Evaluation of mutual fundportfolio @ sbi project report mba finance


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Evaluation of mutual fundportfolio @ sbi project report mba finance

  1. 1. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONABBREVIATIONS USED IN THE STUDY  NAV—Net Asset Value  AMC- Asset Management Company  SEBI- Security Exchange Board of India  AMFI- Association of Mutual Funds in India  UTI- Unit Trust of India  MF- Mutual Fund  ELSS- Equity Linked Saving Scheme BABASAB PATIL 1
  2. 2. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONEXECUTIVE SUMMERYMutual Funds over the years have gained immensely in their popularity. Apart from themany advantages that investing in mutual funds provide like diversification,professional management, the ease of investment process has proved to be a majorenabling factor. However, with the introduction of innovative products, the world ofmutual funds nowadays has a lot to offer to its investors. With the introduction ofdiverse options, investors needs to choose a mutual fund that meets his risk acceptanceand his risk capacity levels and has similar investment objectives as the investor.With the plethora of schemes available in the Indian markets, an investors needs toevaluate and consider various factors before making an investment decision. Hence aninvestor must infer the fact sheets of the various scheme to asses the portfoliomanagement style of the fund manager. Mutual funds provide risk diversification:diversification of a portfolio is amongst the primary tenets of portfolio structuring, and anecessary one to reduce the level of risk assumed by the portfolio holder. Mutual fundsrepresent one such option. So it is always safe for investor to invest their hard earnedmoney in those schemes which have invested in stock of divers sectors with potential toearn higher returns.So this project is carried to understand the science of portfolio management that mutualfund apply to trade off with risk and maximize return. It becomes very difficult forinvestor to make decision as where to invest his hard earned money and in which streamof investment will reap optimal appreciation of money invested for the period. Byanalyzing the fact sheets of the Asset Management Company we can auspicate the bestfund scheme to invest. There are many research institutes, which provide updatedinformation of all the schemes that are available and the trend in the Mutual Fundindustry. All that we need is to read between the lines and make sense of befuddlinginformation, and acquire knowledge related to investment and comprehend financeterminology. BABASAB PATIL 2
  3. 3. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONThough still at a nascent stage, Indian MF industry offers a plethora of schemes andserves broadly all type of investors. The range of products includes equity funds, debt,liquid, gilt and balanced funds. India offers biggest opportunity for asset managementcompaniesThe next five years will see the Indian asset management business grow at least 33percent annually. The main drivers of this will be the retail segment, expected to growat 36 percent annually, and the institutional investor segment, expected to grow at 29percent annually. This will take the total assets under management (AUM) to $440billion, as per study by McKinsey, a consultancy firm.In India, asset management business is in emerging phase. One reason why it also hasthe fastest growth rate though still behind Russia and China. The business has grown 47percent annually since 2003, taking the total AUM in India today to $92 billion. It grew97 percent and 67 percent in Russia and China, respectively.Investment in mutual funds is still low in India, by both the retail and institutionalcategories. AUM as a percentage of GDP works out to only 8 percent here, comparedwith 79 percent in the US, and 39 percent in Brazil. AUM as a percentage of bankdeposits is also abysmally low in India, at 25 percent, while it is 140 percent in the USand 96 percent in Brazil.The business is very profitable in India, with operating profits at 32 bps as a percentageof average AUM. In developed markets, this ratio is very low: it is 18 bps in the US and12 bps in the UKMoreover, the setup of a legal structure, which has enough teeth to safeguard investors’interest, ensures that the investors are not cheated out of their hard-earned money. All inall, benefits provided by them cut across the boundaries of investor category and thuscreate for them, a universal appeal. BABASAB PATIL 3
  4. 4. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONThe project has been under taken at SBI- MUTUAL FUND HUBLI. The focus of studyis to evaluate the portfolio performance of the funds. In this report an attempt is madeto evaluate the performance of three growth-oriented mutual funds on the basis ofmonthly returns compared to benchmark returns for the period of 3 years. For thispurpose, risk adjusted performance measures suggested by Jenson, Treynor and Sharpeare employed.I have chosen three Growth schemes having highest asset under management as fundwith huge asset basis can diversify risk by deploying assets in various investmentvehicle.The schemes I have chosen for study areMAGNUM CONTRA FUNDMAGNUM GLOBAL FUNDMAGNUM TAX GAIN SCHEMEThe rationale behind choosing these three different schemes (one is equity scheme,other one is diversified scheme and one more is tax scheme) is that these three are thetop performing schemes of SBI MF. And has highest Asset Under Management So toknow as to weather the risk and return associated with these schemes are high as theyare one of the best schemes or it is vice versa. The schemes are compared with the Benchmark BSE 100 index. Three yearsvalues have been taken into consideration for calculation. The past performance is notan indicative for the future growth .No AMC can guarantee for any return. BABASAB PATIL 4
  5. 5. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONDESIGN OF THE STUDY TITLE OF THE PROJECT“ MUTUAL FUNDPORTFOLIO PERFORMANCEEVALUATIONOBJECTIVESObjective • To Evaluate portfolio performance of mutual fund scheme with its respective benchmark Sub objectives • Elaborate rationalism of investment • Comprehensive study of mutual fund industry • Inquisition of SBI Mutual Fund and its schemesSCOPE OF THE STUDY  The study was conducted on only SBI Mutual fund schemes.  The study was conducted on three schemes of SBI  The study focuses on portfolio management strategy applied with respect to 3 schemes of SBI Mutual Fund. BABASAB PATIL 5
  6. 6. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION  The study covers the period from January 2005 to Dec 2007. METHODOLOGY OF DATA COLLECTION SOURCES OF DATA PRIMARY DATA  Discussion with the company managers regarding the schemes nature, their performance, and risk associated with these schemes and the return that these schemes are generating.SECONDARY DATA  Internet sources  Materials provided by the company  Business magazinesCONCEPTUAL DESIGN Sample unit: schemes of SBI mutual fund Sample size: 5 years NAV and market index valuesConclusionThe schemes taken for study proved to be a good investment avenue for all theinvestors as the risk associated with these schemes are low and they are yielding avery good return. it should be considered for Long-term investment plan. The volatility in the market might have affected the returns of the schemesfor short period like 6 months or one year, but the performance of the schemesfor 3 years and above proves to be consistent. The schemes have been the one ofthe best schemes of SBI MF and hence have bagged many awards. BABASAB PATIL 6
  8. 8. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION COMPANY PROFILE STATE BANK OF INDIA - MUTUAL FUND A partner for life.SBI Funds Management Ltd. is the investment manager of SBI Mutual Fund. SBIMutual Fund has been constituted as a trust, sponsored by State Bank India.Today the Fund has an investor base of over 2.8 million spread over 23 schemes.With a large network of collecting branches and investor service centers, SBIMutual Fund constantly endeavors to get closer to its growing family of investors.SBI is the largest public sector Bank in India with 8,836 branches all over India.SBI is the leader in providing loans to trade & industry. It also provides relatedservices, which generate significant fee-based income. It has also identifiedproject finance and consumer banking as key areas.Currently the SBI Mutual Fund offers 64 schemes in with different investmentobjective and needs, as follows. No. of schemes 64 No. of schemes including options 177 Equity Schemes 36 Debt Schemes 115 Short term debt Schemes 11 Equity & Debt 3 Money Market 0 Gilt Fund 12 Corpus under management Rs.29492.9685 Crs. as on Feb 29, 2008 BABASAB PATIL 8
  9. 9. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION SBI Mutual fund is India’s largest bank sponsored mutual fund and has anenviable track record in judicious investments and consistent wealth creation.The fund traces its lineage to SBI- India’s largest banking enterprise. Theinstitution has grown immensely since its inception and today it is India’s largestbank patronized by over 80% of the top corporate houses of the country. SBI Funds Management Pvt. Ltd – Investment Managers for SBI MutualFund, one of the largest mutual funds in the country . SBI- Mutual fund is a jointventure between Societe-Generale Asset Management, one of the world’s leadingfund management companies that manage over 330 U.S.$ billion worldwide. Started in July 1987, the fund has launched 67 schemes and successfullyredeemed 15 schemes. In the process, it has rewarded its investors handsomelywith consistently high returns. A total of over 3.5 million investors have reposedtheir faith in the wealth generation expertise of the mutual fund. Schemes of themutual fund have consistently outperformed benchmarks indices and haveemerged as the preferred investment for the millions of investors and HNI’s Today the fund manages Rs.29492.9685 Crs. as on Feb 29, 2008 of assets andhas diversified profile of investors actively parking their investments across 37active schemes. The fund serves this vast family of investors by reaching out tothem through network of 100 collection branches, 26 investor service centers, 28investor service desks, and 52 district organizers. SBI- Mutual fund is the first bank sponsored fund to launch an off-shore fundcalled Resurgent India Opportunity Fund Growth through innovation and stableinvestment policies is the SBI-mutual fund credo BABASAB PATIL 9
