49262330 performance evaluation of mutual funds in india jaiprakash 0478
TRANSCRIPT
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PREFACE
As a Student of MBA IIIrd Sem, the survey on customer
satisfaction on Reinsurance Insurance to Insurers has been
provide to me by my department, under the guidance of Mr.
Anil Mishra.
It presents synoptic review the research methodology.
Objective, limitations and suggestions regarding the existing
product. A field survey was conducted with the help of
questionnaire and personal interview in Sagar City.
This Survey is made to answer the expose above
motioned topies through statistical representation, pie
diagram and graphs.
NEETU YADAVMBA IIIRD SEM.
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ACKNOWLEDGEMENT
Preparing a project of this nature is an arduous task and I was
fortunate enough to get support from a large number o persons. I wish
to express my deep sense of gratitude to all those who generously
helped in successful completion of this report by sharing their
invaluable time and knowledge.
It is my proud and previledge to express my deep regards to
Respected HOD Dr. Anil Mishra , Head of Department,
Department of Business Management , Dr. Hari Singh Gour Central
University Sagar for allowing me to undertake this project.
I feel extremely exhilarated to have completed this project under
the able and inspiring guidance of , Dr. Anil Mishra he rendered me all
possible help me guidance while reviewing the manuscript in finalizing
the report.
I also extend my deep regards to my teachers , family members ,
friends and all those whose encouragement has infused courage in me
to complete to work successfully.
(NEETU YADAV )
MBA III RD SEM.
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DELCLARATION BY THE CANDIDATE
Date :
I declare that the project report titled " A STUDY OF
PERFORMANCE EVALUATION OF MUTAL FUNDS IN INDIA
AND ITS AWARNESS AMONG THE INVESTORS" on Market
Segmentation is nay own work conducted under the supervision of Dr.
Anil Mishra , INFINITY MANAGEMENT & ENGINEERING COLLAGE
SAGAR To the best of my knowledge the report does not contain any
work , which has been submitted for the award of any degree ,
anywhere.
(Neetu Yadav)
MBA IIIRD SEM.
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CERTIFICATE
The project report titled " A STUDY OF
PERFORMANCE EVALUATION OF MUTAL FUNDS IN
INDIA AND ITS AWARNESS AMONG THE INVESTORS "
been prepared by MISS NEETU YADAV MBA IIIRD SEM. under the
guidance and supervision of DR. ANIL MISHRA for the partial
fulfillment of the Degree of B.B.A.
Signature of the Signature of the Signature of the
Supervisor Head of the
Department
Examiner
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ABSTRACT
Financial system in a country plays a dominant role in assets formation and
intermediation, and contributes substantially in macroeconomic development. In this
process of development mutual funds have emerged as strong financial intermediaries
and are playing a very important role in bringing stability to the financial system and
efficiency to resource allocation.
Mutual funds play a crucial role in an economy by mobilizing savings and investing themin the capital market, thus establishing a link between savings and the capital market.
The activities of mutual funds have both short-and long-term impact on the savings and
capital markets, and the national economy.
The Indian Mutual fund Industry has witnessed a structural transformation during the
past few years. Therefore it becomes important to examine the performance of the
mutual fund in the changed environment. This research report has evaluate the
performance of Indian Mutual fund equity scheme by using monthly NAV returns of 10
equity Growth funds of 3 years past data from 1-1-2003 to 31-12-2005. BSE sensex has
been used as a proxy for the market portfolio, while 364 day Treasury bills (T-bills) have
been used as a surrogate for risk free rate of return. The performance of funds has
been computed by using Sharpes ratio, Treynors ratio and Jensens ratio. To evaluate
investment performance of mutual funds in terms of risk and return. TO examine the
funds sensitivity to the market fluctuations in terms of beta. To appraise investment
performance of mutual funds with risk adjustment the theoretical parameters as
suggested by Sharpe, Treynor and Jensen. To rank the funds according to Sharpes,
Treynors and Jensons performance measure. There is no conclusive evidence which
suggests that performance mutual funds superior to the market. However there is some
evidence that some of the funds are performing better than the market.
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INTRODUCTION
MUTUAL FUNDS AN OVERVIEW:
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 invested by the fund manager in
different types of securities depending upon the objective of the scheme. These couldrange from shares to debentures to money market Instruments. The income earned
through these investments and the capital appreciations realized by the scheme are
shared by its unit holders in proportion to the number of units held by them. Thus a
mutual fund is the most suitable for the common man as it offers an opportunity to
invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody
with an invest able surplus of as little as a few thousand rupees can invest in Mutual
Funds. Each Mutual Fund scheme has a defined investment objective and strategy.
A Mutual Fund is the ideal investment vehicle for todays complex and modern financial
scenario. Markets for Equities, Bonds and other Fixed Income Instruments, real estate,
derivatives and other assets are driven by global events occurring in faraway places. A
typical individual is unlikely to have the knowledge, skills, inclination and the time to
keep track of events, understand their implications and act speedily. An Individual also
finds it difficult to keep track of ownership of his assets, brokerage, dues and bank
transactions etc. A Mutual Fund is the answer to all these situations. It appoints
professionally qualified and experienced staff that manages each of these functions on
full time basis. The large pool of money collected in the fund allows it to hire such staff
at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies
of Scale in all three areas-Research, Investments and Transaction Processing. While
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the concept of coming together to invest money collectively is not new, the mutual funds
in their present form are a 20th century Phenomenon. In fact, mutual funds gained
popularity only after the Second World War. Globally there are thousands of mutual
funds with different investment objectives. Today, mutual funds, collectively managealmost as much as or more money as compared to banks.
M P BIRLA INSTITUTE OF MANAGEMENT -7
A draft offer document is to be prepared at the time of launching the fund. Typically, it
pre-specifies the investment objectives of the fund, the risk associated, the costs
involved in the process and the broad rules for entry into and exit from the fund and
other areas of operation. In India, as in most of the countries, these sponsors need
approval from a regulator, SEBI. SEBI looks at he records of the Sponsor and its
financial strength in granting approval to the fund for commencing operations.
A sponsor then hires an Asset Management Company to invest the funds according to
the investment objective. It also hires equity to the custodian of the assets of the fund
and perhaps a third one to handle registry work for the unit holders of the fund.
