Professional Documents
Culture Documents
Mutual Funds
AT Alcove Technologies PrivateLimited, Hyderabad A project Report submitted in partial fulfillment of
B.SRILATHA
REGD.No.07911E0044
MR.SV SARMA
Asst professor, M.B.A
ACKNOWLEDGEMENT
I express my deep sense of gratitude and indebtedness to Mr. Ravi Rao, Manager of Alcove Technologies Pvt.Ltd for his able guidance and continuous support on this project without whose endeavor the project would not have been completed. I wish to express my heart full thanks to Mr. SV SARMA,HOD, MBA DEPARTMENT and my staff members for giving me this opportunity. Last but not the least I am greateful to my parents for their support and inspiration on this project.
(SRILATHA) (07911E0044)
CERTIFICATE
This is to certify that the project report titled MUTUAL FUNDS carried out at ALCOVE TECHNOLOGIES PVT LTD.,HYDERABAD is being submitted by B.SRILATHA(070911E0044), in partial fulfillment for the award of Master of Business Administration to the Jawaharlal Nehru Technological University, is a record of confide work carried out by her under my guidance and supervision during 2008-09. The results embodied in this thesis have not been submitted to any other University or Institute for the award of any Degree or Diploma.
INDEX
CHAPTER -1
Meaning of mutual funds Objectives of the study Need of the study Scope of the study
Alcove financial products sales services offerings Benefits from alcove BPO& financial services Our BPO & financial professionals Alcove clients list About CEO
Contact information
CHAPTER-5
Findings Suggestions Conclusions
CHAPTER-6
Bibliography
CHAPTER-I
Generates
Invests in
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
To evaluate the performance of diversified equity funds, balanced growth fund and income fund for the last 6 months.(may 2007 to oct 2007
To measure return and risk of investing in UTI mutual fund To measure the performance of UTI mutual fund using Sharpes Model, Treynors Model. To find out the systematic risk of UTI mutual fund To help an investor make a right choice of investment, while considering the inherent risk factors. To understand the recent trends in Mutual Funds world.
called in some parts of the world has a long and successful history, of late Mutual Funds have become a hot favorite of millions of people all over the world. The driving force of Mutual Funds is the safety of the principal guaranteed, plus the added advantage of capital appreciation together with the income earned in the form of interest or dividend. The various schemes of Mutual Funds provide the investor with a wide range of investment options according to his risk bearing capacities and interest besides, they also give handy return to the investor. Mutual Funds offers an investor to invest even a small amount of money, each Mutual Fund has a defined investment objective and strategy. Mutual Funds schemes are managed by respective asset managed companies sponsored by financial institutions, banks, private companies or international firms. A Mutual Fund is the ideal investment vehicle for todays complex and modern financial scenario. The study is basically made to analyse the various open-ended equity schemes of different Asset Management Companies to highlight the diversity of investment that Mutual Fund offer. Thus, through the study one would understand how a common man could fruitfully convert a pittance into great penny by wisely investing into the right scheme according to his risk taking abilities
11
This sample represents total industries specialized mutual funds offered by AMC as on 1st May 2007.
Source: The Hindu Business Line
12
RESEARCH METHODOLOGY
Research design or research methodology is the procedure of collecting, analyzing and interpreting the data to diagnose the problem and react to the opportunity in such a way where the costs can be minimized and the desired level of accuracy can be achieved to arrive at a particular conclusion. Source of Data: Secondary data: In this method I collected the performance reports of the funds, company profile, Industry profile, fund fact sheets, journals, and some information through internet. Time Period I collected; daily NAV data pertains to year (May 2008 to Oct- 2008)
13
(For detailed definitions in the above chart refer to annexure 1) Mutual Funds diversify their risk by holding a portfolio of instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced. Mutual Fund investments are not totally risk free. In fact, investing in Mutual Funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced. A very important risk involved in Mutual Fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.
14
Sector Schemes These schemes focus on particular sector as IT, banking, etc. They seek to generate longterm capital appreciation by investing in equity and related securities of companies in that particular sector. Index Schemes These schemes aim to provide returns that closely correspond to the return of a particular stock market index such as BSE Sensex, NSE Nifty, etc. Such schemes invest in all the stocks comprising the index in approximately the same weightage as they are given in that index. Exchange Traded Funds (ETFs) ETFs invest in stocks underlying a particular stock index like NSE Nifty or BSE Sensex. They are similar to an index fund with one crucial difference. ETFs are listed and traded on a stock exchange. In contrast, an index fund is bought and sold by the fund and its distributors. Equity Tax Saving Schemes These work on similar lines as diversified equity funds and seek to achieve long-term capital appreciation by investing in the entire universe of stocks. The only difference between these funds and equity-diversified funds is that they demand a lock-in of 3 years to gain tax benefits. 15
Dynamic Funds These schemes alter their exposure to different asset classes based on the market scenario. Such funds typically try to book profits when the markets are overvalued and remain fully invested in equities when the markets are undervalued. This is suitable for investors who find it difficult to decide when to quit from equity. Balanced Schemes These schemes seek to achieve long-term capital appreciation with stability of investment and current income from a balanced portfolio of high quality equity and fixed-income securities. Medium-Term Debt Schemes These schemes have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio is in the range of five to seven years. Short-Term Debt Schemes These schemes have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio is in the range of one to two years. Money Market Debt Schemes These schemes invest in debt securities of a short-term nature, which generally means securities of less than one-year maturity. The typical short-term interest-bearing instruments these funds invest in Treasury Bills, Certificates of Deposit, Commercial Paper and inter-bank call money market. Medium-Term Gilt Schemes
16
These schemes invest in government securities. The average maturity of the securities in the scheme is over three years.
