Mutual Industry Ranjeet

8/7/2019 Mutual Industry Ranjeet

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A

DESSERTATION REPORT

MUTUAL FUND INDUSTRY IN

INDIASubmitted In the partial Fulfillment for the

degree of

Master of Finance Management.FACULTY OF COMMERCE

BANARAS HINDU UNIVERSITY

SUBMITTED BY: SUBMITTED TO:

Ranjeet Kumar Maurya Prof. S.B. Rai

(MFM IVth Sem)Roll No:- 31

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ACKNOWLEDGEMENT

The satisfaction and euphoria that accompany the successful completion of any

task would be incomplete without the mention of the people who made it possible and

whose constant guidance and encouragement heads all efforts with success.

I extend my gratitude to Prof. V.S. Singh (HEAD & DEAN) Faculty Of Commerce

who gave the valuable time to answer my queries. I am deeply indebted to him, without

his help this report would not have been a possibility.

Also my gratitude to all my colleagues at my institute for their valuable advice and moral

support during the project.

Thanking you,

Ranjeet Kumar Maurya

Roll No: 31

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SYNOPSIS

TO STUDY THE MUTUAL FUND

INDUSTRY IN INDIA BY COMPARING

DIFFERENT MUTUAL FUNDS OF

VARIOUS COMPANIES AND ALSO THE

CURRENT PERFORMANCE OF VARIOUS

MUTUAL FUND SCHEMES

ABSTRACT

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The project involves in depth study and analysis of different mutuals funds that are

available in the

Market. The project also involves different steps that a retail investor should take into

consideration

before investing into mutual funds . Also we will also see how mutual fund will help to

save taxes..

Purpose of the project

The purpose of the project was to study what different types of mutual

funds are available in the market. Which type of mutual funds suits which types of

investors. Also comparing few mutual funds which are on the top of the chart in which

the return on investment is the criteria. How people judge which mutual fund is good for

them. The factors which affect there choice.

Scope of the project

Mutual fund is retails investor best choice. Also it is the best toll for the

people who dont

Know much about the capital market. Also for people who dont have much time for

investing and doing research of the company to invest. It is one of the best way to save

your money from inflation. What factors people should take care of before investing forma very important part of it.

Limitations of Project

As the time was quite short.It was very difficult to study in debt about the

mutual fund

Industry as it is very vast . Also the datas are collected from secondary sources.

Methodology Followed

The data was collected from different mutal funds site. Comparison. Was

done after carefully

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Seeing the rate of return for the last year performance. After that NAV was compare and

a percentage growth was calculated.The theory of mutual fund was found on various sites

that were dedicated to mutuall funds.

Sources

The data was found on AMFI website. As it is the official website of the AMFI.

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INTRODUCTION

COMPARISON BETWEEN TRADITIONAL AND MODERN METHODS OF

INVESTMENTS

S.No. Options Risk Return Tax

1

TRADITIONAL

METHODS

Fixed Deposit LOW Less Than 6%

p.a

Taxable

2 Recurring

Deposit

LOW Less than 6%

p.a

Taxable

3

Savings

LOW 3.5% p.a Taxable

4

MODERN

METHODS

ICICI Bank

Tax Saving

Bonds

LOW 8% Deductible

From Taxable

Income

5 Government

of India Bonds

No Risk 8% Tax Free

6 Investment in

Mutual Funds

Moderate Average

returns Depend

On Market

Fluctuations

Funds Under

ELSS

Deductible

From Taxable

Income

7 Initial Public

Offers by

Corporate

High High or Low

Depends on

Market

Conditions

Returns After

One Year are

Tax Free

8 Investment in

Pure Gold

Low Depends on

the Growth in

the Market

Taxable

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MUTUAL FUNDS

.Mutual funds are popular among all income levels. With a mutual fund, we get a

diversified basket of stocks managed by a professional

Barbara Stanny, author of

Prince Charming Isnt Coming: How Women Get Smart About Money

A mutual fund is a company that brings together money from many people and

invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or

other assets the fund owns are known as its portfolio. Each investor in the fund owns

shares, which represent a part of these holdings..

The U.S. Securities and Exchange

Commission

1. THEORETICAL BACKGROUND

1. INTRODUCTION

HISTORY OF INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust ofIndia, at the initiative of the Government of India and Reserve Bank the. The history of

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

First Phase 1964-87

An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up by the

Reserve Bank of India and functioned under the Regulatory and administrative control of

the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial

Development Bank of India (IDBI) took over the regulatory and administrative control in

place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of

1988 UTI had Rs.6, 700 crores of assets under management.

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

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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 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 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 othermutual 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

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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

October 31, 2003, there were 31 funds, which manage assets of Rs.126726 crores under

386 schemes.

Structure of the Indian mutual fund industry

The Indian mutual fund industry is dominated by the Unit Trust of India which has a totalcorpus of Rs700bn collected from more than 20 million investors. The UTI has manyfunds/schemes in all categories ie equity, balanced, income etc with some being open-ended and some being closed-ended. The Unit Scheme 1964 commonly referred to as US64, which is a balanced fund, is the biggest scheme with a corpus of about Rs200bn. UTIwas floated by financial institutions and is governed by a special act of Parliament. Mostof its investors believe that the UTI is government owned and controlled, which, while

legally incorrect, is true for all practical purposes.

The second largest category of mutual funds are the ones floated by nationalized banks.Canbank Asset Management floated by Canara Bank and SBI Funds Management floatedby the State Bank of India are the largest of these. GIC AMC floated by GeneralInsurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some ofthe other prominent ones. The aggregate corpus of funds managed by this category ofAMCs is about Rs150bn.