In the Indian concept, the sponsors promote the AMC also, in which it holds a majority
stake. In many cases a Sponsor can hold a 100% stake in the AMC eg. IL&FS is the
sponsor of IL&FS AMC, which has floated different Mutual fund schemes and also acts
as an asset manager or the funds collected under the schemes.
History of mutual funds in India
The history of mutual funds in India can be broadly divided into 5 important phases.
First Phase: 1963-87 Initial Development phase (Unit Trust of India)
In 1963, UTI was established by an Act of Parliament and given a monopoly. UTI
commenced its operations from July 1964 .The impetus for establishing a formal
institution came from the desire to increase the propensity of the middle and lower
groups to save and to invest. UTI came into existence during a period marked by great
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political and economic uncertainty in India. The first and still one of the largest schemes,
launched by UTI was Unit Scheme 1964. UTI created a number of products such as
monthly income plans, childrens plans, equity-oriented schemes and offshore funds
during this period. The total asset under management for the year 1987-88 was 6,700crores.
Second Phase: 1987-93 (Entry of Public Sector Funds)
Second phase witnessed the entry of mutual funds sponsored by state owned banks
and financial institutions. With the opening up of the economy, many public sector and
financial institutions were allowed to establish mutual funds. In November 1987 the
State Bank of India established the first non-UTI mutual fund-SBI Mutual Fund. This
was followed by Canbank Mutual Fund (launched in December, 1987), LIC Mutual Fund
(1989), and Indian Bank Mutual Fund (1990) followed by Bank of India Mutual Fund,
GIC Mutual Fund and PNB Mutual Fund. These mutual funds helped enlarge the
investor community and the invest able funds. During this period, investors were shifting
away from bank deposits to mutual funds. Most funds were growth-oriented closed-ended funds. From 1987 to 1992-93, the fund industry expanded nearly seven times in
terms of Assets under Management. The total asset under management considering
both UTI and Public Sector was 47,004.
Third Phase: 1993-96 (Emergence of Private Funds)
A new era in the mutual fund industry began with the permission granted for the entry of
private sector funds in 1993, both Indian and Foreign. Also Government launched aseries of measures aimed at the financial sector as a part of the economic liberalization
and reform process. This included the setting up of the Securities and Exchange Board
of India (SEBI) as a regulatory body for the financial sector including Mutual Funds,
which issued the SEBI Mutual Fund Regulations in January 1993. During the year 1993-
94, five private sector mutual funds launched their schemes followed by six others in
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1994-95.
Fourth Phase: 1996-1999 (SEBI Regulations for Mutual Funds)
More investor friendly regulatory measures have been taken both by SEBI to protect the
investor and by the Government to enhance investors returns. A comprehensive set of
regulations for all mutual funds operating in India was introduced with SEBI (Mutual
Fund), 1996. These regulations set uniform standards for all funds and will eventually
be applied in full to Unit Trust of India as well, even though UTI is governed by its own
UTI Act. In 1999 Union Government Budget took a big step in exempting all mutual
funds dividends from income tax in the hands of investors. 1999 marks the beginning of
a new phase in the history of the mutual fund industry in India, a phase of significant
growth in terms of both amounts mobilized from investors and assets under
management.
Fifth Phase: 1999-2002
This phase was marked by very rapid growth in the industry, and significant increase inmarket shares of private sector players. Assets crossed Rs. 1,00,000. The tax break
offered to mutual funds in 1999 created arbitrage opportunities for a number of
institutional players. Bond funds and liquid funds registered the highest growth in this
period, accounting for nearly 60% of the assets. UTIs share of the industry dropped to
nearly 50%
MEANING & DEFINITIONS OF MUTUAL FUND:
Mutual Funds are financial intermediaries. They are companies set up to receive your
money, and then having received it, make investments with the money Via an AMC. It is
an ideal tool for people who want to invest but don't want to be bothered with
deciphering the numbers and deciding whether the stock is a good buy or not. A mutual
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fund manager proceeds to buy a number of stocks from various markets and industries.
Depending on the amount you invest, You own part of the overall fund.
The beauty of mutual funds is that anyone with an invest able surplus of a few hundredrupees can invest and reap returns as high as those provided by the equity markets or
have a steady and comparatively secure investment as offered by debt instruments.
A Mutual Fund is an investment tool that allows small investors access to a well-
diversified portfolio of equities, bonds and other securities. Each shareholder
participates in the gain or loss of the fund. Units are issued and can be redeemed as
needed. The fund's Net Asset Value (NAV) is determined each day.
In simple words, a mutual fund is a trust, which collects the savings from small
investors, invest them in government securities and earn through interest, dividends and
capital gains.
For instance, if one has Rs. 1000 to invest, it may not fetch much on its own. But, when
it is pooled with Rs. 1000 each from a lot of other people, then, one could create a !big
fund large enough to invest in wide varieties of shares and debentures on a
commanding scale and thus, to enjoy the economies of large scale operations.
DEFINITIONS:
The SEBI, 1993 defines a Mutual Fund as "a fund established in the form of a trust by a
sponsor, to raise monies by the trustees through the sale of units to the public, under
one or more schemes, for investing in securities in accordance with these regulations .
According to Weston J. Fred and Brigham, Eugene, unit trusts are Corporations
which accept dollars from savers and then use these dollars to buy stocks, long
term bonds and short term debt instruments issued by business or government
units; these corporations pool funds and thus reduce the risk of diversification!.
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OPERATION OF THE FUND:
A mutual fund invites the prospective investors to join the fund by offering various
schemes so as to suit to the requirements of categories of investors. The resources of
individual investors are pooled together and the investors are issued units/shares for the
money invested. The amount so collected is invested in capital market instruments like
treasury bills, commercial papers, etc.
For managing the fund, a mutual fund gets an annual fee of 1.25% of funds
managed at the maximum as fixed by SEBI (MF) regulations, 1993 and if the funds
exceed Rs. 100 cores , the fee is only 1%. The fee cannot exceed 1%. Offcourse,
regular expenses like custodial fee, cost of dividend warrants, fee for registration, the
asset management fee etc are debited to the respective schemes. These expenses
cannot exceed 3% of the assets in the respective schemes. These expenses cannot
exceed 3% of the assets in the respective schemes each year. The remaining amount is
given back to the investors in full.
