AXIS BANK LTD Project Report On
A COMPARITIVE ANALYSIS ON PUBLIC AND PRIVATE SECTOR MUTUAL FUNDS Submitted B PRITI Section-B (MBA 06) Under the Supervision of MRS. SHIKHA BHARDWAJ (Faculty)
In the partial fulfillment of the requirement for the award of Degree of Master of Business Administration Administration Of GGSIP University ,Delhi Batch 2009-11
Army Institute of Management & Technology Greater Noida-201306 1
CERTIFICATE OF ORIGINALITY
I ------------------------------------------------------------------------------ Roll Roll No --------------------- Class Class of 200 2009, 9, a full time bonafide student of first year of Master of Business Administration (MBA)Programme (MBA)Programme of Army Institute of Management & Technology, Greater Noida. I hereby certify that this project work carried out by me at and the report submitted in partial fulfillment of the requirements of the programme is an original work of mine under the guidance of the industry mentor------------------------mentor------------------------------------------------------------------------------------------------------------- and faculty mentor-mentor-------------------------------------------------------------------- ---------------------, ---------------------, and is not based or reproduced from any existing work of any other person or on any earlier work undertaken at any other time or for any other purpose, and has not been submitted anywhere else at any time
(Student's Signature) Date:
, 2010
2
DECLARATION
I,PRITI of MBA IIIrd sem, Army Institute of Management & Technology, hereby declare that the summer training project titled “A Comparative Analysis of Public Sector and Private Sector Mutual Funds” is an original work. A copy of the same has been provided to the Axis Bank. On 31/07/10
(Signature of External)
(Signature of Internal)
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ACKNOWLEDGEMENT
I am highly obliged to have an opportunity to thank all those who have helped me during the course of my summer training project. First of all I would like to thank, AXIS BANK LTD., for providing me an opportunity to work in their organization as a trainee. I express my sincere thanks and gratitude towards Ms. ANJALI BHATNAGAR,
ASST.
MANAGER,for
her kind
guidance
and
cooperation she extended to me during my project period. She provided me with information as and when I required, therefore making my project a successful one. Not to forget the helpfulness and cooperation of all the executives of AXIS BANK
LTD. would like to express my healthy
gratitude towards them. I am thankful to Prof.SHIKHA BHARDWAJ , AIMT, Greater Noida for her continuous motivation, encouragement and firm guidance for the successful completion of this project report. This project has been a greater learning outcome for me and without her help it would not have been possible for me to complete this project.
StudentName........................................................ Signature.....................................Date............................
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EXECUTIVE SUMMARY Financial system facilitates the transformation of savings of individuals, government and businesses into investments and consumption .The process of economic development is accompanied by a corresponding and parallel growth of financial institution. A significant outcome of this economic and financial development is the emergence of mutual funds,leasing,depository,factoring services, merchant banking etc. Thus mutual funds act as a gateway to enter into big companies hitherto inaccessible to an ordinary investor with his small investments. Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. 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. There are many types of mutual funds, including aggressive growth fund, asset allocation fund, balanced fund, blend fund, bond fund, capital appreciation fund, clone fund, closed fund, crossover fund, equity fund, fund of funds, global fund, growth fund, growth and income fund, hedge fund, income fund, index fund, international fund, money market fund, municipal bond fund, prime rate fund, regional fund, sector fund, specialty fund, stock fund and tax-free bond fund. Many types of mutual funds have lead to increasing importance of selecting right scheme that fulfill the desired objectives of investors. This study is a relative study of debt funds of private and public sector. Debt funds are a mutual fund aims to achieve regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. The present study is attempted to make an in-depth analysis of performance of Debt schemes. Further the study seeks to analyze the portfolio investments of public and private sectors. And various other parameters relating to mutual funds performance are also discussed and analyzed.
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Table of Content S.No
Topic
1. 2.
AXIS BANK PROFILE CHAPTER -1 INTRODUCTION IMPORTANCE OF STUDY SCOPE OF STUDY CHAPTER -2 MUTUAL FUND INDUSTRY IN INDIA CHAPTER -3 RESEARCH METHODOLOGY OBJECTIVE OF STUDY THE PRESENT STUDY DATA SOURCE DATA ALALYSIS LIMITATIONS OF STUDY CHAPTER -4 MUTUAL FUND PERFORMANCE CHAPTER -5 FINDINGS AND CONCLUSIONS BIBLOGRAPHY
2.1 2.2 3. 4. 4.1 4.2 4.3 4.4 4.5 5. 6. 7.
Page No.
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COMPANY DESCRIPTION : Axis Bank was the first new generation private sector bank to be established in India under the overall reform programme initiated by the Government of India in 1991, under which nine new banking licenses were granted. The Bank was promoted by Unit Trust of India, the largest mutual fund in India, holding 87% of the equity. Life Insurance Corporation of India (LIC), General Insurance Corporation Ltd and its four subsidiaries who were the co-promoters held the balance 13%. The Bank started its operations in 1994. Axis Bank’s first capital raising post inception was in 1998 through a public offering of primary shares and in subsequent years through equity allotment to a few other investors like CDC. Citicorp Banking Corporation, Bahrain, Karur Vysya Bank and Chrys Capital leading to a dilution in UTI’s shareholding in the Bank. Further dilution of Promotors’ shareholding happened during Q4 ended of 2004, when the Bank raised US$ 239.30 Million of Capital through a GDR issue. The Bank today is capitalized to the extent of Rs. 358.56 crores with the public holding (other than promoters) at 57.60%. The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. Presently, the Bank has a very wide network of more than 701 branch offices and Extension Counters. The Bank has a network of over 2854 ATMs providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence. Axis Bank is one of the fastest growing banks in the country and has an extremely competitive and profitable banking franchise evidenced by: Comprehensive portfolio of banking services including Corporate Credit, Retail Banking, Business Banking, Capital Markets, Treasury and International Banking.
