Bank Fixed Deposits.

3. Bonds and Debentures.

4. Equity.

5. Life Insurance

1. Company Fixed Deposits versus Mutual Funds
Fixed deposits are unsecured borrowings by the company accepting the deposits. Credit
rating of the fixed deposit program is an indication of the inherent default risk in the
investment.

The moneys of investors in a mutual fund scheme are invested by the AMC in specific
investments under that scheme. These investments are held and managed in- trust for the
benefit of scheme’s investors. On the other hand, there is no such direct correlation
between a company’s fixed deposit mobilization, and the avenues where these resources are
deployed. A corollary of such linkage between mobilization and investment is that the gains
and losses from the mutual fund scheme entirely flow through to the investors. Therefore,
there can be no certainty of yield, unless a named guarantor assures a return or, to a lesser



extent, if the investment is in a serial gilt scheme. On the other hand, the return under a
fixed deposit is certain, subject only to the default risk of the borrower.

Both fixed deposits and mutual funds offer liquidity, but subject to some differences:

• The provider of liquidity in the case of fixed deposits is the borrowing company. In mutual
funds, the liquidity provider is the scheme itself (for open-end schemes) or the market (in the
case of closed-end schemes).

• The basic value at which fixed deposits are en-cashed is not subject to market risk.
However, the value at which units of a scheme are redeemed entirely depends on the
market. If securities have gained in value during the period, then the investor can even earn a
return that is higher than what she anticipated when she invested. Conversely, she could also
end up with a loss.

• Early encashment of fixed deposits is always subject to a penalty charged by the company
that accepted the fixed deposit. Mutual fund schemes also have the option of charging a
penalty on “early” redemption of units (by way of an ‘exit load’). If the NAV has
appreciated adequately, then despite the exit load, the investor could earn a capital gain on
her investment.

2. Bank Fixed Deposits versus Mutual Funds
Bank fixed deposits are similar to company fixed deposits. The major difference is that
banks are more stringently regulated than are companies. They even operate under stricter
requirements regarding Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). While the
above are causes for comfort, bank deposits too are subject to default risk. However, given the
political and economic impact of bank defaults, the Government as well as Reserve Bank of
India (RBI) tries to ensure that banks do not fail.



Further, bank deposits up to Rs 1, 00, 000 are protected by the Deposit Insurance and
Credit Guarantee Corporation (DICGC), so long as the bank has paid the required insurance
premium of Rs 0.05 per annum for every Rs 100 of deposits. The monetary ceiling of Rs
100,000 is for all the deposits in all the branches of a bank, held by the depositor in the same
capacity and right. 3. Bonds and Debentures versus Mutual Funds

As in the case of fixed deposits, credit rating of the bond / debenture is an indication of
the inherent default risk in the investment. However, unlike fixed deposits, bonds and
debentures are transferable securities.

While an investor may have an early encashment option from the issuer (for instance
through a “put” option), generally liquidity is through a listing in the market.

Implications of this are:

• If the security does not get traded in the market, then the liquidity remains on paper. In this
respect, an open-end scheme offering continuous sale / re-purchase option is superior.
• The value that the investor would realize in an early exit is subject to market risk. The
investor could have a capital gain or a capital loss. This aspect is similar to a MF scheme.

It is possible for an astute investor to earn attractive returns by directly investing in the debt
market, and actively managing the positions. Given the market realities in India, it is difficult
for most investors to actively manage their debt portfolio. Further, at times, it is difficult to
execute trades in the debt market even when the transaction size is as high as Rs 1 crore. In
this respect, investment in a debt scheme would be beneficial.

Debt securities could be backed by a hypothecation or mortgage of identified fixed and or
current assets (secured bonds / debentures). In such a case, if there is a default, the
identified assets become available for meeting redemption requirements. An unsecured bond



/ debenture is for all practical purposes like a fixed deposit, as far as access to assets is
concerned.

The investment in mutual fund scheme is held by a Custodian for the benefit of all investors in
that scheme. Thus, the securities that relate to a scheme are ring-fenced for the benefit of its
investors.

4. Equity versus Mutual Funds
Investment in both equity and mutual funds are subject to market risk. An investor holding
an equity security that is not traded in the market place has a problem in realizing value from
it. But investment in an open-end mutual fund eliminates this direct risk of not being able
to sell the investment in the market. An indirect risk remains, because the scheme has
to realize its investments to pay investors. The AMC is however in a better position to handle
the situation.