The flow chart below describes broadly the working of a mutual fund:
Mutual Fund Operation Flow Chart
ORGANISATION OF A MUTUAL FUND:
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The formation and operations of Mutual Funds in India is solely guided by SEBI (Mutual
Funds) Regulations, 1993, which came into force on 20 th January, 1996, through a
notification on 9th December, 1996. these Regulations make it mandatory for Mutual
Funds to have a three-tier structure of :
1.1. A Sponsor Institution to promote the Fund.2.2. A team of Trustees to oversee the operations and to provide checks for theefficient, profitable and transparent operations of the fund and3.3. An Asset Management Company (AMC) to actually deal with the funds.
Sponsoring Institution:
The Company, which sets up the mutual fund, is called the Sponsor. SEBI has
laid down certain criteria to be met by the sponsor. The criterion mainly deals with
adequate experience, good past track record, net worth etc.
Sponsor appoints the Trustees, Custodian and the AMC with the prior approval of
SEBI, and in accordance with SEBI Regulations.
Sponsor must have at least 5-year track record of business interest in the
Financial Markets.
Trustees:
Trustees are the people with long experience and good integrity in the respective
fields carry the crucial responsibility in safeguarding the interests of the investors .For
this purpose, they monitor the operations of the different schemes. They have wide
ranging powers and they can even dismiss AMC with the approval of SEBI. The Indian
Trust Act governs them.
Rules regarding appointment of the Trustees are:
Appointment of Trustees has to be done with the prior approval of SEBI. There
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must be at least 4 members in the Board of Trustees and at least 2/3 rd of the members of
the Board of Trustees must be independent.
Trustees of one Mutual Fund cannot be a Trustee of another Mutual Fund,
unless he is an independent trustee in both cases, and has the approval ofboth the Boards.
Rights of Trustees:
Trustees appoint the AMC, in consultation with the sponsor and
according to SEBI Regulations. All mutual Fund Schemes
floated by the AMC have to be approved by the Trustees.
Trustees can seek information from the AMC on the operations and
compliance of the Mutual Fund, with the provisions of the trust Deed,
investment management agreement and the SEBI Regulations.
Trustees can review and ensure that Net worth of the AMC is according to
stipulated norms and regulations.Asset Management Company:
The AMC actually manages the funds of the various schemes. The AMC employs a
large number of professionals to make investments, carry out research &to do agent
and investor servicing. Infact, the success of any Mutual Fund depends upon the
efficiency of this AMC. The AMC submits a quarterly report on the functioning of the
mutual fund to the trustees who will guide and control the AMC. The AMC is usually a
private limited company, in which the sponsors and their associations or joint venture
partners are shareholders. The AMC has to be registered by SEBI and should have a
minimum Net worth of Rs.10 cores all times. The role of the AMC is to act as the
Investment Manager of the Trust along with the following functions:
It manages the funds by making investments in accordance with the
provision of the Trust Deed and Regulations The AMC shall disclose
the basis of calculation of NAV and Repurchase price of the schemes
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and disclose the same to the investors. Funds shall be invested as per
Trust Deed and Regulations.
Restrictions on the AMC"s:
AMCs cannot launch a fund scheme without the prior
approval of Trustees. AMCs have to provide full details of
Employees and Board Members, in all cases where such
investments exceed Rs. 1 lakh.
AMC"s cannot take up any activity that is in conflict with the activities of
the mutual funds.Registrars and Transfer Agents:
The Registrars and Transfer Agents are responsible for the investor servicing
functions, as they maintain the records of investors in the mutual funds. They process
investor applications , record details provided by the investors on application forms,
send out periodical information on the performance of the mutual fund; process dividend
pay-out to the investors; incorporate changes in information as communicated byinvestors; and keep the investor record up to date, by recording new investors and
removing investors who have withdrawn their funds.
Custodian:
Custodians are responsible for the securities held in the mutual funds portfolio.
They discharge an important back-office function, by ensuring that securities that are
bought are delivered and transferred to the books of mutual funds, and that funds are
paid-out when mutual fund buys securities. They keep the investment account of the
mutual fund, and also collect the dividends and interest payments due on the mutual
fund investments. Custodians also track corporate actions like bonus, issues, right
offers, offer for sale, buy back and open offers for acquisition.
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ORGANISATION OF A MUTUAL FUND:
There are many entities involved and the diagram below illustrates the organisational
set up of a mutual fund:
Composition of Indian Mutual Fund Industry:
Unit Trust of India Bank sponsored Bank of Baroda AMC Bank of India AMC
Canbank Investment Management Services Ltd. Punjab National Bank AMC Ltd.
SBI Funds Management Ltd. Indfund Management Ltd.
Institutions:
General Insurance Corporation AMC
IDBI Principal Asset Management Co.
Jeevan Bima Sahayog Asset Management Co. Ltd.
Private Sector:
1. India
Benchmark AMC Ltd.
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system and efficiency to resource allocation.
Mutual funds play a crucial role in an economy by mobilizing savings and investing them
in the capital market, thus establishing a link between savings and the capital market.The activities of mutual funds have both short-and long-term impact on the savings and
capital markets, and the national economy. Mutual funds, thus, assist the process of
financial deepening and intermediation. They mobilize funds in the savings market and
act as complementary to banking; at the same time they also compete with banks and
other financial institutions. In the process stock market activities are also significantly
influenced by mutual funds.
There is thus hardly any segment of the financial market, which is not (directly or
indirectly) influenced by the existence and operation of mutual funds. However, the
scope and efficiency of mutual funds are influenced by overall economic fundamentals:
the interrelationship between the financial and real sector, the nature of development of
the savings and capital markets, market structure, institutional arrangements and overall
policy regime.
