A Detailed Analysis of Mutual Funds, which are distributed by IL&FS Investsmart (HSBC Group)

Submitted in Partial Fulfillment MBA (finance) GGSIP University, New Delhi

Submitted to: Submitted by:

Acknowledgement An endeavor over a period can be successful only with the advice and support of well-wishers. I take this opportunity to express my gratitude and appreciation to all those who encouraged me to complete this project. I am deeply indebted to -------------------- for my successful completion of my project.

I express my profound and sincere thanks to -------------- who provided me with excellent guidance and constant inspiration throughout my project work.

I shall be failing in my duty if I dont acknowledge my debt to Mr. Joyobrata Dutta, Area Sales Manager of IL&FS Investsmart, New delhi for giving me an opportunity to take up the project work and providing all the facilities for the same.

. I also extend my hearty thanks to all other faculty members of GGSIP U, New Delhi for their external support and guidance. I acknowledge with profound gratitude and reverence the help and guidance of one and all in my endeavor for gainful project work I undertook at IL&FS Investsmart,

Place: New Delhi

DECLARATION

I, hereby declare that the project on A Detailed Analysis of Mutual Funds, which are distributed by IL&FS Investsmart(HSBC Group) is written by me under the guidance of -------------- The empirical conclusion and findings in the project are based on the data collected by me and the entire project work is not a reproduction of any other source.

Table of Contents

Sl.No. 1 2 3 4 5 6 7 8 9 10 12 13

Contents Executive Summary Overview of the Indian Broking Industry Overview of the Indian Mutual Fund Industry Introduction to the Project Company Profile A Study on Mutual Funds Important Concepts of Mutual Funds Methods & Concepts used for Analysis of 5 Mutual Fund Schemes Analysis & Findings of Five Mutual Fund Schemes Comparative Analysis of 5 Different Mutual Fund Schemes and their Ranking based on various Parameters. Analysis of the Reliance Growth Fund with a Master Index (Average of BSE 100, BSE 200 and BSE SENSEX). Conclusions and Recommendations Bibliography

Page No. 4-5 6-20 21-25 26-29 30-50 50-77 78-85 86-93 94-150 151-162 163-172 173-174 175

Executive Summary The project undertaken includes all the knowledge required to advice in Mutual Funds and evaluating the performance of the Mutual Funds. 1) The Project speaks about the Background of the Broking Industry, recent developments, regulations and the process of stock trading. It includes the

functioning of the Broking Firms. 2) Then it shows the history of Mutual Funds in India, the rise in the AUM in recent years. 3) The project will impart knowledge to the readers about the important concepts of Mutual Fund; its structure in India, Major fund constituents, the functioning of Mutual Funds etc. 4) Different performance evaluation techniques are mentioned in the project. 5) Allocation in regards to Asset Class, different sector (industry), and stock specific is studied for different Mutual Funds. 6) Analysis of 5 Mutual Funds is made and their performance is gauged for the last 5 years. 7) Risk-Return Analysis of the Mutual Fund is conducted using statistical techniques, generally used in portfolio management. 8) Various performance evaluation measures are used to rank the 5 Mutual Funds among themselves. The overall rankings of the Mutual Funds are as follows: 1st Reliance Growth Fund 2nd HDFC Top 200 3rd HSBC Equity Fund 4th Reliance Vision Fund 5th Birla Advantage Fund 9) Comparative analysis is made in regards to the Mutual Funds. 10) Allocation in regards to Asset Class, different sector (industry), and stock specific is studied for different Mutual Funds. 11) Then an hypothetical analysis is made, where a Master Index(average of BSE 100, BSE 200, BSE SENSEX) returns are compared with the best fund returns

(Reliance Growth Fund) and it is found that the performance of the fund enhances by considering Master Index rather than the conventional Benchmark Index(BSE 100).

Overview of the Indian Broking

Industry
Introduction Key Participants of Securities Market Segments of Securities market Primary Market & Secondary Market FII Inflows Major Developments In Securities Market Post 1990s Key Industry Regulations

Introduction Capital formation is an important ingredient for economic development of any

country. An efficient securities market provides the necessary channel for flow of resources from the providers of capital to the users of capital for economic development. Domestic savings and capital inflows (domestic and foreign) are channelised in the securities markets. The flow of resources in the securities market depends on the depth and efficiency of the markets, robust risk management system, attractiveness of securities and the ability of the users of capital to attract resources. In a post reform period in India, capital formation through securities market has become an important tool for achieving economic growth. The overall growth of the economy and economic activity are also important factors, which determine availability of resources. The following table outlines the growth of the economy and growth in savings. The increasing savings ratio presents an opportunity to divert the savings from traditional instruments to capital markets.

India has been the 2nd fastest growing economy in the world over the last 8 years (1995-2003). The average growth during the period has been about 6% whereas China grew at 8% during the same period. The growth in the Indian economy until now (FY04) remains one of the fastest in the world. India would require massive capital investment in various sectors to sustain its growth. Securities market provide route for raising capital by bringing providers and utilisers of capital.

Key participants in the Securities Market The securities market essentially has four types of participants viz.

1)Issuer of Securities 2)Investors 3)Financial Intermediaries; and 4)Regulators The Issuers and Investors are the consumers of services rendered by the intermediaries and the investors are consumers (they subscribe for / and trade in securities) of securities issued by the Issuer as well. Those who deal in securities need an assurance that it is safe to do so and this reassurance is provided by the laws framed in relation to the securities markets, which in turn are enforced by the regulator. The regulator exercises control over the market and market practices through rules, regulations and guidelines for market participants and intermediaries. Intermediaries play an important role in the securities market by providing a critical link between the various market participants. The efficiency of the market is often determined by the level of intermediation and efficacy of the regulatory framework. Segments of Securities Market The securities market comprises of two broad segments Primary markets Secondary markets Primary markets create a flow of new securities to the securities market. This is achieved through public offerings of debt or equity or a composite structure of debt and equity to the investors. Here the issuer of securities raises the funds to meet its fund requirements. Primary market offerings could either be in the form of public offerings or private placements. The issuers here could include corporates, Government, municipal corporations and in some cases existing shareholders and institutional investors offering their securities for sale.

The product offerings by intermediaries in the primary markets include management of IPOs of issuers, mobilization of resources from retail and institutional investors, private placement of issues, debt syndications etc. Intermediaries in the primary market include merchant bankers, registrars and brokers.

Secondary markets provide a medium of exchange and enable investors to trade in the securities. An efficient securities market distinguishes financial investments from various forms of other illiquid investments. Stock Exchanges provide the platform and the mechanism for effecting transactions between different market participants. Secondary market comprises of trading in equities, bonds and derivatives. The depth of the market is determined by number of factors such as liquidity of the instruments traded, number of market participants, types of instruments traded, settlement practices etc. There are 23 exchanges in the country, which offer screen based trading system. The trading system is connected using the VSAT technology from over 357 cities. There were 9,368 trading members registered with SEBI as at end March 2011 The trading volumes on exchanges have been witnessing phenomenal growth over the past decade. The trading volume, which peaked at Rs. 28,809,900 million in 2000-01, fell substantially to Rs. 9,689,093 million in 2002-03. However, the year 2003-04 saw a turnaround in the total trading volumes on the exchanges. It registered a volume of Rs. 16,204,977 million. The turnover ratio, which reflects the volume of trading in relation to the size of the market, has been increased after the advent of screen based trading system by the National Stock Exchange (NSE). NSE accounted for 85% of total turnover (volumes of all segments) in 2003-04 Market Participants

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The Indian securities market is characterised by different players in the various product segments. The IPO market in India consists of merchant bankers, which help issuers in bringing companies to the market. In India this product is offered by domestic as well as foreign players. Foreign players have typically helped corporates access foreign capital. The issues are distributed to the retail investors through a vast network of brokers across the length and breadth of the country. These brokers act as a distribution link between the ultimate investor and the issuers. Another set of participants in the primary markets are the registrar and transfer agents who manage the entire process of applications, refunds, allotments etc in an issue and the maintenance of records of transfer of shares. The secondary market is also characterised by brokers who are members of the stock exchanges. This space is also represented by domestic as well as foreign brokers. The last few years have seen a consolidation in the industry since capital requirements and technology are becoming key differentiators. The following table outlines the market share of top brokers over the years. As can be seen, the larger brokers have increased their market share. For e.g. market share of top 100 brokers has progressively increased from 47% in FY99 to 65% in March 2011.

Foreign Institutional Investors (FII) inflows: (source : SEBI website) FIIs play crucial role in determination of market sentiments and price trends. FII

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activity has shown considerable interest in Indian investment story and is viewed favourably by them. The FII registration with SEBI has increased from 502 in 200203 to 657 as on February, 2011. FII investments have gone up considerably in recent years.

MAJOR DEVELOPMENTS IN SECURITIES MARKET POST 1990s The reforms in the capital markets during the 1990s in terms of market microstructure and transactions have ensured that the Indian capital market in particular is now comparable to the capital markets in most developed markets. The early 1990s saw a greater willingness of the saver to place funds in capital market instruments, on the supply side as well as an enthusiasm of corporate entities to take recourse to capital market instruments on the demand side. The size of the capital market is now comparable to other developing countries but there is still a long way to go. It is important to note that developed economies with bank-based systems, such as Germany and Japan, also have capital markets with substantial market capitalisation in relation to GDP.

Some of the major reforms/changes in securities market since 1990 include 1) SEBI Act, 1992 replacing Capital Issues (Control) Act, 1947: As a part of liberalisation process, Capital Issues (Control) Act, 1947 was repealed in

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1992 paving a way for (SEBI Act, 1992) market-determined allocation of resources. Under the new Act, issuers complying with eligibility criteria were allowed freedom to issue securities at market-determined rates. SEBI exercises control over the market through issuance of guidelines and rules for various capital market activities and through regulations for intermediaries and stock exchanges. 2) Screen Based Trading: The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide on-line fully automated screen based trading system (NEAT). The Stock Exchange, Mumbai has also introduced nation-wide screen based trading system (BOLT). Introduction of these trading systems is one of the key developments, which has transformed Indian capital markets in different league. 3) Trading Cycle: The trades were accumulated over a trading cycle and at the end of the cycle, these were clubbed together, and positions were netted out and payment of cash and delivery of securities settled the balance. This trading cycle varied from 14 days for specified securities to 30 days for others and settlement took another fortnight. Often this cycle was not adhered to. There were several occasions of defaults and risks in settlement. In order to reduce large open positions, the trading cycle was reduced over a period of time to a week. The exchanges, however, continued to have different weekly trading cycles, which enabled shifting of positions from one exchange to another. Rolling settlement on T+5 basis was introduced in respect of specified scrips reducing the trading cycle to one day. It was made mandatory for all exchanges to follow a uniform weekly trading cycle in respect of scrips not under

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rolling settlement. All scrips moved to rolling settlement from December 2001. The settlement period has been reduced progressively from T+5 to T+3 days. Currently T+2 day settlement cycle is being followed. 5) Derivatives Trading: To assist market participants to manage risks better through hedging, speculation and arbitrage, SCRA was amended in 1995 to lift the three decade old ban on options in securities. The SCRA was amended further in December 1999 to expand the definition of securities to include derivatives so that the whole regulatory framework governing trading of securities could apply to trading of derivatives also. In the meanwhile exchanges developed adequate infrastructure and the information systems required to implement trading discipline in derivative instruments. Derivative trading took off in June 2000 on NSE and BSE only. The market presently offers index futures and index options on three indices and stock options and stock futures on individual stocks (presently 51 stocks on NSE) and futures in interest rate products like notional 91-day T-bills and notional 10-year bonds. 6) Demutualisation (Segregation of ownership from management): Historically, brokers owned, controlled and managed stock exchanges. Government proposed in March 2001 to corporatise the stock exchanges by which ownership, management and trading membership would be segregated from one another. Few exchanges have already initiated demutualisation process. Government has offered a variety of tax incentives to facilitate corporatisation and demutualisation of stock exchanges. NSE adopted a demutualised governance structure where ownership, management and trading are with three different sets of people. This completely eliminates any conflict of interest and helped it to aggressively pursue policies. 7) Investors Protection:

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The SEBI Act established SEBI with the primary objective of protecting the interests of investors in securities and empowers it to achieve this objective. SEBI specifies that the critical data should be disclosed in the specified formats regarding all the concerned market participants. The Central Government has established a fund called Investor Education and Protection Fund (IEPF) in October 2001 for the promotion of awareness amongst investors and protection of the interest of investors. Department of Economic Affairs (DEA), Department of Company Affairs (DCA), the SEBI and the stock exchanges have set up investor grievance cells for redressal of investor grievance. The exchanges maintain investor protection funds to take care of investor claims. In January 2003, SEBI launched a nation-wide Securities Market Awareness Campaign that aims at educating investors about the risks associated with the market as well as the rights and obligations of investors. 8) Depositories Act: Settlement system on Indian stock exchanges gave rise to settlement risk due to the time that elapsed before trades were settled. Trades were settled by physical movement of paper. The process of physically moving the securities among different parties involved, took time with the risk of delay somewhere along the chain. Significant proportion of transactions ended up as bad delivery due to faulty compliance of paperwork. This added to costs, and delays in settlement, restricted liquidity and made investor grievance redressal time consuming and at times intractable. To obviate these problems, the Depositories Act, 1996 was passed. At the end of March 2011, number of companies connected to NSDL and CDSL were 5,212 and 4,720 respectively. The number of demat securities increased to 97.7 billion at the end of March 2011 from 76.9 billion as of end March 2003. As on the same date, the value of dematerialsied securities was Rs. 10,701 billion and the

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number of investor accounts was 5,832,552. All actively traded scrips are held, traded and settled in demat form. Demat settlement accounts accounted for over 99% of turnover settled by delivery. This has almost eliminated the bad deliveries and associated problems. To prevent physical certificates from coming into circulation, it has been made mandatory for all new IPOs to be compulsorily traded in dematerialised form. The admission to a depository for dematerialisation of securities has been made a pre-requisite for making a public or rights issue or an offer for sale. 9) Globalization: Indian securities market is getting increasingly integrated with the rest of the world. Indian companies have been permitted to raise resources from abroad through issue of ADRs, GDRs, FCCBs and ECBs. ADRs/GDRs have two-way fungibility. The twoway fungibility for ADRs/GDRs has been permitted by RBI, which meant that the investors (foreign institutional or domestic) in any company that has issued ADRs/ GDRs can freely convert the ADRs/GDRs into underlying domestic shares. They could also reconvert the domestic shares into ADRs/GDRs, depending on the direction of price change in the stock. This is expected to bring about an improvement in the liquidity in ADR/GDR market and elimination of arbitrage opportunity. This will better align ADR/GDR prices and domestic share prices of companies that have floated ADRs/GDRs.

KEY INDUSTRY REGULATION The Companys key activities are broking, merchant banking, underwriting and portfolio management services. The Companys primary business is in relation to the securities markets.

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The Securities and Exchange Board of India Act, 1992 The main legislation governing the activities in relation to the securities markets is the Securities and Exchange Board of India Act, 1992 (the SEBI Act) and the rules, regulations and notifications framed thereunder. The SEBI Act was enacted to provide for the establishment of SEBI whose function is to protect the interests of investors and to promote the development of, and to regulate the securities market, and for matters connected therewith and incidental thereto. The SEBI Act regulates functioning of SEBI and enumerates its powers. The SEBI Act also provides for the registration and regulation of the function of various market intermediaries like the stock- brokers, merchant bankers, portfolio managers, etc. Pursuant to the SEBI Act, SEBI has formulated various rules and regulations to govern the functions and working of these intermediaries. SEBI also issues various circulars, notifications and guidelines from time to time in accordance with the powers vested with it under the SEBI Act. In addition to the SEBI Act, the key activities of the Company are also governed by the following rules, regulations, notifications and circulars: Broking The stock broking activities of the Company are regulated by the SEBI (StockBrokers and Sub-Brokers) Rules, 1992 and the SEBI (Stock-Brokers and SubBrokers) Regulations, 1992. These rules and regulations govern the registration and functioning of stock- brokers, sub-brokers and the trading members of derivatives exchanges or the derivatives segment of a stock exchange. The regulations prescribe the criteria, standards and the procedure for registration of stock-brokers, sub-brokers and persons seeking to be trading members of a derivatives exchange or the derivatives segment of a stock exchange. The intermediaries are required to

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abide by a code of conduct prescribed by these regulations. The penalties for failure to comply with the regulations are also laid down. SEBI has the authority to inspect the books of accounts of the intermediaries and take such appropriate action as it deems fit after giving an opportunity for hearing. The Company also provides margin trading facilities to its clients. The Company also is a trading member on the derivatives segments of the NSE and the BSE. Margin Trading and derivatives trading are regulated by SEBI by various circulars which have been issued from time to time.

Merchant Banking The Company is registered as a Category I Merchant banker with SEBI. The merchant banking activities of the Company are regulated by the (Merchant Bankers) Rules, 1992 and the SEBI (Merchant Bankers) Regulations, 1992. For carrying on the activities as a merchant banker, a person has to be registered in any one of the categories prescribed under the regulations. The registration in any one particular category determines the actions and functions that the merchant banker can carry on. One of the criteria for eligibility as a merchant banker is a capital adequacy requirement based on the category of registration. There are also restrictions on the appointment of lead managers and responsibilities prescribed in the regulations. The merchant bankers are also required to abide by a code of conduct prescribed by these regulations. The penalties for failure to comply with the regulations are laid down in the regulations. SEBI has the authority to inspect the books of accounts and take such action as it deems fit after giving an opportunity for hearing. Underwriting Being registered as an underwriter, the underwriting activities of the Company are regulated by the SEBI (Underwriters) Rules, 1993 and the SEBI (Underwriters)

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Regulations, 1993 (the Underwriters Regulations). The Underwriting Regulations regulate the registration and functioning of underwriters. It prescribes the criteria, standards and the procedure for registration as underwriters, including a capital adequacy requirement. Further, the duties and responsibilities of the underwriters are prescribed in the Underwriting Regulations. The underwriter is required to enter into an agreement with the client providing details including inter alia the duration, the amount underwritten, commission or brokerage payable etc. A code of conduct to be followed by the underwriters is also prescribed. It also lays down liabilities and the penalties for failure to comply with the regulations. The SEBI has the authority to inspect the books of accounts of the intermediaries and take such action as it deems fit after giving an opportunity for hearing. Portfolio Management The portfolio management activities of the Company are regulated by the SEBI (Portfolio Managers) Rules, 1992 and SEBI (Portfolio Managers) Regulations, 1993 (the Portfolio Manager Regulations). The Portfolio Manager Regulations regulates the registration and functioning of portfolio managers. It prescribes the criteria, standards and the procedure for registration as portfolio managers. In addition to qualifications, experience of personnel etc the portfolio manager regulations also mandates a stipulated capital adequacy requirement of Rs. 50 lakhs. Further, the duties and responsibilities of the portfolio manager are prescribed, along with the code of conduct and the measures to be adopted during inter-se dealings with clients. It also lays down liabilities and the penalties for failure to comply with the regulations. The SEBI has the authority to inspect the books of accounts of the intermediaries and take appropriate action if it deems fit after giving an opportunity for hearing.

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Other Regulations The Company is governed by the provisions of the SEBI (Prohibition of Insider Trading) Regulations, 1992. The regulations prohibit the dealing by any person or company in securities of any other company when in possession of unpublished price sensitive information of such company. SEBI is empowered to inspect, investigate the books of accounts or other documents of an insider and pass appropriate directions, where it deems fit. The regulations also prescribe a model code of conduct to be followed by all companies and organisations associated with the securities markets. Further, the regulations mandate a disclosure, of the number of shares or voting rights held by any person who holds in excess of 5% of the shares or voting rights of a listed company. Any change in the aforementioned shareholding / voting rights must be intimated to the SEBI. In addition to the aforementioned regulations, the criteria for determination of whether an entity can be registered under any of the above regulations are governed by the SEBI (Criteria for Fit and Proper Person) Regulations, 2011. The Company is also required, as an intermediary, to be registered under the SEBI (Central Database of Market Participants) Regulations, 2003. In addition, the Company is also regulated by the rules and regulations framed by the Association of Mutual Funds in India (AMFI). Stock Exchange Rules, Regulations and Bye-laws Further, the Company is also regulated by the rules, regulation and by-laws of the stock exchanges where it is registered as a trading member. Hence it is also governed by the rules, regulations and by-laws of the NSE, the BSE and the Delhi Stock Exchange (DSE), the stock exchanges on which it is a trading member.