Another benefit of equity mutual fund schemes is that they give investors the benefit of
portfolio diversification through a small investment. For instance, an investor can take
an exposure to the index by investing a mere Rs 5,000 in an index fund.

5. Life Insurance versus Mutual Funds
Life insurance is a hedge against risk – and not really an investment option. So, it would be
wrong to compare life insurance against any other financial product. Occasionally on
account of market inefficiencies or mis-pricing of products in India, life insurance products
have offered a return that is higher than a comparable “safe” fixed return security – thus,
you are effectively paid for getting insured! Such opportunities are not sustainable in the
long run.



FUTURE OF MUTUAL FUNDS IN INDIA

At the end of 2006 March, Indian mutual fund industry reached Rs. 2, 57, 499 crores. It is
estimated that by 2010 March-end, the total assets of all scheduled commercial banks
should be Rs. 40, 90, 000 crores.

The annual composite rate of growth is expected 13.4% during the rest of the decade. In the
last 5 years we have seen annual growth rate of 9%. According to the current growth rate,
by year 2010, mutual fund assets will be double.

Going by the above facts and generally, mutual funds have often been considered a
good route to invest and earn returns with reasonable safety. Small and big investors have
both invested in instruments that have suited their needs. And so equity and debt funds
have attracted investments alike. The performance of the investments, equity in
particular, for the last one-year, has however been disappointing for the investors.

The fall in NAVs of equity funds, and it is really steep in some, even to the extent of 60-70
percent, has left investors disgusted. Such backlash was only to be expected when funds, in
a hurry to post good returns invested in volatile tech stocks. The move, though good under
conducive market conditions, is the point of rebuttal now. Owing to volatility in market and
profit warnings by some IT majors, tech stocks have been on the downhill journey and the
result is fall in NAVs of most equity funds.

This hurts the investor but then investments in equity are never safe. Mutual funds are not
just guilty of mismanaging their risks as the recent survey by Pricewaterhouse Coopers
indicates but also not educating their investors enough on the risks facing them. It is for the
mutual benefit of the investors as well as mutual funds that investor is educated enough
or else an agitated investor might route his investments to other avenues that are



considered safe. Debt funds are safe investments and generate returns far in excess of what
other so-called safe avenues such as banks generate. Despite this, the inflow of funds in
debt funds and banks is by no means comparable. The factor contributing to this is the lack
of understanding caused by improper guidance by the intermediaries.

Till now, Investor education has been one of the issues, less cared for, by the industry. The
industry focused upon the amounts and not why a person wanted to invest or whether a
particular product suited him or not. While educating the customer might not have been on
the cards earlier, the things are beginning to change now.

With SEBI passing on the guidelines, the funds will engage in investor education. The
guidelines state that funds will utilize the income earned on unclaimed money lying with
them for a period exceeding three years to educate the investors. AMFI has started a
certification program for intermediaries. This will be made mandatory for the
intermediaries and is aimed at educating the investors about the risks attached to the schemes
and to inculcate adequate skills into the intermediaries to help the investors choose the right
kind of fund. Steps such as these are aimed at obliterating various flaws in the system by
standardizing the knowledge base of intermediaries, as they are the interface between the
investor and the funds.

Although the investors themselves are also guilty of picking funds that were not suited for
them, the blame can’t lie square on their shoulders alone. The industry has also got to bear
some of it. With such programs becoming mandatory, it can be ensured to some extent that
ignorance ceases to be an aspect associated with the industry.

Till now, investors have been ignorant about the kind of fund to be picked or how to select
a fund. Teaching an investor how to select a fund is thus an important aspect. Educated
investors can, on their part, ask pertinent questions to find funds that qualify to be in their
portfolio as per their risk bearing capacity.



It would not be improper to say that investor education is still the key to managing the
funds handed over by investors. The investors are important to the industry and likewise,
mutual funds form an important avenue for an investor. It would thus be of critical importance
to educate people for an informed investor is in the best position to pick up Schemes as per
his need. This would also infuse some confidence in the minds of the investors who under the
current scenario seem to be losing faith on account of the falls suffered in recent times.

An educated and informed intermediary stands the best chance of
understanding the needs of the client and also of winning his confidence through proper
guidance. As it is, investor education will remain a key issue for mutual funds in the longer
run and educating the intermediaries will be the first step towards it.