Short-Term Gilt Schemes These schemes invest in government securities. The securities invested in are of short to medium term maturities. Floating Rate Funds They invest in debt securities with floating interest rates, which are generally linked to some benchmark rate like MIBOR. Floating rate funds have a high relevance when interest rates are on the rise helping investors to ride the interest rate rise.Monthly Income Plans (MIPs) These are basically debt schemes, which make marginal investments in the range of 1025% in equity to boost the schemes returns. MIP schemes are ideal for investors who seek slightly higher return that pure long-term debt schemes at marginally higher risk.
17
METHODOLOGY
Formulas Used For Data Analysis
1. Return=Ve Vb (Current Price-Previous Price) / Previous Price *100 2. Standard Deviation = () 3. Sharpes model St = (RT RF)/SD 4. Treynors model = (Rt-Rf) Rt=returns on stock Rf=risk free rate Rm=return on market index =systematic risk (=NXY-XY / NX^2-(X)^2)
18
CHAPTER-II
LITERATURE REVIEW
19
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.
21
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 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
22
Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. The graph indicates the growth of assets over the years.
23
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.
24
When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder.
25
Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors. For example: A. If the market value of the assets of a fund is Rs. 100,000 B. The total number of units issued to the investors is equal to 10,000. C. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00 D. Now if an investor 'X' owns 5 units of this scheme E. Then his total contribution to the fund is Rs. 50 (i.e. Number of units held multiplied by the NAV of the scheme)
26
DIFFERENT MODES OF RECEIVING THE INCOME EARNED FROM MUTUAL FUND INVESTMENTS
Mutual Funds offer three methods of receiving income: Growth Plan In this plan, dividend is neither declared nor paid out to the investor but is built into the value of the NAV. In other words, the NAV increases over time due to such incomes and the investor realizes only the capital appreciation on redemption of his investment. Income Plan In this plan, dividends are paid-out to the investor. In other words, the NAV only reflects the capital appreciation or depreciation in market price of the underlying portfolio. Dividend Re-investment Plan In this case, dividend is declared but not paid out to the investor, instead, it is reinvested back into the scheme at the then prevailing NAV. In other words, the investor is given additional units and not cash as dividend.
27
Systematic Withdrawal Plans (SWPs) These plans are best suited for people nearing retirement. In these plans, an investor invests in a mutual fund scheme and is allowed to withdraw a fixed sum of money at regular intervals to take care of his expenses Systematic Transfer Plans (STPs) They allow the investor to transfer on a periodic basis a specified amount from one scheme to another within the same fund family meaning two schemes belonging to the same mutual fund. A transfer will be treated as redemption of units from the scheme from which the transfer is made. Such redemption or investment will be at the applicable NAV. This service allows the investor to manage his investments actively to achieve his objectives. Many funds do not even charge any transaction fees for his service an added advantage for the active investor.
ASSET ALLOCATION
Mutual Funds offer the investors a valuable tool Asset Allocation. This is explained by an example. An investor investing Rs.1 lakh in a mutual fund scheme, which has collected Rs.100 crores and invested the money in various investment options, will have Rs.1lakh spread over a number of investment options as demonstrated below:
28
Investment Type
Equity: State Bank of India Infosys Technologies ABB Reliance Industries MICO Tata Power DEBT: Govt. Securities Company Debentures Institutuion Bonds Money Market Total
57 15 12 10 9 7 4 43 20 10 9 4 100
57,000 15,000 12,000 10,000 9,000 7,000 4,000 43,000 20,000 10,000 9,000 4,000 1,00,000
Thus Asset Allocation is allocating your investments into different investment options depending on your risk profile and return expectations. DIVERSIFICATION Diversification is spreading your investment amount over a larger number of investments in order to reduce risk. For instance, if you have Rs.10,000 to invest in Information Technology (IT) stocks, this amount will only buy you a handful of stocks of perhaps one or two companies. A fall in the market price of any of these company stocks will significantly erode your investment amount instead it makes sense to invest in an IT sector mutual fund scheme so that your Rs.10,000 is spread across a larger number of stocks thereby reducing your risk.