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Overview of the Indian Mutual Fund Industry

History of Mutual Fund Industry 1. First Phase 1964-87 2. Second Phase 1987-1993 (Entry of Public Sector Funds) 3. Third Phase 1993-2003 (Entry of Private Sector Funds) 4. Fourth Phase since February 2003 5. Growth of assets over the years 6. AMFI

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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 of India. 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 had Rs.6,700 crores of assets under management. Second Phase 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 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.

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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

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In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund, 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. The graph indicates the growth of assets over the years.

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QuickTime a nd a de co mpre ss o r a re ne e de d to se e this picture .

Note: 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.

AMFI (Association of Mutual Fund in India) AMFI (Association of Mutual Funds in India) is the industry association for the mutual fund industry in India which was incorporated in the year 1995. The Principal objective of AMFI are to: 1) Promote the interests of the mutual funds and unit holders and interact with regulators- SEBI/RBI/Govt./Regulators.

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2) To set and maintain ethical, commercial and professional standards in the industry and to recommend and promote best business practices and code of conduct to be followed by members and others engaged in the activities of mutual fund and asset management. 3) To increase public awareness and understanding of the concept and working of mutual funds in the country, to undertake investor awareness programmes and to disseminate information on the mutual fund industry. 4) To develop a cadre of well trained distributors and to implement a programme of training and certification for all intermediaries and others engaged in the industry.

Introduction to the Project

Objectives of the Project Scope of the Project Need and Managerial Usefulness of the Project

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Objectives of the Project 1) To impart knowledge about Mutual Funds, its structure, functioning and constituents and why it is beneficial to invest in Mutual Funds. 2) To give a brief description of 5 mutual Fund schemes distributed by IL&FS Investsmart (HSBC) Group. 3) To find out the asset wise allocations of the 5 Mutual Fund Schemes and the rationale behind it. 4) To find out the major sectors (in equity market) where the mutual Funds have invested their AUM.

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5) To find out the major stocks where the Mutual Funds have invested their corpus. 6) To determine the performance of the schemes finding out the absolute returns from 2011-09 and by comparing it year wise and in each year with its benchmark index. 7) Again, to depict the performance of the schemes by comparing the Compounded Annualized Returns for the last 1year, last 3years, and last 5 years with its respective Benchmark Index. 8) To evaluate the performance of each Mutual Fund Scheme by using the RiskReturn Relationship concepts of the schemes. Further detail evaluation is accomplished by usage of certain statistical Indexes. 9) A Comparative analysis is done to rank among the 5 mutual funds in accordance to the value of the statistical Indexes. 10) To take up the best performing mutual fund and to assess its performance with respect to a Master Index (average of BSE 100, BSE200 and BSE SENSEX). Scope of the Project The scope of the analysis is very specific, as it is an analysis of 5 Mutual Funds, their performance evaluation and ranking of the schemes in accordance to its past performance. It uses statistical measures, compounded annualized returns, Absolute returns for the last 5 years. It compares the schemes with their respective designated Benchmark Indexes. Further, I have taken a hypothetical case by computing a Master Index and comparing it with the best performing scheme to further justify the performance evaluation. The scope also expands when I included the various aspects of Mutual

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Funds structure, its functioning a constituents in India. I have also included the asset wise, sector wise and stock wise allocation in each scheme. The project also talks about some very essential concepts in Mutual Fund Industry. It enlightens about the various types of Mutual Funds in which investments can be made successfully. The project also includes the history of Mutual Fund Industry and how its AUM has increase substantially. It also talks about the Indian Broking Industry as a whole.

Need and Managerial Usefulness of the Project Now days all the companies are sales driven in nature, IL&FS Investsmart (HSBC Group) belongs to the same category. My project recommendations and analysis is to support the Sales Managers of IL&FS Investsmart. Primarily it is a broking firm but it also deals in Mutual Funds. This Project is to equip the Area Sales Managers and Relationship Managers with the knowledge on Mutual Funds as a whole. It also ranks 5 mutual Funds through extensive analysis, so that a client in accordance to its time period of investment, amount of investment, Risk appetite 30

and Return expectations can be recommended a Mutual Fund Scheme by the managers or advisors. This will help to boost up the sales of the company, resulting in superior profits to the company.

Apart from this the managers can have an idea to evaluate a funds performance and by themselves make the analysis, because the process of analysis is documented in an organized manner in the project. Hence, the managers dealing in Mutual Funds are not required to depend on anyone.

The hypothetical study made by me may induce the fund managers to adopt a Master Index as their Benchmark Index rather than using the conventional stock indices for equity oriented schemes.

Company Profile
Business Overview Background Target Market Retail Business Companys Offerings

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Investment / Merchant Banking (MB) Business Model Business Strategy Key Officials of IL&FS Investsmart IL&FS Investsmart Details in the Stock Markets Company History: Incorporation Major Events in the History of the Company Investsmart acquired by HSBC (2008)

1. IL&FS Investsmart Limited (Investsmart) 2. HSBC Holdings plc

BUSINESS OVERVIEW The Company is one of the leading financial services companies in India primarily engaged in intermediation of financial products and financial advisory services for retail, institutional investors and corporates. The Company was set up by IL&FS, one of Indias premier non-banking financial services company on September 01, 1997. IMBSL prior to its merger with the Company, was engaged in merchant banking activities. DIL was jointly promoted by IL&FS and the National Stock Exchange of India Limited to set up an electronic platform for placement of debt securities. IMBSL and DIL merged with the Company with effect from January 01, 2002. 32

BACKGROUND The financial markets in India had been largely unregulated in the past and accordingly the distribution of financial products was also unregulated. The range of financial products was limited and largely related to fixed income products. Awareness among people was limited and a large majority of the population let their money lie idle in savings bank accounts or invested in bank deposits. Equity investments were driven by sentiment and speculation rather than by fundamentals. THE OPPORTUNITY Post 1990, with the advent of liberalization and opening up of the financial sector, the changing economic scenario gave rise to a number of instruments, investors and tightening of regulations. Deregulation of the interest rate regime, entry of private sector mutual funds, opening up of the insurance sector, reforms in capital markets, advent of derivatives represented a sea change in the investment arena. On the other hand, the growth in the service sector gave rise to a growing class of working professionals with reasonable disposable incomes. Indian professionals amassed reasonable wealth in the form of high salary levels and stock options. Changing work and lifestyles helped in accelerating the growth of the burgeoning upper middle class (commonly referred to as the mass affluent). CONCEPTION These investors were looking for trusted advisors who possessed a thorough knowledge of the capital market and the various instruments and were easily accessible, reliable, trustworthy and financially sound, who maintained high standards of service and offered a complete range of services advice, execution and monitoring based on their risk profile. Given the above scenario and an

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absence of a reliable distribution house backed by institutional shareholders a need was created for having a pan India entity that offered quality advice and full range of financial products through effective use of technology, research and service. This presented an opportunity to set up a financial services distribution entity and gave birth to the idea of setting up the Company. Business approach The Company embarked upon setting up the distribution house on a model to address the problems faced and to meet requirements of investors. The Company being promoted by institutional shareholders had the inherent advantage of credibility, a factor lacking in many other intermediaries. Credibility in advisory services is very critical to be successful in the long run. It was considered that apart from high quality of service, the business approach should address two key requirements knowledge of products or services being offered. The environment has been dynamic and it was essential to understand the implications of each of the products and to whom it is suited; and reaching the customer and giving him what he needs rather than what the Company has to offer. Thus, the emphasis was on providing a full bouquet of products and services without any bias and to maintain vendor neutrality The focus was to target retail and institutional customers by providing quality services backed by strong knowledge and research capabilities. Target market The products/services covered provide a wide range of financial products catering to different segments. In the retail segment, the focus is to cater to middle and upper segments of clients (commonly referred to as the mass affluent) by advising them and offering a complete range of products to cover life cycle requirements. In the institutional segment, the aim is to cover banks, corporates and institutions that

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are active in the business segments that the Company targets leveraging existing relationships of the IL&FS Group.

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Retail Business Why retail Indians by and large are debt-averse and have a tendency to save. Gross Domestic Savings in India are at a respectable level and stands at 24% of GDP. There is thus a large corpus in personal retail savings, which is a potential target for retail offerings. The retail segment is set to grow for a number of reasons: Increased returns: Significant portion of these savings comprising financial assets is parked in bank fixed deposits, postal schemes, etc. which would now require an asset reallocation as these instruments no longer yield attractive returns Regulatory reforms in financial markets: Reforms in the financial sector have

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opened up new avenues for investments. Over the years, regulations have become more investor friendly which have boosted confidence of the retail investors to take active participation Diversified asset instruments: Investors generally lack a perspective on planning for the future and the need to allocate their savings and earnings in the right proportion to address their current and future needs. With a host of investment options and instruments, the role of investment advisors will gain crucial importance Changing demographic profile: Changing demographic profile of investors and their perception and attitude towards investments has resulted in a shift in investment patterns from traditional investment instruments (gold, land, fixed deposits) towards capital market products (IPOs, Mutual Funds, Equities) Likely shift to equity: Currently less than 2% of the population has ever invested in the equity markets. With a robust capital market, remaining investors in the population class will look for a shift to equity related instruments Reducing real interest rates: Over the years, investors parked their surplus investments in high yielding debt instruments. With the steep reduction in interest rates leading to a reduction in the yields on fixed deposits and bank deposits, investors would have to look at alternate options which provide greater returns In a country like India, considering the population and demographic profile, the retail segment is sizeable and offers a great potential for offering intermediation services. Retail normally provides higher intermediation margins as compared to other segments and once critical mass is achieved, offers a stable stream of revenues. What the Company offers Retail is the core activity of the Company and the offerings seek to cover all financial planning requirements at the retail level which include providing personalised

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investment management services including planning, advisory, execution and monitoring of the full range of investment services. Retail division essentially services customers of the Company by offering: (a) Investment advisory services : Portfolio advisory and management services These services comprise of : a) Execution and management of investment portfolios of customers who prefer to delegate their investment to specialists b) Advisory support on investment portfolios of customers (b)Brokerage services Equities & Derivatives Broking services are provided in primary and secondary equity capital market. These services are offered to customers who are largely self directed, independent and actively participate in the capital market and are looking for access to trading tools, stock research and trade support; Distribution of financial products These services are offered to customers who want limited research inputs and advice, but an array of investment choices to evaluate backed by quality service to help them manage their own portfolios. The Company services its customer base through its network of 153 outlets through 30 branches and 123 business associates in 62 cities and its informative website www.investsmartindia.com. The customer base is serviced through a team of relationship managers, customer service executives, advisory managers and research analysts. In addition to the existing network, the Company has also set up corporate work sites (advisory desks) to cater to the employees of these corporates for their investment needs. (1) Investment advisory services:

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Managing investments is a time consuming exercise. While executing a transaction takes 10% of the overall time dedicated to investments, the other 90% is taken up in planning, sourcing and monitoring. It is therefore necessary to assist investors in the overall process rather than peddle investments to them. The Company offers a suite of advisory products aimed at developing a partnership approach with customers who prefer enhanced relationships that require understanding the unique financial requirements of the customers and offer investment solutions through value added services. Advisory services are broadly classified as discretionary advisory services or non-discretionary advisory services. (a) Discretionary Services: Investors who prefer to delegate their investments to specialists avail of discretionary services. The Company is registered with SEBI to provide Portfolio Management Services (PMS). The primary focus of IIL-PMS is to provide individualised portfolio management services for clients in a variety of asset classes to fit the investors specific investment parameters. At present, the Company is serving 525 clients under PMS.

i. Equities: These services are offered through IIL-PMS, a discretionary portfolio management service. The IIL-PMS is targeted essentially towards the mass affluent having an investible surplus of Rs 1 million and above and invests the monies on behalf of clients in equities and derivatives ii. Mutual funds: These services are offered through i-Preserve, a discretionary portfolio management service designed to manage client portfolios by investing in a mix of various mutual fund schemes (encompassing both Debt as well as Equity) debt instruments and bank deposits with an objective to meet the clients pre-defined financial objectives and goals

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(b) Non-discretionary services: Investors who value advise but prefer to take their own investment decisions avail of these services. Under these services, the Company offers Advisory services to clients to address complete portfolio requirements of customers who are desirous of using their discretion in making investment decisions but with active assistance of the Company. These services are offered to varied customers depending on the age group and status of their career. Over the years, the Company has offered investment advisory services to over 1394 customers with portfolio values aggregating to Rs 2160 crores. The basic approach followed by the Company in providing these services includes profiling of the customer, current income levels, current and future financial requirements, return expectations and the risk appetite. Based on this study, a suitable investment plan is worked out for the investor, which includes a review of the existing portfolio and suggesting suitable changes to the same. (2) Brokerage services: (a) Equity and Derivative Trading : The Company is a member of BSE and NSE and offers secondary market broking services to its retail customers. The Company has over 54,790 registered customers for the broking services. The Company offers equity and derivative broking services through dedicated dealers and relationship managers who provide personalized phone assisted trade and execution services through the network of branches and business associates. Brokerage services are provided on an advisory model where active traders, retail investors and high networth investors are given advisory inputs by the team of dealers and relationship managers located across the country based on technical, fundamental and market research being carried out by the central research team The retail customer acquisition has seen accelerated growth

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owing to widespread branch and business associate network of the Company. (b)Distribution of financial products: Utilising the strength of its network and customer base, the Company also distributes financial products including fixed income products such as bonds, corporate debentures, corporate fixed deposits, mutual funds, Initial Public Offers (IPOs), home loans and insurance. The Company is one of the established mutual fund distributors in the country enjoying a preferred distributor status with most Mutual Funds. The aggregate mobilization of funds by the Company in mutual funds was over Rs 14,164 crores for the period April 1, 2011 to March 31,2011. The Company maintains a fund neutral status and provides research-based advice to its customers as part of its distribution services.

Investment / Merchant Banking (MB) The Companys Merchant Banking division caters to providing equity capital market and other advisory solutions to their corporate clients. This division of the Company, which was earlier, a separate company called IL&FS Merchant Banking Services Ltd. was taken over by the Company and merged with the Company. The Company is registered with SEBI as a Category I Merchant Bank and Underwriter. The Company product portfolio comprises entire gamut of Investment banking services which includes corporate advisory services and resources raising through either the capital markets or private placement / syndication of equity, mergers and acquisition transactions. This includes management of IPOs, rights issues, buyback of equity, open offers, and private placements of equity The business is primarily driven by the strength of the corporate relationships of the Company and its parent, which are

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effectively leveraged for origination of new assignments. The division is supported by the retail and institutional sales & distribution network of the Company. The retail distribution network is used in distribution of new issues at the retail level and the institutional equities group helps in the private placement and placement of new issues with the institutions. The division has existing relationships with private equity investors across the globe for execution of such transactions The team advises clients on structuring the transaction and adopting the appropriate route to resource raising based on the growth needs of the client and the state of the markets.

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BUSINESS MODEL: Retail Customers: The Company believes in servicing customers through a comprehensive producrange & superior service quality. As can be seen from the model above, typically a new customer acquisition could happen through a client using any of the transaction or

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distribution product or service. The customer is serviced by Relationship Managers either at branch or business associate outlet. Transaction and distribution businesses are highly competitive in nature with relatively low margins. Further such businesses also to some extent are dependent on the performance of capital markets. The Company therefore believes that encouraging these customers to use advisory oriented businesses would improve margins, build sustainable revenue streams and ensure strong customer loyalty

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Servicing of clients and value add is key for progression of transaction & distribution customers to higher ladders, which typically generate more margins and are more stable. Given the widespread distribution of branches for servicing, effective control and risk management systems are important while adding new customers and executing business. The Company uses its business associates to effectively service the retail customers and is progressively using the branch network to acquire and service the mass affluent/HNI investors. Institutional Customers: Institutional customers include banks, financial institutions, mutual funds, provident funds and FIIs etc. Product knowledge and ability to service is key. Brokerage business from institutions is driven by established broking relationships and value of

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brokerage business derived from them. Institutional customers carefully evaluate brokerage houses on number of parameters such as research capability, service quality, proactiveness, quality client calls, institutional back up, networth etc before choosing to establish relationships. Such relationships are often called as empanelment with an institution. After such relationship is established, the trading desk of the institution and execution office of the Company use dedicated lines of communication to execute broking business, adequately supported by back office of the brokerage house for after deal servicing. However, equally important aspect is using these relationships to get larger share of business from them, which is driven by the depth of research and order execution capability of the brokerage house. Other forms of relationships with institutional customers would include acting as distributors for the products of such institutions. For e.g. IIL acts as a distributor for mutual fund schemes for all leading mutual funds in India.. The Company is an active player in loan syndication market in which banks and financial institutions are key participants. Corporate Customers: The Company offers merchant banking and loan syndication services to corporates. Merchant banking deals such as managing IPOs, and rights offerings also require skills in marketing & distribution of IPOs to institutional investors & HNIs and retail investors. The Company uses its relationships with institutions and HNIs, for marketing IPOs lead managed by the Company and others where it acts as a broker or a syndicate member, and also utilizes its retail distribution network for mobilising retail subscriptions. The Company also effectively utilizes skills and domain knowledge developed by IL&FS in project finance and developing innovative financial solutions. The Company has also developed relationships with all the

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leading participants in the loan syndication market i.e. banks & FIs. BUSINESS STRATEGY Retail business is at the core of the business strategy and has strong linkages with all the other businesses. The Company believes in leveraging its retail presence to move up the value chain and grow into a full service one stop financial solutions provider. The business model developed by the Company addresses the focus areas identified by the Company. 1) Multi product offering across asset class driven by research 2)Three tier service approach : planning & advisory, execution and monitoring 3)Customer centric approach and have customers to move up the value chain 4)Derisking the Business Model having annuity income products and debt business 5)Reach out to diverse investor segments through a combination of own branches and franchise partners 6) Effectively use technology to segment customers 7Extend presence in international markets 8)Leverage relationships, expertise and products of strategic investor Insurance distribution : The Company was offering insurance distribution through its wholly owned subsidiaries IL&FS Investsmart Insurance and Risk Management Services Ltd and Investsmart Insurance Agency Private Ltd in the life and non-life segments. These companies were corporate agents for Life Insurance Corporation of India (LIC) and HDFC Standard Life for the life segment and Iffco Tokkio and Prudential ICICI Insurance for the non-life segment respectively These companies have surrendered the corporate agencies for the life and non-life segments. IL&FS Investsmart Insurance and Risk Management Services Ltd (formerly Investsmart Insurance Distribution

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Private Ltd) has applied for a license to operate as an insurance broker. The application is currently pending with IRDA. f) Margin Trade Financing (MTF): SEBI has announced guidelines for margin trade financing. As per these guidelines, interalia, brokers with a minimum networth of Rs 3 crores would be permitted to offer margin-trade financing facility to its customers after seeking prior approval from the stock exchanges. The Company with a networth of more than Rs 60 crores as on March 31, 2011 is in a position to offer this facility to its customers. The Company has put in place the necessary systems and procedures required to commence margintrading facility as per these guidelines.