STATEMENT OF THE PROBLEM:

“The project deals with the Overview of Mutual Industry in India and evaluation study of
Risk and Returns Equity Schemes of different mutual fund companies”.

OBJECTIVES OF THE STUDY:
• To study Mutual Fund Industry in India.
• To study the performance of equity schemes of different company.
• To study the Risk involved in different Schemes.
• To compare the returns of different mutual funds.

HYPOTHESIS:
H0 : There is no significant difference between the returns of Mutual Fund Companies.
H1 : There is a significant difference in the returns of Mutual Fund Companies.

NEED FOR THE STUDY:

The evaluation study of risk and returns of Equity Schemes of different Mutual Funds is
useful to know the performance of schemes and it helps the investors to invest in Mutual
Fund schemes Equity.

The performance of different schemes however helps the prospective investors to choose the
best scheme that suits his objective.



SCOPE OF THE STUDY:

• The study was limited to just finding the risk and returns associated with the schemes.
• The study covers the schemes provided by six different companies.
• The study covers the period of past two years from January 2007 to January 2009.
• The study covers only the open-ended funds.

LIMITATIONS OF THE STUDY:

•The study was limited only to six companies.
•Time duration for the study was very short as it was restricted to just two years.
•The study was limited to the extent of just finding the risks and returns of each Scheme.



PRODUCT PROFILE
Tata Equity Management Fund

Objective: Tata Equity Management Fund seeks to generate capital appreciation & provide
long term growth opportunities by investing in a portfolio constituted of equity & equity
related instruments and to generate consistent returns by investing in debt and money market
securities.
Structure: Open-ended Equity Fund
Inception Date: May 15, 2006
Plans and Options under the Plan: Growth, Dividend
Face Value (Rs/Unit): Rs. 10
Minimum Investment: Rs. 5000
Entry Load: Nil.
Exit Load: In case of redemption before expiry of close ended period, proportionate
unamortised NFO expenses will be recovered from the redemption proceeds of the investors.

Birla SunLife Equity Plan

Objective: To provide growth along with tax benefits to investors.
Structure: Open Ended
Inception Date : February 16, 1999
Plans and Options under the Plan : Dividend and Growth Option.
Minimum Investment: Rs.5000
Entry Load: 2.25% for amount < 5 crores. Nil, for amount > 5 crore.
Exit Load: Nil.



StanChart Asian Equity Fund

Objective: The fund seeks to achieve capital appreciation through investment in Asian
companies (excluding Japan), which have high growth potential.
Structure: Open ended scheme.
Inception Date: January 16, 2008
Plans and Options under the Plan: Growth and Dividend options.
Face Value (Rs/Unit): Rs 10
Minimum Investment: Rs 5000/-
Entry Load: 2.25% for less than 5 crores.
Exit Load : For less than 5 crores- 1% if redeemed within 6 months, 0.5% if redeemed after 6
months but within 1 year.
For greater than 5 crores but less than 25 crores-1% if redeemed within 6 months. Greater than
25 crores- Nil

HSBC Equity Fund

Objective: HSBC Equity Fund (HEF) aims to generate long term capital growth from an actively
managed portfolio of equity and equity related securities.
Structure: Open-ended Equity Scheme
Inception Date: December 03, 2002
Plans and Options under the Plan: Open-ended Equity Scheme
Minimum Investment: Rs.5000
Entry Load: For investments below Rs. 5 crores, Entry load is 2.25%. For Investments of Rs. 5
crores and above, Entry Load is Nil.
Exit Load: If redeemed before 6 Months; and Amount less than 5 crores, Exit load is
0.5%. For Amount greater than 5 crore, Exit load is Nil.



LIC MF Equity Fund

Objective: LIC MF Equity Fund seeks to obtain maximum possible capital growth consistent
with reasonable levels of safety and security by investing the funds mainly in equities and also
in debts and other permitted instruments of capital and money market.
Structure: Open-ended Equity Scheme

Inception Date: January 11, 1993
Plans and Options under the Plan : Growth, Dividend.


Minimum Investment: Rs. 2000
Entry Load: For investments below Rs.1 crore, Entry load is 2.25%. For Investments of Rs. 1
crore and above, Entry Load is Nil.
Exit Load: Nil.