  10. 10. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONFUND-HOUSE EXPERTISEThe investment environment is becoming increasingly complex. Innumerableparameter need to be factored in to generate a clear understanding of marketmovement and performance in the near and long term future. At SBI- mutual fund the team donates considerable resources to gain,maintain and sustain the profitable insights in to market movements. The teamconsistently pushes the envelope to ensure our investors get the maximumbenefits year after year.RESEARCH- THE BACKBONE OF SBI MF SUCESSFUL PERFORMANCE Our expert and experienced and market savvy researchers preparecomprehensive analytical and informative reports on diverse sectors and identifystocks that promise high performance in the future. This team works in tandem with a compliance and risk-monitoringdepartment, which insures minimization of operational while protecting theinterest of investors.The fund house has an experienced team of fund managers and analyst whocontinuously monitor market movements to identify stocks that promise highperformance in the future. This team works in tandem with a compliance and risk-monitoring department, which ensures minimization of operational risks whileprotecting the interests of the investors. The outcome of this is that the schemescontinue to deliver consistent returns to investors and outperform benchmarkindices. BABASAB PATIL 10
  11. 11. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION KEY PERSONNEL OF SBI MUTUAL FUNDMr. Syed Shahabuddin Managing DirectorMr. C A Santosh Chief Manager - Customer Service.Mr. Didier Turpin Dy. Chief Executive OfficerMs.Aparna Nirgude Chief Risk OfficerMr. Achal K. Gupta Chief Operating OfficerMr. Ashutosh P Vaidya Company Secretary & Compliance OfficerMr. Sanjay Sinha Chief Investment OfficerMr. Parijat Agrawal Head – Fixed IncomeMr. R. S. Srinivas Jain Chief Marketing Officer BABASAB PATIL 11
  12. 12. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION THE FUND MANAGERSQuote by Managing DirectorMr. Syed Shahabuddin, Managing Director and CEO, SBI Mutual Fund said: “Weat SBI Mutual Fund endeavor to provide efficient and prompt service to ourinvestors and cater to their investment and servicing needs.Chief Investment Officer:Sanjay SinhaMr. Sanjay Sinha has taken over as Chief Investment Officer with effect fromJune 1, 2007. Mr. Sinha joined SBI Mutual Fund as the Head of Equities inNovember 2005 and has managed the largest number of funds in SBI MF coveringthe entire spectrum of equity funds – from index funds, diversified equity funds tosector funds.He has over 18 years of experience in the Mutual Fund Industry. Prior to joiningSBI MF, Mr. Sinha worked as Senior Fund Manager with UTI Mutual Fund andwas managing a corpus of over Rs 28 billion (over US$600 million). A PostGraduate from IIM Kolkatta, Mr. Sanjay Sinha has a rich experience in managingfunds.Head Portfolio Management Services / Fund Manager :Nipa LadiwalaAfter obtaining a post graduate degree in Business Management and Law, Nipaworked as an equity analyst, and dealer for the offshore Funds of UTI.Subsequently she was appointed as Fund Manager for India Growth Fund, whichwas listed on NYSE. She was head of Research at UTI Securities before joiningSBIMF as Head of PMS. Nipa has 6 years experience as Fund Manager. She has a BABASAB PATIL 12
  13. 13. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONtotal of 15 years experience and has been with SBI Funds Management Pvt Ltdsince October 2005.Debt / Fixed Income :Parijat Agrawal (Head – Fixed Income)Parijat has done his B.E (ECE) and PGDM (IIM Bangalore). He has got 12 yearsexperience in capital markets in areas like research, dealing and fundmanagement. Parijat is associated with SBI Funds Management Pvt. Ltd. sinceJuly 2006.Prior to joining SBI Funds Management Pvt. Ltd., he was with State Bank ofMauritius Limited, Mumbai as Head – Treasury.Ganti N Murthy (Asst. Vice President & Fund Manager)Mr. Murthy did his B.Sc (Hons) from Osmania University and his Masters inFinancial Management from Jamnalal Bajaj Institute of Management Studies,Mumbai. He has over 12 years experience in the Mutual Fund Industry, 9 years inUnit Trust of India and 3 years in Cholamandalam AMC Ltd. Prior to joining SBIFunds Management Pvt. Ltd., he was with Cholamandalam Mutual Fund as FundManager – Debt.Offshore Funds - Fund Manager :Anand GuptaAnand holds charter from CFA Institute, USA and Institute of CharteredAccountants of India. Before joining SBI Funds Management in October 2005,Anand has worked with HSBC securities and domestic brokerage house as equity BABASAB PATIL 13
  14. 14. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONresearch analyst for 3 years. Anand has 5 years of experience in capital marketsand 3 years of experience in Audit & Business consulting.Investment Team (Equity) :Aashish Wakankar (Vice President & Fund Manager)Aashish Wakankar is a Bachelor of Science from University of Mumbai and holdsPost Graduate Diploma in Management Studies from Jamnalal Bajaj Institute ofManagement Studies, University of Mumbai. He has more than 12 years ofexperience in capital markets ranging from institutional equities, equity researchand fund management. He is associated with SBI Funds Management fromDecember 2005.Prior to joining SBI Funds Management, he has worked with Kotak MahindraAsset Management, Deutsche Asset Management - part of Deutsche Bank Group,and TATA TD Waterhouse Securities - a joint venture between the TATA Group,India and TD Bank Financial Group, Canada. At Deutsche Asset Management, hewas responsible for advising the offshore fund Deutsche India Equity Fund, Japanand MetLife Insurance.Pankaj Gupta – Fund ManagerPankaj has done his B.Com (Hons), PGDBM, C.S and PGDBM IIM – Lucknow.He has experience of over 4 years in Mutual Fund, Equity Research and CorporateBanking. His last assignment was ICICI Bank Ltd. and has been with SBI FundsManagement Pvt. Ltd. since December 2005.Jayesh Shroff – Fund ManagerJayesh has done his B.Com and PGD (MBFS) – ICFAI. He has experience of over5 years as Fund Manager. He also has wide experience in investment bankingactivities including M&A activities, venture capital funding, preparation of BABASAB PATIL 14
  15. 15. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONbusiness plans, project reports etc. His last assignment was with BOB MutualFund and has been with SBI Funds Management Pvt. Ltd. since March 2006.Vivek Pandey – Fund ManagerVivek is a Science graduate and has done his CFA from ICFAI. He has about 7years of experience in the industry. He is currently placed in InvestmentDepartment as a Junior Fund Manager since June 2007.Investment Team (Debt) :Killol Pandya - Fund ManagerKillol has done his B.Com, DPCM and MMS (Finance). He has over 7 years ofexperience in debt trading. His last assignment was with IL&FS Investmart Indiaand has been with SBI Funds Management Pvt. Ltd. since June BABASAB PATIL 15
  16. 16. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONPRODUCTS OF SBI MUTUAL FUNDSEquity SchemesThe investments of these schemes will predominantly be in the stock markets andendeavor will be to provide investors the opportunity to benefit from the higherreturns which stock markets can provide. However they are also exposed to thevolatility and attendant risks of stock markets and hence should be chosen only bysuch investors who have high risk taking capacities and are willing to think longterm. Equity Funds include diversified Equity Funds, Sectoral Funds and IndexFunds. Diversified Equity Funds invest in various stocks across different sectorswhile sectoral funds which are specialized Equity Funds restrict their investmentsonly to shares of a particular sector and hence, are riskier than Diversified EquityFunds. Index Funds invest passively only in the stocks of a particular index andthe performance of such funds move with the movements of the index.• Magnum COMMA Fund• Magnum Equity Fund• Magnum Global Fund• Magnum Index Fund• Magnum MidCap Fund• Magnum Multicap Fund• Magnum Multiplier Plus 1993• Magnum Sector Funds Umbrella• MSFU - FMCG Fund• MSFU - Emerging Businesses Fund• MSFU - IT Fund• MSFU - Pharma Fund• MSFU - Contra Fund• SBI Arbitrage Opportunities Fund• SBI Blue chip Fund• SBI Infrastructure Fund - Series I• SBI Magnum Taxgain Scheme 1993• SBI ONE India Fund• SBI TAX ADVANTAGE FUND - SERIES BABASAB PATIL 16
  17. 17. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONDebt Fund SchemesDebt Funds invest only in debt instruments such as Corporate Bonds, GovernmentSecurities and Money Market instruments either completely avoiding anyinvestments in the stock markets as in Income Funds or Gilt Funds or having asmall exposure to equities as in Monthly Income Plans or Childrens Plan. Hencethey are safer than equity funds. At the same time the expected returns from debtfunds would be lower. Such investments are advisable for the risk-averse investorand as a part of the investment portfolio for other investors. • Magnum Children’s Benefit Plan • Magnum Gilt Fund • Magnum Gilt Fund (Long Term) • Magnum Gilt Fund (Short Term) • Magnum Income Fund • Magnum Income Plus Fund • Magnum Income Plus Fund (Saving Plan) • Magnum Income Plus Fund (Investment Plan) • Magnum Insta Cash Fund • Magnum Insta Cash Fund -Liquid Floater Plan • Magnum Institutional Income Fund • Magnum Monthly Income Plan • Magnum Monthly Income Plan Floater • Magnum NRI Investment Fund • SBI Capital Protection Oriented Fund - Series I • SBI Debt Fund Series • SDFS 15 Months Fund • SDFS 90 Days Fund • SDFS 13 Months Fund • SDFS 18 Months Fund • SDFS 24 Months Fund BABASAB PATIL 17