Key Officials of IL&FS Investsmart: Mr. Kashmira Mathew Mr. Steven Christensen Mr. Ravi Adusumalli Dr. Ajay Dua Mr. Carnado Engel Mr. Tarun Kateria Mr. Alok Bhargava Mr. Jarrett Lilien Ms. Sonal Dave Mr. Hardeep Singh Mr. Manasije Mishra Non Executive Director Director Director Independent Director Non Executive Director Non Executive Director Executive Director Director Non Executive Director Independent Director Managing Director & CEO

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IL&FS Investsmart Details in the Stock Markets Public Issue Date: 04/07/2011 BSE CODE: 532653 NSE CODE: INVSTSMARTEQ Face Value: 10 Market Lot: 1 ISIN: INE800B01013 Current PE: 31.1968 Current Market Capital: 486.0605 Promoters %: 73.2107 Promoters Shares: 51127614 Institution Investment %: 9.2414 Institution Investment Shares: 6453878 Auditor: Deloitte Haskins & Sells Registrar: Karvy Computershare Private Ltd Plot No. 17-24 Vittal Rao

NagarMadhapurHyderabad 500086 Andhra Pradesh 1-800-3454001

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Company History: Incorporation The Company was set up as Investsmart India Limited a wholly ownedsubsidiary of Infrastructure Leasing & Financial Services Limited forcarrying on capital market activities such as share and stock broking underwriting placement of securities etc. The Company was incorporatedon September 01 1997 and received the Certificate of Commencement ofBusiness on October 07 1997.

MAJOR EVENTS IN THE HISTORY OF THE COMPANY Year Event 1997-1998 * February 1998: Commenced equity broking on NSE 1998-99 * Commenced branch operations for retail businesses at Bangalore Chennai and Kolkata. 1999-2000 * August 1999: Commenced equity broking on BSE * March 30 2000: ORIX subscribed to 80 00 000 Equity Shares * March 30 2000: K. Raheja group subscribed to 30 00 000 Equity Shares * Launched a fully functional website : www.investsmartindia.com2000-2001 * April 14 2000: Change in the registered office of the Company * June 2000: Commenced derivative broking on NSE * January 2001: Launched investment advisory products. * Set up a dedicated mutual fund desk and fixed income retail desk at branch locations. * Received SEBI

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registration as a Portfolio Manager2001-2002 * January 01 2002 : Merger of IL&FS Merchant Banking Services Limited (IMBSL) and DebtonNet India Limited (DIL) with the Company * Foray into insurance distribution through setting up of wholly owned subsidiaries i.e. Investsmart Insurance Agency Pvt. Ltd. and Investsmart Insurance Distribution Private Limited as Corporate Agents of HDFC Standard Life Insurance Company Limited and Life Insurance Corporation of India respectively 2002-2003 * March 25 2003 : Change in name of the Company from Investsmart India Limited to IL&FS Investsmart Limited 2003-2011 * Registered as an Underwriter with SEBI * Acquired 4 branches of Tata TD Waterhouse Securities Pvt. Limited along with assets. * Incorporated a wholly owned subsidiary IL&FS Investsmart Commodity Brokers Limited * Acquired IL&FS Academy for Insurance and Finance Limited (Formerly known as SAIFA Training Academy Limited) 2011-2011 * Induction of ETM and SAIF as strategic investors * Commenced derivative broking on BSE * IL&FS Investsmart Insurance and Risk Management Services Limited (formerly Investsmart Insurance Distribution Private Limited) applied for insurance broking license which is currently pending with IRDA * Name of SAIFA Training Academy Limited was changed to IL&FS Academy for Insurance and Finance Limited * Commenced commodities broking business through wholly owned subsidiary IL&FS Investsmart Commodity Brokers Limited 2007 - IL&FS Investsmart Ltd has informed that Mr. Mitchell Caplan Chief Executive Officer and Director of E*TRADE FINANCIAL Corporation USA has been appointed as an Additional Director on the Board of the Company.

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2008 -IL&FS Investsmart Ltd has informed that Mr. Gregory Framke has been appointed on the Board of the Company in the meeting of the Board held on February 28 2008 subject to completion of regulatory procedures including obtaining Director Identification Number (DIN). Investsmart acquired by HSBC (2008) IL&FS Investsmart Limited, an Indian incorporated, 93.86 per cent owned subsidiary company of HSBC Holdings plc has reported a consolidated net loss of Rs67.73 crore (US$13.90 million) for the quarter ended 31 December 2008. This compares to a net loss of Rs26.11 crore (US$5.36 million) for the previous quarter and a net profit of Rs20.56 crore (US$4.22 million) for the quarter ended 31 December 2007. The companys total income during the quarter ended 31 December 2008 fell 30 per cent to Rs49.02 crore (US$10.06 million) from Rs70.06 crore (US$14.38 million) in the previous quarter, and was down 61 per cent from Rs124.44 crore (US$25.55 million) for the quarter ended 31 December 2007. During the quarter ended 31 December 2008, the companys operating income reduced by 34 per cent to Rs45.91 crore (US$9.43 million) from Rs69.35 crore (US$14.24 million) in the previous quarter, and by 63 per cent from Rs122.95 crore (US$25.24 million)

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for the quarter ended 31 December 2007. Total expenses have increased by 48 per cent to Rs126.81 crore (US$26.04 million) from Rs85.62 crore (US$17.58 million) in the previous quarter and by 38 per cent from Rs91.77 crore (US$18.84 million) for the quarter ended 31 December 2007. Manasije Mishra, MD and Chief Executive Officer, IL&FS Investsmart, said: Market conditions in recent times have been challenging. This is an opportune time to review our products and processes and prepare for the future. Following the completion of the companys acquisition by the HSBC Group in September 2008, we are now in the process of aligning best practices so as to offer our customers the benefit of the HSBC Groups global experience and expertise. 1. IL&FS Investsmart Limited (Investsmart) IL&FS Investsmart Group (IIL) is one of Indias leading financial services organisations. IIL, through its subsidiaries in India and Singapore, provides a wide range of investment products to its retail and institutional clients including equity broking, investment banking, insurance broking and distribution, mutual funds distribution and related financing services. IILs 1,500 employees provide a complete range of investment solutions to over 160,000 customers in India through its 79 branches and 168

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franchisee outlets from over 100 cities and has been recognised as National Best Performing Financial Advisor Retail for two years in a row (06-07 and 07-08) by CNBC TV 18. Investsmart is listed on the National Stock Exchange and the Bombay Stock Exchange and its Global Depository Shares are listed on the Luxembourg Stock Exchange. 2. HSBC Holdings plc HSBC Holdings plc, the parent company of the HSBC Group is headquartered in London. The Group serves customers worldwide from more than 9,500 offices in 85 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. With assets of US$2,547 billion at 30 June 2008, HSBC is one of the worlds largest banking and financial services organisations. HSBC is marketed worldwide as the worlds local bank. As part of the Open Offer document, HSBC Securities and Capital Markets (India) Pvt Ltd (HSCI) and HSBC Violet Investments (Mauritius) Ltd (Violet) (the Acquirers) had notified that since banks in India are not permitted to engage, directly or indirectly, in any commodities business or activities, the Group has discontinued the commodities broking business which was

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undertaken through its subsidiary IL&FS Investsmart Commodities Ltd. (IICL). IICL has applied for surrender of the licences held by it in MCX, NCDEX and other commodity exchanges. The financial statements of IICL have been drawn up by the Company on a going concern basis considering other business plans relating to the corporate entity.

A Study on Mutual Funds

Introduction Basic Concept of Mutual Fund MUTUAL FUNDS: STRUCTURE IN INDIA INVESTORS RIGHTS & OBLIGATIONS MUTUAL FUND PRODUCTS AND FEATURES Exchange Traded Funds Taxation in Mutual Funds

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 Introduction: -

Regulations on Mutual Funds Advantages of Mutual Funds

An investment means employment of funds on assets i.e(securities or mutual funds or any of the investment avenues) with the aim of earning of income and capital appreciation. There are mainly two attributes while investing to any of the means, i.e time and risk. There are mainly four objectives, which the investments activities will carry on those are: -

Return Risk Liquidity Hedge against inflation Safety

There are many alternatives which investment avenues are open to the investors to suit their needs and nature. The selection of investment alternatives is dependent upon the required level of return and risk tolerance level. These alternatives range from financial securities and traditional non-securities investments. Following are the various Investment alternatives: 1) Negotiable and Fixed income securities 3) Preference Shares 5) Bonds 7) Government Securities 2) Equity Shares 4) Debentures 6) Indira Vikas Patra 8) Money Market Securities

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Non-negotiable Securities:-

1) Bank Deposit 3) NBFC Deposit 5) PPF Scheme 7) Life Insurance 9) Real Estate

2) Post Office Deposit 4) Tax Saving Schemes 6) National Saving Scheme 8) Mutual Funds

Basic Concept of Mutual Fund A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments and other securities. Mutual funds have a fund manager who invests the money on behalf of the investors by buying / selling stocks, bonds etc. In a MF many investors contribute to form a common pool of money . This pool of money is invested in accordance with a stated objective. The ownership of the fund is thus joint or mutual the fund belongs to all investors. A single ownership of the fund is in the same proportion as the amount the contribution made by him bears to the total amount of the fund. Currently, the worldwide value of all mutual funds totals more than $US 26 trillion. The United States leads with the number of mutual fund schemes. There are more than 8000 mutual fund schemes in the U.S.A. Comparatively, India has around 1000 mutual fund schemes, but this number has grown exponentially in the last few years. The Total Assets under Management in India of all Mutual funds put together touched a peak of Rs. 5,44,535 crs. at the end of August 2008. It is less expensive to invest in a

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mutual fund since the minimum investment amount in mutual fund units is fairly low (Rs. 500 or so).In a MF many investors contribute to form a common pool of money . This pool of money is invested in accordance with a stated objective. The ownership of the fund is thus joint or mutual the fund belongs to all investors. A single ownership of the fund is in the same proportion as the amount the contribution made by him bears to the total amount of the fund.

MUTUAL FUNDS : STRUCTURE IN INDIA Mutual Funds in India follow a 3-tier structure. There is a Sponsor (the First tier), who thinks of starting a mutual fund. The Sponsor approaches the Securities & Exchange Board of India (SEBI), which is the market regulator and also the regulator for mutual funds. Not everyone can start a mutual fund. SEBI checks whether the person is of integrity, whether he has enough experience in the financial sector, his net worth etc. Once SEBI is convinced, the sponsor creates a Public Trust (the Second tier) as per the Indian Trusts Act, 1882. Trusts have no legal identity in India and cannot enter into contracts, hence the Trustees are the people authorized to act on behalf of the Trust. Contracts are entered into in the name of the Trustees. Once the Trust is created, it is registered with SEBI after which this trust is known as the mutual fund. It is important to understand the difference between the Sponsor and the Trust. They are two separate entities. Sponsor is not the Trust; i.e. Sponsor is not the Mutual Fund. It is the Trust which is the Mutual Fund. The Trustees role is not to manage the money. Their job is only to see,

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whether the money is being managed as per stated objectives. Trustees may be seen as the internal regulators of a mutual fund. Asset Management Company (the Third tier) Trustees appoint the Asset Management Company (AMC), to manage investors money. The AMC in return charges a fee for the services provided and this fee is borne by the investors as it is deducted from the money collected from them. The AMCs Board of Directors must have at least 50% of Directors who are independent directors. The AMC has to be approved by SEBI. The AMC functions under the supervision of its Board of Directors, and also under the direction of the Trustees and SEBI. It is the AMC, which in the name of the Trust, floats new schemes and manage these schemes by buying and selling securities. In order to do this the AMC needs to follow all rules and regulations prescribed by SEBI and as per the Investment Management Agreement it signs with the Trustees.

If any fund manager, analyst intends to buy/ sell some securities, the permission of the Compliance Officer is a must. A compliance Officer is one of the most important persons in the AMC. Whenever the fund intends to launch a new scheme, the AMC has to submit a Draft Offer Document to SEBI. This draft offer document, after getting SEBI approval becomes the offer document of the scheme. The Offer Document (OD) is a legal document and investors rely upon the information provided in the OD for investing in the mutual fund scheme. The Compliance Officer has to sign the Due Diligence Certificate in the OD. This certificate says that all the information provided inside the OD is true and correct. This ensures that there is accountability and

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somebody is responsible for the OD. In case there is no compliance officer, then senior executives like CEO, Chairman of the AMC has to sign the due diligence certificate. The certificate ensures that the AMC takes responsibility of the OD and its contents. The role of the AMC is to manage investors money on a day to day basis. Thus it is imperative that people with the highest integrity are involved with this activity. The AMC cannot deal with a single broker beyond a certain limit of transactions. The AMC cannot act as a Trustee for some other Mutual Fund. The responsibility of preparing the OD lies with the AMC. Appointments of intermediaries like independent financial advisors (IFAs), national and regional distributors, banks, etc. is also done by the AMC. Finally, it is the AMC which is responsible for the acts of its employees and service providers.

As can be seen, it is the AMC that does all the operations. All activities by the AMC are done under the name of the Trust, i.e. the mutual fund. The AMC charges a fee for providing its services. SEBI has prescribed limits for this. This fee is borne by the investor as the fee is charged to the scheme, in fact, the fee is charged as a percentage of the schemes net assets. An important point to note here is that this fee is included in the overall expenses permitted by SEBI. There is a maximum limit to the amount that can be charged as expense to the scheme, and this fee has to be within that limit. Thus regulations ensure that beyond a certain limit, investors money is not used for meeting expenses. CUSTODIAN A custodians role is safe keeping of physical securities and also keeping a tab on the corporate actions like rights, bonus and dividends declared by the

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companies in which the fund has invested. The Custodian is appointed by the Board of Trustees. The custodian also participates in a clearing and settlement system through approved depository companies on behalf of mutual funds, in case of dematerialized securities. In India today, securities (and units of mutual funds) are no longer held in physical form but mostly in dematerialized form with the Depositories. The holdings are held in the Depository through Depository Participants (DPs). Only the physical securities are held by the Custodian. The deliveries and receipt of units of a mutual fund are done by the custodian or a depository participant at the instruction of the AMC and under the overall direction and responsibility of the Trustees. Regulations provide that the Sponsor and the Custodian must be separate entities.

Qi k i e a d u T n a c m d c mr s o eo pe s r aen e e t s et i p t r . r e d d o e h i ue s c

Fig. 1

NFO Once the 3 tier structure is in place, the AMC launches new schemes, under

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the name of the Trust, after getting approval from the Trustees and SEBI. The launch of a new scheme is known as a New Fund Offer (NFO). We see NFOs hitting markets regularly. It is like an invitation to the investors to put their money into the mutual fund scheme by subscribing to its units. When a scheme is launched, the distributors talk to potential investors and collect money from them by way of cheques or demand drafts. Mutual funds cannot accept cash. (Mutual funds units can also be purchased on-line through a number of intermediaries who offer on-line purchase / redemption facilities). Before investing, it is expected that the investor reads the Offer Document (OD) carefully to understand the risks associated with the scheme. ROLE OF A REGISTRAR AND TRANSFER AGENTS Registrars and Transfer Agents (RTAs) perform the important role of maintaining investor records. All the New Fund Offer (NFO) forms, redemption forms (i.e. when an investor wants to exit from a scheme, it requests for redemption) go to the RTAs office where the information is converted from physical to electronic form. How many units will the investor get, at what price, what is the applicable NAV, what is the entry load, how much money will he get in case of redemption, exit loads, folio number, etc. is all taken care of by the RTA.

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Q uick im T e and a decom ressor p are needed to see th p is icture.

Fig.2

INVESTORS RIGHTS & OBLIGATIONS Some of the Rights and Obligations of investors are : Investors are mutual, beneficial and proportional owners of the schemes assets. The investments are held by the trust in fiduciary capacity (The fiduciary duty is a legal relationship of confidence or trust between two or more parties). In case of dividend declaration, investors have a right to receive the dividend within 30 days of declaration. On redemption request by investors, the AMC must dispatch the redemption proceeds within 10 working days of the request. In case the AMC fails to do so, it has to pay an interest @ 15%. This rate may change from time to time subject to regulations.

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 In case the investor fails to claim the redemption proceeds immediately, then the applicable NAV depends upon when the investor claims the redemption proceeds. Investors can obtain relevant information from the trustees and inspect documents like trust deed, investment management agreement, annual reports, offer documents, etc. They must receive audited annual reports within 6 months from the financial year end. Investors can wind up a scheme or even terminate the AMC if unit holders representing 75% of schemes assets pass a resolution to that respect. Investors have a right to be informed about changes in the fundamental attributes of a scheme. Fundamental attributes include type of scheme, investment objectives and policies and terms of issue.

Lastly, investors can approach the investor relations officer for grievance redressal. In case the investor does not get appropriate solution, he can approach the investor grievance cell of SEBI. The investor can also sue the trustees. The offer document is a legal document and it is the investors obligation to read the OD carefully before investing. The OD contains all the material information that the investor would require to make an informed decision. It contains the risk factors, dividend policy, investment objective, expenses expected to be incurred by the proposed scheme, fund managers experience, historical performance of other schemes of the fund and a lot of other vital information. It is not mandatory for the fund house to distribute the OD with each

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application form but if the investor asks for it, the fund house has to give it to the investor. However, an abridged version of the OD, known as the Key Information Memorandum (KIM) has to be provided with the application form.

MUTUAL FUND PRODUCTS AND FEATURES

OPEN ENDED AND CLOSE ENDED FUNDS Equity Funds (or any Mutual Fund scheme for that matter) can either be open ended or close ended. An open ended scheme allows the investor to enter and exit at his convenience, anytime (except under certain conditions) whereas a close ended scheme restricts the freedom of entry and exit. Whenever a new fund is launched by an AMC, it is known as New Fund Offer (NFO). Units are offered to investors at the par value of Rs. 10/ unit. In case of open ended schemes, investors can buy the units even after the NFO period is over. Thus, when the fund sells units, the investor buys the units from the fund and when the investor wishes to redeem the units, the fund repurchases the units from the investor. This can be done even after the NFO has closed. The buy / sell of units takes place at the Net Asset Value (NAV) declared by the fund. The freedom to invest after the NFO period is over is not there in close ended schemes. Investors have to invest only during the NFO period; i.e. as long as the NFO is on or the scheme is open for subscription. Once the NFO closes, new investors cannot enter, nor can existing investors exit, till the term of the scheme comes to an end. However, in order to provide entry and exit option, close ended mutual funds list their schemes on stock exchanges. This provides an opportunity for investors to buy and sell the units from each other. This is just like buying / selling shares on the stock exchange. This is done through a stock broker. The outstanding

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units of the fund does not increase in this case since the fund is itself not selling any units. Sometimes, close ended funds also offer buy-back of fund shares units, thus offering another avenue for investors to exit the fund. Therefore, regulations drafted in India permit investors in close ended funds to exit even before the term is over.

Equity Fund Equity Funds are defined as those funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities. This is important from taxation point of view, as funds investing 100% in international equities are also equity funds from the investors asset allocation point of view, but the tax laws do not recognise these funds as Equity Funds and hence investors have to pay tax on the Long Term Capital Gains made from such investments (which they do not have to in case of equity funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities).

Diversified Large Cap Funds Another category of equity funds is the diversified large cap funds. These are funds which restrict their stock selection to the large cap stocks typically the top 100 or 200 stocks with highest market capitalization and liquidity. It is generally perceived that large cap stocks are those which have sound businesses, strong management, globally competitive products and are quick to respond to market dynamics. Therefore, diversified large cap funds are considered as stable and safe. However, since equities as an asset class are risky, there is no guaranteeing returns for any type of fund. These funds are

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actively managed funds unlike the index funds which are passively managed, In an actively managed fund the fund manager pores over data and information, researches the company, the economy, analyses market trends, takes into account government policies on different sectors and then selects the stock to invest. This is called as active management. Mid Cap Funds After largecap funds come the midcap funds, which invest in stocks belonging to the mid cap segment of the market. Many of these midcaps are said to be the emerging bluechips or tomorrows largecaps. There can be actively managed or passively managed mid cap funds. There are indices such as the CNX Midcap index which tracks the midcap segment of the markets and there are some passively managed index funds investing in the CNX Midcap companies. Sectoral Fund Funds that invest in stocks from a single sector or related sectors are called Sectoral funds. Examples of such funds are IT Funds, Pharma Funds, Infrastructure Funds, etc. Regulations do not permit funds to invest over 10% of their Net Asset Value in a single company. This is to ensure that schemes are diversified enough and investors are not subjected to undue risk. This regulation is relaxed for sectoral funds and index funds.