UTI Equity Fund

Objective: Capital appreciation through investments in Equities and Equity related
instruments, convertible debentures, derivatives in India and also in overseas markets.
Structure: Open Ended Equity Fund
Inception Date: April 20, 1992
Plans and Options under the Plan: Growth Option, Income Option


Minimum Investment: Rs. 5,000/-

Entry Load: 2.25% for < Rs.2 crores; Nil for >= Rs.2 crores.
Exit Load: Nil.



DESIGN OF THE STUDY
INTRODUCTION:

A detail study is done on Equity Schemes provided by six Mutual Fund Companies.
Analysis is done on the Risk and Returns of Equity Scheme provided by the organization,
where it is useful to the investors to mobilize the savings in the respective schemes
provided by the Company.

RESEARCH DESIGN:

A Research design is a method and procedure for acquiring information needed to solve the
problem. A research design is the basic plan that helps in the data collection or analysis. It
specifies the type of information to be collected the sources and data collection procedure.

METHOD OF RESEARCH DESIGN USED UNDER STUDY IS:

DESCRIPTIVE RESEARCH

Descriptive research is study of existing facts to come to a conclusion. In this research
an attempt has been made to analyze the past performance of the equity schemes and to
know the benefits to the investors. The study is done on equity schemes provided by six
companies to know the company’s performance for the past two years and to know the risk
and returns of the funds.



OPERATIONAL DEFINITIONS OF THE
CONCEPT

RISK:

The dictionary meaning of risk is the possibility of loss or injury. Any rational investor, before
investing his/her investible wealth in the security, analyzes the risk associated with a
particular security. The actual return he receives from a security may vary from his expected
return and the risk is expressed in term of variability of return. The down side of risk may be
caused by several factors, either common to all securities or specific to a particular
security.
Investor in general would like to analyze the risk factors and a through knowledge of a risk
helps him to plan his portfolio in such a manner so as to minimize risk associated with the
investment.

Risk consists of two components:
• The systematic risk.
• The unsystematic risk.

The systematic risk is caused by the factors external to a particular company and
uncontrollable by the company. The systematic risk affects the market as a whole.

In case of unsystematic risk the factors are specific, unique and related to a particular
industry or company.

Systematic Risk: The systematic risk affects the entire market. The economic
conditions, political situations and the sociological changes affect the security market. These



factors are beyond the control of the corporate and the investor. The investor cannot avoid
them.
This is subdivided into:
i. Market Risk
ii. Interest Rate Risk
iii. Purchasing Power Risk.

Unsystematic Risk: The unsystematic risk is unique and peculiar to a firm or an
industry. Unsystematic Risk stems from managerial inefficiency, technological change in the
production process, availability of raw material changes in the customer preference, and
labor problems. The nature and magnitude of the above-mentioned factors differ from
industry to industry, and company to company. They have to be analyzed separately for
each industry and firm. Broadly, unsystematic risk can be classified into:
i. Business Risk
ii. Financial Risk

Risk Measurement: Understanding the nature of risk is not adequate unless the
investor or analyst is capable of expressing it in some quantitative terms.
Measurements cannot be assured of cent percent accuracy because risk is caused by
numerous factors such as social, political, economic and managerial efficiency. The statistical
tools used to quantify risk are:

i. Standard Deviation:

a. A measure of the dispersion of a set of data from its mean. The more spread apart the data
is, the higher the deviation.
b. In finance, standard deviation is applied to the annual rate of return of an investment to
measure the investment's volatility (risk).
A volatile stock would have a high standard deviation. In mutual funds, the standard
deviation tells us how much the return on the fund is deviating from the expected normal
returns. Standard deviation can also be calculated as the square root of the variance.



ii. Beta:
Beta describes the relationship between the securities return and the index returns.
Beta = + 1.0
One percent change in market index returns causes exactly one percent change in the
security return. It indicates that the security moves in tandem with the market.
Beta = + 0.5
One percent change in the market index return causes 0.5 percent change in the
security return. The security is less volatile compared to the market.
Beta = + 2.0
One percent change in the market index return causes 2 percent change in the security
return. The security return is more volatile. When there is a decline of 10% in the market
return, the security with beta of 2 would give a negative return of 20%. The security with
more than 1 beta value is considered to be risky.
Negative Beta
Negative beta value indicates that the security return moves in the opposite direction to the
market return. A security with a negative beta of -1 would provide a return of 10%, if the
market return declines by 10% and vice-versa.

