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1. INTRODUCTION
Right from its existence, Banks, whether nationalize or corporate, always
dominated others, in case of public investments or retail investments. But in
past few years due to various reasons like continuously falling of interest
rates, various scams etc. investors will have to look for various other
investments avenues that will give them better returns with minimization of
risks. Here Mutual Funds Industry has very important role to play in
providing alternate investment avenue to entire gamut of investors in
scientific and professional manner.
Indian Mutual Fund Industry has been definitely maturing over the
period. In four decades of its existence in India Mutual Funds have gone
through various structural changes and gained prominent position in
Financial Industry. Because of easy of investments, professional
management and diversification more and more investors are gaining
confidence in Mutual Funds. Even government policies like abolishment of
long term capital benefit taxes added advantage to growth of Mutual Funds.
This is all the way is leading to pool of more and more money from retail
investors into the Mutual Funds. So I carried out project in Mutual Funds to
understand Mutual Funds, Mutual Fund Industry, analyze the trend in
Mutual Funds. The Report first provides the fundamentals, explaining whatmutual funds are and how they work. Data Analysis of Indian Index Mutual
fund market has been done to give a comparative analysis of the selected six
funds in the category. Various factors surrounding the performance of these
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SCOPE OF THE STUDY
This study covers Equity growth funds of which ANANDRAHTI is a
distributor.
The study covers the period of 10 weeks
The study applies only three approaches to evaluate performance, namely
Treynors Index, Sharpes Index and Jensens Index.
SCHEMES CONSIDERED FOR THE PORTFOLIO EVALUATION
STUDY
1) Reliance banking fund
2) UTI Pharma and health care fund
3) Franklin FMCG fund
4) ICICI prudential Technology fund
5) Franklin Pharma fund
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2. Research Design
ADVANTAGES OF MURUAL FUND:
Diversification
Return Potential
Liquidity
Transparency
Flexibility
DIVERSIFICATION:
Mutual Funds invest in a number of companies across a broad cross-section ofindustries and sectors. This diversification reduces the risk because seldom do
all stocks decline at the same time and in the same proportion. You achieve this
diversification through a Mutual Fund with far less money than you can do on
your own.
RETURN POTENTIAL:
Over a medium to long term, Mutual Funds have the potential to provide a
higher return as they invest in a diversified basket of selected securities.
LIQUIDITY:
In open-end schemes, the investor gets the money back promptly at net asset
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DRAWBACKS OF MUTUAL FUNDS
Mutual funds have their drawbacks and may not be for everyone:
FEES AND COMMISSIONS:
All funds charge administrative fees to cover their day-to-day expenses. Some
funds also charge sales commissions or "loads" to compensate brokers, financial
consultants, or financial planners. Even if you don't use a broker or other
financial adviser, you will pay a sales commission if you buy shares in a Load
Fund.
TAXES:
During a typical year, most actively managed mutual funds sell anywhere from
20 to 70 percent of the securities in their portfolios. If your fund makes a profit
on its sales, you will pay taxes on the income you receive, even if you reinvest
the money you made.
MANAGEMENT RISK:
When you invest in a mutual fund, you depend on the fund's manager to make
the right decisions regarding the fund's portfolio. If the manager does not
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perform as well as you had hoped, you might not make as much money on your
investment as you expected. Of course, if you invest in Index Funds, you forego
management risk, because these funds do not employ managers.
RESEARCH DESIGN
It is the basic plan which guides the researcher in the collection and analysis of
data required for practicing the research. The fundamental base for the success
of the project depends on its effective research design. Research design simply
means a search for facts, answers to the questions and solutions to problems.
METHODOLOGY
Descriptive research: The main purpose of Descriptive Research is to
describe the state of view as it exists at present. Simply stated, it is fact
finding investigation. In Descriptive Research definite conclusion can be
arrived at, but it doesnt establish a cause and effect relationship
SOURCE OF DATA
After identifying and defining the research problem and determining specific
information required to solving the problem the research will look for the type
and sources of data which may yield the desired results, while deciding about
the method of data collection to be used for the study. There are two types of
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data,
1. Primary data.
2. Secondary data.
PRIMARY DATA:
These are those data which are collected for the first time. Primary data is
collected by enquiring certain employees, manager who was chosen on the basis
of their depth knowledge and work experience in the stock market. This enquiry
was informal in nature to gain as much as possible information.
SECONDARY DATA:
These are those data which are already been collected and analyzed by someone
and can save the time of the researcher. Secondary data may be available in the
form of company records, trade publications, libraries etc.
THE SECONDARY SOURCES ARE:
Company annual report
Fact Sheet of different funds
Articles
Text books
Broachers
TOOLS AND TECHNIQUES
PERFORMANCE MEASURE
Trenors Index
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Sharpes Index
Jensens Index
7.5 LIMITATIONS OF THE STUDY
The primary data collected is only from the customers of
ANANDRATHI.
The study is limited to the Portfolio evaluation of equity funds of the
selected funds.
Dividends declared for the period has not been considered in calculating
the returns from the funds.
NAV s considered for the calculations of returns is obtained from
MUTUALFUND INDIA website and the same is taken as true value
without verification.
The evaluation of Portfolio is limited to three main approaches viz
Treynors Index approach, Shapres Index approach and Jensen Index
approach.
3. Dynamics of Mutual Fund Industry
3.1. INTRODUCTION
A Mutual Fund is a trust that pools the savings of a number of investors
who share a common financial goal. The money thus collected is then
invested in capital market instruments such as shares, debentures and other
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securities. The income earned through these investments and the capital
appreciation realized is shared by its unit holders in proportion to the
number of units owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low
cost. The flow chart below describes broadly the Working of mutual funds.
Mutual fund is a mechanism for pooling the resources by issuing units to
the investors and investing funds in securities in accordance with objectives
as disclosed in offer document.
Investments in securities are spread across a wide cross-section of
industries and sectors and thus the risk is reduced. Diversification reduces
the risk because all stocks may not move in the same direction in the same
proportion at the same time. Mutual fund issues units to the investors in
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accordance with quantum of money invested by them. Investors of mutual
funds are known as unit holders.
The investors in proportion to their investments share the profits orlosses. The mutual funds normally come out with a number of schemes with
different investment objectives that are launched from time to time. A
mutual fund is required to be registered with Securities and Exchange Board
of India (SEBI), which regulates securities markets before it can collect
funds from the public.
Different investment avenues are available to investors. Mutual funds
also offer good investment opportunities to the investors. Like all
investments, they also carry certain risks. The investors should compare the
risks and expected yields after adjustment of tax on various instruments
while taking investment decisions.
3.2. ORGANISATION OF A MUTUAL FUND
A mutual fund is set up in the form of a trust, which has sponsor, trustees,
Asset Management Company (AMC) and custodian. The trust is established
by a sponsor or more than one sponsor who is like promoter of a company.
The trustees of the mutual fund hold its property for the benefit of the unit
holders. Asset Management Company (AMC) approved by SEBI manages
the funds by making investments in various types of securities. Custodian,
who is registered with SEBI, holds the securities of various schemes of the
fund in its custody. The trustees are vested with the general power of
superintendence and direction over AMC. They monitor the performance
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and compliance of SEBI Regulations by the mutual fund SEBI Regulations
require that at least two thirds of the directors of trustee company or board
of trustees must be independent i.e. they should not be associated with the
sponsors. Also, 50% of the directors of AMC must be independent. All
mutual funds are required to be registered with SEBI before they launch any
scheme.