  18. 18. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION • SDFS 30 DAYS • SDFS 30 DAYS • SDFS 60 Days Fund • SDFS 180 Days Fund • SDFS 30 DAYS • SBI Premier Liquid Fund • SBI Short Horizon Fund • SBI Short Horizon Fund - Liquid Plus Fund • SBI Short Horizon Fund - Short Term FundBalanced Schemes..Magnum Balanced Fund invest in a mix of equity and debt investments. Hencethey are less risky than equity funds, but at the same time providecommensurately lower returns. They provide a good investment opportunity toinvestors who do not wish to be completely exposed to equity markets, but islooking for higher returns than those provided by debt funds.• Magnum Balanced Fund• Magnum NRI Investment Fund - FlexiAsset Plan BABASAB PATIL 18
  19. 19. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONAWARDS AND ACHIEVEMENTS SBI- MUTUAL FUND has been performing excellently since its inception. Thefund house expertise and excellent performance is frequently recognized by themutual fund industry. SBI Mutual Fund (SBIMF) has been the proud recipient of theICRA Online Award - 8 times, CNBC TV - 18 Crisil Award 2006 - 4 Awards, TheLipper Award (Year 2005-2006) and most recently with the CNBC TV - 18 CrisilMutual Fund of the Year Award 2007 and 5 Awards for our schemes. BABASAB PATIL 19
  22. 22. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONHISTORY OF MUTUAL FUNDS :When three Boston securities executives pooled their money together in 1924 to createthe first mutual fund, they had no idea how popular mutual funds would become.The idea of pooling money together for investing purposes started in Europein the mid-1800s. The first pooled fund in the U.S. was created in 1893 for thefaculty and staff of Harvard University. On March 21st, 1924 the first officialmutual fund was born. It was called the Massachusetts Investors Trust. After one year, the Massachusetts Investors Trust grew from $50,000 inassets in 1924 to $392,000 in assets (with around 200 shareholders). Incontrast, there are over 10,000 mutual funds in the U.S. today totaling around$7 trillion (with approximately 83 million individual investors) according tothe Investment Company Institute.The stock market crash of 1929 slowed the growth of mutual funds. Inresponse to the stock market crash, Congress passed the Securities Act of1933 and the Securities Exchange Act of 1934. These laws require that a fundbe registered with the SEC and provide prospective investors with aprospectus. The SEC (U.S. Securities and Exchange Commission) helpedcreate the Investment Company Act of 1940, which provides the guidelinesthat 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 inassets. BABASAB PATIL 22
  23. 23. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONINCEPTION OF MUTUAL FUND IN INDIA:Mutual funds made an opening in India in 1963 under the enactment f Unit Trust ofIndia (UTI), which came out with is debut scheme named US-64, an open endedscheme n, which is operating till date. Up to 1986-87 it had launched 20 schemes,mobilizing net resources amounting to Rs. 4564 crores. for these 23 long years up to1987 UTI enjoyed complete monopoly of the unit trust business in India. It remainedone and the only mutual fund in India. It was in 1986 that the government of India amended banking regulation actand allowed commercial banks in public sector to set up mutual funds. This lead topromotion of ‘SBI-MUTUAL FUND’ by State Bank Of India (SBI) in July 1987followed by• Canara Bank• Indian bank• Bank of India• Bank of Baroda• Punjab National bankThe government of India further granted permission to Insurance Corporation to publicsector to float mutual funds. The following were the corporations, Life Insurance Corporation General Insurance of CorporationThis was the picture till 1991, but when in 1991 the government of India followed apolicy of liberalization, privatization, and globalization it opened the gates to privatesector to launch mutual funds. BABASAB PATIL 23
  24. 24. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONThe History of Indian mutual fund industry can be broadly classified in toThe four phases: • Phase 1— July 1964 to November 1987 • Phase 1— November 1987- October 1993 • Phase 3--- October 1993- February 2003 • Phase 4-- since February 2003First Phase – 1964-87 monopoly of UTI Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. Itwas set up by the Reserve Bank of India and functioned under the Regulatory andadministrative control of the Reserve Bank of India. In 1978 UTI was de-linked fromthe RBI and the Industrial Development Bank of India (IDBI) took over the regulatoryand administrative control in place of RBI. The first scheme launched by UTI was UnitScheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets undermanagement.Second Phase – 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by publicsector banks and Life Insurance Corporation of India (LIC) and General InsuranceCorporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fundestablished in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab NationalBank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management ofRs.47,004 crores. BABASAB PATIL 24
  25. 25. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONThird Phase – 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indianmutual 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, underwhich all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first privatesector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a morecomprehensive and revised Mutual Fund Regulations in 1996. The industry nowfunctions under the SEBI (Mutual Fund) Regulations 1996.Fourth Phase – since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTIwas bifurcated into two separate entities. One is the Specified Undertaking of the UnitTrust of India with assets under management of Rs.29,835 crores as at the end ofJanuary 2003, representing broadly, the assets of US 64 scheme, assured return andcertain other schemes. The Specified Undertaking of Unit Trust of India, functioningunder an administrator and under the rules framed by Government of India and does notcome under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB andLIC. 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 thanRs.76,000 crores of assets under management and with the setting up of a UTI MutualFund, conforming to the SEBI Mutual Fund Regulations, and with recent mergerstaking place among different private sector funds, the mutual fund industry has enteredits current phase of consolidation and growth. As at the end of September, 2004, therewere 29 funds, which manage assets of Rs.153108 crores under 421 schemes. BABASAB PATIL 25
  26. 26. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONIntroduction to Mutual FundsMutual Funds - The ConceptA Mutual Fund is a trust that pools the savings of a number of investors who share acommon financial goal. The money thus collected is then invested in capital marketinstruments such as shares, debentures and other securities. The income earned throughthese investments and the capital appreciations realized are shared by its unit holders inproportion to the number of units owned by them. Thus a Mutual Fund is the mostsuitable investment for the common man as it offers an opportunity to invest in adiversified, professionally managed basket of securities at a relatively low cost. Theflow chart below describes broadly the working of a mutual fundThe following simple diagram clearly shows the working of a mutual fund:Mutual fund as an investment company combines or collects money of its shareholdersand invests those funds in variety of stocks, bonds, and money market instruments. Thelatter include securities, commercial papers, certificates of deposits, etc. Mutual fundsprovide the investor with professional management of funds and diversification ofinvestment. BABASAB PATIL 26
  27. 27. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONInvestors who invest in mutual funds are provided with units to participate in stockmarkets. These units are investment vehicle that provide a means of participation in thestock market for people who have neither the time, nor the money, nor perhaps theexpertise to undertake the direct investment in equities. On the other hand they alsoprovide a route into specialist markets where direct investment often demands bothmore time and more knowledge than an investor may possess. The price of units in any mutual fund is governed by the value of underlyingsecurities. The value of an investor’s holding in a unit can therefore, like an investmentin share, can go down as well as up. Hence it is said that mutual funds are subjected tomarket risk. Mutual fund cannot guarantee a fixed rate of return. It depends on themarket condition. If the particular scheme is performing well than more return can beexpected. It also depends on the fund manager expertise knowledge. It is also seen thatpeople invest in particular funds depending on who the fund manager is BABASAB PATIL 27