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Axis Bank
Type
Public (BSE: 532215
Industry
Banking, Financial services
Founded
1994
Headquarters
Mumbai, India
Key people
Adarsh Kishore (Chairman)
Shikha Sharma (MD & CEO)
Products
Investment Banking Commercial Banking Retail Banking Private Banking Asset Management Mortgages Credit Cards
Revenue
▲Rs 13,745.04 crore (US$ 2.93 billion)(2009)
Net income
▲Rs. 1,812.93 crore (US$ 386.15 million)(2009)
Employees
13,389 (2010)[1]
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CHAPTE R-1 INTRODUCTION This chapter presents the introduction of mutual funds, Debt schemes of mutual funds, organization of mutual funds, Types of mutual funds schemes, and need of mutual funds.
INTRODUCTION
Different investments avenues are available to investors. Mutual funds also offer good investments opportunities to the investors. Like all investments, they also carry certain risk. The investors should compare the risks and expected yields after adjustments of tax on various instruments while taking investments decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investments decisions.
An efficient articulate and developed financial system is must for the rapid economic growth and development of a country.
Financial system facilitates the transformation of savings of individuals, government and businesses into investments and consumption. The process of economic development is accompanied by a corresponding and parallel growth of financial institutions. Financial institutions are business organization that act as immobilizers and depositories of savings, and as purveyors of credit of finance. They also provide various financial services to the country. Financial system helps in improving the standard of living and increase the social welfare of the community by mobilizing the savings and investing them gainfully. It is financial system which establishes a link between savers and investors and help converting investments ideas into reality. This link is provided by a mechanism through which savings of different kinds of savers , small, moderate, and large savers are pooled together and are put at the disposal of those who are able and willing to invest. Such a mechanism includes wide varieties of institutions, which meet the safety, liquidity, and profitability requirements of savers. These institutions grouped as money market and capital market. Money market institutions, comprising of
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development banks and financial institutions grants long term loans and invest in securities of the industrial and trading concerns. The financial institutions help reducing the risk by diversification. These institutions also engage in the services of expert investment analysis, professional knowledge and expertise for the selection and supervision of their investment portfolio. Thus, a financial institution can assure the investors triple benefit of:
1. 2. 3.
Low risk Steady returns Capital appreciation
A significant outcome of this economic and financial development is the emergence of mutual funds, leasing, depository, factoring services, merchant banking etc.
Thus mutual funds act as a gateway to enter into big companies hitherto inaccessible to an ordinary investor with his small investments.
WHAT IS A MUTUAL FUND?
Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all sectors may not move in same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.
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The investors in proportion to their investments share the profits and losses. The mutual funds normally come out with a number of schemes with different investments objectives that are launched from time to time. A mutual fund is required to be registered with securities and exchange board of India (SEBI), which regulates securities market before it can collect funds from the public.
Mutual fund means a non-depository or non-banking financial intermediary, which acts as “important vehicle for bringing wealth holders and deficit units together indirectly”. Mutual fund is a type of investment. company which is concerned with garnering savings of individuals and institutions and channelisation of these savings in corporate securities in such a way as to ensure to its investors steady returns and capital appreciation with low exposure to the risk. Thus, mutual funds facilitate the investors to pool their funds to invest in a diversified portfolio of securities. These funds are invested in a wide variety of securities in such a way as to minimize risk while ensuring steady returns. The mutual funds pool the resources of the savers by creating claims against themselves in the form of units sold to investors.
Basically, there are two types of investments companies VIZ. open end and close end. Open end investment company continuously offer its units for sale and always stands ready to buy securities (units)at any time. This renders the capitalization of the company to undergo a constant changes the investors purchase and sale their units directly with the fund. Such purchase and sale takes place invariably at the net asset value at the time the unit holders request for redemption. Close end-company has a fixed no of shares that can be owned by the investing public. It is just like another incorporated association with a fixed amount of capital.
A mutual fund is a trust that pools the savings of a no of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized 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 men as it offer 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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Investors Passed back to
Pool their money with
Returns
Fund Manager
Generates
Securities
Invest in
An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. Mutual fund raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public. Mutual funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicle, such as stock, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and,in effect, in each of its underlying securities. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund.
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Benefits of the mutual fund include diversification and professional money management. Mutual funds offer choice, liquidity, and convenience, but charge fees and often require a minimum investment. A closed-end fund is often incorrectly referred to as a mutual fund, but is actually an investment trust. There are many types of mutual funds, including aggressive growth fund, asset allocation fund, balanced fund, blend fund, bond fund, capital appreciation fund, clone fund, closed fund, crossover fund, equity fund, fund of funds, global fund, growth fund, growth and income fund, hedge fund, index fund, international fund, money market fund, municipal bond fund, prime rate fund, regional fund, sector fund, specialty fund, stock fund, and tax free bond fund.