PROFESSIONALS AT WORK Few investors have the time or expertise to manage their personal investments every day, to efficiently reinvest interest or dividend income, or to investigate the thousands of securities available in the financial markets. Fund managers are professionals and 29
experienced in tracking the finance markets, having access to extensive research and market information, which enables them to decide which securities to buy and sell for the fund. For an individual investor like you, this professionalism is built in when you invest in the Mutual Fund. REDUCTION OF TRANSACTION COSTS While investing directly in securities, all the costs of investing such as brokerage, custodial services etc. borne by you are at the highest rates due to small transaction sizes. However, when going through a fund, you have the benefit of economies of scale; the fund pays lesser costs because of larger volumes, a benefit passed on to its investors like you. EASY ACCESS TO YOUR MONEY This is one of the most important benefits of a Mutual Fund. Often you hold shares or bonds that you cannot directly, easily and quickly sell. In such situations, it could take several days or even longer before you are able to liquidate his Mutual Fund investment by selling the units to the fund itself and receive his money within 3 working days.
TRANSPARENCY The investor gets regular information on the value of his investment in addition to disclosure on the specific investments made by the fund, the proportion invested in each class of assets and the fund managers investment strategy and outlook.
SAVING TAXES Tax saving schemes of Mutual Funds offer investor a tax rebate under section 88 of the Income Tax Act. Under this section, an investor can invest up to Rs.10,000 per Financial year in a tax saving scheme. The rate of rebate under this section depends on the investors total income. INVESTING IN STOCK MARKET INDEX Index schemes of mutual funds give you the opportunity of investing in scrips that make up a particular index in the same proportion of weightage that these scrips have in the index. Thus, the return on your investment mirrors the movement of the index. 30
INVESTING IN GOVERNMENT SECURITIES Gilt and money market schemes of Mutual Funds also give you the opportunity to invest in government securities and money markets (including the inter banking call money market) WELL-REGULATED INDUSTRY 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. CONVENIENCE AND FLEXIBILITY Mutual Funds offer their investors a number of facilities such as inter-fund transfers, online checking of holding status, etc, which direct investments dont offer.
Interest rate risk relates to future changes in interest rates. For instance, if an investor invests in a long-term debt Mutual Fund scheme and interest rates increase, the NAV of the scheme will fall because the scheme will be end up holding debt offering lower interest rates. BUSINESS RISK Business risk is the uncertainty concerning the future existence, stability, and profitability of the issuer of the security. Business risk is inherent in all business ventures. The future financial stability of a company cannot be predicted or guaranteed, nor can the price of its securities. Adverse changes in business circumstances will reduce the market price of the companys equity resulting in proportionate fall in the NAV of the Mutual Fund scheme, which has invested in the equity of such a company.
ECONOMIC RISK Economic risk involves uncertainty in the economy, which, in turn, can have an adverse effect on a companys business. For instance, if monsoons fail in a year, equity stocks of agriculture-based companies will fall and NAVs of Mutual Funds, which have invested in such stocks, will fall proportionately.
32
CHAPTER-III
Alcove technologies
Profile
33
This publication and its contents are strictly confidential and proprietary to Alcove Technologies Pvt Ltd. No part of this document shall be disclosed outside or reproduced in whole or part in any form for any purpose without written permission of Alcove Technologies Pvt Ltd.
ABOUT US
Alcove Technologies (Alcove means niche/special in Latin) is a multi-faceted Organisation providing the following services to its world-wide Clients. Information Technology Business & Knowledge Process Outsourcing Recruitments, Staff Augmentation, Temp Staffing Corporate Training Our philosophy is, leave your worries on the above needs of your organisation to us to handle these functions more efficiently & cost effectively while you focus on your core business activities Alcove services are managed by seasoned professionals and Industry experts with decades of experience in delivering strategic value to our global customers. Alcove s professional services teams have served global organisations and have delivered multiple complex projects in each line of our services. Alcove is recognized for its ability to provide thoughtful and efficient services based on an intimate knowledge of our clients business needs, we strive to ensure our clients retain their competitive edge in the market place with our strong emphasis on quality assurance, efficient processes, cost effective services and well qualified people. Alcove has its objectives to provide cost-effective and high quality solutions and services using leading edge Technologies through its secure state-of-the-art facilities and Infrastructure to undertake large client projects in each of our service lines. Alcove has grown in terms of its available skills (Technical, non-Technical and Project Management), resources and experiences. Alcove follows global standards to deliver Products and services Alcove focuses continuously on its People, Processes, Tools, Technologies and Methodologies to deliver best solutions to its customers. A growing number of Project Managers in Alcove have earned the Project Management Professional (PMP) certificate from the Project Management Institute (PMI), Pennsylvania, U.S.A., which is widely recognized the world over as a leading certification for the project management professionals. 34
OUR VISION
In our chosen lines of business, We strive to be the leader in service delivery, client satisfaction, professionalism, superior quality and innovation. We aim to architect,develop and implement state of the art and creative solutions and services for our global clients. We aspire to be a leading global Technology Solutions and Services provider by delivering integrated consulting, software services, all related business process services and training services, bringing value and lasting impact to the business of our worldwide clients through the best services of our dedicated and motivated projects personnel.