Other Equity Schemes: Arbitrage Funds These invest simultaneously in the cash and the derivatives market and take advantage of the price differential of a stock and derivatives by taking

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opposite positions in the two markets (for e.g. stock and stock futures). Multicap Funds These funds can, theoretically, have a smallcap portfolio today and a largecap portfolio tomorrow. The fund manager has total freedom to invest in any stock from any sector. Quant Funds A typical description of this type of scheme is that The system is the fund manager, i.e. there are some predefined conditions based upon rigorous backtesting entered into the system and as and when the system throws buy and sell calls, the scheme enters, and/ or exits those stocks. P/ E Ratio Fund A fund which invests in stocks based upon their P/E ratios. Thus when a stock is trading at a historically low P/E multiple, the fund will buy the stock, and when the P/E ratio is at the upper end of the band, the scheme will sell. International Equities Fund This is a type of fund which invests in stocks of companies outside India. This can be a Fund of Fund, whereby, we invest in one fund, which acts as a feeder fund for some other fund(s), i.e invests in other mutual funds, or it can be a fund which directly invests in overseas equities. These may be further designed as International Commodities Securities Fund or World Real Estate and Bank Fund etc. Growth Schemes Growth schemes invest in those stocks of those companies whose profits are expected to grow at a higher than average rate. For example, telecom sector is a growth sector because many people in India still do not own a phone so

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as they buy more and more cell phones, the profits of telecom companies will increase. Similarly, infrastructure; we do not have well connected roads all over the country, neither do we have best of ports or airports. For our country to move forward, this infrastructure has to be of world class. Hence companies in these sectors may potentially grow at a relatively faster pace. Growth schemes will invest in stocks of such companies. ELSS Equity Linked Savings Schemes (ELSS) are equity schemes, where investors get tax benefit upto Rs. 1 Lakh under section 80C of the Income Tax Act. These are open ended schemes but have a lock in period of 3 years. These schemes serve the dual purpose of equity investing as well as tax planning for the investor; however it must be noted that investors cannot, under any circumstances, get their money back before 3 years are over from the date of investment. Fund of Funds These are funds which do not directly invest in stocks and shares but invest in units of other mutual funds which they feel will perform well and give high returns. In fact such funds are relying on the judgment of other fund managers. Index Funds Equity Schemes come in many variants and thus can be segregated according to their risk levels. At the lowest end of the equity funds risk return matrix come the index funds while at the highest end come the sectoral schemes or specialty schemes. These schemes are the riskiest amongst all types schemes as well. However, since equities as an asset class are risky, there is

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no guaranteeing returns for any type of fund. Index Funds invest in stocks comprising indices, such as the Nifty 50, which is a broad based index comprising 50 stocks. There can be funds on other indices which have a large number of stocks such as the CNX Midcap 100 or S&P CNX 500. Here the investment is spread across a large number of stocks. In India today we find many index funds based on the Nifty 50 index, which comprises large, liquid and blue chip 50 stocks. The objective of a typical Index Fund states This Fund will invest in stocks comprising the Nifty and in the same proportion as in the index. The fund manager will not indulge in research and stock selection, but passively invest in the Nifty 50 scrips only, i.e. 50 stocks which form part of Nifty 50, in proportion to their market capitalisation. Due to this, index funds are known as passively managed funds. Such passive approach also translates into lower costs as well as returns which closely tracks the benchmark index return (i.e. Nifty 50 for an index fund based on Nifty 50). Index funds never attempt to beat the index returns, their objective is always to mirror the index returns as closely as possible. The difference between the returns generated by the benchmark index and the Index Fund is known as tracking error. By definition, Tracking Error is the variance between the daily returns of the underlying index and the NAV of the scheme over any given period.The fund with the least Tracking Error will be the one which investors would prefer since it is the fund tracking the index closely. Tracking Error is also function of the scheme expenses. Lower the expenses, lower the Tracking Error. Hence an index fund with low expense ratio, generally has a low Tracking Error. Exchange Traded Funds Exchange Traded Funds (ETFs) are mutual fund units which investors buy/

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sell from the stock exchange, as against a normal mutual fund unit, where the investor buys / sells through a distributor or directly from the AMC. ETF as a concept is relatively new in India. It was only in early nineties that the concept gained in popularity in the USA. ETFs have relatively lesser costs as compared to a mutual fund scheme. This is largely due to the structure of ETFs. While in case of a mutual fund scheme, the AMC deals directly with the investors or distributors, the ETF structure is such that the AMC does not have to deal directly with investors or distributors. It instead issues units to a few designated large participants, who are also called as Authorised Participants (APs), who in turn act as market makers for the ETFs. The Authorised Participants provide two way quotes for the ETFs on the stock exchange, which enables investors to buy and sell the ETFs at any given point of time when the stock markets are open for trading. ETFs therefore trade like stocks. Buying and selling ETFs is similar to buying and selling shares on the stock exchange. Prices are available on real time and the ETFs can be purchased through a stock exchange broker just like one would buy / sell shares. There are huge reductions in marketing expenses and commissions as the Authorised Participants are not paid by the AMC, but they get their income by offering two way quotes on the floor of the exchange. Due to these lower expenses, the Tracking Error for an ETF is usually low. Tracking Error is the acid test for an index fund/ ETF. By design an index fund/ index ETF should only replicate the index return. The difference between the returns generated by the scheme/ ETF and those generated by the index is the tracking error. Gold ETFs

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Gold ETFs (G-ETFs) are a special type of ETF which invests in Gold and Gold related securities. This product gives the investor an option to diversify his investments into a different asset class, other than equity and debt.

Traditionally, Indians are known to be big buyers of Gold; an age old tradition. G-ETFs can be said to be a new age product, designed to suit our traditional requirements. We buy Gold, among other things for childrens marriages, for gifting during ceremonies etc. Holding physical Gold can have its disadvantages: 1. Fear of theft 2. Payment Wealth Tax 3. No surety of quality 4. Changes in fashion and trends 5. Locker costs 6. Lesser realisation on remoulding of ornaments G-ETFs score over all these disadvantages, while at the same time retaining the inherent advantages of Gold investing. In case of Gold ETFs, investors buy Units, which are backed by Gold. Thus, every time an investor buys 1 unit of G-ETFs, it is similar to an equivalent quantity of Gold being earmarked for him somewhere. Thus his units are as good as Gold. Debt Funds Debt funds are funds which invest money in debt instruments such as short and long term bonds, government securities, t-bills, corporate paper, commercial paper, call money etc. The fees in debt funds are lower, on

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average, than equity funds because the overall management costs are lower. The main investing objectives of a debt fund is usually preservation of capital and generation of income. Performance against a benchmark is considered to be a secondary consideration. Investments in the equity markets are considered to be fraught with uncertainties and volatility. These factors may have an impact on constant flow of returns. Which is why debt schemes, which are considered to be safer and less volatile have attracted investors. Debt markets in India are wholesale in nature and hence retail investors generally find it difficult to directly participate in the debt markets. Not many understand the relationship between interest rates and bond prices or difference between Coupon and Yield. Therefore venturing into debt market investments is not common among investors. Investors can however participate in the debt markets through debt mutual funds. Fixed Maturity Plans FMPs have become very popular in the past few years. FMPs are essentially close ended debt schemes. The money received by the scheme is used by the fund managers to buy debt securities with maturities coinciding with the maturity of the scheme. There is no rule which stops the fund manager from selling these securities earlier, but typically fund managers avoid it and hold on to the debt papers till maturity. Investors must look at the portfolio of FMPs before investing. If an FMP is giving a relatively higher indicative yield, it may be investing in slightly riskier securities. Thus investors must assess the risk level of the portfolio by looking at the credit ratings of the securities. Indicative yield is the return which investors can expect from the FMP. Regulations do not allow mutual funds to guarantee returns, hence mutual

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funds give investors an idea of what returns can they expect from the fund. An important point to note here is that indicative yields are pre-tax. Investors will get lesser returns after they include the tax liability. Capital Protection Funds These are close ended funds which invest in debt as well as equity or derivatives. The scheme invests some portion of investors money in debt instruments, with the objective of capital protection. The remaining portion gets invested in equities or derivatives instruments like options. This component of investment provides the higher return potential. It is beyond the scope of this book to explain how Options work. For that you may need to refer to NCFM modules Financial Markets : A Beginners Module or Derivatives Markets (Dealers) module. It is important to note here that although the name suggests Capital Protection, there is no guarantee that at all times the investors capital will be fully protected. Gilt Funds These are those funds which invest only in securities issued by the Government. This can be the Central Govt. or even State Govts. Gilt funds are safe to the extent that they do not carry any Credit Risk. However, it must be noted that even if one invests in Government Securities, interest rate risk always remains. Balanced Funds These are funds which invest in debt as well as equity instruments. These are also known as hybrid funds. Balanced does not necessarily mean 50:50 ratio between debt and equity. There can be schemes like MIPs or Children benefit plans which are predominantly debt oriented but have some equity exposure

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as well. From taxation point of view, it is important to note how much portion of money is invested in equities and how much in debt. This point is dealt with in greater detail in the chapter on Taxation. MIPs Monthly Income Plans (MIPs) are hybrid funds; i.e. they invest in debt papers as well as equities. Investors who want a regular income stream invest in these schemes. The objective of these schemes is to provide regular income to the investor by paying dividends; however, there is no guarantee that these schemes will pay dividends every month. Investment in the debt portion provides for the monthly income whereas investment in the equities provides for the extra return which is helpful in minimising the impact of inflation.

Child Benefit Plans These are debt oriented funds, with very little component invested into equities. The objective here is to capital protection and steady appreciation as well. Parents can invest in these schemes with a 5 15 year horizon, so that they have adequate money when their children need it for meeting expenses related to higher education. Liquid Funds By far the biggest contributor to the MF industry, Liquid Funds attract a lot of institutional and High Networth Individuals (HNI) money. It accounts for approximately 40% of industry AUM. Less risky and better returns than a bank current account, are the two plus points of Liquid Funds. Money Market instruments have maturities not exceeding 1 year. Hence

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Liquid Funds (also known as Money Market Mutual Funds) have portfolios having average maturities of less than or equal to 1 year. Thus such schemes normally do not carry any interest rate risk. Liquid Funds do not carry Entry/ Exit Loads. Other recurring expenses associated with Liquid Schemes are also kept to a bare minimum.

Taxation in Mutual Funds Taxation in case of Mutual Funds must be understood, primarily, from Capital Gains, Securities Transaction Tax (STT) and Dividends point of view. Tax rules differ for equity and debt schemes and also for Individuals, NRIs, OCBs and corporates. Investors also get benefit under section 80C of the Income Tax Act if they invest in a special type of equity scheme, namely, Equity Linked Savings Scheme. Capital Gain Tax

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QuickTime and a decompressor are needed to see this picture.

To understand Capital Gains Taxation, definitions of equity and debt schemes must be understood; similarly difference between Long Term and Short Term must also be understood. As per SEBI Regulations, any scheme which has minimum 65% of its average weekly net assets invested in Indian equities, is an equity scheme. An investor in such a scheme will not have to pay any tax on the capital gains which he makes, provided he holds the schemes units for a period of more than 12 months. While exiting the scheme, the investor will have to bear a Securities Transaction Tax (STT) @ 0.25% of the value of selling price. However, if the investor makes a profit by selling his units at a higher NAV (capital gains), within 12 months, then such a capital gain is treated as being short-term in nature, and hence taxed @ 15% of the profits. Investors in all other schemes have to pay capital gains tax, either short term or long term. In case a scheme invests 100% in foreign equities, then such a scheme is not considered to be an equity scheme from taxation angle and the investor has to pay tax even on the long term capital gains made from such a scheme. In case investors make capital gains within 12 months, for non-equity 74

schemes, the capital gains are added to their income and then the total income is taxed as per their tax slab. This is known as taxation at the marginal rate. For long-term capital gains made by investors in non-equity schemes, they have to pay tax either @ 10% or @ 20%, depending upon whether investors opt for indexation benefit or not.

Regulations on Mutual Funds Overview Regulations ensure that schemes do not invest beyond a certain percent of their NAVs in a single security. Some of the guidelines regarding these are given below: No scheme can invest more than 15% of its NAV in rated debt instruments of a single issuer. This limit may be increased to 20% with prior approval of Trustees. This restriction is not applicable to Government securities. No scheme can invest more than 10% of its NAV in unrated paper of a single issuer and total investment by any scheme in unrated papers cannot exceed 25% of NAV No fund, under all its schemes can hold more than 10% of companys paid up capital. No scheme can invest more than 10% of its NAV in a single company. If a scheme invests in another scheme of the same or different AMC, no fees will be charged. Aggregate inter scheme investment cannot exceed 5% of net asset value of the mutual fund. No scheme can invest in unlisted securities of its sponsor or its group

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entities. Schemes can invest in unlisted securities issued by entities other than the sponsor or sponsors group. Open ended schemes can invest maximum of 5% of net assets in such securities whereas close ended schemes can invest upto 10% of net assets in such securities. Schemes cannot invest in listed entities belonging to the sponsor group beyond 25% of its net assets.

Advantages of Mutual Funds Mutual Funds give investors best of both the worlds. Investors money is managed by professional fund managers and the money is deployed in a diversified portfolio. Retail investors cannot buy a diversified portfolio for say Rs. 5000, but if they invest in a mutual fund, they can own such a portfolio. Mutual Funds help to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments.

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 Investors may not have resources at their disposal to do detailed analysis of companies. Time is a big constraint and they may not have the expertise to read and analyze balance sheets, annual reports, research reports etc. A mutual fund does this for investors as fund managers, assisted by a team of research analysts, scan this data regularly. Investors can enter / exit schemes anytime they want (at least in open ended schemes). They can invest in an SIP, where every month, a stipulated amount automatically goes out of their savings account into a scheme of their choice. Such hassle free arrangement is not always easy in case of direct investing in shares. There may be a situation where an investor holds some shares, but cannot exit the same as there are no buyers in the market. Such a problem of illiquidity generally does not exist in case of mutual funds, as the investor can redeem his units by approaching the mutual fund. As more and more AMCs come in the market, investors will continue to get newer products and competition will ensure that costs are kept at a minimum. Initially mutual fund schemes could invest only in debt and equities. Then they were allowed to invest in derivative instruments. Gold ETFs were introduced, investing in international securities was allowed and recently real estate mutual funds where also in the process of being cleared. We may one day have commodity mutual funds or other exotic asset classes oriented funds. Thus it is in investors best interest if they are aware of the nitty gritties of MFs. Investors can either invest with the objective of getting capital appreciation or

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regular dividends. Young investors who are having a steady regular monthly income would prefer to invest for the long term to meet various goals and thus opt for capital appreciation (growth or dividend reinvestment options), whereas retired individuals, who have with them a kitty and would need a monthly income would like to invest with the objective of getting a regular income. This can be achieved by investing in debt oriented schemes and opting for dividend payout option. Mutual funds are therefore for all kinds of investors. An investor with limited funds might be able to invest in only one or two stocks / bonds, thus increasing his / her risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified. Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type. The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor can pick up a scheme depending upon his risk/return profile. All the Mutual Funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor.

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Important concepts of Mutual Funds

Offer Document Tracking Error Growth and Value Investing Asset Under Management(AUM) ENTRY LOAD Fund Fact Sheet Expense Ratio

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Portfolio Turnover Cash Level Exit Load Net Asset Value Computation

Offer Document The offer document is a legal document and it is the investors obligation to read the OD carefully before investing. The OD contains all the material information that the investor would require to make an informed decision. It contains the risk factors, dividend policy, investment objective, expenses expected to be incurred by the proposed scheme, fund managers experience, historical performance of other schemes of the fund and a lot of other vital information. It is not mandatory for the fund house to distribute the OD with each

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application form but if the investor asks for it, the fund house has to give it to the investor. However, an abridged version of the OD, known as the Key Information Memorandum (KIM) has to be provided with the application form. Tracking Error Tracking Error is the Standard Deviation of the difference between daily returns of the index and the NAV of the scheme (index fund). This can be easily calculated on a standard MS office spreadsheet, by taking the daily returns of the Index, the daily returns of the NAV of the scheme, finding the difference between the two for each day and then calculating the standard deviation of difference by using the excel formula for standard deviation. In simple terms it is the difference between the returns delivered by the underlying index and those delivered by the scheme. The fund manager may buy/ sell securities anytime during the day, whereas the underlying index will be calculated on the basis of closing prices of the Nifty 50 stocks. Thus there will be a difference between the returns of the scheme and the index. There may be a difference in returns due to cash position held by the fund manager. This will lead to investors money not being allocated exactly as per the index but only very close to the index. If the indexs portfolio composition changes, it will require some time for the fund manager to exit the earlier stock and replace it with the new entrant in the index. These and other reasons like dividend accrued but not distributed, accrued expenses etc. all result in returns of the scheme being different from those delivered by the underlying index. This difference is captured by Tracking Error. As is obvious, this should be as low as possible. Growth and Value Investing

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Investment approaches can be broadly classified into Growth based and Value Based. While Growth investing refers to investing in fast growing companies, Value investing approach is based upon the premise that a stock/ sector is currently undervalued and the market will eventually realize its true value. So, a value investor will buy such a stock/ sector today and wait for the price to move up. When that happens, the Value investor will exit and search for another undervalued opportunity. Hence in Growth investing, it is the growth momentum that the investor looks for, whereas in Value investing, the investor looks for the mismatch between the current market price and the true value of the investment. Contra Funds can be said to be following a Value investing approach. Asset Under Management(AUM) Assets Under Management (AUM) represents the money which is managed by a mutual fund in a scheme. Adding AUMs for all schemes of a fund house gives the AUM of that fund house and the figure arrived at by adding AUMs of all fund houses represents the industry AUM. AUM is calculated by multiplying the Net Asset Value of a scheme by the number of units issued by that scheme. A change in AUM can happen either because of fall in NAV or redemptions. In case of sharp market falls, the NAVs move down, because of which the AUMs may reduce. ENTRY LOAD Investors have to bear expenses for availing of the services (professional management) of the mutual fund. The first expense that an investor has to incur is by way of Entry Load. This is charged to meet the selling and distribution expenses of the scheme. A major portion of the Entry Load is used for paying commissions to the distributor. The distributor (also called a mutual fund advisor) could be an Independent Financial Advisor, a bank or a

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large national distributor or a regional distributor etc. They are the intermediaries who help an investor with choosing the right scheme, financial planning and investing in schemes from time to time to meet ones requirements. Investors must ensure that his Advisor has passed the AMFI Mutual Fund (Advisors) module certification. Entry Load is applied as a percent of the Net Asset Value (NAV). Net Assets of a scheme is that figure which is arrived at after deducting all scheme liabilities from its asset. NAV is calculated by dividing the value of Net Assets by the outstanding number of Units. Apart from Entry Load, there are other expenses which the investor has to bear. Whether an investor chooses to invest directly or through an intermediary, he must be aware of these finer points, which may materially affect investment decisions. We will now look at the other important points which should be considered before making an investment in an Equity Fund. All these are easily available in the Fund Fact Sheets.