The third largest category of mutual funds are the ones floated by the private sector andby foreign asset management companies. The largest of these are Prudential ICICI AMCand Birla Sun Life AMC. The aggregate corpus of assets managed by this category of

AMCs is in excess of Rs250bn

Some of the AMCs operating currently are:

\

Name of the AMC Nature of ownership

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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

Canbank Investment Management Services Limited Banks

Cholamandalam Cazenove Asset Management Company Limited Private foreign

Dundee Asset Management Company Limited Private foreign

DSP Merrill Lynch Asset Management Company Limited Private foreign

Escorts Asset Management Limited Private Indian

First India 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

Jardine Fleming (I) Asset Management Limited Private foreign

Kotak Mahindra Asset Management Company Limited Private Indian

Kothari Pioneer Asset Management Company Limited Private Indian

1. CONCEPT OF MUTUAL FUND

A mutual fund is an investment vehicle which allows investors with similar (one could

say mutual) investment objectives, to pool their resources and thereby achieve economies

of scale and diversification in their investing. Economies of Scale means lower costs on a

per unit basis by doing things "in bulk" which spreads fixed costs over greater volume. A

mutual fund achieves lower per unit costs for professional money management and for

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transaction charges, than small investors could achieve on their own. This can increase

return to the investor. Diversification is just another way of saying "Dont put all your

eggs in one basket." A mutual fund allows its investors to a small percentage of many

different investments. So in a well-diversified mutual fund no one particular investment

dominates its performance. Poor results from some investments are likely to be offset by

good results from other investments. Therefore, the unit value of a mutual fund will not

fluctuate as sharply as the value of any one of its investments. This can reduce risk to the

investor.

A mutual fund is the ideal investment vehicle for todays complex and modern financial

scenario. Markets for equity shares, bonds and other fixed income instruments, real

estate, derivatives and other assets have become mature and information driven. Price

changes in these assets are driven by global events occurring in faraway places. A typical

individual is unlikely to have the knowledge, skills, inclination and time to keep track of

events, understand their implications and act speedily. An individual also finds it difficult

to keep track of ownership of his assets, investments, brokerage dues and bank

transactions etc.

A mutual fund is the answer to all these situations. It appoints professionally qualifiedand experienced staff that manages each of these functions on a full time basis. The large

pool of money collected in the fund allows it to hire such staff at a very low cost to each

investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas -

research, investments and transaction processing. While the concept of individuals

coming together to invest money collectively is not new, the mutual fund in its present

form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the

Second World War. Globally, there are thousands of firms offering tens of thousands of

mutual funds with different investment objectives. Today, mutual funds collectively

manage almost as much as or more money as compared to banks.

Despite these advantages mutual funds do not guarantee do not return, nor do they

eliminate risk to investors. The return and risk of a mutual fund depend primarily on the

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type of securities instruments in which it invests, and secondarily on how well it is

managed by the company offering it.

Typically a mutual fund scheme is initiated by a sponsor who recognizes and markets the

fund. It pre specifies the investment objective of the fund and the risks associated with

the costs involved in the process and broad rules for entry into and exit from the fund and

other areas of operation. In India as in most nations the sponsors

need approval from the regulator viz. SEBI. A sponsor then hires an asset management

company to invest the funds according to the investment objective. It also hires another

entity to the custodian of the assets of the funds and perhaps a third one to handle registry

work.

In the Indian context, the sponsors promote the Asset Management Company also, in

which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the

Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the

Birla Sun Life Asset Management Company Ltd., which has floated different mutual

funds schemes and also acts as an asset manager for the funds collected under the

schemes.

In nutshell, A Mutual Fund is a trust that pools the savings of a number of investors whoshare 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 are shared by its unit

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

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

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

chart below describes broadly the working of a mutual fund:

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ORGANISATION OF A MUTUAL FUND

There are many entities involved and the diagram below illustrates the

organizational set up of a mutual fund:

1.3. ADVANTAGES OF MUTUAL FUNDS

Mutual funds provide following benefit to investors

Professional Management

Mutual Funds provide the services of experienced and skilled professionals, backed by adedicated investment research team that analyses the performance and prospects of

companies and selects suitable investments to achieve the objectives of the scheme.

Diversification

Mutual Funds invest in a number of companies across a broad cross-section of industries

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.

Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such

as bad deliveries, delayed payments and follow up with brokers and companies. Mutual

Funds save your time and make investing easy and convenient.

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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.

Low Costs

Mutual Funds are a relatively less expensive way to invest compared to directly investing

in the capital markets because the benefits of scale in brokerage, custodial and other fees

translate into lower costs for investors.

Liquidity

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

related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a

stock exchange at the prevailing market price or the investor can avail of the facility of

direct repurchase at NAV related prices by the Mutual Fund.

Transparency

you get regular information on the value of your investment in addition to disclosure onthe specific investments made by your scheme, the proportion invested in each class of

assets and the fund manager's investment strategy and outlook.

Flexibility

Through features such as regular investment plans, regular withdrawal plans and dividend

reinvestment plans, you can systematically invest or withdraw funds according to your

needs and convenience.

Affordability

Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual

fund because of its large corpus allows even a small investor to take the benefit of its

investment strategy.

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Choice of Schemes

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

Well Regulated

All Mutual Funds are registered with SEBI and they function within the provisions of

strict regulations designed to protect the interests of investors. The operations of Mutual

Funds are regularly monitored by SEBI.

Disadvantages of investing through mutual funds:

While the benefits of investing through mutual funds far outweigh the disadvantages, an

investor and his advisor will do well to be aware of a few shortcomings of using the

mutual funds as investment vehicles.

No control over costs: an investor in a mutual fund has no control over the overall cost of

investing. He pays investment management fees as long as he remains with the fund,

albeit in return for the professional management and research. Fees are payable even

while the value of his investments may be declining. a mutual fund investor also pays

fund distribution cost, which he would not incur in direct investing.however,this

shortcoming only means that there is a cost to obtain the benefits of mutual fund services.

No tailor made portfolios: investor who invests on their own can build their own

portfolios of shares and bonds and other securities. Investing through funds means he

delegates this decision to the fund managers. The very high net worth individuals or large

corporate investors may find this to be a constraint in achieving their objectives.

However, most mutual fund managers help investors overcome this constraint by offering

families of funds-----a large number of different schemes---within their own management

company. An investor can choose from different investment plans and construct a

portfolio of his choice.

Managing a portfolio of funds: availability of a large number of funds can actually mean

too much choice for the investor. He may again need advice on how to select a fund to

achieve his objectives, quite similar to the situation when he has to select individual

shares or bonds to invest in.

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Role of Mutual Funds in the Financial Market

The brief review in the preceding section of financial system and structural changes in the

market suggests that Indian Financial institutions have played a dominant role in assets

formation and intermediation, and contributed substantially in macroeconomic

development. In this process of development, Indian mutual funds have emerged as

strong financial intermediaries and are playing a very important role in bringing stability

to the financial system and efficiency to resource allocation. Mutual funds have opened

new vistas to investors and imparted much-needed liquidity to the system.

Mutual funds are the fastest growing institutions in the household saving sector. Growing

complications and risk in the stock market, rising tax rates and increasing inflation have

pushed household towards mutual funds. The active involvement of mutual funds in

promoting economic development can be seen not only in terms of their participation in

the savings market but also in their dominant presence in the money and capital market.

