evaluation of mutual fundportfolio @ sbi project report mba finance

“ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION

ABBREVIATIONS USED IN THE STUDY

NAV—Net Asset Value

AMC- Asset Management Company

SEBI- Security Exchange Board of India

AMFI- Association of Mutual Funds in India

UTI- Unit Trust of India

MF- Mutual Fund

ELSS- Equity Linked Saving Scheme

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EXECUTIVE SUMMERY

Mutual Funds over the years have gained immensely in their popularity. Apart from the

many advantages that investing in mutual funds provide like diversification,

professional management, the ease of investment process has proved to be a major

enabling factor. However, with the introduction of innovative products, the world of

mutual funds nowadays has a lot to offer to its investors. With the introduction of

diverse options, investors needs to choose a mutual fund that meets his risk acceptance

and his risk capacity levels and has similar investment objectives as the investor.

With the plethora of schemes available in the Indian markets, an investors needs to

evaluate and consider various factors before making an investment decision. Hence an

investor must infer the fact sheets of the various scheme to asses the portfolio

management style of the fund manager. Mutual funds provide risk diversification:

diversification of a portfolio is amongst the primary tenets of portfolio structuring, and a

necessary one to reduce the level of risk assumed by the portfolio holder. Mutual funds

represent one such option. So it is always safe for investor to invest their hard earned

money in those schemes which have invested in stock of divers sectors with potential to

earn higher returns.

So this project is carried to understand the science of portfolio management that mutual

fund apply to trade off with risk and maximize return. It becomes very difficult for

investor to make decision as where to invest his hard earned money and in which stream

of investment will reap optimal appreciation of money invested for the period. By

analyzing the fact sheets of the Asset Management Company we can auspicate the best

fund scheme to invest. There are many research institutes, which provide updated

information of all the schemes that are available and the trend in the Mutual Fund

industry. All that we need is to read between the lines and make sense of befuddling

information, and acquire knowledge related to investment and comprehend finance

terminology.

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Though still at a nascent stage, Indian MF industry offers a plethora of schemes and

serves broadly all type of investors. The range of products includes equity funds, debt,

liquid, gilt and balanced funds. India offers biggest opportunity for asset management

companies

The next five years will see the Indian asset management business grow at least 33

percent annually. The main drivers of this will be the retail segment, expected to grow

at 36 percent annually, and the institutional investor segment, expected to grow at 29

percent annually. This will take the total assets under management (AUM) to $440

billion, as per study by McKinsey, a consultancy firm.

In India, asset management business is in emerging phase. One reason why it also has

the fastest growth rate though still behind Russia and China. The business has grown 47

percent annually since 2003, taking the total AUM in India today to $92 billion. It grew

97 percent and 67 percent in Russia and China, respectively.

Investment in mutual funds is still low in India, by both the retail and institutional

categories. AUM as a percentage of GDP works out to only 8 percent here, compared

with 79 percent in the US, and 39 percent in Brazil. AUM as a percentage of bank

deposits is also abysmally low in India, at 25 percent, while it is 140 percent in the US

and 96 percent in Brazil.

The business is very profitable in India, with operating profits at 32 bps as a percentage

of average AUM. In developed markets, this ratio is very low: it is 18 bps in the US and

12 bps in the UK

Moreover, the setup of a legal structure, which has enough teeth to safeguard investors’

interest, ensures that the investors are not cheated out of their hard-earned money. All in

all, benefits provided by them cut across the boundaries of investor category and thus

create for them, a universal appeal.

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The project has been under taken at SBI- MUTUAL FUND HUBLI. The focus of study

is to evaluate the portfolio performance of the funds. In this report an attempt is made

to evaluate the performance of three growth-oriented mutual funds on the basis of

monthly returns compared to benchmark returns for the period of 3 years. For this

purpose, risk adjusted performance measures suggested by Jenson, Treynor and Sharpe

are employed.

I have chosen three Growth schemes having highest asset under management as fund

with huge asset basis can diversify risk by deploying assets in various investment

vehicle.

The schemes I have chosen for study are

MAGNUM CONTRA FUND

MAGNUM GLOBAL FUND

MAGNUM TAX GAIN SCHEME

The rationale behind choosing these three different schemes (one is equity scheme,

other one is diversified scheme and one more is tax scheme) is that these three are the

top performing schemes of SBI MF. And has highest Asset Under Management So to

know as to weather the risk and return associated with these schemes are high as they

are one of the best schemes or it is vice versa.

The schemes are compared with the Benchmark BSE 100 index. Three years

values have been taken into consideration for calculation. The past performance is not

an indicative for the future growth .No AMC can guarantee for any return.

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DESIGN OF THE STUDY

TITLE OF THE PROJECT

“ MUTUAL FUNDPORTFOLIO PERFORMANCE

EVALUATION

OBJECTIVES

Objective

To Evaluate portfolio performance of mutual fund scheme with its

respective benchmark

Sub objectives

Elaborate rationalism of investment

Comprehensive study of mutual fund industry

Inquisition of SBI Mutual Fund and its schemes

SCOPE OF THE STUDY

The study was conducted on only SBI Mutual fund schemes.

The study was conducted on three schemes of SBI

The study focuses on portfolio management strategy applied with respect to 3 schemes of SBI Mutual Fund.

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The study covers the period from January 2005 to Dec 2007.

METHODOLOGY OF DATA COLLECTION

SOURCES OF DATA PRIMARY DATA

Discussion with the company managers regarding the schemes nature, their performance, and risk associated with these schemes and the return that these schemes are generating.

SECONDARY DATA

Internet sources

Materials provided by the company

Business magazines

CONCEPTUAL DESIGN Sample unit: schemes of SBI mutual fund Sample size: 5 years NAV and market index values

Conclusion

The schemes taken for study proved to be a good investment avenue for all the

investors as the risk associated with these schemes are low and they are yielding a

very good return. it should be considered for Long-term investment plan.

The volatility in the market might have affected the returns of the schemes

for short period like 6 months or one year, but the performance of the schemes

for 3 years and above proves to be consistent. The schemes have been the one of

the best schemes of SBI MF and hence have bagged many awards.

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COMPANY PROFILE

STATE BANK OF INDIA - MUTUAL FUND A partner for life.

SBI Funds Management Ltd. is the investment manager of SBI Mutual Fund. SBI

Mutual Fund has been constituted as a trust, sponsored by State Bank India.

Today the Fund has an investor base of over 2.8 million spread over 23 schemes.

With a large network of collecting branches and investor service centers, SBI

Mutual Fund constantly endeavors to get closer to its growing family of investors.

SBI is the largest public sector Bank in India with 8,836 branches all over India.

SBI is the leader in providing loans to trade & industry. It also provides related

services, which generate significant fee-based income. It has also identified

project finance and consumer banking as key areas.

Currently the SBI Mutual Fund offers 64 schemes in with different investment

objective and needs, as follows.

No. of schemes 64

No. of schemes including options 177

Equity Schemes 36

Debt Schemes 115

Short term debt Schemes 11

Equity & Debt 3

Money Market 0

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Gilt Fund 12

Corpus under management

Rs.29492.9685 Crs. as on Feb 29, 2008

SBI Mutual fund is India’s largest bank sponsored mutual fund and has an

enviable track record in judicious investments and consistent wealth creation.

The fund traces its lineage to SBI- India’s largest banking enterprise. The

institution has grown immensely since its inception and today it is India’s largest

bank patronized by over 80% of the top corporate houses of the country.

SBI Funds Management Pvt. Ltd – Investment Managers for SBI Mutual

Fund, one of the largest mutual funds in the country . SBI- Mutual fund is a joint

venture between Societe-Generale Asset Management, one of the world’s leading

fund management companies that manage over 330 U.S.$ billion worldwide.

Started in July 1987, the fund has launched 67 schemes and successfully

redeemed 15 schemes. In the process, it has rewarded its investors handsomely

with consistently high returns. A total of over 3.5 million investors have reposed

their faith in the wealth generation expertise of the mutual fund. Schemes of the

mutual fund have consistently outperformed benchmarks indices and have

emerged as the preferred investment for the millions of investors and HNI’s

Today the fund manages Rs.29492.9685 Crs. as on Feb 29, 2008 of assets and

has diversified profile of investors actively parking their investments across 37

active schemes. The fund serves this vast family of investors by reaching out to

them through network of 100 collection branches, 26 investor service centers, 28

investor service desks, and 52 district organizers.

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SBI- Mutual fund is the first bank sponsored fund to launch an off-shore fund

called Resurgent India Opportunity Fund Growth through innovation and stable

investment policies is the SBI-mutual fund credo

FUND-HOUSE EXPERTISE

The investment environment is becoming increasingly complex. Innumerable

parameter need to be factored in to generate a clear understanding of market

movement and performance in the near and long term future.

At SBI- mutual fund the team donates considerable resources to gain,

maintain and sustain the profitable insights in to market movements. The team

consistently pushes the envelope to ensure our investors get the maximum

benefits year after year.

RESEARCH- THE BACKBONE OF SBI MF SUCESSFUL PERFORMANCE

Our expert and experienced and market savvy researchers prepare

comprehensive analytical and informative reports on diverse sectors and identify

stocks that promise high performance in the future.

This team works in tandem with a compliance and risk-monitoring

department, which insures minimization of operational while protecting the

interest of investors.

The fund house has an experienced team of fund managers and analyst who

continuously monitor market movements to identify stocks that promise high

performance in the future. This team works in tandem with a compliance and risk-

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monitoring department, which ensures minimization of operational risks while

protecting the interests of the investors. The outcome of this is that the schemes

continue to deliver consistent returns to investors and outperform benchmark

indices.

KEY PERSONNEL OF SBI MUTUAL FUND

Mr. Syed Shahabuddin Managing Director

Mr. C A Santosh Chief Manager - Customer Service.

Mr. Didier Turpin Dy. Chief Executive Officer

Ms.Aparna Nirgude Chief Risk Officer

Mr. Achal K. Gupta Chief Operating Officer

Mr. Ashutosh P Vaidya Company Secretary & Compliance Officer

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Mr. Sanjay Sinha Chief Investment Officer

Mr. Parijat Agrawal Head – Fixed Income

Mr. R. S. Srinivas Jain Chief Marketing Officer

THE FUND MANAGERS

Quote by Managing Director

Mr. Syed Shahabuddin, Managing Director and CEO, SBI Mutual Fund said: “We

at SBI Mutual Fund endeavor to provide efficient and prompt service to our

investors and cater to their investment and servicing needs.

Chief Investment Officer:

Sanjay Sinha

Mr. Sanjay Sinha has taken over as Chief Investment Officer with effect from

June 1, 2007. Mr. Sinha joined SBI Mutual Fund as the Head of Equities in

November 2005 and has managed the largest number of funds in SBI MF covering

the entire spectrum of equity funds – from index funds, diversified equity funds to

sector funds.

He has over 18 years of experience in the Mutual Fund Industry. Prior to joining

SBI MF, Mr. Sinha worked as Senior Fund Manager with UTI Mutual Fund and

was managing a corpus of over Rs 28 billion (over US$600 million). A Post

Graduate from IIM Kolkatta, Mr. Sanjay Sinha has a rich experience in managing

funds.

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Head Portfolio Management Services / Fund Manager :

Nipa Ladiwala

After obtaining a post graduate degree in Business Management and Law, Nipa

worked as an equity analyst, and dealer for the offshore Funds of UTI.

