Comparitive Study Between Mutual Funds Offered by Various Companies in Indian Market

1.1 INTRODUCTION

Investment is the application of money for earning more money. The money we earn

is partly spent and the rest is saved for meeting future expenses. Instead of keeping

the savings idle one may like to channelize their savings in a particular order so that

they get a percentage of return out of it in the future. This is called Investment.

Thus, Investing is a method of purchasing assets in order to gain profit in the

form of reasonably predictable income (dividends, interest, or rentals) and

appreciation over the long term.

In India, traditionally the family savings were invested in immovable assets such

as land & building, fixed deposit, post office savings as well as precious metals.

One needs to invest to:

Earn return on their idle resources,

Generate a specified sum of money for a specific

goal in life,

Make a provision for an uncertain future.

One of the important reasons why one needs to invest wisely is to meet the cost of

Inflation. Inflation is the rate at which the cost of living increases. The cost of living is

simply what it costs to buy the goods and services you need to live. Inflation causes

money to lose value because it will not buy the same amount of a good or a service in

the future as it does now or did in the past. This is why it is important to consider

inflation as a factor in any long-term Investment strategy. The aim of Investments

should be to provide a return above the inflation rate to ensure that the Investment

does not decrease in value.

If the after-tax return on the Investment is less than the inflation rate, then the assets

have actually decreased in value; that is, they won't buy as much today as they did last

year.

By investing early, we allow our investments more time to grow, whereby the concept

of compounding increases the income by accumulating the principal and the interest

or dividend earned on it, year after year.

The three golden rules for all investors are:

Invest early,

Invest regularly,

Invest for long term or short term as per your objective.

Introduction to Mutual Funds

A mutual fund is a professionally managed type of collective investment scheme that

pools money from many investors and invests it in stocks, bonds, short-term money

market instruments and other securities. Mutual funds have a fund manager who

invests the money on behalf of the investors by buying / selling stocks, bonds etc. It is

a substitute for those who are unable to invest directly in equities or debt because of

resource, time or knowledge constraints. Benefits include professional money

management, buying in small amounts and diversification.

Mutual fund units are issued and redeemed by the Fund Management Company based

on the fund's Net Asset Value (NAV), which is determined at the end of each trading

session. NAV is calculated as the value of all the shares held by the fund, minus

expenses, divided by the number of units issued. Mutual Funds are usually long term

investment vehicle though there are some categories of mutual funds, such as money

market mutual funds which are short term instruments.

Currently, the worldwide value of all mutual funds totals more than $US 26 trillion.

The United States leads with the number of mutual fund schemes. There are more

than 8000 mutual fund schemes in the U.S.A. Comparatively, India has around 1000

mutual fund schemes, but this number has grown exponentially in the last few years.

The Total Assets under Management in India of all Mutual funds put together touched

a peak of Rs. 5,44,535 crs. at the end of August 2008.

Why Mutual Fund?

There are various investment avenues available to an investor such as real estate, bank

deposits, post office deposits, shares, etc. A mutual fund is one more type of

Investment Avenue available to investors. There are many reasons why investors

prefer mutual funds.

Buying shares directly from the market is one way of investing. But this requires

spending time to find out the performance of the company whose share is being

purchased, understanding the future business prospects of the company, finding out

the track record of the dividend, bonus issue history of the company etc. Many

investors find it cumbersome and time consuming to pore over so much of

information, get access to so much of details before investing in the shares.

Investors therefore prefer the mutual fund route. They invest in a mutual fund scheme

which in turn takes the responsibility of investing in stocks and shares after due

analysis and research. The investor need not bother with researching hundreds of

stocks. It leaves it to the mutual fund and its professional fund management team.

Another reason why investors prefer mutual funds is because mutual funds offer

diversification. An investor’s money is invested by the mutual fund in a variety of

shares, bonds and other securities thus diversifying the investor’s portfolio across

different companies and sectors. This diversification helps in reducing the overall risk

of the portfolio. It is also less expensive to invest in a mutual fund since the minimum

investment amount in mutual fund units is fairly low (Rs. 500 or so). These are some

of the reasons why mutual funds have gained in popularity over the years.

IMPORTANT CHARACTERISTICS OF A MUTUAL FUND

A Mutual Fund actually belongs to the investors who have

pooled their Funds. The ownership of the mutual fund is in the

hands of the Investors.

A Mutual Fund is managed by investment professional and

other Service providers, who earn a fee for their services, from

the funds.

The pool of Funds is invested in a portfolio of marketable

investments.

The value of the portfolio is updated every day.

The investor’s share in the fund is denominated by “units”.

The value of the units changes with change in the portfolio value,

every day. The value of one unit of investment is called net asset

value (NAV)’.

OBJECTIVES OF A MUTUAL FUND

To Provide an opportunity for lower income groups to acquire

without much difficulty, property in the form of shares.

