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PERFORMANCE EVALUATION OF MUTUAL FUNDS

1. INTRODUCTION

Right from its existence, Banks, whether nationalize or corporate, always

dominated others, in case of public investments or retail investments. But in

past few years due to various reasons like continuously falling of interest

rates, various scams etc. investors will have to look for various other

investments avenues that will give them better returns with minimization of

risks. Here Mutual Funds Industry has very important role to play in

providing alternate investment avenue to entire gamut of investors in

scientific and professional manner.

Indian Mutual Fund Industry has been definitely maturing over the

period. In four decades of its existence in India Mutual Funds have gone

through various structural changes and gained prominent position in

Financial Industry. Because of easy of investments, professional

management and diversification more and more investors are gaining

confidence in Mutual Funds. Even government policies like abolishment of

long term capital benefit taxes added advantage to growth of Mutual Funds.

This is all the way is leading to pool of more and more money from retail

investors into the Mutual Funds. So I carried out project in Mutual Funds to

understand Mutual Funds, Mutual Fund Industry, analyze the trend in

Mutual Funds. The Report first provides the fundamentals, explaining whatmutual funds are and how they work. Data Analysis of Indian Index Mutual

fund market has been done to give a comparative analysis of the selected six

funds in the category. Various factors surrounding the performance of these

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SCOPE OF THE STUDY

This study covers Equity growth funds of which ANANDRAHTI is a

distributor.

The study covers the period of 10 weeks

The study applies only three approaches to evaluate performance, namely

Treynors Index, Sharpes Index and Jensens Index.

SCHEMES CONSIDERED FOR THE PORTFOLIO EVALUATION

STUDY

1) Reliance banking fund

2) UTI Pharma and health care fund

3) Franklin FMCG fund

4) ICICI prudential Technology fund

5) Franklin Pharma fund



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2. Research Design

ADVANTAGES OF MURUAL FUND:

Diversification

Return Potential

Liquidity

Transparency

Flexibility

DIVERSIFICATION:

Mutual Funds invest in a number of companies across a broad cross-section ofindustries and sectors. This diversification reduces the risk because seldom do

all stocks decline at the same time and in the same proportion. You achieve this

diversification through a Mutual Fund with far less money than you can do on

your own.

RETURN POTENTIAL:

Over a medium to long term, Mutual Funds have the potential to provide a

higher return as they invest in a diversified basket of selected securities.

LIQUIDITY:

In open-end schemes, the investor gets the money back promptly at net asset



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DRAWBACKS OF MUTUAL FUNDS

Mutual funds have their drawbacks and may not be for everyone:

FEES AND COMMISSIONS:

All funds charge administrative fees to cover their day-to-day expenses. Some

funds also charge sales commissions or "loads" to compensate brokers, financial

consultants, or financial planners. Even if you don't use a broker or other

financial adviser, you will pay a sales commission if you buy shares in a Load

Fund.

TAXES:

During a typical year, most actively managed mutual funds sell anywhere from

20 to 70 percent of the securities in their portfolios. If your fund makes a profit

on its sales, you will pay taxes on the income you receive, even if you reinvest

the money you made.

MANAGEMENT RISK:

When you invest in a mutual fund, you depend on the fund's manager to make

the right decisions regarding the fund's portfolio. If the manager does not



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perform as well as you had hoped, you might not make as much money on your

investment as you expected. Of course, if you invest in Index Funds, you forego

management risk, because these funds do not employ managers.

RESEARCH DESIGN

It is the basic plan which guides the researcher in the collection and analysis of

data required for practicing the research. The fundamental base for the success

of the project depends on its effective research design. Research design simply

means a search for facts, answers to the questions and solutions to problems.

METHODOLOGY

Descriptive research: The main purpose of Descriptive Research is to

describe the state of view as it exists at present. Simply stated, it is fact

finding investigation. In Descriptive Research definite conclusion can be

arrived at, but it doesnt establish a cause and effect relationship

SOURCE OF DATA

After identifying and defining the research problem and determining specific

information required to solving the problem the research will look for the type

and sources of data which may yield the desired results, while deciding about

the method of data collection to be used for the study. There are two types of



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data,

1. Primary data.

2. Secondary data.

PRIMARY DATA:

These are those data which are collected for the first time. Primary data is

collected by enquiring certain employees, manager who was chosen on the basis

of their depth knowledge and work experience in the stock market. This enquiry

was informal in nature to gain as much as possible information.

SECONDARY DATA:

These are those data which are already been collected and analyzed by someone

and can save the time of the researcher. Secondary data may be available in the

form of company records, trade publications, libraries etc.

THE SECONDARY SOURCES ARE:

Company annual report

Fact Sheet of different funds

Articles

Text books

Broachers

TOOLS AND TECHNIQUES

PERFORMANCE MEASURE

Trenors Index



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Sharpes Index

Jensens Index

7.5 LIMITATIONS OF THE STUDY

The primary data collected is only from the customers of

ANANDRATHI.

The study is limited to the Portfolio evaluation of equity funds of the

selected funds.

Dividends declared for the period has not been considered in calculating

the returns from the funds.

NAV s considered for the calculations of returns is obtained from

MUTUALFUND INDIA website and the same is taken as true value

without verification.

The evaluation of Portfolio is limited to three main approaches viz

Treynors Index approach, Shapres Index approach and Jensen Index

approach.

3. Dynamics of Mutual Fund Industry

3.1. INTRODUCTION

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

who share a common financial goal. The money thus collected is then

invested in capital market instruments such as shares, debentures and other



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securities. The income earned through these investments and the capital

appreciation realized is shared by its unit holders in proportion to the

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

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

diversified, professionally managed basket of securities at a relatively low

cost. The flow chart below describes broadly the Working of mutual funds.

Mutual fund is a mechanism for pooling the resources by issuing units to

the investors and investing funds in securities in accordance with objectives

as disclosed in offer document.

Investments in securities are spread across a wide cross-section of

industries and sectors and thus the risk is reduced. Diversification reduces

the risk because all stocks may not move in the same direction in the same

proportion at the same time. Mutual fund issues units to the investors in



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accordance with quantum of money invested by them. Investors of mutual

funds are known as unit holders.

The investors in proportion to their investments share the profits orlosses. The mutual funds normally come out with a number of schemes with

different investment objectives that are launched from time to time. A

mutual fund is required to be registered with Securities and Exchange Board

of India (SEBI), which regulates securities markets before it can collect

funds from the public.

Different investment avenues are available to investors. Mutual funds

also offer good investment opportunities to the investors. Like all

investments, they also carry certain risks. The investors should compare the

risks and expected yields after adjustment of tax on various instruments

while taking investment decisions.

3.2. ORGANISATION OF A MUTUAL FUND

A mutual fund is set up in the form of a trust, which has sponsor, trustees,

Asset Management Company (AMC) and custodian. The trust is established

by a sponsor or more than one sponsor who is like promoter of a company.

The trustees of the mutual fund hold its property for the benefit of the unit

holders. Asset Management Company (AMC) approved by SEBI manages

the funds by making investments in various types of securities. Custodian,

who is registered with SEBI, holds the securities of various schemes of the

fund in its custody. The trustees are vested with the general power of

superintendence and direction over AMC. They monitor the performance



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and compliance of SEBI Regulations by the mutual fund SEBI Regulations

require that at least two thirds of the directors of trustee company or board

of trustees must be independent i.e. they should not be associated with the

sponsors. Also, 50% of the directors of AMC must be independent. All

mutual funds are required to be registered with SEBI before they launch any

scheme.