Subsequently she was appointed as Fund Manager for India Growth Fund, which

was listed on NYSE. She was head of Research at UTI Securities before joining

SBIMF as Head of PMS. Nipa has 6 years experience as Fund Manager. She has a

total of 15 years experience and has been with SBI Funds Management Pvt Ltd

since October 2005.

Debt / Fixed Income :

Parijat Agrawal (Head – Fixed Income)

Parijat has done his B.E (ECE) and PGDM (IIM Bangalore). He has got 12 years experience in capital markets in areas like research, dealing and fund management. Parijat is associated with SBI Funds Management Pvt. Ltd. since July 2006.

Prior to joining SBI Funds Management Pvt. Ltd., he was with State Bank of Mauritius Limited, Mumbai as Head – Treasury.

Ganti N Murthy (Asst. Vice President & Fund Manager)

Mr. Murthy did his B.Sc (Hons) from Osmania University and his Masters in

Financial Management from Jamnalal Bajaj Institute of Management Studies,

Mumbai. He has over 12 years experience in the Mutual Fund Industry, 9 years in

Unit Trust of India and 3 years in Cholamandalam AMC Ltd. Prior to joining SBI

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Funds Management Pvt. Ltd., he was with Cholamandalam Mutual Fund as Fund

Manager – Debt.

Offshore Funds - Fund Manager :

Anand Gupta

Anand holds charter from CFA Institute, USA and Institute of Chartered

Accountants of India. Before joining SBI Funds Management in October 2005,

Anand has worked with HSBC securities and domestic brokerage house as equity

research analyst for 3 years. Anand has 5 years of experience in capital markets

and 3 years of experience in Audit & Business consulting.

Investment Team (Equity) :

Aashish Wakankar (Vice President & Fund Manager)

Aashish Wakankar is a Bachelor of Science from University of Mumbai and holds

Post Graduate Diploma in Management Studies from Jamnalal Bajaj Institute of

Management Studies, University of Mumbai. He has more than 12 years of

experience in capital markets ranging from institutional equities, equity research

and fund management. He is associated with SBI Funds Management from

December 2005.

Prior to joining SBI Funds Management, he has worked with Kotak Mahindra

Asset Management, Deutsche Asset Management - part of Deutsche Bank Group,

and TATA TD Waterhouse Securities - a joint venture between the TATA Group,

India and TD Bank Financial Group, Canada. At Deutsche Asset Management, he

was responsible for advising the offshore fund Deutsche India Equity Fund, Japan

and MetLife Insurance.

Pankaj Gupta – Fund Manager

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Pankaj has done his B.Com (Hons), PGDBM, C.S and PGDBM IIM – Lucknow.

He has experience of over 4 years in Mutual Fund, Equity Research and Corporate

Banking. His last assignment was ICICI Bank Ltd. and has been with SBI Funds

Management Pvt. Ltd. since December 2005.

Jayesh Shroff – Fund Manager

Jayesh has done his B.Com and PGD (MBFS) – ICFAI. He has experience of over

5 years as Fund Manager. He also has wide experience in investment banking

activities including M&A activities, venture capital funding, preparation of

business plans, project reports etc. His last assignment was with BOB Mutual

Fund and has been with SBI Funds Management Pvt. Ltd. since March 2006.

Vivek Pandey – Fund Manager

Vivek is a Science graduate and has done his CFA from ICFAI. He has about 7

years of experience in the industry. He is currently placed in Investment

Department as a Junior Fund Manager since June 2007.

Investment Team (Debt) :

Killol Pandya - Fund Manager

Killol has done his B.Com, DPCM and MMS (Finance). He has over 7 years of

experience in debt trading. His last assignment was with IL&FS Investmart India

and has been with SBI Funds Management Pvt. Ltd. since June

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PRODUCTS OF SBI MUTUAL FUNDS

Equity Schemes

The investments of these schemes will predominantly be in the stock markets and

endeavor will be to provide investors the opportunity to benefit from the higher

returns which stock markets can provide. However they are also exposed to the

volatility and attendant risks of stock markets and hence should be chosen only by

such investors who have high risk taking capacities and are willing to think long

term. Equity Funds include diversified Equity Funds, Sectoral Funds and Index

Funds. Diversified Equity Funds invest in various stocks across different sectors

while sectoral funds which are specialized Equity Funds restrict their investments

only to shares of a particular sector and hence, are riskier than Diversified Equity

Funds. Index Funds invest passively only in the stocks of a particular index and

the performance of such funds move with the movements of the index.

Magnum COMMA Fund Magnum Equity Fund

Magnum Global Fund

Magnum Index Fund

Magnum MidCap Fund

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Magnum Multicap Fund

Magnum Multiplier Plus 1993

Magnum Sector Funds Umbrella

MSFU - FMCG Fund

MSFU - Emerging Businesses Fund

MSFU - IT Fund

MSFU - Pharma Fund

MSFU - Contra Fund

SBI Arbitrage Opportunities Fund

SBI Blue chip Fund

SBI Infrastructure Fund - Series I

SBI Magnum Taxgain Scheme 1993

SBI ONE India Fund

SBI TAX ADVANTAGE FUND - SERIES

Debt Fund Schemes

Debt Funds invest only in debt instruments such as Corporate Bonds, Government

Securities and Money Market instruments either completely avoiding any

investments in the stock markets as in Income Funds or Gilt Funds or having a

small exposure to equities as in Monthly Income Plans or Children's Plan. Hence

they are safer than equity funds. At the same time the expected returns from debt

funds would be lower. Such investments are advisable for the risk-averse investor

and as a part of the investment portfolio for other investors.

Magnum Children’s Benefit Plan

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Magnum Gilt Fund

Magnum Gilt Fund (Long Term)

Magnum Gilt Fund (Short Term)

Magnum Income Fund

Magnum Income Plus Fund

Magnum Income Plus Fund (Saving Plan)

Magnum Income Plus Fund (Investment Plan)

Magnum Insta Cash Fund

Magnum Insta Cash Fund -Liquid Floater Plan

Magnum Institutional Income Fund

Magnum Monthly Income Plan

Magnum Monthly Income Plan Floater

Magnum NRI Investment Fund

SBI Capital Protection Oriented Fund - Series I

SBI Debt Fund Series

SDFS 15 Months Fund

SDFS 90 Days Fund

SDFS 13 Months Fund

SDFS 18 Months Fund

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SDFS 24 Months Fund

SDFS 30 DAYS

SDFS 30 DAYS

SDFS 60 Days Fund

SDFS 180 Days Fund

SDFS 30 DAYS

SBI Premier Liquid Fund

SBI Short Horizon Fund

SBI Short Horizon Fund - Liquid Plus Fund

SBI Short Horizon Fund - Short Term Fund

Balanced Schemes..

Magnum Balanced Fund invest in a mix of equity and debt investments. Hence

they are less risky than equity funds, but at the same time provide

commensurately lower returns. They provide a good investment opportunity to

investors who do not wish to be completely exposed to equity markets, but is

looking for higher returns than those provided by debt funds.

Magnum Balanced Fund

Magnum NRI Investment Fund - FlexiAsset Plan

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AWARDS AND ACHIEVEMENTS

SBI- MUTUAL FUND has been performing excellently since its inception. The fund house expertise and excellent performance is frequently recognized by the mutual fund industry. SBI Mutual Fund (SBIMF) has been the proud recipient of the ICRA Online Award - 8 times, CNBC TV - 18 Crisil Award 2006 - 4 Awards, The Lipper Award (Year 2005-2006) and most recently with the CNBC TV - 18 Crisil Mutual Fund of the Year Award 2007 and 5 Awards for our schemes.

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HISTORY OF MUTUAL FUNDS :

When three Boston securities executives pooled their money together in 1924 to create

the first mutual fund, they had no idea how popular mutual funds would become.

The idea of pooling money together for investing purposes started in Europe

in the mid-1800s. The first pooled fund in the U.S. was created in 1893 for the

faculty and staff of Harvard University. On March 21st, 1924 the first official

mutual fund was born. It was called the Massachusetts Investors Trust.

After one year, the Massachusetts Investors Trust grew from $50,000 in

assets in 1924 to $392,000 in assets (with around 200 shareholders). In

contrast, there are over 10,000 mutual funds in the U.S. today totaling around

$7 trillion (with approximately 83 million individual investors) according to

the Investment Company Institute.

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The stock market crash of 1929 slowed the growth of mutual funds. In

response to the stock market crash, Congress passed the Securities Act of

1933 and the Securities Exchange Act of 1934. These laws require that a fund

be registered with the SEC and provide prospective investors with a

prospectus. The SEC (U.S. Securities and Exchange Commission) helped

create the Investment Company Act of 1940, which provides the guidelines

that all funds must comply with today.

With renewed confidence in the stock market, mutual funds began to blossom.

By the end of the 1960s there were around 270 funds with $48 billion in

assets.

INCEPTION OF MUTUAL FUND IN INDIA:

Mutual funds made an opening in India in 1963 under the enactment f Unit Trust of

India (UTI), which came out with is debut scheme named US-64, an open ended

scheme n, which is operating till date. Up to 1986-87 it had launched 20 schemes,

mobilizing net resources amounting to Rs. 4564 crores. for these 23 long years up to

1987 UTI enjoyed complete monopoly of the unit trust business in India. It remained

one and the only mutual fund in India.

It was in 1986 that the government of India amended banking regulation act

and allowed commercial banks in public sector to set up mutual funds. This lead to

promotion of ‘SBI-MUTUAL FUND’ by State Bank Of India (SBI) in July 1987

followed by

Canara Bank

Indian bank

Bank of India

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Bank of Baroda

Punjab National bank

The government of India further granted permission to Insurance Corporation to public

sector to float mutual funds. The following were the corporations,

Life Insurance Corporation

General Insurance of Corporation

This was the picture till 1991, but when in 1991 the government of India followed a

policy of liberalization, privatization, and globalization it opened the gates to private

sector to launch mutual funds.

The History of Indian mutual fund industry can be broadly classified in to

The four phases:

Phase 1— July 1964 to November 1987

Phase 1— November 1987- October 1993

Phase 3--- October 1993- February 2003

Phase 4-- since February 2003

First Phase – 1964-87 monopoly of UTI

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It

was set up by the Reserve Bank of India and functioned under the Regulatory and

administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from

the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory

and administrative control in place of RBI. The first scheme launched by UTI was Unit

Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under

management.

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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 Can bank Mutual Fund (Dec 87), Punjab National

Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun

90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June

1989 while GIC had set up its mutual fund in December 1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian

mutual fund industry, giving the Indian investors a wider choice of fund families. Also,

1993 was the year in which the first Mutual Fund Regulations came into being, under

which all mutual funds, except UTI were to be registered and governed. The erstwhile

Kothari Pioneer (now merged with Franklin Templeton) was the first private

sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more

comprehensive and revised Mutual Fund Regulations in 1996. The industry now

functions under the SEBI (Mutual Fund) Regulations 1996.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI

was bifurcated into two separate entities. One is the Specified Undertaking of the Unit

Trust of India with assets under management of Rs.29,835 crores as at the end of

January 2003, representing broadly, the assets of US 64 scheme, assured return and

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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, the mutual fund industry has entered

its current phase of consolidation and growth. As at the end of September, 2004, there

were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

Introduction to Mutual Funds

Mutual Funds - The Concept

A Mutual Fund is a trust that pools the savings of a number of investors who share a

common financial goal. The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities. The income earned through

these investments and the capital appreciations realized are shared by its unit holders in

proportion to the number of units owned by them. Thus a Mutual Fund is the most

suitable investment for the common man as it offers an opportunity to invest in a

diversified, professionally managed basket of securities at a relatively low cost. The

flow chart below describes broadly the working of a mutual fund

The following simple diagram clearly shows the working of a mutual fund:

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Mutual fund as an investment company combines or collects money of its shareholders and invests those funds in variety of stocks, bonds, and money market instruments. The latter include securities, commercial papers, certificates of deposits, etc. Mutual funds provide the investor with professional management of funds and diversification of investment.