Fund Fact Sheet Investors must read the Offer Document (OD) before investing. If not the OD, at least the Key Information Memorandum (KIM), which has to be provided with the application form. After an investor has entered into a scheme, he must monitor his investments regularly. This can be achieved by going through the Fund Fact Sheet. This is a monthly document which all mutual funds have to publish. This document gives all details as regards the AUMs of all its schemes, top holdings in all the portfolios of all the schemes, loads, minimum investment, performance over 1, 3, 5 years and also since launch,

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comparison of schemes performance with the benchmark index (most mutual fund schemes compare their performance with a benchmark index such as the Nifty 50) over the same time periods, fund managers outlook, portfolio composition, expense ratio, portfolio turnover, risk adjusted returns, equity/ debt split for schemes, YTM for debt portfolios and other information which the mutual fund considers important from the investors decision making point of view. In a nutshell, the fund fact sheet is the document which investors must read, understand and keep themselves updated with. Expense Ratio Among other things that an investor must look at before finalising a scheme, is that he must check out the Expense Ratio. Expense Ratio is defined as the ratio of expenses incurred by a scheme to its Average Weekly Net Assets. It means how much of investors money is going for expenses and how much is getting invested. This ratio should be as low as possible. It is not enough to compare a schemes expense ratio with peers. The schemes expense ratio must be tracked over different time periods. Ideally as net assets increase, the expense ratio of a scheme should come down. Portfolio Turnover Fund managers keep churning their portfolio depending upon their outlook for the market, sector or company. This churning can be done very frequently or may be done after sufficient time gaps. There is no rule which governs this and it is the mandate of the scheme and the fund managers outlook and style that determine the churning. However, what is important to understand is that a very high churning frequency will lead to higher trading and transaction costs, which may eat into investor returns. Portfolio Turnover is

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the ratio which helps us to find how aggressively the portfolio is being churned. While churning increases the costs, it does not have any impact on the Expense Ratio, as transaction costs are not considered while calculating expense ratio. Transaction costs are included in the buying & selling price of the scrip by way of brokerage, STT, cess, etc. Thus the portfolio value is computed net of these expenses and hence considering them while calculating Expense Ratio as well would mean recording them twice which would be incorrect. Cash Level The next logical point of focus must be the Cash Level in the scheme. The Cash level is the amount of money the mutual fund is holding in Cash, i.e. the amount not invested in stocks and bonds but lying in cash. If the scheme is having higher than industry average cash levels consistently, more so in a bull market, it will lead to a inferior performance by the scheme than its peers. However, in a falling market, it is this higher cash level that will protect investor wealth from depleting. Hence whenever one is analyzing cash levels, it is extremely important to see why the fund manager is sitting on high cash levels. It may be so that he is expecting a fall therefore he is not committing large portions of monies. It may be so in a bull market or a bear market. The strategy could be to enter once the prices correct. High cash levels can also be seen as a cushion for sudden redemptions and in large amounts. Exit Load As there are Entry Loads, there exist Exit Loads as well. As Entry Loads increase the cost of buying, similarly Exit Loads reduce the amount received

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by the investor. Not all schemes have an Exit Load, and not all schemes have similar exit loads as well. Some schemes have Contingent Deferred Sales Charge (CDSC). This is nothing but a modified form of Exit Load, wherein the

period. If the investor exits early, he will have to bear more Exit Load and if he remains invested for a longer period of time, his Exit Load will reduce. Thus the longer the investor remains invested, lesser is the Exit Load. After some time the Exit Load reduces to nil; i.e. if the investor exits after a specified time period, he will not have to bear any Exit Load. Net Asset Value Computation The NAV per unit of the scheme(s) will be computed by dividing the net assets of the scheme(s) by the number of units outstanding under the scheme(s) by the number of units outstanding under the scheme on the valuation date. The mutual fund will value its investments according to the valuation norms as specified I schedule 8 of Mutual Fund Regulation, or such norms as may be specified SEBI from time to time. NAV of units of under each scheme / plan shall be calculated as shown below. Market or Fair value of Schemes Investments + + Current Assets Current Liabilities & Provisions + Unamortized NFO Expenses NAV(Rs.) per unit = ------------------------------------------------------------------No. Of units outstanding under the Scheme / Plan The NAV of the scheme(s) will be calculated and disclosed at the close of every business day, for an open-ended scheme and every Wednesday for close ended Scheme. NAV of the scheme(s) upto 3 decimals.

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Methods & Concepts used for Analysis of 5 Mutual Fund Schemes Methods & Concepts used for Analysis of 5 Mutual Fund Schemes
Beta Alpha

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R-squared Sharpes Performance Index Jenesens Performance Index Treynors Performance Index Comparison of Sharpe and Treynor Fama Model

Beta A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the

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security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaqbased stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk. Alpha 1. A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha. 2. The abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the capital asset pricing model (CAPM). Alpha is one of five technical risk ratios; the others are beta, standard deviation, Rsquared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. 2. If a CAPM analysis estimates that a portfolio should earn 10% based on the risk of the portfolio but the portfolio actually earns 15%, the portfolio's alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model.

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R-squared A statistical measure that represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index. For fixed income securities, the benchmark is the T-bill. For equities, the benchmark is the S&P 500. R-squared values range from 0 to 100. An R-squared of 100 means that all movements of a security are completely explained by movements in the index. A high R-squared (between 85 and 100) indicates the fund's performance patterns have been in line with the index. A fund with a low R-squared (70 or less) doesn't act much like the index. A higher R-squared value will indicate a more useful beta figure. For example, if a fund has an R-squared value of close to 100 but has a beta below 1, it is most likely offering higher risk-adjusted returns. A low R-squared means you should ignore the beta. Sharpes Performance Index A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the

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security being analyzed. A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility. Jenesens Performance Index A risk-adjusted performance measure that represents the average return on a portfolio over and above that predicted by the capital asset pricing model (CAPM), given the portfolio's beta and the average market return. This is the portfolio's alpha. In fact, the concept is sometimes referred to as "Jensen's alpha."

If the definition above makes your head spin, don't worry: you aren't alone! This is a very technical term that has its roots in financial theory. The basic idea is that to analyze the performance of an investment manager you must look not only at the overall return of a portfolio, but also at the risk of that portfolio. For example, if there are two mutual funds that both have a 12% return, a rational investor will want the fund that is less risky. Jensen's measure is one of the ways to help determine if a portfolio is earning the proper return for its level of risk. If the value is positive, then the portfolio is earning excess returns. In other words, a positive value for Jensen's alpha means a fund manager has "beat the market" with his or her stock picking skills. Higher alpha represents superior performance of the fund and vice versa. Limitation of this model is that it considers only systematic risk not the entire risk associated with the fund and an ordinary investor can not mitigate unsystematic risk, as his knowledge of market is primitive. Treynors Performance Index

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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.

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 on Treynor measure, compared with another fund that is highly diversified, will rank lower on Sharpe Measure.

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Fama Model The Eugene Fama model is an extension of Jenson model. This model compares the performance, measured in terms of returns, of a fund with the required return commensurate with the total risk associated with it. The difference between these two is taken as a measure of the performance of the fund and is called net selectivity. The net selectivity represents the stock selection skill of the fund manager, as it is the excess return over and above the return required to compensate for the total risk taken by the fund manager. Higher value of which indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf) Where, Sm is standard deviation of market returns. The net selectivity is then calculated by subtracting this required return from the actual return of the fund.

Among the above performance measures, two models namely, Treynor measure and Jenson model use systematic risk based on the premise that the unsystematic risk is diversifiable. These models are suitable for large investors like institutional investors with high risk taking capacities as they do not face paucity of funds and can invest in a number of options to dilute some risks. For them, a portfolio can be spread across a number of stocks and sectors. However, Sharpe measure and Fama model that consider the entire risk associated with fund are suitable for small investors, as the

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ordinary investor lacks the necessary skill and resources to diversified. Moreover, the selection of the fund on the basis of superior stock selection ability of the fund manager will also help in safeguarding the money invested to a great extent. The investment in funds that have generated big returns at higher levels of risks leaves the money all the more prone to risks of all kinds that may exceed the individual investors' risk appetite.

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Analysis of Five Mutual Fund Schemes

Reliance Growth Fund HSBC Equity Fund HDFC Top 200 Birla Advantage Fund Reliance Vision Fund

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Reliance Growth Fund Name of the Fund Reliance Mutual Fund Sponsor Reliance Capital Limited Name of the AMC Reliance Capital Asset Management Limited Name of the Trustee Company Reliance Capital Trustee Co. Limited Type of Scheme:An Open-ended Equity Growth Scheme Investment Objective:The primary investment objective of the scheme is to achieve long term growth of capital by investment in equity and equity related securities through a research based investment approach. Asset Allocation Pattern of the Scheme:Type of Instruments Equity and Equity related instruments Debt & Money Market Instruments NAV as on 5/08/09 is 358.135 Asset Size (Rs cr) 5,169.54 (Jun-30-2009) 96 Allocation (% of net assets) 65-100% Up to 35%

Plans and Options:Growth Plan Growth & Bonus Options Dividend Plan Dividend payout &Re-investment Options Benchmark Index: BSE 100 Name of the Fund Manager: Mr. Sunil Singhania Minimum Application Amount / Number of Units :Retail Plan: Rs. 5000 and in multiples of Re.1 thereafter Institutional Plan: Rs. 5 crore and in multiples of Re.1 thereafter Minimum Additional Investment: Retail Plan: Rs. 1,000 (plus in the multiple of Re.1) Institutional Plan: Rs. 1, 00,000 (plus in the multiple of Re.1) Date of Inception of the scheme is 08/10/1995. Expenses of the Scheme: Load Structure: Continuous Offer Entry Load For subscription below Rs. 2crores For subscription of Rs. 2 crores & above but below Rs.5 crores For subscription of Rs. 5 crores and above Exit Load 2.25% 1.25% Nil Nil

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Recurring Expense: As per SEBI (Mutual Funds) Regulations, the maximum expenses that can be charged to a scheme are as follows: First Rs.100 crores Next Rs.300 crores Next Rs.300 crores Balance 2.50% 2.25% 2.00% 1.75%

Provided that such recurring expenses shall be lesser by at least 0.25% of the daily average net assets outstanding in each financial year in of a scheme investing in bonds. Estimated Expense of the Scheme AMC Expenses Operational Expenses Marketing Expenses Total 1.25% 0.25% 1.00% 2.50%

The above expenses are estimates only and are subject to changes as per actuals.

Allocation of AUM in Different Avenues of Investment

Class Equity Others/ unlisted Debt Mutual Funds Money Market Cash /Call Net Receiveable/Payable % 71.56 13.47 0 0 0 14.97 0

98

Asset Allocation as on 30th July

0% 0% 0% 13% 15%

0% Equity Others/ unlisted Debt Mutual Funds Money Market Cash /Call Net Receiveable/Payable

72%

The above pie chart depicts that the fund manager of the scheme has allocated 72% of the AUM in Equity and Equity derivatives to maximize returns. 15% of the AUM has been kept in cash form since it is an open-ended fund and the schemes units can be any time resold and the unit holders may make a demand for redemption. This 15% also includes investment in call money market, which provides very high rate of return and the money is lent for a very short period.

Sector wise Allocation of the Scheme (as on 30th July) : -

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Sector Banking & Financial Services State Bank of India Bank Of Baroda Shriram Transport Finance Corporation ICICI Bank Kotak Mahindra Bank Metals & Mining Jindal Steel & Power Jindal Saw Gujarat Mineral Development Corporation Food & Beverages EID Parry (India) United Spirits Radico Khaitan Britannia Industries Pharmaceuticals Lupin Divis Laboratories Information Technology Financial Technologies Infosys Technologies HCL Technologies Oil & Gas Reliance Industries Oil and Natural Gas Corporation Shiv Vani Oil & Gas Exploration Services Manufacturing Jain Irrigation Systems Orient Paper and Industries Bombay Dyeing and Manufacturing Company Engineering & Capital Goods BEML Crompton Greaves Telecommunication Bharti Airtel Reliance Communications Chemicals United Phosphorous Gujarat State Fertilizers Company Services Adani Enterprises Automotive Maruti Suzuki India Cement & Construction

% 13.68 3.93 3.48 2.86 2.31 1.10 7.17 3.74 2.01 1.42 6.15 2.53 1.44 1.11 1.07 6.04 3.42 2.62 6.01 2.43 2.42 1.16 5.92 3.08 1.65 1.19 5.58 2.67 1.67 1.24 3.63 2.29 1.34 3.54 2.04 1.50 3.01 1.58 1.43 2.46 2.46 1.99 1.99 1.97 100 The above table shows the sector wise allocation of

funds in the scheme. 14.97% is kept in cash form for redemption purpose and call money market for higher returns in the short time period. 13.68 % of AUM is invested in Banking & Financial Services Sector. 7.17 % in metals and mining 6.15% in food and beverages, 6.04% in Pharmaceutical Sector and 6.01% in IT.

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Performance of the Scheme: Compunded Annualised Return

30 20 10 Returns(%) 0 -10 -20 -30 -40 -50 Period -34.15 -37.19 Rets. For the last 1 Yr. Rets. For the last 3yrs. Rets. For the last 5yrs. Rets. Since inception Scheme Returns % Benchmark Returns % -1.18 -2.44 24.79 13.81 26.51

9.77

Interpretation: From the above graph it can be interpreted that the compounded annualized return of the scheme (i.e assuming the appreciation or returns from the scheme is reinvested in the prevailing NAV) for last one year is negative, though the loss of the scheme is less than the Benchmark Index (BSE 100) of the scheme by (37.19 34.15) % points i.e. 3.04 % points. Then the return from the last three years is also negative, though less in magnitude than last 1 year and again it faced less losses as compared with BSE 100 losses by 1.16% points . After this the returns in the long term i.e. for the period of last five years has been excellent, positive and the scheme has outperformed BSE 100 returns by 10.98 % points . Again by following the graph it can be seen that the performance or return of the scheme since its inception in 1995 has been marvelous because it has given a return of 26.51% and also beat the BSE 100 returns by 16.74% points. Despite of the recession and drastic fall in the stock market the scheme has managed to provide a reasonable return of 26.51 % since inception. Hence, I 102

recommend that an investor should invest for a longer horizon of time (3 years and above) to reap the benefit of substantial returns from the Reliance Growth Fund

Absolute Returns for each FY for the last 5 Years

100 Absolute Returns(%) 80 60 40 20 0 -20 -40 -60 Financial Years FY 04-05 FY 05-06 FY 06-07 FY 07-08 FY 08-09 -39.97 -37.94 58.45 92.28 69.57

17.38

13

26.2 24.9 11.62

Scheme Returns % Benchmark Returns %

Interpretation In the above graph, it is seen that Reliance growth fund has provided fabulous returns of 58.45% and 92.28% in FY 04-05 and 05-06 respectively. It has managed funds so efficiently that it has outperformed BSE 100 by huge extent i.e. 41.07% points and 22.71% points in the above 2 years respectively. In FY 06-07and 07-08 there has been a reasonable return by the scheme i.e. 13% and 26.2% and have barely beat the index returns. But due to the global economic turmoil in FY 08-09 and its subsequent impact on the Indian stock market has made the scheme to give a negative return of -39.97 %.

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Risk- Return Analysis of Reliance Growth Fund The analysis is for the Financial Years ( 2009 20011) FY Absolute (RYearly Return (%) 06-07 07-08 08-09 09-10 10-11 Total (R) 58.45 92.28 13.0 26.2 -39.97 149.96 Rmean) (RRm(BSE Rm{Rm{Rm-

Rmean)^ 100)

Rm(mean) Rm(mean)}^2 Rm(mean)}{R=17.1 Rmean} Cov(R,Rm)

Rmean= 2 29.99 28.45 62.29 -16.99 -3.79 -69.96 809.40 3880.04 288.66 14.36 4894.40 9886.86 17.38 69.57 11.62 24.9 -37.94 85.53

0.27 52.47 -5.48 7.8 -55.04

0.07 2753.10 30.03 60.84 3029.40 5873.44

7.68 3268.36 93.11 -29.56 3850.60 7190.19

Average Return [Ri(mean)] = sum of Ri / n = 149.96 / 5 = 29.99 Average Return (Rm mean) = sum of Rm / n = 85.53 / 5 = 17.1 Standard Deviation / Total Risk S.D(Ri) = Square Root[Sum of { Ri Rmean}^2 / n ] = Square Root {9886.86 / 5 } = 44.47 The Range of return is from (-39.97% to 92.28%) i.e. 132.25% points The Total Risk(S.D) is 44.47 for the mutual fund for the last three years(2011-2009) The range of absolute returns on Reliance Growth Fund is (-39.97% to 92.28%) i.e. 132.25% points . The lowest return is shown in 08-09 when the economy was in a recessionary phase and the market was purely bearish. The highest return appears when the economy was in a good state and the fund was very prudently and efficiently managed in 05-06.

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S.D(Rm) = Square Root[Sum of { Rm Rm(mean)}^2 / n ] = Square Root {9886.86 / 5} = Square Root (5873.44 /5) Beta of the Scheme Beta = Sum of [{Rm-Rm(mean)}{R-Rmean}] / Sum of [{Rm - Rm(mean)}^2] = 7190.19 / 5873.44 = 1.22 = 34.27

Beta of 1.22 indicates that 1% change in BSE 100 returns would cause 1.22% change in Reliance Growth Scheme returns. Since Beta is > 1 i.e.1.22 the scheme is considered as risky and aggressive (which is normal for an equity oriented scheme. Correlation Coefficient between Scheme Returns and BSE 100 Returns r(Ri,Rm) = Sum of [{Rm-Rm(mean)}{R-Rmean}] /{ n * S.D(Ri) * S.D(Rm)} = 7190.19 / 5 *44.57 * 34.27 = + 0.94 There is very high positive correlation between schemes returns and BSE 100 returns .The scheme tracks its benchmark index very effectively and even beats it frequently. The returns of both the scheme and BSE 100 move in the same direction with nearly the same proportion. Coefficient of determination (r^2) r^2 = (0.94)^2 = 0.88 The interpretation is that 88% of variations in Reliance growth Fund schemes return is explained by the variations in the BSE 100 index returns. Alpha of the Scheme Alpha = Ri(mean) Beta [ Rm(mean) ] = 29.99 - 1.22 (17.1)

105

= + 9.12 The interpretation is that since the alpha value is positive i.e.(9.12) it is a healthy sign for the schemes portfolio and it indicates that the portfolio would yield profitable returns.

Performance Evaluation of the Scheme Sharpes Performance Index St = Ri Rf / S.D(Ri) = 29.99 7.01 / 44.47 = 0.52 [Risk Free rate assumed to be 7.01% - (reference: 10 year T-bill)]. 0.52 is the risk adjusted average rate of returns or risk premium of the portfolio relative to the total amount of risk in the portfolio. Treynors Performance Index Tn = Ri Rf / Beta = 29.99 7.01 / 1.22 = 18.84 18.84 is the risk premium per unit of systematic risk. The higher the index value the better is performance of the scheme in relation to its systematic risk.

Jensens Performance Index Rp = Rf + Beta ( Rm Rf ) = 7.01 + 1.22 (17.1 7.01) = 19.32 Now by comparing the actual return with expected return we get 29.99 19.32 = 10.62 Hence, Ri >Rp and the portfolio is considered to be functioning in an efficient manner.

106

Alpha (p) = (Rp Rf) Beta (Rm Rf) = 19.32 1.22(10.09) = 19.32 12.31 = 7.01 The scheme has a positive alpha (7.01) so it considered that the predictability of price movements by the fund manager is satisfactory. Note:Rf = Risk Free Reurn ( assumed to be 7.01%) Rm = Average absolute market return (BSE 100) Rp = Expected return of the scheme. Ri = Average absolute return of the scheme Alpha(p) = Fund managers ability to forecast price movements in securities. Fama Model Rr = Rf + Si/Sm*(Rm - Rf) = 7.01 + 44.47 / 34.27 (10.09) = 20.10 Net selectivity is then calculated by subtracting this required return from the actual return of the fund. Actual Return Required Return 29.99 20.10 = 9.89 Hence, the net selectivity of the scheme is positive i.e.9.89. So, this indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. It represents the stock selection skill of the fund manager is very good , as it is the excess return over and above the return required to compensate for the total risk taken by the fund manager.