3.3. Mutual fund structure:

The structure consists of:



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3.3.1. Sponsor:

Sponsor is the person who acting alone or in combination with another

body corporate establishes a mutual fund. Sponsor must contribute at least

40% of the net worth of the Investment Managed and meet the eligibility

criteria prescribed under the Securities and Exchange Board of India

(Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable

for any loss or shortfall resulting from the operation of the Schemes beyond

the initial contribution made by it towards setting up of the Mutual Fund.

3.3.2. Trust:

The Mutual Fund is constituted as a trust in accordance with the

provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is

registered under the Indian Registration Act, 1908.

3.3.3. Trustee:

Trustee is usually a company (corporate body) or a Board of Trustees

(body of individuals). The main responsibility of the Trustee is to safeguard

the interest of the unit holders and inter alia ensure that the AMC functions

in the interest of investors and in accordance with the Securities and

Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions

of the Trust Deed and the Offer Documents of the respective Schemes. At

least 2/3rd directors of the Trustee are independent directors who are not

associated with the Sponsor in any manner.

3.3.4. Asset Management Company:

The Trustee as the Investment Manager of the Mutual Fund appoints the

AMC. The AMC is required to be approved by the Securities and Exchange

Board of India (SEBI) to act as an asset management company of the



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Mutual Fund. At least 50% of the directors of the AMC are independent

directors who are not associated with the Sponsor in any manner. The AMC

must have a net worth of at least 10 crore Rupees at all times.

The role of an Asset management companies is to act as the investment

manager of the trust. They are the ones who manage money of investors. An

AMC takes decisions, compensates investors through dividends, maintains

proper accounting & information for pricing of units, calculates the NAV,

& provides information on listed schemes. It also exercises due diligence on

investments & submits quarterly reports to the trustees.

3.3.5. Custodian:

The custodian is appointed by the Board of Trustees for safekeeping of

securities in terms of physical delivery and eventual safe keeping or

participating in the clearing system through approved depository

companies.

3.3.6. Registrars & Transfer Agent(R & T Agent):

The Registrars & Transfer Agents(R & T Agents) are responsible for the

investor servicing function, as they maintain the records of investors in

mutual funds. They process investor applications; record details provide by

the investors on application forms; send out to investors details regarding

their investment in the mutual fund; send out periodical information on the

performance of the mutual fund; process dividend payout to investor;

incorporate changes in information as communicated by investors; & keep

the investor record up-to-date, by recording new investors & removing

investors who have withdrawn their funds.



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3.4. Role of SEBI in mutual funds industry

Unit Trust of India was the first mutual fund set up in India

in the year 1963. In early 1990s, Government allowed public

sector banks and institutions to set up mutual funds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was

passed. The objectives of SEBI are to protect the interest of investors in

securities and to promote the development of and to regulate the securities

market.

As far as mutual funds are concerned, SEBI formulates policies and

regulates the mutual funds to protect the interest of the investors. SEBI

notified regulations for the mutual funds in 1993. Thereafter, mutual funds

sponsored by private sector entities were allowed to enter the capital

market. The regulations were fully revised in 1996 and have been amended

thereafter from time to time. SEBI has also issued guidelines to the mutual

funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector

entities including those promoted by foreign entities are governed by the

same set of Regulations. There is no distinction in regulatory requirements

for these mutual funds and all are subject to monitoring and inspections by

SEBI. The risks associated with the schemes launched by the mutual funds

sponsored by these entities are of similar type.



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3.5. Association of Mutual Funds in India (AMFI)

With the increase in mutual fund players in India, a need for mutual

fund association in India was generated to function as a non-profitorganization. Association of Mutual Funds in India (AMFI) was

incorporated on 22nd August, 1995.

AMFI is an apex body of all Asset Management Companies (AMC)

which has been registered with SEBI. Till date all the AMCs are that have

launched mutual fund schemes are its members. It functions under the

supervision and guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the Indian Mutual

Fund Industry to a professional and healthy market with ethical lines

enhancing and maintaining standards. It follows the principle of both

protecting and promoting the interests of mutual funds as well as their unit

holders.

3.6. History of the Indian Mutual Fund Industry

The formation of Unit Trust of India marked the evolution of the Indian

mutual fund industry in the year 1963. The primary objective at that time

was to attract the small investors and it was made possible through the

collective efforts of the Government of India and the Reserve Bank of India.

The history of mutual fund industry in India can be better understood

divided into four distinct phases.



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3.6.1. First Phase 1964-87 (Establishment and Growth of Unit Trust

of India)

Unit Trust of India enjoyed complete monopoly when it was establishedin the year 1963 by an act of Parliament. UTI was set up by the Reserve

Bank of India and it continued to operate under the regulatory control of the

RBI until the two were de-linked in 1978 and the entire control was

transferred in the hands of Industrial Development Bank of India (IDBI).

UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-

64), which attracted the largest number of investors in any single investment

scheme over the years. It launched ULIP in 1971, six more schemes

between 1981-84, Children's Gift Growth Fund and India Fund (India's first

offshore fund) in 1986, Mastershare (Indias first equity diversified scheme)

in 1987 and Monthly Income Schemes (offering assured returns) during

1990s. By the end of 1987, UTI's assets under management grew ten times

to Rs 6700 Crores.

3.6.2. Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by

public sector banks and Life Insurance Corporation of India (LIC) and

General Insurance Corporation of India (GIC). SBI Mutual Fund was the

first non- UTI Mutual Fund established in June 1987 followed by Canbank

Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89),

Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of

Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989

while GIC had set up its mutual fund in December 1990. At the end of

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



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crores. However, UTI remained to be the leader with about 80% market

share.

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

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

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

families. Also, 1993 was the year in which the first Mutual Fund regulations

came into being, under which all mutual funds, except UTI were to be

registered and governed. The erstwhile Kothari Pioneer (now merged with

Franklin Templeton) was the first private sector mutual fund registered in

July 1993.

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

comprehensive and revised Mutual Fund Regulations in 1996. The industry

now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many

foreign mutual funds setting up funds in India and also the industry has

witnessed several mergers and acquisitions. As at the end of January 2003,

there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The

Unit Trust of India with Rs.44,541 crores of assets under management was

way ahead of other mutual funds.

3.6.4. Fourth Phase since February 2003

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

1963 UTI was bifurcated into two separate entities. One is the Specified

Undertaking of the Unit Trust of India with assets under management of



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Rs.29,835 crores as at the end of January 2003, representing broadly, the

assets of US 64 scheme, assured return and certain other schemes. The

Specified Undertaking of Unit Trust of India, functioning under an

administrator and under the rules framed by Government of India and does

not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB

and LIC. It is registered with SEBI and functions under the Mutual Fund

Regulations. With the bifurcation of the erstwhile UTI which had in March

2000 more than Rs.76,000 crores of assets under management and with the

setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund

Regulations, and with recent mergers taking place among different private

sector funds in the mutual fund industry.

The Mutual Fund Marker has entered its current phase of consolidation

and growth. At present there are 44 Mutual Fund Houses in India with

Average Assets under Management (AAUM) Rs. 71328123.33 Lakhs..

The graph indicates the growth of assets over the years.