To Cater mainly of the need of individual investors, whose

means are small.

To Manage investors portfolio that provides regular income,

growth, Safety, liquidity, tax advantage and diversification.

1.2 NEED OF THE STUDY

The main aim of the project is to project Mutual Fund as a better avenue for

investment on a long-term or short-term basis. Mutual Fund is a productive package

for an investor with limited finances, this project creates an awareness that the

Mutual Fund is a worthy investment practice. Mutual Fund is a globally proven

instrument. Mutual Funds are ”Unit Trust” as it is called in some parts of the world

has a long and successful history, of late Mutual Funds have become a hot favorite

of millions of people all over the world.

The driving force of Mutual Funds is the ‘safety of the principal’ guaranteed, plus

the added advantage of capital appreciation together with the income earned in the

form of interest or dividend. The various schemes of Mutual Funds provide the

investor with a wide range of investment options according to his risk bearing

capacities and interest besides. Mutual Funds offers an investor to invest even a

small amount of money, each Mutual Fund has a defined investment objective and

strategy. Mutual Funds schemes are managed by respective asset managed

companies sponsored by financial institutions, banks, private companies or

international firms. A Mutual Fund is the ideal investment vehicle for today’s

complex and modern financial scenario.

The study is basically made to analyze the various open-ended equity schemes of

different Asset Management Companies to highlight the diversity of investment that

Mutual Fund offer. Thus, through the study one would understand how a common

man could fruitfully convert a pittance into great penny by wisely investing into the

right scheme according to his risk taking abilities.

1.3 OBJECTIVES OF THE STUDY

1. To project Mutual Fund as the ‘productive avenue’ for

investing activities.

2. To compare the schemes based on Sharpe’s ratio, Treynor’s

ratio, Co-efficient, Returns and show which scheme is best

for the investor based on his risk profile.

3. To help an investor make a right choice of investment, while

considering the inherent risk factors.

4. To understand the recent trends in Mutual Funds world.

1.4 SCOPE OF THE STUDY

The study here has been limited to analyse open-ended equity Growth schemes of

different Asset Management Companies namely Reliance growth fund, Sundaram

BNP Paribas Select Midcap – Growth, Birla Sun Life Mid Cap Fund - Plan A –

Growth, SBI Magnum Global Fund 94 – Growth, Franklin India Prima Fund –

Growth, IDFC premier Equity Fund Plan A- Growth

Each scheme is analysed according to its performance against the other, based on

factors like Sharpe’s Ratio, Treynor’s Ratio, (Beta) Co-efficient, Returns.

Research is carried out to appraise the financial performance of mutual funds.

1.5 INDUSTRY PROFILE

Definition

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 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 chart below describes broadly the working of a mutual fund:

STRUCTURE OF MUTUAL FUND IN INDIA:

Mutual Funds in India follow a 3-tier structure. There is a Sponsor (the First tier),

who thinks of starting a mutual fund. The Sponsor approaches the Securities &

Exchange Board of India (SEBI), which is the market regulator and also the regulator

for mutual funds. SEBI checks whether the person is of integrity, whether he has

enough experience in the financial sector, his net-worth etc. Once SEBI is convinced,

the sponsor is allowed to create a Public Trust (the Second tier) as per the Indian

Trusts Act, 1882. Trusts have no legal identity in India and cannot enter into

contracts, hence the Trustees are the people authorized to act on behalf of the Trust.

Contracts are entered into in the name of the Trustees. Once the Trust is created, it is

registered with SEBI after which this trust is known as the mutual fund. It is

important to understand the difference between the Sponsor and the Trust. They are

two separate entities. Sponsor is not the Trust; i.e. Sponsor is not the Mutual Fund. It

is the Trust which is the Mutual Fund. The Trustees role is not to manage the

Sponsor

Mutual fund

Trustees

ASSET MANAGEMENT COMPANY

Custodian

Registrar

money. Their job is only to see, whether the money is being managed as per stated

objectives. Trustees may be seen as the internal regulators of a mutual fund.

ASSET MANAGEMENT COMPANIES (AMC)

AMC forms the third tier of the mutual fund structure. Trustees appoint the Asset

Management Company (AMC), to manage investor’s money. The AMC in return

charges a fee for the services provided and this fee is borne by the investors as it is

deducted from the money collected from them. The AMC’s Board of Directors must

have at least 50% of Directors who are independent directors. The AMC has to be

approved by SEBI. The AMC functions under the supervision of its Board of

Directors, and also under the direction of the Trustees and SEBI. It is the AMC, which

in the name of the Trust, floats new schemes and manages these schemes by buying

and selling securities. In order to do this the AMC needs to follow all rules and

regulations prescribed by SEBI and as per the Investment Management Agreement it

signs with the Trustees. If any fund manager, analyst intends to buy/ sell some

securities, the permission of the Compliance Officer is a must. A compliance Officer

is one of the most important persons in the AMC. Whenever the fund intends to

launch a new scheme, the AMC has to submit a Draft Offer Document to SEBI. This

draft offer document, after getting SEBI approval becomes the offer document of the

scheme. The Offer Document (OD) is a legal document and investors rely upon the

information provided in the OD for investing in the mutual fund scheme. The

Compliance Officer has to sign the Due Diligence Certificate in the OD. This

certificate says that all the information provided inside the OD is true and correct.