3.3. Mutual fund structure:
The structure consists of:
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3.3.1. Sponsor:
Sponsor is the person who acting alone or in combination with another
body corporate establishes a mutual fund. Sponsor must contribute at least
40% of the net worth of the Investment Managed and meet the eligibility
criteria prescribed under the Securities and Exchange Board of India
(Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable
for any loss or shortfall resulting from the operation of the Schemes beyond
the initial contribution made by it towards setting up of the Mutual Fund.
3.3.2. Trust:
The Mutual Fund is constituted as a trust in accordance with the
provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is
registered under the Indian Registration Act, 1908.
3.3.3. Trustee:
Trustee is usually a company (corporate body) or a Board of Trustees
(body of individuals). The main responsibility of the Trustee is to safeguard
the interest of the unit holders and inter alia ensure that the AMC functions
in the interest of investors and in accordance with the Securities and
Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions
of the Trust Deed and the Offer Documents of the respective Schemes. At
least 2/3rd directors of the Trustee are independent directors who are not
associated with the Sponsor in any manner.
3.3.4. Asset Management Company:
The Trustee as the Investment Manager of the Mutual Fund appoints the
AMC. The AMC is required to be approved by the Securities and Exchange
Board of India (SEBI) to act as an asset management company of the
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Mutual Fund. At least 50% of the directors of the AMC are independent
directors who are not associated with the Sponsor in any manner. The AMC
must have a net worth of at least 10 crore Rupees at all times.
The role of an Asset management companies is to act as the investment
manager of the trust. They are the ones who manage money of investors. An
AMC takes decisions, compensates investors through dividends, maintains
proper accounting & information for pricing of units, calculates the NAV,
& provides information on listed schemes. It also exercises due diligence on
investments & submits quarterly reports to the trustees.
3.3.5. Custodian:
The custodian is appointed by the Board of Trustees for safekeeping of
securities in terms of physical delivery and eventual safe keeping or
participating in the clearing system through approved depository
companies.
3.3.6. Registrars & Transfer Agent(R & T Agent):
The Registrars & Transfer Agents(R & T Agents) are responsible for the
investor servicing function, as they maintain the records of investors in
mutual funds. They process investor applications; record details provide by
the investors on application forms; send out to investors details regarding
their investment in the mutual fund; send out periodical information on the
performance of the mutual fund; process dividend payout to investor;
incorporate changes in information as communicated by investors; & keep
the investor record up-to-date, by recording new investors & removing
investors who have withdrawn their funds.
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3.4. Role of SEBI in mutual funds industry
Unit Trust of India was the first mutual fund set up in India
in the year 1963. In early 1990s, Government allowed public
sector banks and institutions to set up mutual funds.
In the year 1992, Securities and exchange Board of India (SEBI) Act was
passed. The objectives of SEBI are to protect the interest of investors in
securities and to promote the development of and to regulate the securities
market.
As far as mutual funds are concerned, SEBI formulates policies and
regulates the mutual funds to protect the interest of the investors. SEBI
notified regulations for the mutual funds in 1993. Thereafter, mutual funds
sponsored by private sector entities were allowed to enter the capital
market. The regulations were fully revised in 1996 and have been amended
thereafter from time to time. SEBI has also issued guidelines to the mutual
funds from time to time to protect the interests of investors.
All mutual funds whether promoted by public sector or private sector
entities including those promoted by foreign entities are governed by the
same set of Regulations. There is no distinction in regulatory requirements
for these mutual funds and all are subject to monitoring and inspections by
SEBI. The risks associated with the schemes launched by the mutual funds
sponsored by these entities are of similar type.
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3.5. Association of Mutual Funds in India (AMFI)
With the increase in mutual fund players in India, a need for mutual
fund association in India was generated to function as a non-profitorganization. Association of Mutual Funds in India (AMFI) was
incorporated on 22nd August, 1995.
AMFI is an apex body of all Asset Management Companies (AMC)
which has been registered with SEBI. Till date all the AMCs are that have
launched mutual fund schemes are its members. It functions under the
supervision and guidelines of its Board of Directors.
Association of Mutual Funds India has brought down the Indian Mutual
Fund Industry to a professional and healthy market with ethical lines
enhancing and maintaining standards. It follows the principle of both
protecting and promoting the interests of mutual funds as well as their unit
holders.
3.6. History of the Indian Mutual Fund Industry
The formation of Unit Trust of India marked the evolution of the Indian
mutual fund industry in the year 1963. The primary objective at that time
was to attract the small investors and it was made possible through the
collective efforts of the Government of India and the Reserve Bank of India.
The history of mutual fund industry in India can be better understood
divided into four distinct phases.
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3.6.1. First Phase 1964-87 (Establishment and Growth of Unit Trust
of India)
Unit Trust of India enjoyed complete monopoly when it was establishedin the year 1963 by an act of Parliament. UTI was set up by the Reserve
Bank of India and it continued to operate under the regulatory control of the
RBI until the two were de-linked in 1978 and the entire control was
transferred in the hands of Industrial Development Bank of India (IDBI).
UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-
64), which attracted the largest number of investors in any single investment
scheme over the years. It launched ULIP in 1971, six more schemes
between 1981-84, Children's Gift Growth Fund and India Fund (India's first
offshore fund) in 1986, Mastershare (Indias first equity diversified scheme)
in 1987 and Monthly Income Schemes (offering assured returns) during
1990s. By the end of 1987, UTI's assets under management grew ten times
to Rs 6700 Crores.
3.6.2. Second Phase 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by
public sector banks and Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India (GIC). SBI Mutual Fund was the
first non- UTI Mutual Fund established in June 1987 followed by Canbank
Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89),
Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of
Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989
while GIC had set up its mutual fund in December 1990. At the end of
1993, the mutual fund industry had assets under management of Rs.47, 004
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crores. However, UTI remained to be the leader with about 80% market
share.
3.6.3. Third Phase 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in Indian
mutual fund industry, giving the Indian investors a wider choice of fund
families. Also, 1993 was the year in which the first Mutual Fund regulations
came into being, under which all mutual funds, except UTI were to be
registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in
July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996. The industry
now functions under the SEBI (Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many
foreign mutual funds setting up funds in India and also the industry has
witnessed several mergers and acquisitions. As at the end of January 2003,
there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The
Unit Trust of India with Rs.44,541 crores of assets under management was
way ahead of other mutual funds.
3.6.4. Fourth Phase since February 2003
In February 2003, following the repeal of the Unit Trust of India Act
1963 UTI was bifurcated into two separate entities. One is the Specified
Undertaking of the Unit Trust of India with assets under management of
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Rs.29,835 crores as at the end of January 2003, representing broadly, the
assets of US 64 scheme, assured return and certain other schemes. The
Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does
not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB
and LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in March
2000 more than Rs.76,000 crores of assets under management and with the
setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund
Regulations, and with recent mergers taking place among different private
sector funds in the mutual fund industry.
The Mutual Fund Marker has entered its current phase of consolidation
and growth. At present there are 44 Mutual Fund Houses in India with
Average Assets under Management (AAUM) Rs. 71328123.33 Lakhs..
The graph indicates the growth of assets over the years.
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GROWTH IN ASSETS UNDER MANAGEMENT
Note:
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified
Undertaking of the Unit Trust of India effective from February 2003. The
Assets under management of the Specified Undertaking of the Unit Trust of
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India has therefore been excluded from the total assets of the industry as a
whole from February 2003 onwards.