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Regulatory Aspects of Mutual Fund
Schemes of mutual fund:S
The asset management company shall launch no scheme unless the trusteesapprove such scheme and a copy of the offer document has been filed with the Board.a
Every mutual fund shall along with the offer document of each scheme pay filingfees.f
The offer document shall contain disclosures which are adequate in order toenable the investors to make informed investment decision including the disclosure onmaximum investments proposed to be made by the scheme in the listed securities ofthe group companies of the sponsor.t
No one shall issue any form of application for units of a mutual fund unless theform is accompanied by the memorandum containing such information as may bespecified by the Board.s
Every close ended scheme shall be listed in a recognized stock exchange withinsix months from the closure of the subscription.s
The asset management company may at its option repurchase or reissue therepurchased units of a close-ended scheme.r
A close-ended scheme shall be fully redeemed at the end of the maturity period."Unless a majority of the unit holders otherwise decide for its rollover by passing aresolution".
. The mutual fund and asset management company shall be liable to refund theapplication money to the applicants,-.(I) If the mutual fund fails to receive the minimum subscription amount referred to in
clause (a) of sub-regulation.(ii) If the moneys received from the applicants for units are in excess of subscription asreferred to in clause (b) of sub-regulation (1).r
The asset management company shall issue to the applicant whose applicationhas been accepted, unit certificates or a statement of accounts specifying the number ofunits allotted to the applicant as soon as possible but not later than six weeks from thedate of closure of the initial subscription list and or from the date of receipt of therequest from the unit holders in any open ended scheme.
INVESTMENT OBJECTIVES AND VALUATION POLICIES:
The money collected under any scheme of a mutual fund shall be invested only in
transferable securities in the money market or in the capital market or in privately
placed debentures or securitised debts.
Provided that moneys collected under any money market scheme of a mutual fund
shall be invested only in money market instruments in accordance with directions
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issued by the Reserve Bank of India.
The mutual fund shall not borrow except to meet temporary liquidity needs of the
mutual funds for the purpose of repurchase, redemption of units or payment of
interest or dividend to the unit holders. The mutual fund shall not advance any loans for any purpose.
The Net Asset Value of the scheme shall be calculated and published at least in two
daily newspapers at intervals of not exceeding one week.
The price at which the units may be subscribed or sold and the price at which such
units may at any time be repurchased by the mutual fund shall be made available to
the investors.TYPES OF MUTUAL FUNDS:
The open-ended schemes do not have a fixed maturity and are open for
subscription the whole year. One can buy and sell units at the NAV related prices to
the Mutual funds. These schemes are normally not listed on the stock exchanges
and can be redeemed directly to the Mutual Fund.
Close-ended Schemes:
The closed ended schemes can be bought and sold on the stock exchangesubsequent to the initial subscription through the public offer. One can stay invested
in the scheme for a stipulated period ranging from 2 to 15 years. Generally, the
close-ended schemes are traded at a discount to their NAV in the stock exchange.
On the basis of investments objective, there are five different types of schemes:
Growth/Equity Scheme :
Majority of the corpus of such a scheme is invested in equities and equity related
instruments. This kind of scheme is for those investors who are not risk averse and
are willing to hold on to their investment for a long period of time, caring little for
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volatility. In such schemes, dividend may or may not be declared.
Income /Debt Scheme:
The Fund Manager of such schemes invests a substantial portion of their fund in
fixed income securities like debentures, bonds and money market instruments.
This kind of scheme is ideal for risk averse investors who are interested in steady
income.
Balanced Schemes:
Fund Manager of such funds invests in both equity as well as debt markets in
the proportion as that highlighted in the prospectus. The objective of such a scheme
is to provide both growth and income by distributing a part of the income and capital
gains they earn. Such a scheme is suitable for investors who want long-term returns
without taking the entire risk of the equity market.
Money Market/Liquid Schemes:
These are schemes with very low risks. They invest in Zero risk or safer, short
term instruments like treasury bills, certificates of deposit, Commercial Paper and
inter-bank call money. The objective of these schemes is to provide liquidity and
moderate income and also preserve the capital.
Tax Saving Schemes:
The objective of such a scheme is to provide tax benefits to the investors.Two types of schemes fall under this head.
1. ELSS (Equity Linked Savings Schemes:
A Fund Manager of such a scheme invests primarily in stocks. An important
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feature of this scheme is that there is a lock-in period of three years from the date of
investment. During this period unit holders are prohibited from trading, pledging and
transferring the units. Repurchase is permitted only after three years.
2. Pension Schemes:
A unit holder in a Pension Scheme can avail of a tax rebate of 20 per cent for
investments up to Rs 60,000 (tax saving of Rs 12,000).
Benefits of investing in Mutual Funds:
Small investments:
Mutual funds help you to reap the benefit of returns by a portfolio spread across
a wide spectrum of companies with small investments. Such a spread would not
have been possible without their assistance.
Professional Fund Management:
Professionals having considerable expertise, experience and resources managethe pool of money collected by a mutual fund. They thoroughly analyse the markets
and economy to pick good investment opportunities.
Spreading Risk:
An investor with a limited amount of fund might be able to invest in only one or two
stocks / bonds, thus increasing his or her risk. However, a mutual fund will spread its
risk by investing a number of sound stocks or bonds. A fund normally invests in
companies across a wide range of industries, so the risk is diversified at the same
time taking advantage of the position it holds. Also in cases of liquidity crisis where
stocks are sold at a distress, mutual funds have the advantage of the redemption
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option at the NAVs. Transparency and interactivity:
Mutual Funds regularly provide investors with information on the value of their
investments. Mutual Funds also provide complete portfolio disclosure of the investments
made by various schemes and also the proportion invested in each asset type. Mutual
Funds clearly layout their investment strategy to the investor.
Liquidity:
Closed ended funds have their units listed at the stock exchange, thus they can
be bought and sold at their market value. Over and above this the units can be directly
redeemed to the Mutual Fund as and when they announce the repurchase.
Choice:
The large amounts of Mutual Funds offer the investor a wide variety to choose from. An
investor can pick up a scheme depending upon his risk / return profile.
Regulations:
All the mutual funds are registered with SEBI and they function within the provisions
of strict regulation designed to protect the interests of the investor.
Flexibility:
Investors can exchange their units from one scheme to another, which cannot be done
in other kinds of investments. Income units can be exchanged for growth units
depending upon the performance of the funds.