Investors who invest in mutual funds are provided with units to participate in stock

markets. These units are investment vehicle that provide a means of participation in the

stock market for people who have neither the time, nor the money, nor perhaps the

expertise to undertake the direct investment in equities. On the other hand they also

provide a route into specialist markets where direct investment often demands both

more time and more knowledge than an investor may possess.

The price of units in any mutual fund is governed by the value of underlying

securities. The value of an investor’s holding in a unit can therefore, like an investment

in share, can go down as well as up. Hence it is said that mutual funds are subjected to

market risk. Mutual fund cannot guarantee a fixed rate of return. It depends on the

market condition. If the particular scheme is performing well than more return can be

expected. It also depends on the fund manager expertise knowledge. It is also seen that

people invest in particular funds depending on who the fund manager is

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WHY TO INVEST IN MUTUAL FUNDS:

A proven principle of sound investment is –do not put all eggs in one

basket. Investment in mutual funds is beneficial due to following reasons.

They help in pooling of funds and investing in large basket of shares of

different companies. Thus by investing in diverse companies, mutual funds

can protect against unexpected fall in value of investment.

An average investor does not have enough time and resources to develop

professional attitude towards their investment. Here professional fund

managers engaged by mutual funds take desirable investment decision on

behalf of investors so as to make better utilization of resources.

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Investment in mutual funds is comparatively more liquid because investor

can sell the units in open market or can approach mutual fund to repurchase

the units at net asset value depending upon the type of scheme.

Investors can avail tax rebates by investing in different tax saving schemes

floated by these funds, approved by the government.

Operating cost is minimized per head because of large size of investiable

funds, there by realizing more net income of investors.

Instruments where Mutual funds deploy funds

1. Equity

Equity represents the shares of a company. Mutual funds are entitled to

dividends, rights and bonuses declared by the companies apart from the benefit of

capital appreciation resulting from appreciation resulting from appreciation in the

market value of the held shares. This is definitely reflected in the appreciation of the net

asset value of the mutual fund units. The disadvantage of investing in equity is the

highly volatile nature of the Indian capital markets leading to sudden changes in the

prices of the shares.

2 Convertible Debentures

These are bonds issued by companies that automatically get converted into equity

shares on a pre-determined date. From that date onwards the so converted shares have

the same benefits and risks that normal equity shares have.

3. Fixed Income Securities.

Mutual funds invest a part of their funds in fixed income securities like debentures

or Bonds or Gilts. The underlying idea is to have some fixed return to safeguard and

meet the recurring expenses and to pay at least some dividend to the investors. Bonds or

debentures are instruments issued by public or private limited companies, having a

fixed rate of interest payable on a fixed date every year. Gilts are also similar

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instruments but the only difference is that they are issued by the Government and are

hence considered as the safest investment.

4. Money Market Instruments

Money market instruments are instruments that are issued /invested in for a short

term ranging from a few days to a few months. In spite of the fact the yield from such

instruments is very low, mutual funds (especially open-ended) invest a part of their

funds in money market instruments to maintain adequate liquidity to meet short term /

sudden requirements like repurchase. Some of the money market instruments are

commercial paper, Treasury Bills, Bills of exchange and Call Money.

In nutshell, mutual funds act as financial intermediaries by building a liaison between

financial market and small investors. Mutual funds are financial intermediaries as they

pool down small savings of scattered investors and invest in to securities in capital

market and earn income over it. The earning is distributed in the shape of return on

investment to investors who again save a part of it and reinvest through mutual funds.

Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.

Overview of existing schemes existed in mutual fund category:

BY STRUCTURE

1. Open - Ended Schemes:

An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

2. Close - Ended Schemes:

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A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. 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 they are listed. In order to provide an exit route to the investors, some close-ended 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.

3. Interval Schemes:

Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

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Overview of existing schemes existed in mutual fund category:

BY NATURE

1. Equity fund:

These funds invest a maximum part of their corpus into equities holdings. The

structure of the fund may vary different for different schemes and the fund

manager’s outlook on different stocks. The Equity Funds are sub-classified

depending upon their investment objective, as follows:

Diversified Equity Funds

Mid-Cap Funds

Sector Specific Funds

Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high

on the risk-return matrix.

2. Debt funds:

The objective of these Funds is to invest in debt papers. Government authorities,

private companies, banks and financial institutions are some of the major issuers

of debt papers. By investing in debt instruments, these funds ensure low risk and

provide stable income to the investors. Debt funds are further classified as:

Gilt Funds: Invest their corpus in securities issued by Government, popularly

known as Government of India debt papers. These Funds carry zero Default risk

but are associated with Interest Rate risk. These schemes are safer as they invest

in papers backed by Government.

Income Funds:

Invest a major portion into various debt instruments such as bonds, corporate

debentures and Government securities.

MIPs:

Invests maximum of their total corpus in debt instruments while they take minimum

exposure in equities. It gets benefit of both equity and debt market. These

scheme ranks slightly high on the risk-return matrix when compared with other

debt schemes.

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Short Term Plans (STPs):

Meant for investment horizon for three to six months. These funds primarily invest

in short term papers like Certificate of Deposits (CDs) and Commercial Papers

(CPs). Some portion of the corpus is also invested in corporate debentures.

Liquid Funds:

Also known as Money Market Schemes, These funds provide easy liquidity and

preservation of capital. These schemes invest in short-term instruments like

Treasury Bills, inter-bank call money market, CPs and CDs. These funds are

meant for short-term cash management of corporate houses and are meant for an

investment horizon of 1day to 3 months. These schemes rank low on risk-return

matrix and are considered to be the safest amongst all categories of mutual

funds.

3. Balanced funds :

As the name suggest they, are a mix of both equity and debt funds. They invest

in both equities and fixed income securities, which are in line with pre-

defined investment objective of the scheme. These schemes aim to provide

investors with the best of both the worlds. Equity part provides growth and

the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of

investment parameter viz Each category of funds is backed by an

investment philosophy, which is pre-defined in the objectives of the fund.

The investor can align his own investment needs with the funds objective

and invest accordingly.

By investment objective:

Growth Schemes:

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Growth Schemes are also known as equity schemes. The aim of these

schemes is to provide capital appreciation over medium to long term. These

schemes normally invest a major part of their fund in equities and are willing to

bear short-term decline in value for possible future appreciation.

Income Schemes: Income Schemes are also known as debt schemes. The aim of

these schemes is to provide regular and steady income to investors. These

schemes generally invest in fixed income securities such as bonds and corporate

debentures. Capital appreciation in such schemes may be limited.

Balanced Schemes:

Balanced Schemes aim to provide both growth and income by periodically

distributing a part of the income and capital gains they earn. These schemes

invest in both shares and fixed income securities, in the proportion indicated in

their offer documents (normally 50:50).

Money Market Schemes:

Money Market Schemes aim to provide easy liquidity, preservation of

capital and moderate income. These schemes generally invest in safer, short-

term instruments, such as treasury bills, certificates of deposit, commercial

paper and inter-bank call money

Others

Dividend Re-investment plan

Here the dividend accrued on the mutual funds is automatically re-invested in the

purchasing additionally units in the open ended funds. In most cases mutual funds offer

the investor an option of collecting dividends or re-investing the same.

Systematic investment Plan

In this type of plan the investor is given the option of preparing a predetermined

number of post-dated cheques in favour of the fund. He will get the units on the date of

cheques at the existing NAV.

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For instances , if on the 5th March ,he has given a post dated cheques for June 5 th

2006, he will get units on 5th June 2006 at the existing NAV.

Systematic Withdrawal Plan:

As opposed to SIP, the systematic withdrawal plan allows the investor the facility to

withdraw predetermined amount/units from his fund at a pre-determined interval. The

investor’s units will be redeemed at the existing NAV as on that day. The unit holder

may set-up a systematic Withdrawal plan on a monthly, quarterly or semi annually or

on an annual basis to redeem a fixed number of units or redeem enough units to provide

a fixed amount of money.

Retirement Pension Plan

Some schemes are linked with retirement pension. Individuals participate in these plans

for themselves, and corporate for their employees.

Insurance Plan:

Some schemes launched by UTI and LIC offer insurance cover to investor.

Like ULIP plans

Tax Saving Scheme

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, eg: Equity Linked Saving Scheme (ELSS). Pension schemes launched by the

mutual fund also offer tax benefits. These schemes are growth-oriented and invest pre-

dominantly in equities. Their growth opportunities and risk associated are like any

equity-oriented scheme.

Load and No-Load Funds

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A load fund is one that charges a percentage of NAV for entry or exit. That is, each

time one buys or sells the units in the fund, a charge will be payable. This charge is used

by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit

is Rs.10 .if the entry as well as exit load charge is 2% , then the investors who buy

would be required to pay Rs.10.20 and those would want to repurchase must pay

Rs.9.80 per unit. A no-load fund is the one that does not charge for entry or exit. It m

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Pros & cons of investing in mutual funds:

For investments in mutual fund, one must keep in mind about the Pros and cons of

investments in mutual fund.

Advantages of Investing Mutual Funds:

1. Professional Management - The basic advantage of funds is that, they are

professional managed, by well-qualified professional. Investors purchase funds

because they do not have the time or the expertise to manage their own

portfolio. A mutual fund is considered to be relatively less expensive way to

make and monitor their investments.

2. Diversification - Purchasing units in a mutual fund instead of buying individual

stocks or bonds, the investors risk is spread out and minimized up to certain

extent. The idea behind diversification is to invest in a large number of assets so

that a loss in any particular investment is minimized by gains in others.

3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a

time, thus help to reducing transaction costs, and help to bring down the average

cost of the unit for their investors.

4. Liquidity - Just like an individual stock, mutual fund also allows investors to

liquidate their holdings as and when they want.

5. Simplicity - Investments in mutual fund is considered to be easy, compare to

other available instruments in the market, and the minimum investment is small.

Most AMC also have automatic purchase plans whereby as little as Rs. 2000,

where SIP start with just Rs.50 per month basis.

Disadvantages of Investing Mutual Funds:

1. Professional Management- Some funds doesn’t perform in neither the market, as

their management is not dynamic enough to explore the available opportunity in

the market, thus many investors debate over whether or not the so-called

professionals are any better than mutual fund or investor him self, for picking up

stocks.

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2. Costs – The biggest source of AMC income, is generally from the entry & exit

load which they charge from an investors, at the time of purchase. The mutual

fund industries are thus charging extra cost under layers of jargon.

3. Dilution - Because funds have smallholdings across different companies, high

returns from a few investments often 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.

4. Taxes - when making decisions about your money, fund managers don't consider

your personal tax situation. For example, when a fund manager sells a security, a

capital-gain tax is triggered, which affects how profitable the individual is from

the sale. It might have been more advantageous for the individual to defer the

capital gains liability. Mutual Funds – Organization

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Structure of mutual Fund in India

The formation and operations of mutual funds in India is solely guided by the Securities

and Exchange Board of India (SEBI) regulations, in 1993, which came in to force on 20

Jan 1993.