FREQUENTLY USED TERMS
Net Asset Value (NAV):
Net Asset Value is the market value of the assets of the scheme minus its
liabilities. The per unit NAV is the net asset value of the scheme divided by
the number of units outstanding on the Valuation Date.
The net asset value (NAV) is the market value of the fund's underlying
securities. It is calculated at the end of the trading day. Any open-end funds
buy or sell order received on that day is traded based on the net asset value
calculated at the end of the day. The NAV per units is such Net Asset Value
divided by the number of outstanding units.
Sale Price:
Is the price charged while investing in an open-ended scheme. This is
also called Offer Price.
Repurchase Price:
Is the price at which a close-ended scheme repurchases its units. This is
also called Bid Price.
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Redemption Price:
Is the price at which open-ended schemes repurchase their units and
close-ended schemes redeem their units on maturity. Such prices are NAV
related.
3.7. ADVANTAGES OF MUTUAL FUNDS
There are numerous benefits of investing in mutual funds and one of the
key reasons for its phenomenal success in the developed markets like US
and UK is the range of benefits they offer, which are unmatched by most
other investment avenues.
3.7.1. Affordability:
A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc.
depending upon the investment objective of the scheme. An investor can
buy in to a portfolio of equities, which would otherwise be extremely
expensive. Each unit holder thus gets an exposure to such portfolios with an
investment as modest as Rs.500/-. This amount today would get you less
than quarter of an Infosys share. Thus it would be affordable for an investor
to build a portfolio of investments through a mutual fund rather than
investing directly in the stock market.
3.7.2. Economies of Scale:
Because a mutual fund buys and sells large amounts of securities at a
time, its transaction costs are lower than you as an individual would pay.
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3.7.3. Diversification:
It simply means that spread the investment across different securities
(stocks, bonds, money market instruments, real estate, fixed deposits etc.)
and different sectors (auto, textile, information technology etc.). This kind
of diversification may add to the stability of returns, for example during one
period of time equities might under perform but bonds and money market
instruments might do well enough to offset the effect of a slump in the
equity markets. Similarly the information technology sector might be faringpoorly but the auto and textile sectors might do well and may protect
principal investment as well as help to meet return objectives.
3.7.4. Variety:
Mutual funds offer a tremendous variety of schemes. This variety is
beneficial in two ways: first, it offers different types of schemes to investors
with different needs and risk appetites; secondly, it offers an opportunity to
an investor to invest sums across a variety of schemes, both debt and equity.
For example, an investor can invest his money in a Growth Fund (equity
scheme) and Income Fund (debt scheme) depending on his risk appetite and
thus create a balanced portfolio easily or simply need to buy a Balanced
Scheme.
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3.7.5. Professional management:
Qualified investment professionals who seek to maximize returns and
minimize risk monitor investor's money. When you buy in to a mutual fund,you are handing your money to an investment professional that has
experience in making investment decisions. It is the Fund Manager's job to
(a) find the best securities for the fund, given the fund's stated investment
objectives; and (b) keep track of investments and changes in market
conditions and adjust the mix of the portfolio, as and when required.
3.7.6. Regulations:
Securities Exchange Board of India (SEBI), the mutual funds regulator
has clearly defined rules, which govern mutual funds. These rules relate to
the formation, administration and management of mutual funds and also
prescribe disclosure and accounting requirements. Such a high level of
regulation seeks to protect the interest of investors.
3.7.7. Liquidity:
In open-ended mutual funds, you can redeem all or part of your units any
time you wish. Some schemes do have a lock-in period where an investor
cannot return the units until the completion of such a lock-in period.
3.7.8. Convenience:
An investor can purchase or sell fund units directly from a fund, througha broker or a financial planner. The investor may opt for a Systematic
Investment Plan (SIP) or a Systematic Withdrawal Advantage Plan
(SWAP). In addition to this an investor receives account statements and
portfolios of the schemes.
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3.7.9. Flexibility:
Mutual Funds offering multiple schemes allow investors to switch easily
between various schemes. This flexibility gives the investor a convenient
way to change the mix of his portfolio over time.
3.7.10. Transparency:
Open-ended mutual funds disclose their Net Asset Value (NAV) daily
and the entire portfolio monthly. This level of transparency, where the
investor himself sees the underlying assets bought with his money, is
unmatched by any other financial instrument. Thus the investor is in the
know of the quality of the portfolio and can invest further or redeem
depending on the kind of the portfolio that has been constructed by the
investment manager.
3.8. Drawbacks of Mutual Funds
Mutual funds have their drawbacks and may not be for everyone:
3.8.1. No Guarantees:
No investment is risk free. If the entire stock market declines in value, the
value of mutual fund shares will go down as well, no matter how balanced
the portfolio. Investors encounter fewer risks when they invest in mutual
funds than when they buy and sell stocks on their own. However, anyone
who invests through a mutual fund runs the risk of losing money.
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3.8.2. Fees and commissions:
All funds charge administrative fees to cover their day-to-day expenses.
Some funds also charge sales commissions or "loads" to compensate
brokers, financial consultants, or financial planners.
3.8.3. Taxes:
During a typical year, most actively managed mutual funds sell anywhere
from 20 to 70 percent of the securities in their portfolios. If a fund makes a
profit on its sales, investor needs to pay taxes on the income received, even
if the money is reinvested.
3.8.4. Management risk:
When you invest in a mutual fund, you depend on the fund's manager to
make the right decisions regarding the fund's portfolio. If the manager does
not perform as well as you had hoped, you might not make as much money
on your investment as you expected. Of course, if you invest in Index
Funds, you forego management risk, because these funds do not employ
manage.
3.8.5. Dilution
It's possible to have too much diversification because funds have
smallholdings in so many different companies, high returns from a fewinvestments often don't make much difference on the overall return.
Dilution is also the result of a successful fund getting too big. When money
pours into funds that have had strong success, the manager often has trouble
finding a good investment for all the new money.
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3.9. TYPES OF MUTUAL FUND SCHEMES
Wide variety of Mutual Fund Schemes exists to cater to the needs such as
financial position, risk tolerance and return expectations etc. The tablebelow gives an overview into the existing types of schemes in the Industry.
3.9.1. By structure
Open-Ended schemes
Close-ended schemes
Interval schemes
3.9.2. By Investment objective
Growth schemes
Income schemes
Balanced schemes
Money market schemes
3.9.3. Other schemes
Tax saving schemes
Special saving schemes
Index schemes
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Sector specific schemes
3.9.4. By Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-
ended scheme depending on its maturity period.
a. Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription
and repurchase on a continuous basis. These schemes do not have a fixed
maturity period. Investors can conveniently buy and sell units at Net Asset
Value (NAV) related prices, which are declared on a daily basis. The key
feature of open-end schemes is liquidity.
b. Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7
years. The funds give an option of selling back the units to the mutual fund
through periodic repurchase at NAV related prices. SEBI Regulations
stipulate that at least one of the two exit routes is provided to the investor
i.e. either repurchase facility or through listing on stock exchanges. These
mutual funds schemes disclose NAV generally on weekly basis, open for
subscription only during a specified period at the time of launch of the
scheme. Investors can invest in the scheme at the time of the initial public
issue and thereafter they can buy or sell the units of the scheme on the stock
exchanges where the units are listed.