A developed financial market is critical to overall development and mutual funds play an

active role in promoting a healthy capital market. We have also noted that Indian

investors have moved towards more liquid, growth-oriented tradable instrument like

share/ debentures, and units of mutual funds. This shift in asset holding pattern ofinvestors has been significantly influenced by the equity and unit culture.

Mutual funds in India have emerged as a critical institutional linkage among various

financial segments like saving, capital market and the corporate sector. They provide

much needed impetus to the money market and stock market, in addition to direct and

indirect support to the corporate sector. Above all, mutual funds have given a new

direction to the flow of personal saving and enabled small and medium investors in

remote, rural and semi urban areas to reap the benefit of stock market investment. Indian

mutual funds are thus playing a very crucial developmental role in allocating resource in

the emerging market economy.

1.4. CLASSIFICATION OF MUTUAL FUNDS

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There are varied ways in which funds can be classified. From the investors perspective

funds are usually classified in terms:

Constitution Structure Collection entry or exit

charges from investors

Close ended Load funds

Open ended No-Load funds

Under each broad classification, there are several types of funds, depending on the basis

of the nature of their portfolio. Even fund has unique risk-profiles that are determined by

its portfolio.

I. Open ended and close ended funds

Open-ended Funds

An open-end fund is one that has units available for sale and repurchase at all the times at

a price based on the NAV per unit. Such funds are open for subscription the whole year.

Capitalization/corpus is continuously changing. Fund size and the total investment

amount goes up if more new subscription comes in from new investors than redemption

by exiting investors, the fund shrinks when redemption of units exceeds fresh

subscription. Theres no fixed maturity.

Shares or units of such funds are normally not traded on the stock exchange but are

repurchased by the fund at announced rates. They provide better liquidity even though

not listed as investors can any time approach mutual funds for sale of such units.

Dividend reinvestment option is also available in case of such funds. Since there is

always a possibility of withdrawals, management of such funds becomes more tedious as

managers have to work from crises to crises. Crises may be two fronts:

Unexpected withdrawals require funds to maintain a high level of cash available every

time implying thereby idle cash.

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By virtue of this situation such funds may fail to grab favorable opportunities. Further to

match quick cash payments, funds cannot have matching realization from their portfolio

due to intricacies of the stock market.

Close-ended Funds

Close end funds can be subscribed to, only during the initial public offer. Thereafter the

units of such funds can be bought and sold on the stock exchange on which they are listed

through a broker. Such funds have a stipulated maturity period. The duration of such

funds is generally 2 to 15 years.

The funds units may be traded at the discount or premium to NAV based on the

investors perception about the funds future performance and other market factors

affecting the demand for a supply of the funds units. An important point to note here is

that the number of outstanding units of such fund doesnt vary on account of trading in

the funds units at the stock exchange. From management point of view, managing close

ended schemes is comparatively easy since fund managers can evolve and adopt long

term investment strategies depending on the life of the scheme.

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Load Funds Vs No Load funds

Load Funds

Marketing of new mutual fund scheme involves initial expenses. Charges made to the

investor to cover distribution/sales/marketing expenses are often called loads. These

expenses may be recovered from the investors in different ways at different times.

Typically entry and exit loads range from 1% to 2%. Three usual ways in which funds

sales expenses may be recovered from the investor are:

At the time of entry into the fund, by deducting a specific amount from his initial

expenses. The load charges to the investor at the time of his entry into the scheme are

called a front-end or entry load.

By charging the fund/scheme with a fixed amount each year, during the stated number of

years. The load amount charged to the scheme over a period of time is called deferred

load

At the time of investors exit from the scheme, by deducting a specified amount from the

redemption precedes payable to the investor. The load that the investors pay at the time of

his exit is called a back-end or exit load

Some funds may also charge different amounts of load to the investor depending upon

how many years the investors has stayed with the fund, the longer the investor stays with

the fund less the amount of exit load, he is charged. This is called as contingent deferred

sales charge. The schemes NAV would reflect the net amount after the deferred load.

Loads are charged not only by an open-ended fund but even a close-ended fund can

charge a load to cover the initial issue expense.

No-Load Funds

Funds that make no such charges or loads for sales expenses are called as no load

funds.

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1.5. TYPES OF FUNDS

Funds are generally distinguished from each other by their investment objectives and

types of securities they invest in. Currently, mutual funds in India are allowed to invest

either in equity or debt or a combination of these two. While moves are on to float funds

that invest in gold or real estate etc, as of date, mutual funds are not permitted to

currently hold physical assets. Thus, a fund can invest in shares or debt instruments of a

gold mining company, but cannot buy gold itself.

By Objective

Here the funds are classified on the basis of the investment objective where objective

reflects the purpose for which the investor is investing his money. By law each mutual

fund must declare an investment objective which tells an investor what the fund

concentrates on and allows the investor to integrate a particular fund with his or her own

needs. The main objective of any investor is to generate returns on his investments but

investors have different needs depending upon which the returns and the portfolio for any

investor varies.

Investors can have one particular objective or can have a mix of various objectives. On

the basis of objective and asset allocation mutual funds can be categorized as follows.

Equity Funds

These are funds which invest in equity shares of companies. Equities, as an asset class,

have historically delivered higher returns compared to debt funds over a long term.

Equity funds, by their very nature, tend to be volatile, that is, in the short term their value

can go up or down. Therefore, they are not meant for those investors who need a regular

and stable stream of easily predictable income.

Broad-based, diversified equity funds vary their investments across companies and

sectors to give a return comparable to the market indices. For instance, if the BSE sensex

appreciates 50 per cent in a one-year, then a broad-based fund would try to give returns

of about 40-60 per cent. Aggressive growth funds take sector bets, that is, they invest

more in particular sectors like infotech and pharma. Here, the fund managers believe that

companies in a particular sector will outperform the general market. Sector funds invest

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their money exclusively in companies belonging to one sector. Here the investor risks his

entire investments on the fortunes of that sector. If the sector does well, he will get above

market returns, but if his bet goes wrong, then the entire capital could get eroded. Hence,

fund managers recommend that sector funds should form only a very small part of your

overall equity investment portfolio.

I. Equity Diversified Funds -

Diversification - Mutual Funds reduces the risk by investing in all the sectors. Instead of

putting all your money in one sector or company it's better to invest in various good

performing sectors as you reduces the risk of getting involved in a particular

sector/company which may perform or may not.

