Dissertation Report

On

ANALYSIS OF MUTUAL FUND INDUSTRY IN INDIA

By

Rajesh BoharaEnrollment No.

MBA Class of 2009

Under the Supervision ofMr. /Ms

LecturerFinance Department

In Partial Fulfillment of Award of Master of Business Administration

Directorate of distance education

GJUS&T-HisarINDIA

2009-2011

Literature Review

Studies undertaken by various scholars and researchers reveals that mutual funds is a

trust that pools the savings which are further invested into capital market instruments

such as shares, debentures and other securities and since most of the capital market

instruments, not all , have an element of risk so it very difficult to evaluate the

performance of various schemes .Various research papers have been written while

considering the performance evaluation criteria into mind which have been discussed in

the coming paragraphs

According to Bijan Roy & Saikat Sovan Deb1 when the beta of the fund is conditioned

to lagged economic information variables (interest rates, dividend yields, term structure

yield spread and a dummy for April-effect), the fund performance does not change

appreciably. However, when fund alpha is also controlled for these information variables

the fund performance on an average becomes significantly negative. Thus, showing that

on an average the Indian mutual fund managers only capture the opportunities from the

available economic information, they do not contribute anything beyond it. They have

also examined the evidence of persistence in the performance of the Indian mutual funds.

Their approach to measure performance persistence is based on cross-sectional

regressions of future excess returns on a measure of past fund performance. Both

unconditional and conditional measures of performance were used as measure of past

fund performance. According to the findings of their study it was being evidenced that

conditional measures of past fund performance predict the future fund returns

significantly. Also, they found that between the two different conditional measures of

past performance, time-varying conditional alpha is found to be a better measure in

indicating persistence in performance of Indian mutual funds.

One of the most important developments in the field of finance during last forty years is

the mutual fund performance evaluation technique. The traditional techniques use the

1 “Conditional Alpha and Performance Persistence for Indian Mutual Funds: Empirical Evidence” - ICFAI Journal of Applied Finance, pp. 30-48, January 2004

unconditional moments of the returns. Such techniques cannot capture the time-varying

element of expected return

Bijan Roy & Saikat Sovan Deb2 have examined the effect of incorporating lagged

information variables(T-bill yield, dividend yields, term structure yield spread and a

dummy for April-effect) into the evaluation of mutual fund managers' performance using

conditional performance evaluation technique designed by Ferson and Schadt (96) .

The findings of the research suggests that the use of conditioning lagged information

variables improves the performance of the mutual fund schemes, causing the alphas to

shift towards the right and reducing the number of negative timing coefficients. They

have also studied the impact of the tech rally( Major event in the history of Indian capital

market from 1999 to 2001) in the conditional models by introducing a dummy variable

indicating the period of rally in tech stocks. Finally, they found managers' performance as

well as timing skill worsens with the inclusion of this dummy.

Passive investment management has become an important component of the investment

management industry. The responsibility of the index fund managers is to deliver risk and

return same as the underlying index. Many factors impact investment performance. Some

of these factors lie outside the sphere of influence of the fund manager. For a

comprehensive assessment of fund performance and follow up, it has become necessary

to identify the causes and attribute components of fund performance to these causes.

Attribution analysis plays a crucial role in identifying factors controllable by the fund

manager and in computing the part of fund performance arising out of managing these

factors. While significant attention has been paid to performance attribution in equity and

income funds, research relating to the same in the index fund domain is scarce.

2 The Conditional Performance of Indian Mutual Funds: An Empirical Study-Working Paper, Dec 2003

According to G. Sethu & Rachana Baid findings3 significant contribution to index fund

tracking error may arise from factors that are not under index fund manager's control and

also tracking error is not neutral to some of the factors.

Banikanta Mishra & Mahmud Rahman4 have developed measures of evaluating

portfolio-performance based on LPM (Lower-Partial-Moment). According to them, the

three traditional measures by Treynor, Sharpe, and Jensen are based on the Mean-

Variance (M-V) rule are valid only when the distribution of asset returns is characterized

by spherical symmetry to which class normal and similar distributions belong. From the

LPM perspective, risk has been measured by taking into account only those states in

which return is below a pre-specified "target rate", like risk-free rate, and capturing the

extent to which it is below. They have also provided a new way to evaluate the

performance of a portfolio, which is similar to the M2 [Modigliani-Modigliani] approach,

but differs from it in an important way.

Despite of lot of research being done on the mutual funds, there has not been any fixed

criteria for evaluating the performance of the mutual funds , there is still lot of research

that needs to be done keeping in view changing investment pattern of the

investors ,increasing market risk and various other factors linked with the mutual fund

industry.