Key Differences between open and close open ended schemes
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S.No Feature Open
end
Close
end
1 Capitalizatio
n
Unlimit
ed
Limited
2 Any time
entry
Yes No
3 Any time
exit
Yes No
4 Tax
advantages
Yes No
5 Listed on
exchange
General
ly no
Yes
3.9.5. By Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or
balanced scheme considering its investment objective. Such schemes may
be open-ended or close-ended schemes as described earlier. Such schemes
may be classified mainly as follows:
a. Growth / Equity Oriented Scheme:
The aim of growth funds is to provide capital appreciation over the
medium to long- term. Such schemes normally invest a major part of theircorpus in equities. Such funds have comparatively high risks. These
schemes provide different options to the investors like dividend option,
capital appreciation, etc. and the investors may choose any option
depending on their preferences. The investors must indicate the option in
the application form. The mutual funds also allow the investors to change
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the options at a later date. Growth schemes are good for investors having a
long-term outlook seeking appreciation over a period of time.
b.Income / Debt Oriented Scheme:
The aim of income funds is to provide regular and steady income to
investors. Such schemes generally invest in fixed income securities such as
bonds, corporate debentures, Government securities and money market
instruments. Such funds are less risky compared to equity schemes. These
funds are not affected because of fluctuations in equity markets. However,
opportunities of capital appreciation are also limited in such funds. The
NAVs of such funds are affected because of change in interest rates in the
country. If the interest rates fall, NAVs of such funds are likely to increase
in the short run and vice versa. However, long-term investors may not
bother about these fluctuations
c.Balanced Fund:
The aim of balanced funds is to provide both growth and regular income
as such schemes invest both in equities and fixed income securities in the
proportion indicated in their offer documents. These are appropriate for
investors looking for moderate growth. They generally invest 40-60% in
equity and debt instruments. These funds are also affected because of
fluctuations in share prices in the stock markets. However, NAVs of suchfunds are likely to be less volatile compared to pure equity funds.
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3.9.6. Other Schemes:
a.Money Market or Liquid Fund:
These funds are also income funds and their aim is to provide easy
liquidity, preservation of capital and moderate income. These schemes
invest exclusively in safer short-term instruments such as treasury bills,
certificates of deposit, commercial paper and inter-bank call money,
government securities, etc. Returns on these schemes fluctuate much less
compared to other funds. These funds are appropriate for corporate and
individual investors as a means to park their surplus funds for short periods.
b. Gilt Fund:
These funds invest exclusively in government securities. Government
securities have no default risk. NAVs of these schemes also fluctuate due to
change in interest rates and other economic factors as are the case with
income or debt oriented schemes.
c.Index Funds:
Index Funds replicate the portfolio of a particular index such as the BSE
Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in
the securities in the same weight age comprising of an index. NAVs of such
schemes would rise or fall in accordance with the rise or fall in the index,though not exactly by the same percentage due to some factors known as
"tracking error" in technical terms. Necessary disclosures in this regard are
made in the offer document of the mutual fund scheme.
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There are also exchange traded index funds launched by the mutual
funds, which are traded on the stock exchanges.
d.Sector specific funds/schemes:
These are the funds/schemes, which invest in the securities of only those
sectors or industries as specified in the offer documents. e.g.
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG),
Petroleum stocks, etc. The returns in these funds are dependent on the
performance of the respective sectors/industries. While these funds may
give higher returns, they are more risky compared to diversified funds.
Investors need to keep a watch on the performance of those
sectors/industries and must exit at an appropriate time. They may also seek
advice of an expert.
e. Tax Saving Schemes:
These schemes offer tax rebates to the investors under specific provisions
of the Income Tax Act, 1961 as the Government offers tax incentives for
investment in specified avenues. e.g. Equity Linked Savings Schemes
(ELSS). Pension schemes launched by the mutual funds also offer tax
benefits. These schemes are growth oriented and invest pre-dominantly in
equities. Their growth opportunities and risks associated are like any equity-
oriented scheme.
f. Fund of Funds (FOF) scheme:
A scheme that invests primarily in other schemes of the same mutual fund
or other mutual funds is known as a FOF scheme. A FOF scheme enables
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the investors to achieve greater diversification through one scheme. It
spreads risks across a greater universe.
g.Assured return scheme:
Assured return schemes are those schemes that assure a specific return to
the unit holders irrespective of performance of the scheme.
A scheme cannot promise returns unless such returns are fully guaranteed
by the sponsor or AMC and this is required to be disclosed in the offer
document.
Investors should carefully read the offer document whether return is
assured for the entire period of the scheme or only for a certain period.
Some schemes assure returns one year at a time and they review and change
it at the beginning of the next year.
h.Asset allocation funds:
These funds invest in various asset classes including, but not limited to,
equities, fixed income securities, and money market instruments. They seek
high total return by maintaining precise weightings in asset classes. Global
asset allocation funds invest in a mix of equity & debt securities issued
worldwide
i. Flexible portfolio fund:
These funds invest in common stocks, bonds, other debt securities, and
money market securities to provide high total return. These funds may
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invest up to100 percent in any one type of security and may easily change
weightings depending upon market conditions.
3.9.7. Dividend Option:
Generally two options are available for every scheme regarding dividend
payout and growth option. By opting for growth option an investor can have the
benefit of long-term growth in the stock market on the other side by opting for
the dividend option an investor can maintain his liquidity by receiving dividend
time to time. Some time people refer dividend option as dividend fund and
growth fund. Generally decisions regarding declaration of the dividend depend
upon the performance of stock market and performance of the fund.
OPTION REGARDING DIVIDEND
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IIFL owns and manages the website, www.indiainfoline.com, which is
one of Indias leading online destinations for personal finance, stock markets,
economy and business.
IIFL has been awarded the Best Broker, India by Finance Asia and the
Most improved brokerage, India in the Asia Money polls. India Infoline was
also adjudged as Fastest Growing Equity Broking House - Large firms by Dun
& Bradstreet. A forerunner in the field of equity research, IIFLs research is
acknowledged by none other than Forbes as Best of the Web and a must
read for investors in Asia. Our research is available not just over the Internet
but also on international wire services like Bloomberg, Thomson First Call and
Internet Securities where it is amongst one of the most read Indian brokers.
A network of over 2,500 business locations spread over more than 500
cities and towns across India facilitates the smooth acquisition and servicing of
a large customer base. All our offices are connected with the corporate office inMumbai with cutting edge networking technology. The group caters to a
customer base of about a million customers, over a variety of mediums viz.
online over the phone and at our branches
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HISTORY AND MILESTONES
1995 Commenced operations as Probity Research & Services Pvt. Ltd.
1997 Launched research products of leading Indian companies, key
sectors and the economy. Client included leading FIIs, banks and
companies
1999 Launched www.indiainfoline.com
2000 Launched online trading through www.5paisa.com.
Started distribution of life insurance, mutual fund and personal
financial products
Acknowledged by Forbes as Best of the Web and must read for
investors
2003 Launched proprietary trading platform Trader Terminal for retailcustomers
2004 Acquired commodities broking license
Launched Portfolio Management Service.
2005 Maiden IPO and listed on NSE, BSE
2006 Acquired membership of DGCX,
Launched Wealth Advisory Services.
2007 Commenced institutional equities business under IIFL
Formed Singapore subsidiary, IIFL (Asia) Pte Ltd
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Launched consumer finance business.
CLSA team joined IIFL in May 2007.