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GROWTH IN ASSETS UNDER MANAGEMENT

Note:

Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified

Undertaking of the Unit Trust of India effective from February 2003. The

Assets under management of the Specified Undertaking of the Unit Trust of



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India has therefore been excluded from the total assets of the industry as a

whole from February 2003 onwards.

FREQUENTLY USED TERMS

Net Asset Value (NAV):

Net Asset Value is the market value of the assets of the scheme minus its

liabilities. The per unit NAV is the net asset value of the scheme divided by

the number of units outstanding on the Valuation Date.

The net asset value (NAV) is the market value of the fund's underlying

securities. It is calculated at the end of the trading day. Any open-end funds

buy or sell order received on that day is traded based on the net asset value

calculated at the end of the day. The NAV per units is such Net Asset Value

divided by the number of outstanding units.

Sale Price:

Is the price charged while investing in an open-ended scheme. This is

also called Offer Price.

Repurchase Price:

Is the price at which a close-ended scheme repurchases its units. This is

also called Bid Price.



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Redemption Price:

Is the price at which open-ended schemes repurchase their units and

close-ended schemes redeem their units on maturity. Such prices are NAV

related.

3.7. ADVANTAGES OF MUTUAL FUNDS

There are numerous benefits of investing in mutual funds and one of the

key reasons for its phenomenal success in the developed markets like US

and UK is the range of benefits they offer, which are unmatched by most

other investment avenues.

3.7.1. Affordability:

A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc.

depending upon the investment objective of the scheme. An investor can

buy in to a portfolio of equities, which would otherwise be extremely

expensive. Each unit holder thus gets an exposure to such portfolios with an

investment as modest as Rs.500/-. This amount today would get you less

than quarter of an Infosys share. Thus it would be affordable for an investor

to build a portfolio of investments through a mutual fund rather than

investing directly in the stock market.

3.7.2. Economies of Scale:

Because a mutual fund buys and sells large amounts of securities at a

time, its transaction costs are lower than you as an individual would pay.



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3.7.3. Diversification:

It simply means that spread the investment across different securities

(stocks, bonds, money market instruments, real estate, fixed deposits etc.)

and different sectors (auto, textile, information technology etc.). This kind

of diversification may add to the stability of returns, for example during one

period of time equities might under perform but bonds and money market

instruments might do well enough to offset the effect of a slump in the

equity markets. Similarly the information technology sector might be faringpoorly but the auto and textile sectors might do well and may protect

principal investment as well as help to meet return objectives.

3.7.4. Variety:

Mutual funds offer a tremendous variety of schemes. This variety is

beneficial in two ways: first, it offers different types of schemes to investors

with different needs and risk appetites; secondly, it offers an opportunity to

an investor to invest sums across a variety of schemes, both debt and equity.

For example, an investor can invest his money in a Growth Fund (equity

scheme) and Income Fund (debt scheme) depending on his risk appetite and

thus create a balanced portfolio easily or simply need to buy a Balanced

Scheme.



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3.7.5. Professional management:

Qualified investment professionals who seek to maximize returns and

minimize risk monitor investor's money. When you buy in to a mutual fund,you are handing your money to an investment professional that has

experience in making investment decisions. It is the Fund Manager's job to

(a) find the best securities for the fund, given the fund's stated investment

objectives; and (b) keep track of investments and changes in market

conditions and adjust the mix of the portfolio, as and when required.

3.7.6. Regulations:

Securities Exchange Board of India (SEBI), the mutual funds regulator

has clearly defined rules, which govern mutual funds. These rules relate to

the formation, administration and management of mutual funds and also

prescribe disclosure and accounting requirements. Such a high level of

regulation seeks to protect the interest of investors.

3.7.7. Liquidity:

In open-ended mutual funds, you can redeem all or part of your units any

time you wish. Some schemes do have a lock-in period where an investor

cannot return the units until the completion of such a lock-in period.

3.7.8. Convenience:

An investor can purchase or sell fund units directly from a fund, througha broker or a financial planner. The investor may opt for a Systematic

Investment Plan (SIP) or a Systematic Withdrawal Advantage Plan

(SWAP). In addition to this an investor receives account statements and

portfolios of the schemes.



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3.7.9. Flexibility:

Mutual Funds offering multiple schemes allow investors to switch easily

between various schemes. This flexibility gives the investor a convenient

way to change the mix of his portfolio over time.

3.7.10. Transparency:

Open-ended mutual funds disclose their Net Asset Value (NAV) daily

and the entire portfolio monthly. This level of transparency, where the

investor himself sees the underlying assets bought with his money, is

unmatched by any other financial instrument. Thus the investor is in the

know of the quality of the portfolio and can invest further or redeem

depending on the kind of the portfolio that has been constructed by the

investment manager.

3.8. Drawbacks of Mutual Funds

Mutual funds have their drawbacks and may not be for everyone:

3.8.1. No Guarantees:

No investment is risk free. If the entire stock market declines in value, the

value of mutual fund shares will go down as well, no matter how balanced

the portfolio. Investors encounter fewer risks when they invest in mutual

funds than when they buy and sell stocks on their own. However, anyone

who invests through a mutual fund runs the risk of losing money.



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3.8.2. Fees and commissions:

All funds charge administrative fees to cover their day-to-day expenses.

Some funds also charge sales commissions or "loads" to compensate

brokers, financial consultants, or financial planners.

3.8.3. Taxes:

During a typical year, most actively managed mutual funds sell anywhere

from 20 to 70 percent of the securities in their portfolios. If a fund makes a

profit on its sales, investor needs to pay taxes on the income received, even

if the money is reinvested.

3.8.4. Management risk:

When you invest in a mutual fund, you depend on the fund's manager to

make the right decisions regarding the fund's portfolio. If the manager does

not perform as well as you had hoped, you might not make as much money

on your investment as you expected. Of course, if you invest in Index

Funds, you forego management risk, because these funds do not employ

manage.

3.8.5. Dilution

It's possible to have too much diversification because funds have

smallholdings in so many different companies, high returns from a fewinvestments often don't make much difference on the overall return.

Dilution is also the result of a successful fund getting too big. When money

pours into funds that have had strong success, the manager often has trouble

finding a good investment for all the new money.



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3.9. TYPES OF MUTUAL FUND SCHEMES

Wide variety of Mutual Fund Schemes exists to cater to the needs such as

financial position, risk tolerance and return expectations etc. The tablebelow gives an overview into the existing types of schemes in the Industry.

3.9.1. By structure

Open-Ended schemes

Close-ended schemes

Interval schemes

3.9.2. By Investment objective

Growth schemes

Income schemes

Balanced schemes

Money market schemes

3.9.3. Other schemes

Tax saving schemes

Special saving schemes

Index schemes



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Sector specific schemes

3.9.4. By Maturity Period:

A mutual fund scheme can be classified into open-ended scheme or close-

ended scheme depending on its maturity period.

a. Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription

and repurchase on a continuous basis. These schemes do not have a fixed

maturity period. Investors can conveniently buy and sell units at Net Asset

Value (NAV) related prices, which are declared on a daily basis. The key

feature of open-end schemes is liquidity.

b. Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7

years. The funds give an option of selling back the units to the mutual fund

through periodic repurchase at NAV related prices. SEBI Regulations

stipulate that at least one of the two exit routes is provided to the investor

i.e. either repurchase facility or through listing on stock exchanges. These

mutual funds schemes disclose NAV generally on weekly basis, open for

subscription only during a specified period at the time of launch of the

scheme. Investors can invest in the scheme at the time of the initial public

issue and thereafter they can buy or sell the units of the scheme on the stock

exchanges where the units are listed.

