FINANCIAL ANALYSIS OF SELECTED PUBLIC

SECTOR AND PRIVATE SECTOR MUTUAL FUNDS

1. INRODUCTION

A mutual fund is a trust that pools the savings of a number of investors who

share a common financial goal. Anybody with an investable surplus of as

little as a few thousand rupees can invest in mutual funds. These investors

buy units of a particular mutual fund scheme that has a defined investment

objective and strategy. The money thus collected is then invested by the

fund manager in different types of securities. These could range from

shares to debentures to money market instruments, depending upon the

schemes 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.

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

scheme is liquidity.

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

The fund is open for subscription only during a specified period at the time of

lunch 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 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 Regulation stipulates 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.

Interval scheme combines the features of open-ended schemes. They are open

for sale or redemption during predetermined intervals at NAV related prices.

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 market. However, opportunities of capital appreciation

are also limited in such funds. The NAV, of such funds are affected because of

change in interest rates in the country. IF the interest rates fall, NAVs of such are

likely to increase in the short run and vice versa. However, long-term investors

may not bother about these fluctuations.

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 provide different options to the

investors like dividend option, capital appreciation, etc.

1.1 MEANING OF MUTUAL FUND:

To state in simple words, a mutual fund collects the savings from small

investors, invest them in Government and other corporate securities and

earn income through interest and dividends, besides capital gains. It works

on the principle of ‘small drops of water makes a big ocean’. For instance,

if one has Rs. 1000 to invest, it may not fatch very much on its own. But,

when it is pooled with Rs. 1000 each from a lot of other people, then, one

could create a big fund large enough to invest in a wide varieties of shares

and debentures on a commanding scale and thus, to enjoy the economics

of large scale operations. Hence, a mutual fund is nothing but a form of

collective investment. It is formed by the coming together of a number of

investors who transfer their surplus funds to a professionally qualified

organisation to manage it. To get the surplus funds from investors, the

fund adopt a simple technique. Each fund is divided into a small fraction

called “units” of equal value. Each investor is allocated units in proportion

to the size of his investment. Thus, every investor, whether big or small,

will have a stake in the fund and can enjoy the wide portfolio of the

investment held by the fund. Hence, mutual funds enable millions of small

and large investors to participate in and derive the benefits of the capital

market growth. It has emerged as a popular vehicle of creation of wealth

due to high return, lower cost and diversified risk.

1.2 DEFINITIONS OF MUTUAL FUND:

The Securities and Exchange Board of India (Mutual Funds) Regulations,

1993 defines a mutual fund as ‘a fund established in the form of a trust by

a sponsor to raise money by the trustees through the sale of units to the

public, under one or more schemes, for investing in securities in

accordance with these regulations’.

Kamm,J.O. defines an open end investment company as “an organisation

formed for the investment of funds obtained from individuals and

institutional investors who in exchange for the funds receive shares which

can be redeemed at any time at their underlying asset values.”

2. REVIEW OF LITERATURE:

2.1 RESEARCH ON MUTUAL FUNDS IN INDIA- A REVIEW

A key measure to accelerate development in any society is to raise the rate

of savings, which in turn finance additional investment in industry,

agriculture, service and human skills. By enabling small savers, to combine

safety with a higher return than they could have obtained from bank fixed

deposits or investment in gold or in any other asset. UTI played a significant

role in raising India’s saving rate, sawing the seeds of greater economic

growth.

There are some Indian studies which viewed UTI as a development financial

institution and also examined the role of UTI in providing finance to the

corporate and other sectors of economy.

A number of articles and brief essays have been published in financial

dailies, Periodicals and in many professional and research journals. The

available literature can be divided into five categories.

Informative and Descriptive

Performance Evaluation

Valuation and Pricing

Regulatory Issues

Managerial aspects

A brief review of literature is presented below.

A number of academics, professionals and business journals have

written articles explaining the basic concept of mutual funds, their

characteristics and reviewed the trends in the growth of mutual funds.

They also emphasized the importance of mutual funds in the

development of capital market in India.

Verma’s book on mutual funds covers the conceptual and regulatory

aspects of the Indian mutual funds with some informational data and

guidelines to the investors in selection of mutual funds.

S. Narayan Rao evaluated performance of Indian mutual funds in a bear

market through relative performance index, risk-return analysis,

Treynor’s ratio, Sharpe’s ratio, Sharpe’s measure, Jensen’ measure and

Fama’s measure. The study used 269 open-ended schemes( out of total

schemes of 433) for computing relative performance index. Then after

excluding funds whose returns are less than risk-free returns, 58

schemes are finally used for further analysis. The results of performance

measures suggest that most of mutual fund schemes in the sample of

58 were able to satisfy investor’s expectations by giving excess returns

over expected returns based on both premium for systematic risk and

total risk.