This ensures that there is accountability and somebody is responsible for the OD. In

case there is no compliance officer, then senior executives like CEO, Chairman of the

AMC has to sign the due diligence certificate. The certificate ensures that the AMC

takes responsibility of the OD and its contents.

CUSTODIAN

A custodian’s role is safe keeping of physical securities and also keeping a tab on the

corporate actions like rights, bonus and dividends declared by the companies in which

the fund has invested. The Custodian is appointed by the Board of Trustees. The

custodian also participates in a clearing and settlement system through approved

depository companies on behalf of mutual funds, in case of dematerialized securities.

In India today, securities and units of mutual funds are no longer held in physical

form but mostly in dematerialized form with the Depositories. The holdings are held

in the Depository through Depository Participants (DPs). The deliveries and receipt of

units of a mutual fund are done by the custodian or a depository participant at the

instruction of the AMC and under the overall direction and responsibility of the

Trustees. Regulations provide that the Sponsor and the Custodian must be separate

entities.

HISTORY OF THE INDIAN MUTUAL INDUSTRY

The mutual fund industry in India started in 1963 with the formation of unit trust of

India, at the initiative of the government of India and reserve bank. The history of

mutual funds in India can be broadly divided into four distinct phases.

First phase-1964-87

Unit trust of India (UTI) was established on 1963 by an act of parliament. It was set

up 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 schemes launched by UTI were unit

schemes 1964. At the end of 1988 UTI scheme 1964. At the end of 1988 UTI had

Rs.6700 Crores of assets under management.

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), 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.

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

funds settings up funds in India and the industry has witnessed several mergers and

acquisitions. As at the end of January 2003, there were 33 mutual funds with total

assets under management was way ahead of other mutual funds.

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

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. Being a collection of many stocks,

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.

1. By Structure

o Open - Ended Schemes

o Close - Ended Schemes

2. By Investment Objective

o Growth Schemes

o Income Schemes

o Balanced Schemes

o Money Market Schemes

Other Schemes

o Tax Saving Schemes

o Special Schemes

Index Schemes

Sector Specific Schemes

Classification of schemes based on structure:

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.

Close - Ended Schemes:

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.

Classification of schemes based on the investment objective:

Growth Schemes:

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.

Other schemes:

Tax Saving Schemes:

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from

time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity

Linked Savings Scheme (ELSS) are eligible for rebate.

Index Schemes:

Index schemes attempt to replicate the performance of a particular index such as the

BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those

stocks that constitute the index. The percentage of each stock to the total holding will

be identical to the stocks index weightage. And hence, the returns from such schemes

would be more or less equivalent to those of the Index.

Sector Specific 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

MUTUAL FUND INVESTING STRATEGIES:

1. Systematic Investment Plans (SIPs)

These are best suited for young people who have started their careers and need to

build their wealth. SIPs entail an investor to invest a fixed sum of money at regular

intervals in the Mutual fund scheme the investor has chosen, an investor opting for

SIP in xyz Mutual Fund scheme will need to invest a certain sum on money every

month/quarter/half-year in the scheme.

2. Systematic Withdrawal Plans (SWPs)

These plans are best suited for people nearing retirement. In these plans, an investor

invests in a mutual fund scheme and is allowed to withdraw a fixed sum of money at

regular intervals to take care of his expenses

3. Systematic Transfer Plans (STPs)

They allow the investor to transfer on a periodic basis a specified amount from one

scheme to another within the same fund family – meaning two schemes belonging to

the same mutual fund. A transfer will be treated as redemption of units from the

scheme from which the transfer is made. Such redemption or investment will be at

the applicable NAV. This service allows the investor to manage his investments

actively to achieve his objectives. Many funds do not even charge any transaction

fees for his service – an added advantage for the active investor.

ADVANTAGES OF INVESTING IN MUTUAL FUND

Affordable

Almost everyone can buy mutual funds. Even for a sum of Rs 1,000 an investor can

invest in a mutual fund.

Professional Management

For an average investor, it is a difficult task to decide what securities to buy, how

much to buy and when to sell. By buying a mutual fund, you acquire a professional

fund manager who manages your money. This is the person who decides what to buy

for you, when to buy it and when to sell. The fund manager takes these decisions after

doing adequate research on the economy, industries and companies, before buying

stocks or bonds. Most mutual fund companies charge a small fee for providing this

service which is called the management fee.