Alcove aims to be among the top 2 business partners of each of our client organizations and be their long term value added partner.
OUR MISSION
Alcove is an enabling company. Through its solutions and services , Alcoves mission is to assist global organizations to transition their business to next level of maturity.Alcove is committed to creating and nurturing strong partnerships with its clients. Our mission statement is as follows: Alcove seeks to be a trusted partner in the growth and success of clients business. We will leverage the breadth and scope of service offerings from conceptualization to postdeployment support to deliever business solutions & services and strengthen our clients competitive position . We strive to be viewed as a partner that competes aggressively and earns more business everyday from each of our clients.
Manufacturing Sector Retailing Sector Government Sector Services Industry Sector Hospitality and Entertainment sector Healthcare and Pharmaceutical sector Technology Services; Alcove believes in supporting its client with its comprehensive and complementing Technologies and services. Alcove has capabilities to support its global customers on the following Technology service; Management Consulting Project Definition and Planning Business Requirement Specifications Systems Design Software Development Software Products Installation and Implementation Systems Support & Maintenance Training and Support Applications Management Advanced Technology Research.
Technologies :
Alcove Technology specialists have delivered multiple applications on all leading technologies to global customers in the past and look forward to deliver cutting edge solutions to needy clients. BUSINESS/KNOWLEDGE PROCESS OUTSOURCING SERVICES BPO / KPO Expertise; Alcove has an in-depth expertise in Business Process outsourcing for clients in different business sectors, Alcoves experienced BPO / KPO professional have been servicing multiple clients in these sectors for the past many years and have seen the industry growing from close quarters. Our BPO expertise span across; Document Processing Data Entry and Processing IT Help Desk Services Technical support services 36
Process Development Enterprise Resource Planning processes Telecommunication Services Medical Transcription Medical content, coding and services Equity, financial, and insurance research Data search, integration, and management Analytics (data analytics/risk analytics) and data mining services Research and information services Business and market research (including competitive intelligence) Engineering and design services Intellectual Property (IP) research Pharmaceuticals and biotechnology Research and Development (IT and non-IT areas) Quality reviews & Feedback Remote education and publishing Knowledge Process Outsourcing Java Technologies .NET Technologies Web Technologies Mainframe Technologies Multiple Databases Microsoft Applications Business Intelligence Data Warehousing SAS, Informatica , Ab- Initio, Business Objects Multi-Tiered Architecture Varied Operating Systems Multiple Hardware platforms Different Application Servers Open Systems Enterprise Appl. Integration (EAI) Tools Oracle Applications CRM People Soft SAP Microsoft Dynamics Axapta
Contact Center Expertise; Alcove s Contact Center expertise and service delivery capability supports its clients for their varied Contact Center needs for their internal or external customer servicing. Our professionals have extensive experience in both inbound and outbound calls such as; 37
Inbound Calls Answering Service Customer Service Inquiry Handling Technical Support Toll Free Services Website Response Order Processing Messaging Services Outbound Calls Lead Generation Appointment Scheduling Product/Service Promotion Market Research Sales & Marketing Verification services E-mail follow-up Data Management CORPORATE TRAINING SERVICES Alcove recognises Training as a key tool to enhance skills and productivity, offers specialised and advanced Technology Training Programs to the specific needs of our global customers. Alcove provides customized Training programs which saves huge training cost to our customers. Alcoves team is very efficient in rolling out Training Programs across client organisation and across all locations. Alcove delivers the following types of Training programs; Induction Training for project resources. Skill Enhancement Training program. Cross Skills Training program for those wishing to move to another Technology /skill. Pre-Recruitment Training program to short-listed candidates who might be your potential employees after the training program. Certification Training programs to help those looking to attain certification in a specific technology.
Alcove Offers the Following Financial Products Sales Services to its clients and customers.. Loan Products: Home Loans Mortgage Loans Personal Loans Business Loans Vehicle Loans Educational Loan IPO & Margin Funding Other Products: Credit Cards Global Instant Money Transfer Foreign Exchange: Money Changing Travel Cards & Traveler Cheques Offshore investments Other Products/Services: Portfolio Management Service (PMS) Wealth Management Service ( WMS) Other Tax saving Instruments (Post office savings- IVPs, KVPs, Postal Deposits, PPF, Pension Funds etc.)