RATE OF RETURN:

The compounded annual return on a mutual fund scheme represents the return to investors
from a scheme since the date of issue. It is calculated on NAV basis or price basis. On NAV basis
it reflects the return generated by the fund manager on NAV. On price basis it reflects the
return to investors by way of market or repurchase price

Net Asset Value (NAV):

The net asset value of the fund is the cumulative market value of the assets fund of its
liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in
the fund, this is the amount that the shareholders would collectively own. This gives rise to



the concept of net asset value per unit, which is the value, represented by the ownership of
one unit in the fund. It is calculated simply by dividing the net asset value of the fund by
thenumber of units. However, most people refer loosely to the NAV per unit as NAV,
ignoring the “per unit”. We also abide by the same convention.

Computation of Net Asset Value

The Net Asset Value (NAV) of the units will be determined as of every working day and
for such other days as may be required for the purpose of transaction of units. The NAV shall
be calculated in accordance with the following formula, or such other formula as may be
prescribed by SEBI from time to time.

Market Fair value of scheme’s investments + Receivables + Accrued

Income + Other Assets – Accrued Expenses – Payables – Other

Liabilities
AV = ---------------------------------------------------------------------------------------
Number of Units Outstanding



METHODOLOGY OF DATA COLLECTION:

SOURCES OF DATA

SECONDARY DATA used for the study:

• Internet sources.

• Newspapers.

• Announcements and publishing’s by the company.

CONCEPTUAL DESIGN:

Sample unit: Schemes of Sahara Mutual Fund.
Sample size: 16 weeks NAV of the Schemes.
Sampling Procedure: Direct.



TOOLS & TECHNIQUES USED FOR THE STUDY
To analyze the data in the project various statistical tools are used. They are:
i. Beta:

β = Beta of the fund;

N = Number of Observations; X =
Weekly return of NAV;
Y = Weekly return of the Index.

ii. Standard Deviation:

Where

σ = Standard Deviation;

N = Number of observations;

d = Deviations from actual mean;



iii. Rate of Return for a period:

Where,

A = NAV at the end of the period of the period; B =
NAV at the beginning of the period;
D = Dividend paid during the period;

iii. Analysis of Variance (ANOVA):

ANOVA has been conducted using inbuilt function of Microsoft Excel. Single factor ANOVA
has been used for this purpose. If F-value is less than tabulated, then we accept the null
hypothesis. We are using 5% Level of Significance. Annova is used to see if there is a
significant difference between the returns of the schemes.



Evaluation of Portfolio Performance:

Composite Equity Portfolio Performance Measures

As late as the mid 1960s investors evaluated PM performance based solely on the rate of
return. They were aware of risk, but didn't know how to measure it or adjust for it. Some
investigators divided portfolios into similar risk classes (based upon a measure of risk such
as the variance of return) and then compared the returns for alternative portfolios within
the same risk class.
We shall look at some measures of composite performance that combine risk and return
levels into a single value.

Treynor Portfolio Performance Measure

This measure was developed by Jack Treynor in 1965. Treynor (helped developed
CAPM) argues that, using the characteristic line, one can determine the relationship
between a security and the market. Deviations from the characteristic line (unique returns)
should cancel out if you have a fully diversified portfolio.

Treynor's Composite Performance Measure: He was interested in a performance
measure that would apply to ALL investors regardless of their risk preferences. He argued
that investors would prefer a CML with a higher slope (as it would place them on a higher
utility curve). The slope of this portfolio possibility line is:

A larger Ti value indicates a larger slope and a better portfolio for all investors regardless
of their risk preferences. The numerator represents the risk premium and the denominator
represents the risk of the portfolio; thus the value, T, represents the portfolio's return per unit
of systematic risk. All risk averse investors would want to maximize this value.



The Treynor measure only measures systematic risk--it automatically assumes an adequately
diversified portfolio.
We can compare the T measures for different portfolios. The higher the T value, the better the
portfolio performance. For instance, the T value for the market is:

In this expression, < m = 1.