The above figure shows the structure of Indian mutual funds. A mutual fund comprises

four separate entities namely,

Sponsors

Mutual fund trust

AMC

Custodian

These are associated by other independent administrative entities like banks, registrar,

and transfer agents.

The sponsor for a mutual fund can be any person who, acting alone or in

combination with another body corporate establishes the mutual fund and gets it

registered with SEBI. The sponsor is required to contribute at least 40% of the

minimum net worth (Rs 10 crores) of the asset management company. The sponsor

must have a sound track record and general reputation of fairness and integrity in all his

business transactions.

As per SEBI regulations, 1996, a mutual fund must be formed by the sponsor and

registered with SEBI. ‘ A mutual fund shall be constituted in the form of trust and the

instrument of trust shall be in the form of the deed, duly registered under

the provision of the Indian registration act 1908, executed by the sponsor in favor of

trustees named in such an instrument.

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Mutual fund is managed by the Board of trustees and the sponsor executes the trust

deeds in favor of the trustees. The mutual fund raises money through sale of units under

one or more schemes for investing in securities in accordance with SEBI guidelines. It

is the job of mutual fund trustees to see that the schemes floated and managed by the

AMC appointed by the trustees, are accordance with the trust deeds and SEBI

guidelines. It is also the responsibility of the trustee to control the capital property of

mutual fund schemes.

The trustees have the right to obtain relevant information from the AMC, as well

as a quarterly report on its activities. They can also dismiss the AMC under specific

condition as per SEBI regulations.

At least half the trustees should be independent persons. The AMC or its employees

cannot act as a trustee. No person who is appointed as a trustee of a mutual fund can be

appointed as a trustee of any other mutual fund unless he is independent trustee and

prior permission is obtained from the mutual fund in which he is a trustee. The trustees

are required to submit half yearly reports to SEBI on the activities of the mutual fund.

The trustees appoint the custodian and supervise their activities. The trustees can be

removed only with prior approval of SEBI.

As per the SEBI guidelines, an asset management company is appointed by trustees to

float the schemes for mutual fund and manage the funds raised by selling units a

scheme. The AMC must act as per SEBI guidelines, the trust deeds and the management

agreement between the trustees and the AMC.

The AMC should be registered with SEBI. As per revised guidelines the net worth of an

AMC should be in the form of cash all assets should held in the name of the AMC. In

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case the AMC wants to carry out the other fund management business, it should satisfy

the capital adequacy requirement for each such business independently.

The AMC cannot give or guarantee loans and is prohibited from acquiring any assets

(out of the scheme property) which would involve the assumption of unlimited liability.

The AMC is required to disclose the scheme particulars and base of calculation of

NAV. It must submit quarterly reports to the mutual fund.

The director of the AMC should be a person of repute and high standing, with at least 5

years experience in the relevant field. The appointment of the AMC can be terminated

by a decision of 75% of unit holders or a majority of the trustees.

The SEBI 1996 defines the mutual fund as a fund established in the form of trust to

raise moneys through the sale of units to the public or section of public under one or

more schemes for investing in securities, including money marketable instruments.

Since the definition is restricting the scope of operations of mutual funds to diversify

their activities in the following years

Portfolio management services

Management of off-shore funds

Providing advice to off-shore funds

Management of pension or provident funds

Management of venture capital funds

Management of money market funds

Management of real estate funds

The regulations deal with the various issues relating to the launching, advertising, and

listing of mutual fund schemes. All the schemes to be launched by an AMC need to be

approved by the trustees and copies of offer documents of such schemes are to be filed

with the SEBI. The offer document shall contain adequate disclosures to enable

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investors to make informed decisions. Advertisements in respect of schemes should be

in conformity with the prescribed advertisement code of SEBI.

The listing of closed ended scheme is mandatory and every closed ended scheme

should be listed in a recognized stock exchange within six months from the closure of

subscription. However, listing is not mandatory:

Units of a closed ended scheme can be repurchased or reissued by an AMC. Units of a

closed –ended scheme can also be converted in to an open-ended scheme. Units of a

closed ended scheme may be rolled over by passing a resolution by majority

shareholders.

Guaranteed returns can be provided in a scheme if such return is fully guaranteed by the

AMC or the sponsor. In such cases, there should be a statement indicating name of the

person and the manner in which the guarantee to be made must be made in the offer

document.

The regulations provide procedures for winding up of a closed ended scheme. A closed

ended scheme will be wound up on redemption date, unless it is rolled over, or if 75%

of unit holders of a scheme pass a resolution for winding up of the scheme, or if the

trustees, on the happening of any event, require the scheme to be wound up, or SEBI so

directs in the interest of the investors.

Some other operational aspects as prescribed by SEBI are

1) Appointment of custodian.

2) Disclosure

3) Advertisement

4) Investment restriction

5) Sale and distribution of units

6) Code of conduct.

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SEBI REGULATIONS ON MUTUAL FUND

SEBI’s regulatory reach has been extended to more areas and there is a considerable

change in the capital market. SEBI’s annual report for 97-98 has stated that throughout

its six years existence as a statutory body, it has sought to balance the twin objectives of

investor protection and market development. it has formulated new rules and crafted

regulations to foster development. Monitoring and surveillance was put in the stock

exchanges in 96-97 and strengthened 97-98.

OBJECTIVES OF SEBI

The promulgation of the SEBI ordinance in the parliament gave statutory status to

SEBI in 92. According to the preamble of the SEBI, the three main objectives are:

To protect the interest of the investors in securities.

To promote the development of securities market

To regulate the securities market.

FUNCTIONS OF SEBI

a) Regulating the business in stock exchanges and any other securities Market.

b) Registering and regulating the working of stock brokers , sub brokers, Share transfer agents, bankers to the issue, trustees of the trust deed Underwriters, portfolio managers, investment advisors, and other such intermediaries who may be associated with securities market in any manner.

c) Registering and regulating the working of collective investment schemes mutual funds.

d) Promoting and regulating self-regulatory organization

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e) Prohibiting fraudulent and unfair trade practices in the securities market

MUTUAL FUNDS AND SEBI

For the smooth conduct and regulation of the mutual fund several guidelines have been

issued by the SEBI regarding the investment, disclosure, accountability distribution, of

its profits to its members and the asset management companies. SEBI has issued

regulation and code of conduct in 93 that provided a basic legal framework for the

functioning of the mutual fund. The mutual fund regulation act 1996 has provided a

sound footing and considerable leeway to fund management. The new elements

incorporated in the year 98, have placed the investors in a better position with regard to

proper asset management and disclosure.

DISCLOSURE NORMS

With the number of mutual funds schemes on the increase (in 97 alone 67

new of schemes of wide varieties were introduced in the market) the investor should be

kept well informed about the nature and functioning of the mutual funds. It should start

right from the offer document. The offer document should provide essential information

to assist the investors to informed and correct decision. According to SEBI regulations

the standard offer document should give the following information

Standard and scheme specific risk factors. The latter may be related to

investment objective, investment strategy, asset allocation, risks from non

diversification if any, and from investing in closed ended schemes (range of

discount, liquidity)

Due diligence by the asset management company (AMC)

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Fundamental attributes such as type of schemes, investment objective (including

the tentative equity /debt/money market portfolio) and terms of issue (provision

such as listing, repurchase /redemption, fees, expenses, guarantee/safety net)

Details of the offer, such as sale, purchase, minimum corpus and pricing of units in

relation to NAV

Likely initial issue expenses, actual issue expenses for schemes launched

during the last year, expenses borne by the AMC and annual recurring

expenses (as a percentage of average weekly net assets).

Identification of AMC and background of fund managers.

Asset allocation pattern (as a percentage of the assets) with indicative range

of investment or the maximum investment in a certain assets class.

The policy of diversification or concentration to be pursued.

The portfolio turnover policy and effects of investment techniques on total

portfolio turnover.

The policy with respect to dividend and distributions, including any options

for unit holders.

The policy of the fund regarding their scheme transfers.

Associate transaction

The borrowing policy including the intent and purpose of borrowing and

stock lending by the fund.

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Valuation of assets, accounting policies and NAV.

The manner of determination of redemption and repurchase price of the

units.

Tax treatment of investments in mutual funds, investor rights, and services

and redressal of investor grievances.

The amendment in 1998 made a significant change in information disclosure pertaining

to litigation/penalties. SEBI has now mandated the disclosure of information contained

in reports of investigation and inspection conducted by it. So far such information was

neither disclosed in the offer document nor in the annual reports. Now, all mutual funds

have to disclose in the offer documents the information pertaining to the following

areas.

All cases of penalty awarded by the SEBI or any other regulatory body against

the sponsor of the mutual fund, the Trustee Company/ board of trustee, or any of

the directors or key personnel of the AMC and trustee company. The nature of

the penalty must be disclosed.

Pending material litigation proceedings including pending criminal and

economic cases against any of the afore mentioned parties. The name of the

court or agencies in which the proceedings are pending, the date instituted , the

principal parties thereto, a brief description of the factual basis alleged to

underline the proceedings and relief sought, if any shall be indicated.

Any deficiency in the system and operations of the sponsor of the mutual fund

or any company associated with the sponsor in any capacity such as the AMC or

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the trustee company. This must pertain to matters that SEBI has specifically

directed disclosures. The full disclosure in the annual reports is mandatory.

INVESTMENT

The investment made issued by the mutual funds decides the return for the investor.

Improper management would land the investor in peril. To prevent this, SEBI has

tightened its control regarding the investment criteria. They are as given below:-

Mutual funds cannot deal in option trade, short sale carry forward transaction in

securities. They can only invest in transferable securities in the money market capital

market, any privately placed debenture or debt securities.

Mutual funds required to form trust and managed separately by the asset management

companies. The minimum net worth of asset management should be Rs 5 crores and

40% should be the sponsor’s contribution.

Investment under individual schemes should not cross the 5% of the corpus of any

company’s share and the investment under all schemes should not exceed 10% of the

funds in the shares, debentures or securities of a single company.

Mutual fund shall not make investment in any privately placed securities issued by the

associates/group companies of the sponsors.

The aggregate investment of mutual funds in the listed or to be listed securities of group

companies of the sponsor shall not exceed 25% of the net assets of all schemes of the

fund.

The assets management companies (AMC) would be required to disclose in the offer

document maximum investment proposed to be made by the schemes in the securities

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of the group companies of the sponsors and also aggregate investment made by all

schemes in the group companies.

The AMCs shall have to submit quarterly report to the trustees giving details about the

transactions in the securities of the group companies during the quarter and the trustees

have to make specific comments in their half yearly reports to the SEBI on those

investment.

The ‘group’ for this purpose would have the meaning as provided in the Monopolies

and Trade Practices Act in 1969.

An AMC cannot purchase or sell securities through a broker who is an associate of the

sponsor beyond 5% of the gross business of the mutual fund, which will be monitored

on a quarterly average than on a daily basis.

An AMC shall not in quarter purchase or sell securities for any of the schemes through

any broker beyond 5% of the aggregate business of the securities in a quarter , unless

the AMC records the justification for exceeding the limit and reports such cases to the

trustees on a quarterly basis.

ACCOUNTABILITY

Every mutual fund for each scheme should keep and maintain proper books of accounts,

records and documents to explain its transaction. The records should disclose at any

point of time financial position of the mutual fund in a true and fair view of the state of

affairs of the fund. The accounts should provide information regarding the distribution

or accumulation of income accruing to the unit holder in a fair and true manner.