Who should invest - This is an ideal category for those who want to participate in stock

market & knows the risk involved in stock market but have few rupees to invest in

bluechip stocks.

How they performed - Though the short term out look is volatile in long-term equity

diversified funds have outperformed other categories & stock markets will lesser amount

of risk than stock markets. The average returns of equity diversified funds are 102

PERFORMANCE AS ON APRIL10,2007S

Equity Diversified AssetSize(Rs.cr.)

NAV(Rs./Uni

t)

1wk 1mth

3mth

6mth

1yr 2yr 3yr

Magnum GlobalFund (G)

1,361.77

41.08 2.0 1.1 -7.4 8.8 8.4134.

7327.

5ICICI Pru Services

Indus. (G)424.02 14.99 3.3 1.9 -2.3 21.8 23.7 -- --

ICICI Pru Dynamic

Plan (G)

1,757.56

63.14 3.4 2.2 -3.2 12.3 14.4137.

4218.

1

Reliance GrowthFund (G)

3,243.92

260.28 3.2 2.8 -2.4 8.1 8.4 114.6

229.7

Birla FrontlineEquity (G)

147.76 49.66 4.2 4.0 1.3 9.3 18.6109.

3140.

0

II. Index Funds -

22
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Follow the index - These are the index-based funds, which move with the likes of Sensex

& Nifty. These fund charges NIL or very low entry/exit loads.

Who should invest - As you have seen in last few months Nifty & Sensex have almost

come down 500points from their tops, it is a good time to invest in Index funds with the

principal of "Investing at the lower levels".

How they performed - Though the short term out look is volatile in long-term Sensex &

Nifty could do well with improving economic conditions. It has been seen that these

Index funds have outperformed the indices making them more attractive.

III. Sector Fund

Sector - Sector Schemes follow particular sector.

Who should invest - You have to be selective while investing in these funds, as you need

to select particular sector, which will perform better in the future. Investing in these funds

carries some amount of risk but also give you more returns.

How they performed - Sector funds have given average returns of 73% for 1 year period.

Auto, Steel, Cement have done well the year '03 & the trend will continue in year '04 but

IT, FMCG sectors are experiencing downward trend due to $ depreciation, price war in

FMCG respectively. Though short-term trend for pharma sector looks down in long term

we look forward to lot more action in the sector, as there exists a long-term, strong

fundamental story backed by immense growth potential for the Indian pharmaceuticalcompanies.

*IV. Equity Linked Tax Savings Schemes (ELSS) -

Enjoy tax benefits - These schemes are becoming more popular as traditional ways of tax

saving becoming less interesting with declining interest rates.

Who should invest - Equity Linked Savings Schemes (ELSS) is an ideal way to save on

tax as well as staying invested in equity mutual funds.

How they performed - In last 1 year these funds have given above average returns to keep

you more & more interested in saving tax as well as counting returns on your investment.

The average returns for this category are 98%

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PERFORMANCE AS ON APRIL 10, 2007

Equity Tax Saving AssetSize(Rs.cr.)

NAV(Rs./Uni

t)

1wk 1mth

3mt

h6mt

h1yr 2yr 3yr

Magnum Tax GainScheme

1,663.97

42.77 2.9 2.5 -2.3 9.7 10.9135.

3324.

1Kotak Tax Saver (G) 175.33 13.98 3.4 3.2 -0.7 15.0 3.7 -- --Principal Personal

Tax Saver38.11 123.59 2.7 3.4 -2.3 12.5 6.1 66.8

105.5

Birla Tax Relief 96 309.20 88.21 3.8 2.8 -1.5 6.6 7.8 98.6105.

3Fidelity Tax

Advantage (G)665.23 12.30 4.1 3.7 0.1 10.1 11.2 -- --

Debt funds

Debt funds are particularly attractive to investors who would otherwise invest in banks or

company fixed deposits. But the deposits are subject to tax deduction at source, whereas

the dividends received from debt funds are totally tax free in the hands of investors.

There are various types of debt funds designed for parking your short-term surpluses to

medium term savings. Money market funds or liquid or cash funds are designed as an

alternative to your savings bank account. They offer you 1.5 to 2 per cent higher returns

on an average

than your savings bank account which typically yields 4.50 per cent per annum. Some

funds even offer a cheque writing facility on your investments in such funds which can

be used to issue cheques to others. Income funds are aimed at slightly longer-term

investments, say about six months to one year. These are low risk funds which offer you

a steady return better than that of a bank fixed deposit.

I. Debt Funds -

Banking on Debt Markets - Debt funds invest in the government securities, CorporateBonds, Treasury Bills, etc.

Who should invest - The conservative investors like to go for capital safety.

How they performed - From Last 12 months in the declining interest rate scenario debt

funds remained flat. In 3 years debt funds have given average returns of 12%. As equity

market is looking volatile its better to invest part of your money in these funds.

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PRRFORMANCE AS ON APRIL 10 ,2007

Debt - Floating Rate AssetSize(Rs.cr.)

NAV(Rs./Uni

t)

1wk 1mth

3mt

h6mt

h1yr 2yr 3yr

LIC MF FloatingRate Fund (G)

2,177.45

12.01 0.2 0.8 2.1 4.2 7.8 14.4 19.9

CanFloating Rate -STP (G)

711.26 11.50 0.1 1.0 2.2 4.1 7.7 14.3 --

DBS Chola ShortTerm FRF (G)

1,222.86

11.20 0.1 0.9 2.2 4.2 7.7 -- --

Reliance FloatingRate (G)

1,847.86

11.72 0.1 0.9 2.2 4.2 7.6 13.7 --

S Birla Floating Rate- STP (G)

179.16 12.38 0.1 0.8 2.1 4.0 7.3 13.3 18.9

II. Gilt Funds -

Government Sec. - Gilt funds invest in government securities.

Who should invest - The investors who like to avail the benefits of capital safety with

government security.

How they performed - From Last 6-12 months Gilt funds have given average returns. As

equity market is looking volatile its better to invest part of your money in these funds as

they provide adequate security to your investments. The average returns for 1-year period

are 10.41% compare to the NSE G Sec Composite Index has given 12.60% returns.


Debt - Long Term AssetSize(Rs.cr.)