107

Si = S.D of Scheme Returns Sm = S.D of Index Returns

HSBC Equity Fund (HEF) Type of Fund An open-ended diversified Equity Scheme

108

Sponsor HSBC Securities and Capital Markets (India) Private Limited Trustee Board of Trustees Office: 314, D.N Road , Fort, Mumbai Asset Management Company HSBC Asset Management (India) Private Limited Investment Objective To generate long-term capital growth from an actively managed portfolio of equity and equity related securities. Asset Allocation Pattern Type of Security Equities & Equity related securities Debt Instruments & Money Market Instruments (including cash & cash equivalents) Normal allocation (% of Corpus) 65-100% 0-35% Risk Profile High Low to Medium

Options & Sub-options Dividend (Payout/Reinvestment) and Growth Minimum Application Amount Purchase: Rs.10, 000 Additional Purchase: Rs.1000 and multiples of Rs.1 thereafter 109

Repurchase: Rs.1000 and multiples of Rs.1 thereafter Benchmark Index BSE 200 BSE 200 covers all major industry sectors representing around 85% of the domestic market capitalisation. Hence, it is an appropriate benchmark for the Scheme(s). Name of the Fund Managers Mihir Vora and Jitendra Sriram Overseas Fund Manager Niren Parekh Date of Inception 10th December 2002 NAV Movement

Q u ic k T im e a n d a d e c o m p re s s o r a r e n e e d e d t o s e e t h is p ic t u r e .

NAV as on 5/08/09 is 87.182 Asset under Management (Rs. Cr.) 1,492.18 (Jun-30-2009)

Entry Load (including SIP/STP For investment / switch in < Rs 5 crores - 2.25%, otherwise Nil. For switch transactions from HCF to HEF (excludes existing & prospective STP transactions) 110

Nil . Asset Allocation (%) 1.25% for < Rs 5 crores, if redeemed / switched out$ within 1 year from date of investment, otherwise Nil. For switch transactions from HCF to HEF & subsequent switch transactions from HEF to any other debt or equity scheme (excludes existing & prospective STP transactions) 2.25% for < Rs 5 crores, if above switch investments are redeemed / switched out within 1 year from date of switch, otherwise Nil. Entry Load Exit Load Load Comments 2.25% 1.00% Entry load 2.25% for investments below Rs 5 crores. Exit load of 1% for investment less than Rs 5 crores if redeemed within 1 year from the date of allotment.

Allocation of AUM in different Avenues

Asset Class Equity Debt Cash& Equivalents % age 85.87 2.88 11.25

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Asset Allocation as on June 09

Cash& Equivalents 11% Debt 3%

Equity Debt Cash& Equivalents Equity 86%

The above pie chart depicts that the fund management is aggressive in nature. 82% of the corpus is invested in equity, 11% in liquid form or cash and cash equivalent for redemption purpose. The remaining 3% in Debt instruments.

Major Stocks of the Scheme Equity Reliance BHEL SBI Sector Oil & Gas Engineering Banking/Finance Value (Rs cr) 107.44 75.38 72.26 Asset % 7.20 5.05 4.84

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HDFC Bank Larsen Infosys Bharti Airtel ITC ONGC Jaiprakash Asso

Banking/Finance Engineering Technology Telecom Tobacco Oil & Gas Cement

60.47 58.79 57.56 55.33 53.84 48.03 42.36

4.05 3.94 3.86 3.71 3.61 3.22 2.84

The above table shows that HSBC equity fund invests 7.20% of its assets in Reliance . Then 5.05% in BHEL , 4.84% in SBI and 4.05% in HDFC Bank . These all stocks are fundamentally strong stocks and has a very low chances of giving returns.

Sector Allocation (Jun 30, 09)

Sector Oil & Gas Banking/Finance Engineering Food & Beverage Telecom Technology % 15.20 14.27 10.29 6.79 5.43 5.26 -- 1-Year -High 13.97 16.39 10.38 4.41 10.27 8.57 Low 8.89 11.95 6.96 2.78 8.36 4.27

Major sectors where investment has taken place are Oil and Gas (15.20%), Banking & Finance (14.27%) and Engineering (10.29%). Their has been a a high allocation of 10.27% in Telecom sector within one year.

Performance of the Scheme: -

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Compunded Annualised Returns(%)

40 35 Returns(%) 30 25 20 15 10 5 0 Last 1 Year Last 3 years Last 5 Years Period Since Inception 7.48 1.08 13.9 11.6 26.15 23.09 26.15 Scheme Returns% BSE 200 Returns 37.53

Interpretation: From the above graph it can be interpreted that the compounded annualized return of the scheme (i.e assuming the appreciation or returns from the scheme is reinvested in the prevailing NAV) for last one year very less due to the bearish market . But the BSE 200 gave a higher return than the scheme, this was probably due to some bad decisions taken by the Fund managers. The scheme returns was 1.08% whereas the index returns is 7.48%. Then the return from the last three years is positive and it is 13.9% and has beaten the Index return by 2.3% points. losses by 1.16% points . After this the returns in the long term i.e. for the period of last five years has been excellent, positive and the scheme has outperformed BSE 200 returns by 3.06 % points . Again by following the graph it can be seen that the performance or return of the scheme since its inception in 2002 has been marvelous because it has given a return of 37.53% and also beat the BSE 100 returns by 11.38% points. Despite of the recession and drastic fall in the stock market the scheme has managed to provide an excellent return of 37.53 % since inception. Hence, I recommended that an investor should invest for a medium horizon of time (1 year and above) to reap the benefit of substantial returns. It has also shown a positive return in times of bearish trends. The 114

HSBC Equity Fund must have had a strategy to counter the bear market. Hence it is a dependable scheme.
Absolute Returns for 5 years
80 60 Returns(%) 40 20 0 -20 -40 -60 Financial year 2004-05 2005-06 2006-07 2007-08 2008-09 -31.6 -40.98 28.5 18.27 10.58 36.1 23.99 Scheme Returns% BSE 200 Returns 64.7 62.82

8.9

In the above graph, it is seen that HSBC Equity Fund has provided good returns of 28.5% and 67.4% in FY 04-05 and 05-06 respectively. It has managed funds well to beat the index by 10.23% and 1.88% respectively. In FY 06-07and 07-08 there has been a reasonable return by the scheme i.e. 8.9% and 36.1% and have barely beat the index returns, in 2006-07 the scheme returns lost to the index returns by 1.68%. Nevertheless, due to the global economic turmoil in FY 08-09 and its subsequent impact on the Indian stock market has made the scheme to give a negative return of -31.6 % but loss was hedged and was less than the index.

Risk- Return Analysis of HSBC Equity Fund 115

The analysis is for the Financial Years ( 2006 2009) FY Year Absolute (RYearly Return (%) (R) 04-05 05-06 06-07 07-08 08-09 Total 28.5 64.7 8.9 36.1 -31.6 106.6 7.18 43.38 -12.42 14.78 -52.92 51.55 1881.82 154.26 218.45 2800.53 5106.61 18.27 62.82 10.58 23.99 -40.98 74.68 3.33 47.88 -4.36 9.05 -55.92 11.09 2292.50 19.00 81.90 3127.05 5531.54 23.91 2077.03 54.15 133.76 2959.29 5248.14 Rmean) (RRm(BSE Rm{Rm{Rm-

Rmean)^ 200)

Rm(mean) Rm(mean)}^2 Rm(mean)}{R= 14.94 Rmean} Cov(R,Rm)

Rmean= 2 21.32

Ri(mean) = Sum of (Ri) / n = 106.6 / 5 = 21.32 R(m)mean = Sum of (Rm) / n = 74.68 / 5 = 14.94 S.D (Ri) = Square Root{Sum of (Ri Rmean)^2 / n} = Square Root{5106.61/ 5} = 31.96 The Range of return is from (-31.6% to 64.7%) i.e. 96.3%points The Total Risk(S.D) is 31.96 for the mutual fund for the last three years(2011-2009) The range of absolute returns on HSBC Equity Fund is (-31.6% to 64.7%) i.e. 96.3%points . The lowest return is shown in 08-09 when the economy was in a recessionary phase and the market was purely bearish. The highest return appears when the economy was in a good state and the fund was well managed in 05-06.

S.D(Rm) = Square Root[Sum of { Rm Rm(mean)}^2 / n ] = Square Root { 5531.54 / 5} = 33.26

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Beta of the Scheme Beta = Sum of [{Rm-Rm(mean)}{R-Rmean}] / Sum of [{Rm - Rm(mean)}^2] = 5248.14 / 5531.54 = 0.95 Beta of 0.95 indicates that 1% change in BSE 200 returns would cause 0.95% change in HSBC Equity Fund Returns. Since Beta is < 1 i.e.(0.95 )the scheme is considered as a bit less volatile than BSE 200 returns . The scheme nearly moves in tandem with BSE 200. Correlation Coefficient between Scheme Returns and BSE 200 Returns r(Ri,Rm) = Sum of [{Rm-Rm(mean)}{R-Rmean}] /{ n * S.D(Ri) * S.D(Rm)} = 5248.14 / (5 * 31.96 * 33.26) = + 0.99 There is very high positive correlation between schemes returns and BSE 200 returns .The scheme tracks its benchmark index very effectively and even beats it frequently. The returns of both the scheme and BSE 200 move in the same direction with nearly the same proportion. Coefficient of determination (r^2) r^2 = (0.99)^2 = 0.98 The interpretation is that 98% of variations in HSBC Equity Fund schemes return is explained by the variations in the BSE 200 index returns.

Alpha of the Scheme Alpha = Ri(mean) Beta [ Rm(mean) ] = 21.32 - 0.95 (14.94) = + 7.13

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The interpretation is that since the alpha value is positive i.e.( 7.13) it is a healthy sign for the schemes portfolio and it indicates that the portfolio would yield profitable returns. Performance Evaluation of the Scheme Sharpes Performance Index St = Ri Rf / S.D(Ri) = 21.32 7.01 / 31.96 = 0.45 [Risk Free rate assumed to be 7.01% - (reference: 10 year T-bill)]. 0.45 is the risk adjusted average rate of returns or risk premium of the portfolio relative to the total amount of risk in the portfolio. Treynors Performance Index Tn = Ri Rf / Beta = 21.32 7.01 / 0.95 = 15.06 15.06 is the risk premium per unit of systematic risk. The higher the index value the better is performance of the scheme in relation to its systematic risk.

Jensens Performance Index Rp = Rf + Beta ( Rm Rf ) = 7.01 + 0.95 (14.94 7.01) = 14.54 Now by comparing the actual return with expected return we get 21.32 14.54 = 6.78 Hence, Ri >Rp and the portfolio is considered to be functioning in an efficient manner. Alpha (p) = (Rp Rf) Beta (Rm Rf) = 7.53 0.95 (7.93)

118

= 7.53 7.53 =0 The scheme has a alpha(p) value = 0 so it is considered that the predictability of price movements by the fund manager is neutral. Note:Rf = Risk Free Reurn ( assumed to be 7.01%) Rm = Average absolute market return (BSE 200) Rp = Expected return of the scheme. Ri = Average absolute return of the scheme Alpha(p) = Fund managers ability to forecast price movements in securities. Fama Model Rr = Rf + Si/Sm*(Rm - Rf) = 7.01 + 31.96 / 33.26 (7.93) = 14.63 Net selectivity is then calculated by subtracting this required return from the actual return of the fund. Actual Return Required Return 21.32 14.63 = 6.69 Hence, the net selectivity of the scheme is positive i.e.6.69. So, this indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. It represents the stock selection skill of the fund manager is very good , as it is the excess return over and above the return required to compensate for the total risk taken by the fund manager. Si = S.D of Scheme Returns Sm = S.D of Index Returns

119

HDFC Top 200 (HT 200) Type of Scheme Open Ended Growth Scheme Sponsors

120

Housing Development Finance Corporation Limited Asset Management Company HDFC Asset Management Company Limited A Joint Venture with Standard Life Investments Limited Trustee HDFC Trustee Company Limited Investment Objective To generate long term capital appreciation from portfolio of equity and equity-linked instruments primarily drawn from the companies in BSE 200 index. Asset Allocation Pattern of the Scheme Types of Instruments Equity & Equity Linked Normal Allocation (% of Net Assets) Upto 100% (including use of derivatives for hedging and other uses as permitted by prevailing SEBI Debt & Money Market regulations Balance in Debt and Low to medium Risk Profile Medium to high

Instruments * money market instruments *Investment in securitized debt, if undertaken, would not exceed 20% of the net assets of the scheme. The scheme may seek investment opportunity in ADR /GDR /Foreign Equity and Debt Securities (max.40%of net assets) subject to SEBI MF Regulations, 1996. The scheme may use derivatives mainly for hedging and portfolio balancing (max. 25% of net assets) based on the opportunities available subject to SEBI (MF) Regulations, 1996. Plans & Options Plans: 1) Growth Plan 2) Dividend Plan 121

Options:

Dividend Plans offers Payout and Reinvestment facility.

Minimum Application Amount Purchase New Investors Rs.5000 Additional Purchase In multiples of Rs.100 thereafter Existing Investors Rs.1000 In multiples of Rs. 100 thereafter Repurchase Rs. 500 or minimum of 50 units Rs. 500 or minimum of 50 units Name of the Fund Manager Mr. Prashant Jain (since Jun19, 03) Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities

Benchmark Index BSE 200 BSE 200 covers all major industry sectors representing around 85% of the domestic market capitalisation. Hence, it is an appropriate benchmark for the Scheme(s). Date of Inception 11/10/1996 NAV as on 5/08/09 is 157.505 122

Asset under Management (Rs. Cr.) 3,453.36 (Jul-31-2009)

Asset Allocation

Asset Class

% age

Equity Others Debt Mutual Funds Money Market Cash / Call

93.08 1.54 0.22 0 0 5.16

123

Asset Allocation
Money Market 0% Mutual Funds 0% Deb t

Others 2%

Cash / Call Equity Others Debt Mutual Funds Money Market Cash / Call

Equity 93%

The above pie chart depicts that 93% of assets of the fund are invested in equity, and only 5% in cash or call (liquid) form. This is because the scheme is a purely equity oriented scheme.

Sector Allocation (Jul 31, 09)

Sector Banking/Finance Oil & Gas Technology Pharmaceuticals Engineering Cons NonDurable % 26.70 10.75 9.83 8.76 8.53 5.04 -- 1-Year -High 23.94 16.58 13.87 9.29 16.69 4.91 Low 20.61 9.96 8.38 8.07 5.74 1.49

In HDFC Top 200 the major part of AUM (26.7%) is invested in Banking/Finance sector. The next preferred sector for the fund is Oil & gas sector (10.75%).Then some funds are also allocated to Technology sector(9.83%) . All these sectors at present are doing very well and have a potential for further growth.

124

Top Holdings (Jul 31, 09)

Equity ICICI Bank SBI Infosys ONGC Reliance ITC HDFC Bharti Airtel HUL LIC Housing Fin Sector Banking/Finance Banking/Finance Technology Oil & Gas Oil & Gas Tobacco Banking/Finance Telecom Cons NonDurable Banking/Finance Value (Rs cr) 303.38 240.55 235.34 231.19 195.54 149.52 146.58 139.43 113.69 113.30 Asset % 6.78 5.38 5.26 5.17 4.37 3.34 3.28 3.12 2.54 2.5

The table shows that the scheme has its major stock holdings in ICICI Bank(6.78%),SBI(5.38)which is a PSU bank, and has less chances of bankruptcy. Apart from that It is the largest bank (no. of branches & customers) in India. Infosys(5.26%) and ONGC(5.17%) very safe stock with less volatility. Hence all the stocks are fundamentally strong. Performance of the Scheme
Compunded Annualised Returns(%)
30 20 10 0 6.88 1.3 18.29 9.22 20.13 11.61 21.44 10.9

Returns(%) La st 1 Ye ar La st 3 Ye ar s La st 5 Ye ar s La st 10 Ye ar Si s nc e In ce pt io n

-10 -20 -30 -40 -50

Scheme Returns(%) Benchmark Returns(%)

-29.64

-40.98 Period

Interpretation: 125

From the above graph it can be interpreted that the compounded annualized return of the scheme (i.e assuming the appreciation or returns from the scheme is reinvested in the prevailing NAV) for last one year is negative, though the loss of the scheme is less than the Benchmark Index (BSE 100) of the scheme by (40.98 29.64) % points i.e. 11.34% points. Then the return from the last three years is very less i.e 1.3% and gets defeated by the BSE 200 returns.. After this the returns in the long term i.e. for the period of last five years is 18.29% has been excellent, positive and the scheme has outperformed BSE 200 returns by 9.07% points . Again by following the graph it can be seen that the performance or return of the scheme for the last 10 years is 20.13% and it handsomely beats the BSE200 by8.52% since its inception in 1996 HT 200 has done well to maintain a 21.44% returns, and also beat the BSE 200 returns by 10.54% points. Despite of the recession and drastic fall in the stock market the scheme has managed to provide a reasonable return of 21.44 % since inception. Hence, I recommended that an investor should invest for a longer horizon of time because from the graph it is seen that the longer is the term of investment the higher is the returns of HDFC Top 200 Fund.

126

Absolute Returns for 5 years

100 80 Returns(%) 60 40 20 0 -20 -40 -60 Financial Year 2004-05 2005-06 2006-07 2007-08 2008-09 -29.64 -40.98 30.97 18.27 25.72 23.99 8.36 10.58 Absolute Returns(%) BSE 200 Returns 84.03 62.82

In the above graph, it is seen that HT 200 has provided fabulous returns of 30.97% and 84.03% in FY 04-05 and 05-06 respectively. It has managed funds so efficiently that it has outperformed BSE 200 by huge extent i.e. 12.7% points and 21.21% points in the above 2 years respectively. In FY 06-07 the return is 8.36% and Scheme was lagged behind by the index returns by 2.22% .In 07-08 there has been a reasonable return by the scheme i.e. 25.72 and have scarcely beat the index returns. However, due to the global economic turmoil in FY 08-09 and its subsequent impact on the Indian stock market has made the scheme to give a negative return of -29.64 % but the loss was less than the index by 11.34% points.

Risk- Return Analysis of HDFC Top 200 Fund The analysis is for the Financial Years ( 2006 2009) FY Year Absolute (RYearly Return (%) Rmean) (RRm(BSE Rm{Rm{Rm-

Rmean)^ 200)

Rm(mean) Rm(mean)}^2 Rm(mean)}{R=14.94 Rmean} Cov(R,Rm) 127

Rmean= 2 23.89

04-05 05-06 06-07 07-08 08-09 Total

(R) 30.97 84.03 8.36 25.72 -29.64 119.44

7.08 60.14 -15.53 1.83 -53.53

50.13 3616.82 241.18 3.35 2865.46 6776.94

18.27 62.82 10.58 23.99 -40.98 74.68

3.33 47.88 -4.36 9.05 -55.92

11.09 2292.50 19.00 81.90 3127.05 5531.54

23.58 2879.50 67.71 16.56 2993.40 5980.75

Ri (mean) = Sum of (Ri) / n = 119.44 / 5 = 23.89 R(m)mean = Sum of (Rm) / n = 74.68 / 5 = 14.94 S.D (Ri) = Square Root{Sum of (Ri Rmean)^2 / n} = Square Root{6776.94 / 5} = 36.82 The Total Risk(S.D) is 36.82 for the mutual fund for the last 5 years(2011-2009) The range of absolute returns on HDFC Top 200 is (-29.64% to 84.03%) i.e 113.67%. The lowest return is shown in 2008-09 when the economy was in a recessionary phase and the market was purely bearish. The highest return is shown when the economy was at a good state and the fund was well managed in 05-06.