2008 Launched IIFL Wealth, Transitioned to insurance broking modelReceived Best Broker-India award from finance Asia; Most
improved Brokerage-India award from Asia money.
Got in principle approval from SEBI for sponsoring mutual fund in
November 2008.
2009 Received registration for Housing FinanceReceived Fastest growing Equity Broking House-Large firms in
India by Dun & Bradstreet.
Entered into a strategic agreement with interactive Brokers,
LLC(USA) to provide our clients direct market access to over 80
global exchanges in 18 countries.
2010 Received in-principle approval for membership of the Singapore
Stock Exchange.
Received membership of the Colombo Stock Exchange.
2011 IIFL gets approval for starting its Mutual Funds operations
(Approval for AMC) IIFL will commence its Mutual funds
operations in the second half of 2011
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Our Business Model
IIFL, started as a company providing independent and unbiased research.
Butoverthe years, we have added almost the entire gamut of financial products
and services to our portfolio of offerings. We not only offer advice and products
to customers, but also execute their orders and provide constant service
thereafter.
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Board of directors
Mr. Nirmal Jain, Chairman , India Infoline Ltd.
Mr. R. Venkataraman, Managing Director , India Infoline Ltd.
Mr. Nilesh Vikamsey, Independent Director , India Infoline Ltd.
Mr. A. K. Purwar, Independent Director , India Infoline Ltd.
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Mr. Kranti Sinha, Independent Director , India Infoline Ltd.
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IIFL Today
We are leading financial services intermediary where the customer can meet all
his advisory, investing and borrowing needs under one roof.
So what is the underlying mega opportunity in the financial services industry?
Positive macro-economic growth
India has become the outsourcing capital of the world. With more and more
businesses being outsourced to India, the number of jobs created by BPOs
has given a tremendous boost to our economy
India has the one of the worlds largest young working class
Volatile interest rates have made people more cautious about where to invest
their hard earned money
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Investment habits changing from lazy to advise everyone wants to
invest their savings where returns are maximum.
Thats why there is an increased demand for financial services today.
Customers need an expert, an advisor who can help them with all their
investing and borrowing needs. Someone who can help them secure their future
by making the right choices! We help people secure their own future as well as
their families future by helping them make the right investment decisions. Weprovide advice, offer a wide range of products to choose from, execute the
orders and complete the value chain by providing constant service to all our
customers. We help them fulfill their financial needs. In short, we are a one stop
investment shop where customers can meet all their advisory, investing and
borrowing needs under one roof.
IIFL Network
IIFL has a wide distribution network with:
Over a million customers all over India
Presence in over 3,000 business locations across 500 cities.
Our global footprint extends across geographies with offices in Colombo,
Dubai, Singapore and New York.
IIFL Businesses
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IIFL offers almost the entire gamut of financial services in India They can be
broadly categorized into:
Equities, commodities and currency broking
Wealth Management services
Investment banking
Distribution of Life Insurance products
Distribution of Mutual funds, Fixed Deposits, RBI Bonds and Small Savingsamong others
Distribution of Mortgages and other Loan products
Therefore as on date we are into the following businesses:
We are registered with BSE and NSE for securities trading.
We are registered with MCX, NCDEX and DGCX for commodities trading.
We are registered with CDSL and NSDL as depository participants.
We are registered as a Category I merchant banker where we focus on the
SME space with strong distribution network. We have a strong presence in
the QIP space.
We are a SEBI registered portfolio manager.
We are the first Indian broker to have memberships of the Colombo Stock
Exchange and also on the Singapore Stock Exchange.
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Two subsidiaries India Infoline Investment Services and Moneyline Credit
Limited are registered with RBI as non-deposit taking non-banking
financial services companies.
Distribution of Mutual funds, Fixed Deposits, RBI Bonds and Small Savings
among others.
India Infoline Housing Finance Ltd, the housing finance arm, is registered
with the National Housing Bank for distribution of Mortgages and other
Loan products.
We are Insurance brokers registered with the IRDA and we distribute
insurance products of all leading insurance companies.
We are one of the fastest growing companies in the Indian Wealth
Management space.
We have received approval in 2011 to start our Mutual Funds operations.
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Awards and accolades
Best Equity Broker of the Year Bloomberg UTV, 2011
IIFL was awarded the Best Equity Broker of the Year at the recently held
Bloomberg UTV Financial Leadership Awards, 2011.
The award was presented by the Honble Finance Minister of India,
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Shri Pranab Mukherjee. The Bloomberg UTV Financial Leadership Awards
acknowledge the Extraordinary contribution of Indias financial leaders and
visionaries from January 2010 to January 2011.
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IIFL Vision
To become the Most Respected Company in the
financial services space in India
IIFL Culture
OM and AOM Owner Mindset and Application of Mind The Strong
Foundation on which we stand Owner Mindset (OM)
OM is the DNA and culture of our organization.
Everyone behaves like an owner and not as an employee of the organization.
When anyone from team IIFL is faced with a problem he thinks like an
owner and finds a solution to it rather than blindly taking the problem to his
seniors.
At IIFL one has the autonomy to operate, be creative and even make
mistakes, it provides all employees a platform to learn, experiment and grow.
At IIFL, we never compromise on our vision or do anything that will affect
the morale of our people
Application of Mind (AOM)
Keep the objective of the task assigned and the overall objective of the
organization in mind all the time.
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Dont follow rules / procedures without understanding the logic.
When in doubt, ask questions and seek clarity.
With OM and AOM everyone in the organization feels that work is fun. Its
less tedious and more enjoyable
We are a one-stop financial services shop, most respected for quality of its
advice, personalized service and cutting-edge technology.
Equities
IIFL is a member of BSE and NSE registered with NSDL and CDSL as a
depository participant and provides broking services in the cash, derivatives and
currency segments, online and offline. IIFL is a dominant player in the retail as
well as institutional segments of the market. It recently became the first Indianbroker to get a membership of the Colombo Stock Exchange and is also the first
Indian broker to have received an in-principle approval for membership of the
Singapore Stock Exchange. IIFLs Trader Terminal, its proprietary trading
platform, is widely acknowledged as one of the best available for retail
investors. Investors opt for IIFL given its unique combination of superior
Service, cutting-edge proprietary Technology, Advice powered by world-
acclaimed research and its unparalleled Reach owing to its over 2500 business
locations across over 500 cities in India.
IIFL received the BQ1 broker grading (highest grading) from CRISIL.
The assigned grading reflects an effective external interface, robust systems
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framework and strong risk management. The grading also reflects IIFLs
healthy regulatory compliance track record and adequate credit risk profile
IIFLs analyst team won Zee Business Indias best market analysts
awards 2009 for being the best in the Oil and Gas and Commodities sectors
and a finalist in the Banking and IT sectors.
IIFL has rapidly emerged as one of the premier institutional equities
houses in India with a team of over 25 research analysts, a full-fledged sales and
trading team coupled with an experienced investment banking team.
The Institutional equities business conducted a very successful
Enterprising India global investors conference in Mumbai in March 2010,
which was attended by funds with aggregate AUM over US$5 trillion and CEOs
and other executives representing corporates with a combined market
capitalization of over US$500 billion. The Discover Sri Lanka globalinvestors conference, held in Colombo in July 2010, was attended by more than
50 leading global and major local investors and 25 Sri Lankan corporates, along
with senior Government officials.
