International Journal of Management (IJM), ISSN 0976 International Journal of Management (IJM) 6502(Print), ISSN 0976 6510(Online) Volume

me 1, Number 2, Aug - Sep (2010), IAEME ISSN 0976 6502(Print), ISSN 0976 6510(Online) Volume 1, Number 2, Aug - Sep (2010), pp. 44-52 IAEME IAEME, http://www.iaeme.com/ijm.html

IJM

A CRITICAL VIEW OF UNDISCLOSED FACTS OF DISCLOSED FACT SHEETS: A CASE STUDY OF BENCHMARKING OF MUTUAL FUNDS
Prof. Abdul Noor Basha Chairman, Board of Studies Commerce (PG) Acharya Nagarjuna Unviersity, Nagarjuna Nagar, Guntur. G.V.satya sekhar Assistant Professor, Dept of Finance GITAM Institute of Management GITAM University, Visakhapatnam- 530 045 Email: gudimetlavss@yahoo.com

ABSTRACT:
Financial statements should focus on the true and fair view of state of affairs of the corporate entity. It is the responsibility of audit committee to authenticate the true and fair view of financial position. But, there are several undisclosed facts which are to be unearthed by audit committee are ignored. This leads to financial turmoil and loss of investors confidence as well as investment made by them In this context, this paper is intended to examine the importance of disclosure practices of financial statements with reference to benchmarking of a select mutual funds fact sheets. This paper focuses on the following objectives: To examine the prevailing disclosure norms of financial statements. To study on improving efficiency methods in timely reporting of financial statements To educate the readers about financial statement disclosures in UTI mutual funds

Key words: financial statements, disclosure practices, misstatements, benchmarking

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online) Volume 1, Number 2, Aug - Sep (2010), IAEME

Nature of Paper: empirical data based analytical paper INTRODUCTION:

Disclosed Financial Statements (DFS) should be replica of financial position of any corporate entity. But the variability in the quality of reporting is common as companies try and take refuge under legal subtleties. DFS can also be called as financial reporting which is the communication of accounting information of an entity to user or group of users1. There is a broader view of corporate governance, which views the subject as the methods by which suppliers of finance control managers in order to ensure that their capital cannot be expropriated and that they earn a return on their investment (Shleifer and Vishny, 1997). Macey and OHara (2001) argue that a broader view of corporate governance should be adopted in the case of banking institutions, arguing that because of the peculiar contractual form of banking, corporate governance mechanisms for banks should encapsulate depositors as well as shareholders. Government-provided guarantees in the form of implicit and explicit deposit insurance might encourage economic agents to deposit their wealth with a bank, as a substantial part of the moral hazard cost is borne by the government. Nevertheless, even if the government provides deposit insurance, bank managers still have an incentive to opportunistically increase their risk taking, but now it is mainly at the governments expense.

1.1. BENCHMARK RETURNS

This will give you a standard by which to make the comparison. It basically indicates what the fund has earned as against what it should have earned. A fund's benchmark is an index that is chosen by a fund company to serve as a standard for its returns. The market watchdog, the Securities and Exchange Board of India, has made it mandatory for funds to declare a benchmark index. In effect, the fund is saying that the benchmark's returns are its target and a fund should be deemed to have done well if it

Ramesh Venkatram (2008), Good Governance can be as strong differentiator as good strategy, The Hindu-Business Line, April, 24, pp 9. 45

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online) Volume 1, Number 2, Aug - Sep (2010), IAEME

manages to beat the benchmark. Let's say the fund is a diversified equity fund that has benchmarked itself against the Sensex. So the returns of this fund will be compared vis-aviz the Sensex. Now if the markets are doing fabulously well and the Sensex keeps climbing upwards steadily, then anything less than fabulous returns from the fund would actually be a disappointment.

1.2. REVIEW OF LITERATURE:

Naser Abdelkarim et al (2009)2 carried out a study to investigate the perception of users regarding the availability, adequacy, and usefulness of information disclosed in the financial reports of companies listed on the Palestine Securities Exchange (PSE). Results of the study demonstrated that users perceive reported information as neither adequate nor relevant to investment decisions. In particular, reported information was insufficient, as listed companies did not comply with the minimum disclosure requirements of international standards. This unfavorable perception, along with poor credibility and bad timeliness of the disclosures, has prevented information from being impounded into stock prices. The study presented a number of recommendations that may be helpful in improving the efficiency of the PSE, which in turn will contribute to the Palestinian economy as a whole. Vrajlal Sapovadia3 critically examined the relevant Accounting Standards and such practices in India, to evaluate potency and fairness vis--vis Good Corporate Governance. As per OECD principles of Corporate Governance, Accounting Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosure s. The application of high quality standards is expected to significantly improve the ability of investors to monitor the company by providing increased reliability and comparability of reporting, and improved insight into

Naser Abdelkarim , Yasser. A. Shahin & Bayan M. Arqawi, Investor Perception of Information Disclosed in Financial Reports of Palestine Securities Exchange Listed Companies, Accounting & Taxation, Volume 1, Number 1, 2009.