Potential yields:
The pooling of funds from a large number of customers enables the fund to have
large funds at its disposal. Due to these large funds, mutual funds are able to buy
cheaper and sell dearer than the small & medium investors. Thus, they are able to get
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better market rates and lower rates of brokerage. So, they provide better yields to their
customers. They also enjoy the economies of scale and reduce the cost of capital
market participation. The transaction costs of large investments are quite lower than
that of small investments. All the profits are passed on to the investor in the form ofdividends and capital appreciation. Mutual funds have a return ranging from 12-17%
p.a.
Renders expertise service at lower costs:
The management of the fund is generally assigned to professionals who are well
trained and have adequate experience in the field of investment. The investment
decisions of these professionals are backed by informed judgement and experience.Thus, investors are assured of quality services in their best interest. The fee charged
by the mutual funds is 1%.
Risks of investment in Mutual Funds:
Mutual funds are not free from risks as the funds so collected are invested in stock
markets, which are volatile in nature and are not risk free. The following risks are
generally involved in mutual funds
Market risks:
In general, there are many kinds of risks associated with every kind of investment on
shares. They are called market risks. These market risks can be reduced, but not
completely eliminated even by a good investment management. The prices of
shares are subject to wide price fluctuations depending upon market conditions over
which nobody has control. The various phases of business cycle such as Boom,
Recession, Slump and Recovery affects the market conditions to a larger extent. Scheme risks:
There are certain risks inherent in the scheme itself. For instance, in a pure growth
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scheme, risks are greater. It is obvious because if one expects more returns as in the
case of a growth scheme, one has to take more risks.
Investment risk:
Whether the mutual fund makes money in shares or loses depends upon the investment
expertise of the Asset Management Company (AMC). If the investment advice goes
wrong, the fund has to suffer a lot. The investment expertises of various funds are
different and it is reflected on the returns, which they offer to the investors.
Business Risk:
The corpus of a mutual fund might have been invested in a companys shares. If the
business of that company suffers any set back, it cannot declare any dividend. It may
even go to the extent of winding up its business. Though the mutual funds can
withstand such a risk, its income paying capacity is affected.
Political risks:
Every government brings new economic ideologies and policies. It is often said
that many economic decisions are politically motivated. Change of government brings in
the risk of uncertainty, which every player in the finance service industry has to face.MAJOR MUTUAL FUND COMPANIES IN INDIA
Birla Sun Life Mutual Fund
Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life
Financial. Sun Life Financial is a global organization evolved in 1871 and is being
represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart
from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to
investment. Recently it crossed AUM of Rs. 10,000 cr.
HDFC Mutual Fund
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HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely
Housing Development Finance Corporation Limited and Standard Life Investments
Limited.
HSBC Mutual Fund
HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and
Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual
Fund acts as the Trustee Company of HSBC Mutual Fund.
Prudential ICICI Mutual Fund
The mutual fund of ICICI is a joint venture with Prudential Plc. Of America, one
of the largest life insurance companies in the USA. Prudential ICICI Mutual Fund was
setup on 13th of October 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The
Trustee Company formed is Prudential ICICI Asset Management Company Limited
incorporated on 22nd of June 1993.
Sahara Mutual Fund
Sahara Mutual Fund was setup on July 18, 1996 with Sahara India Financial
Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited
incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-
up capital of the AMC stands at Rs.25.8 cr.
Tata Mutual Fund
Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. Thesponsors for Tata Mutual Fund are Tata Sons Ltd., and Tata
Investment Corporation Ltd. The investment manager is Tata Asset Management
Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited is
one of the fastest in the country with more than Rs. 7,703 cr. (as on April, 30 2005) of
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AUM.
Kotak Mahindra Mutual Fund
Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary ofKMBL. It is presently having more than 1,99,818 investors in its various schemes.
KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers
schemes catering to investors with varying risk -return profiles. It was the first company
to launch dedicated gilt scheme investing only in government securities.
Franklin Templeton India Mutual Fund
The group, Franklin Templeton Investments is a California (USA) based
company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the
largest financial services in the world. Investors can buy or sell the mutual fund through
their financial advisor or through mail or through their website. They have Open-End
Diversified Equity Scheme, Open-End Sector Equity Schemes, Open-End Hybrid
Schemes, Open-End Tax Savings Schemes, Open-End Income and Liquid Schemes,
Closed-End Income Schemes and Open-End Fund Of Funds Schemes to offer.Morgan Stanley India Mutual Fund
Morgan Stanley is a worldwide financial services company and it is leading in the
market of securities, investment management and credit services.
Morgan Stanley Investment Management (MSIM) was established in the year
1975. It provides customized asset management services and products to governments,
corporations, pension funds and non-profit organization. Its services are also extended
to high net worth individuals and retail investors. In India it is known as Morgan Stanley
Investment Management Private Limited (MSIM) and its AMC is Morgan Stanley Mutual
Fund (MSMF). This is the first close-end diversified equity scheme serving the needs of
Indian retail investors focusing on a long-term capital appreciation.
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Canbank Mutual Fund
Canbank Mutual Fund was setup on Dec 19, 1987 with Canara Bank acting as
the sponsor. Canbank Investment Management Services Ltd. incorporated on March
02, 1993 is the AMC. The corporate office of the AMC is in Mumbai.
LIC Mutual Fund
Life Insurance Corporation of India setup LIC Mutual Funds on 19th June 1989. It
contributed Rs. 2 cr. towards the corpus of the fund. LIC Mutual Fund was constituted
as a trust in accordance with the provisions of the Indian Trust Act 1882. The company
started its business on 29th April 1994. The trustees of LIC Mutual Fund have appointed
Jeevan Bima Sahyog Asset Management Company Ltd. as the investment managers
for LIC Mutual fund.
BACKGROUND OF THE STUDY
Industry and commerce so as to bring about the integration of the Indian economy with
the global economy. With the growth of the economy and the capital market in India, thesize investor has also increased rapidly. Thus the The Government of India introduced
economic reforms in the field of trade involvement of mutual funds in the transformation
Indian economy has made it urgent to view their services not only as financial
intermediary but also as pace setter as they are playing a significant role in spreading
equity culture. In this context close monitoring and evaluation of mutual funds has
become essential for fund managers to make this instrument as the strongest and most
preferred instrument in Indian capital market in the coming years.