WHAT ARE DEBT SCHEMES IN MUTUAL FUNDS?
There are so many types of mutual funds. One of them is a debt schemes or income schemes or income fund. Debt funds are mutual funds aims to achieve regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
Features:
(1) Income schemes provide return in the form of dividends. (2) The return may be cumulative. (3) The return may be non-cumulative on a monthly, quarterly, half yearly or yearly basis. (4) Mutual funds carry market risk, so no guaranteed rate of return. (5) In addition to the regular return, there is some marginal growth also as reflected in the bonus declared from time to time. (6) In the view of the regular, consistence and steady flow of returns to the investors, the corpus is invested predominantly in fixed income securities, like debentures, bonds, govt. securities etc. of course, funds are invested in shares but relatively at lower percentage.
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Prior to 1993 all the mutual funds floated monthly or yearly income schemes with assured returns. This was subsequently prohibited in 1993-94 but allowed in 1995 again.
TYPES OF MUTUAL FUND SCHEMES
Wide varieties of mutual fund schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the industry.
TYPES OF MUTUAL FUND SCHEMES
BY STRUCTURE • • •
Open – Ended schemes Close – Ended schemes Interval schemes
BY INVESTMENT OBJECTIVE • • • •
Growth schemes Income schemes Balanced schemes Money market schemes
OTHER SCHEMES • • •
Tax Saving Schemes Special Schemes Index Schemes
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•
Sector Specific Schemes
Schemes according to structure:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
•
Open – ended fund/ scheme
An open ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices that are declared on a daily basis. The key features of open-end schemes is liquidity.
•
Close – ended fund / scheme
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 launch of the scheme. Investors can invest in the scheme at the time of the initial public and thereafter they can buy or sell the units of the scheme on the stock exchange where the units are listed. In order to provide an exit route to the investors, some close- ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices.
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•
Interval schemes
These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices.
Schemes according to investment objectives:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
•
Growth / Equity oriented scheme
The aim of growth fund is to provide capital appreciation over the medium to longterm. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences.
•
Income / debt oriented scheme
The aim of income fund is to provide regular and steady income to the investors. such schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets.
•
Balanced fund
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The aim of balanced fund is to provide both growth and regular income. As such schemes invest both in equities and fixed income securities in the proportion indicated in their offer document. These are appropriate for investors looking for moderate growth. They generally invest 40-60 % in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However NAVs of such funds are likely to be less volatile compared to pure equity funds.
•
Money market or liquid fund
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposits, commercial papers and inter bank call money, government securities, etc.
Other schemes:
•
Tax saving schemes
These schemes offer tax rebates to the investors under specific provisions of the income tax act, 1961 as the government offers tax incentives for investments in specified avenues . e.g Equity linked saving schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits.
•
Gilt fund
These funds invest exclusively in government securities. Government securities have no default risk. NAV of these schemes also fluctuate due to change in interest rates and other economic factors as are the case with income or debt oriented schemes.
•
Index funds
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Index fund replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (nifty), etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise and fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as “tracking error” in technical terms.
•
Sector specific funds/ schemes
These are the funds schemes , which invest in the securities of only those sectors or industries as specified in the offer document. E.g. pharmaceuticals, software, fast moving consumer goods (FMCG), Petroleum stocks etc. the return in these funds are dependent on the performance of the respective sectors/industries.
•
Load or no-load fund
A load fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund /scheme at NAV and no additional charges are payable on purchase or sale of units.
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IMPORTANCE OF THE STUDY: In view of increasing number of schemes and growing competition in mutual fund industry, investors are finding it difficult to make a right selection of schemes. By the emergence of both private and public sectors even a single wrong decision may put the investor and his investments in trouble. The proper performance evaluation with expert services removes such confusion and helps the investor in selecting right fund under right sector.
It is with this fact in mind that the present study “debt schemes in mutual funds” (A comparative study b/w public and private sectors) is being undertaken.
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SCOPE OF THE STUDY:
The secondary data on the size and growth of debt schemes in mutual fund industry in India pertains to five years from January 2002 to December 2006. The scope of the study is kept limited to the period of five years. The data for the selected schemes pertaining to a five year period . The study covers the ten selected schemes of top 5 schemes of both public and private sector mutual fund houses each listed on the Indian stock exchange. To compare debt schemes of both sectors on the basis of Benchmark index to evaluate over-performance or under-performance of selected mutual funds. For this comparison BSE sensex is taken as Benchmark index.
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CHAPTER – 2
MUTUAL FUND INDUSTRY IN INDIA In this chapter, an attempt has been made to give the details regarding the history of the Indian mutual fund industry, overview of Indian mutual fund industry, fund mobilization, and other mutual fund information.
HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases.
First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an act of parliament. It was set up 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 has 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 the 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
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established in june 1987 followed by canbank mutual fund (dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 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 investor a wider choice of fund families. Also,1993 was the year in which the first mutual fund regulation came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in july 1993.
The 1993 SEBI (mutual fund) regulations were substituted by a more comprehensive and revised mutual fund regulations in 1996. The industry now functions under the SEBI (mutual fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs. 44,541 crores of assets under management was way ahead of other mutual funds.