Short-term capital gains and long-term capital gains should be segregated in the

accounts. All the expenses should be clearly identified and appropriated to the

individual scheme. The AMC may charge the mutual fund with investment

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management and advising fees that are fully disclosed in the prospectus subject to the

following viz,

One and quarter of one per cent of the weekly average net assets outstanding in

each accounting year for scheme concerned as long as the net assets do not

exceed Rs. 100 crores and one percent of the excess amount over Rs.100 crores.

The AMC can charge a) initial issue costs of sponsoring the fund and its

schemes b) recurring expenses related to marketing and selling expenses

including agents commission, brokerage and transaction costs and registrar

services for transfer of shares sold or redeemed, provided , the initial expenses

in respect of any one scheme shall not exceed 6% of the fund raised under the

scheme.

The above mentioned expenses and fees payable to Asset management Company

shall be charged to the mutual fund.

DIVIDEND

Mutual funds after closing the accounts, distribute by way of dividend

the holders in accordance with the regulations, an amount not less than 90% of the

profits earned during the year by that scheme. This does not apply to a cumulative

investment schemes or a growth oriented scheme where the nature of the scheme

has been made known to the investors at the time of offer.

MANAGEMENT

The sponsor should have a sound track record, experience in the relevant field

of financial services for a minimum period of five years, professional competence,

financial soundness and general reputation of integrity in all his business

transaction.

AMC shall be authorized for business by SEBI on the basis of certain criteria. The

memorandum and articles of association of the AMC would have to be approved by

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the SEBI. The trustee board should be constituted with two thirds of independent

trustees to stand for the interest of the investors.

ASSOCIATION OF MUTUAL FUNDS IN INDIA

With increase in Mutual Fund players in India, a need for mutual fund association in

India was generated to function as a non-profit organization.

Association of mutual funds in India (AMFI) was incorporated on 22nd August, 1995.

AMFI is an apex body of all Assets Management Companies (AMC) which has been

registered with Security Exchange Board of India (SEBI) .till date all the AMCs are that

have 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 a healthy market with the ethical lines enhancing and maintaining

standards. It follows the principle of both protecting and promoting the interests of

mutual funds as well as their unit holders.

THE OBJECTIVES OF ASSOCIATION OF MUTUAL FUNDS IN INDIA

The Association of Mutual Funds of India works with 30 registered AMCS of

the country. It has certain defined objectives which juxtaposes the guidelines of its

Board of Directors. The objectives are as follows.

This Mutual Fund Association of India maintains high professional and ethical

standards in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conduct

which is followed by members and related people engaged in activities of Mutual

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Fund and Assets Management. The agencies that are by any means connected or

involved in this code of conduct of the association.

AMFI interacts with SEBI and works according to SEBI’s guidelines in the

mutual fund industry.

Association of Mutual Fund of India do represent the government of India , the

Reserve bank of India and other related bodies on matters relating to the Mutual

Fund Industry.

It develops a team of well qualified and trained agent distributors. It implements a

programme of training and certification for all intermediaries and other engaged in

the Mutual Fund Industry.

.

AMFI undertakes all India awareness programme for investors in order to promote

proper understanding of the concept and working of mutual funds.

At last Association of mutual fund of India also disseminate information on

mutual fund industry and undertakes studies and research either directly or in

association with other bodies.

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The sponsors of Association of Mutual Funds in India.

Bank sponsored

SBI Mutual management Ltd.

BOB asset management CO. Ltd.

Canbank Investment Management Services. Ltd

UTI Asset management Company Pvt, Ltd.

Institution

GIC Asset management Co.Ltd

Jeevan Bima sahayog asset management Company.

PRIVATE SECTOR

INDIAN

Benchmark asset management company

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Cholamandalam Asset Management Co.Ltd

Credit Capital Asset Management Co.Ltd

Escorts Asset Management Ltd

JM Financial Mutual fund

Kotak Mahindra asset management company

Reliance capital Asset management Ltd

Sahara Asset management Co.Ltd

Sundaram Asset management Co.Ltd

Tata Asset Management Private Ltd

Indian joint ventures

Birla Sun life Asset management company

DSP Merill Lynch Fund Managers company

HDFC Asset management company

Foreign joint ventures

ABN AMRO Asset Management (I) Ltd.

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Alliance capital Asset management (India) Pvt.Ltd

INVESTMENT PERSPECTIVE

Investment is the employment of funds on assets with the aim of earning income or

capital appreciation. Investment has two attributes namely time and risk. Present

sacrificed to get a return in the future. The sacrifice that has to be borne is certain but

the return in the future may be uncertain. This attribute of investment indicates the risk

factor. The risk is undertaken with a view to reap some return from the investment. For

laymen. Investment means some monetary commitment.

Financial investment is the allocation of money to assets that are expected to yield some

gain over a period of time. It is an exchange of financial claims such as stocks and

bonds for money .they are expected to yield returns and experience capital growth over

the years

Investment objectives:-

The main investment objectives are increasing the rate of return and reducing the risk.

Other objectives like safety, liquidity, and hedge against inflation can be considered as

subsidiary objectives.

Return

Investor always expects a good rate of return from their investments. Rate of return

could be defined as the total income the investor receives during the holding period

stated as a percentage of the purchasing price at the beginning of the holding period.

Capital appreciation & dividend

Return =

Purchase price

Risk

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Risk of holding securities is related with the probability of actual return become less

than the expected return. An investment whose rate of return varies widely from period

to period is risky than whose return that does not change much. Every likes to reduce

the risk of his investment by proper combination of different securities.

Liquidity

Marketability of the investment provides liquidity to the investment. The liquidity

depends upon the marketing and trading facility. If a portion of the investment could be

converted into the cash without much loss of time, if would help the investor meet the

emergencies. Stocks are liquid only if they command good market by providing

adequate return through dividends and capital appreciation.

Hedge against inflation;

Since there is inflation in almost all the economy, the rate of return should ensure a

cover against the inflation. The return rate should be higher than the rate of inflation,

otherwise the investor will have loss in real terms. Growth stocks would appreciate in

their values overtime and provide a protection against inflation. the return thus earned

should assure the safety of the principal amount, regular flow of income and be a hedge

against inflation.

Safety

The selected investment avenue should be under the legal and regulatory framework. If

it is not under the legal framework, it is difficult to represent the grievances, if any.

Approval of the law itself adds a flavor of safety. Even though approved by law, the

safety of the principal differs from one mode of investment to another. Investments

done with the government assure more safety than with the private party.

The investment process

The investment process involves a series of activities leading to the purchase of

securities or other investment alternatives

The investment process can be divided in to

1. Framing of investment policy

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2. Investment analysis

3. Valuation

4. Portfolio construction

5. Portfolio evaluation

Investment Process

Investment Policy Analysis Valuation Portfolio Construction Portfolio Evaluation

Investable fund Market Intrinsic value Diversification Appraisal

Knowledge Industry Future value Selection & Revision

Allocation

Objectives Company

Financial Planning

Whenever we talk of planning, the first question which comes to our mind is what is the

objective?

The first step of planning is setting up of objectives. the same applies with financial

planning.

Every investor has needs at various stages in his life. For example we need money for

our education, for buying car, buying house etc. we have to ensure that we should have

money when we need it.

As we all need money to meet our needs, these needs can be the best objectives or goals

for us to plan finances. So, “financial planning is a process aimed at achieving

investor’s goal in life.”

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Life cycle stage of financial planning

Life cycle stage Features Priority Choice of investment products.

Childhood stage This is a period dependency which lasts till the full time education finishes.Most of the fulfillments and requirements are filled by parents.

Long term investment of money received in the form of gifts at various occasions.

No immediate needs. Long-term investments.

Young Unmarried

Might still depend to some extent on parents. Relatively lower income and would not be able to afford large amount to financial planning.More risk taking ability.

They might not have any dependents and hence might not need insurance. Main need is to protect their earnings against any disability or long sickness.More immediate and short term needs.

Liquid plans and short term investments. Investments for long term plans when adequate short term savings have been achieved.

Young married stage both partners earn

Two incomes to meet cost and save.Sufficient income and surplus to meet financial planning needs.Short and intermediate term Housing and insurance needs. Consumer finance needs

To secure income loss of any partner against any disability or sickness.Life insurance so that unfortunate events of any partner’s death that part of income may be replaced Need for emergency fund.

Medium to long-term investments. Ability to take risks. Fixed income, insurance and equity products.

Young married stage one partne with childern rs earn

Two or more dependent on just one earner. Less potential to save

Life insurance of earning member is must.Need to start for pension provision at an early stage is

Medium to long-term investments. lesser ability to take risks and save.

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immense.

Young married with childern

Arrival of kids changes the scenario. The expenditure starts raising at a faster rate than income children’s education holidays and consumer finance housing.

Life assurance of earning member is must. Consumer finance needs are high. Financial needs are highest as this stage is ideal for disciplining spending and saving regularly

Medium to long-term investments. Ability to take risks. Portfolio of products, for growth and long term

Married with elder children

Individuals are in mid- career and family has become bigger with more children. Improved finance and better life style Medium term needs for children’s education and marriage. Need for pension, insurance and medical cover higher.

Higher saving ratio recommended. Priority would shift from protection needs to investment needs because of pension needs. Because of loan repayment needs requirement cash flows is higher.

Medium term investments with higher liquidity needs. Portfolio of products including equity, debts and pension plans. Major contribution to pension products contribution to health insurance.

Post family /pre-retirement stage.

Children’s have become independent. Last chance to ensure adequate income to maintain the standards of living after retirement.

Adequate income and savings

Maximum investment in pension funds

Retirement stage As a thumb rule, after retirement individual need 2/3rd of their final years incomes .In general people would fall in one of the following three categories:1)Low pension income and low capital to supplement it.2)Relatively low pension income plus some accumulated capital.3)sufficient pension income plus substantial assets and capital.

After retirement the savings rate declines substantially

The need would correspond to categories 1),2),3) of the previous column:1)continue to work and/or produce fixed income with no risk at all.2)invest capital to produce additional income and can take any risk3)wise people. need to preserve the value of savings against inflation

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PYRAMID OF INVESTMENT AVENUES :

The above pyramid speaks about the different types of risk and the respective growth

associated with the risk.

It can be seen that, at the lower level risk is very less and their more safety. This kind of

portfolio is usually preferred by the in the third level of their life cycle i.e. mainly

people who are pension holders.

As we move on to the pyramid we see that there is average risk and reasonable growth

and income. These are people in second level of their life cycle who are well settled in

life who are ready to take the calculated risk.

The last level depicts a picture of people who can assume the highest risk. these are

people who have just started their career who can take high risk.

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PORTFOLIO MANAGEMENT

Portfolio:

It is combination of all the securities, group of assets - such as stocks, bonds and debt instrument - held by an investor. It is constructed in such a manner to meet the investor’s goals & objectives . The balanced portfolio is the one which gives maximum return with minimum risk.The process of blending together the broad assets classes so as to obtain optimum return with minimum risk is called portfolio construction. To reduce their risk, investors tend to hold more than just a single stock or other asset. Each piece of the portfolio is divided up into specific assets such as bonds, equities, stock , commodity etc. A passive form of portfolio management involves the matching of future cash flows with future liabilities.Diversification is a familiar term to most investors. In the most general sense, it can be summed up with phrase: "Don’t put all of your eggs in one basket." The main objective is reduction of risk in loss of capital & income.

Portfolio Management

The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk vs. performance.Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and numerous other trade offs encountered in the attempt to maximize return at a given appetite for risk.