NAV(Rs./Uni

t)

1wk 1mth

3mt

h6mt

h1yr 2yr 3yr

ICICI Pru Gilt Inv

Plan - PF80.87 11.70 0.2 -- -2.3 1.1 7.1 12.6 12.9

ICICI Pru Long Term

Plan (G)8.06 15.67 0.2 0.7 1.9 3.5 7.3 14.5 26.1

Birla Income Fund(G)

28.17 25.95 0.2 0.7 0.9 3.8 8.0 12.3 12.0

HDFC High Interest -STP (G)

42.59 13.66 0.2 0.8 1.7 3.4 7.6 12.5 16.5

ICICI Pru Flexible

Income (G)547.36 13.78 0.2 0.8 2.2 4.0 7.7 13.2 14.5

III. MIP -

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Monthly Income - These schemes gives you monthly income.

Who should invest - Those who seek monthly income. In the current scenario where debt

market is very volatile it's better to invest in hybrid funds like MIP with suitable time

horizon for capital appreciation.

How they performed - In Last 6-12 months MIP's have given descent returns compare to

debt funds. The average returns of MIP's stands at 15.68%, which looks good, compared

to income funds.

PERFORMANCE AS ON APRIL 10,2007

Monthly IncomePlan

Asset

Size(Rs.cr.)

NAV(Rs./Uni

t)

1wk 1mth

3mt

h6mt

h1yr 2yr 3yr

ABN Amro MIP (G) 62.27 12.93 0.5 0.1 -0.4 5.9 9.6 22.4 --HDFC MIP - LTP

(G)1,161.5

514.79 1.1 1.1 1.2 3.4 7.8 30.8 40.3

HSBC MIP - SavingsPlan (G)

69.54 13.16 1.0 1.1 0.1 3.7 6.9 23.5 28.3

Birla Sun Life MIP(G)

144.35 25.24 0.7 0.9 -0.1 2.8 7.2 20.4 23.5

Tata Monthly IncomeFund (G)

34.01 14.67 0.5 0.6 2.6 3.9 5.0 14.0 18.3

IV. STP -

Short-term Plans - These schemes provides short-term saving option with more liquidity

than FD's to park your investments.

Who should invest - Those who seeking for income in short-term investments of 6-10

months with more liquidity than Bank fixed deposit.

How they performed - While savings accounts would give you 3.5% per anum, bank FD's

annually return up to 6.5%, Liquid funds would typically give you more than 5% and

short-term plans 6 to 6.5% per anum.

In Last 6-12 months STP's have given descent returns.

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Debt - Short Term AssetSize(Rs.cr.)

NAV(Rs./Uni

t)

1wk 1mth

3mt

h6mt

h1yr 2yr 3yr

ABN Amro FlexiDebt - RP (G)

234.99 11.63 0.2 0.9 2.2 4.9 9.2 14.7 --

Reliance Short TermFund (G)

269.47 13.10 0.2 0.8 1.8 3.8 7.6 13.7 19.6

Sundaram Debt STPAP (G)

7.30 13.14 0.1 0.7 2.1 4.0 7.8 12.9 18.2

Birla Short TermPlan (G)

38.66 13.41 0.2 0.8 2.3 4.3 7.7 12.9 18.2

Tata Short TermBond Fund (G)

40.30 13.37 0.2 0.7 2.0 4.0 7.6 13.8 19.3

Balance Funds

Balanced funds invest in a combination of debt and equity to balance the risks of

investing in equity. Balanced funds are theoretically designed to hedge the risk of loss on

equity investments by the income generated by debt instruments. The ideal mix of debt to

equity investments in a balanced fund is 50:50. But as funds which invest a majority of

their money in equity are exempt from paying tax on their income up to the year 2002, in

India most funds have a debt to equity ratio of 49:51. A ratio higher than 51 for equity

investments could actually work against the very purpose of balanced schemes.

Balanced fund - Balanced funds gives you the stability with the potential to grow with the

equity help of equity investments. These funds invest in both Equity & Debt markets.

Who should invest - The balanced funds are for those, who want to enjoy the appreciation

effects of equity market but at the same time like to play safe with less volatile debt

market. In this volatile market it is good to invest in balanced funds as they carries less

risk compare to equity funds.

How they performed - In the last 12 months balanced funds have given descent returns

with the up trend in the equity markets. Balanced funds average returns are 60% for 1-

year period.

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PERFOFMANCE AS ON APRIL 10, 2007

Balanced AssetSize(Rs.cr.)

NAV(Rs./Uni

t)

1wk 1mth

3mt

h6mt

h1yr 2yr 3yr

HDFC PrudenceFund (G)

2,104.78

110.68 2.9 2.5 -2.6 5.0 14.7 85.2135.

6Magnum Balanced

Fund (G)271.16 33.97 2.6 1.5 -3.1 4.8 3.7 83.3

141.1

Canbalanced II 83.93 35.72 1.9 1.4 -2.5 -2.1 -1.5 86.0122.

4Tata Balanced Fund

(G)151.63 49.02 3.3 3.4 0.5 9.6 5.1 67.3

111.5

UTI Mahila UnitScheme (G)

83.19 27.44 1.0 2.2 -0.2 4.0 8.6 64.0 73.1

1.6. MUTUAL FUNDS RANKED FROM LEAST TO MOST RISKY

Money Market Mutual Fund

Government or Agency Bond Fund

Income Fund

Balanced Fund

Index Fund

Growth FundAggressive Growth Fund

International / Global Fund

Specialty / Sector Fund

1.7. TAX STATUS

Dividend paid by mutual funds is fully tax-exempt at the hands of the investor, although,

debt funds have to pay a 12.81 per cent dividend distribution tax. On redemption of any

units held for more than a year, your realization will attract long-term capital gains tax of

20 per cent plus surcharge after indexing for inflation, or at a flat rate of 10 per cent. If

redeemed before a year it will be termed as short term capital gain and taxed along with

your other income. However, you can save tax by investing in Equity-Linked Savings

Scheme (ELSS) under Section 88 of the Income Tax Act, 1961, according to which 20

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per cent of the amount invested in ELSS can be deducted from your tax liability subject

to a maximum investment of Rs 10,000 per year

1.8. FREQUENTLY USED TERMS IN THE MUTUAL FUND INDUSTRY

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.

Calculation of NAV

The most important part of the calculation is the valuation of the assets owned by the

fund. Once it is calculated, the NAV is simply the net value of assets divided by the

number of units outstanding. The detailed methodology for the calculation of the asset

value is given below.