  28. 28. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONWHY TO INVEST IN MUTUAL FUNDS: A proven principle of sound investment is –do not put all eggs in onebasket. Investment in mutual funds is beneficial due to following reasons. • They help in pooling of funds and investing in large basket of shares of different companies. Thus by investing in diverse companies, mutual funds can protect against unexpected fall in value of investment. • An average investor does not have enough time and resources to develop professional attitude towards their investment. Here professional fund managers engaged by mutual funds take desirable investment decision on behalf of investors so as to make better utilization of resources. • Investment in mutual funds is comparatively more liquid because investor can sell the units in open market or can approach mutual fund to repurchase the units at net asset value depending upon the type of scheme. • Investors can avail tax rebates by investing in different tax saving schemes floated by these funds, approved by the government. • Operating cost is minimized per head because of large size of investiable funds, there by realizing more net income of investors.Instruments where Mutual funds deploy funds1. Equity Equity represents the shares of a company. Mutual funds are entitled todividends, rights and bonuses declared by the companies apart from the benefit ofcapital appreciation resulting from appreciation resulting from appreciation in themarket value of the held shares. This is definitely reflected in the appreciation of the netasset value of the mutual fund units. The disadvantage of investing in equity is the BABASAB PATIL 28
  29. 29. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONhighly volatile nature of the Indian capital markets leading to sudden changes in theprices of the shares.2 Convertible Debentures These are bonds issued by companies that automatically get converted into equityshares on a pre-determined date. From that date onwards the so converted shares havethe same benefits and risks that normal equity shares have. 3. Fixed Income Securities. Mutual funds invest a part of their funds in fixed income securities like debenturesor Bonds or Gilts. The underlying idea is to have some fixed return to safeguard andmeet the recurring expenses and to pay at least some dividend to the investors. Bonds ordebentures are instruments issued by public or private limited companies, having afixed rate of interest payable on a fixed date every year. Gilts are also similarinstruments but the only difference is that they are issued by the Government and arehence considered as the safest investment. 4. Money Market Instruments Money market instruments are instruments that are issued /invested in for a shortterm ranging from a few days to a few months. In spite of the fact the yield from suchinstruments is very low, mutual funds (especially open-ended) invest a part of theirfunds in money market instruments to maintain adequate liquidity to meet short term /sudden requirements like repurchase. Some of the money market instruments arecommercial paper, Treasury Bills, Bills of exchange and Call Money.In nutshell, mutual funds act as financial intermediaries by building a liaison betweenfinancial market and small investors. Mutual funds are financial intermediaries as theypool down small savings of scattered investors and invest in to securities in capitalmarket and earn income over it. The earning is distributed in the shape of return oninvestment to investors who again save a part of it and reinvest through mutual funds. BABASAB PATIL 29
  30. 30. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONTypes of Mutual Funds Schemes in India Wide variety of Mutual Fund Schemes exists to cater to the needs such asfinancial position, risk tolerance and return expectations etc. thus mutual funds hasVariety of flavors, Being a collection of many stocks, an investors can go for picking amutual fund might be easy. There are over hundreds of mutual funds scheme to choosefrom. It is easier to think of mutual funds in categories, mentioned below.Overview of existing schemes existed in mutual fund category:BY STRUCTURE1. Open - Ended Schemes:An open-end fund is one that is available for subscription all through the year. These donot have a fixed maturity. Investors can conveniently buy and sell units at Net AssetValue ("NAV") related prices. The key feature of open-end schemes is liquidity.2. Close - Ended Schemes:A closed-end fund has a stipulated maturity period which generally ranging from 3 to15 years. The fund is open for subscription only during a specified period. Investorscan invest in the scheme at the time of the initial public issue and thereafter they canbuy or sell the units of the scheme on the stock exchanges where they are listed. Inorder to provide an exit route to the investors, some close-ended funds give an optionof selling back the units to the Mutual Fund through periodic repurchase at NAVrelated prices. SEBI Regulations stipulate that at least one of the two exit routes isprovided to the investor.3. Interval Schemes: Interval Schemes are that scheme, which combines the features of open-endedand close-ended schemes. The units may be traded on the stock exchange or may beopen for sale or redemption during pre-determined intervals at NAV related prices. BABASAB PATIL 30
  31. 31. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONOverview of existing schemes existed in mutual fund category: BY NATURE 1. Equity fund: These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows: Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS) Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix. 2. Debt funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as: Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government. Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities. MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes. BABASAB PATIL 31
  32. 32. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures. Liquid Funds: Also known as Money Market Schemes, These funds provide easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.3. Balanced funds: As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre- defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. Further the mutual funds can be broadly classified on the basis of investment parameter viz Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.By investment objective: Growth Schemes: BABASAB PATIL 32
  33. 33. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation. Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50). Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short- term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call moneyOthersDividend Re-investment planHere the dividend accrued on the mutual funds is automatically re-invested in thepurchasing additionally units in the open ended funds. In most cases mutual funds offerthe investor an option of collecting dividends or re-investing the same.Systematic investment Plan In this type of plan the investor is given the option of preparing a predeterminednumber of post-dated cheques in favour of the fund. He will get the units on the date ofcheques at the existing NAV. BABASAB PATIL 33
  34. 34. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION For instances , if on the 5th March ,he has given a post dated cheques for June 5 th 2006, he will get units on 5th June 2006 at the existing NAV.Systematic Withdrawal Plan:As opposed to SIP, the systematic withdrawal plan allows the investor the facility towithdraw predetermined amount/units from his fund at a pre-determined interval. Theinvestor’s units will be redeemed at the existing NAV as on that day. The unit holdermay set-up a systematic Withdrawal plan on a monthly, quarterly or semi annually oron an annual basis to redeem a fixed number of units or redeem enough units to providea fixed amount of money.Retirement Pension PlanSome schemes are linked with retirement pension. Individuals participate in these plansfor themselves, and corporate for their employees.Insurance Plan: Some schemes launched by UTI and LIC offer insurance cover to investor.Like ULIP plansTax Saving SchemeThese schemes offer tax rebates to the investors under specific provisions of the incometax act, 1961 as the government offers tax incentives for investment in specifiedavenues, eg: Equity Linked Saving Scheme (ELSS). Pension schemes launched by themutual fund also offer tax benefits. These schemes are growth-oriented and invest pre-dominantly in equities. Their growth opportunities and risk associated are like anyequity-oriented scheme.Load and No-Load Funds BABASAB PATIL 34
  35. 35. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONA load fund is one that charges a percentage of NAV for entry or exit. That is, eachtime one buys or sells the units in the fund, a charge will be payable. This charge is usedby the mutual fund for marketing and distribution expenses. Suppose the NAV per unitis Rs.10 .if the entry as well as exit load charge is 2% , then the investors who buywould be required to pay Rs.10.20 and those would want to repurchase must payRs.9.80 per unit. A no-load fund is the one that does not charge for entry or exit. It m BABASAB PATIL 35
  36. 36. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONPros & cons of investing in mutual funds: For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund. Advantages of Investing Mutual Funds: 1. Professional Management - The basic advantage of funds is that, they are professional managed, by well-qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments. 2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. 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. 3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors. 4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want. 5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis. Disadvantages of Investing Mutual Funds: 1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks. BABASAB PATIL 36
  37. 37. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.3. Dilution - Because funds have smallholdings across different companies, high returns from a few investments often dont 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.4. Taxes - when making decisions about your money, fund managers dont consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain 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. Mutual Funds – Organization BABASAB PATIL 37