Vrajlal Sapovadia (2008), Critical Analysis of Accounting Standards vis--vis Corporate Governance Practice in India, SSRN-ID-712461. 46

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online) Volume 1, Number 2, Aug - Sep (2010), IAEME

company performance. The quality of information substantially depends on the standards under which it is compiled and disclosed. Shiw Kumar Jiloka (2006)4 mentions that disclosure is regarded as a process through which a business enterprise communicates to third parties. Government and other regulating bodies like ICAI, SEBI propagate expanded disclosure in annual reports on the hand, but at the time the Government through section 210 of the companies to disclose the maximum possible information. It may be helpful to the Government in making disclosure laws, to the ICAI and SEBI in considering the areas of disclosure regarding which some standards or guidelines need to be issue. Dave (2000) conducted a study on accounting standards during the period 1990-91 to 1993-94. This study covers 50 companies of which 25 from public sector and 25 from private sector. The companies in both the sector complying with the accounting standards while preparing annual reports differently, but not up to the satisfactory level. Surendar and Manish Khanduri,5 explained that an absolute lack of disclosure norms- from declaring the Net Asset Value of US-64 to inter-fund transfers- characterizes UTIs functioning. Unit Scheme, 1964 (US-64), is the Unit Trust of Indias largest and best known mutual fund scheme. With this scheme there was a trouble of disclosure policy. UTI discloses at the end of every quarter where it has invested about only 70% of US-64s corpus.

1.3. MEASURES FOR GOOD CORPORATE GOVERNANCE

In developed economies, protection of depositors in a deregulated environment is typically provided by a system of prudential regulation, but in developing economies such protection is undermined by the lack of well-trained supervisors, inadequate disclosure requirements, the cost of raising capital and the presence of distributional cartels. In order to deal with these problems, it was suggested that developing economies need to adopt the following measures.

Shiw Kumar Jiloka (2006), Corporate Financial Disclosure, The Management Accountant, November, 2006, pp 867-871.

T. Surender & Manish Khanduri, US- 64: Pandora s Box opens- Business world, 6th August, 2001.

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online) Volume 1, Number 2, Aug - Sep (2010), IAEME

Firstly, Liberalizations policies need to be gradual, and should be dependent upon improvements in prudential regulation. Secondly, developing economies need to expend resources enhancing the quality of their financial reporting systems. Thirdly, given that capital plays such an important role in prudential regulatory systems, it may be necessary to improve investor protection laws, increase financial disclosure and impose fiduciary duties upon directors so that firms can raise the equity capital required for regulatory purposes. A further reason as to why this policy needs implemented is the growing recognition that the corporate governance has an important role to play in assisting supervisory institutions to perform their tasks, allowing supervisors to have a working relationship with bank management, rather than adversarial one. It was suggested that the corporate governance in developing economies is severely affected by political considerations. Firstly, given the trend towards privatization of government-owned firms in developing economies, there is a need for the managers of such firms to be granted autonomy and be gradually introduced to the corporate governance practices of the private sector prior to divestment. Secondly, where there has only been partial divestment and governments have not relinquished any control to other shareholders, it may prove very difficult to divest further ownership stakes unless corporate governance is strengthened. Finally, given that limited entry of foreign firm may lead to increased competition, which in turn encourages domestic banks to emulate the corporate governance practices of their foreign competitors.

1.4. RELEVANCE OF BENCHMARK IN MUTUAL FUNDS:

The idea behind investing in a specialized fund, be in diversified or sectoral fund, is to outperform the market benchmark. If he is not able to beat the benchmark, there is something wanting in investment skills of fund manager. For example if any investor want to invest in an index fund, where the costs are lower. Also, there is no risk of a great downslide. This is because an index fund invests only in stocks in proportion to their weightage in the index. It is a passive investment strategy. The returns would be in tandem with the movement of index, save for a small tracking error. Since these funds do not have to churn their portfolio heavily, the transaction costs are also lower. In addition,

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online) Volume 1, Number 2, Aug - Sep (2010), IAEME

investor do not have worry about the performance record of the fund manager, as investing in an index is not rocket science.

1.5. ANALYSIS OF SELECT FACT SHEETS OF MUTUAL FUNDS:

The following note is made by this organization is a caution to investors: IISL is not responsible for any errors or omissions or the results obtained from the use of such index and in no event shall IISL have any liability to any party for any damages of whatsoever nature (including loss of profit) resulted to such party due to purchase or sale or otherwise of such product benchmarked to such index. For instance, HDFC Equity Fund and Capital Builder Fund are benchmarked to S&P CNX 500 Index are not sponsored, endorsed, sold or promoted by India Index & Service Products Ltd (IISL). The following tables 1 to 3 gives a reflection of the performance of HDFC growth fund, equity fund and capital builder fund against its benchmark. Table 1 HDFC GROWTH FUND (As on 28th Feb, 2007) Details Since Inception (sept.11.2000) March31,2006 * Absolute Returns ** Compounded Annualized return Table 2 HDFC EQUITY FUND As on 28th Feb, 2007) Details NAV per unit Growth Fund % returns 24.31** 11.06* 20.87* 126.30 Bench MarkS &P CNX 500 % returns 10.01** 6.78* 16.88 98.14 NAV per unit 10.00 41.236 36.490 Growth Fund % returns 26.20** 9.24* 23.45* Bench Mark: ENSEX % returns 16.96** 14.70* 24.76*