S.D(Rm) = Square Root[Sum of { Rm Rm(mean)}^2 / n ] = Square Root { 5531.54 / 5} = 33.26 Beta of the Scheme Beta = Sum of [{Rm-Rm(mean)}{R-Rmean}] / Sum of [{Rm - Rm(mean)}^2] = 5980.75 / 5531.54 = 1.08 Beta of 1.08 indicates that 1% change in BSE 200 returns would cause 1.08% change in HDFC Top 200 Returns. Since Beta is > 1 i.e.(1.08 )the scheme is considered as a volatile/risky than BSE 200 returns. Correlation Coefficient between Scheme Returns and BSE 200 Returns

128

r(Ri,Rm) = Sum of [{Rm-Rm(mean)}{R-Rmean}] /{ n * S.D(Ri) * S.D(Rm)} = 5980.75 / (5 * 36.82 * 33.26) = +0.98 There is very high positive correlation between schemes returns and BSE 200 returns .The scheme tracks its benchmark index very effectively and even beats it frequently. The returns of both the scheme and BSE 200 move in the same direction with nearly the same proportion. Coefficient of determination (r^2) r^2 = (0.98)^2 = 0.96 The interpretation is that 96% of variations in HDFC Top 200 Fund schemes return is explained by the variations in the BSE 200 index returns. Alpha of the Scheme Alpha = Ri(mean) Beta [ Rm(mean) ] = 23.89 - 1.08 (14.94) = + 7.75 The interpretation is that since the alpha value is positive i.e.( 7.75) it is a healthy sign for the schemes portfolio and it indicates that the portfolio would yield profitable returns. Performance Evaluation of the Scheme Sharpes Performance Index St = Ri Rf / S.D(Ri) = 23.89 7.01 / 36.82 = 0.46 [Risk Free rate assumed to be 7.01% - (reference: 10 year T-bill)]. 0.46 is the risk adjusted average rate of returns or risk premium of the portfolio relative to the total amount of risk in the portfolio.

129

Treynors Performance Index Tn = Ri Rf / Beta = 23.89 7.01 / 1.08 = 15.63 15.63 is the risk premium per unit of systematic risk. The higher the index value the better is performance of the scheme in relation to its systematic risk. Jensens Performance Index Rp = Rf + Beta ( Rm Rf ) = 7.01 + 1.08 (14.94 7.01) = 15.57 Now by comparing the actual return with expected return we get 23.89 15.57 = 8.32 Hence, Ri >Rp and the portfolio is considered to be functioning in an efficient manner. Alpha (p) = (Rp Rf) Beta (Rm Rf) = 8.56 1.08 (7.93) = 8.56 - 8.56 =0

The scheme has a alpha(p) value = 0 so it is considered that the predictability of price movements by the fund manager is neutral. Note:Rf = Risk Free Reurn ( assumed to be 7.01%) Rm = Average absolute market return (BSE 200) Rp = Expected return of the scheme. Ri = Average absolute return of the scheme Alpha(p) = Fund managers ability to forecast price movements in securities. Fama Model Rr = Rf + Si/Sm*(Rm - Rf) = 7.01 + 36.82 / 33.26 (7.93)

130

= 15.79 Net selectivity is then calculated by subtracting this required return from the actual return of the fund. Actual Return Required Return 23.89 15.79 = 8.10 Hence, the net selectivity of the scheme is positive i.e.8.10. So, this indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. It represents the stock selection skill of the fund manager is very good , as it is the excess return over and above the return required to compensate for the total risk taken by the fund manager. Si = S.D of Scheme Returns Sm = S.D of Index Returns

Birla Advantage Fund Name of the Trustee Company Birla Sun Life Trustee Company Private Limited Sponsors Aditya Birla Nuvo Ltd. Asset Management Company Birla Sunlife Asset Management Company Type of Scheme An Open ended Growth Scheme Investment Objective The objective of the scheme is to achieve long-term growth of capital ,at relatively

131

moderate levels of risk through a diversified research based investment approach. Asset Allocation Pattern of the Scheme Types of Instruments Equity and Equity related instruments Debt and Money market instruments Plans and Options Dividend (Payout & Reinvestment option) & Growth Minimum Application Amount /Number of Units Purchase (including switch-in) : Rs. 5000 Additional Purchase (including switch-in): Rs.1000 Repurchase: Nil Normal Allocation (% of net assets) At least 70 % Upto 30%

Benchmark Index BSE Sensex BSE SENSEX is calculated using a free float Advantage Fund. market capitalization weighted methodology of selected stocks that represent large, well- established and financially sound companies across key sectors. Hence, it is an appropriate benchmark for the Scheme(s). Dividend Policy The scheme may declare dividends at the discretion of the trustee, subject to the availability of distributable surplus NAV as on 5/07/09 is 132.06 Asset Size (Rs cr) 377.27 (Jun-30-2009) Launch Date 132

Feb 24, 1995 Fund Manager A. Balasubramaniam Entry Load Exit Load 2.50% 1.00%

Load Comments: Entry load of 2.5% for each purchase/switch-in of units for less than Rs 5 crores. Exit Load of 1% on investment upto Rs 5 crore if redeemed within 12 months from the date of allotment. Min. Investment is Rs 5,000

Asset allocation as on 30 July 2009

Asset Class Equity Others Debt Mutual Funds Money Market Cash / Call % 95.26 1.38 0 0 0 3.35

133

Others 1% Mutual Funds 0% Money Market 0% Deb t

Asset Allocation

Cash / Call Equity Others Debt Mutual Funds Money Market Cash / Call

Equity 96%

The above pie chart depicts that 96% of assets of the fund are invested in equity, and only 3% in cash or call (liquid) form. This is because the scheme is a purely equity oriented scheme. 3% of liquidity is very low as it is an open ended scheme and redemption can be made any time by the unitholders

Sector Allocation (Jul 31, 09)

Sector Engineering Banking/Finance % 18.00 14.52 -- 1-Year -High 10.25 20.73 Low 8.91 15.03

134

Oil & Gas Technology Metals & Mining Telecom

10.80 10.74 8.88 8.25

12.96 10.22 8.20 7.95

10.17 6.64 5.11 7.16

The above table shows that Birla Advantage Fund invests 18% of AUM in Engineering sector, 14.52% in Banking/Finance, 10.80% in Oil and Gas and 10.74% in Technology sector.

Top Holdings (Jul 31, 09)

Equity Reliance Infosys Jindal Steel BHEL Bharti Airtel Welspun Guj ICICI Bank Larsen HPCL SBI Sector Oil & Gas Technology Metals & Mining Engineering Telecom Metals & Mining Banking/Finance Engineering Oil & Gas Banking/Finance Value (Rs cr) 18.01 16.70 16.27 14.06 13.21 13.16 13.08 11.80 11.54 10.45 Asset % 4.91 4.55 4.43 3.83 3.60 3.59 3.56 3.21 3.15 2.85

The major stocks in which Birla Advantage Fund enters are Reliance(4.91%), Infosys(4.55%) and Jindal Steels(4.43%). All these stocks are fundamentally strong stocks.

Performance of the Scheme

135

Absolute Return for 5 Financial Years

80 60 Returns(%) 40 20 0 -20 -40 -60 Periods 2004-05 2005-06 2006-07 2007-08 2008-09 -37.94 24.2 16.14 15.61 2 13.9 19.56 Scheme Returns(%) BSE SENSEX Retuns 73.7

73.73

-40.3

In the above graph, it is seen that BAF has provided fabulous returns of 24.2% and 73.7% in FY 04-05 and 05-06 respectively. It has managed funds so efficiently that it has outperformed BSE SENSEX by 8.06% in 04-05 but provided return equivalent to the index in 05-06. In FY 06-07 the return is 2% and Scheme lost drastically from the index .In 07-08 there has been a reasonable return by the scheme i.e. 13.9% and had faced defeat from the index returns by 5.66% .This was due to bad management of the fund. However, due to the global economic turmoil in FY 08-09 and its subsequent impact on the Indian stock market has made the scheme to give a negative return of -40.3 % but the loss was again more than the index by 2.36% points. This prove that the equity research team of the fund was not efficient in predicting the stocks performance. Hence, it is recommended that an investor must not go for long term returns from this equity oriented scheme, because it cannot keep pace with its Benchmark index(SENSEX) . Hence, one must take advantage of the scheme by investing for a short time period ( 7-8 months) so that he can redeem whenever he sees a considerable profit (rise in NAV) .

Risk- Return Analysis of Birla Advantage Fund 136

The analysis is for the Financial Years ( 2006 2009) FY Year Absolute (RYearly Return (%) (R) 0405 0506 0607 0708 0809 Total 24.2 59 73.7 -12.7 2 -0.8 13.9 -55 -40.3 73.5 3025 6758.18 -37.94 87.1 0.64 19.56 -55.36 3064.73 6245.05 3044.8 6376.21 161.29 15.61 2.14 4.58 -1.71 3481 73.73 -1.81 3.28 22.99 9.5 90.25 16.14 56.31 3170.82 3322.29 -1.28 1.64 -12.16 Rmean) (RRm(BSE Rm{Rm{Rm-

Rmean)^ SENSEX) Rm(mean) Rm(mean)}^2 Rm(mean)}{R=17.42 Rmean} Cov(R,Rm)

Rmean= 2 14.7

Ri(mean) = Sum of (Ri) / n = 73.5 / 5 = 14.7 R(m)mean = Sum of (Rm) / n = 87.1 / 5 = 17.42 S.D (Ri) = Square Root{Sum of (Ri Rmean)^2 / n} = Square Root{6758.18/ 5} = 36.76 The Total Risk(S.D) is 36.76 for the mutual fund for the last 5 years(2011-2009) The range of absolute returns on Birla Advantage Fund is (-40.3% to 73.7%) i.e 114%. The lowest return is shown in 2008-09 when the economy was in a recessionary phase and the market was purely bearish. The highest return is shown when the economy was at a good state and the fund was well managed in 05-06.

137

S.D(Rm) = Square Root[Sum of { Rm Rm(mean)}^2 / n ] = Square Root { 6245.05/ 5} = 35.34 Beta of the Scheme Beta = Sum of [{Rm-Rm(mean)}{R-Rmean}] / Sum of [{Rm - Rm(mean)}^2] = 6376.21 / 6245.05= 1.02 Beta of 1.08 indicates that 1% change in BSE SENSEX returns would cause 1.02% change in HDFC Top 200 Returns. Since Beta is > 1 i.e.(1.02 )the scheme is considered as a volatile/risky than BSE SENSEX returns. Correlation Coefficient between Scheme Returns and BSE 200 Returns r(Ri,Rm) = Sum of [{Rm-Rm(mean)}{R-Rmean}] /{ n * S.D(Ri) * S.D(Rm)} = 6376.21/ (5 * 35.34 * 36.76) = +0.98 There is very high positive correlation between schemes returns and BSE SENSEX returns .The scheme tracks its benchmark index very effectively and even beats it frequently. The returns of both the scheme and BSE SENSEX move in the same direction with nearly the same proportion. Coefficient of determination (r^2) r^2 = (0.98)^2 = 0.96 The interpretation is that 96% of variations in Birla Advantage Fund schemes return is explained by the variations in the BSE SENSEX returns. Alpha of the Scheme Alpha = Ri(mean) Beta [ Rm(mean) ] = 14.7 - 1.02 (17.42)

138

= -3.07 The interpretation is that since the alpha value is negative i.e. (-3.07) it is a bad sign for the schemes portfolio and it indicates that the portfolio would yield unprofitable returns. It shows that there is a very low degree of independence of the schemes returns with respect to its Benchmark return. Performance Evaluation of the Scheme Sharpes Performance Index St = Ri Rf / S.D(Ri) = 14.7 7.01 / 36.76 = 0.21 [Risk Free rate assumed to be 7.01% - (reference: 10 year T-bill)]. 0.21 is the risk adjusted average rate of returns or risk premium of the portfolio relative to the total amount of risk in the portfolio. Treynors Performance Index Tn = Ri Rf / Beta = 14.7 7.01 / 1.02 = 7.54 7.54 is the risk premium per unit of systematic risk. The higher the index value the better is performance of the scheme in relation to its systematic risk. Jensens Performance Index Rp = Rf + Beta ( Rm Rf ) = 7.01 + 1.02 (17.42 7.01) = 17.63 Now by comparing the actual return with expected return we get 17.63 14.7 = 2.93 Hence, Ri >Rp and the portfolio is considered to be functioning in an efficient manner.

139

Alpha (p) = (Rp Rf) Beta (Rm Rf) = 10.62 1.02 (7.93) = 10.62 10.62 =0

The scheme has a alpha(p) value = 0 so it is considered that the predictability of price movements by the fund manager is neutral. Note:Rf = Risk Free Reurn ( assumed to be 7.01%) Rm = Average absolute market return (BSE SENSEX) Rp = Expected return of the scheme. Ri = Average absolute return of the scheme Alpha(p) = Fund managers ability to forecast price movements in securities. Fama Model Rr = Rf + Si/Sm*(Rm - Rf) = 7.01 + 36.76 / 35.34 (7.93) = 18.06 Net selectivity is then calculated by subtracting this required return from the actual return of the fund. Actual Return Required Return 14.7 8.25 = 6.45 Hence, the net selectivity of the scheme is positive i.e.6.45. So, this indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. It represents the stock selection skill of the fund manager is very good , as it is the excess return over and above the return required to compensate for the total risk taken by the fund manager.

140

Si = S.D of Scheme ReturnsSm = S.D of Index Returns Reliance Vision Fund Name of the Fund Reliance Mutual Fund Sponsor Reliance Capital Limited Name of the AMC Reliance Capital Asset Management Limited Name of the Trustee Company Reliance Capital Trustee Co. Limited Type of Scheme:An Open-ended Equity Growth Scheme Investment Objective:The primary investment objective of the Scheme is to achieve long term growth of capital by investing in equity and equity related securities through a research based investment approach. Asset Allocation Pattern of the Scheme:Type of Instruments Equity and Equity related instruments Debt Instruments Money Market Instruments NAV as on 5/08/09 is 211.506 Asset Size (Rs cr) 3,453.36 (Jun-30-2009) Allocation (% of net assets) 60-100% 0-30% 0-10% Risk Profile High Low-medium Low

141

Plans and Options:Growth Plan Growth & Bonus Options Dividend Plan Dividend payout &Re-investment Options Benchmark Index: BSE 100 Name of the Fund Manager: Mr. Ashwani Kumar Minimum Application Amount / Number of Units :Retail Plan: Rs. 5000 and in multiples of Re.1 thereafter Institutional Plan: Rs. 5 crore and in multiples of Re.1 thereafter Minimum Additional Investment: Retail Plan: Rs. 1,000 (plus in the multiple of Re.1) Institutional Plan: Rs. 1, 00,000 (plus in the multiple of Re.1) Date of Inception of the scheme is Sep 07, 1995 Expenses of the Scheme: -

Load Structure: Continuous Offer Entry Load For subscription below Rs. 2crores 2.25% 142

For subscription of Rs. 2 crores & above but below Rs.5 crores For subscription of Rs. 5 crores and above Exit Load Recurring Expense: -

1.25% Nil Nil

As per SEBI (Mutual Funds) Regulations, the maximum expenses that can be charged to a scheme are as follows: First Rs.100 crores Next Rs.300 crores Next Rs.300 crores Balance 2.50% 2.25% 2.00% 1.75%

Provided that such recurring expenses shall be lesser by at least 0.25% of the daily average net assets outstanding in each financial year in of a scheme investing in bonds. Estimated Expense of the Scheme AMC Expenses Operational Expenses Marketing Expenses Total 1.25% 0.25% 1.00% 2.50%

The above expenses are estimates only and are subject to changes as per actuals. Asset Allocation Avenues as on 30 July
Asset Class Equity Others Debt Mutual Funds Money Market Cash / Call %age 76.46 5.19 0 0 0 18.35

143

Asset Allocation Avenues

Mutual Funds 0% Others 5%

Cash / Call Equity Others Debt Mutual Funds Money Market Cash / Call

Deb t

Money Market 0%

Equity 77%

The above pie chart depicts that the fund manager of the scheme has allocated 72% of the AUM in Equity and Equity derivatives to maximize returns. 15% of the AUM has been kept in cash form since it is an open-ended fund and the schemes units can be any time resold and the unit holders may make a demand for redemption. This 15% also includes investment in call money market, which provides very high rate of

return and the money is lent for a very short period.

Sector Allocation (Jun 30, 09)

Sector Banking/Finance Technology Oil & Gas Engineering Pharmaceuticals % 18.45 10.88 9.77 8.75 8.75 -- 1-Year -High 17.10 7.81 10.18 8.73 9.07 Low 9.26 5.21 3.74 3.45 6.96 144

Telecom

3.81

4.19

2.87

The above table shows that 18.45% of Reliance vision Schemes AUM is invested in Banking and Finance Sector, 10.88% in Technology sector and 9.77% in Oil and Gas sector.

Top Holdings (Jun 30, 09)

Equity SBI Larsen Reliance Divis Labs Infosys ICICI Bank ONGC TCS Reliance Infra Maruti Suzuki Sector Banking/Finance Engineering Oil & Gas Pharmaceuticals Technology Banking/Finance Oil & Gas Technology Utilities Automotive Value (Rs cr) 280.49 172.46 158.62 152.66 142.12 137.22 135.87 125.88 118.36 118.05 Asset % 8.12 4.99 4.59 4.42 4.12 3.97 3.93 3.65 3.43 3.42

The major stock holdings of Reliance Vision Fund are SBI with 8.12% of assets, L&T with 4.99% , Reliance (4.59%), Divis Labs(4.42%) and Infosys (4.12%). All are from different sectors, so that the sector risk is minimized due to diversification.

Performance of the Scheme

145

Compunded Annualised Returns

30 20 Returns(%) 10 0 -10 -20 -30 -40 -50 Period -31.96 -37.19 Last 1 Year Last 3 Last 5 Years Years -3.74 -2.44 Since Inception Scheme Returns(%) BSE 100 Returns(%) 18.11 13.81 22.14 9.77

Interpretation: From the above graph it can be interpreted that the compounded annualized return of the scheme (i.e assuming the appreciation or returns from the scheme is reinvested in the prevailing NAV) for last one year is negative and the scheme returns cannot keep up to BSE 100 returns. Then the return from the last three years is also negative, though less in magnitude than last 1 year and again it faced less losses as compared with BSE 100 losses by 1.30% points . After this the returns in the long term i.e. for the period of last five years has been good, positive and the scheme has outperformed BSE 100 returns by 4.30% points . Again by following the graph it can be seen that the performance or return of the scheme since its inception in 1995 has been marvelous because it has given a return of 22.14% and also beat the BSE 100 returns by 12.37% points. Despite of the recession and drastic fall in the stock market the scheme has managed to provide a reasonable return of 22.14 % since inception. Hence, I recommend that an investor should invest for a longer horizon of time (3 years and above) to reap the benefit of substantial returns from the Reliance Vision Fund. The fund management needs improvement so that it can consistently beat the Benchmark Index. 146

Absolute Returns for 5 Years

100 80 Returns(%) 60 40 20 0 -20 -40 -60 Financial Years 2004-05 2005-06 2006-07 2007-08 2008-09 -35.1 -39.97 37.38 17.38 79.64 69.57 11.57 8.95

21.47

24.98

Scheme Returns(%) BSE 100 Returns(%)

In the above graph, it is seen that Reliance growth fund has provided fabulous returns of 37.38% and 76.64% in FY 04-05 and 05-06 respectively. It has managed funds so efficiently that it has outperformed BSE 100 by 10.07% points and 22.71% points in the above 2 years respectively. In FY 06-07and 07-08 there has been a reasonable return by the scheme i.e. 8.95% and 21.47% and got defeated by the index by 2.62% and 3.51% respectively. However, due to the global economic turmoil in FY 08-09 and its subsequent impact on the Indian stock market has made the scheme to give a negative return of -35.1% and minimized its losses as compared to the index by 4.87%.