Commodities
IIFL offers commodities trading to its customers vide its membership of
the MCX and the NCDEX. Our domain knowledge and data based on in depth
research of complex paradigms of commodity kinetics, offers our customers a
unique insight into behavioral patterns of these markets. Our customers are
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ideally positioned to make informed investment decisions with a high
probability of success.
Credit and finance
IIFL offers a wide array of secured loan products. Currently, secured
loans (mortgage loans, margin funding, loans against shares) comprise 94% of
the loan book. The Company has discontinued its unsecured products. It has
robust credit processes and collections mechanism resulting in overall NPAs of
less than 1%. The Company has deployed proprietary loan-processing software
to enable stringent credit checks while ensuring fast application processing.
Recently the company has also launched Loans against Gold.
Insurance
IIFL entered the insurance distribution business in 2000 as ICICI
Prudential Life Insurance Co. Ltds corporate agent. Later, it became an
Insurance broker in October 2008 in line with its strategy to have an open
architecture model. The Company now distributes products of major insurance
companies through its subsidiary India Infoline Insurance Brokers Ltd.
Customers can choose from a wide bouquet of products from several insurance
companies including Max New York Life Insurance, MetLife, Reliance Life
Insurance, Bajaj Allianz Life, Birla Sunlife, Life Insurance Corporation, Kotak
Life Insurance and others.
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Wealth Management Service
IIFL offers private wealth advisory services to high-net-worth individuals
(HNI) and corporate clients under the IIFL Private Wealth brand. IIFL Private
Wealth is managed by a qualified team of MBAs from IIMs and premier
institutes with relevant industry experience. The team advises clients across
asset classes like sovereign and quasi-sovereign debt, corporate and
collateralized debt, direct equity, ETFs and mutual funds, third party PMS,
derivative strategies, real estate and private equity. It has developed innovative
products structured on the fixed income side.
It also has tied up with Interactive Brokers LLC to strengthen its
execution platform and provide investors with a global investment platform.
Investment Banking
IIFLs investment banking division was launched in 2006. The business
leverages upon its strength of research and placement capabilities of the
institutional and retail sales teams. Our experienced investment banking team
possesses the skill-set to manage all kinds of investment banking transactions.Our close interaction with investors as well as corporate helps us understand
and offer tailor-made solutions to fulfill requirements.
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The Company possesses strong placement capabilities across
institutional, HNI and retail investors. This makes it possible for the team to
place large issues with marquee investors.
In FY10, the team advised and managed more than 10 transactions
including four IPOs and four Qualified Institutions Placements Product
Offerings.
FLAME, Indias largest financial literacy initiative, by IIFL
FLAME (Financial Literacy Agenda for Mass Empowerment) is an IIFL
(India Infoline Group) initiative towards spreading financial literacy amongst
masses to help their inclusion in the economic prosperity of India. With
accelerating GDP, per capita growth as well as savings, financial literacy is
more relevant and important today than ever before. While the governmentsemphasis on financial inclusion is to widen the reach of banking services to
unbanked rural areas, we endeavor to complement the effort by helping people
make the most of the available banking and financial services.
Even the people who qualify as banked population have limited
understanding of how to use financial products to help enhancement of financialsecurity, building up wealth and ensuring a comfortable life post retirement, and
also how to avoid frauds and losses from unscrupulous agents and ponzi
schemes. The objective is to light a FLAME, which will be ignite many a flame
to remove the darkness of illiteracy and steer the inclusion of the masses
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towards the sunshine of growth and prosperity. As a part of the FLAME
initiative, IIFL has planned an elaborate set of activities
Financial awareness workshops across 1000 cities in India -As a part
of this initiative, IIFL will hold financial awareness workshops at over 1,000
locations across India. These free workshops will be held across the country,
including Tier II and Tier III cities where our expert speakers will spread
financial literacy.
A comprehensive mass media campaign This will be a huge campaign
which will feature in the print media and will reach out to investors across the
country. The idea is to convey the various concepts which are a part of the
literacy drive through easy-to-grasp way e.g. our first campaign uses cartoon
illustrations which will make it far easier for people to understand the various
concepts explained therein.
Books and publications -Multiple publications are planned which would
seek to highlight the various concepts of finance as a part of this initiative.
These publications will be given out at the workshops which will be held across
the country.
Financial awareness helpline - IIFL will setup a helpline, in our owncall center, where anyone can call up and get answers to their queries pertaining
to financial services. This helpline will be manned by IIFLs trained
professionals who will provide a solution to such queries.
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Driving the knowledge edge
To educate and update the clients, IIFL brings out research reports on a
daily, weekly, fortnightly, monthly, quarterly and yearly basis, spanning
technical and fundamental research on funds, stocks, indexes, derivatives,
commodities, insurance, corporate earnings and SMEs. Very recently, IIFL has
ventured into regional research reports and books. During the year, IIFL
research articles have been published in many regional newspapers. IIFL has
Ask Analyst feature on its website, wherein clients can ask the research team
questions on all sectors, and receive their answers within 24 hours. Another
feature which the website carries is the Live Chat, wherein clients can call and
have discussions with the research team.
At IIFL, our core competence lies in research, which has been
assiduously built over the years. We have come out with a number of
comprehensive research reports, which have been well received by industryexperts. IIFL has separate research teams for the institutional and the retail
customer segments. The research is available on international wire services like
Bloomberg, Thomson First Call and Internet Securities. The 50 member strong
research team is based in Mumbai, Singapore and Colombo and covers 200+
stocks.
Trader Terminal
The Trader Terminal is a new world class trading software that provides
single-screen products access to Equities, Derivatives, Commodities,
Currencies, Mutual Funds and IPOs. The principal advantage is faster
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execution, multiple options for investors to trade from their desktop, over the
web and using their mobiles.
Trade across Equities, Commodities, Currencies, MFs, all in one screen
Easy access to our world-class research, Trade on the Trader Terminal through
your mobile. Advanced charting options and technical analysis tools Streaming
quotes and instant order confirmation.
Reviewing 2010-11 Performance
Business
IIFL Mutual Fund
During the year, IIFL Mutual Fund, the India Infoline Ltd sponsored
mutual fund, received final regulatory approval from Securities and ExchangeBoard of India (SEBI) to commence operations. This will enable
commencement of the mutual fund business and the launch of mutual fund
schemes in due course.
International Expansion
IIFLs Singapore subsidiary received the final approval from SingaporeStock Exchange for its equities broking business. The subsidiary commenced its
broking operations from December 2010. IIFL donated its entire first week
commissions from trading operations in SGX to Community Chest, Singapore.
The Company also received approval from the Colombo Stock Exchange and
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SEC, Sri Lanka for undertaking broking business, becoming the first Indian
broker to set up business in Sri Lanka.
Technology Development
Launch of Latest Version of Trader Terminal
The Company launched the latest version of Trader Terminal, which
enjoys lightning-fast execution speed, world-class user interface and a single
click access to its worldclass research. The new terminal offers the facility to
trade in cash, derivatives, mutual funds, IPOs, currencies and commodities all in
one screen. Besides, investors can now trade from their desktops, over the web
or using their mobile phones.