3 “Index Funds Performance -Some insights”- Capital Market Conference ‘02 Proceedings4 “Measuring Mutual Fund Performance using Lower Partial Moment”- Capital Market Conference 2002 Proceedings

Objective of Study

The objective of the study undertaken is as follows:-

i. To analyze investment alternatives through market survey.

ii. To find out investor’s motive towards investment.

iii. To find out the factor, which influences the investor’s decisions?

Research Problem:

“Comparing Mutual funds with other investment options i.e; fixed deposits, PPF, etc”.

Hypothesis

Null

Investors prefer Mutual Funds over other investment options

Alternate

Investors do not prefer Mutual Funds over other investment options

Research methodology and survey

As in depth analysis of the data generated by own observation and collected from primary

and secondary sources has been carried out.

Primary sources :- (a) Questionnaire technique

(b) Direct interview

Secondary data: - (a) Mutual funds related Organization’s website.

(b) Journals

(c) Newspapers and other magazines.

Research Design

Exploratory Research

As the term suggests, exploratory research is often conducted because a problem’s real

scope is as yet unclear. It allows the researcher to familiarize him/herself with the

problem or concept to be studied, and perhaps generate hypotheses to be tested. It is the

initial research, before more conclusive research is undertaken. Exploratory research

helps determine the best research design, data collection method and selection of

subjects.

Sample and Data Collection

Primary Research: The primary study is done on the basis of questionnaire that had got

filled up directly from the investors of different age, income and profession.

Secondary Research: The study is done on secondary basis. It will be consisting of data

collected from various journals, internet, books, magazines etc.

Convenience Sampling: In convenience sampling, the selection of units from the

population is based on easy availability and/or accessibility. Information collected

provides significant insights and is a good source of data in exploratory research.

Data Collection

For this study, data from various internet sites (mutualfundsindia, valueresearchonline)

funds has been taken including the questionnaire for primary research has been

undertaken for the purpose of our study. For the purpose of studying the performance

evaluation of the mutual fund in India, data was collected from websites of SEBI, AMFI,

RBI and various other finance related sites along with sites of some mutual fund

companies

Analysis:

All the data from primary and secondary sources, is studied and have been analyzed with

the help of different techniques and presented graphically. Reasonable assumptions have

been made where data is found lacking. Based on finding conclusion, a suitable

suggestion has been provided in this report.

Data collection & analysis

Investment is activities that is engaged in by people who have savings that is investments

are made from savings or in other words people invest their savings. There is large

number of investment alternatives. Some of them are marketable and liquid while others

are non-marketable. Some of them are highly risky and others are almost risk less. The

investor has to choose proper alternative from among various alternative avenues

depending on his /her preferences, needs and ability to assume risks. Therefore,

comprehensive data covering various aspects of data is necessary.

Investment alternatives are:-

1.Non-marketable financial assets ( fixed deposits, provident fund deposits , post-

office deposits)

2. Stock market

3. Bonds

4. Mutual funds

5. Real estates

6. Life insurance policy & general insurance policy.

To keep this requirement in view the data related to investment alternatives, the

Questionnaire was designed based on time factor and standard of the respondent.

The data has been collected for three types of information.

a. Age based ( 25 onwards)

b. Profession based (business/ employee)

c. Income based

The source of collection of data

Primary and secondary both type of data sources have been collected to prepare this

project report.

Primary sources :- (a) Questionnaire technique

(b) Direct interview

Secondary data: - When there is use of any data, which has been collected earlier for

solving some other problem. That is the data is not collected on a first hand basis. The

already collected data by some other medium is used for own purpose.

For this analysis, data has been collected through secondary sources like magazines, fact

sheets and Internet.

The choice of survey data

The data required for the research have required the following characters:-

i) Accuracy

ii) Relevance

iii) Sufficiency

iv) Availability

v) Cost Effectiveness

vi) Time Effectiveness

For the above reasons the way for data collection was “survey data collection

method”.

It is the systemic gathering in of information form respondents for the purpose of

understanding some aspect of the behavior of the population of the interest.

The survey method is divided into four phases:-

i) Sampling

ii) Questionnaire Design

iii) Questionnaire Administration

iv) Data Analysis

SCOPE & RELEVANCE OF THE STUDY

MUTUAL FUND is one of the biggest and most successful investment instruments in

the investment world. It has a strong presence of more than 40 years as a tool in the

investment industry of India.

It has a vast product mix, catering to the needs of people from every economic

background. This includes Debt funds, Equity funds, Income funds, balanced funds etc.

The topic undertaken for study was too wide to be studied in detail & in all aspects, as

there are nearly 34 funds and about 500 schemes. Out of these many funds I have

selected 4 Equity Diversified funds for my study. This study not only made me familiar

with Mutual Fund Industry, but also provided me the practical view that how this

industry really functions. After my study I came to understand that Investor should invest

some part or their investment portfolio in mutual funds. In fact some investors may be

better off by putting their entire portfolio in mutual funds. This is on account of the

following reasons:

On their own, uninformed investors could perform much worse than mutual

funds.