A Guide To Portfolio ConstructionIn today's financial market place, a well-maintained portfolio is vital to any investor's success. As an individual investor, we need to know how to determine an asset allocation which best conforms to our personal investment goals and strategies. In other words, a portfolio should meet future needs for capital . Investors can construct portfolios aligned to their goals and investment strategies by following a systematic approach. Some essential steps for taking such approaches are as under :

Step1:Determining the appropriate Assets Allocation Ascertaining our individual financial situation and investment goals is the first task in constructing a portfolio. Important items to consider are age, how much time we have to grow our investments, as well as amount of capital to invest and future capital needs. A

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single college graduate just beginning his or her career and a 55-year-old married person expecting to help pay for a child's college education and plans to retire soon will have disparate investment strategies.A second factor to take into account is personality and risk tolerance. Generally, the more risk we can bear, the more aggressive our portfolio will be, devoting a larger portion to equities and less to bonds and other fixed-income securities. Conversely, the less risk that's appropriate, the more conservative our portfolio will be. Here are two examples: one suitable for a conservative investor and another for the moderately aggressive investor.

The main goal of a conservative portfolio is to protect its value. The allocation shown above would yield current income from the bonds, and would also provide some long-term capital growth potential from the investment in high-quality equities.

A moderately aggressive portfolio satisfies an average risk tolerance, attracting those willing to accept more risk in their portfolio in order to achieve a balance of capital growth and income.

Step 2: Achieving the Portfolio Designed in Step 1

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Once we determined the right asset allocation, we simply need to divide our capital between the appropriate asset classes. On a basic level, this is not difficult: equities are equities, and bonds are bonds. For example, an investor might divide the equity portion between different sectors and market caps, and between domestic and foreign stock. The bond portion might be allocated between those that are short term and long term, government versus corporate debt and so forth. Stock picking - Choose stocks that satisfy the level of risk we want to carry in the equity portion of your portfolio - sector, market cap and stock type are factors to consider. Analyze the companies using stock screeners to shortlist potential picks, than carry out more in-depth analysis on each potential purchase to determine its opportunities and risks going forward. This is the most work-intensive means of adding securities to our portfolio, and requires to regularly monitor price changes in our holdings and stay current on company and industry news. Bond picking - When choosing bonds, there are several factors to consider including the coupon, maturity, the bond type and rating, as well as the general interest rate

Step 3: Re-assessing Portfolio Weightings Once we have an established portfolio, we need to analyze and rebalance it periodically because market movements may cause our initial weightings to change. To assess our portfolio's actual asset allocation, quantitatively categorize the investments and determining their values' proportion to the whole. To rebalance, we need to determine which of our positions are over-weighted and those that are under-weighted.

Step 4: Rebalancing Strategically Once we have determined which securities we need to reduce and by how much, decide which under-weighted securities we will buy with the proceeds from selling the over-weighted securities. When selling assets to rebalance our portfolio, take a moment to consider the tax implications of readjusting our portfolio. Perhaps our investment in growth stocks has appreciated strongly over the past year, but if we were to sell all of our equity positions to rebalance our portfolio, we may incur significant capital gains taxes. In this case it might be more beneficial to simply not contribute any new funds to that asset class in the future while continuing to contribute to other asset classes. This will reduce our growth stocks' weighting in our portfolio over time without incurring capital gains taxes.

Importance of Diversification.

Throughout the entire portfolio construction process, it is vital that we remember to maintain our diversification. It is not enough simply to own securities from each asset class; we must also diversify within each class. Ensure that our holdings within a given asset class are spread across an array of subclasses and industry sectors.

Portfolio Evaluation:

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Portfolio Manager evaluates portfolio performance and identifies the sources of strength and weakness. The evaluation provides a feedback about the performance to evolve better management strategy.

Portfolio management style

Basically the fund managers who manage the portfolio of the scheme follow normally two kinds of strategy they can be classified into aggressive defensive strategy.

Aggressive Portfolio Management Strategy

Aggressive investment management and capital growth strategies are portfolio management strategies which aim at maximizing the return over investment. An aggressive portfolio management strategy often includes high-return high-risk investments such as equities. Aggressive portfolio management requires highest grade of money management and is not at all suitable for those with low-risk tolerance and those with less experience.

In an aggressive portfolio management strategy, usually more than 60% of investments are done in equities. Aggressive investors allocate lesser percentage of their money in low-risk low-return or fixed- income products like bonds, treasury notes, money market funds, etc. They often choose to invest in aggressive stocks from high growth companies, small and mid caps, etc. Although these strategies may include methods for limiting downside risks, they will not be as strict as defensive investment strategies.

The advantages of aggressive investment strategy include long-term capital growth and higher return over investment. The disadvantages include higher risk, high volatility in asset value, difficulty in estimating the return and the need of active money management. Aggressive investment strategy is suitable for long-term returns and not at all for monthly earnings or living costs. With aggressive strategies, it is better to diversify investments and to include some low-risk investments.

Defensive Investment Strategy :

As the name suggests, defensive investment strategy is the portfolio management strategy which aims at investing in low-risk products. Defensive investors choose bonds, treasury notes, money market funds, and defensive stocks. Defensive stocks include stocks which are undervalued, less volatile, steadily growing, and/or offering reasonable dividends. Defensive investors must be very strict with their money management and investment product selection.

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The main advantage of a good defensive investment strategy is the minimized risk of losing the capital. Other advantages include better planning of investments, almost steady and predictable income, and better use of risk-minimizing practices like close stop-losses. Defensive investment strategy suits beginners, investors with less risk-tolerance and investors having less time to monitor their portfolio.

Defensive investment strategy is a low profit strategy, and often requires much more capital investment to get a targeted profit. When investing in stocks or similar products, defensive investors are limited with their options and often limited with their profit maximizing techniques such as leverage or margin trading. This type of investment

Some manager uses mix of both strategies to balance the needs of investors and investment objective of fund house as whole.

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Evaluation The facts sheets of Magnum Global, Magnum Contra, and Magnum taxgain Funds are given below. By analyzing the data we can observe the type of management the fund manager follows to beat risk and earn extra return, how often the mix in portfolio is changed which is most favored sector is the invest decision of fund manager right and can he break even or out performance the bench mark indices

SBI Mutual Fund is India’s largest bank sponsored mutual fund and has an enviable track record in judicious investments and consistent wealth creation.

SBI Mutual Fund is a joint venture between the State Bank of India and Société Générale Asset Management, one of the world’s leading fund management companies that manage over US$ 500 Billion worldwide.

Exploiting expertise, compounding growth

In twenty years of operation, the fund has launched 38 schemes and successfully redeemed fifteen of them. In the process it has rewarded it’s investors handsomely with consistently high returns.

A total of over 4.6 million investors have reposed their faith in the wealth generation expertise of the Mutual Fund.

Schemes of the Mutual fund have consistently outperformed benchmark indices and have emerged as the preferred investment for millions of investors and HNI’s.

Today, the fund manages over Rs. 28500 crores of assets and has a diverse profile of investors actively parking their investments across 36 active schemes.

The fund serves this vast family of investors by reaching out to them through network of over 130 points of acceptance, 28 investor service centers, 46 investor service desks and 56 district organisers.

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Portfolio as on 31-9-07 of Magnum Global FundNAV :45.82AUM 1138.22 Cr.

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Portfolio As on 28-2-07 of Magnum Global fund

NAV:42.10 AUM: 123021 Cr.

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Portfolio as on 31-3-07 Global FundNAV: 41.21AUM: 1361.69

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Portfolio as on 29-6-07 Global FundNAV: 46.54AUM: 1,614 Cr

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Portfolio as on 30-7-07-07 Global FundNAV: 47.75 AUM: 1,594.47 Cr

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Portfolio as on 31-8-07 Global FundNAV: 47.30AUM: 1,626.95 Cr

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Portfolio as on 30-11-07 Global FundNAV: 60.20

AUM: 1858.33 l

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Snapshot of Magnum Global portfolio management

Magnum Global has had a seesaw ride over the years. At times it finds itself at the bottom of the category & then comes out tops only to fade again

From a fairly dismal track record, it was the best performer in 2004 and the second best in 2005. Last year too it had a good performance. But with the recent increased diversification, low concentration levels and huge asset base, this mid-cap fund is in unknown territory.

The fund's strength has been its ability to pick trends, invest aggressively and to make huge gains. Some of its profitable picks include Dishman Pharmaceuticals, Sintex Industries, India Cements, Infotech Enterprises and Jai Prakash Associates. Its earlier focus of 30-35 stocks has given way to 70, none of which account for more than 5 per cent. This could be the fall-out of its large asset base which has crossed Rs 1,700 crores. Its five-year returns of 64.95 per cent (annualised) rank it way ahead of the category's 51.19 per cent. But its year-to-date and one-year returns are below the category average.

SBI Magnum Global Fund has increased exposure to select sectors like banking, metal etc while offloaded large holding in textile, auto, and services sectors. The scheme has made fresh investment in Bank of Baroda whereas exited Arvind Mills.

The scheme has raised investment in banking sector as it introduced Bank of Baroda with 2 lakh shares and bought 0.5 lakh shares of Axis Bank. (View - What is SBI Magnum Global Fund buying / selling?)

In the metal sector, it has purchased 4.9 lakh shares of Usha Martin and in the conglomerate sector, bought 1.5 lakh shares of Sintex India. In the auto sector, it has sold 14.29 lakh shares of Ashok Leyland and in the pharma sector, offloaded 5.4 lakh shares of Marksans Pharma. In the services sector, it has cut exposure to Hotel Leela by selling 2.43 lakh shares.

Thermax, Jaiprakash Associates and Shree Cements were the top stocks held by the scheme in September. Cement (19.64%), Engineering (17.12%) and Metals (8.34%) were the top invested sectors in the scheme's portfolio. (Check out - Top stocks held by SBI Magnum Global Fund).

The cash exposure of the scheme has decreased from 11.77% to 6.59%. The total assets managed by the scheme were of Rs 1,728 crores as on September 30, 2007. Over the last one-year, SBI Magnum Global Fund has yielded 41.3% returns as against 47.09% yielded by its benchmark BSE 100 as on October 12, 2007. Currently Magnum Global is performing at its best , and shows the potential to bounce back.

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INVESTMENT OBJECTIVE:

To provide the investors maximum growth opportunity through equity investments in stocks of growth-oriented sectors. There are four sub-funds dedicated to specific sectors viz. IT, Pharmaceuticals, FMCG, and a Contrasub fund for investment in stocks currently out of favour.PORTFOLIO MANAGER COMMENTS:The fund continues to be one of the better performing diversified equity fund, while remaining contrarian in its strategy of investment. Industrial manufacturing and energy continue to be the top two sectors by way of weightage, with a slight increase in exposure in each - we increased exposure to metals during the month under review and reduced the fund exposure to the automobile sector. The Sep-Dec '06 quarterly performance of the top ten sectors where the fund is invested continued to show strong traction in net profit growth which is expected to support valuations at current levels.

PORTFOLIO MANAGER COMMENTS:

The fund continues to be one of the better performing diversified equity fund, while remaining contrarian in its strategy of investment. Industrial manufacturing and energy continue to be the top two sectors by way of weightage, with a slight increase in exposure in each - we increased exposure to metals during the month under review and reduced the fund exposure to the automobile sector. The Sep-Dec ‘06 quarterly performance of the top ten sectors where the fund is invested continued to show strong traction in net profit growth which is expected to support valuations at current

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levels.