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 Un dertaking of the Unit Trust
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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 returns 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. 76000 crores of assets under management and with the setting up a UTI Mutual fund, confirming to the SEBI SEBI Mutual Mutual fund fund regula regulati tions, ons, and with with recent recent merger mergerss taking taking place place among among different private sector firms, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September 2004, there were 29 funds, which manage assets of Rs. 153108 Crores under 421 Schemes. The following graph, the figure 2.1 indicates the growth of assets over the years.
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MUTUAL FUND INDUSTRY IN INDIA – AN OVERVIEW
In four decades of its existence in India, the mutual fund industry has gone through several structural changes.
From the UTI’s monopoly, until 1987, when the industry was opened first two other public sector enterprises, and then to private sector playes in 1993, it has come a long way. The entry of private players has galvonised the sector as increased competition has forced forced indust industry ry player playerss to focus focus on produc productt innovat innovation ion,, market market penetr penetrati ation, on, identifying new channels of distribution, and last but not the least, improving investors service. These measures have helped the industry grow significantly from having assets worth Rs. 47000 Crores under management in March 1993 to Rs. 150198 Crores by December 2004. However, and the industry is going to face significant challenges in the future as the competitive pressure increases. Debt funds too have been benefited by the soft bias in the interest rates. The volatility in the bond prices has helped debt oriented funds delivered handsome returns. However, this is not to take credit away from the fund managers investment management skills which played a major role in the funds performance. However, with the industry moving up the learning curve, significant changes in the investment environment such as increased competition, ongoing reforms which allow mutual funds to invest abroad as well as in derivatives derivatives instrumen instruments ts and increased increased integration integration of global financial financial markets markets pose significant challenges to the industry in the country. Also, the funds need to be investor friendly and would have to significantly improve their portfolio disclosure practices. The key to success would be size, geographic reach, product innovation, better investment management skills, and last but not the least, customer services.
The period from 2000 to 2005 was eventful year for the mutual fund industry. The Indian economy, just like its global competitors slowed down significantly. There was low credit off taken by the industry from the banking system system and this led to the funds begin part in the government securities. This coupled with the interest rate cut by the RBI leas to an under precedent precedent dream run in G-Sec prices. The debt funds flourished flourished and the investors also flocked to this funds.
MUTUAL FUND SETUP
A mutu mutual al fund fund is set set up in the the form form trus trust, t, whic which h has has spon sponso sor, r, trus truste tees es,, asse assett Management Company (AMC) and custodian. The trust is established by a sponsor or 24
more than one sponsor who is like like promoter of a company the trustees of the the mutual fund hols its property for the benefit of the unit holders. Asset management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are wasted with the general power of supe superi rint ntend enden ence ce and dire direct ctio ion n over over AMC. AMC. Th They ey moni monito torr the the perf perfor orma manc ncee and compliance of SEBI regulations by the mutual funds.
SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before b efore they launch any scheme.
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Chapter 3
RESEARCH METHODOLOGY
In this chapter, an attempt has been made to give the details regarding the research materials and methods used to achieve the research objective besides research objective, it consist need of the study, scope of the study, database and data collection methods. Also, the tools of analysis and limitations of the study have been described herein.
OBJECTIVES OF STUDY:
The objectives of the study are spelled out as under: To evaluate the performance of debt schemes in mutual funds in public and private sector in India. •
To compare private and public sectors on the basis of investment pattern or investment portfolio. •
To compare debt schemes of both sectors on the basis of Benchmark index to evaluate over-performance or under-performance of selected mutual funds. •
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THE PRESENT STUDY In the preceding chapter, we have seen that the mutual funds falling both in public and private sectors have displayed significant growth from 2000. however, this growth has posed the difficulty to investors in making the selection of suitable schemes as presently there are more than 403 Schemes. The issue related to the choice among the public and private sector debt funds, have become highly important because even a single wrong decision may put the investors in financial crisis, sometimes leading to their bankruptcy. A proper performance evaluation measure will remove such confusion and help the small investors in selecting various mutual funds schemes for investments. Moreover, with growing competition in the market, the fund managers also need to satisfy themselves that management fees and research expenses are justified dripping in view the returns generated. In this context, close monitoring and evaluation mutual fund is very important for the investors and fund managers both. It is against this backgroung that the present study “Performance of Schemes – a comparative study of private and public sector mutual funds” has been undertaken.
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DATA SOURCE:
Data is collected from secondary source related to various schemes will be taken from various investment journals, capital market reports, research reports, related books and internet whereas analysis is done by own. The collected data should be analysed with suitable stastitical technique.
Table 3.1 Schemes under various selected Assets Management Companies (Dec. 2005)
Asset Management Companies Public Sector SBI UTI LIC BOB CanBank Private Sector Prudential ICICI Templeton HDFC Reliance Birla
No. of Debt Schemes
43 57 17 12 19 70 34 53 101 47
Investment pattern has been analysed on selected individual schemes basis. Debt schemes are selected on the top performance (last 3 Years) basis from selected mutual funds from both private and public sector. Mutual funds houses are selected on the basis of the resource mobilization or Assets under Management (AUM) of the month Dec. 2004.