Key Differences between open and close open ended schemes



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S.No Feature Open

end

Close

end

1 Capitalizatio

n

Unlimit

ed

Limited

2 Any time

entry

Yes No

3 Any time

exit

Yes No

4 Tax

advantages

Yes No

5 Listed on

exchange

General

ly no

Yes

3.9.5. By Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or

balanced scheme considering its investment objective. Such schemes may

be open-ended or close-ended schemes as described earlier. Such schemes

may be classified mainly as follows:

a. Growth / Equity Oriented Scheme:

The aim of growth funds is to provide capital appreciation over the

medium to long- term. Such schemes normally invest a major part of theircorpus in equities. Such funds have comparatively high risks. These

schemes provide different options to the investors like dividend option,

capital appreciation, etc. and the investors may choose any option

depending on their preferences. The investors must indicate the option in

the application form. The mutual funds also allow the investors to change



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the options at a later date. Growth schemes are good for investors having a

long-term outlook seeking appreciation over a period of time.

b.Income / Debt Oriented Scheme:

The aim of income funds is to provide regular and steady income to

investors. Such schemes generally invest in fixed income securities such as

bonds, corporate debentures, Government securities and money market

instruments. Such funds are less risky compared to equity schemes. These

funds are not affected because of fluctuations in equity markets. However,

opportunities of capital appreciation are also limited in such funds. The

NAVs of such funds are affected because of change in interest rates in the

country. If the interest rates fall, NAVs of such funds are likely to increase

in the short run and vice versa. However, long-term investors may not

bother about these fluctuations

c.Balanced Fund:

The aim of balanced funds is to provide both growth and regular income

as such schemes invest both in equities and fixed income securities in the

proportion indicated in their offer documents. These are appropriate for

investors looking for moderate growth. They generally invest 40-60% in

equity and debt instruments. These funds are also affected because of

fluctuations in share prices in the stock markets. However, NAVs of suchfunds are likely to be less volatile compared to pure equity funds.



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3.9.6. Other Schemes:

a.Money Market or Liquid Fund:

These funds are also income funds and their aim is to provide easy

liquidity, preservation of capital and moderate income. These schemes

invest exclusively in safer short-term instruments such as treasury bills,

certificates of deposit, commercial paper and inter-bank call money,

government securities, etc. Returns on these schemes fluctuate much less

compared to other funds. These funds are appropriate for corporate and

individual investors as a means to park their surplus funds for short periods.

b. Gilt Fund:

These funds invest exclusively in government securities. Government

securities have no default risk. NAVs of these schemes also fluctuate due to

change in interest rates and other economic factors as are the case with

income or debt oriented schemes.

c.Index Funds:

Index Funds replicate the portfolio of a particular index such as the BSE

Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in

the securities in the same weight age comprising of an index. NAVs of such

schemes would rise or fall in accordance with the rise or fall in the index,though not exactly by the same percentage due to some factors known as

"tracking error" in technical terms. Necessary disclosures in this regard are

made in the offer document of the mutual fund scheme.



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There are also exchange traded index funds launched by the mutual

funds, which are traded on the stock exchanges.

d.Sector specific funds/schemes:

These are the funds/schemes, which invest in the securities of only those

sectors or industries as specified in the offer documents. e.g.

Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG),

Petroleum stocks, etc. The returns in these funds are dependent on the

performance of the respective sectors/industries. While these funds may

give higher returns, they are more risky compared to diversified funds.

Investors need to keep a watch on the performance of those

sectors/industries and must exit at an appropriate time. They may also seek

advice of an expert.

e. Tax Saving Schemes:

These schemes offer tax rebates to the investors under specific provisions

of the Income Tax Act, 1961 as the Government offers tax incentives for

investment in specified avenues. e.g. Equity Linked Savings Schemes

(ELSS). Pension schemes launched by the mutual funds also offer tax

benefits. These schemes are growth oriented and invest pre-dominantly in

equities. Their growth opportunities and risks associated are like any equity-

oriented scheme.

f. Fund of Funds (FOF) scheme:

A scheme that invests primarily in other schemes of the same mutual fund

or other mutual funds is known as a FOF scheme. A FOF scheme enables



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the investors to achieve greater diversification through one scheme. It

spreads risks across a greater universe.

g.Assured return scheme:

Assured return schemes are those schemes that assure a specific return to

the unit holders irrespective of performance of the scheme.

A scheme cannot promise returns unless such returns are fully guaranteed

by the sponsor or AMC and this is required to be disclosed in the offer

document.

Investors should carefully read the offer document whether return is

assured for the entire period of the scheme or only for a certain period.

Some schemes assure returns one year at a time and they review and change

it at the beginning of the next year.

h.Asset allocation funds:

These funds invest in various asset classes including, but not limited to,

equities, fixed income securities, and money market instruments. They seek

high total return by maintaining precise weightings in asset classes. Global

asset allocation funds invest in a mix of equity & debt securities issued

worldwide

i. Flexible portfolio fund:

These funds invest in common stocks, bonds, other debt securities, and

money market securities to provide high total return. These funds may



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invest up to100 percent in any one type of security and may easily change

weightings depending upon market conditions.

3.9.7. Dividend Option:

Generally two options are available for every scheme regarding dividend

payout and growth option. By opting for growth option an investor can have the

benefit of long-term growth in the stock market on the other side by opting for

the dividend option an investor can maintain his liquidity by receiving dividend

time to time. Some time people refer dividend option as dividend fund and

growth fund. Generally decisions regarding declaration of the dividend depend

upon the performance of stock market and performance of the fund.

OPTION REGARDING DIVIDEND


Dividend Growth

ReinvestedPayout


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IIFL owns and manages the website, www.indiainfoline.com, which is

one of Indias leading online destinations for personal finance, stock markets,

economy and business.

IIFL has been awarded the Best Broker, India by Finance Asia and the

Most improved brokerage, India in the Asia Money polls. India Infoline was

also adjudged as Fastest Growing Equity Broking House - Large firms by Dun

& Bradstreet. A forerunner in the field of equity research, IIFLs research is

acknowledged by none other than Forbes as Best of the Web and a must

read for investors in Asia. Our research is available not just over the Internet

but also on international wire services like Bloomberg, Thomson First Call and

Internet Securities where it is amongst one of the most read Indian brokers.

A network of over 2,500 business locations spread over more than 500

cities and towns across India facilitates the smooth acquisition and servicing of

a large customer base. All our offices are connected with the corporate office inMumbai with cutting edge networking technology. The group caters to a

customer base of about a million customers, over a variety of mediums viz.

online over the phone and at our branches



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HISTORY AND MILESTONES

1995 Commenced operations as Probity Research & Services Pvt. Ltd.

1997 Launched research products of leading Indian companies, key

sectors and the economy. Client included leading FIIs, banks and

companies

1999 Launched www.indiainfoline.com

2000 Launched online trading through www.5paisa.com.

Started distribution of life insurance, mutual fund and personal

financial products

Acknowledged by Forbes as Best of the Web and must read for

investors

2003 Launched proprietary trading platform Trader Terminal for retailcustomers

2004 Acquired commodities broking license

Launched Portfolio Management Service.