Diversification

According to finance theory, when your investments are spread across several

securities, your risk reduces substantially. A mutual fund is able to diversify more

easily than an average investor across several companies, which an ordinary investor

may not be able to do. With an investment of Rs.5000, you can buy stocks in some of

the top Indian companies through a mutual fund, which may not be possible to do as

an individual investor.

Liquidity

Unlike several other forms of savings like the public provident fund or National

Savings Scheme, you can withdraw your money from a mutual fund on immediate

basic.

Tax Benefits

Mutual funds have historically been more efficient from the tax point of view. A debt

fund pays a dividend distribution tax of 12.5 per cent before distributing dividend to

an individual investor or an HUF, whereas it is 20 per cent for all other entities. There

is no dividend tax on dividends from an equity fund for individual investor.

Transparency

The investor gets regular information on the value of his investment in addition to

disclosure on the specific investments made by the fund, the proportion invested in

each class of assets and the fund manager’s investment strategy and outlook.

Risks Associated With Mutual Funds

Investing in Mutual Funds, as with any security, does not come without risk. One of

the most basic economic principles is that risk and reward are directly correlated. In

other words, the greater the potential risk the greater the potential return. The types

of risk commonly associated with Mutual Funds are:

1) Market Risk

Market risk relates to the market value of a security in the future. Market prices

fluctuate and are susceptible to economic and financial trends, supply and demand,

and many other factors that cannot be precisely predicted or controlled.

2) Political Risk

Changes in the tax laws, trade regulations, administered prices, etc are some of the

many political factors that create market risk. Although collectively, as citizens, we

have indirect control through the power of our vote individually, as investors, we

have virtually no control.

3) Inflation Risk

Interest rate risk relates to future changes in interest rates. For instance, if an

investor invests in a long-term debt Mutual Fund scheme and interest rates increase,

the NAV of the scheme will fall because the scheme will be end up holding debt

offering lower interest rates.

4) Business Risk

Business risk is the uncertainty concerning the future existence, stability, and

profitability of the issuer of the security. Business risk is inherent in all business

ventures. The future financial stability of a company cannot be predicted or

guaranteed, nor can the price of its securities.

Adverse changes in business circumstances will reduce the market price of the

company’s equity resulting in proportionate fall in the NAV of the Mutual Fund

scheme, which has invested in the equity of such a company.

5) Economic Risk

Economic risk involves uncertainty in the economy, which, in turn, can have an

adverse effect on a company’s business. For instance, if monsoons fail in a year,

equity stocks of agriculture-based companies will fall and NAVs of Mutual Funds,

which have invested in such stocks, will fall proportionately.

1.6 COMPANY PROFILE

INTRODUCTION

Reliance Capital Ltd. is one of India’s leading and fastest growing private sector

financial services companies, and ranks among the top 3 private sector financial

services and banking companies, in terms of net worth. Reliance Capital Ltd. has

interests in asset management, life and general insurance, private equity and

proprietary investments, stock broking and other financial services.

Reliance Mutual Fund (RMF) is one of India’s leading Mutual Funds, with Average

Assets Under Management (AAUM) of Rs. 1,17,314 Crores and an investor base of

over 74.16 Lacs. (AAUM and investor count as on August 31, 2009)

Reliance Mutual Fund, a part of the Reliance - Anil Dhirubhai Ambani Group, is one

of the fastest growing mutual funds in the country.

PRODUCTS

RMF offers investors a well-rounded portfolio of products to meet varying investor

requirements. It constantly endeavors to launch innovative products and customer

service initiatives to increase value to investors. As on 31st December 2008, reliance

mutual fund has a well rounded portfolio of 38 schemes under various categories such

as Equity, debt etc.

Reliance is also a pioneer in launching ATM cum debit cards for withdrawing cash on

account of mutual fund investments.

Reliance Equity Fund and Reliance Natural Resources Fund has set benchmarks

among the equity category in the industry for their highest collection in terms of

AUM and applications.

"Reliance Mutual Fund schemes are managed by Reliance Capital Asset

Management Limited., a subsidiary of Reliance Capital Limited, which holds

93.37% of the paid-up capital of RCAM, the balance paid up capital being held by

minority shareholders."

VISION STATEMENT

To be a globally respected wealth creator with an emphasis on customer care and a

culture of good corporate governance.

MISION STATEMENT

To create and nurture a world-class, high performance environment aimed at

delighting our customers.

SCHEMES

Equity/Growth Schemes

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

term. Such schemes normally invest a major part of their corpus 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

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

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

at a later date. Growth schemes are good for investors having a long-term outlook

seeking appreciation over a period of time.

Debt/Income Schemes

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.

Sector Specific 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.

AWARDS WON BY RELIANCE MUTUAL FUND

The company has been awarded the “India Equity Fund house” by morning

star India. This award has been given for delivering sustained out performance

on a risk-adjusted basis in the Equity category for the period ending December

31, 2008.