It has been established that the single most important factor that has a strong bearing
on investors interest and growth of mutual fund industry is its superior financial
performance. The financial performance may be defined in terms of !rates of return, !
risk-adjusted returns or !benchmark comparison. !Jensens alpha is another widely used
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measure of portfolio performance: It indicates the abilities of fund managers to identify
and select superior stocks for the portfolio. This constitutes the subject matter of the
present study.
In India, very little work has been done to investigate fund managers forecasting
abilities. Active fund managers are expected to reward higher return. If the fund
manager feels that market on the whole overvalued, then he would get out of the
market. Hence the present study has the objective of finding out the necessary facts
which can benefit the investors and fund managers. This paper evaluates the
performance evaluation of mutual fund in the framework of risk and return.
LITERATURE REIEW
An Empirical Analysis on Performance Evaluation of Mutual Funds in India (Nalini
Prava Tripathy)
The Government of India introduced economic reforms in the field of trade industry and
commerce so as to bring about the integration of the Indian economy with the global
economy. With the growth of the economy and the capital market in India, the size
investor has also increased rapidly. Thus the involvement of mutual funds in thetransformation Indian economy has made it urgent to view their services not only as
financial intermediary but also as pace setter as they are playing a significant role in
spreading equity culture. In this context close monitoring and evaluation of mutual funds
has become essential for fund managers to make this instrument as the strongest and
most preferred instrument in Indian capital market in the coming years.
In India, very little work has been done to investigate fund managers forecasting
abilities. Active fund managers are expected to reward higher return. If the fund
manager feels that market on the whole overvalued, then he would get out of the
market. Hence the present study has the objective of finding out the necessary facts
which can benefit the investors and fund managers. This paper evaluates the
performance of mutual fund schemes in the framework of risk and return.
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The study tests the following hypothesis in respect of performance evaluation of the
Indian mutual funds
The sample mutual funds are earning higher returns than the market portfolio returns in
terms of risk. The sample mutual funds are offering the advantages of diversification
and superior returns due to selectivity to their investors. The investment objectives of
the mutual fund schemes are related to their systematic risk and total variability.
Generally investors invest in mutual fund by considering capital appreciation, better
liquidity less risk and tax liability. So, the study makes a comprehensive evaluation of
equity linked schemes. For the purpose of the study, schemes have been taken from
1994-95 to 2001-02. A total of 31 schemes offer are selected bank mutual funds havetaken for study. The risk is calculated on the basis of month end Net Asset Values.
Further, BSE national index was assessed as market index or benchmark. The returns
are computed on the basis of the Net Asset Values of the different schemes and returns
in the market index are computed on the basis of the BSE National Index on the
respective date.
The performance sample mutual fund scheme has been evaluated by using the six
performance measures. A brief description of these measures as
Rate of Return measure, Treynor measure, Sharpe measure, Jensen measure, Sharpe
differential return, Famas Decomposition measure.
According to the modern portfolio policy, the risk and return are to be in the linear form.
So the risk and return are expected to be in tandem with the investment policy. As the
tax planning schemes are expected to earn higher returns with higher risk. So, it is
highly essential to examine if the risk characteristics of these schemes are consistent
with their stated objectives. The risk return analysis indicates that some of the schemes
are not in con format with their stated objectives. The sated objections of the funds with
their average betas and average total risk.
This paper has examined the investment performance of Indian mutual funds in terms of
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six performance measures. The empirical results reported here do not lend support to
the hypothesis taken in the study. . All other schemes do not demonstrate this
relationship. On the whole, 13 schemes have an alone average beta which indicates
that mutual fund returns are highly volatile. About 10 schemes have outperformed bothin terms of Treynor measure and Sharpe measure. However, four schemes exhibited
superior performance in terms of systematic risk but did not do so in respect of total risk.
The analysis made by the application of famas measure indicates that the return out of
diversification is very less. All other schemes show lack of net selectivity and
diversification. So, it was found that proper balance between selectivity and
diversification is not maintained. This is due to fund managers acumen of selectivity and
poor investment planning of the fund.
Performance Evaluation of Select Indian Mutual Fund Schemes (O P Gupta and
Amitabh Gupta)
During the past one and a half decade, the Indian mutual fund industry has witnessed a
major structural transformation and growth as result of policy initiatives taken by the
Government of India to break the monolithic structure of the Industry. Therefore, it
becomes important to examine the performance of the industry in the changed
environment. This paper aims at evaluating the investment performance of select Indianmutual fund schemes during the recent four years period.
He has used a sample of 57 equity funds including 10 tax planning funds to study their
investment performance. The choice of the sample is largely based on the availability of
the necessary data. Weekly returns, based on Net Asset Values, have been used for
performance evaluation. The study period is a recent four year period from April 1, 1999
to March 31, 2003. It is during this period that a major structural change has taken place
in the Indian mutual fund industry. The study has used the weekly yields on 91 day
Treasury bills as a surrogate for the risk free rate of return. The value data collected
from Value Research India Pvt. Ltd., while Treasury bill data has been collected from
PNB Gilts ltd.
The study tests the following hypotheses in respect of performance evaluation of mutual
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fund schemes: The investment performance of schemes is superior to the relevant
benchmark portfolio. The mutual fund schemes are well diversified. There is a
relationship between investment objectives of the schemes and their risk
characteristics. We have utilized the following six measures to evaluate performance;
Rate of Return, Sharpe Ratio, Treynor Ratio, Jensen Differential Return Measure,
Sharpe Differential Return Measure. We have computed the weekly returns for each of
the sample. Weekly returns for the market index viz.
This paper has aimed at testing the investment performance of select Indian mutual
funds during a recent four year period from April 1, 1999 to March 31, 2003. Using
weekly returns, based on NAVs for 57 funds, the results reported here indicate that, ingeneral, fund managers have not outperformed the relevant benchmark during the
study period. After measuring in Sharpe, Treynor, Jenson measures only three funds
reflect superior performance. In terms of Famas components of Investment
performance, all the funds suffered negative performance on account of risk bearing
activity of their fund managers. Only one ffund earned a positive return on
diversification. Though 30 funds showed some net selectivity skills. It appears that
Indian fund managers do not appear to possess sock selection skills.