o o o o o
Prompt & accurate reporting Better results through test marketing Increased market share Maximum phone productivity Increased number of Customer appointments
40
Alcoves
Client List
41
42
Ravi Rao: Ravi is CEO, India operations of Alcove Technologies Pvt. Ltd. Ravi has over 24 years of experience all spheres of Information Technology and Financial Services line of business. Ravi held senior positions at IBM Global Services as Industry Executive Financial services sector, Application Management Services (AMS) Global Delivery. Earlier worked at PricewaterhouseCoopers Consulting (PWC Consulting) as Managing Consultant - Financial Services, Prior to that, he worked for Tata Consultancy Services (TCS) as Banking Solutions Group Head, Earlier to that Ravi worked for the third largest commercial bank in India . CONTACT INFORMATION Sales: Sales Team Alcove Technologies Pvt. Ltd. 401, Balaji Residency, Hitec-city Main Road Madhapur, Hyderabad 400 081, India Ph: +91 40 4435 5555 (30 lines) Mail: sales@alcovetec.com web: www.alcovetechnologies.com Contact: Ravi Rao ravi.rao@alcovetechnologies.com Ph: +91 40 4435 5678 Mobile: +91 9393 66 5432 PS: Alcove would be pleased to provide detailed profile depending on your specific requirements.
44
CHAPTER-IV
PERFORMANCE MEASURES OF MUTUAL FUNDS:
Mutual Fund industry today, with about 30 players and more than six 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 cannot 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 different Mutual 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 45
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. 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 cannot. 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. In order to determine the risk-adjusted returns of investment portfolios, several eminent authors have worked since 1960s to develop composite performance indices to evaluate a portfolio by comparing alternative portfolios within a particular risk class. The most important and widely used measures of performance are: The Treynor Measure The Sharpe Measure The Treynor Measure Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's Index. This Index is a ratio of return generated by the fund over and above risk free rate of return (generally taken to be the return on securities backed by the government, as there is no credit risk associated), during a given period and systematic risk associated with it (beta). Symbolically, it can be represented as: Treynor's Index (Ti) = (Ri - Rf)/Bi. 46
Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the fund. All risk-averse investors would like to maximize this value. While a high and positive Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index is an indication of unfavorable performance. The Sharpe Measure In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be written as: Sharpe Index (Si) = (Ri - Rf)/Si Where, Si is standard deviation of the fund. While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a low and negative Sharpe Ratio is an indication of unfavorable performance. Comparison of Sharpe and Treynor Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a numerical risk measure. The total risk is appropriate when we are evaluating the risk return relationship for well-diversified portfolios. On the other hand, the systematic risk is the relevant measure of risk when we are evaluating less than fully diversified portfolios or individual stocks. For a well-diversified portfolio the total risk is equal to systematic risk. Rankings based on total risk (Sharpe measure) and systematic risk (Treynor measure) should be identical for a well-diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that ranks higher
47
on Treynor measure, compared with another fund that is highly diversified, will rank lower on Sharpe Measure. PROFILE OF KOTAK MAHINDRA
Kotak Mahindra Mutual Fund (KMMF) is managed by Kotak Mahindra Asset Management Company Ltd., a wholly owned subsidiary of Kotak Mahindra Bank Ltd. Kotak Mahindra Mutual Fund launched its Schemes in December 1998 and today manages assets over and above Rs. 7353.82 cr. contributed by more than 1,99,818 investors in various schemes. KMMF has to its credit the launching of innovative schemes and plans like Kotak Gilt and Free Life Insurance with Kotak Bond Deposit Plan. Kotak Mahindra is one of India's leading financial institutions, offering complete financial solutions that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the financial needs of individuals and corporates. The group has a net worth of around Rs.1,700 crore and employs over 4,000 employees in its various businesses. With a presence in 74 cities in India and offices in New York, London, Dubai and Mauritius, it services a customer base of over 5,00,000 Kotak Mahindra has international partnerships with Goldman Sachs (one of the world's largest investment banks and brokerage firms), Ford Credit (one of the world's largest dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset management conglomerate). Kotak Mahindra Asset Management Company Limited (KMAMC), a wholly owned subsidiary of KMBL, is the asset manager for Kotak Mahindra Mutual Fund (KMMF). KMAMC started operations in December 1998 and has over 1,99,818 investors in various schemes. KMMF offers schemes catering to investors with varying risk - return profiles and was the first fund house in the country to launch a dedicated gilt scheme investing only in government securities. The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak & 48
Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and that's when the company changed its name to Kotak Mahindra Finance Limited. Since then it's been a steady and confident journey to growth and success. Kotak Mahindra Finance Limited starts the activity of Bill Discounting Kotak Mahindra Finance Limited enters the Lease and Hire Purchase market. The Auto Finance division is started the Investment Banking Division is started. Takes over FICOM, one of Indias largest financial retail marketing networks