Diversification of risks which is difficult for an investor to achieve with the small

amount of funds at his disposal

Possibility of investing in small amounts as and when the investor has funds to

invest

Unquestioned service of transaction processing, tracking of investments,

collecting dividends an enormous amount of time to make investment decisions

and keep monitoring them. Some people have the inclination and the time to make

better decisions than fund managers do, but the vast majority does not. Those who

can are advised to /interest warrants etc.

Investors require analytical capability and access to research and information and

need to spend invest some part of their money into funds, especially debt funds, to

diversify their risk. They may also note that one of the objectives of this site is to help

them improve the odds.

Mutual funds are such a wide area of research that no single study can cover

Different related dimensions. Mutual fund investments are subject to market risk.

Past performance may not be the indicator of future profit. Thus it is very

Important to be updated while investing in mutual funds. Mutual funds offer

Various schemes. Past performance have shown that equity funds are piling

Profits. So it is advisable to invest into equity mutual funds as in long run, they

Give maximum safe returns. Further, research can also be conducted for studying

Perceptions of institutional investors towards mutual funds, the area which has

Been left out of the scope of the present study. Research is also needed to review use of

parameter beta ( i.e.; systematic risk) for performance evaluation of mutual fund in

relation to a chosen market index as a benchmark. This is because, beta is calculated on

the basis of total return earned by a given equity - diversified fund in relation to the

market return whereas no equity - diversified fund even invest solely in equities rather

they, too, keep 5% to 10% of total invested funds in liquid securities for meeting any

contingent occurrence. Hence, for true performance evaluation, beta should be adjusted

accordingly on the basis of percentage of total investment in equities.

Scope for Further Research

Mutual funds are such a wide area of research that no single study can cover different

related dimensions. Even primary surveys for studying the perception of investors

towards mutual funds from time to time are not regular feature in India, hence there is

much potential of research on a bigger scale covering wider area.

Further, research can also be conducted for studying perceptions of institutional investors

towards mutual funds, the area which has been left out of the scope of the present study.

Research is also needed to review use of parameter beta ( i.e; systematic risk) for

performance evaluation of mutual fund in relation to a chosen market index as a

benchmark. This is because, beta is calculated on the basis of total return earned by a

given equity - diversified fund in relation to the market return whereas no equity -

diversified fund even invest solely in equities rather they, too, keep 5% to 10% of total

invested funds in liquid securities for meeting any contingent occurrence. Hence, for true

performance evaluation, beta should be adjusted accordingly on the basis of percentage

of total investment in equities.

MASTER QUESTIONNAIRE.

(special consideration to Mutual Fund)

1. Name:2. Address:3. Contact No.:4. Age group:

35-25ٱ 50-35ٱ 50ٱ onwards5. Income range (Annually)

3.0-1.5ٱ Up to 1.5lakhs ٱ lakhs 5.0-3.0ٱ lakhs 5ٱ < lakh6. At present you invest in: (number 1-10), 1 being lowest and 10 highest

a. Bank FD ____ e. Stock market ____b. PF ____ f. Mutual funds ____c. Bonds ____ g. Real estates ____d. Post Office ____ h. Insurance ____i. Gold ____ j. Others ____

7. Among various investment alternatives you think is best for you and why?

_____________________________________________________________________

8. Objective of your investment is? Rate on scale of 1-5 (1-lowest, 5-highest)a. Rate of return _____b. Security _____c. Speculation _____d. Marketability _____e. Tax Free Return _____

9. Who influence your investment decision the most? Rate On Scale 1-5 (1-lowest, 5- highest)

a. Financial experts _____b. Friends _____c. Attractive advertisements _____d. Your own decision _____e. Others _____

10. Awareness towards mutual fund through: Rate On 1-5, (1-lowest, 5-highest) a. T.V & Newspapers _________

b. Magazines _________

c. Friends & Relatives _________

d. Financial Advisor _________

e. Others _________

11. What is the most preferred period of investment in the mutual fund? Rate 1-5, (1-lowest, 5-highest)

I. Below 1 year _________

II. 1-2 year _________

III. 2-3 years _________

IV. 3-5 years _________

V. Above 5 year _________

12. Do you have any future plan for investing in mutual funds?

Yes ٱ No ٱ

13. IF yes, in which fund

Debt ٱ Balanced ٱ Equity ٱ

14. Any other information or suggestions

_______________________________________________________________

_______________________________________________________________

THANK YOU FOR YOUR PRECIOUS TIME

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