  38. 38. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONStructure of mutual Fund in IndiaThe formation and operations of mutual funds in India is solely guided by the Securitiesand Exchange Board of India (SEBI) regulations, in 1993, which came in to force on 20Jan 1993.The above figure shows the structure of Indian mutual funds. A mutual fund comprisesfour separate entities namely,  Sponsors  Mutual fund trust  AMC  CustodianThese are associated by other independent administrative entities like banks, registrar,and transfer agents. The sponsor for a mutual fund can be any person who, acting alone or incombination with another body corporate establishes the mutual fund and gets itregistered with SEBI. The sponsor is required to contribute at least 40% of theminimum net worth (Rs 10 crores) of the asset management company. The sponsormust have a sound track record and general reputation of fairness and integrity in all hisbusiness transactions.As per SEBI regulations, 1996, a mutual fund must be formed by the sponsor andregistered with SEBI. ‘ A mutual fund shall be constituted in the form of trust and theinstrument of trust shall be in the form of the deed, duly registered underthe provision of the Indian registration act 1908, executed by the sponsor in favor oftrustees named in such an instrument. BABASAB PATIL 38
  39. 39. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONMutual fund is managed by the Board of trustees and the sponsor executes the trustdeeds in favor of the trustees. The mutual fund raises money through sale of units underone or more schemes for investing in securities in accordance with SEBI guidelines. Itis the job of mutual fund trustees to see that the schemes floated and managed by theAMC appointed by the trustees, are accordance with the trust deeds and SEBIguidelines. It is also the responsibility of the trustee to control the capital property ofmutual fund schemes. The trustees have the right to obtain relevant information from the AMC, as wellas a quarterly report on its activities. They can also dismiss the AMC under specificcondition as per SEBI regulations.At least half the trustees should be independent persons. The AMC or its employeescannot act as a trustee. No person who is appointed as a trustee of a mutual fund can beappointed as a trustee of any other mutual fund unless he is independent trustee andprior permission is obtained from the mutual fund in which he is a trustee. The trusteesare required to submit half yearly reports to SEBI on the activities of the mutual fund.The trustees appoint the custodian and supervise their activities. The trustees can beremoved only with prior approval of SEBI.As per the SEBI guidelines, an asset management company is appointed by trustees tofloat the schemes for mutual fund and manage the funds raised by selling units ascheme. The AMC must act as per SEBI guidelines, the trust deeds and the managementagreement between the trustees and the AMC.The AMC should be registered with SEBI. As per revised guidelines the net worth of anAMC should be in the form of cash all assets should held in the name of the AMC. In BABASAB PATIL 39
  40. 40. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONcase the AMC wants to carry out the other fund management business, it should satisfythe capital adequacy requirement for each such business independently.The AMC cannot give or guarantee loans and is prohibited from acquiring any assets(out of the scheme property) which would involve the assumption of unlimited liability.The AMC is required to disclose the scheme particulars and base of calculation ofNAV. It must submit quarterly reports to the mutual fund.The director of the AMC should be a person of repute and high standing, with at least 5years experience in the relevant field. The appointment of the AMC can be terminatedby a decision of 75% of unit holders or a majority of the trustees.The SEBI 1996 defines the mutual fund as a fund established in the form of trust toraise moneys through the sale of units to the public or section of public under one ormore schemes for investing in securities, including money marketable instruments.Since the definition is restricting the scope of operations of mutual funds to diversifytheir activities in the following years  Portfolio management services  Management of off-shore funds  Providing advice to off-shore funds  Management of pension or provident funds  Management of venture capital funds  Management of money market funds  Management of real estate fundsThe regulations deal with the various issues relating to the launching, advertising, andlisting of mutual fund schemes. All the schemes to be launched by an AMC need to beapproved by the trustees and copies of offer documents of such schemes are to be filedwith the SEBI. The offer document shall contain adequate disclosures to enable BABASAB PATIL 40
  41. 41. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONinvestors to make informed decisions. Advertisements in respect of schemes should bein conformity with the prescribed advertisement code of SEBI. The listing of closed ended scheme is mandatory and every closed ended schemeshould be listed in a recognized stock exchange within six months from the closure ofsubscription. However, listing is not mandatory:Units of a closed ended scheme can be repurchased or reissued by an AMC. Units of aclosed –ended scheme can also be converted in to an open-ended scheme. Units of aclosed ended scheme may be rolled over by passing a resolution by majorityshareholders.Guaranteed returns can be provided in a scheme if such return is fully guaranteed by theAMC or the sponsor. In such cases, there should be a statement indicating name of theperson and the manner in which the guarantee to be made must be made in the offerdocument.The regulations provide procedures for winding up of a closed ended scheme. A closedended scheme will be wound up on redemption date, unless it is rolled over, or if 75%of unit holders of a scheme pass a resolution for winding up of the scheme, or if thetrustees, on the happening of any event, require the scheme to be wound up, or SEBI sodirects in the interest of the investors.Some other operational aspects as prescribed by SEBI are1) Appointment of custodian.2) Disclosure3) Advertisement4) Investment restriction5) Sale and distribution of units6) Code of conduct. BABASAB PATIL 41
  42. 42. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONSEBI REGULATIONS ON MUTUAL FUNDSEBI’s regulatory reach has been extended to more areas and there is a considerablechange in the capital market. SEBI’s annual report for 97-98 has stated that throughoutits six years existence as a statutory body, it has sought to balance the twin objectives ofinvestor protection and market development. it has formulated new rules and craftedregulations to foster development. Monitoring and surveillance was put in the stockexchanges in 96-97 and strengthened 97-98.OBJECTIVES OF SEBI The promulgation of the SEBI ordinance in the parliament gave statutory status toSEBI in 92. According to the preamble of the SEBI, the three main objectives are:  To protect the interest of the investors in securities.  To promote the development of securities market  To regulate the securities market.FUNCTIONS OF SEBI a) Regulating the business in stock exchanges and any other securities Market. b) Registering and regulating the working of stock brokers , sub brokers, Share transfer agents, bankers to the issue, trustees of the trust deed Underwriters, portfolio managers, investment advisors, and other such intermediaries who may be associated with securities market in any manner. c) Registering and regulating the working of collective investment schemes mutual funds. d) Promoting and regulating self-regulatory organization e) Prohibiting fraudulent and unfair trade practices in the securities market BABASAB PATIL 42
  43. 43. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONMUTUAL FUNDS AND SEBIFor the smooth conduct and regulation of the mutual fund several guidelines have beenissued by the SEBI regarding the investment, disclosure, accountability distribution, ofits profits to its members and the asset management companies. SEBI has issuedregulation and code of conduct in 93 that provided a basic legal framework for thefunctioning of the mutual fund. The mutual fund regulation act 1996 has provided asound footing and considerable leeway to fund management. The new elementsincorporated in the year 98, have placed the investors in a better position with regard toproper asset management and disclosure.DISCLOSURE NORMS With the number of mutual funds schemes on the increase (in 97 alone 67new of schemes of wide varieties were introduced in the market) the investor should bekept well informed about the nature and functioning of the mutual funds. It should startright from the offer document. The offer document should provide essential informationto assist the investors to informed and correct decision. According to SEBI regulationsthe standard offer document should give the following information  Standard and scheme specific risk factors. The latter may be related to investment objective, investment strategy, asset allocation, risks from non diversification if any, and from investing in closed ended schemes (range of discount, liquidity)  Due diligence by the asset management company (AMC)  Fundamental attributes such as type of schemes, investment objective (including the tentative equity /debt/money market portfolio) and terms of issue (provision such as listing, repurchase /redemption, fees, expenses, guarantee/safety net) BABASAB PATIL 43