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Table 3.2 Assets under Management (AUM) has at the end of Dec. 2005 (Rs. In Crores) Mutual Fund Names 1. ABN Amro Mutual Funds 2. JM Financial Mutual Fund 3. Escorts Mutual Fund 4. Birla Sun Life Mutual Fund 5. BOB Mutual Fund 6. Benchmark Mutual Fund 7. Chola Mutual Fund 8. Duetsche Mutual Fund 9. DSP Merill Lynch Mutual Fund 10. Fidelity Fund Mutual Fund 11. Franklin Templeton Mutual Fund 12. CanBank mutual Fund 13. HDFC Mutual Fund 14. HSBC Mutual Fund 15. ING Vysya Mutual Fund 16. Credit Capital Mutual Fund 17 Kotak Mahindra Mutual Fund 18 Quantum Mutual Fund 19. Morgan Stanlay mutual Fund 20. Principal Mutual Fund 21. Prudential Mutual Fund 22. Reliance Mutual Fund 23. Sahara Mutual Funds 24. SBI Mutual Funds 25. Standard chartered Mutual Fund 26. Sundaram Mutual Fund 27. tata Mutual Fund 28. JBS Mutual Fund 29. UTI Mutual Fund Total
AUM 2769 2596 164 15019 191 982 2007 2535 10795 3663 17827 2223 21550 9221 1961 232 9949 11 2892 6489 23502 24670 282 13186 9411 3278 9717 5229 29519 231862
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To carryout return and risk analysis and evaluate performance of selected schemes according to Sharpe’s, Treynor’s and jenson’s model.
Tabel 3.3 Following are the list of selected schemes of selected Mutual funds. Sectors
Mutual Fund Houses
Schemes
PUBLIC
UTI (Institutions)
UTI – BOND ADVANTAGE G UTI – BOND FUND G UTI SMALL INVESTORS UTI GSEC G UTI LIQUID CASH PLAN INST G UTI LIQUID CASH PLAN LIC BOND G
LIC (Institution)
LIC GSEC G LIC LIQUID G LIC CHILD FUND
SBI (Bank Sponsered)
LIC MF SHORT TERM PLAN G MAGNUM INCOME G MAGNUMM INSTA G MAGNUM INSTA INCOME FUND SAVING G MAGNUM INSTA CASH STP
CANBANK Sponsered)
(bank
MAGNUM GILT STP G CANCIGO CANLIQUID G CANINCOME CANLIQUID INSTA G
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BOB sponsored)
(Bank
BOB INCOME G BOB LIQUID G BOB GILT G
PRIVATE
PRUDENTIAL ICICI
BOB INCOME STP G PRU ICICI INC G PRU ICICI G PRU ICICI GILT IP G PRU ICICI GILT TG
FRANKLIN TEMPLETON
PRU ICICI LIIQUID INST G TEMPLETON CHILDREN ASSETS TEMPLETON INC BUILDER ACC G TEMPLETON INC G TEMPLETON LIQUID G TEMPLETON TMA G
HDFC
TEMPLETON GSEC G HDFC HIGH INTREST G HDFC CASH MANAGEMENT SAVINGS PLAN G HDFC SOVEREIGN GILT PT G HDFC SOVEREIGN GILT IP G HDFC SOVEREIGN GILT SP G
BIRLA
HDFC LIQUID PREMIUM PLUS G BIRLA INCOME PLUS B BIRLA GILT RP G BIRLA GILT PF PLUS G BIRLA GILT LIQUID G BIRLA CASH PLUS INST PREMIUM G BIRLA SWEEP PLAN G
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RELIANCE
RELIANCE INC GR RELIANCE LIQUID TP BONUS RELIANCE LIQ TP G RELIANCE LIQ SUPER CASH G RELIANCE LIQ CASH G
The secondary data regarding NAV and market prices of selected schemes have been collected for each month of entire study period.
Benchmark Comparison
Benchmark index – Crisil composite Debt fund index is used to evaluate and for comparison of over-performance or under-performance by selected Debt-schemes.
CRISIL COMPOSITE DEBT FUND INDEX The composite Bond Fund index consist of tracking the returns on the constituents like the Call index, the CP index, the AAA index, AA index and the Gilt fund index to arrive at the Index Figures The weighted average methodology is used to arrive at the returns for the composite bond funds. The index history is calculated from the base date of 31st March, 2002. •
•
•
An index of this kind, generally serves as an indicator for all the market participants in the category, to benchmark their performance against the index, find out the attributes for the variation in their performance vis-à-vis the index and reshuffle their portfolio keeping in mind the risk/reward tradeoff.
Since the resulting index is a derived index rather than a primary index, it also serves as a benchmark for non-diversified market participants to evaluate their performance
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against a diversified portfolio containing a mix of all the instruments in the universe of non-equity instruments. Finally, the index is a useful tool to track volatility, charting correlation and developing hedging instruments.
These indices have been arrived in consultation with AMFI(association of mutual funds in India) for benchmarking the performance of individual funds in the Indian mutual funds. Marketplace against an index that is representative of the universe of that fund.
Index
CRISIL composite bond fund index f
Index value as on 1Aug, 2006 1267.47
Day ago 31 July,2006 1267.43
A Week ago 25 July, 2006 1266.43
A Month ago 30 June,2006
A Year Ago 1Aug,2005
1261.73
1232.24
DATA ANALYSIS The analysis has been carried out on one dimension: the gain to the investor in terms of average monthly returns on their investments in debt schemes and risk associated with these returns.
LIMITATIONS OF THE STUDY As the study is totally based on the secondary data, so all the limitation exists, which arises due to use of secondary data. Other side of limitations exists as less time was available, constraint of money.