2005 Maiden IPO and listed on NSE, BSE

2006 Acquired membership of DGCX,

Launched Wealth Advisory Services.

2007 Commenced institutional equities business under IIFL

Formed Singapore subsidiary, IIFL (Asia) Pte Ltd



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Launched consumer finance business.

CLSA team joined IIFL in May 2007.

2008 Launched IIFL Wealth, Transitioned to insurance broking modelReceived Best Broker-India award from finance Asia; Most

improved Brokerage-India award from Asia money.

Got in principle approval from SEBI for sponsoring mutual fund in

November 2008.

2009 Received registration for Housing FinanceReceived Fastest growing Equity Broking House-Large firms in

India by Dun & Bradstreet.

Entered into a strategic agreement with interactive Brokers,

LLC(USA) to provide our clients direct market access to over 80

global exchanges in 18 countries.

2010 Received in-principle approval for membership of the Singapore

Stock Exchange.

Received membership of the Colombo Stock Exchange.

2011 IIFL gets approval for starting its Mutual Funds operations

(Approval for AMC) IIFL will commence its Mutual funds

operations in the second half of 2011



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Our Business Model

IIFL, started as a company providing independent and unbiased research.

Butoverthe years, we have added almost the entire gamut of financial products

and services to our portfolio of offerings. We not only offer advice and products

to customers, but also execute their orders and provide constant service

thereafter.



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Board of directors

Mr. Nirmal Jain, Chairman , India Infoline Ltd.

Mr. R. Venkataraman, Managing Director , India Infoline Ltd.

Mr. Nilesh Vikamsey, Independent Director , India Infoline Ltd.

Mr. A. K. Purwar, Independent Director , India Infoline Ltd.



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Mr. Kranti Sinha, Independent Director , India Infoline Ltd.



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IIFL Today

We are leading financial services intermediary where the customer can meet all

his advisory, investing and borrowing needs under one roof.

So what is the underlying mega opportunity in the financial services industry?

Positive macro-economic growth

India has become the outsourcing capital of the world. With more and more

businesses being outsourced to India, the number of jobs created by BPOs

has given a tremendous boost to our economy

India has the one of the worlds largest young working class

Volatile interest rates have made people more cautious about where to invest

their hard earned money



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Investment habits changing from lazy to advise everyone wants to

invest their savings where returns are maximum.

Thats why there is an increased demand for financial services today.

Customers need an expert, an advisor who can help them with all their

investing and borrowing needs. Someone who can help them secure their future

by making the right choices! We help people secure their own future as well as

their families future by helping them make the right investment decisions. Weprovide advice, offer a wide range of products to choose from, execute the

orders and complete the value chain by providing constant service to all our

customers. We help them fulfill their financial needs. In short, we are a one stop

investment shop where customers can meet all their advisory, investing and

borrowing needs under one roof.

IIFL Network

IIFL has a wide distribution network with:

Over a million customers all over India

Presence in over 3,000 business locations across 500 cities.

Our global footprint extends across geographies with offices in Colombo,

Dubai, Singapore and New York.

IIFL Businesses



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IIFL offers almost the entire gamut of financial services in India They can be

broadly categorized into:

Equities, commodities and currency broking

Wealth Management services

Investment banking

Distribution of Life Insurance products

Distribution of Mutual funds, Fixed Deposits, RBI Bonds and Small Savingsamong others

Distribution of Mortgages and other Loan products

Therefore as on date we are into the following businesses:

We are registered with BSE and NSE for securities trading.

We are registered with MCX, NCDEX and DGCX for commodities trading.

We are registered with CDSL and NSDL as depository participants.

We are registered as a Category I merchant banker where we focus on the

SME space with strong distribution network. We have a strong presence in

the QIP space.

We are a SEBI registered portfolio manager.

We are the first Indian broker to have memberships of the Colombo Stock

Exchange and also on the Singapore Stock Exchange.



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Two subsidiaries India Infoline Investment Services and Moneyline Credit

Limited are registered with RBI as non-deposit taking non-banking

financial services companies.

Distribution of Mutual funds, Fixed Deposits, RBI Bonds and Small Savings

among others.

India Infoline Housing Finance Ltd, the housing finance arm, is registered

with the National Housing Bank for distribution of Mortgages and other

Loan products.

We are Insurance brokers registered with the IRDA and we distribute

insurance products of all leading insurance companies.

We are one of the fastest growing companies in the Indian Wealth

Management space.

We have received approval in 2011 to start our Mutual Funds operations.



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Awards and accolades

Best Equity Broker of the Year Bloomberg UTV, 2011

IIFL was awarded the Best Equity Broker of the Year at the recently held

Bloomberg UTV Financial Leadership Awards, 2011.

The award was presented by the Honble Finance Minister of India,



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Shri Pranab Mukherjee. The Bloomberg UTV Financial Leadership Awards

acknowledge the Extraordinary contribution of Indias financial leaders and

visionaries from January 2010 to January 2011.



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IIFL Vision

To become the Most Respected Company in the

financial services space in India

IIFL Culture

OM and AOM Owner Mindset and Application of Mind The Strong

Foundation on which we stand Owner Mindset (OM)

OM is the DNA and culture of our organization.

Everyone behaves like an owner and not as an employee of the organization.

When anyone from team IIFL is faced with a problem he thinks like an

owner and finds a solution to it rather than blindly taking the problem to his

seniors.

At IIFL one has the autonomy to operate, be creative and even make

mistakes, it provides all employees a platform to learn, experiment and grow.

At IIFL, we never compromise on our vision or do anything that will affect

the morale of our people

Application of Mind (AOM)

Keep the objective of the task assigned and the overall objective of the

organization in mind all the time.



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Dont follow rules / procedures without understanding the logic.

When in doubt, ask questions and seek clarity.

With OM and AOM everyone in the organization feels that work is fun. Its

less tedious and more enjoyable

We are a one-stop financial services shop, most respected for quality of its

advice, personalized service and cutting-edge technology.

Equities

IIFL is a member of BSE and NSE registered with NSDL and CDSL as a

depository participant and provides broking services in the cash, derivatives and

currency segments, online and offline. IIFL is a dominant player in the retail as

well as institutional segments of the market. It recently became the first Indianbroker to get a membership of the Colombo Stock Exchange and is also the first

Indian broker to have received an in-principle approval for membership of the

Singapore Stock Exchange. IIFLs Trader Terminal, its proprietary trading

platform, is widely acknowledged as one of the best available for retail

investors. Investors opt for IIFL given its unique combination of superior

Service, cutting-edge proprietary Technology, Advice powered by world-

acclaimed research and its unparalleled Reach owing to its over 2500 business

locations across over 500 cities in India.

IIFL received the BQ1 broker grading (highest grading) from CRISIL.

The assigned grading reflects an effective external interface, robust systems



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framework and strong risk management. The grading also reflects IIFLs

healthy regulatory compliance track record and adequate credit risk profile

IIFLs analyst team won Zee Business Indias best market analysts

awards 2009 for being the best in the Oil and Gas and Commodities sectors

and a finalist in the Banking and IT sectors.

IIFL has rapidly emerged as one of the premier institutional equities

houses in India with a team of over 25 research analysts, a full-fledged sales and

trading team coupled with an experienced investment banking team.