  44. 44. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONDetails of the offer, such as sale, purchase, minimum corpus and pricing of units inrelation to NAV  Likely initial issue expenses, actual issue expenses for schemes launched during the last year, expenses borne by the AMC and annual recurring expenses (as a percentage of average weekly net assets).  Identification of AMC and background of fund managers.  Asset allocation pattern (as a percentage of the assets) with indicative range of investment or the maximum investment in a certain assets class.  The policy of diversification or concentration to be pursued.  The portfolio turnover policy and effects of investment techniques on total portfolio turnover.  The policy with respect to dividend and distributions, including any options for unit holders.  The policy of the fund regarding their scheme transfers.  Associate transaction  The borrowing policy including the intent and purpose of borrowing and stock lending by the fund.  Valuation of assets, accounting policies and NAV. BABASAB PATIL 44
  45. 45. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION  The manner of determination of redemption and repurchase price of the units.  Tax treatment of investments in mutual funds, investor rights, and services and redressal of investor grievances.The amendment in 1998 made a significant change in information disclosure pertainingto litigation/penalties. SEBI has now mandated the disclosure of information containedin reports of investigation and inspection conducted by it. So far such information wasneither disclosed in the offer document nor in the annual reports. Now, all mutual fundshave to disclose in the offer documents the information pertaining to the followingareas.  All cases of penalty awarded by the SEBI or any other regulatory body against the sponsor of the mutual fund, the Trustee Company/ board of trustee, or any of the directors or key personnel of the AMC and trustee company. The nature of the penalty must be disclosed.  Pending material litigation proceedings including pending criminal and economic cases against any of the afore mentioned parties. The name of the court or agencies in which the proceedings are pending, the date instituted , the principal parties thereto, a brief description of the factual basis alleged to underline the proceedings and relief sought, if any shall be indicated.  Any deficiency in the system and operations of the sponsor of the mutual fund or any company associated with the sponsor in any capacity such as the AMC or the trustee company. This must pertain to matters that SEBI has specifically directed disclosures. The full disclosure in the annual reports is mandatory. BABASAB PATIL 45
  46. 46. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONINVESTMENT The investment made issued by the mutual funds decides the return for the investor.Improper management would land the investor in peril. To prevent this, SEBI hastightened its control regarding the investment criteria. They are as given below:-Mutual funds cannot deal in option trade, short sale carry forward transaction insecurities. They can only invest in transferable securities in the money market capitalmarket, any privately placed debenture or debt securities.Mutual funds required to form trust and managed separately by the asset managementcompanies. The minimum net worth of asset management should be Rs 5 crores and40% should be the sponsor’s contribution.Investment under individual schemes should not cross the 5% of the corpus of anycompany’s share and the investment under all schemes should not exceed 10% of thefunds in the shares, debentures or securities of a single company.Mutual fund shall not make investment in any privately placed securities issued by theassociates/group companies of the sponsors.The aggregate investment of mutual funds in the listed or to be listed securities of groupcompanies of the sponsor shall not exceed 25% of the net assets of all schemes of thefund.The assets management companies (AMC) would be required to disclose in the offerdocument maximum investment proposed to be made by the schemes in the securitiesof the group companies of the sponsors and also aggregate investment made by allschemes in the group companies.The AMCs shall have to submit quarterly report to the trustees giving details about thetransactions in the securities of the group companies during the quarter and the trustees BABASAB PATIL 46
  47. 47. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONhave to make specific comments in their half yearly reports to the SEBI on thoseinvestment.The ‘group’ for this purpose would have the meaning as provided in the Monopoliesand Trade Practices Act in 1969.An AMC cannot purchase or sell securities through a broker who is an associate of thesponsor beyond 5% of the gross business of the mutual fund, which will be monitoredon a quarterly average than on a daily basis.An AMC shall not in quarter purchase or sell securities for any of the schemes throughany broker beyond 5% of the aggregate business of the securities in a quarter , unlessthe AMC records the justification for exceeding the limit and reports such cases to thetrustees on a quarterly basis.ACCOUNTABILITYEvery mutual fund for each scheme should keep and maintain proper books of accounts,records and documents to explain its transaction. The records should disclose at anypoint of time financial position of the mutual fund in a true and fair view of the state ofaffairs of the fund. The accounts should provide information regarding the distributionor accumulation of income accruing to the unit holder in a fair and true manner.Short-term capital gains and long-term capital gains should be segregated in theaccounts. All the expenses should be clearly identified and appropriated to theindividual scheme. The AMC may charge the mutual fund with investmentmanagement and advising fees that are fully disclosed in the prospectus subject to thefollowing viz, BABASAB PATIL 47
  48. 48. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION• One and quarter of one per cent of the weekly average net assets outstanding in each accounting year for scheme concerned as long as the net assets do not exceed Rs. 100 crores and one percent of the excess amount over Rs.100 crores.• The AMC can charge a) initial issue costs of sponsoring the fund and its schemes b) recurring expenses related to marketing and selling expenses including agents commission, brokerage and transaction costs and registrar services for transfer of shares sold or redeemed, provided , the initial expenses in respect of any one scheme shall not exceed 6% of the fund raised under the scheme.The above mentioned expenses and fees payable to Asset management Companyshall be charged to the mutual fund.DIVIDEND Mutual funds after closing the accounts, distribute by way of dividendthe holders in accordance with the regulations, an amount not less than 90% of theprofits earned during the year by that scheme. This does not apply to a cumulativeinvestment schemes or a growth oriented scheme where the nature of the schemehas been made known to the investors at the time of offer.MANAGEMENT The sponsor should have a sound track record, experience in the relevant fieldof financial services for a minimum period of five years, professional competence,financial soundness and general reputation of integrity in all his businesstransaction.AMC shall be authorized for business by SEBI on the basis of certain criteria. Thememorandum and articles of association of the AMC would have to be approved bythe SEBI. The trustee board should be constituted with two thirds of independenttrustees to stand for the interest of the investors. BABASAB PATIL 48
  49. 49. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONASSOCIATION OF MUTUAL FUNDS IN INDIAWith increase in Mutual Fund players in India, a need for mutual fund association inIndia 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 Assets Management Companies (AMC) which has beenregistered with Security Exchange Board of India (SEBI) .till date all the AMCs are thathave mutual fund schemes are its members. It functions under the supervision andguidelines of its board of Directors.Association of Mutual Funds India has brought down the Indian Mutual Fund Industryto a professional and a healthy market with the ethical lines enhancing and maintainingstandards. It follows the principle of both protecting and promoting the interests ofmutual funds as well as their unit holders.THE OBJECTIVES OF ASSOCIATION OF MUTUAL FUNDS IN INDIA The Association of Mutual Funds of India works with 30 registered AMCS ofthe country. It has certain defined objectives which juxtaposes the guidelines of itsBoard 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 conductwhich is followed by members and related people engaged in activities of MutualFund and Assets Management. The agencies that are by any means connected orinvolved in this code of conduct of the association. BABASAB PATIL 49
  50. 50. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION  AMFI interacts with SEBI and works according to SEBI’s guidelines in the mutual fund industry.  Association of Mutual Fund of India do represent the government of India , the Reserve bank of India and other related bodies on matters relating to the Mutual Fund Industry.  It develops a team of well qualified and trained agent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the Mutual Fund Industry..  AMFI undertakes all India awareness programme for investors in order to promote proper understanding of the concept and working of mutual funds.  At last Association of mutual fund of India also disseminate information on mutual fund industry and undertakes studies and research either directly or in association with other bodies. BABASAB PATIL 50