Demonstration of Comparative Treynor Measures: Assume that we are an
administrator of a large pension fund (i.e. Terry Teague of Boeing) and we are trying to decide
whether to renew contracts with our three money managers. We must measure how they
have performed. Assuming we have the following results for each individual's performance:

Investment Avg. Annual
Beta
Manager Rate of Return

Z 0.12 0.90

B 0.16 1.05

Y 0.18 1.2

We can calculate the T values for each investment manager:
Tm = (0.14 – 0.08)/1.00 = 0.06
TZ = (0.12 – 0.08)/0.09 = 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. [To find required return, the line is: .08 + .06(Beta) ]

One can achieve a negative T value if you achieve very poor performance or very good
performance with low risk. For instance, if you had a positive beta portfolio but your return
was less than that of the risk-free rate (which implies you weren't adequately diversified or
that the market performed poorly) then you would have a (-) T value. If you have a negative
beta portfolio and you earn a return higher than the risk-free rate, then you would have
a high T-value. Negative T values can be confusing, thus you may be better off plotting
the values on the SML or using the CAPM (in this case, .08+.06(Beta)) to calculate the
required return and compare it with the actual return.

Sharpe Portfolio Performance Measure

This measure was developed in 1966. It is as follows:

It is VERY similar to Treynor's measure, except it uses the total risk of the portfolio rather
than just the systematic risk. The Sharpe measure calculates the risk premium earned per
unit of total risk. In theory, the S measure compares portfolios on the CML, whereas the T
measure compares portfolios on the SML.


Birla Institute of Management Technology Greater Noida
Technology,

Demonstration of Comparative Sharpe Measures: Sample returns an SDs for four
nd
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: CML=.08 + (0.30)
ation: (0.30)SD

Treynor Measure vs. Sharpe Measure. The Sharpe measure evaluates the portfolio
manager on the basis of both rate of return and diversification (as it considers total
portfolio risk in the denominator). If we had a fully diversified portfolio, then both the
inator).
Sharpe and Treynor measures should given us the same ranking. A poorly diversified
asures
portfolio could have a higher ranking under the Treynor measure than for the Sharpe
measure.

Jenson Portfolio Performance Me
Measure

This measure (as are all the previ
ious measures) is based on the CAPM:
We can express the expectations formula (the above formula) in terms of realized rates
of return by adding an error term to reflect the difference between E(Rj) vs actual Rj:
rm


Birla Institute of Management Technology Greater Noida
Technology,

By subtracting the risk free rate from both sides, we get:

Using this format, one would not expect an intercept in the regression. However, if
we had superior portfolio managers who were actively seeking o undervalued
out
securities, they could earn a higher risk-adjusted return than those implied in the model. So, if
we examined returns of superior portfolios, they would have a significant positi intercept.
positive
An inferior manager would have a significant negative intercept. A manager that was not
anager
clearly superior or inferior woul have a statistically insignificant intercept. We would test
ld
the constant, or intercept, in the following regression:

This constant term would tell us how much of the return is attributable to the manager's
ability to derive above-average returns adjusted for risk.
average

Applying the Jenson Measure. This requires that you use a different risk
risk-free rate for
each time interval during the sa
sample period. You must subtract the risk-free rate from the
free
returns during each observation period rather than calculating the average return and
average risk-free rate as in the Sharpe and Treynor measures. Also, the Jensen measure
does not evaluate the ability of the portfolio manager to diversify, as it calc
calculates risk
premiums in terms of systematic risk (beta). For evaluating diversified portfolios (such a
atic
most mutual funds) this is probably adequate. Jensen finds that mutual fund returns are
typically correlated with the market at rates above 0.90.
arket



ANALYSIS AND INTEPRETATIONS



NAV - Net Asset Value( Closing Month End Values; Equity Funds)
Year StanChart HSBC UTI LIC TATA BirlaSunlife

Jan-07 11.8178 73.0236 32.86 21.5973 11.339 183.53

Feb-07 12.3544 73.9072 33.62 22.5309 11.3209 188.79

Mar-07 10.6932 67.5688 31.06 19.6142 10.3624 172.01

Apr-07 10.9721 64.9581 29.64 18.4244 10.6306 167.37

May-07 12.1329 72.6258 33.21 21.0207 10.8756 187.76

Jun-07 12.2531 75.3107 34.94 21.2184 10.9052 203.87

Jul-07 12.3014 76.9942 34.98 21.5221 11.2891 209.45

Aug-07 12.6771 77.9247 35.06 21.9315 11.1341 212.68

Sep-07 13.0877 80.017 35.96 22.8593 11.5812 219.63

Oct-07 15.1709 89.453 40.16 25.6692 12.4419 242.73

Nov-07 16.7393 105.7896 44.57 30.8318 13.3582 269.86

Dec-07 17.1336 109.2251 45.11 32.8405 13.8287 283.85

Jan-08 17.6996 115.0424 48.33 34.8438 14.5373 308.33

Feb-08 15.4311 101.7038 42.13 28.6223 12.5876 254.44

Mar-08 14.3606 93.8314 39.98 26.4151 11.9001 234

Apr-08 13.8577 87.9695 37.94 22.313 11.0109 211.51
May-08
14.84 97.1612 41.24 26.21 12.0565 232.89