Outsourcing Technology infrastructure to IBM
IIFL has entered into a ten year IT outsourcing agreement with IBM to
transform its IT Infrastructure and establish a direct linkage between business
performance and IT costs. The` 3 bn agreement would help IIFL deliver
enhanced levels of
customer satisfaction, ensure continuous audit readiness, strengthen IT security
framework and compliance and provide better visibility and control of IT
operations. The agreement covers IIFLs 700 branches. IBM will set up acentralized helpdesk, a pan-India services desk, applications and infrastructure
in branches, and deploy service management processes to cover assets, IT
security, capacity, network, storage, incident /problem/change, and technology,
among others
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Customer Engagement
Enterprising India-ii
IIFLs global investor conference Enterprising India II held in
Mumbai received an overwhelming response. The conference attracted a
participation of over 400 institutional investors, over 75 Indian and Sri Lankan
companies and select specialist speakers. The conference had a strong line-up of
quality investors, including a number of marquee long-only funds with
estimated investments of over US$ 100 bn in India.
Discover Srilanka Conference
IIFLs global investor conference, Discover Sri Lanka was held in
Colombo in July 2010. The same was attended by more than 50 leading globaland local investors and 25 Sri Lankan corporates, along with senior government
officials.
Retail Investor Meets
IIFL conducted several investor meets and camps across India, on its own
as well as with leading media house ET Now to spread financial literacy andawareness about risk- return of various products, aspects of financial planning
and understanding of investor rights
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4. Performance Measures or Risk Measurement of
Mutual Funds
Mutual Fund industry today, with about 44 players and more than one
thousand schemes, is one of the most preferred investment avenues in India.
However, with a plethora of schemes to choose from, the retail investor faces
problems in selecting funds. Factors such as investment strategy and
management style are qualitative, but the funds record is an important indicator
too. Though past performance alone can not be indicative of future
performance, it is, the only quantitative way to judge how good a fund is at
present. Therefore, there is a need to correctly assess the past performance of
different mutual funds.
Worldwide, good mutual fund companies over are known by their AMCs
and this fame is directly linked to their superior stock selection skills. For
mutual funds to grow, AMCs must be held accountable for their selection of
stocks. In other words, there must be some performance indicator that will
reveal the quality of stock selection of various AMCs.
Return alone should not be considered as the basis of measurement of the
performance of a mutual fund scheme, it should also include the risk taken by
the fund manager because different funds will have different levels of risk
attached to them. Risk associated with a fund, in general, can be defined as
variability or fluctuations in the returns generated by it. The higher the
fluctuations in the returns of a fund during a given period, higher will be the risk
associated with it. These fluctuations in the returns generated by a fund are
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resultant of two guiding forces. First, general market fluctuations, which affect
all the securities present in the market, called market risk or systematic risk and
second, fluctuations due to specific securities present in the portfolio of the
fund, called unsystematic risk. The Total Risk of a given fund is sum of these
two and is measured in terms of standard deviation of returns of the fund.
Systematic risk, on the other hand, is measured in terms of Beta, which
represents fluctuations in the NAV of the fund vis--vis market. The more
responsive the NAV of a mutual fund is to the changes in the market; higher
will be its beta. Beta is calculated by relating the returns on a mutual fund with
the returns in the market. While unsystematic risk can be diversified through
investments in a number of instruments, systematic risk can not. By using the
risk return relationship, we try to assess the competitive strength of the mutual
funds vis--vis one another in a better way.
In order to determine the risk-adjusted returns of investment portfolios,
several eminent authors have worked since 1960s to develop composite
performance indices to evaluate a portfolio by comparing alternative portfolios
within a particular risk class.
The most important and widely used measures of performance are:
Arithmetic Mean
Standard Deviation
Beta
The Sharpe Measure
The Treynor Measure
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Jenson Model
4.1. Arithmetic Mean (Returns)
Y/N
Where Y- Return of NAV values N- Number of Observation
Average return that can be expected from investment. The arithmetic
average return is appropriate as a measure of the central tendency of a number
of returns calculated for a particular time i.e. for one year.
4.2. Standard Deviation
It reflects the degree to which returns fluctuate around their average. The
higher the standard deviation, the greater is the risk. The measure is typically
calculated using monthly results which are generally disclosed by Fund houses
in their fund updates. A conservative equity fund might have a number below
3.5% per month, whereas an extremely aggressive one could have a value of 6%
or more. About two thirds of the time a funds actual monthly return will range
within plus or minus one standard deviation of its monthly average. Its return
will vary within the two standard deviations about 95 % of the time.
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With the S&P 500 Fund B, the investor would be acquiring a largeramount of volatility risk than necessary to achieve the same returns as
Fund A. Fund A would provide the investor with the optimal risk/return
relationship
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The standard deviation is a measure of the variables around its mean or it
is the square root of the sum of the squared deviations from the mean
divided by the number of observations.
4.3. BETA
Beta describes the relationship between the stocks return and index
returns. There can be direct or indirect relation between stocks return and
index return. Indirect relations are very rare.
Beta= {N*XY- (X) (Y)} / { N(X) * (x)2}
Where
N- No of observation X- Total of market index return value Y- Total
of return to Nav
1) Beta = + 1.0
It indicates that one percent change in market index return
causes exactly one percent change in the stock return. It indicates that
stock moves along with the market.
2) Beta= + 0.5
One percent changes in the market index return causes 0.5
percent change in the stock return. It indicates that it is less volatile
compared to market.
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3) Beta= + 2.0
One percent change in the market index return causes 2 percent
change in the stock return. The stock return is more volatile. The
stocks with more than 1 beta value are considered to be very risky.
4) Negative beta value indicates that the stocks return move in opposite
direction to the market return.
4.4. The Sharpe Measure:
In this model, performance of a fund is evaluated on the basis of Sharpe
Ratio, which is a ratio of returns generated by the fund over and above risk free
rate of return and the total risk associated with it. According to Sharpe, it is the
total risk of the fund that the investors are concerned about. So, the model
evaluates funds on the basis of reward per unit of total risk. Symbolically, it can
be written as :
St= Rp Rf
S.D
WHERE
Rp Avereage Return on Portfolio(fund) RfRisk Free Rate of Interest
S.D- Standard Deviation
Higher the value of sharpe ratio better the fund has performed.
Sharpe ratio can be used to rank the desirability of funds or portfolios. The
fund that has performed well comapred to other will be ranked first then the
others.
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4.5. The Treynor Measure:
Developed by Jack Treynor, this performance measure evaluates
funds on the basis of Treynor's Index. This Index is a ratio of return
generated by the fund over and above risk free rate of return (generally
taken to be the return on securities backed by the government, as there is
no credit risk associated), during a given period and systematic risk
associated with it (beta).
Ty= Rp Rf
B
WHERE
Rp- Average Return to Portfolio Rf- Risk Less Rate of Interest. B-
Beta Coeffecient
While a high and positive Treynor's Index shows a superior
risk-adjusted performance of a fund, a low and negative Treynor'sIndex is an indication of unfavorable performance.
4.6. The Jenson Model:
Jenson's model proposes another risk adjusted performance measure.
This measure was developed by Michael Jenson and is sometimes referred
to as the Differential Return Method. This measure involves evaluation of
the returns that the fund has generated vs. the returns actually expected out
of the fund given the level of its systematic risk. The surplus between the
two returns is called Alpha, which measures the performance of a fund
compared with the actual returns over the period. Required return of a fund
at agiven level of risk (Bi) can be calculated as:
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Ri = Rf + Bi (Rm - Rf)
Where, Rm is average market return during the given period. After
calculating it, alpha can be obtained by subtracting required return from the
actual return of the fund.