Thus, on the whole, it can be concluded that there is no conclusive evidence, which
suggests that performance of mutual funds is superior to the market during the study
period. However, there is some evidence that the sample funds are not adequately
diversified. However, the diversification level seems to have changed over time. In
addition, the average beta for the funds has increased over time. Overall the results
reported here are similar to the ones reported earlier for the Indian Market.
Empirical Investigation on the Indian Managers Stock Selection Abilities (Ramesh
Chander)
Investment decision making encompasses a variety of activities such as stock selection,
market timing, diversification and risk bearing. Stock selection and market timing are
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prime activities that contribute widely in the return generation process while
diversification and risk bearing supplement as subsidiary activities. Professional
managers are heftily paid for a judious amalgam of these performances. Investment
performance on the stock selection pertains to successful micro forecasting forcompany specific events. It refers to the managers ability to identify under or over
valued securities. Such performance attribution may be constructed as an indicator of
the investment decision making quality. It may even delineate the superior ex post
investment performance.
Study of investment managers stock selection skills is very important as it enables the
fund managers to understand how they have fared in achieving desired return targets
and how much risk has been controlled in the process. Second it enables the investors
to assess how well the fund manager has achieved these targets in comparison with
other managers or with some benchmark indices. In this sense it may even be viewed
as a feedback mechanism for improving investment mangers forecasting skills.
The study under performance outcomes obtained in this regard shall be analysed
across fund characteristics such as, nature, investment objectives and sponsorship
categories to identify any performance bias in regard thereto. Taking these objectives
into consideration, the present study test the following null hypotheses. Investment
managers lack superior stock selection abilities. Managers stock selection performance
is maintained across the measurement criteria. Stock selection performance is not
influenced by the fund characteristics. Stock selection performance is not influence by
the choice of benchmark indices. The study under consideration is based on the
performance outcomes obtained for 80 samples for the five year period. Monthly
investment returns derived above are further annualized through geometric averaging.
The yield on the 91 day treasury bills issued by Government of India has been used as
surrogate for risk less return. Jensen and Fama is used for measuring the performance
of stock selectivity.
Managers stock selection performance obtained in relation to the fund characteristics
viz., nature, size investment objectives and sponsorship as well as benchmark indices
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such as BSE Sensex, BSE-100, CNX Nifty 50.
Performance persistence is another vital dimension widely acknowledged and
investigated world over better comprehend portfolio performance evaluation. The
information inputs reported that to the absence of persistence of the stock selection
performance for the sample investment schemes, as the sample funds having
registered average positive performance in the period first came to realize negative
performance in the subsequent period second. Similar tendencies wer obtained for the
sample funds across all the quartiles. The results are equally robust for the positive
persistence as well as for the negative persistence.
Investment performance depends on the stock selection and pertains to the successfulmicro forecasting for company specific events. It refers to the managers ability to
identify under or over valued securities. Such a performance attribution may be
construed as an indicator of the investment decision making quality as it delineates the
superior investment performance from that attributed to pure chance or luck. This study
examined the stock selection abilities across fund characteristics as well as the
performance persistence. The results reported in the study have wider implications for
the investment decision making in the sense that signify the vital relevance of stock
selection ability in the return generation process. The absence of performance
persistence signifies that past performance is in no way implicated for the future. The
outcomes thus obtained also have ramifications for the efficient market theory and
rational expectations in the performance.
An Empirical Analysis of Performance Evaluation of Mutual Fund schemes in
India(Sanjay j Bhayani and Vishal G Patidar)
Mutual funds play a vital role in mobilization of resources and their effective allocation.
These funds play a significant role in financial intermediation, development capital
markets and growth of the financial sector as a whole. The active involvement of mutual
funds in economic development can be seen by their dominant presence in the money
and capital market. The present study distinguishes itself from standard mutual fund
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literature by making several unique contributions. First, it finds the trends of the mutual
fund industry in India second it uses risk return method to evaluate the various funds
and schemes outperform the market with the same level of risk or not.
The major objectives of the study are; To evaluate investment performance of mutual
funds in terms of risk and return. TO examine the funds sensitivity to the market
fluctuations in terms of beta. To find out the financial performance of mutual fund
schemes. To appraise investment performance of mutual funds with risk adjustment the
theoretical parameters as suggested by Sharpe, Treynor and Jensen. The period of
study was 5 years. The sample consists of top performer schemes and funds of mutual
fund companies in India based on average return during the last five years.
The main purpose of this analysis is to evaluate whether an organization uses its
resources effectively and efficiently or not. The overall objective of a business is to earn
satisfactory return on the funds invested in it consistent with maintaining sound financial
position. Performance of mutual fund schemes has been evaluated by using the
following measures; Risk, Standard Deviation, Beta, Jensen Alpha, Sharpe Ratio and
Treynor Index.
The results indicate that all the schemes have earned better return in comparison to the
market returns. Most of the schemes have beta less than one, there by implying that
these schemes tended to hold portfolios that were less risky than the market portfolio.
Higher positive value of alpha indicates its better performance. The analysis of the
alpha of all schemes as being positive, there by indicating superior performance of
these funds.
The performances of Balanced Fund schemes have been evaluated in terms of average
return. A majority of the sample mutual fund schemes have a recorded superior
performance as compared to the benchmark index. In the case of Equity Diversified
schemes, the performance of schemes have shown better returns and most of the
schemes have outperformed the benchmark.
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The results of Gilt Fund Schemes indicated that all the schemes earned a slightly higher
return in comparison to the market return. The performances of Tax Planning Fund
Schemes have generated superior return as compared to the market. The performance
of schemes was better in case of returns and has earned returns on lower risk ascompared to the market
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RESEARCH METHODOLOGY
PROBLEM STATEMENT
In India, very little work has been done to investigate fund managers forecasting
abilities. Active fund managers are expected to reward higher return. If the fund
manager feels that market on the whole overvalued, then he would get out of the
market. Hence the present study has the objective of finding out. The performance of
mutual fund schemes in the framework of risk and return.