Jun-08 13.3027 91.8995 38.75 22.859 11.4104 215.16

Jul-08 11.9187 77.6541 32.34 19.2678 9.6343 172.22

Aug-08 13.1324 83.9529 35.32 21.7883 10.4812 188.61

Sep-08 12.8837 82.4644 35.87 21.2754 10.3467 189.22

Oct-08 11.4472 75.343 33.24 19.3474 9.2684 170.79

Nov-08 8.6122 60.6914 27.16 15.0982 7.8354 137.68

Dec-08 7.6261 55.5332 24.3 12.8871 7.1906 120.52

Jan-09 8.3681 60.5767 26.62 15.1599 7.9427 136.66



BSE Sensex
Rm- ARm (Rm- ARm)^2
Year Index Rm ARm

Jan-07 14,090.92 -0.0800 -0.04676 -0.0332 0.0011

Feb-07 12,938.09 0.0104 -0.04676 0.0571 0.0033

Mar-07 13,072.10 0.0612 -0.04676 0.1080 0.0117

Apr-07 13,872.37 0.0480 -0.04676 0.0948 0.0090

May-07 14,544.46 0.0073 -0.04676 0.0541 0.0029

Jun-07 14,650.51 0.0615 -0.04676 0.1083 0.0117

Jul-07 15,550.99 -0.0149 -0.04676 0.0319 0.0010

Aug-07 15,318.60 0.1288 -0.04676 0.1755 0.0308

Sep-07 17291.1 0.1473 -0.04676 0.1941 0.0377

Oct-07 19837.99 -0.0239 -0.04676 0.0228 0.0005

Nov-07 19363.19 0.0477 -0.04676 0.0945 0.0089

Dec-07 20286.99 -0.1300 -0.04676 -0.0833 0.0069

Jan-08 17648.71 -0.0040 -0.04676 0.0428 0.0018

Feb-08 17578.72 -0.1100 -0.04676 -0.0633 0.0040

Mar-08 15644.44 0.1050 -0.04676 0.1518 0.0230

Apr-08 17287.31 -0.0504 -0.04676 -0.0036 0.0000
-
May-08 16,415.57 0.01799 -0.04676 0.0288 0.0008

Jun-08 13,461.60 0.0664 -0.04676 0.1132 0.0128

Jul-08 14,355.75 0.0145 -0.04676 0.0613 0.0038

Aug-08 14,564.53 -0.1170 -0.04676 -0.0702 0.0049

Sep-08 12,860.43 -0.2389 -0.04676 -0.1921 0.0369

Oct-08 9,788.06 -0.0710 -0.04676 -0.0243 0.0006

Nov-08 9,092.72 0.0610 -0.04676 0.1078 0.0116

Dec-08 9,647.31 -0.0231 -0.04676 0.0237 0.0006

Jan-09 9,424.24 -1.0000 -0.04676 -0.9532 0.9087

Sum (Rm-Arm)^2 1.1351

Sum Rm -1.1223 -0.0468



Risk Free Rate
Year Rf
Jan-07 4.25
Feb-07 4.25
Mar-07 4.25
Apr-07 4.25
May-07 4.25
Jun-07 4.25
Jul-07 4.25
Aug-07 4.25
Sep-07 4.25
Oct-07 4.25
Nov-07 4.25
Dec-07 4.00
Jan-08 4.00
Feb-08 4.00
Mar-08 4.00
Apr-08 3.75
May-08 3.75
Jun-08 3.75
Jul-08 3.75
Aug-08 3.75
Sep-08 3.75
Oct-08 3.75
Nov-08 4.25
Dec-08 4.25
Jan-09 4.25

Sum Rf 101.75

Arf 0.0424



Rm Market Returns
ARm Average Market Returns
Rf Risk Free Rate
Arf Average Risk Free Rate
Rp Asset Return
ARp Average Asset Return
SML Securities Market Line


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