It has been awarded the Morningstar Fund Award in the “India open ended

Small/ Mid Cap” category for its three – year performance ending December

31, 2008.

It has been awarded the Morningstar Fund Award in the “India Open Ended

Conservation Allocation” category for its three – year performance ending

December 31, 2008.

2.2 RESEARCH METHODOLOGY

The Methodology involves randomly selecting Open-Ended equity schemes of

different fund houses of the country. The data collected for this project is basically

from two sources, they are:-

1. Primary sources: The monthly fact sheets of different fund

houses and research reports from banks.

2. Secondary sources: Collection of data from Internet and

Books.

Statistical Tools

Usually the returns derived are only considered for choosing the best scheme. But it is

only half of the consideration for choosing the best scheme. The risk should also be

considered in choosing the suitable and best scheme. Therefore, what matters a lot, is

the risk adjusted returns. There are several measures to measure the performance of

the scheme and rate it. Each of these measures uses past performance data.

The various statistical tools are as follows

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). Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where,

Ri represents return on fund,

Rf is risk free rate of return, and

Bi is beta of the fund.

All risk-averse investors would like to maximize this value. While a high and

positive Treynor's Index shows a superior risk-adjusted performance of a fund, a

low and negative Treynor's Index is an indication of unfavorable performance.

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:

Sharpe Index (Si) = (Ri - Rf)/Si

Where,

Si is standard deviation of the fund,

Ri represents return on fund, and

Rf is risk free rate of return.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance

of a fund, a low and negative Sharpe Ratio is an indication of unfavorable

performance.

Comparison of Sharpe and Treynor

Sharpe and Treynor measures are similar in a way, since they both divide the risk

premium by a numerical risk measure. The total risk is appropriate when we are

evaluating the risk return relationship for well-diversified portfolios. On the other

hand, the systematic risk is the relevant measure of risk when we are evaluating less

than fully diversified portfolios or individual stocks. For a well-diversified portfolio

the total risk is equal to systematic risk. Rankings based on total risk (Sharpe

measure) and systematic risk (Treynor measure) should be identical for a well-

diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a

poorly diversified fund that ranks higher on Treynor measure, compared with

another fund that is highly diversified, will rank lower on Sharpe Measure.

Standard Deviation

The most basic of all measures- Standard Deviation allows you to evaluate the

volatility of the fund. It allows you to measure the consistency of the returns.

Volatility is often a direct indicator of the risks taken by the fund. 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.

A security that is volatile is also considered higher risk because its performance may

change quickly in either direction at any moment.

Beta

Beta indicates the level of volatility associated with the fund as compared to the

benchmark. So quite naturally the success of Beta is heavily dependent on the

correlation between a fund and its benchmark. Thus if the fund's portfolio doesn't

have a relevant benchmark index then a beta would be grossly inadequate.

A beta that is greater than 1 means that the fund is more volatile than the benchmark,

while a beta of less than 1 means that the fund is less volatile than the index. A fund

with a beta very close to 1 means the fund's performance closely matches the index or

benchmark.

Investors expecting the market to be bullish may choose funds exhibiting high betas,

which increase investors' chances of beating the market. If an investor expects the

market to be bearish in the near future, the funds that have betas less than 1 are a good

choice because they would be expected to decline less in value than the index.

Formulae

Standard Deviation: √∑(Ři - Ri )2 /n

Beta: n∑XY - ∑X ∑Y n∑X2 – (∑X)2

Sharpe Ratio: Rt - Rf

S.D

Treyner’s Ratio: Rt - Rf

β

2.3 LIMITATIONS OF THE STUDY

1. The study is limited only to the analysis of different schemes and its

suitability to different investors according to their risk-taking ability.

2. The study is based on secondary data available from monthly fact sheets,

websites and other books, as primary data was not accessible.

3. The study is limited by the detailed study of various schemes of Five Asset

Management Company.

4. Five years return data not available for IDFC Premier Equity Fund Plan A-

Growth Mutual Fund.

3.1 DATA ANALYSIS AND INTERPRETATION

HYPOTHESIS

The Hypothesis of the study involves Comparison between

1. Reliance Growth Fund

2. Sundaram BNP Paribas Select Midcap - Growth

3. Birla Sun Life Mid Cap Fund - Plan A – Growth

4. SBI Magnum Global Fund 94 – Growth

5. Franklin India Prima Fund – Growth

6. IDFC Premier Equity Fund Plan A- Growth

(Note: All the data used for analysis is taken on period 16-9-2009)

Reliance Growth – Growth

Fund Objective

The scheme aims at long term growth of capital through research based investment

approach. The funds will be invested in Equity and equity related instruments ,and

there will be an exposure to debt and money market instruments also.