Enters the Funds Syndication sector 1995 Brokerage and Distribution businesses incorporated into a separate company Kotak Securities. Investment Banking division incorporated into a separate company Kotak Mahindra Capital Company. 1996 The Auto Finance Business is hived off into a separate company - Kotak Mahindra Primus Limited. Kotak Mahindra takes a significant stake in Ford Credit Kotak Mahindra Limited, for financing Ford vehicles. The launch of Matrix Information Services Limited marks the Groups entry into information distribution. 1998 Enters the mutual fund market with the launch of Kotak Mahindra Asset Management Company. Kotak Mahindra ties up with Old Mutual plc. For the Life Insurance business. Kotak Securities launches kotakstreet.com - its on-line broking site. Formal commencement of private equity activity through setting up of Kotak Mahindra Venture Capital Fund. 2003 Kotak Mahindra Finance Ltd. converts to bank Kotak Mahindra is one of India's leading financial institutions, offering complete financial solutions cities in India and offices in New York, London, Dubai and Mauritius, it services a customer base of over 5,00,000. has international partnerships with Goldman Sachs (one of the world's largest investment banks and brokerage firms), Ford Credit (one of the world's largest dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset management 49
conglomerate that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the financial needs of individuals and corporates. The group has a net worth of around Rs.1,700 crore and employs over 4,000 employees in its various businesses. With a presence in 74 cities in India and offices in New York, London, Dubai and Mauritius, it services a customer base of over 5,00,000. Kotak Mahindra has international partnerships with Goldman Sachs (one of the world's largest investment banks and brokerage firms), Ford Credit (one of the world's largest dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset management conglomerate). Kotak Mahindra Asset Management Company Limited (KMAMC), a wholly owned subsidiary of KMBL, is the asset manager for Kotak Mahindra Mutual Fund (KMMF). KMAMC started operations in December 1998 and has over 1,99,818 investors in various schemes. KMMF offers schemes catering to investors with varying risk - return profiles and was the first fund house in the country to launch a dedicated gilt scheme investing only in government securities.
50
Kotak Investment Banking* (KIB), India's premier Investment Bank is a strategic joint venture between Kotak Mahindra Bank Limited (KMBL) and the Goldman Sachs Group, LLP. KMBL has come into existence in March 2003 through the conversion of Kotak Mahindra Bank Ltd. into a Commercial Bank. Kotak Mahindra is one of India's leading financial institutions, offering complete financial solutions that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the financial needs of individuals and corporates. The group has a net worth of over Rs.1,550 crore and employs over 3,000 employees in its various businesses. With a presence in 60 cities in India and offices in New York, London, Dubai and Mauritius, it services a customer base of over 5,00,000. Kotak Mahindra has international partnerships with Goldman Sachs (one of the world's largest investment banks and brokerage firms), Ford Credit (one of the world's largest dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset management conglomerate). Kotak Investment Banking (KIB) and Kotak Institutional Equities represent the securities business of the Kotak Mahindra Group **(KI), both, joint ventures with Goldman Sachs involved in brokerage, distribution and research. We are a full service Investment Bank bringing to our clients the global reach and expertise of Goldman Sachs and the local knowledge and skills of Kotak Mahindra. As a full service Investment Bank, Kotak Investment Bakings core business areas include Equity Issuances, Mergers & Acquisitions, Advisory Services and Fixed Income Securities and Principal Business. Our strength lies in understanding our clients' businesses backed by a strong research team and an extensive distribution network, which spans a wide variety of investors across the country. We are also the first Indian Investment Bank to be registered with the Securities & Futures Authority in the UK (through our wholly owned subsidiary) and the National Association of Securities and Dealers in the USA. We are also the first Indian Investment Bank to be appointed by the Government of India as a Co-lead Manager in their international divestment of Gas Authority of India Ltd through a GDR offering. We are today well positioned in an increasing globalised environment to provide full service to its clients based either in India or overseas.
51
RESEARCH METHODOLOGY
The methodology involves randomly selecting open-ended equity schemes of different fund houses of the country. The data collected for this project is basically from two sources, they are 1. Primary sources: The monthly fact sheets of different fund houses and research reports from banks. 2. Secondary sources: Collection of data from Internet and books.
HYPOTHESIS The hypothesis of the study involves comparison between Kotak 30 Reliance capital Growth Fund, HDFC Capital Builder Fund. The comparison between these schemes is made based on the following factors A) Sharpes Ratio B) Treynors Ratio C) (Beta) co-efficient. D) Returns
A) The Sharpes Measure In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it. 52
According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be written as: Sharpe Index (Si) = (Ri - Rf)/Si Where, Si is standard deviation of the fund. While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a low and negative Sharpe Ratio is an indication of unfavorable performance. B) The Treynor Measure Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's Index. This Index is a ratio of return generated by the fund over and above risk free rate of return (generally taken to be the return on securities backed by the government, as there is no credit risk associated), during a given period and systematic risk associated with it (beta). Symbolically, it can be represented as: Treynor's Index (Ti) = (Ri - Rf)/Bi. Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the fund. All risk-averse investors would like to maximize this value. While a high and positive Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index is an indication of unfavorable performance. C) (Beta) Co-efficient: Systematic risk 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 cannot. By using the risk
53
return relationship, we try to assess the competitive strength of the Mutual Funds vis-vis one another in a better way. (Beta) is calculated as N ( XY) X Y N ( X2) ( X) 2 D) Returns: Returns for the last one-year of different schemes are taken for the comparison and analysis part.