Bijan Roy concluded an empirical study on conditional performance of

Indian mutual funds. This paper uses a technique called conditional

performance evaluation on a sample of eighty-nine Indian mutual fund

schemes. This paper measures the performance of various mutual funds

with both-conditional and unconditional form of CAPM, Treynor-Mazuy

model and Henriksson-Merton model. The effect of incorporating lagged

information variables into the evaluation of mutual fund manager’s

performance is examined in the Indian context. The results suggest that

the use of conditioning lagged information variables improves the

performance of mutual fund schemes, causing alphas to shift towards

right and reducing the number of negative timing coefficients.

In 1987, when the public sector banks entered in the mutual fund

sector, there were no regulations at all. Later guidelines were issued by

RBI and the Government of India. A few articles highlighted the

importance and issues for the regulation of mutual fund. In 1993, SEBI

framed regulations for mutual funds.

Computation of the Net Asset Value(NAV) and the pricing of mutual fund

units are very important as there were no guidelines at all. A few articles

published in the financial dailies highlighted the importance of uniform

valuation of investment. Jaydev also critically analysed the desperate

practices of mutual funds in the valuation of investments. In January,

1996 SEBI Committee report of valuation andpricing was released which

suggest norms for the valuation and pricing.

A few articles touched upon certain aspects of portfolio management

and other issues involved in the management of mutual funds. The

notable among them are Sengupta, Lal and Sharma and Shah and

Murthy.

Ajay Shah and Susan Thomas studied the performance evaluation of 11

mutual fund schemes, on the basis of market price data. The weekly

returns were computed for these schemes since their commencement

to April, 1994. Jensen and sharpe measures were used to evaluate the

superior performance of the schemes. They concluded that except UGE-

2000 of UTI, none of the schemes earned superior returns then the

market is general. The risk of these schemes is very high and funds

might be inadequately diversified.

Jaideep and Sudip Majumdar (1994) evaluated the performance of five

growth oriented schemes for the period February 1991 to August 1993.

They have employed the CAPM and Jensen Measurement to evaluated

the performance. They have also evaluated the boom period

performance of the scheme during the first quarter of 1992 by

employing Jensen Model. They conclude that the selected mutual fund

schemes have not offered superior returns during the study period than

the market in general. However, they concluded that in the boom period

the fund performed well.

Kshama Fernandes (2003) evaluated index fund implementation in

India, In this paper, tracking error of index funds in India is measured.

The consistency and level of tracking errors obtained by some well-run

index fund suggests that it is possible to attain low levels of tracking

error under Indian conditions. At the same time, there do seem to be

periods where certain index funds appear to depart from the discipline

of indexation.

K. Pendarika studied construction of mutual fund portfolios, developed a

multi-criteria methodology and applied it to the Greek market of equity

mutual funds. The methodology is based on the combination of discrete

and continuous multi-criteria decision aid methods for mutual fund

selection and composition. UTADIS multi-criteria decision aid method is

employed to develop mutual fund’s performance models. Goal

programming model is employed to determine proportion of selected

mutual funds in the final portfolios.

A few articles also appeared in the financial dailies ( The Economic

Times, Financial Express, Business Standards ) and the periodicals

( Capital Market, Dalal Streets, Business Today, Money Life, Outlook

etc.) about the evaluation of mutual fund schemes by comparing the

changes in NAV and Market Price between the changes in stock market

indices. However, these analyses were purely for short period and

ignored the concept of risk.

3.1 RESEARCH ON MUTUAL FUND IN US

In the US, innumerable studies and paper work has been done for mutual

funds. The advanced research on Mutual Fund performance evaluation

contribution a lot to the wealth of knowledge, brief review of which is as

follow. The review has also helped the researchers in identifying research

gaps. The initial work on the US mutual funds was done by Wharten School

of finance and commerce (1962) for the period 1953 to 1958. The study

examined the issues relating to investment policy , performance , portfolio

turnover rate and impact of mutual funds trading activity on the stock

markets. The study concludes that, on an average, the funds had not

performed well than composite markets from which they select their

securities. There was no persistent relationship between the annual portfolio

turnover rates and the performance. Further, the fund’s net purchases have

considerably affected the price movement of individual stocks and, to a

lesser extent, the price movements of the markets. Friend and Vickers

(1965) evaluated the performance of mutual funds against the randomly

constructed portfolios. The study concludes that mutual funds on the whole

have not performed super to random portfolios.

Treynor (1965) devised a new method for rating management of investment

funds. He has suggested a new predictor of mutual fund performance one

that differs from virtually all those used previously by incorporating the

volatility of a fund’s return in a simple yet meaningful manner. In other

words, he developed a concept of fund performance which takes investment

risk into account and a measure for rating fund management performance

which he applied directly using a graphical technique, also developed for the

purpose.