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CHAPTER-4
MUTUAL FUND PERFORMANCE In this chapter, an attempt has been made to give the details regarding the need to evaluate funds performance, statistical tools, analysis and tables and total returns.
WHY MEASURE FUND PERFORMANCE
The Investors Perspective The investor would naturally be interested in tracking the value of his investments, whether he invests directly in the market or indirectly through mutual funds.. he would have to make intelligent decisions on whether he gets an acceptable return on his investments in the funds selected by him, or if he needs to switch to another fund. He therefore needs to understand the basic knowledge of the different measures of evaluating the performance of a fund. Only than would he be in a position to judge correctly whether his fund is performing well or not, and make the right decision.
The Advisor’s Perspective If u were an intermediary recommending a mutual fund to a potential investor, he would except you to give him proper advise on which mutual funds have a good performance track record. If u want to be an effective investment advisor, then you too have to know hoe to measure and evaluate the performance of the different funds that are available to the investor. The need to compare different funds performance requires the advisor to have the knowledge of the correct and appropriate measure of evaluating the fund performance.
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Different Performance Measures Remember that there are many measures of fund performance. you must find the most suitable measure, depending on the type of fund you are looking at, the stated investment objective of the fund and even depending on the current financial market condition. We discuss below each type of the most common measures, along with comments on its suitability for different types of funds, for different investments objectives and market conditions.
THE MOST COMMON MEASURES (1) Change in NAV
Purpose : if an investor wants to compute the return on investment between two dates, he can simply use the Per Unit Net Asset Value at the beginning and the end periods, and calculate the change in the value of the NAV between the two dates in absolute and percentage terms.
Formula : for NAV change in absolute terms: (NAV at the end of the period)-(NAV at the beginning of the period) T For NAV change in percentage terms: (absolute change in NAV/NAV at the beginning)*100
If period is less /more than one year: for annualized NAV change: (((absolute change in NAV/ NAV at the beginning)/months covered)*12)*100
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Example: Thus, if a fund’s NAV was Rs 20 at the beginning of the year and Rs. 22 at the end of the year, the absolute change was Rs 2 (22-20) and percentage change was + 10%(22-20/20*100). Now, let us assume that an investor purchases a unit in an open-end fund at Rs 20, and its NAV after 16 months is Rs 22, the annualized NAV change is :7.5%; (((22-20)/20)/16*12)*100
Suitability: NAV change is most commonly used by investors to evaluate fund performance, and so is also most commonly published by the mutual fund managers. The advantage of this measure is that it is easily understood and applies to virtually and type of fund.
Interpretation: whether the return in terms of NAV growth is sufficient or nor should be interpreted in light of the investment objective of the fund, current market conditions and alternative investment returns. Thus, a long term growth fund or infrastructure fund will give low returns in the initial years. All equity funds may give lower returns when the markets are in a bearish phase. Doubt funds may give lower returns when interest rates are rising.
Limitations: However, this measure does not always give the correct picture, in cases where the fund has distributed ti investors a significant amount of dividend in the interim period. If, in the above example year-end NAV was Rs. 22 after declaration and payment of a dividend of Rs 1, the NAV change of 10% gives an incomplete picture. Therefore, it is suitable for evaluating growth funds aand accumulation plans of debts and equity funds, but should be avoided for income funds and funds with withdrawal plans. For this reason, this measure neither is nor considered as comprehensive as the measure described below.
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(2) TOTAL RETURN Purpose: This measure corrects the shortcoming of the NAV change measure, by takin account of the dividends distributed by the fund between the two NAV dates, and adding them to the NAV change to arrive at the total return.
Formula for total returns : (( distributions +change in NAV)/NAV at the beginning of the period )*100
Example: lets us assume that an investor purchased 1 unit of an open –end equity fund at Rs 20. the fund had an interim dividend distribution of Rs. 4 per unit. Now let us assume that the NAV of the fund at year- end was Rs. 22. Thus, total returns at the end of the year for the investor was 30%((4+(22-20))/20)*100.
Suitability: Total return is a measure suitable for all types of funds. Performance of different types of funds can be compared on the basis of total return. Thus, during a given period, you can find out whether a debt fund gave better returns than an equity fund. It is also more accurate than simple NAV change, because it takes into accounts distributions during the period. While using Total return, performance must be interpreted in the light of market conditions and investment objective of the fund.
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EVALUATING FUNDS PERFORMANCE
Importance of Benchmarking in evaluating fund performance The measures described in section one are absolute, meaning that none of the measures should be used to evaluate the fund performance in isolation. A funds performance can only be judged in relation to investors expectations. However, it is important for the investors to define his expectations in relation to certain. “guideposts” on what is possible to achieve, or moderate his expectations with realistic investment alternative available to him in the financial markets. These guidelines or indicators of performance can be thought of as benchmark against which a fund;s performance ought to be judged. For, example an invvestor’s expectations of returns from an equity fund should be judged against how the overall stock market performed, in other words by how much the index itself moved up or down and whether the fund gave a return that was better or worse than the index movements. In this example, we can use a market index like S&P CNX Nifty or BSE SENSEX as benchmarks to evaluate our investor’s mutual fund performance.