Asset value is equal to

Sum of market value of shares/debentures + Liquid assets/cash held, if any

+ Dividends/interest accrued

Amount due on unpaid assets

Expenses accrued but not paid

Sale Price: Is the price you pay when you invest in a scheme. Also called Offer Price. It

may include a sales load.

Repurchase Price: Is the price at which a close-ended scheme repurchases its units and

it may include a back-end load. This is also called Bid Price.

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.

Sales Load: Is a charge collected by a scheme when it sells the units. Also called,

Front-end load. Schemes that do not charge a load are called No Load schemes.

Repurchase or Back-end Load: Is a charge collected by a scheme when it buys back the

units from the unit-holders

EQUITY INVESTING

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Equities are unique assets that investors feel more comfortable buying at higher prices

and selling at lower prices

What are the deciding factors which should be considered while buying equities?

1. Political environment and Macro Economic Policies: & industry trends?

The government lays down economic policies from time to time. We should assess what

impact these policies will have on the private and public sector. We must also assess how

government policies can affect a particular company whose shares we are interested in

buying.

For example: to give a boost to the electronic industry the government may come out

with a series of tax exemptions on color television sets and government policies in certain

sectors might affect the growth of companies in those sectors.

Your decision has to be right not only at the micro level (telecom companies) but also at

the micro level- which particular company is the best bet?

2. Which company to go for?

Once you have chosen the right sector or industry the stage is set to choose the right

company. Take note of the three important factors ---

The past track record of the company.

The management and the existing culture of the company.

The ability of the management to lead the company in the future given its track

record.

If the company has been consistently making profits for five or six consecutive years, it is

likely that it will continue to make profits in the future too.

But what if the company has been making losses for seven consecutive years and the

management promises a huge profit next year?

In such a situation find answer to these questions:

Does the company expect a change in government policies that will allow it to

raise prices and maintain its cost levels so that profitability jumps sharply?

Is company X developing a new product that will finally be success in the

market?

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Have consumer switched their preferences for products manufactured by rival

companies to products manufactured by company X?

Has the main shareholders changed its attitude to company X or its philosophy of

management and control.

But keeping a track of all the above factors is not easy for a layman and for this there are

technical annalists who consider the following tools to understand a companys

performance:

Charts and graphs showing price movements.

Product performance of the company.

Competitive analysis.

Ratio Analysis

Current Ratios

Sales-To-Assets Ratios

Debt Ratios

Return On Equity

Balance sheet and Income statement.

Assets and liabilities

Cash flows Analysis sheet

Equity share data

Earning Per Share

Dividends Per share

The market price

P/E Ratio

Cash Flow ratios

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1.9. RISK ASSOCITED WITH MUTUAL FUNDS

Mutual funds and securities investment are subject to various risks and there is no

assurance that a scheme objective will be achieved. These risks should be properly

understood by investors so that they can understand how much risky their investment

avenue is. Equity and fixed income bearing securities have different risks associated with

them. Various risks associated with mutual funds can be described as below.

Risk associated to fixed income bearing securities

Interest rate risk - As with all the securities, changes in interest rates may affect the

schemes Net Asset Value as the prices of the securities generally increase as interest rates

decline and generally decrease as interest rates rise. Prices of long-term securities

generally fluctuate more in response to interest rates changes then do short term

securities. Indian Debt markets can be volatile leading to the possibility of price

movements or down in the fixed income securities and thereby to the possible

movements in the NAV.

Liquidity or marketable risk - This refers to the ease with which an security can be sold

at near to its valuation yield to maturity. The primary measure of liquidity risk is thespread between the bid price and the offer price quoted by the dealer. Liquidity risk is

inherent to the Indian Debt market.

Credit risk - Credit risk or default risk refers to the risk that an issuer of fixed income

security may default (i.e, will be unable to make timely principal and interest payments

on the security). Because of those risk corporate debentures are sold at a yield above

those offered on Government securities, which are sovereign obligations and free of

credit risk. Normally the value of fixed income security will fluctuate depending upon the

perceived level of credit risks well as the actual event of default. The greater the credit

risk the greater the yield require for someone to be compensated for increased risk.

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Risk associated to equities

Market risk The NAV of the scheme investing in equity will fluctuate as the daily

prices of the individual securities in which they invest fluctuate and the units when

redeemed may be worth more or less than the original cost.

Timing the market It is difficult to identify which is the right time to invest and which

is the right time to take out the money. There may be situations where stocks may not be

rightly timed according to the market leading to loss in the value of scheme.

Liquidity - Investment made in unlisted equities or equity related securities might only

be realizable upon the listing of the securities. Settlement problems could cause the

scheme to miss certain investment opportunities

1.10. OPTIONS AVAILABLE TO INVESTORS

Each plan of every mutual fund has three options Growth, Dividend and dividend

reinvestment. Separate NAV are calculated for each scheme.

Dividend Option

Under the dividend plan dividend are usually declared on quarterly or annual basis.Mutual fund reserves the right to change the frequency of dividend declared.

Dividend reinvestment option

Instead of remittances of units through payouts, Units holder may choose to invest the

entire dividend in additional units of the scheme at NAV related prices of the next

working day after the record date. No sales or entry load is levied on dividend reinvest.

Growth Option

Under this plan returns accrue to the investor in the form of capital appreciation as

reflected in the NAV. The scheme will not declare the dividend under the Growth plan

and investors who opt for this plan will not receive any income from the scheme. Instead

of income earned on their units will remain invested within the scheme and will be

reflected in the NAV

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3. INVESTMENT MANAGEMENT

After learning the concept of mutual funds and various schemes of mutual funds

available for investment it is required to effectively manage the portfolio of an investor

which depends upon the objective of investor. The most important objective of any

investor is to generate returns. Requirement for return for every investor varies which

depends upon many factors and these factors determine the category to which an investor

belongs. Depending upon the category to which an investors belongs portfolio of any

customer is managed.

Investors can be categorized on the basis of certain factors which can be described as

below.

1. On the basis of Risk and Return

Low Risk Bearing Capacity

Medium Risk Bearing Capacity

High Risk Bearing Capacity

Risk and return goes hand to hand. Higher return means higher risk. Low risk means

moderate return.

2. On the basis of Age of Investor:

Young Age (20-35 years)

Middle Age (35-50 years)

Old Age (50 and above)

3. On the basis of Liquidity required by Investor:

Less Liquidity

Medium Liquidity

More Liquidity

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4. On the basis of tenure of investment:

Short Term

Medium Term

Long Term

5. Investment can also be made to

Park the Idle Funds

Make a full time investment

Avail tax benefits

Meet requirement for Contingencies

On the basis of the advisory paradigm (deciding factors) mentioned above, various

categories of investor can be made which is deciding factor as to where an investor with a

particular requirement must invest.