Table 3.1.1 showing the covariance of reliance Growth

Year Rp Rm Rf Rm-Rf Rp-Rf X2 XY X - ¯X D2

X Y

last 1

year 27.47 21.17 3.23 17.94 24.24 321.8436 434.8656 2.196667 4.825344

last 3

years

10.48 3.23 7.25 16.13 52.5625 116.9425 -8.49333 72.13671

19.36

last 5

years 34.85 25.27 3.23 22.04 31.62 485.7616 696.9048 6.296667 39.64801

Total 47.23 71.99 860.1677 1248.713 0 116.6101

where

Rp - Portfolio Return-Reliance growth-growth

Rm - Market Return-Fund’s Benchmark BSE-100

Rf - Risk free rate of return

CALCULATION OF ARTHMETIC MEAN:-

= SX / N

= 47.23/ 3

= 15.74333

CALCULATION OF STANDARD DEVIATION (σ) :-

= √ S(X-Xbar)2 / N

= √116.6101/3

= 6.03173

CALCULATION OF BETA CO-EFFICIENT;-

= N ( S XY) – S X S Y

N (SX2) – (SX) 2

= 3( 1248.713 ) – (47.23)(71.99)

3(860.1677) – (47.23) 2

= 0.989197

CALCULATION OF SHARPE’S RATIO:-

= Rp-Rf/ σ

= 71.99

6.03

= 11.93522

CALCULATION OF TREYNOR’S RATIO :-

= Rp-Rf/

= 71.99

0.989

= 72.7762

Interpretation

Last 1 year : It reveals that Reliance growth Fund Returns

are 27.47 as compare to Funds Benchmark Returns Are

21.17, and The Risk Free Rate is 3.23%

Last 3 years : It reveals that Reliance growth Fund Returns

are 19.36 as compare to Funds Benchmark Returns are 10.48,

and The Risk Free Rate is 3.23%

Last 5 years : It reveals that Reliance growth Fund Returns

are 34.85 as compare to Funds Benchmark Returns are 25.27

and The Risk Free Rate is 3.23%

Sundaram BNP Paribas Select Midcap

Fund Objective

The scheme aims to achieve capital appreciation by investing in mid-cap stocks. The

fund defines 'midcap' as a stock whose market capitalization shall not exceed the

market capitalization of the 50th stock (after sorting the securities in the descending

order of market capitalization) listed with the NSE.

Table 3.1.2 showing the covariance of Sundaram BNP Select Midcap Growth


X Y

last 1

year 32.39 21.17 3.23 17.94 29.16 321.8436 523.1304 2.196667 4.825344

last 3

years 12.83 10.48 3.23 7.25 9.6 52.5625 69.6 -8.49333 72.13671

last 5

years 33.33 25.27 3.23 22.04 30.1 485.7616 663.404 6.296667 39.64801

total 47.23 68.86 860.1677 1256.134 0 116.6101

where

Rp - Portfolio Return- Sundaram BNP Paribas Select Midcap

Rm - Market Return-Fund’s Benchmark BSE Mid Cap



= SX / N

= 47.23/ 3

= 15.74333


= √ S(X-Xbar)2 / N

= √116.6101/3

= 6.03173


= N ( S XY) – S X S Y

N (SX2) – (SX) 2

= 3( 1256.134 ) – (47.23)( 68.86 )

3(860.1677) – (47.23) 2

= 1.475417

CALCULATION OF SHARPE’S RATIO

= Rp-Rf/ σ

= 68.86

6.03

= 11.41629


= Rp-Rf/

= 68.86

1.475

= 46.67155

Interpretation:-

Last 1 year : It reveals that Sundaram BNP Paribas select

midcap Fund Returns are 32.39 as compare to Funds

Benchmark Returns Are 21.17 and The Risk Free Rate is

3.23%)

Last 3 years : It reveals that Sundaram BNP Paribas select


Benchmark Returns are 10.48, and The Risk Free Rate is

3.23%

Last 5 years : It reveals that Sundaram BNP Paribas select


Benchmark Returns are 25.27, and The Risk Free Rate is

3.23%.

Brila Sunlife Midcap Fund Plan A

Fund Objective

The scheme aims at long-term growth of capital at controlled level of risk by investing primarily in mid-cap stocks, to generate returns higher than a fund focused on large and liquid stocks.