  51. 51. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONThe sponsors of Association of Mutual Funds in India.Bank sponsored • SBI Mutual management Ltd. • BOB asset management CO. Ltd. • Canbank Investment Management Services. Ltd • UTI Asset management Company Pvt, Ltd.Institution • GIC Asset management Co.Ltd • Jeevan Bima sahayog asset management Company.PRIVATE SECTOR INDIAN • Benchmark asset management company • Cholamandalam Asset Management Co.Ltd • Credit Capital Asset Management Co.Ltd BABASAB PATIL 51
  52. 52. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION • Escorts Asset Management Ltd • JM Financial Mutual fund • Kotak Mahindra asset management company • Reliance capital Asset management Ltd • Sahara Asset management Co.Ltd • Sundaram Asset management Co.Ltd • Tata Asset Management Private LtdIndian joint ventures • Birla Sun life Asset management company • DSP Merill Lynch Fund Managers company • HDFC Asset management companyForeign joint ventures • ABN AMRO Asset Management (I) Ltd. • Alliance capital Asset management (India) Pvt.Ltd BABASAB PATIL 52
  53. 53. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONINVESTMENT PERSPECTIVEInvestment is the employment of funds on assets with the aim of earning income orcapital appreciation. Investment has two attributes namely time and risk. Presentsacrificed to get a return in the future. The sacrifice that has to be borne is certain butthe return in the future may be uncertain. This attribute of investment indicates the riskfactor. The risk is undertaken with a view to reap some return from the investment. Forlaymen. Investment means some monetary commitment.Financial investment is the allocation of money to assets that are expected to yield somegain over a period of time. It is an exchange of financial claims such as stocks andbonds for money .they are expected to yield returns and experience capital growth overthe yearsInvestment objectives:-The main investment objectives are increasing the rate of return and reducing the risk.Other objectives like safety, liquidity, and hedge against inflation can be considered assubsidiary objectives.ReturnInvestor always expects a good rate of return from their investments. Rate of returncould be defined as the total income the investor receives during the holding periodstated as a percentage of the purchasing price at the beginning of the holding period. Capital appreciation & dividend Return = Purchase priceRiskRisk of holding securities is related with the probability of actual return become lessthan the expected return. An investment whose rate of return varies widely from period BABASAB PATIL 53
  54. 54. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONto period is risky than whose return that does not change much. Every likes to reducethe risk of his investment by proper combination of different securities.LiquidityMarketability of the investment provides liquidity to the investment. The liquiditydepends upon the marketing and trading facility. If a portion of the investment could beconverted into the cash without much loss of time, if would help the investor meet theemergencies. Stocks are liquid only if they command good market by providingadequate return through dividends and capital appreciation.Hedge against inflation;Since there is inflation in almost all the economy, the rate of return should ensure acover against the inflation. The return rate should be higher than the rate of inflation,otherwise the investor will have loss in real terms. Growth stocks would appreciate intheir values overtime and provide a protection against inflation. the return thus earnedshould assure the safety of the principal amount, regular flow of income and be a hedgeagainst inflation.SafetyThe selected investment avenue should be under the legal and regulatory framework. Ifit is not under the legal framework, it is difficult to represent the grievances, if any.Approval of the law itself adds a flavor of safety. Even though approved by law, thesafety of the principal differs from one mode of investment to another. Investmentsdone with the government assure more safety than with the private party.The investment processThe investment process involves a series of activities leading to the purchase ofsecurities or other investment alternatives The investment process can be divided in to 1. Framing of investment policy 2. Investment analysis 3. Valuation BABASAB PATIL 54
  55. 55. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION 4. Portfolio construction 5. Portfolio evaluationInvestment ProcessInvestment Policy Analysis Valuation Portfolio Construction Portfolio EvaluationInvestable fund Market Intrinsic value Diversification AppraisalKnowledge Industry Future value Selection & Revision AllocationObjectives CompanyFinancial PlanningWhenever we talk of planning, the first question which comes to our mind is what is theobjective?The first step of planning is setting up of objectives. the same applies with financialplanning.Every investor has needs at various stages in his life. For example we need money forour education, for buying car, buying house etc. we have to ensure that we should havemoney when we need it.As we all need money to meet our needs, these needs can be the best objectives or goalsfor us to plan finances. So, “financial planning is a process aimed at achievinginvestor’s goal in life.” BABASAB PATIL 55
  56. 56. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONLife cycle stage of financial planningLife cycle stage Features Priority Choice of investment products.Childhood stage This is a period Long term investment No immediate needs. dependency which lasts of money received in Long-term investments. till the full time the form of gifts at education finishes. various occasions. Most of the fulfillments and requirements are filled by parents.Young Might still depend to They might not have Liquid plans and shortUnmarried some extent on parents. any dependents and term investments. Relatively lower income hence might not need Investments for long and would not be able to insurance. Main need term plans when afford large amount to is to protect their adequate short term financial planning. earnings against any savings have been More risk taking ability. disability or long achieved. sickness. More immediate and short term needs.Young married Two incomes to To secure Medium tostage both meet cost and income loss of long-termpartners earn save. any partner investments. Sufficient income against any Ability to take and surplus to disability or risks. Fixed meet financial sickness. income, planning needs. Life insurance insurance and Short and so that equity products. intermediate term unfortunate Housing and events of any insurance needs. partner’s Consumer finance death that part needs of income may be replaced Need for emergency fund.Young married Two or more Life insurance of Medium to long-termstage one partne dependent on just earning member is investments. lesserwith childern rs one earner. Less must. ability to take risks and BABASAB PATIL 56
  57. 57. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONearn potential to save Need to start for save. pension provision at an early stage is immense.Young married Arrival of kids changes Life assurance of Medium to long-termwith childern the scenario. The earning member is investments. Ability to expenditure starts raising must. Consumer take risks. Portfolio of at a faster rate than finance needs are products, for growth income children’s high. Financial needs and long term education holidays and are highest as this consumer finance stage is ideal for housing. disciplining spending and saving regularly Married with Individuals are in mid- Higher saving ratio Medium termelder children career and family has recommended. investments with higher become bigger with more Priority would shift liquidity needs. children. Improved from protection needs Portfolio of products finance and better life to investment needs including equity, debts style Medium term needs because of pension and pension plans. for children’s education needs. Because of Major contribution to and marriage. Need for loan repayment needs pension products pension, insurance and requirement cash contribution to health medical cover higher. flows is higher. insurance.Post family /pre- Children’s have become Adequate income and Maximum investmentretirement stage. independent. Last chance savings in pension funds to ensure adequate income to maintain the standards of living after retirement.Retirement stage As a thumb rule, after After retirement the The need would retirement individual savings rate declines correspond to need 2/3rd of their final substantially categories 1),2),3) of years incomes . the previous column: In general people would 1)continue to work and/ fall in one of the or produce fixed following three income with no risk at categories: all. 1)Low pension income 2)invest capital to and low capital to produce additional supplement it. income and can take 2)Relatively low pension any risk income plus some 3)wise people. need to accumulated capital. preserve the value of 3)sufficient pension savings against income plus substantial inflation BABASAB PATIL 57
  58. 58. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION assets and capital. PYRAMID OF INVESTMENT AVENUES :The above pyramid speaks about the different types of risk and the respective growthassociated with the risk.It can be seen that, at the lower level risk is very less and their more safety. This kind ofportfolio is usually preferred by the in the third level of their life cycle i.e. mainlypeople who are pension holders.As we move on to the pyramid we see that there is average risk and reasonable growthand income. These are people in second level of their life cycle who are well settled inlife who are ready to take the calculated risk.The last level depicts a picture of people who can assume the highest risk. these arepeople who have just started their career who can take high risk. BABASAB PATIL 58