The Institutional equities business conducted a very successful

Enterprising India global investors conference in Mumbai in March 2010,

which was attended by funds with aggregate AUM over US$5 trillion and CEOs

and other executives representing corporates with a combined market

capitalization of over US$500 billion. The Discover Sri Lanka globalinvestors conference, held in Colombo in July 2010, was attended by more than

50 leading global and major local investors and 25 Sri Lankan corporates, along

with senior Government officials.

Commodities

IIFL offers commodities trading to its customers vide its membership of

the MCX and the NCDEX. Our domain knowledge and data based on in depth

research of complex paradigms of commodity kinetics, offers our customers a

unique insight into behavioral patterns of these markets. Our customers are



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ideally positioned to make informed investment decisions with a high

probability of success.

Credit and finance

IIFL offers a wide array of secured loan products. Currently, secured

loans (mortgage loans, margin funding, loans against shares) comprise 94% of

the loan book. The Company has discontinued its unsecured products. It has

robust credit processes and collections mechanism resulting in overall NPAs of

less than 1%. The Company has deployed proprietary loan-processing software

to enable stringent credit checks while ensuring fast application processing.

Recently the company has also launched Loans against Gold.

Insurance

IIFL entered the insurance distribution business in 2000 as ICICI

Prudential Life Insurance Co. Ltds corporate agent. Later, it became an

Insurance broker in October 2008 in line with its strategy to have an open

architecture model. The Company now distributes products of major insurance

companies through its subsidiary India Infoline Insurance Brokers Ltd.

Customers can choose from a wide bouquet of products from several insurance

companies including Max New York Life Insurance, MetLife, Reliance Life

Insurance, Bajaj Allianz Life, Birla Sunlife, Life Insurance Corporation, Kotak

Life Insurance and others.



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Wealth Management Service

IIFL offers private wealth advisory services to high-net-worth individuals

(HNI) and corporate clients under the IIFL Private Wealth brand. IIFL Private

Wealth is managed by a qualified team of MBAs from IIMs and premier

institutes with relevant industry experience. The team advises clients across

asset classes like sovereign and quasi-sovereign debt, corporate and

collateralized debt, direct equity, ETFs and mutual funds, third party PMS,

derivative strategies, real estate and private equity. It has developed innovative

products structured on the fixed income side.

It also has tied up with Interactive Brokers LLC to strengthen its

execution platform and provide investors with a global investment platform.

Investment Banking

IIFLs investment banking division was launched in 2006. The business

leverages upon its strength of research and placement capabilities of the

institutional and retail sales teams. Our experienced investment banking team

possesses the skill-set to manage all kinds of investment banking transactions.Our close interaction with investors as well as corporate helps us understand

and offer tailor-made solutions to fulfill requirements.



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The Company possesses strong placement capabilities across

institutional, HNI and retail investors. This makes it possible for the team to

place large issues with marquee investors.

In FY10, the team advised and managed more than 10 transactions

including four IPOs and four Qualified Institutions Placements Product

Offerings.

FLAME, Indias largest financial literacy initiative, by IIFL

FLAME (Financial Literacy Agenda for Mass Empowerment) is an IIFL

(India Infoline Group) initiative towards spreading financial literacy amongst

masses to help their inclusion in the economic prosperity of India. With

accelerating GDP, per capita growth as well as savings, financial literacy is

more relevant and important today than ever before. While the governmentsemphasis on financial inclusion is to widen the reach of banking services to

unbanked rural areas, we endeavor to complement the effort by helping people

make the most of the available banking and financial services.

Even the people who qualify as banked population have limited

understanding of how to use financial products to help enhancement of financialsecurity, building up wealth and ensuring a comfortable life post retirement, and

also how to avoid frauds and losses from unscrupulous agents and ponzi

schemes. The objective is to light a FLAME, which will be ignite many a flame

to remove the darkness of illiteracy and steer the inclusion of the masses



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towards the sunshine of growth and prosperity. As a part of the FLAME

initiative, IIFL has planned an elaborate set of activities

Financial awareness workshops across 1000 cities in India -As a part

of this initiative, IIFL will hold financial awareness workshops at over 1,000

locations across India. These free workshops will be held across the country,

including Tier II and Tier III cities where our expert speakers will spread

financial literacy.

A comprehensive mass media campaign This will be a huge campaign

which will feature in the print media and will reach out to investors across the

country. The idea is to convey the various concepts which are a part of the

literacy drive through easy-to-grasp way e.g. our first campaign uses cartoon

illustrations which will make it far easier for people to understand the various

concepts explained therein.

Books and publications -Multiple publications are planned which would

seek to highlight the various concepts of finance as a part of this initiative.

These publications will be given out at the workshops which will be held across

the country.

Financial awareness helpline - IIFL will setup a helpline, in our owncall center, where anyone can call up and get answers to their queries pertaining

to financial services. This helpline will be manned by IIFLs trained

professionals who will provide a solution to such queries.



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Driving the knowledge edge

To educate and update the clients, IIFL brings out research reports on a

daily, weekly, fortnightly, monthly, quarterly and yearly basis, spanning

technical and fundamental research on funds, stocks, indexes, derivatives,

commodities, insurance, corporate earnings and SMEs. Very recently, IIFL has

ventured into regional research reports and books. During the year, IIFL

research articles have been published in many regional newspapers. IIFL has

Ask Analyst feature on its website, wherein clients can ask the research team

questions on all sectors, and receive their answers within 24 hours. Another

feature which the website carries is the Live Chat, wherein clients can call and

have discussions with the research team.

At IIFL, our core competence lies in research, which has been

assiduously built over the years. We have come out with a number of

comprehensive research reports, which have been well received by industryexperts. IIFL has separate research teams for the institutional and the retail

customer segments. The research is available on international wire services like

Bloomberg, Thomson First Call and Internet Securities. The 50 member strong

research team is based in Mumbai, Singapore and Colombo and covers 200+

stocks.

Trader Terminal

The Trader Terminal is a new world class trading software that provides

single-screen products access to Equities, Derivatives, Commodities,

Currencies, Mutual Funds and IPOs. The principal advantage is faster



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execution, multiple options for investors to trade from their desktop, over the

web and using their mobiles.

Trade across Equities, Commodities, Currencies, MFs, all in one screen

Easy access to our world-class research, Trade on the Trader Terminal through

your mobile. Advanced charting options and technical analysis tools Streaming

quotes and instant order confirmation.

Reviewing 2010-11 Performance

Business

IIFL Mutual Fund

During the year, IIFL Mutual Fund, the India Infoline Ltd sponsored

mutual fund, received final regulatory approval from Securities and ExchangeBoard of India (SEBI) to commence operations. This will enable

commencement of the mutual fund business and the launch of mutual fund

schemes in due course.

International Expansion

IIFLs Singapore subsidiary received the final approval from SingaporeStock Exchange for its equities broking business. The subsidiary commenced its

broking operations from December 2010. IIFL donated its entire first week

commissions from trading operations in SGX to Community Chest, Singapore.

The Company also received approval from the Colombo Stock Exchange and



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SEC, Sri Lanka for undertaking broking business, becoming the first Indian

broker to set up business in Sri Lanka.

Technology Development

Launch of Latest Version of Trader Terminal

The Company launched the latest version of Trader Terminal, which

enjoys lightning-fast execution speed, world-class user interface and a single

click access to its worldclass research. The new terminal offers the facility to

trade in cash, derivatives, mutual funds, IPOs, currencies and commodities all in

one screen. Besides, investors can now trade from their desktops, over the web

or using their mobile phones.