Since Inception
(1ST JAN1995)

10.00

March31,2006 127.169 Last 1year (2007) 116.84 Last year(as at 2003) 22.790 * Absolute Returns ** Compounded Annualized return

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online) Volume 1, Number 2, Aug - Sep (2010), IAEME

Table 3 HDFC Capital Builder Fund

Details NAV per unit Growth Fund % returns 14.86** 1.81* 10.80* 121.91 Bench MarkS &P CNX 500 % returns 8.55* 6.78* 16.88* 98.14(due to share rise in stockprise)

Since Inception Feb 1st, 1994 March31,2006 Last 1year (2007) Last year(as at 2003)

10.00 60.169 55.290 0.740

* Absolute Returns ** Compounded Annualized return Table-4: JM Financial Mutual fund

Scheme JM Equity Fund JM Balanced Fund JM Basic Fund JM Auto Sector fund JM Health care Sector Fund JM Emerging Leaders Fund JM Hi fi Fund Bench Mark BSE SENSEX CRISIL Balanced Fund Index BSE Basic Industries Index BSE Auto Sector Index BSE Health Care Index BSE 200 Index S&P CNX Nifty Index

The above table gives information about JM Financial Mutual Fund. The fund manager selects BSE Basic Industries Index as a bench mark for JM Basic fund. BSE cautions the investors by the following note: All rights in the BSE Basic Industries Index vest in BSE. It shall not liable in any manner whatsoever (including in negligence) for any loss arising to any person whosever out of use of a reliance on this fund by any person. Table-5 Tata Mutual Fund Scheme Bench Mark Rate of return of the scheme since inception 13.37% 33.83% 22.26% 24.44% 27.13% 11.02% Bench mark return since inception 11.95% 14.62% 12.81% 16.71% 13.62% 9.92%

Tata Equity Opportunities Fund Tata Pure Equity Fund Tata Select Equity Fund Tata Life Sciences and Technology Fund Tata Tax Saving Fund Tata Growth Fund

SENSEX SENSEX SENSEX SENSEX SENSEX SENSEX

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online) Volume 1, Number 2, Aug - Sep (2010), IAEME

All the schemes mentioned above listed by Tata Mutual Fund selected Sensex as their bench mark as per their portfolio statement released on 30th April, 2007. However, the rate of return for these schemes with reference to benchmark is same for one year duration (15.19%), three year duration (34.87%) and five year duration (32.94%). It varies with respect to rate of return of the bench mark, since inception for each scheme. It shows that index of bench mark may be different for each scheme. In practice, the indices selected as bench mark should be varied according to nature of scheme.

1.6. CONCLUSION:
Benchmark Mutual Fund, which specializes in managing exchange traded funds (ETFs), has lined up a scheme that will try to generate returns through investment in securities represented by a host of sectoral indices. The indices - the offer document sent to SEBI mentions nine of them - are owned by India Index Services & Products Ltd, the joint venture formed by NSE and CRISIL to provide a variety of indices and indexrelated services for the capital market. These indices cover the following sectors:

Automobiles/four-wheeler, cement, electrical equipment, pharmaceutical, power, steel, telecom, services and information technology. Their names are S&P CNX

Pharmaceutical Index, S&P CNX Cement and Cement Product Index, S&P CNX Power Index and the like. Thus, investors should have awareness of benchmarking of mutual funds as they may not reveal real risk factors which are undisclosed in disclosed fact sheets.

REFERENCES:
Agarwal G.D (1992), Mutual Funds and Investors Interest, Chartered Secretary, Jan. Bhatt, Narayana M (1990)., Mutual Funds; Some Regulatory Issues, The Economic Times, January 7th. Dave S.A (1994), An Open Ended fund may be more prudent, The Economic Times, December 20th. Goyal Madan (1990), Off-shore country funds: The Indian Experience, State Bank of India Monthly Review, May.

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online) Volume 1, Number 2, Aug - Sep (2010), IAEME

Gupta, L.C (1993), Mutual Funds and Assets Preference, Society for Capital Market Research and Development, New Delhi.

Naser Abdelkarim, Yasser. A. Shahin & Bayan M. Arqawi (2009),

Investor

Perception of Information Disclosed in Financial Reports of Palestine Securities Exchange Listed Companies, Accounting & Taxation, Volume 1, Number 1, 2. Ramesh Venkatram (2008), Good Governance can be as strong differentiator as good strategy, The Hindu-Business Line, April, 24, pp 9. Shiw Kumar Jiloka (2006), Corporate Financial Disclosure, The Management Accountant, November, 2006, pp 867-871 T. Surender & Manish Khanduri (2001), US- 64: Pandoras Box OpensBusiness world, 6th August. Vrajlal Sapovadia (2008), Critical Analysis of Accounting Standards vis--vis Corporate Governance Practice in India, SSRN-ID-712461.

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