While an advisor needs to look at the absolute measure of performance, he needs to select the right benchmark to evaluate a fund’s performance, so that he can compare the measured performance figures against the selected benchmark. How do we selesct the right benchmark to evaluate a giben fund’s performance? Historically, in India, investors only option were UTI schemes or blank deposits. UTI itself tended to “BENCHMERK” its return against what interest rates were available on blank deposits of 3/5 year maturity. Thus, for a long period, US64 scheme dividends were compared to bank deposit interest rates and investors would be happy if the dividend yield on US64 units were greater than comparable deposit interest rates and investors would be happy if the dividend yield on US64 units was greater than comparable deposit interest rate. Thus, investors in Indian mutual funds tend to routinely compare bank interest rates with returns on mutual fund schemes. However, with increasing investment option in the market, bank interest rates should not be used to judge a mutual fund’s performance in all cases. Let us therefore take a look at how to choose the correct benchmarks of mutual fund performance.
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BASIS OF CHOOSING BENCHMARK
AN
APPROPRIATE
PERFORMANCE
The appropriate benchmark for any fund has to be selected by reference to: 1. The asset class it invest in. Thus, an equity fund has to be judged by an appropriate benchmark from the equity markets, a debt fund performance against a debt market benchmark and so on; and 2. The fund’s stated investment objective. For example, if a fund invests in long term growth stocks, its performance ought to be evaluated against a benchmark that captures growth stocks performance. There are in fact three types of benchmarks that can be used to evaluate a fund’s performance, relative to the market as a whole, relative to other mutual funds, and relative to other comparable financial products or investment option open to the investor.
DEBT FUNDS
Historically investors have used bank interest rate as benchmarks to judge the performance of debt funds. However a debt fund performance ought to be judge against a debt market index, just as an equity fund’s benchmark would be judge against the equity market index. Further for debt funds, the kind of debt that comprises the portfolio will also decide the index to be used. If the bond fund or debt fund in question is is a broad based one, then a broad based debt index has to be used for this purpose. If the debt fund is narrower government security fund, for example, then, only the government security sub-segment of the broad based index has to be used as the appropriate benchmark. Performance of closed-end debt funds with a clear period of maturity, however, may be compared with bank fixed deposits of comparable maturity, as is commonly done by investors in India.
In practice, no appropriate debt index is available in India, to be used for benchmarking debt funds. Some analysts often used I-SEC’s I-BEX index, and its government securities sub-segment can be used as benchmark to judge govt. sec.
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funds. In any case, any benchmark for a debt fund must have the same portfolio composition and the same maturity profile as the fund itself, to be comparable.
While every fund is exposed to market risks, good funds should at least match major market indices, and be able to sustain bearish market phases better than other funds. Good fund managers operate with a long term perspective, do not sacrifice investors value by excessive trading which generates a high level of transaction cost, and will turn out more consistence performance, which is more valuable than one-time high and otherwise volatile performance record.
The investor must evaluate the fund manager’s record, how his schemes have performed over the years. There is a difference between institution managed funds that have a team of managers with successful records as against funds that are managed only by individuals. The reliability and track record of these sponsors has been an important factor in investor perceptions. In the final analysis, asset management companies and their fund managers ought to be judged on consistency in the returns obtained, and performance record against competing or peer group managers running similar funds. While transaction costs incurred are also an important factor.
STATISTICAL TOOLS USED FOR ANALYZING DATA. To come to the finding of the research project an extensive use of statistical techniques. Following tools have been used for analysis of data.
A)
Average
It has been used to calculate average market returns and average returns of mutual funds over the period of study.
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Average weekly Rp= Current Week -Previous week +Dividend Market Price
Market Price
Previous week Market Price
Where, RP= return on portfolio
B)
Varaince
Variance of price of mutual funds from average price has been calculated to give an idea of fluctuation in prices. C) Standard Deviation Standard deviation has also been calculated for the purpose of studying fluctuations in prices.
D)
Covariance
It is used to calculate Beta, which is arrived at by dividing covariance between return of mutual fund schemes and market return by variance of market return.
Beta=COV(Rp,Rm)
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VAR(Rm)
E)
Return of portfolio
Denoted by Rp
Rp=NAV(t)-NAV(t-1)+Dt NAV(t-1)
Although the formula is like above but due to the non-availability of dividend data, we calculated Rp by this method
Rp= NAV(t)-NAV(t-1) NAV(t-1)
Where, NAV (t)= net asset value of the portfolio for the present month NAV (t-1)= net asset value of the portfolio for the previous month Dt =dividend for the period under consideration
Average monthly return The average monthly return have been arrived by dividing the summation of the monthly returns for individual schemes by the total number of months for which the return is calculated.
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F)
Risk of portfolio
Denoted by Sp
Sp=
(Rp-AMRp)2
N
Rp= return of portfolio AMRp= average monthly return of portfolio N= Number of observations.
G)
Market return
Denoted by Rm Rm=M.I.(t)-M.I.(t-1)*100 M.I.(t-1)
Where, M.I. (t) market index for the present month M.I. (t-1) market index for the previous month
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Avg Rm = (Rm1 + Rm2 + Rm3 +…….Rmn)/N
Rm1, Rm2, Rm3,……………. Are the returns for the 1st,2nd,3rd months respectively and so on.