Table 3.1.3 showing the covariance of Brila Sunlife Midcap fund plan A- Growth


X Y last 1 year 36.07 21.17 3.23 17.94 32.84 321.8436 589.1496 2.196667 4.825344last 3 years 17.18 10.48 3.23 7.25 13.95 52.5625 101.1375 -8.49333 72.13671last 5 years 29.98 25.27 3.23 22.04 26.75 485.7616 589.57 6.296667 39.64801

Total 47.23 73.54 860.1677 1279.857 0 116.6101

where

Rp - Portfolio Return- Brila Sunlife Midcap Fund plan A

Rm - Market Return-Fund’s Benchmark CNX Midcap



= SX / N

= 47.23/ 3

= 15.74333


= √ S(X-Xbar)2 / N

= √116.6101/3

= 6.03173


= N ( S XY) – S X S Y

N (SX2) – (SX) 2

= 3( 1279.857 ) – (47.23)( 73.54 )

3(860.1677) – (47.23) 2

= 1.047014


= Rp-Rf/ σ

= 73.54

6.03

= 12.19219


= Rp-Rf/

= 73.54

1.047

= 70.23784

Interpretation:-

Last 1 year : It reveals that Brila Sunlife Midcap Fund plan A

Returns are 36.07 as compare to Funds Benchmark Returns

are 21.17 and The Risk Free Rate is 3.23%)

Last 3 years : It reveals that Brila Sunlife Midcap Fund plan

A Returns are 17.18 as compare to Funds Benchmark Returns

are 10.48, and The Risk Free Rate is 3.23%

Last 5 years : It reveals that Brila Sunlife madcap Fund plan

A Returns are 29.98 as compare to Funds Benchmark Returns


SBI Magnum Global Fund 94 – Growth

Fund Objective

The scheme seeks to prove maximum growth opportunities from a portfolio of equity

and debt instruments of companies having high growth potential.

Table 3.1.4 showing the covariance of SBI magnum Global fund94 Growth Year Rp Rm Rf Rm-Rf Rp-Rf X2 XY X - ¯X D2

X Y

last 1

year 14.48 21.17 3.23 17.94 11.25 321.8436 201.825 2.196667 4.825344

last 3

years 6.33 10.48 3.23 7.25 3.1 52.5625 22.475 -8.49333 72.13671

last 5

years 29.48 25.27 3.23 22.04 26.25 485.7616 578.55 6.296667 39.64801

Total 47.23 40.6 860.1677 802.85 0 116.6101

where

Rp - Portfolio Return-SBI Magnum Global fund 94 -growth

Rm - Market Return-Fund’s Benchmark BSE-100



= SX / N

= 47.23/ 3

= 15.74333


= √ S(X-Xbar)2 / N

= √116.6101/3

= 6.03173


= N ( S XY) – S X S Y

N (SX2) – (SX) 2

= 3( 802.85 ) – (47.23)( 40.6 )

3(860.1677) – (47.23) 2

= 1.403572


= Rp-Rf/ σ

= 40.6

6.03

= 6.731071


= Rp-Rf/

= 40.6

1.40

= 28.92619

Interpretation:-

Last 1 year : It reveals that SBI Magnum Global fund Returns


and The Risk Free Rate is 3.23%)

Last 3 years : It reveals that SBI Magnum Global fund

Returns are 6.33 as compare to Funds Benchmark Returns are


Last 5 years : It reveals that SBI Magnum Global fund



Franklin India Prima Fund – Growth

Fund Objective

The primary objective of the fund is capital appreciation and secondary objective is

income generation by focussing on mid and small cap industry.

Table 3.1.5 showing the covariance of Franklin India prima fund GrowthYear Rp Rm Rf Rm-Rf Rp-Rf X2 XY X - ¯X D2

X Y

last 1

year 22.29 21.17 3.23 17.94 19.06 321.8436 341.9364 2.196667 4.825344

last 3

years 5.07 10.48 3.23 7.25 1.84 52.5625 13.34 -8.49333 72.13671

last 5

years 20.58 25.27 3.23 22.04 17.35 485.7616 382.394 6.296667 39.64801

Total 47.23 38.25 860.1677 737.6704 0 116.6101

where

Rp - Portfolio Return-Franklin India Prima Fund growth

Rm - Market Return-Fund’s Benchmark S&P CNX 500



= SX / N

= 47.23/ 3

= 15.74333


= √ S(X-Xbar)2 / N

= √116.6101/3

= 6.03173


= N ( S XY) – S X S Y

N (SX2) – (SX) 2

= 3( 737.6704 ) – (47.23)( 38.25 )

3(860.1677) – (47.23) 2

= 1.161889


= Rp-Rf/ σ

= 38.25

6.03

= 6.341464


= Rp-Rf/

= 38.25

1.16

= 32.92054

Interpretation:-

Last 1 year : It reveals that Franklin India Prima Fund Returns


and The Risk Free Rate is 3.23%)

Last 3 years : It reveals that Franklin India Prima Fund

Returns are 5.07 as compare to Funds Benchmark Returns are


Last 5 years : It reveals that Franklin India Prima Fund


are 25.27, and The Risk Free Rate is 3.23

IDFC Premier Equity fund plan A- Growth

Fund objective

The scheme aims to generate long-term capital growth from an actively managed portfolio of predominantly equity and equity related instruments. It would invest in small and medium size businesses with good long term potential, which are available at cheap valuations.