Generally investors are categorized on the basis of

Risk and return

Age

Liquidity Required

For other factors the portfolio of the customer is adjusted accordingly depending upon the

category of the customer. Following are the various profile of investors based on the

advisory paradigm followed by investment avenues where they can park their money:

10 TIPS FOR EQUITY INVESTMENT

1. Start early -

The sooner you invest the more time your money will have to grow. If you delay, you

will almost certainly have to invest much more to achieve a similar result.

The difference time can make: an example

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If you started investing Rs. 5,000 a month on your 40th BDay, in 20 yrs time you would

have put aside Rs. 12 Lakhs. If that investment grew by an average of 7%a year, it would

be worth Rs. 25, 52,994 when you reach 60.

If you started investing ten years earlier, your Rs. 5000 each month would add up to 18

Lakhs over 30 years. Assuming the same average annual growth of 7%, you would have

Rs. 58,825,454 on your 60th Birthday more than double the amount you would have

received if youd started ten years later! the bottom line your investments gain most

from compounding interests when you have time on your side.

2. Keep some cash aside-

It is always a good idea to have some money in a deposit account in case of emergencies.

Enough to cover three months living expenses is often a rough guide to how much you

need. And make sure you can withdraw it when you need to, without penalties.

Reasons you might need your money at short notice:

Making a major purchase

Taking an unplanned holiday

Seeing you through an emergency such as sudden hospitalization or job loss.

3. Ask yourself how much risk you can take-

There is no point having a stock market investment if you are going to lose sleep every

time share price go through a rough patch. Its vital that you are realistic about your

appetite for risk an Investment Advisor may be able to help you decide how much risk

you can tolerate.

4. Bear in mind that inflation will eat into your savings-

Returns on risk free cash investments may should respectable, but when you subtract the

current rate of inflation you may not be so impressed. For significant long-term growth

you need to make your money a little harder.

Inflation --- the tickling time bomb

If you have Rs 10,000 in a savings account earning 3% interest each year, in 20 yrs time,

your savings would be worth Rs 18,061. Thats a return of just 80%. However, if

inflation is about 7%, Rs. 18,061 would only be worth Rs. 4668 in todays terms!

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5. Think carefully about how long you will be investing for -

Only look at the stock market if you are prepared to put your money away for five or ten

years, or perhaps even longer. If you are likely to need your money any sooner, keep it in

a lower-risk investment so there is less chance of a fall in value just before you make a

withdrawal.

6. Spread your money across arrange of investments-

Its really a good idea to have all your eggs in one basket. Depending on your goals and

your risk, you will probably want to spread your money across different types of

investments equities, bonds and cash. You may also want to diversify within each of

these categories. With equities, for example, a mutual fund will invest your money in a

variety of companies but you may want to ensure you have a range of industry sectors

too.

7. Invest regularly-

Investing regularly can be a great way to build up a significant lump sum. You will also

benefit from what is known as rupee cost averaging. This means that, if you are investing

in a mutual fund, over the years you will pay the average price for units. If the market

goes up, the units you already own will increase in value. If it goes down, you will buy

more units.

8. Choose your funds carefully-

You should select investment on the basis of what is right for your personal

circumstances and goals. If you are deciding on a mutual fund to invest in, dont opt for

the one that is the favor of the mouth, unless you are sure it will be right for your needs in

the years to come. And dont assume that all funds investing in Indian equities are

essentially the same look at the details of what a fund invest in and check if you are

comfortable with its investment style and objective.

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9. Remember that time not timing is the key to successful investing-

When you are planning an investment, it can be tempting to wait for the market to reach a

low point. But how will you know when this happens? You run the risk of missing out on

the significant rises that often occur in the early trends of a upward trend.

10. Review your investments-

A portfolio that is right for you at one point in your life may not be quite so suitable a few

years later. Your investments need to adapt to changes in your circumstances, such as

getting married, having children or starting a business.

New Development In The Ways Of Mutual Funds Investments

I. Systematic Switching Plan

The unit holder may set up a Systematic Switching plan on a monthly, quarterly, semi-

annual or annual basis to exchange a fixed number of units and/or amount in one scheme

to another scheme within the Fund Family or one plan/option to another. The redemption

or investment will be at the applicable NAV for the respective schemes as specified in the

offer document

II. Systematic Investment PlanSystematic Investment Plan is available for planned and regular investments, under this

plan unit holders can benefit by investing specified rupee amounts periodically for a

continuous period. This concept is called Rupee Cost Averaging. This program allows

Unit holders to save a fixed amount of rupees every month/ quarter by purchasing

additional units of the Scheme(s). Rupee cost averaging does not guarantee a profit or

protect against a loss. Rupee cost averaging can smooth out the markets ups and downs

and reduce the risk of investing in volatile markets

For as little as Rs. 250* each month for 12 months or Rs. 500 every month for 6 months,

you can purchase mutual fund units and avoid larger minimum investment amounts of

over Rs. 1,000. Fixed amounts can be invested in Mutual Funds each month using funds

drawn automatically from your savings account regularly.

Investing in Systematic Investment Plan (SIP) offer the benefit of "Rupee-cost

averaging", i.e., by purchasing Mutual Fund units over a period of time, you

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automatically buy more units when prices are low and fewer units when prices are high,

resulting in lower "per unit acquiring cost" as a result of averaging.

Understanding SIP How does cost averaging benefits you? (Taking an example of few

schemes of Prudential ICICI mutual fund)

Many investors think that they should invest only when an opportunity to invest like an

IPO (Initial Public Offering) is available. However, \hen doing this, one runs the risk of

mistiming the market. For example, many times investors are attracted by the price in the

market only to subsequently find out that they had invested at a peak. Sometimes

investors buy when they think the market has bottomed out only to find the prices falling

further. SIP through cost averaging helps you avoid the risk of mistiming by spreading

your risk.

To illustrate this point, let us look at the contrast in returns that a hypothetical investor

would have gained by using an SIP in some schemes of Prudential ICICI versus doing an

one time investment in the same fund at IPO stage.