H)
Market risk
Denoted by Sm
Sm= (Rm-AMRm)2
N Rm= return of market AMRm= average monthly return of market N= Number of observation
I)
Yearly returns
Beside monthly and variability therefore, yearly returns are also computed. In place of converting monthly return into yearly returns we have derived the yearly return according to following formula:
YrRp%= NAV at year end-NAV in beginning of year
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NAV at the beginning of year
J)= Beta analysis Beta measures the systematic risk, which is undiversifiable in nature. It shows how the price of portfolio responds to market forces beta. Beta for overall market is equal to 1. Beta can be calculated as:
β1=COV(Rp,Rm) VARm
Where, COV(Rp.Rm)= covariance of portfolio and market returns. VARm= variance of the market.
Evaluation of performance of mutual fund The performance of portfolio is measured by combining the risk and returns levels with a single value. The differential return earned by a portfolio may be due to the difference in the risk exposure from that of say, the stock market index. Following are the major methods of assessing a risk-adjusted performance.
1)
Sharpe’s performance measures for portfolios
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The sharpe’s index measures the risk premium of the portfolio relative to the total amount of risk in portfolio. The sharpe’s index is measured as
S= rp-rf/ σp
Where, S= Sharpe’s index Rp= average monthly return of fund Rf= risk free return
Here the benchmark is additional return of market over risk free return related with market portfolio’s total risk.
RVARm= rm-rf σm
Where, Rm = average weekly market return RVARm is reward to variabilityof the market *risk free return is taken as 5.5% per annum.
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2)
Treynor’s performance measures for portfolios
Jack treynor, as measures by portfolio beta coefficients put an index of portfolio performance that is based on systematic risk, forward. It is used to rank the interest performance of different assets. It is a risk- adjusted rate of return measure than is calculated by dividing the assets risk premium by their beta coefficient.
Tn = rp-rf
βp
Where, Tn = Treynor’s index Rp = average return on portfolio Rf = risk free return Bp = beta coefficient of portfolio
3)
Jensen measure
The Sharpe and Treynor index models provide measure for ranking the relative performance of various portfolios on a risk- adjusted basis according to Jensen equilibrium average return on a portfolio would be a benchmark. Equilibrium average return is the return of the portfolio by the market with respect to systematic risk to portfolio. This is a return the portfolio should earn with the systematic risk.
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EARp = rf + (rm-rf) βp
Where, EARp is equilibrium average return of the portfolio.
Difference between equilibrium average return of the portfolio indicates superior performance of the fund. This is called as alpha(ά )
If the alpha is positive, the portfolio has performed better and if alpha is negative it has not shown performance upto the benchmark, i.e. the market index.
USEFULNESS OF THE STUDY This research work also has an applied basis in nature, which can be used for further analysis and study. It has great practical application in investment decisions. An investment can be suggested on the basis of the study. Persons interested in investing in capital markets can use the results of the study to make comparison between risks and returns offered by various mutual funds and to find out the most suitable avenue for investment in capital market.
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LIMITATIONS OF THE STUDY
1.
Time constraint
Shortage of time was a very big constraint due to which less number of mutual funds has included in the study.
2.Rresource constraint Availability of data was a constraint due to which only those mutual funds data is considered which is available and also there are some MF’s whose data was not available so their duration was shortened.
3
Daily and monthly return
In calculating beta it is desirable to use daily returns because it gives us more number of returns and therefore improve the accuracy of beta estimate. In this case we have taken monthly return, which may not give beta as accurate as with daily returns.
4. Period of analysis Generally longer period gives us a more accurate estimate of beta. In this case period of analysis is only of 3 years.
5 .Complex calculation Though every precaution has taken due to large data and complex calculations there may be chances of error.
Though every precaution has taken due to large data and complex calculations there may be chances of error.
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Performance Treynor used the alpha for performance evaluation. Which varies from negative values to nice average values? Here negative values shows that the related schemes even not performed near to risk free return.
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CHAPTER-6
FINDINGS AND CONCLUSIONS The major findings of the study are as follows:
1. The debt schemes in private sector yield much higher average return than the public sector. It means that performance of private sector mutual funds is better than the public sector mutual funds. 2. The Assets under management (AMU) of public sector was previously (5 yrs before) more but as compared to private sector mutual funds its share in total assets is reducing year after year. 3. The mutual fund UTI, PRUDENTIAL ICICI, HDFC, FRANKLIN TEMPLETON has maximum assets under management till dec 2005 4. The top ten schemes among the total schemes on the basis of total return are TEMPLETON GSEC G, MAGNUM INCOME G, PRU ICICI LIQ G, LIC CHILD FUND, UTI MAHILA UNIT G, HDFC CASH MGMT. SAVING PLAN G, BIRLA GILT LIQUID G among these top performers 5 out of 7 are related to private sector. 5. The variation of monthly returns varies from 0.0025 of CANBANK mutual fund scheme to 0.2201 HDFC mutual fund scheme. Here it is clear that private sector have low variation in returns. 6. The study of risk (β) shows that most of the schemes varies less than 50% variation in the market. 7. The private sector funds over- perform the public sector funds because of good investment portfolio as well as the better advisory services provided by them to investors. 8. Private sector debt schemes related to Gilt funds provide handsome return than the other categories of debt funds. 9. 90% Debt schemes have risk less than the market risk.
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Conclusion In nutshell, the performance of public sector schemes is up to the mark of Benchmark and expectation but they are over-performed by debt schemes of private sector mutual fund houses. And among the Top 7 schemes performance, 5 are from private sector. Investment pattern of both the sectors are slightly different, private sector inclined more towards Equity investment rather than Debt investment. Overall the study indicates that private sector performance are better , even they are only a decade old.
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