OBJECTIVES OF THE STUDY
The present study has been undertaken to meet the following specific objectives,
To evaluate investment performance of mutual funds in terms of risk and return.
TO examine the funds sensitivity to the market fluctuations in terms of beta. To
appraise investment performance of mutual funds with risk adjustment the
theoretical parameters as suggested by Sharpe, Treynor and Jensen. To
rank the funds according to Sharpes, Treynors and Jensons performance
measure.
LIMITATIONS
The study is confined to only to ten asset management companies.
The study considers only for equity funds
The ranks are assigned on the basis of only three measures & data is considered
for three years The historical data was not easily available. Findings of this
study may change due to time constraint. The study is mainly limited to 10 equity
diversified funds for a period of three .
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. Years starting from January-03 to December-05
STUDY DESIGN
The type of research being followed here is the Empirical Research. The
objective of this research work is to test the stock selective ability of equity fund
manager & evaluate the performance based on their return. It is a Secondary Research
as the data or information required is collected through secondary sources. It is a
Quantitative Research as the study involves a collection of secondary data of nine
equity mutual funds of different asset management companies for a term of 3 years and
applying statistical tools to get the results. The time frame of the research is the past 3
years and hence the information between the time periods January 2003 to Dec 2005 is
relevant for the purpose of the study.
STUDY TYPE
This research is an Empirical Research which is carried out on
the Ten equity fund schemes of different asset management companies.
STUDY POPULATION, SAMPLE, SAMPLING FRAME
The study population is the whole of the Indian Equity funds. But it is
infeasible to incorporate all of the Equity funds for the research mainly due to two
reasons:
Large Volumes of Data: There are a very large number of equity funds with
huge volume of data.
Time Constraint: The time duration of the research is from April 2006 to June
2006. Hence to overcome these problems, a sample of equity funds was
selected from equity mutual funds.
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DATA GATHERING PROCEDURES
The major data relevant for this research is secondary data which has
been collected from different means.
DATA COLLECTION
NAV: The monthly NAV data of various mutual funds are collected from
WWW.INDIAINFOLINE.COM. www.amfiindia.com and MARKET INDEX: The monthly BSE
sensex data are collected from www.bseindia.com.
RATE OF RETURN OF 364 DAYS T-BILL:
The weighted average return of 364 days T-Bill is taken for risk free return. The data are
collected from www.rbi.org.in (which has been extracted from var ious directories of
statistics of Reserve Bank of India).
DATA
The various mathematical, statistical and logical operations performed on the data
obtained from the www.amfiindia.com are as fo llows: Mean Standard
Deviation Calculation of yearly Highs and Lows by using MAX and MIN
functions in the spreadsheet. These were some of the tools and
techniques applied on the data, collected for the Ten equity funds in order touse the data as different variables in the research. All of these operations have
been done using the Microsoft Excel and the SPSS for windows software.
http://www.indiainfoline.com./http://www.amfiindia.com/http://www.bseindia.com./http://www.rbi.org.in/http://www.amfiindia.com/http://www.amfiindia.com/http://www.bseindia.com./http://www.rbi.org.in/http://www.amfiindia.com/http://www.indiainfoline.com./ -
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SUMMARY OF FINDINGSS
From the research it is found that most of the returns of equity fund is above the
market index BSE Sensex. Over the period of three years, out of 10 equity funds HDFC
fund shows the highest return of 0.4574,followed by Birla sun life ,Tata, JM Equity, ICICI
, LIC,SUNDRAM, KOTAK CANBANK and BSE SENSEX has given a return of 0.3801,
. Out of 10 equity funds HDFC shows the highest monthly return of 45.74%
compared to others. In case of mean return also, HDFC shows the highest mean return
3.81%.3 Beta is defined as the measure of risk. Canbank tops with a beta of .093
compared to other funds and Franklin with the least beta of 0.67.c
KOTAK shows the highest standard deviation of 0.073 followed by others and
Franklin with the lowest standard deviation of 0.057.F
Systematic risk in Franklin mutual fund is more compare to other funds.S
The alpha values varied widely, the highest being HDFC and the lowest Kotak.
Return per unit of unsystematic risk sundram as the highest systematic riskcompared to other funds and Tata mutual fund as the lowest unsystematic
risk.
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CONCLUSION SUMMARY:
It is examined that investment performance of Indian Mutual funds in terms of
performance measure, some funds shows conformity with the linear relationship of
return and risk. Some funds do not demonstrate this relationship. Some funds have out
performed both in terms of Treynor measure and Sharpe measure. However some
funds exhibited superior performance in terms of systematic risk but did not do so in
respect of total risk. According to Jensen measure funds have positive alpha values
indicating superior performance of the scheme. The alpha values varied widely, the
highest being HDFC and the lowest Kotak. Such large variation of alpha values show
that stock selection abilities of fund manager vary for different mutual funds. Positivealpha values of mutual fund may be a result of adopting better forecast techniques by
the fund managers; they seem to have been able to pick up undervalued stocks
enabling them to post better performance during the period under consideration
For the same reason, it becomes increasingly necessary to periodically monitor
and evaluate performance as objectively as can. More importantly, such evaluation
should provide meaningful feedback for improving the quality of the investment
management process on a continuing basis. In particular, it should help in articulating
the investment objectives with greater clarity, sharpening the investment strategy and
refining the methods of security selection. Value of experience that matters.
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BIBLIOGRAPHY: WEBSITES
www.amfiindia.com
www.bseindia.com
www.rbi.org.in
www.investopedia.com
www.google.com
www.valuepro.net
BOOKS
INVESTMENT MANAGEMENT ,SECURITY ANALYSIS AND
PORTFOLIO MANAGEMENT BY V.K.BHALLA
STATISTICS FOR MANAGEMENT BY LEVIN & RUBIN
JOURNAL
THE ICFAI JOURNAL OF FINANCE.
VALUE RESEARCH ONLINE
http://www.amfiindia.com/http://www.bseindia.com/http://www.rbi.org.in/http://www.investopedia.com/http://www.google.com/http://www.valuepro.net/http://www.amfiindia.com/http://www.bseindia.com/http://www.rbi.org.in/http://www.investopedia.com/http://www.google.com/http://www.valuepro.net/