13.6

22.88

-8.3

23.05

28.87

36.55

13.58

23.33

-10

-5

0

5

10

15

20

25

30

35

40

POW ER TECHNO LOG Y CHILD CARE - Gi ft BALANCED

ONE TIMEINVESTMENT ATIPO

MONTHLY SIPSINCE IPO

Let us compare SIPs of top Players and the kind of returns they give in one year, also

compare the returns with Recurring deposit and fixed deposit returns:

SCHEME TOTAL

AMOUNT

VALUE OF

INVESTMENT

RECURRING

DEPOSIT @

FIXED

DEPOSIT @

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INVESTD

(@ 1,000

PM)

AFTER 1

YEAR

5% 5.5%

F.T. BLUECHIP 12,000 14,791 12,328 12,660

F.T. PRIMA

FUND

12,000 16,913 12,328 12,660

BIRLA

DIVIDEND

YIELD PLUS

12,000 15,487 12,328 12,660

DSPML

OPPORTUNITIES

12,000 20,724 12,328 12,660

HDFC CAPITAL

BUILDER

12,000 15,240 12,328 12,660

HDFC EQUITY 12,000 15,240 12,328 12,660

KOTAK 30 12,000 16,440 12,328 12,660PRU ICICI OWER 12,000 14,689 12,328 12,660

RELIANCE

GROWTH

12,000 17,040 12,328 12,660

SUNDRAM

MIDCAP

12,000 16,320 12,328 12,660

TATA PURE

EQUITY

12,000 15,480 12,328 12,660

HDFC LTA 12,000 18,960 12,328 12,660

F.T. TAXSHIELD

12,000 17,520 12,328 12,660

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III. Systematic Withdrawal Plan

Systematic Withdrawal Plan (SWP) lets you automatically redeem a prearranged amount

of your mutual fund holdings each month. SWPs are an ideal way to supplement your

monthly cash flow, meet minimum withdrawal requirements, or move assets between the

funds.

SWP is a no-charge service. When you set up your SWP, cash proceeds from each

redemption (minimum balance maintained @ 25% of the holding at any given point of

time) are given to you in the form of post-dated cheques (six monthly cheques at par,

which enables you to get the funds lodged).

Performance Measures Of Mutual Funds

Mutual Fund industry today, with about 34 players and more than five hundred 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, frankly, 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 differentmutual 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 a 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 resultant of two guiding forces

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. 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.

When considering a fund's volatility, an investor may find it difficult to decide which

fund will provide the optimal risk-reward combination. Many websites provide various

volatility measures formutual funds free of charge; however, it can be hard to know not

only what the figures mean but also how to analyze them. Furthermore, the relationship

between these figures is not always obvious. Read on to learn about the four most

common volatility measures and how they're applied in the type ofriskanalysis that is

based on modern portfolio theory. Optimal Portfolio Theory and Mutual Funds

One examination of the relationship between portfolio returns and risk is the efficientfrontier, a curve that is a part of the modern portfolio theory. The curve forms from a

graph plotting return and risk indicated by volatility, which is represented by standard

deviation. According to the modern portfolio theory, funds lying on the curve are

yielding the maximum return possible given the amount of volatility.

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Notice that as standard deviation increases, so does the return. In the above chart, once

expected returns of a portfolio reach a certain level, an investor must take on a large

amount of volatility for a small increase in return. Obviously portfolios that have a

risk/return relationship plotted far below the curve are not optimal as the investor is

taking on a large amount of instability for a small return. To determine if the proposed

fund has an optimal return for the amount of volatility acquired, an investor needs to do

an analysis of the fund's standard deviation.

Note that the modern portfolio theory and volatility are not the only means investors use

to determine and analyze risk, which may be caused by many different factors in the

market

#1: Standard Deviation

As with many statistical measures, the calculation for standard deviation can be

intimidating, but, as the number is extremely useful for those who know how to use it,

there are many free mutual fund screening services that provide the standard deviations

of funds.

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

of the returns to rise or fall drastically in a short period of time. A security that is volatile

is also considered higher risk because its performance may change quickly in either

direction at any moment. 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 fund that has a consistent four-year return of 3%, for example, would have a mean, or

average, of 3%. The standard deviation for this fund would then be zero because the

fund's return in any given year does not differ from its four-year mean of 3%. On the

other hand, a fund that in each of the last four years returned -5%, 17%, 2% and 30% will

have a mean return of 11%. The fund will also exhibit a high standard deviation because

each year the return of the fund differs from the mean return. This fund is therefore more

risky because it fluctuates widely between negative and positive returns within a short

period.

A note to remember is that, because volatility is only one indicator of the risk affecting a

security, a stable past performance of a fund is not necessarily a guarantee of future

stability. Since unforeseen market factors can influence volatility, a fund that this year

has a standard deviation close or equal to zero may behave differently in the followingyear.

To determine how well a fund is maximizing the return received for its volatility, you can

compare the fund to another with a similar investment strategy and similar returns. The

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

the return received for the amount of risk acquired. Consider the following graph:

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With the S&P 500 Fund B, the investor would be acquiring a larger amount 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.

#2: Beta

while standard deviation determines the volatility of a fund according to the disparity of

its returns over a period of time,beta, another useful statistical measure, determines the

volatility, or risk, of a fund in comparison to that of its index orbenchmark. A fund with

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

benchmark. A beta greater than 1 indicates greater volatility than the overall market, and

a beta less than 1 indicates less volatility than the benchmark.

If, for example, a fund has a beta of 1.05 in relation to the S&P 500, the fund has been

moving 5% more than the index. Therefore, if the S&P 500 increased 15%, the fund

would be expected to increase 15.75%. On the other hand, a fund with a beta of 2.4would be expected to move 2.4 times more than its corresponding index. So if the S&P

500 moved 10%, the fund would be expected to rise 24%, and, if the S&P 500 declined

10%, the fund would be expected to lose 24%.

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

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

to bebearish in the near future, the funds that have betas less than 1 are a good choice

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because they would be expected to decline less in value than the index. For example, if a

fund had a beta of 0.5 and the S&P 500 declined 6%, the fund would be expected to

decline only 3%.

Be aware of the fact that beta by itself is limited and can be skewed due to factors other

than the market riskaffecting the fund's volatility.

#3: R-Squared

The R-squared of a fund advises investors if the beta of a mutual fund is measured

against an appropriate benchmark. Measuring the correlation of a fund's movements to

that of an index, R-squared describes the level of association between the fund's volatility

and market risk, or more specifically, the degree to which a fund's volatility is a result of

the day-to-day fluctuations experienced by the overall market.

R-squared values range between 0 and 100, where 0 represents the least corre

Mutual Industry Ranjeet

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