  60. 60. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONPORTFOLIO MANAGEMENTPortfolio:It is combination of all the securities, group of assets - such as stocks, bonds and debtinstrument - held by an investor. It is constructed in such a manner to meet theinvestor’s goals & objectives . The balanced portfolio is the one which gives maximumreturn with minimum risk.The process of blending together the broad assets classes so as to obtain optimum returnwith minimum risk is called portfolio construction.To reduce their risk, investors tend to hold more than just a single stock or other asset.Each piece of the portfolio is divided up into specific assets such as bonds, equities,stock , commodity etc.A passive form of portfolio management involves the matching of future cash flowswith future liabilities.Diversification is a familiar term to most investors. In the most general sense, it can besummed up with phrase: "Don’t put all of your eggs in one basket." The mainobjective is reduction of risk in loss of capital & income.Portfolio ManagementThe art and science of making decisions about investment mix and policy, matchinginvestments to objectives, asset allocation for individuals and institutions, and balancingrisk vs. performance.Portfolio management is all about strengths, weaknesses, opportunities and threats inthe choice of debt vs. equity, domestic vs. international, growth vs. safety, andnumerous other trade offs encountered in the attempt to maximize return at a givenappetite for risk.A Guide To Portfolio ConstructionIn todays financial market place, a well-maintained portfolio is vital to any investorssuccess. As an individual investor, we need to know how to determine an assetallocation which best conforms to our personal investment goals and strategies. In otherwords, a portfolio should meet future needs for capital . Investors can construct BABASAB PATIL 60
  61. 61. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONportfolios aligned to their goals and investment strategies by following a systematicapproach. Some essential steps for taking such approaches are as under :Step1:Determining the appropriate Assets Allocation Ascertaining our individual financial situation and investment goals is the first task inconstructing a portfolio. Important items to consider are age, how much time we have togrow our investments, as well as amount of capital to invest and future capital needs. Asingle college graduate just beginning his or her career and a 55-year-old marriedperson expecting to help pay for a childs college education and plans to retire soon willhave disparate investment strategies.A second factor to take into account is personality and risk tolerance. Generally, themore risk we can bear, the more aggressive our portfolio will be, devoting a largerportion to equities and less to bonds and other fixed-income securities. Conversely, theless risk thats appropriate, the more conservative our portfolio will be. Here are twoexamples: one suitable for a conservative investor and another for the moderatelyaggressive investor.The main goal of a conservative portfolio is to protect its value. The allocation shownabove would yield current income from the bonds, and would also provide some long-term capital growth potential from the investment in high-quality equities. BABASAB PATIL 61
  62. 62. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONA moderately aggressive portfolio satisfies an average risk tolerance, attracting thosewilling to accept more risk in their portfolio in order to achieve a balance of capitalgrowth and income.Step 2: Achieving the Portfolio Designed in Step 1Once we determined the right asset allocation, we simply need to divide our capitalbetween the appropriate asset classes. On a basic level, this is not difficult: equities areequities, and bonds are bonds. For example, an investor might divide the equity portion between different sectors andmarket caps, and between domestic and foreign stock. The bond portion might beallocated between those that are short term and long term, government versus corporatedebt and so forth.Stock picking - Choose stocks that satisfy the level of risk we want to carry in theequity portion of your portfolio - sector, market cap and stock type are factors toconsider. Analyze the companies using stock screeners to shortlist potential picks, thancarry out more in-depth analysis on each potential purchase to determine itsopportunities and risks going forward. This is the most work-intensive means of addingsecurities to our portfolio, and requires to regularly monitor price changes in ourholdings and stay current on company and industry news.Bond picking - When choosing bonds, there are several factors to consider including thecoupon, maturity, the bond type and rating, as well as the general interest rateStep 3: Re-assessing Portfolio WeightingsOnce we have an established portfolio, we need to analyze and rebalance it periodicallybecause market movements may cause our initial weightings to change. To assess ourportfolios actual asset allocation, quantitatively categorize the investments anddetermining their values proportion to the whole. To rebalance, we need to determinewhich of our positions are over-weighted and those that are under-weighted.Step 4: Rebalancing StrategicallyOnce we have determined which securities we need to reduce and by how much, decidewhich under-weighted securities we will buy with the proceeds from selling the over-weighted securities.When selling assets to rebalance our portfolio, take a moment to consider the taximplications of readjusting our portfolio. Perhaps our investment in growth stocks hasappreciated strongly over the past year, but if we were to sell all of our equity positionsto rebalance our portfolio, we may incur significant capital gains taxes. In this case itmight be more beneficial to simply not contribute any new funds to that asset class inthe future while continuing to contribute to other asset classes. This will reduce ourgrowth stocks weighting in our portfolio over time without incurring capital gainstaxes.Importance of Diversification. BABASAB PATIL 62
  63. 63. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONThroughout the entire portfolio construction process, it is vital that we remember tomaintain our diversification. It is not enough simply to own securities from each assetclass; we must also diversify within each class. Ensure that our holdings within a givenasset class are spread across an array of subclasses and industry sectors.Portfolio Evaluation:Portfolio Manager evaluates portfolio performance and identifies the sources of strengthand weakness. The evaluation provides a feedback about the performance to evolvebetter management strategy.Portfolio management styleBasically the fund managers who manage the portfolio of the scheme follownormally two kinds of strategy they can be classified into aggressive defensivestrategy.Aggressive Portfolio Management StrategyAggressive investment management and capital growth strategies are portfoliomanagement strategies which aim at maximizing the return over investment. Anaggressive portfolio management strategy often includes high-return high-riskinvestments such as equities. Aggressive portfolio management requires highest gradeof money management and is not at all suitable for those with low-risk tolerance andthose with less experience.In an aggressive portfolio management strategy, usually more than 60% of investmentsare done in equities. Aggressive investors allocate lesser percentage of their money inlow-risk low-return or fixed- income products like bonds, treasury notes, money marketfunds, etc. They often choose to invest in aggressive stocks from high growthcompanies, small and mid caps, etc. Although these strategies may include methods forlimiting downside risks, they will not be as strict as defensive investment strategies.The advantages of aggressive investment strategy include long-term capital growth andhigher return over investment. The disadvantages include higher risk, high volatility inasset value, difficulty in estimating the return and the need of active moneymanagement. Aggressive investment strategy is suitable for long-term returns and not atall for monthly earnings or living costs. With aggressive strategies, it is better todiversify investments and to include some low-risk investments.Defensive Investment Strategy : BABASAB PATIL 63
  64. 64. “ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATIONAs the name suggests, defensive investment strategy is the portfolio managementstrategy which aims at investing in low-risk products. Defensive investors choosebonds, treasury notes, money market funds, and defensive stocks. Defensive stocksinclude stocks which are undervalued, less volatile, steadily growing, and/or offeringreasonable dividends. Defensive investors must be very strict with their moneymanagement and investment product selection.The main advantage of a good defensive investment strategy is the minimized risk oflosing the capital. Other advantages include better planning of investments, almoststeady and predictable income, and better use of risk-minimizing practices like closestop-losses. Defensive investment strategy suits beginners, investors with less risk-tolerance and investors having less time to monitor their portfolio.Defensive investment strategy is a low profit strategy, and often requires much morecapital investment to get a targeted profit. When investing in stocks or similar products,defensive investors are limited with their options and often limited with their profitmaximizing techniques such as leverage or margin trading. This type of investmentSome manager uses mix of both strategies to balance the needs of investors andinvestment objective of fund house as whole. BABASAB PATIL 64