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Portfolio as on 31-1—07 ContraNAV :38.78AUM 11479.94 Cr

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Portfolio as on 28-2-07NAV :35.69144878 Cr

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Portfolio as on 31-3-07 contraNAV :35.551499.10 Cr

Portfolio as on 30-4-07

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NAV :3.886AUM 1701.88 Cr

Sectaoral break down

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Portfolio as on 31--07NAV :41.43AUM 1837.07 Cr

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Portfolio As on 30 – 6-07 contraNAV: 41.97AUM:1837.00 Cr

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Portfolio as on 30-7-07 ContraNAV:44.29AUM: 1906.56 Cr.

Portfolio as on 30-8-07 Contra

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NAV: 44.05AUM: 1970.44 Cr.

Portfolio as on 30-10-07 Contra

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NAV: 55.32AUM: 2357.13 Cr.

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Portfolio as on 30-11-07 ContraNAV: 56.49AUM: 2474.07 Cr.

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Magnum Contra

Contra Funds are mutual funds where the fund manager invests in stocks where he sees value that can be unlocked in the long run and are therefore candidates for a long term bet.

SBI`s Magnum Contra Fund, belonging to the Magnum sector funds umbrella, is one such fund that has fairly stuck to its investment objective and succeeded in giving good returns to the investors. The main objective of the fund is to provide the investors maximum growth opportunity through equity investments in stocks of growth-oriented sectors.

Launched in July 1999, the SBI Contra Fund is an open ended diversified equity scheme that can invest in large, mid and small cap stocks and has two options of growth and dividend for investors to choose according to their needs. The advantage of being a contra fund is that the fund manager may use his own discretion in selecting stocks under this category and the stocks that he feels are undervalued.

The fund boasts of assets under management (AUM) of Rs 2747 crores making it the largest contra fund available in the market. When looked at from a longer-term horizon the fund has outperformed most of the funds in the equity diversified category with returns of 62.32% over a 3-year period and 72.02% over a 5-year period as compared to the benchmark (BSE 100 index) returns of 46% and 46.2% respectively. When compared with other peer funds having the same investment objective, the fund has left behind every other fund in its category by miles.

The portfolio does not have any bias towards market cap and has a mix of large and mid caps with the large caps currently having a higher proportion. The portfolio price earnings (P/E) ratio is fairly high at about 24 compared to peer group of diversified

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funds while the index of volatility, beta, at about 0.91 is on par with similar funds.

The portfolio is fairly diversified now with about 600 stocks in the portfolio as compared to 46 stocks a year back. The top 4 sectors contribute to 45% of the total portfolio while the top 10 stocks comprise of 37% of the portfolio. Industrial Manufacturing, Energy and Automobiles are the top 3 sectors the fund has invested in while Reliance Industries, welspun Gugrat Stahi Rohan Ltd, M & M, SBI and Jaiprakash Associates form the top five stocks that the fund has bet upon. The fund has stuck to its investment theme of being a long term fund with most of the stocks remaining the same throughout the last one year without any bias towards a sector as has been the policy of most of SBI`s mutual fund schemes.

On investigating further into the holdings of the fund we find that the fund has a fair number of stocks which have not done too well in the recent past. There is about 7.25% exposure to pharma stocks like Cipla, Ranbaxy, Lupin and Biocon in its portfolio which have been under performers on the index for quite sum time now. It also has PSU banking stocks like Punjab National Bank, Oriental Bank of Commerce and Union Bank. Overall, it is worth investment fund since contra investing works best during corrections, a phase that we may see now for the stock market. A s are about to see major correction in the market in coming day.

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Current Asset under Management Rs 3,782 Cr.

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Portfolio As On 30-4-07

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As on 31-5-07 Taxgain

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As on 31-7-07 TAXGAIN

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As on 30-11-07 Tax gain

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As on 31-12-07 Tax gain

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SBI Magnum Tax Gain. It’s three- and five-year returns are impressive and have outpaced it immediate peers three-year period..

The portfolio was skewed towards mid-caps earlier in past year and now it is more inclined towards large-cap bias. In the latest portfolio, stocks with a market capitalization of more than Rs 3,000 crores account for 71% per cent of large cap.

The turnaround and shift towards large-caps can mitigate the fund’s risk profile. Investors with a moderate risk profile can consider investment in this fund through the systematic investment route to minimise market risk.

The superior performance, even compared with open-ended diversified funds, makes it an ideal investment opportunity for an investor looking beyond tax benefits. An investment in the fund is eligible for tax benefit under Section 80C with a three-year lock-in period.

Portfolio Overview: The fund has a well-diversified portfolio with nearly 90+ stocks. The fund prefers to restrict single-stock exposure below 5 per cent and the top ten account for 35 per cent of the portfolio.

However, it takes some concentrated bets on sectors; the top 5 sectors accounted for 50 per cent. The fund appears to adopt a buy-and-hold strategy and is low on portfolio churning. Some of the prominent stocks held for close to a year include Reliance Industry Ltd, Jaiprakash associat Ltd, welspun Gugrat stsahi Rohan Ltd, Thermax Ltd Crompton Graves Ltd.

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CALCULATION OF PRIME RATIOS:

ARITHMETIC MEAN:

The most popular & widely used measure for representing the entire data by one value is what most layman call an ‘average’ & what the statistician call the ‘arithmetic mean’. It is obtained by adding together all the items & by dividing this total by the number of items.

AM = Σy

N

Where:

X = Average or Arithmetic Mean.

ΣX = Sum of the frequency.

N = Total number of frequency.

STANDARD DEVIATION:

Understanding the nature of the risk is not adequate unless the investor or analyst is capable of expressing it in some quantitative terms. Expressing the risk of a stock in quantitative terms makes it comparable with other stocks. Measurement cannot be assured of cent per cent accuracy because risk is caused by numerous factors such as social, political, economic and managerial efficiency. Measurement provides an approximate quantification of risk. The statistical tool often used to measure and used as a proxy for risk is the standard deviation.

It is a measure of the values 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 observances. The standard deviation helps to measure the variability of return.

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SD = √ (y- Y¯) ²

√ N

Where,

y = NAV return for the period

Y = Arithmetic return

N= number of observation

BETA:

While standard deviation determines the volatility of a fund according to the disparity of its returns over a period of time, beta, another useful statistical measure, determines the volatility, or risk, of a fund in comparison to that of its index or benchmark. A fund with a beta very close to 1 means the fund's performance closely matches the index or benchmark. A beta greater than 1 indicates greater volatility than the overall market, and a beta less than 1 indicates less volatility than the benchmark.

Beta measures non-diversifiable risk. Beta shows how the price of a security responds to market forces. Beta is calculated by relating the returns on a security with the returns for the market. It can be positive or negative.

Calculated as

β = N∑XY - (∑X)( ∑Y)

N∑X² - (∑X) ²

X = Sum of market return

Y = Sum of NAV return

N = number of observations

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Many investors mistakenly base the success of their portfolios on returns alone. Few consider the risk that they took to achieve those returns. Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different

SHARPE RATIO

Sharpe ratio was derived in 1966 by William Sharpe, it has been one of the most referenced risk/return measures used in finance, and much of this popularity can be attributed to its simplicity. The ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset. in the portfolio. The Sharpe measure should only be used for portfolios but not for single securities. The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment decisions or a result of excess risk. This risk premium is difference between the portfolios average rate of return & the risk free rate of interest dividing the result by the standard deviation of the portfolio return.

Higher the Sharpe Index better is the performance of the fund.

Sr= rt - r*

σ

Where:

Sr = Sharpe Index

Rp = average return on portfolio t

Rf = risk free rate of interest

σ = standard deviation (risk) of return of portfolio

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TREYNOR PERFORMANCE MEASURES:

Jack L. Treynor was the first to provide investors with a composite measure of portfolio performance that also included risk. Treynor's objective was to find a performance measure that could apply to all investors, regardless of their personal risk preferences. The Treynor performance measure is appropriate for single securities & for portfolios. It is the measurement of the returns earned in excess of that which could have been earned on a risk-less investment (i.e., Treasury bill) (per each unit of market risk assumed).

The Trey nor performance relates excess return over the risk-free rate

(Portfolio Return – Risk-Free Rate) / Beta

St = Rp- Rf

β

Where: Rp = average return on portfolio t

Rf = risk free rate of interest

β = portfolio BETA

ALPHA: (Jensen Measure)

Alpha measures how much if any of this extra risk helped the fund outperform its corresponding benchmark. Using beta, alpha's computation compares the fund's performance to that of the benchmark's risk-adjusted returns and establishes if the fund's returns outperformed the market's, given the same amount of risk.

Formula µ = Rp --[Rf + ß (Rm –Rf)]

WHERE

Rp = Average return of Portfolio

Rm= Average return of market index

Rf = Average risk free return

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ß = Beta

R-Squared :

The R-squared of a fund advises investors if the beta of a mutual fund is measured against an appropriate benchmark. Measuring the correlation of a fund’s movements to that of an index, R-squared describes the level of association between the fund’s volatility and market risk, or more specifically, the degree to which a fund’s volatility is a result of the day-to-day fluctuations experienced by the overall market.

R-squared values range between 0 and 100, where 0 represents the least correlation and 100 represents full correlation. If a fund’s beta has an R-squared value that is close to 100, the beta of the fund should be trusted. On the other hand, an R-squared value that is close to 0 indicates that the beta is not particularly useful because the fund is being compared against an inappropriate benchmark.

Calculated as

Ŕxy = N * Σxy – Σx* Σy .

{[(N*Σx2) – (Σx)2] [(N*Σy2) – (Σy)2]}.5

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Performance Evaluation of Three Funds

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MAGNUM GLOBAL FUND

Global Funds:

Arithmetic Mean

AM = Σy _ = 145.109 = 4.03

N 36

Where Σy = average return of portfolio

N = Number of observations

STANDARD DEVIATION

SD = √ (y-Y¯) 2

√N

SD = √2643.569

√36

SD = 8.5

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BETA

ß = N*ΣXY – (ΣX) (ΣY)

N* Σ(X)2 – (ΣX)2

ß = 36 * 1748.744 – (124.59) (145.109)

36*1934.648 – (124.59 )2

ß = 0.8

ALPHA: (Jensen Measure )

µ = Rp --[Rf + ß (Rm –Rf)]

µ = µ = 4.03 – [0.60 + (3.46 – 0.60)]

µ = 1.14

WHERE




ß = Beta

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SHRPE RATIO

St= Rp – Rf = 4.03 – 0.60

S.D 8.5

Sr = 0.4

Where

Rp¯ = Average return of Portfolio


SD = Standard deviation

Treynor:

Treynor = Rp-Rf

ß

Treynor = 4.03 – 0.60

0.8

Treynor = 4.3



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ß = Beta

R-Squared


{[(N*Σx2) – (Σx)2] [(N*Σy2) – (Σy)2]}.5

Ŕxy = 36 * 1748.744 – (124.59) (145.109) .

{[(36*1934.648) – (124.59 )2 ] [(36*3244.44)- (145.1)]}

Ŕxy = 0.4

BABASAB PATIL 121


Portfolio evaluation of Magnum Contra Fund for 3 years

BABASAB PATIL 122


Magnum Contra Fund

Arithmetic Mean

AM = Σy _ = 141.96 = 3.94

N 36

Where Σy = average return of portfolio


STANDARD DEVIATION

SD =√ (y- Y¯) 2

√N

SD = 38.43

6

SD = 6.40

BETA:


N* Σ(X)2 – (ΣX)2

ß = 36 * 1770.48 – 124.59 * 141.96

36 * 1934.65 – 124.59

ß = 0.85

BABASAB PATIL 123



µ = Rp --[Rf + ß (Rm –Rf)]

µ = 3.94 – [0.60 + 0.85(3.46- 0.60)]

µ = 0.87

WHERE




ß = Beta

SHRPE RATIO

Sr = Rp¯-Rf

S.D

Sr = 3.94 – 0.60

6.4

Sr = 0.5




Treynor:

BABASAB PATIL 124


Treynor = Rp-Rf

ß

Treynor = 3.94 – 0.60

0.85

Treynor = 3.92

where



ß = Beta

R-Squared


{[(N*Σx2) – (Σx)2] [(N*Σy2) – (Σy)2]}.5

Ŕxy = 36 * 1770.48 – 124.59 * 141.96 .