Higher alpha represents superior performance of the fund and vice
versa. Limitation of this model is that it considers only systematic risk not
the entire risk associated with the fund and an ordinary investor can not
mitigate unsystematic risk, as his knowledge of market is primitive.
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5. Fund Analysis:
5.1. QUARTERLY COMPARISIONS
Average Returns of the Index Fund Schemes
Quarter-1
Quarter-2
Quarter-3
Quarter-4
Total
CNX
NIFTY
63.97 26.6 4.7 1.07 96.34
Indiainfo line
36.22 16.97 2.51 0.41 56.11
HDFC 36.55 16.13 2.44 0.16 55.28ING 35.78 15.15 3 -0.16 53.7
7JM 30.87 14.63 -1.33 0.16 44.3
3LIC 34.84 14.61 2.62 0.71 52.7
8Tata 35.7 16.74 2.78 0.25 55.4
7UTI 35.79 25.54 2.44 5.3 69.07
QUARTER 1: HDFC has shown good returns when compared to
other funds. FRANKLIN, UTI, TATA and ING also had the same
returns.
QUARTER 2: UTI has shown the same returns of the index whencompared to other funds. All the remaining schemes have
almost the same returns.
QUARTER 3: ING has shown good returns when compared to
other funds. All other funds except JM had similar returns.
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QUARTER 4: UTI has outperformed the INDEX and had given the
best returns when compared to other funds. All other funds
have similar returns.
Quarter 1 FY2009-2010
Std.Dev
-value
SharpeRatio
Trenyor'sRatio
jensen
RSquare
Rank(Trenyo)
Rank(Sharpe)
Indiainfoline
3.10692
0.996
0.1113
0.451 0.14095
0.9998
2 4
HDFC
3.04529
0.975
0.1147
0.4503 0.14139
0.6308
3 2
ING 3.05015
0.9778
0.1119
0.3493 0.00176
0.9991
4 3
JM 3.04395
1.0628
0.171 0.4899 0.0447
0.9749
1 1
LIC 3.020 0.96 0.109 0.3431 - 0.998 7 7
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34 80 9 0.0085
5
Tata 3.08945
0.790
0.1103
0.3439 -0.007
60
0.9996
6 6
UTI 3.09253
0.9917
0.1104
0.3445 -0.006
67
0.9996
5 5
Standard Deviation: The value of the Standard deviation
increases due to increase in volatility of the fund. The Standard
deviation of all the schemes is almost the same which indicates
that the schemes are efficient. Hence in this quarter we can say
that all the schemes are equally good for investing in the view
of volatility.
Beta: Beta indicates the risk of the company for investment
point of view. Higher the beta higher the risk and expect higher
returns. Low beta values indicates low risk. The standard beta
value is 1. All the schemes except TATA has Beta value of
nearly 1. So, in the view of Beta TATA is not a good investment
option.
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Sharpe, Treynor and Jenson: Based on these performance
measures, JM ,HDFC and Franklin are the best three investment
options available.
Recommendation: HDFC being topped in all the aspects
including returns it is the best investment option available.
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Quarter 2 FY2009-2010
Standard Deviation: The Standard deviation of all the
schemes is almost the same except Franklin which indicates
that the schemes are efficient. Hence in this quarter we can say
that all the schemes are equally good for investing except
Franklin in the view of volatility.
Beta: All the schemes have Beta value of nearly 1. So, in the
view of Beta all are equally good investment options.
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Std.Dev
-value
Sharpe
Ratio
Trenyor's
Ratio
jensen RSquar
e
Rank(Tren
yo)
Rank(Shar
pe)Indiainfoline
3.106923
0.99641
0.111377
0.45103
0.140954
0.999811
1 2
HDFC
1.658094
0.952909
0.087502
0.152257
0.00177
0.998429
4 4
ING 1.660124
0.953163
0.081484
0.14192
-0.0018
5
0.99652
5 5
JM 1.753963 1.003864 0.074175 0.1296 -0.03475
0.990243 7 7
LIC 1.71666
0.979645
0.075651
0.132565
-0.0267
5
0.995625
6 6
Tata 1.705922
0.980864
0.088607
0.154105
0.004419
0.999383
3 3
UTI 1.7264
07
0.9928
93
0.1385
37
0.2408
83
0.1411
2
0.9998
87
2 1
-
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Sharpe, Treynor and Jenson: Based on these performance
measures, Franklin, TATA, and UTI are the best three
investment options available.
Recommendation: UTI being topped in all the aspects
including returns it is the best investment option available.
Quarter 3 FY2009-2010
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Std.Dev
-value
SharpeRatio
Trenyor'sRatio
jensen RSquare
Rank(Trenyo)
Rank(Sharpe)
Indiainfo
line
1.2887037
0.994008
0.006907
0.008955
-0.0034
7
0.999836
5 5
HDFC
1.6580938
0.952909
0.087502
0.152257
0.001770
0.998429
1 1
ING 1.2074274
0.924516
0.011412
0.014905
0.00619
0.985285
2 2
JM 1.2903708
0.946436
-0.0229
0
-0.0312
3
-0.0679
3
0.904084
7 7
LIC 1.29105
17
0.9958
05
0.0077
61
0.0100
63
-
0.00237
0.9998
08
4 4
Tata 1.2708543
0.980028
0.009119
0.011826
0.00077
0.999403
3 3
UTI 1.2905809
0.995476
0.006316
0.008189
-0.0055
0.999877
6 6
-
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Standard Deviation: The Standard deviation of all the
schemes is almost the same which indicates that the schemes
are efficient. Hence in this quarter we can say that all the
schemes are equally good for investing in the view of volatility.
Beta: All the schemes have Beta value of nearly 1. So, in the
view of Beta all are equally good investment options.
Sharpe, Treynor and Jenson: Based on these performance
measures HDFC, ING and TATA are the best three investment
options available.
Recommendation: ING being topped in all the aspects
including returns it is the best investment option available.
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Quarter 4 FY2009-2010
Standard Deviation: The Standard deviation of all the
schemes is almost the same except JM which indicates that the
schemes are efficient. Hence in this quarter we can say that all
the schemes are equally good for investing in the view of
volatility.
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Std.De
v
-
value
Sharp
eRatio
Treny
or'sRatio
jensen R
Square
Rank
(Trenyo)
Rank
(Sharpe)Indiainfoline
1.006663
0.955992
-0.0120
6
-0.0127 -0.0038
7
0.941576
4 4
HDFC
0.995397
0.944789
-0.0146
6
-0.0154
4
-0.0081
6
0.940571
6 6
ING 0.946953 0.892214 -0.0189 -0.02006
-0.01415
0.926822 7 7
JM 0.899322
0.844245
0.000826
0.00088
0.01772
0.920072
2 2
LIC 1.041194
0.965438
-0.0087
8
-0.0094
7
0.001017
0.941139
3 3
Tata 1.0062
83
0.9556
23
-
0.01362
-
0.01434
-
0.00658
0.9415
61
5 5
UTI 1.005477
0.958442
0.036634
0.038432
0.080579
0.948642
1 1
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Beta: All the schemes have Beta value of nearly 1 except JM.
So, in the view of Beta all are equally good investment options
except JM.
Sharpe, Treynor and Jenson: Based on these performance
measures UTI, JM and LIC are the best three investment options
available.
Recommendation: UTI being topped in all the aspects
including returns (outperformed INDEX) it is the best
investment option available.
Fund Reliance Banking Fund
Table No 1: Calculation of Return on Fund a