Sharpe William F. (1966) suggested a measure for the evaluation of portfolio

performance, His study concludes that out of 34 funds selected, 19 had

outperformed the bench-mark in terms of total risk.

Michael C. Jensen (1968) derived a risk-adjusted measure of portfolio

performance (Jensen’s alpha) that estimates how much a manager’s

forcasting ability contributes to fund’s returns. He concludes that for the

sample of 115 mutual funds the managers were not able to forcast expenses

and fees. Friens, Blume and Crockeet (1970) compared the performance of

86 mutual funds with random portfolios. The study concludes that, mutual

funds did worse than the randomly selected portfolios in terms of total risk.

Further, the funds with low high turnover and the fund size has no impact on

the performance.

Risk adjusted performance evaluation is also made by Carlson (1970) and

SEC study (1971). The broad conclusions arrived by them are, that some of

the funds had outperformed the benchmarks, but there was no consistency

in performance.

John McDonald(1974) examined the relationship between the stated fund

objectives and their risk and return attributes. The study concludes than, on

an average the fund managers appeared to keep their portfolios within the

stated risk.

Norman E. Mains (1977) applied neutral risk adjusted performance measures

and conduct that approximately 60% of the funds ( out of 75) has larger net

returns adjusted for systematic risk. Kelmosky (1977) concludes that past

risk adjusted performance is not a good guide to future performance. As

indicated by Stateman (2000), the SADR of a fund portfolio is the excess

return of the portfolio over the return of the benchmark index, where the

portfolio is leveraged to have the benchmark index’s standard deviation.

Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual

funds matched to randomly selected conventional funds of similar net assets

to investigate differences in characteristics of assets held, degree of

portfolio diversification and variable effects of diversification on

investment performance. The study found that socially responsible funds do

not differ significantly from conventional funds in terms of any of these

attributes. Moreover, the effect of diversification on investment performance

is not different between the two groups. Both groups underperformed the

Domini 400 Social Index and S & P 500 during the study period.

To conclude, the literature survey reveals that, on an average, mutual fund

managers are not able to offer higher returns than the unmanaged

portfolios. Further, their ability in stock selection and market timing is also

poor. The recent works indicate that fund managers are to earn higher

returns but they offset the expenses. Further, in the short period

Fund managers are able to offer superior returns. The implication of these

studies is that of markets are reasonable efficient.

3.NEED FOR THE STUDY OF MUTUAL FUNDS:

“All Progress is boon of inquiry. Doubt is often better than overconfidence for

it leads to inquiry and inquiry leads to invasion.”

-Hudson Maxim

There are a lot of investment avenues available today in the financial market

for an investor with an investable surplus. He can invest in Bank Deposits,

Corporate Debentures, and Bonds where there is low risk but low return. He

may invest in Stock of companies where the risk is high and the returns are

also proportionately high. The recent trends in the Stock Market have shown

that an average retail investor always lost with periodic bearish trends.

People began opting for portfolio managers with expertise in stock markets

who would invest on their behalf. Thus we had wealth management services

provided by many institutions. However they proved too costly for a small

investor. These investors have found a good shelter with the mutual funds.

Mutual fund industry has seen a lot of changes in past few years with

multinational companies coming into the country, bringing in their

professional expertise in managing funds worldwide. In the past few months

there has been a consolidation phase going on in the mutual fund industry in

India. Now investors have a wide range of Schemes to choose from

depending on their individual profiles.

My study will give an overview of mutual funds – definition, types, benefits,

risks, limitations, history of mutual funds in India, latest trends, global

scenario and future prospects.

4. RESEARCH METHODOLOGY:

4.1 INTRODUCTION

A research methodology defines as what activity of research is, how to

proceed, how to carry the research work systematically. Research

Methodology is the study of how to perform scientific research.

In other words, research is the systematic and objective identification,

analyses, dissemination and use of information for the purpose of improving

decision making related to identification and solution of problems. The

success of any research depends on the methodology followed in the study.

The present study thoroughly attempts to follow the systematic and scientific

approach to understand the study.

2.1 MEANING OF RESEARCH

Research is a systematic activity directed towards discovery and the

development of an organized body of knowledge.

Scientific method or research in problem solving is an informal application or

problem, identification, hypothesis, formulation, observation, analyses and

conclusion.

Redman and Mory defines research as “a systematized effort to gain new

knowledge.”

2.2 INTRODUCTION TO THE STUDY AND PROBLEM IDENTIFICATION

Mutual funds are innovative and provide value addition in personal finance.

Problems occur when a choice has to be made from the large number of

mutual fund selection on the basis of performance and persistence. There is

very little research on the construction of mutual fund portfolio.

Individual, authors, associates and institution at national or international

level have done many research works on different problems and financial

aspects of the mutual funds. Several studies in profitability, liquidity, trend

etc. were also done. here also the researcher has tried to emphasize on , “

the financial analysis of selected public sector private sector mutual funds.”