{[(36 * 1934.65) –(124.59)2] [(36*2052.412)(141.96)2]}.5

Ŕxy = 0.7

BABASAB PATIL 125


Portfolio evaluation of Magnum Taxgain Fund for 3 years

BABASAB PATIL 126


Magnum Tax Gain Fund

Arithmetic Mean

AM = Σy _ = 86

N 36

AM = 2.39

Where

Σy = average return of portfolio


STANDARD DEVIATION

SD = √ (y-Y¯) 2

√N

SD = √ 2592.03

√36

SD = 8.48

BETA:


N* Σ(X)2 – (ΣX)2

ß = 36 * 1175.240 – 124.59 * 86

36 * 1934.65 – 124.59

ß = 0.58

BABASAB PATIL 127



µ = Rp --[Rf + ß (Rm –Rf)]

µ = 2.39 – [0.60 + 0.58 (3.46- 0.60)]

µ = 0.13

WHERE




ß = Beta

SHRPE RATIO

Sr= Rp¯-Rf

S.D

Sr = 2.39 - 0.60

8.48

Sr = 0.2




Treynor:

BABASAB PATIL 128


Treynor = = Rp-Rf

ß

Treynor = 2.39 – 0.60

0.58

Treynor = 3.0

where



ß = Beta

R-Squared


{[(N*Σx2) – (Σx)2] [(N*Σy2) – (Σy)2]}.5

Ŕxy = 36 * 1175.240 – 124.59 * 86

{[(36*1934.65) – (124.59)] [(36*2803.182)(86)]}.5

Ŕxy = 0.19

BABASAB PATIL 129


Findings

BABASAB PATIL 130


Consolidated ratios

SBI Mutual Fund

FUND

RATIOMagnum Global Magnum Contra Magnum Taxgain

AVERAGE

RETURN 4.03 3.942.39

STANDERD

DEVIATION 8.5 6.48.4

BETA0.82 0.85

0.58

JENSEN ALPHA1.14 0.87

1.3

SHARPE0.4 0.53

0.2

TRAYNOR4.3 3.9 3

R-SQUARED0.4 0.7 0.2

The above calculation of ratio’s helps us to interpret the performance of three

funds Magnum Global, Magnum Contra, & Magnum Taxgain(Growth option).

The ratios are calculated with help of trailing monthly returns of the respective

fund for three years starting from Jan-2005 to Dec- 2007,along with benchmark

indices. From the above tabulation we can understand how the funds performed in

past and what are its drawbacks. Proper analysis helps us to recognize the well-

managed fund portfolio and invest in best available fund schemes.

Arithmetic mean

Arithmetic mean gives the 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

five years. It shows the

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From our calculations we see that average monthly return of Global fund is 4 %

which is very good. And Contra has return of 3.9 %which is near to above

returns. But Taxgain average monthly return has decreased to 2.3 which is less

then others, this may be due to wrong allocation of asset or market force.

Standard Deviation:

The standard deviation essentially reports a fund's volatility, which indicates the

tendency of the returns to rise or fall drastically in a short period of time. The

standard deviation of a fund measures this risk by measuring the degree to which

the fund fluctuates in relation to its mean return, the average return of a fund over

a period of time.

The fund with the lower standard deviation would be more optimal because it is

maximizing the return received for the amount of risk acquired.

From our calculation we can see that Contra fund has got less deviation from its

mean which means less risk and more return. Where as Global and Taxgain fund

have SD of 8.5 which is more riskier than Contra .

Beta

While standard deviation determines the volatility of a fund according to the

disparity of its returns over a period of time, beta, another useful statistical

measure, determines the volatility, or risk, of a fund in comparison to that of its

index or benchmark. A fund with a beta very close to 1 means the fund's

performance closely matches the index or benchmark. A beta greater than 1

indicates greater volatility than the overall market, and a beta less than 1 indicate

less volatility than the benchmark.

From our calculation we can see that Global And Contra funds Beta is 8.4& 8.5

which is very close to 1 means the funds performance is similar to its benchmark

BABASAB PATIL 132


indices (BSE-100). Taxgain beta is .54 and other two funds have beta less then 1,

means less volatile then its benchmark.

Jensen Alpha:

Or portfolio Alpha is used to analyze the performance of an investment manager one must look not only at the overall return of a portfolio, but also at the risk of that portfolio. Jensen's measure is one of the ways to help determine if a portfolio is earning the proper return for its level of risk. If the value is positive, then the portfolio is earning excess returns. In other words, a positive value for Jensen's alpha means a fund manager has "beat the market" with his or her stock picking skills.

Our calculation shows that portfolio alpha of Global and Taxgain are positive and more then one, which means the fund portfolio is earning excess return, but contra portfolio is .87 near to one but no negative shows that the fund has not earned excess return for the amount of risk it has taken.

Sharpe Measure:

The ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset. One will always need to be properly compensated for the additional risk taken and for not holding a risk-free asset. Higher the value of sharpe ratio better the fund has performed. Sharpe ratio can be used to rank the desirability of funds or portfolios.

In our calculation we see that ttthe sharpe ratio is not impressive but not negetive too. Global funds ratio is 0.4, Contra ratio is 0. 87 and . Taxgain Sharpe ratio is 0.2 which is very low it shows it has not been compensated for the higher risik it had taken

Treynor Measure:

Treynor ratio is a risk-adjusted measure of return based on systematic risk.the treynor measure reflects the excess return earned per unit of risk It is similar to the Sharpe ratio, with the difference being that the Treynor ratio uses beta as the measurement of volatility.

In our calculation we can see that Global fund has 4.3 treynor ratio Contra has 3.9 ratio and for taxgain it is 3, which shows tha all are having high treynor ratio means the funds have earned excess return for each unit of risk taken when we consider systematic risk to calculat risk adjusted return.

BABASAB PATIL 133


R-Squared :

The R-squared of a fund advises investors if the beta of a mutual fund is measured against an appropriate benchmark. Measuring the correlation of a fund's movements to that of an index, R-squared describes the level of association between the fund's volatility and market risk, or more specifically, the degree to which a fund's volatility is a result of the day-to-day fluctuations experienced by the overall market.

R-squared of all the three funds is less then 1 and only contra r-squared is near to one that is 0.7 some what closer to its benchmark volatility and other fund have less similarity with the market risk and its bench mark indices i.e. BSE100

Table below shows the return by the schemes over the period of three years tiapril 2008

Scheme Name 1 mth 3 mths 6 mths 1 yr 3 yrs NAV

SBI Magnum Contra - Growth 6.89 -9.19 -7.5 24.7 44.75 48.7

SBI Magnum Tax Gain Scheme- Growth 6.71 -12.06 -9.95 20.38 41.93 54.2

SBI Magnum Global Fund 94 - Growth 9.96 -16.15 -11.44 11.53 38.88 48.23

Average performance of similar category funds 7.86 -12.47 -9.63 18.87 41.85 50.38

BSE100 7.59 -7.75 -6.88 26.6 38.23--

BABASAB PATIL 134

http://www.mutualfundsindia.com/comparefund_rpt.asp?sort=3yr&sname=s.sch_code%20='SB026'%20or%20s.sch_code%20='SB030'%20or%20s.sch_code%20='SB211'&exchange='IND022'

http://www.mutualfundsindia.com/comparefund_rpt.asp?sort=1yr&sname=s.sch_code%20='SB026'%20or%20s.sch_code%20='SB030'%20or%20s.sch_code%20='SB211'&exchange='IND022'

http://www.mutualfundsindia.com/comparefund_rpt.asp?sort=182days&sname=s.sch_code%20='SB026'%20or%20s.sch_code%20='SB030'%20or%20s.sch_code%20='SB211'&exchange='IND022'




Wee can see that Magnum Contra has performed in terms of NAV Appreciation. Thane other funds.

BABASAB PATIL 135


Three returns can be graphed as below Contra has performed at par with BSE-100 IndexWhere as Global and Taxgain are below benchmark

TO sum up all the Three Funds are well managed but still they can have to improve to perform better to sustain in race of vigorous market.

BABASAB PATIL 136


Conclusion:

The schemes chosen for study proves to be a good investment avenue for all the

investors as the risk associated with these schemes is comparatively lower than

other top funds. At the same time yielding a very good return. So it should be

considered as Long-term investment plan. As per calculation all the ratio is

positive indicating a good performance, but still it can do better in future.

The volatility in the market might have affected the returns of the schemes

for short period like 6 months or one year, but the performance of the schemes for

3 years and above seams to be consistent. The schemes have been the one of the

best schemes of SBI MF and hence have bagged many awards

With the Indian stock markets growing at a frantic pace in 2007 (much like 2006),

investors who were willing to take on risk have been rewarded rather handsomely

for their efforts. While the smart investor has been grounded, many an ecstatic

investor has lost his bearings taking on even higher dosage of risk for that

additional return.

Nonetheless, 2007 had a lot of innovation in store for the mutual fund investor,

not all of which were positive. And there are indications that 2008 could prove to

be just as innovative.

Given that the domestic mutual fund industry has far from matured, it is only

natural to expect a lot of new products and innovation along the way. 2007

witnessed some of these innovations.

Infrastructure funds storm the rankings among the new innovative and successful

launch of funds.

New trend in fund offer is Real estate mutual funds (REMFs) which are a

relatively new phenomenon in India. Their emergence will fuel rapid growth of

the industry in the country.

BABASAB PATIL 137


Suggestions:

The fund should not change its investment strategy of investing long period

undervalued stock and wait till they appreciate over period of time.

The should introduce new schemes in real estate Fund as its going to be the

most sort after fund in future with lower minimum Investment limit.

The SBI MF should expand its oversee investment to take advantage of

globalize world economy.

The SBI MF should sell units more aggressively as it has advantage of large

investor base across the country.

All fund portfolio should have mix of 60- 65 percent large cap stock and 35 –

40 percent of mid cap stock as there are many emerging business.

BABASAB PATIL 138


Bibliography

1) Jaspal Singh, “History of Mutual Funds”, “Mutual Funds”.

2) Sadhak, “Structure of Mutual Fund in India”, “Mutual funds in

India”.

3) Punithavathy Pandian, “Risk Return Analyses”, “Security

Analyses and Portfolio of Management.

4) Jansen & Fischer, “Risk Return Analyses”, “Security Analyses

and Portfolio Management”.

5) Vidyaut Kumar Ta, (2007) “SBI MF Leading Market Success”,

“ Business Barons”, pp-26 to 31.

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WEBSITES REFERED:

www. valuereserachonline.com

www. Icicidirect.com

www.investopedia.com

www.amfi.com

www.sbimf.com

www.birlasunlife.com

BABASAB PATIL 140

http://www.birlasunlife.com/

http://www.sbimf.com/

http://www.amfi.com/

http://www.investopedia.com/

evaluation of mutual fundportfolio @ sbi project report mba finance

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