Table 3.1.6 showing the covariance of IDFC Premier Equity-Growth


X Y last 1 year 25.28 21.17 3.23 17.94 22.05 321.8436 395.577 5.345 28.56903last 3 years 26.36 10.48 3.23 7.25 23.13 52.5625 167.6925 -5.345 28.56903

Total 25.19 45.18 374.4061 563.2695 0 57.13805

where

Rp - Portfolio Return-IDFC Premier Equity Fund-growth

Rm - Market Return-Fund’s Benchmark BSE 500



= SX / N

= 25.19/ 2

= 12.595


= √ S(X-Xbar)2 / N

= √57.13805/2

= 7.38733


= N ( S XY) – S X S Y

N (SX2) – (SX) 2

= 2( 563.2695 ) – (25.19)( 45.18 )

2(374.4061) – (25.19) 2

= -0.10103


= Rp-Rf/ σ

= 45.18

7.38

= 6.115876


= Rp-Rf/

= 45.18

-0.101

= -447.197

Interpretation:-

Last 1 year : It reveals that IDFC Premier Equity Fund


are 21.17 and The Risk Free Rate is 3.23%)

Last 3 years : It reveals that IDFC Premier Equity Fund


are 10.48, and The Risk Free Rate is 3.23%.

OBSERVATIONS;

Observations are made from the data analysis.

The following observations are drawn from the analysis of schemes:

AMC

Companies

Statistical

Tools

Reliance Growth-Growth

Sundaram BNP Paribas Select Midcap-Growth


SBI Magnum Global Fund 94- Growth

Franklin India Prima Fund - Growth

IDFC Premier Equity Fund - Plan A - Growth

Last 1 year

return

27.47 32.39 36.07 14.48 22.29 25.28

Last 3 years

return

19.96 12.83 17.18 6.33 5.07 26.36

Last 5 years

return

34.85 33.33 29.98 29.48 20.58 -

Std.Deviation(s) 6.03 6.03 6.03 6.03 6.03 7.38

Co-efficient () 0.989 1.475 1.047 1.403 1.161 -0.101

Sharpe’s Ratio 11.94 11.42 12.192 6.731 6.34 6.11

Treynor’s Ratio 72.78 46.67 70.24 28.92 32.92 -447.197

FINDINGS

After interpretation of the above data the following finding have been done

Reliance Growth – Growth

Fund category: Equity Diversified

It is an Open-ended Equity scheme

Since the is very close to 1 the fund is considered to have a lower risk

when compared to the other funds

It can also be seen that the fund provides a higer return

It suits people who are willing to take lesser risk for a greater return

Sundaram BNP Paribas Select Midcap



Since the is more than 1(i.e 1.47) the fund is considered to have a higer

risk when compared to the other funds


The return is not very high for the risk taken




Since the is very close to 1 the fund is considered to have a lower risk.



SBI Magnum Global Fund 94 – Growth



Since the is more than 1(i.e 1.40) the fund is considered to have a higer

risk

It can also be seen that the fund provides above average return

Franklin India Prima Fund – Growth



Since the is more than 1 the fund is considered to have a above average

risk.

It can also be seen that the fund provides a lower return

IDFC Premier Equity fund plan A- Growth



Since the is lesser than 1 the fund is considered to have a very low risk

when compared to the other funds



SUGGESSTIONS:

Following are the suggestions for the both funds.

The fund house has to reduce the total risk involved in the fund in order to

increase the return with good portfolio construction.

The fund house should select the innovative way of portfolio construction and

should see the attracting areas of investing funds.

The fund houses should concentrate on the market conditions according to that

they have to set the benchmark and invest in different sectors.

The fund houses should invest in good and attracting sectors to reduce

standard deviation.

The fund house should try to reduce little more beta in order to generate more

returns to investors.

CONCLUSION

It is seen that all the fund are open-ended diversified Equity fund

It can seen that IDFC fund gives a very high return and a lower risk, so we

say that this fund performs much better than all the other funds, but the sharpe

ratio(i.e) risk-adjusted ratio is low when compared to that of all the other fund

When we compare Reliance Growth Fund to that of Brila Sunlife Midcap

Fund Plan A, we can find both having lower risk to that of a higher return, but

Reliance fund provides greater return than that of Brila when invested for 3

and 5 years and Brila provides a greater return when invested for 1 year.

high and positive Sharpe Ratio shows a superior risk-adjusted performance

of a both Reliance and Brila funds

Other funds like Sundaram and SBI can be rated as average performance as it

has a higher risk when compared to its return, even in this we can see that

sundaram has greater risk that SBI. These funds can be given to people who

are ready to take a higher risk

The franklin India Prima fund is not suggested as the risk is above average and

the return is below average

Documents

Comparitive Study Between Mutual Funds Offered by Various Companies in Indian Market