DATA ANALYSIS:
Note : All the data used for analysis is taken upto the period 31march-2005
KOTAK 30 (FUND MANAGER ANAND SHAH) Kotak 30 is an aggressive diversified equity scheme. Kotak 30 follows a bottom up stock specific aproach and invests in a mix of large cap stocks. The fund has portfolio turnover ratio. The fund manager is bullish on the matrkets in the long term and expects good returns from the same. The fund manager is of the opinion that the market may not fall due to the abundent liquidity in the system.however the fundmanagers sees high oil prices a big concern in the global markets. The fund has invested into equities to the tune of 93% of the total portfolio .the fund manager woukd continue to hold 7-10% of the portfolio in cash . 54
During the month the fund has exited out of the stocks like BPCL,Tata Chemiicals and Glaxo pharma.However the fund has entered into stocks wockhardt and HCL Technologies. The fund is recommended for investors willing to take above average risk.
YEAR
Rm
XY
LAST 1 YEAR LAST 3 YEARS LAST 5 YEARS SINCE INCEP TION TOTAL
9.425
Xbar
= X/N
= 9.16/ 4 = 2.29
Std.Deviation ( )
= (X-Xbar)2 / N = 322.078/4
55
= 8.973 Co-efficient = N ( XY) X Y N ( X2) ( X) 2 = 4(512.57) (9.16)(50.77) 4(343.058) (9.16) 2 = 1.23 Sharpes Ratio = Rp-Rf / = 50.77/8.973 = 5.658 Treynors Ratio = Rm-Rf / = 9.16/1.23 = 7.447
RELIANCE GROWTH FUND (FUND MANAGER :Mr Sunil Singhania) Relaiance Growth fund is an aggressive diversified equity scheme Reliance Growth fund follows a bottom up stock specific aproach and invests in a mix of large and mid cap stocks. The fund has a high portfolio turnover ratio. The fund manager is bullish on the matrkets in the long term and expects good returns from the same. The fund manager is of the opinion that the market may not fall due to the abundent liquidity in the system.however the fundmanagers sees high oil prices a big concern in the global markets. The fund has invested into equities to the tune of 93% of the total portfolio .the fund manager woukd continue to hold 7-10% of the portfolio in cash . 56
During the month the fund has exited out of the stocks like BPCL,Tata Chemiicals and Glaxo pharma.However the fund has entered into stocks wockhardt and HCL Technologies. The fund is recommended for investors willing to take above average risk.
Rm
(RmRf) X
(RpRf) Y
X2
XY
(X -Xba r) D
D2
LAST 1 YEAR LAST 3 YEARS LAST 5 YEARS SINCE INCEP TION TOTAL
Xbar
= X/N
= 47.98 / 4 = 11.99
Std.Deviation ( )
= (X-Xbar)2 / N = 103.42/4 57
= 5.86 Co-efficient = N ( XY) X Y N ( X2) ( X) 2 = 4(2115.6) (47.98)(143.31) 4(678.56) (47.98) 2 = 3.84 Sharpes Ratio = Rp-Rf / = 143.31/5.86 = 24.45 Treynors Ratio = Rm-Rf / = 143.31/3.84 = 37.32 HDFC CAPITAL BUILDER FUND(Fund Manager: Mr.Tushar Pradhan) HDFC Capital Builder is a focused mid cap fund which looks at a mix of value and growth investing. The fund manager feels that the recent rally in the market was driven by liquidity. The fund manager is of the view that the equity markets can give returns of around 15-20% over a time frame of 1-2yrs. The fund manager also believes that equity would be a preferred asset class as other avenues offer lower returns. The fund manager has reduced its exposure to cash at 9% of the total portfolio. The fund manager is bullish on the Transport,Capital Goods,Auto Ancilliaries sectors. The fund has a fairly diversified portfolio with the top 5 stocks accounting for only 21% of the total portfolio.
58
During the month the fund has added on to stocks like Punjab National Bank and Megasoft while it has increased its holdings in Cranes software. However, it has exited from TVS motor company from its portfolio. The fund is recommended to investors willing to take average risk.