2.3 OBJECTIVES OF THE STUDY

1. To give brief idea about the benefits available from Mutual Fund

Investment.

2. To give an idea of the types of schemes available.

3. To discuss about the market trends of Mutual Fund Investment.

4. To check the financial performance of selected public sector and private

sector mutual funds.

5. To assess the fund development pattern of selected mutual fund houses.

6. To analyse and find out which among private sector or public sector

Mutual fund gives higher return to corporate investors.

7. To give an idea about the regulation of mutual funds.

2.4 Hypothesis

H0 : There is no significant difference in financial performance of

selected public sector and private sector mutual funds.

Ha : There is significant difference in financial performance of selected

public sector and private sector mutual fund.

H0 : There is no any significant role of a particular scheme of selected

public sector Mutual Funds in the financial performance of Mutual

Fund as a whole.

Ha : There is a significant role of a particular scheme of selected

public sector Mutual Funds in financial performance of Mutual

Fund company as a whole.

2.5 NATURE OF RESEARCH WORK:

The research work will be “Analytical” in nature.

2.6 SAMPLE SELECTION

For the purpose of research study, various schemes are selected from the following

private sector and public sector mutual funds.

Name of the AMC Nature of ownership

Alliance Capital Asset Management (I) Private Limited Private foreign

Birla Sun Life Asset Management Company Limited Private Indian

Bank of Baroda Asset Management Company Limited Banks

Bank of India Asset Management Company Limited Banks

Cholamandalam Cazenove Asset Management Company

Limited

Private foreign

DSP Merrill Lynch Asset Management Company Limited Private foreign

Escorts Asset Management Limited Private Indian

GIC Asset Management Company Limited Institutions

IDBI Investment Management Company Limited Institutions

Indfund Management Limited Banks

ING Investment Asset Management Company Private

Limited

Private foreign

J M Capital Management Limited Private Indian

Kotak Mahindra Asset Management Company Limited Private Indian

Kothari Pioneer Asset Management Company Limited Private Indian

Jeevan Bima Sahayog Asset Management Company

Limited

Institutions

Morgan Stanley Asset Management Company Private

Limited

Private foreign

Punjab National Bank Asset Management Company

Limited

Banks

Reliance Capital Asset Management Company Limited Private Indian

State Bank of India Funds Management Limited Banks

Shriram Asset Management Company Limited Private Indian

Sundaram Newton Asset Management Company Limited Private foreign

Tata Asset Management Company Limited Private Indian

Credit Capital Asset Management Company Limited Private Indian

Templeton Asset Management (India) Private Limited Private foreign

Unit Trust of India Institutions

2.7 SOURCES OF DATA

The present study of the selected public sector and private sector mutual

funds is based on both primary and secondary data. The raw data for the

present analysis have been obtained from the fact sheet of mutual fund

industry, All India Mutual Fund Association Websites and NAV database. This

information is supplemented by various other journals. Other data will also

be collected by interviewing the executives and investors of these mutual

fund houses.

2.8 TIME PERIOD

For the purpose of studying financial performance of selected schemes of

selected public sector and private sector Mutual Funds, return for the period

of one year, three years and five years and ten years of those selected

schemes are taken into consideration.

2.9 SCOPE OF THE STUDY

The present study deals with the financial performance of selected public

sector and private sector mutual funds. The performance of various schemes

of selected public sector and private sector mutual funds are taken into

consideration.

In my project, the scope is limited to some prominent mutual funds only.

There are so many schemes in mutual fund industry like equity, income,

balance specialized (banking, infrastructure, pharmacy) funds, index fund

etc. But this study will be confined to selected schemes only.

2.8 CHAPTER PLANNING

Chapter 1 Introduction

Chapter 2 Research design

Chapter 3 Review of Literature

Chapter 4 Brief History of Mutual Fund Industry

Chapter 5 Analysis of Selected Mutual Funds

Chapter 6 Major Findings, Conclusion And Suggestions.

2.14 LIMITATIONS OF THE STUDY

Everyone has its own limitations, which restricts the use of that factor. The

same principle applies to this research work also. The major limitations of the

said study are as under.

1. The data given on different websites related to mutual funds even on

websites of RBI and SABI doesn’t match at times, perhaps due to

difference in timing of updation.

2. Performance Appraisal of all the schemes will not be possible because

of non-availability of sufficient data, that is why, few schemes have

been considered for the purpose of the study.[or] These are different

methods to measure the financial performance of any mutual fund, in

this connection views of experts differ from one another.

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Websites:

1. www.amfiindia.com

2. www.iupindia.org

3. www.mutualfundsindia.com

4. www.rbi.com

5. www.sebi.com

6. www.uti.com

7. www.utimf.com

8. www.valuersearchonline.com