Outsourcing Technology infrastructure to IBM

IIFL has entered into a ten year IT outsourcing agreement with IBM to

transform its IT Infrastructure and establish a direct linkage between business

performance and IT costs. The` 3 bn agreement would help IIFL deliver

enhanced levels of

customer satisfaction, ensure continuous audit readiness, strengthen IT security

framework and compliance and provide better visibility and control of IT

operations. The agreement covers IIFLs 700 branches. IBM will set up acentralized helpdesk, a pan-India services desk, applications and infrastructure

in branches, and deploy service management processes to cover assets, IT

security, capacity, network, storage, incident /problem/change, and technology,

among others



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Customer Engagement

Enterprising India-ii

IIFLs global investor conference Enterprising India II held in

Mumbai received an overwhelming response. The conference attracted a

participation of over 400 institutional investors, over 75 Indian and Sri Lankan

companies and select specialist speakers. The conference had a strong line-up of

quality investors, including a number of marquee long-only funds with

estimated investments of over US$ 100 bn in India.

Discover Srilanka Conference

IIFLs global investor conference, Discover Sri Lanka was held in

Colombo in July 2010. The same was attended by more than 50 leading globaland local investors and 25 Sri Lankan corporates, along with senior government

officials.

Retail Investor Meets

IIFL conducted several investor meets and camps across India, on its own

as well as with leading media house ET Now to spread financial literacy andawareness about risk- return of various products, aspects of financial planning

and understanding of investor rights



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4. Performance Measures or Risk Measurement of

Mutual Funds

Mutual Fund industry today, with about 44 players and more than one

thousand schemes, is one of the most preferred investment avenues in India.

However, with a plethora of schemes to choose from, the retail investor faces

problems in selecting funds. Factors such as investment strategy and

management style are qualitative, but the funds record is an important indicator

too. Though past performance alone can not be indicative of future

performance, it is, the only quantitative way to judge how good a fund is at

present. Therefore, there is a need to correctly assess the past performance of

different mutual funds.

Worldwide, good mutual fund companies over are known by their AMCs

and this fame is directly linked to their superior stock selection skills. For

mutual funds to grow, AMCs must be held accountable for their selection of

stocks. In other words, there must be some performance indicator that will

reveal the quality of stock selection of various AMCs.

Return alone should not be considered as the basis of measurement of the

performance of a mutual fund scheme, it should also include the risk taken by

the fund manager because different funds will have different levels of risk

attached to them. Risk associated with a fund, in general, can be defined as

variability or fluctuations in the returns generated by it. The higher the

fluctuations in the returns of a fund during a given period, higher will be the risk

associated with it. These fluctuations in the returns generated by a fund are



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resultant of two guiding forces. First, general market fluctuations, which affect

all the securities present in the market, called market risk or systematic risk and

second, fluctuations due to specific securities present in the portfolio of the

fund, called unsystematic risk. The Total Risk of a given fund is sum of these

two and is measured in terms of standard deviation of returns of the fund.

Systematic risk, on the other hand, is measured in terms of Beta, which

represents fluctuations in the NAV of the fund vis--vis market. The more

responsive the NAV of a mutual fund is to the changes in the market; higher

will be its beta. Beta is calculated by relating the returns on a mutual fund with

the returns in the market. While unsystematic risk can be diversified through

investments in a number of instruments, systematic risk can not. By using the

risk return relationship, we try to assess the competitive strength of the mutual

funds vis--vis one another in a better way.

In order to determine the risk-adjusted returns of investment portfolios,

several eminent authors have worked since 1960s to develop composite

performance indices to evaluate a portfolio by comparing alternative portfolios

within a particular risk class.

The most important and widely used measures of performance are:

Arithmetic Mean

Standard Deviation

Beta

The Sharpe Measure

The Treynor Measure



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Jenson Model

4.1. Arithmetic Mean (Returns)

Y/N

Where Y- Return of NAV values N- Number of Observation

Average return that can be expected from investment. The arithmetic

average return is appropriate as a measure of the central tendency of a number

of returns calculated for a particular time i.e. for one year.

4.2. Standard Deviation

It reflects the degree to which returns fluctuate around their average. The

higher the standard deviation, the greater is the risk. The measure is typically

calculated using monthly results which are generally disclosed by Fund houses

in their fund updates. A conservative equity fund might have a number below

3.5% per month, whereas an extremely aggressive one could have a value of 6%

or more. About two thirds of the time a funds actual monthly return will range

within plus or minus one standard deviation of its monthly average. Its return

will vary within the two standard deviations about 95 % of the time.



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With the S&P 500 Fund B, the investor would be acquiring a largeramount of volatility risk than necessary to achieve the same returns as

Fund A. Fund A would provide the investor with the optimal risk/return

relationship



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The standard deviation is a measure of the variables around its mean or it

is the square root of the sum of the squared deviations from the mean

divided by the number of observations.

4.3. BETA

Beta describes the relationship between the stocks return and index

returns. There can be direct or indirect relation between stocks return and

index return. Indirect relations are very rare.

Beta= {N*XY- (X) (Y)} / { N(X) * (x)2}

Where

N- No of observation X- Total of market index return value Y- Total

of return to Nav

1) Beta = + 1.0

It indicates that one percent change in market index return

causes exactly one percent change in the stock return. It indicates that

stock moves along with the market.

2) Beta= + 0.5

One percent changes in the market index return causes 0.5

percent change in the stock return. It indicates that it is less volatile

compared to market.



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3) Beta= + 2.0

One percent change in the market index return causes 2 percent

change in the stock return. The stock return is more volatile. The

stocks with more than 1 beta value are considered to be very risky.

4) Negative beta value indicates that the stocks return move in opposite

direction to the market return.

4.4. The Sharpe Measure:

In this model, performance of a fund is evaluated on the basis of Sharpe

Ratio, which is a ratio of returns generated by the fund over and above risk free

rate of return and the total risk associated with it. According to Sharpe, it is the

total risk of the fund that the investors are concerned about. So, the model

evaluates funds on the basis of reward per unit of total risk. Symbolically, it can

be written as :

St= Rp Rf

S.D

WHERE

Rp Avereage Return on Portfolio(fund) RfRisk Free Rate of Interest

S.D- Standard Deviation

Higher the value of sharpe ratio better the fund has performed.

Sharpe ratio can be used to rank the desirability of funds or portfolios. The

fund that has performed well comapred to other will be ranked first then the

others.



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4.5. The Treynor Measure:

Developed by Jack Treynor, this performance measure evaluates

funds on the basis of Treynor's Index. This Index is a ratio of return

generated by the fund over and above risk free rate of return (generally

taken to be the return on securities backed by the government, as there is

no credit risk associated), during a given period and systematic risk

associated with it (beta).

Ty= Rp Rf

B

WHERE

Rp- Average Return to Portfolio Rf- Risk Less Rate of Interest. B-

Beta Coeffecient

While a high and positive Treynor's Index shows a superior

risk-adjusted performance of a fund, a low and negative Treynor'sIndex is an indication of unfavorable performance.

4.6. The Jenson Model:

Jenson's model proposes another risk adjusted performance measure.