HDFC CAPITAL BUILDER FUND PERFORMANCE: YEAR LAST 1 YEAR LAST 3 YEARS LAST 5 YEARS LAST 10 YEARS TOTAL Xbar = X/N = 19.82 / 4 = 4.95 Rp Rm Rf (RmRf) X (RpRf) Y X2 XY (X -Xbar) D D2
59
Std.Deviation ( )
co-efficient
Sharpes Ratio
Treynors Ratio
OBSERVATIONS Observations are made from the data analysis. The following observations are drawn from the analysis of schemes:
Std.Deviation( )
INVESTORS PROFILE
5.86
12.90
12.51
An investor normally prioritizes his investment needs before undertaking an investment. So different goals will be allocated to different proportions of the total disposable amount. Investments for specific goals normally find their way into the debt market as risk reduction is of prime importance, this is the area for the risk-averse investors and here, Mutual Funds are generally the best option. One can avail of the benefits of better returns with added benefits of anytime liquidity by investing in open-ended debt funds at lower risk, this risk of default by any company that one has chosen to invest in, can be minimized by investing in Mutual Funds as the fund managers analyse the companies financials more minutely than an individual can do as they have the expertise to do so. Moving up the risk spectrum, there are people who would like to take some risk and invest in equity funds/capital market. However, since their appetite for risk is also limited, they would rather have some exposure to debt as well. For these investors, balanced funds provide an easy route of investment, armed with expertise of investment techniques, they can invest in equity as well as good quality debt thereby reducing risks and providing the investor with better returns than he could otherwise manage. Since they can reshuffle their portfolio as per market conditions, they are likely to generate moderate returns even in pessimistic market conditions. Next comes the risk takers, risk takers by their nature, would not be averse to investing in high-risk avenues. Capital markets find their fancy more often than not, because they have historically generated better returns than any other avenue, provided, the money was judiciously invested. Though the risk associated is generally on the higher side of the spectrum, the return-potential compensates for the risk attached.
61
FINDINGS
1)
2)
which concentrates only on few A sectors may fund fund not get good
Equity funds are performed well with their limited diversification. But if the index
6)
Systematic Risk for the two schemes is below 1(Beta=1). Beta values for
62
7)
represents that the performance of Equity Diversified fund is best when compared to Equity index fund. 8) Alpha of the diversified funds is superior to index funds. In most of the ways actively managed funds are better in many ways, which volatility measures I, e, beta, Sharpes, Treynors and jensons
CHAPTER-V
Suggestions
The advantages of mutual funds should be educating to the public. Covering wide range of promotion can increase the working class people also to well know about the Mutual fund, so that they even come forward to invest. One of the ways to ascertain the right asset allocation is by looking at your life cycle. The basis of this theory lies in the simple maxim that younger people with secure jobs will normally opt for higher return and take higher risks compared to older retired people. One must remember that these are only indicative strategies and will probably have to be fine tuned to meet your individual needs. Arranging free seminars in different organizations can increase the awareness about the new Mutual fund schemes. Arranging stall in public places is good promotion for the organization. The about the Mutual funds and its working should be in market.
63
Tips to make the right investment with so many Mutual funds available, choosing the right one can be risky Here are some guidelines: Dont put your trust in only one Fund Company. It is like Putting all the eggs in one basket. This will help lesson the risk in the long term. Read the offer document carefully and check the quality of instruments in the portfolio. Be careful of high fee funds. It does not always mean good service. Once should avoid relying on any one investing theme. You should ensure that one sector does not overweigh your funds portfolio. Do not chase a short performance. Be careful of the bull market no one knows how long it will last. The same goes for the bear market. Usually, value funds tend to out pace growth funds and stay up longer. Use the internet. Most Mutual funds have their own websites where investors can access half-yearly results, NAVs and portfolios of all their funds. The websites of the Association of Mutual funds in India. The investor must select the right advisory body which is having sound knowledge about the product which they are offering. Conducting market surveys can help to know the market condition. Professionalized advisory is the most important feature to the investors. Professionalized research, analysis which will be helpful for reducing any kind of risk to overcome.
64
Collecting and monitoring the potential clients which will be the information about the investors and the risk. Tolerance of the individuals helps in targeting the market.
Conclusions
This report is an attempt to make analysis on Descriptive study of Mutual fund. How ever, what has been reported is only the tip of the iceberg in terms of data that are available. The introduction includes the introduction of that to the basic concept of mutual funds and that of the study. It includes company profile and the back ground of the company i.e., profile of ALCOVE TECHONOLOGY PVT LTD values and standards. It includes the details regarding the mutual funds, its characteristics, advantages, types, the history of mutual industry; the ratios to measure the risk of the portfolios were discussed. It includes, risk appetite of the investors dealing with different investment strategies was studied. i.e., how to select a portfolio and manage the finances with best asset allocation which gives better returns. its vision, mission, objectives, core
65
However, this study suggests that investor is interested to increase their earnings by investing in different areas; they are concern about safety of their principal. Now the trends have changed investors are opting mutual funds as the instrument for generating more returns. As a part of conclusion, it is important to note that the main feature for initiating the investor is that there is a proper channel of study of the performance of the funds by the experts views and suggestions which is handy for the layman to understand.
CHAPTER- VI BIBLIOGRAPHY
Collected from the following references
1) Indian Financial System
Markets, Institutions & Services Bharati V.Pathak,2/e,Pearson education 2) Indian Financial System M.Y.Khan,5/e, TATA McgraHill. 3) Financial Management I M Pandy, Vikas Publishers
66
OTHER WEBSITES
67