This measure was developed by Michael Jenson and is sometimes referred

to as the Differential Return Method. This measure involves evaluation of

the returns that the fund has generated vs. the returns actually expected out

of the fund given the level of its systematic risk. The surplus between the

two returns is called Alpha, which measures the performance of a fund

compared with the actual returns over the period. Required return of a fund

at agiven level of risk (Bi) can be calculated as:



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Ri = Rf + Bi (Rm - Rf)

Where, Rm is average market return during the given period. After

calculating it, alpha can be obtained by subtracting required return from the

actual return of the fund.

Higher alpha represents superior performance of the fund and vice

versa. Limitation of this model is that it considers only systematic risk not

the entire risk associated with the fund and an ordinary investor can not

mitigate unsystematic risk, as his knowledge of market is primitive.



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5. Fund Analysis:

5.1. QUARTERLY COMPARISIONS

Average Returns of the Index Fund Schemes

Quarter-1

Quarter-2

Quarter-3

Quarter-4

Total

CNX

NIFTY

63.97 26.6 4.7 1.07 96.34

Indiainfo line

36.22 16.97 2.51 0.41 56.11

HDFC 36.55 16.13 2.44 0.16 55.28ING 35.78 15.15 3 -0.16 53.7

7JM 30.87 14.63 -1.33 0.16 44.3

3LIC 34.84 14.61 2.62 0.71 52.7

8Tata 35.7 16.74 2.78 0.25 55.4

7UTI 35.79 25.54 2.44 5.3 69.07

QUARTER 1: HDFC has shown good returns when compared to

other funds. FRANKLIN, UTI, TATA and ING also had the same

returns.

QUARTER 2: UTI has shown the same returns of the index whencompared to other funds. All the remaining schemes have

almost the same returns.

QUARTER 3: ING has shown good returns when compared to

other funds. All other funds except JM had similar returns.



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QUARTER 4: UTI has outperformed the INDEX and had given the

best returns when compared to other funds. All other funds

have similar returns.

Quarter 1 FY2009-2010

Std.Dev

-value

SharpeRatio

Trenyor'sRatio

jensen

RSquare

Rank(Trenyo)

Rank(Sharpe)

Indiainfoline

3.10692

0.996

0.1113

0.451 0.14095

0.9998

2 4

HDFC

3.04529

0.975

0.1147

0.4503 0.14139

0.6308

3 2

ING 3.05015

0.9778

0.1119

0.3493 0.00176

0.9991

4 3

JM 3.04395

1.0628

0.171 0.4899 0.0447

0.9749

1 1

LIC 3.020 0.96 0.109 0.3431 - 0.998 7 7



69/106


34 80 9 0.0085

5

Tata 3.08945

0.790

0.1103

0.3439 -0.007

60

0.9996

6 6

UTI 3.09253

0.9917

0.1104

0.3445 -0.006

67

0.9996

5 5

Standard Deviation: The value of the Standard deviation

increases due to increase in volatility of the fund. The Standard

deviation of all the schemes is almost the same which indicates

that the schemes are efficient. Hence in this quarter we can say

that all the schemes are equally good for investing in the view

of volatility.

Beta: Beta indicates the risk of the company for investment

point of view. Higher the beta higher the risk and expect higher

returns. Low beta values indicates low risk. The standard beta

value is 1. All the schemes except TATA has Beta value of

nearly 1. So, in the view of Beta TATA is not a good investment

option.



70/106


Sharpe, Treynor and Jenson: Based on these performance

measures, JM ,HDFC and Franklin are the best three investment

options available.

Recommendation: HDFC being topped in all the aspects

including returns it is the best investment option available.



71/106



Standard Deviation: The Standard deviation of all the

schemes is almost the same except Franklin which indicates

that the schemes are efficient. Hence in this quarter we can say

that all the schemes are equally good for investing except

Franklin in the view of volatility.

Beta: All the schemes have Beta value of nearly 1. So, in the

view of Beta all are equally good investment options.


Std.Dev

-value

Sharpe

Ratio

Trenyor's

Ratio

jensen RSquar

e

Rank(Tren

yo)

Rank(Shar

pe)Indiainfoline

3.106923

0.99641

0.111377

0.45103

0.140954

0.999811

1 2

HDFC

1.658094

0.952909

0.087502

0.152257

0.00177

0.998429

4 4

ING 1.660124

0.953163

0.081484

0.14192

-0.0018

5

0.99652

5 5

JM 1.753963 1.003864 0.074175 0.1296 -0.03475

0.990243 7 7

LIC 1.71666

0.979645

0.075651

0.132565

-0.0267

5

0.995625

6 6

Tata 1.705922

0.980864

0.088607

0.154105

0.004419

0.999383

3 3

UTI 1.7264

07

0.9928

93

0.1385

37

0.2408

83

0.1411

2

0.9998

87

2 1


72/106



measures, Franklin, TATA, and UTI are the best three

investment options available.

Recommendation: UTI being topped in all the aspects




Std.Dev

-value

SharpeRatio

Trenyor'sRatio

jensen RSquare

Rank(Trenyo)

Rank(Sharpe)

Indiainfo

line

1.2887037

0.994008

0.006907

0.008955

-0.0034

7

0.999836

5 5

HDFC

1.6580938

0.952909

0.087502

0.152257

0.001770

0.998429

1 1

ING 1.2074274

0.924516

0.011412

0.014905

0.00619

0.985285

2 2

JM 1.2903708

0.946436

-0.0229

0

-0.0312

3

-0.0679

3

0.904084

7 7

LIC 1.29105

17

0.9958

05

0.0077

61

0.0100

63

-

0.00237

0.9998

08

4 4

Tata 1.2708543

0.980028

0.009119

0.011826

0.00077

0.999403

3 3

UTI 1.2905809

0.995476

0.006316

0.008189

-0.0055

0.999877

6 6


73/106



schemes is almost the same which indicates that the schemes

are efficient. Hence in this quarter we can say that all the

schemes are equally good for investing in the view of volatility.

Beta: All the schemes have Beta value of nearly 1. So, in the

view of Beta all are equally good investment options.


measures HDFC, ING and TATA are the best three investment

options available.

Recommendation: ING being topped in all the aspects




74/106




schemes is almost the same except JM which indicates that the

schemes are efficient. Hence in this quarter we can say that all

the schemes are equally good for investing in the view of

volatility.


Std.De

v

-

value

Sharp

eRatio

Treny

or'sRatio

jensen R

Square

Rank

(Trenyo)

Rank

(Sharpe)Indiainfoline

1.006663

0.955992

-0.0120

6

-0.0127 -0.0038

7

0.941576

4 4

HDFC

0.995397

0.944789

-0.0146

6

-0.0154

4

-0.0081

6

0.940571

6 6

ING 0.946953 0.892214 -0.0189 -0.02006

-0.01415

0.926822 7 7

JM 0.899322

0.844245

0.000826

0.00088

0.01772

0.920072

2 2

LIC 1.041194

0.965438

-0.0087

8

-0.0094

7

0.001017

0.941139

3 3

Tata 1.0062

83

0.9556

23

-

0.01362

-

0.01434

-

0.00658

0.9415

61

5 5

UTI 1.005477

0.958442

0.036634

0.038432

0.080579

0.948642

1 1


75/106


Beta: All the schemes have Beta value of nearly 1 except JM.

So, in the view of Beta all are equally good investment options

except JM.


measures UTI, JM and LIC are the best three investment options

available.

Recommendation: UTI being topped in all the aspects

including returns (outperformed INDEX) it is the best

investment option available.

Fund Reliance Banking Fund

Table No 1: Calculation of Return on Fund a