Risk- Return Analysis of Reliance Vision Fund The analysis is for the Financial Years ( 2011 2009) 147

FY Year

Absolute (RYearly Return (%) Rmean)

(R-

Rm(BSE Rm-

{Rm-

{Rm-

Rmean)^ 100)

Rm(mean) Rm(mean)}^2 Rm(mean)}{R=17.1 Rmean} Cov(R,Rm)

Rmean= 2 22.47 14.91 57.17 -13.52 -1 -57.57 222.31 3330.44 182.79 1 3314.30 7050.84 17.38 69.57 11.62 24.9 -37.94 85.53

04-05 05-06 06-07 07-08 08-09 Total

(R) 37.38 79.64 8.95 21.47 -35.1 112.34

0.27 52.47 -5.48 7.8 -55.04

0.07 2753.10 30.03 60.84 3029.40 5873.44

4.03 2999.71 74.09 -7.8 3168.65 6238.68

Average Return [Ri(mean)] = sum of Ri / n = 112.34 / 5 = 22.47 Average Return (Rm mean) = sum of Rm / n = 85.53 / 5 = 17.1 Standard Deviation / Total Risk S.D(Ri) = Square Root[Sum of { Ri Rmean}^2 / n ] = Square Root {7050.84 / 5 } = 37.55 The Range of return is from (-35.1% to 79.64%) i.e. 114.74% points The Total Risk(S.D) is 37.55 for the mutual fund for the last 5 years(2011-2009) The range of absolute returns on Reliance Vision Fund is (-35.1% to 79.64%) i.e. 114.74% points. The lowest return is shown in 08-09 when the economy was in a recessionary phase and the market was purely bearish. The highest return appears when the economy was in a good state and the fund was very prudently managed in 05-06. S.D(Rm) = Square Root[Sum of { Rm Rm(mean)}^2 / n ] = Square Root {5873.44/ 5} = Square Root (5873.44 /5) Beta of the Scheme = 34.27

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Beta = Sum of [{Rm-Rm(mean)}{R-Rmean}] / Sum of [{Rm - Rm(mean)}^2] = 6238.68 / 5873.44 = 1.06

Beta of 1.06 indicates that 1% change in BSE 100 returns would cause 1.06% change in Reliance Growth Scheme returns. Since Beta is > 1 i.e.1.06 the scheme is considered as risky and aggressive (which is normal for an equity oriented scheme. Correlation Coefficient between Scheme Returns and BSE 100 Returns r(Ri,Rm) = Sum of [{Rm-Rm(mean)}{R-Rmean}] /{ n * S.D(Ri) * S.D(Rm)} = 6238.68 / 5 * 37.55 * 34.27 = + 0.97 There is very high positive correlation between schemes returns and BSE 100 returns .The scheme tracks its benchmark index very effectively and even beats it frequently. The returns of both the scheme and BSE 100 move in the same direction with nearly the same proportion. Coefficient of determination (r^2) r^2 = (0.97)^2 = 0.94 The interpretation is that 94% of variations in Reliance Vision Fund schemes return is explained by the variations in the BSE 100 index returns.

Alpha of the Scheme Alpha = Ri(mean) Beta [ Rm(mean) ] = 22.47 - 1.06 (17.1) = + 4.34 The interpretation is that since the alpha value is positive i.e.(4.34) it is a healthy sign for the schemes portfolio and it indicates that the portfolio would yield profitable

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returns. Performance Evaluation of the Scheme Sharpes Performance Index St = Ri Rf / S.D(Ri) = 22.47 7.01 / 37.55 = 0.41 [Risk Free rate assumed to be 7.01% - (reference: 10 year T-bill)]. 0.41 is the risk adjusted average rate of returns or risk premium of the portfolio relative to the total amount of risk in the portfolio. Treynors Performance Index Tn = Ri Rf / Beta = 22.47 7.01 / 1.06 = 14.58 14.58 is the risk premium per unit of systematic risk. The higher the index value the better is performance of the scheme in relation to its systematic risk. Jensens Performance Index Rp = Rf + Beta ( Rm Rf ) = 7.01 + 1.06 (17.1 7.01) = 17.71 Now by comparing the actual return with expected return we get 22.47 17.71 = 4.76 Hence, Ri >Rp and the portfolio is considered to be functioning in an efficient manner. Alpha (p) = (Rp Rf) Beta (Rm Rf) =17.71 1.06 (10.09) = 17.71 10.69 = 7.01 The scheme has a positive alpha (7.01) so it considered that the predictability of price

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movements by the fund manager is satisfactory. Note:Rf = Risk Free Reurn (assumed to be 7.01%) Rm = Average absolute market return (BSE 100) Rp = Expected return of the scheme. Ri = Average absolute return of the scheme Alpha(p) = Fund managers ability to forecast price movements in securities.

Fama Model Rr = Rf + Si/Sm*(Rm - Rf) = 7.01 + 37.5 / 34.27 (10.09) = 18.05 Net selectivity is then calculated by subtracting this required return from the actual return of the fund. Actual Return Required Return 22.47 18.05 = 4.42 Hence, the net selectivity of the scheme is positive i.e.4.42. So, this indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. It represents the stock selection skill of the fund manager is very good , as it is the excess return over and above the return required to compensate for the total risk taken by the fund manager. Si = S.D of Scheme Returns Sm = S.D of Index Returns

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Comparative Analysis of 5 Different Mutual Fund Schemes and their Ranking based on various Parameters.
Comparison on the basis of the present NAV of the Schemes

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Comparison in terms of AUM of the Schemes Comparison in terms of Standard Deviation (Total Risk) of the Schemes Comparison in terms of Beta (Systematic Risk) of the Schemes Comparison in terms of Alpha of the Schemes Comparison in terms of Sharpes Performance Index of the Schemes Comparison in terms of Treynors Performance Index of the Schemes Comparison in terms of Jenesens Performance Index of the Schemes Comparison in terms of Jensons Performance Index[Alpha(p)] of the Schemes Comparison in terms of Fama Model of the Schemes Conclusion of the Analysis

Comparison on the basis of the present NAV of the Schemes Name of the MF Scheme Reliance Growth Fund Reliance Vision Fund HDFC Top 200 (HT 200) Birla Advantage Fund HSBC Equity Fund NAV as on 05/08/09 358.135 211.506 157.505 132.06 87.182 Ranking 1 2 3 4 5

In the above table MF schemes are ranked in accordance to their NAV(Net Asset Value). The fund with the highest NAV(358.135) is ranked 1st (Reliance Growth

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Fund) and accordingly other schemes are ranked among 1 to 5 ranks. HSBC equity fund is ranked 5th because its NAV is lowest(87.182) among other 5schemes. NAV is one of the performance indicator of a mutual fund. A high NAV for a scheme is a must to establish faith among investors. It is like the market price of a share.

Comparison in terms of AUM of the Schemes Name of the MF Scheme Reliance Growth Fund HDFC Top 200 (HT 200) Reliance Vision fund HSBC Equity Fund Birla Advantage Fund AUM as on 31st July In (Rs. Crores) 5,169.54 4,475.33 3,453.36 1492.18 367.03 Ranking 1 2 3 4 5

The above table provide ranking to different schemes, according to the AUM that the scheme manages. The higher the AUM , more will be the popularity of the scheme. Here, Reliance Growth fund is heading the chart with a huge corpus of Rs.5169.54

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crores . The fund which ranks 5th is Birla Advantage Fund with Rs. 367.03 crores. It is also considered that with a huge AUM the efficiency to actively manage a fund decreases, because the fund manager does not get enough opportunities to invest every time. Hence, funds corpus must be optimum in size, so that appropriate portfolio churning is done, and maximum returns are achieved. Due to very high AUM the fund manager can also easily come out from huge losses by exiting stocks which are in losses, and either going for short selling(Bear Market) or re-entering the stocks at lower levels to achieve higher returns in the future(Expected Bull Market).

Comparison in terms of Standard Deviation (Total Risk) of the Schemes Name of the MF Scheme HSBC Equity Fund Birla Advantage Fund HDFC Top 200 Reliance Vision Fund Reliance Growth Fund Total Risk (S.D) 31.96 36.76 36.82 37.55 44.47 Ranking 1 2 3 4 5

Here, total risk is considered for different schemes. The lesser the risk means lower the ranking. In this case HSBC Equity Fund has the lowest total risk (31.96) hence is considered to maintain a conservative portfolio, comprising of less volatile stocks, so it is ranked 1st in terms of being less risky. While on the other end Reliance Growth Fund adopts a highly aggressive investment strategy in equity market, hence its portfolio carries a very high risk of 44.47. This is the reason for ranking it 5th among other schemes.

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Comparison in terms of Beta (Systematic Risk) of the Schemes Name of the MF Scheme Reliance Growth Fund HDFC Top 200 Reliance Vision Fund Birla Advantage Fund HSBC Equity Fund Beta 1.22 1.08 1.06 1.02 0.95 Ranking 1 2 3 4 5

In the above table Beta of all the schemes are compared and ranked. The fund with the highest Beta is ranked 1st and fund with the lowest Beta is ranked 5th. Beta Represents the measure of volatility of the schemes returns in comparison to its respective Benchmark Index. The highest Beta is of Reliance Growth Fund (1.22) hence, it is highly volatile fund and it also give fabulous profits, hence it is ranked 1st On the other hand HSBC Equity Fund maintains a very conservative portfolio with a Beta of 0.95, hence it is ranked 5th in terms of volatility compared to its Benchmark Index. Reliance Growth Fund is the most aggressive fund and HSBC Equity Fund is the most defensive fund. Rest of the funds are all aggressive funds because all of them possess a Beta >1.

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Comparison in terms of Alpha of the Schemes Name of the MF Scheme Reliance Growth Fund HDFC Top 200 HSBC Equity Fund Reliance Vision Fund Birla Advantage Fund Alpha 9.12 7.75 7.13 4.34 -3.07 Ranking 1 2 3 4 5

The above table provides the alpha value of all the funds and their respective rankings. Here alpha represents how much the funds return is independent of the market returns. Here, Reliance Growth Fund has the highest alpha value(9.12) which represents that there is very high degree of independence of scheme returns and Benchmark Index returns. This future indicates high profitable retun as a whole. According to portfolio theory in well diversified portfolio the average value of all the stocks turns out to be Zero. At the other end Birla Advantage Fund shows a negative alpha(-3.07) which is a unhealthy sign for a portfolio and depicts that the scheme is much dependent to its Bechmark index retun. So it is ranked 5th among other schemes. Rest of the schemes has a positive and a reasonably high alpha.

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Comparison in terms of Sharpes Performance Index of the Schemes Name of the MF Scheme Reliance Growth HDFC Top 200 HSBC Equity Fund Reliance Vision Birla Advantage Sharpes Performance Index 0.52 0.46 0.45 0.41 0.21 Ranking 1 2 3 4 5

The higher the Sharpe Ratio the better is the risk adjusted return or performance of the fund. Here, the highest ratio is for the Reliance Growth Fund(0.52) hence, ranked 1st . The 2nd rank is for HDFC Top 200 with(0.46), 3rd is HSBC Equity Fund(0.45), 4th is Reliance Vision with(0.41). The fund with the least index value is Birla Advantage Fund(0.21).Sharpe Index is suitable for small investors, as the ordinary investor lacks the necessary skill and resources to diversified.

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Comparison in terms of Treynors Performance Index of the Schemes Name of the MF Scheme Treynors Performance Index Reliance Growth Fund HDFC Top 200 HSBC Equity Fund Reliance Vision Fund Birla Advantage Fund 18.84 15.63 15.06 14.58 7.54 1 2 3 4 5 Ranking

This Index is a ratio of return generated by the fund over and above risk free rate of return during a given period and systematic risk associated with it (beta). All riskaverse 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. Here Reliance Growth has the highest index value, hence it is also very favourble for Risk averse investors. Hence, it is ranked 1st in terms of Risk adjusted returns with18.84 as index value. HDFC Top 200(15.63) is ranked 2nd ,HSBC Equity Fund(15.06) is ranked 3rd, Reliance Vision Fund(14.58) is ranked 4th and Birla Advantage Fund has the lowest index value (7.54) is ranked 5th.

Comparison in terms of Jenesens Performance Index of the Schemes

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Name of the MF Scheme Reliance Growth Fund HDFC Top 200 HSBC Equity Fund Reliance Vision Fund Birla Advantage Fund

(Actual Expected) Returns 10.62 8.32 6.78 4.76 2.93

Ranking 1 2 3 4 5

This is yet another measure to gauge the performance of the fund. Here the expected return for each fund is calculated and is compared with the actual average return of each fund. If actual is greater than expected then the funds portfolio is working in an efficient manner. The degree of efficiency is determined by the residual value . the higher the value, more is the efficiency of the fund and higher is the performance. In this case Reliance growth is yet again the most efficient portfolio with the value of (10.62) , then HDFC Top 200 has the value of 8.32 is in the 2nd place, HSBC Equity Fund has the value of 6.78 is ranked 3rd , Reliance Vision Fund has the value of 4.76 is ranked 4th and Birla Advantage Fund possessing the least value of 2.93 is ranked 5th.

Comparison in terms of Jensons Performance Index[Alpha(p)] of the Schemes Name of the MF Scheme Reliance Vision Fund Reliance Growth Fund HDFC Top 200 HSBC Equity Fund Birla Advantage Fund Alpha(p) / Beta 6.61 5.75 0 0 0 Ranking 1 2 3 3 3

Here the Alpha(p) value indicates the Fund managers ability to forecast price movements in securities which are to be invested by the mutual fund. Only two funds 160

have a positive alpha i.e. Reliance Growth and Reliance Vision with +7.01 value of alpha(p),and the rest of the funds have alpha(p) = 0. Ultimately to rank the funds the Beta value is to be adjusted. Hence, Reliance Vision Fund has a value of 6.61 giving the 1st rank to Reliance Vision in this regards, and second rank is to be awarded to Reliance Growth(5.75) which ranks 2nd and the rest of the funds have a value equal to zero, awarded 3rd rank.

Comparison in terms of Fama Model of the Schemes Name of the MF Scheme Reliance Growth Fund HDFC Top 200 HSBC Equity Fund Birla Advantage Fund Reliance Vision Fund Net Selectivity 9.89 8.10 6.69 6.45 4.42 Ranking 1 2 3 4 5

The Eugene Fama model is an extension of Jenson model. This model compares the performance, measured in terms of returns, of a fund with the required return commensurate with the total risk associated with it. The difference between these two is taken as a measure of the performance of the fund and is called net selectivity. Here, higher the net selectivity of the scheme better is the performance of thefund 161

both for small investors and institutional investors. Hence, Reliance Growth fund is ranked 1st with a net selectivity of 9.89, HDFC Top 200 has a net selectivity of 8.10 and it is ranked 2nd . HSBC Equity fund has a net selectivity of 6.69 has a 3rd rank, Birla Advantage Fund has a value of 6.45 with 4th rank and Reliance Vision has a value of 4.42 ranks 5th. Net selectivity refers to the stock selection ability of the fund manager.

Conclusion Hence it can be very well concluded that the overall ranking based on the rankings of various performance evaluation indexes are as follows: 1st Reliance Growth Fund 2nd HDFC Top 200 3rd HSBC Equity Fund 4th Reliance Vision Fund 5th Birla Advantage Fund This ranking is given because most of the indexes rank these funds as above.

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Analysis of the Reliance Growth Fund with a Master Index (Average of BSE 100 BSE 200 and BSE SENSEX)

Computation of Master Index Reliance Growth Fund Vs Master Index Performance of the Scheme with regards to Master Index (Absolute Returns)

Risk- Return Analysis of Reliance Growth Fund (Master Index) Comparing results of Reliance Growth Fund with respect to BSE 100 and Master Index

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Computation of Master Index Financial Years 04-05 05-06 06-07 07-08 08-09 Total Ret. BSE 100 17.38 69.57 11.62 24.9 -37.94 85.53 Ret. BSE 200 18.27 62.82 10.58 23.99 -40.98 74.68 Ret.BSE SENSEX 16.14 73.73 15.61 19.56 -37.94 87.1 Master Index Ret. (Mi) 17.26 68.71 12.60 22.82 -38.95 82.44

It is a hypothetical case where all the Benchmark Indices of different schemes are combined to form a master index. With the help of this master index a further analysis will be made with respect to the best scheme (Reliance Growth) The return of the master index is calculated by averaging the returns for BSE 100, BSE 200 and BSE SENSEX for each Financial Year.

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Reliance Growth Fund Vs Master Index Performance of the Scheme with regards to Master Index (Absolute Returns)
Absolute Returns for the Last 5 Years
100 80 Returns(%) 60 40 20 0 -20 -40 -60 Financial Years 2004-05 2005-06 2006-07 2007-08 2008-09 -39.97 -38.95 58.45 92.28 68.71

17.26

13

26.2 12.6

22.82

Scheme Returns Master Index Returns

Interpretation In the above graph, it is seen that Reliance growth fund has provided fabulous returns of 58.45% and 92.28% in FY 04-05 and 05-06 respectively. It has managed funds so efficiently that it has outperformed Master Index by huge extent i.e. 41.19% points and 23.57% points in the above 2 years respectively. In FY 06-07and 07-08 there has been a reasonable return by the scheme i.e. 13% and 26.2% and have barely beat the index returns. But due to the global economic turmoil in FY 08-09 and its subsequent 165

impact on the Indian stock market has made the scheme to give a negative return of -39.97 % and faces more loses than the Master Index Returns by 1.02.

Risk- Return Analysis of Reliance Growth Fund (Master Index) The analysis is for the Financial Years ( 2011 2009) FY Absolute (RYearly Return (%) 04-05 05-06 06-07 07-08 08-09 Total (R) 58.45 92.28 13.0 26.2 -39.97 149.96 Rmean) (RMi(Master Mi Mi(mean) =16.49 {MiMi(mean)}^2 {MiMi(mean)}{RRmean} Cov(R,Mi) 809.40 3880.04 288.66 14.36 4894.40 9886.86 17.26 68.71 12.60 22.82 -38.95 82.44 0.77 52.22 -3.89 6.33 -55.44 0.59 2726.93 15.13 40.07 3073.59 5856.31 21.91 3252.78 66.09 -23.99 3878.58 7195.37

Rmean)^ Index)

Rmean= 2 29.99 28.45 62.29 -16.99 -3.79 -69.96

Average Return [Ri(mean)] = sum of Ri / n = 149.96 / 5 = 29.99 Average Return (Mi mean) = sum of Mi / n = 82.44 / 5 = 16.49 Standard Deviation / Total Risk S.D(Ri) = Square Root[Sum of { Ri Rmean}^2 / n ] = Square Root {9886.86 / 5 } = 44.47 The Range of return is from (-39.97% to 92.28%) i.e. 132.25% points

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The Total Risk(S.D) is 44.47 for the mutual fund for the last three years(2011-2009) The range of absolute returns on Reliance Growth Fund is (-39.97% to 92.28%) i.e. 132.25% points . The lowest return is shown in 08-09 when the economy was in a recessionary phase and the market was purely bearish. The highest return appears when the economy was in a good state and the fund was very prudently and efficiently managed in 05-06.

S.D(Mi) = Square Root[Sum of { Mi Mi(mean)}^2 / n ] = Square Root {5856.31 / 5} = Square Root (5856.31 /5) Beta of the Scheme Beta = Sum of [{Mi-Mi(mean)}{R-Rmean}] / Sum of [{Mi - Mi(mean)}^2] = 7195.37/ 5856.31= 1.23 Beta of 1.23 indicates that 1% change in Master Index returns would cause 1.23% change in Reliance Growth Scheme returns. Since Beta is > 1 i.e.1.23 the scheme is considered as risky and aggressive (which is normal for an equity oriented scheme. Correlation Coefficient between Scheme Returns and BSE 100 Returns r(Ri,Rm) = Sum of [{Mi-Mi(mean)}{R-Rmean}] /{ n * S.D(Ri) * S.D(Mi)} = 7195.37/ 5 *44.57 * 34.22 = + 0.94 There is very high positive correlation between schemes returns and Master index returns .The scheme tracks its benchmark index very effectively and even beats it frequently. The returns of both the scheme and Master index move in the same direction with nearly the same proportion. = 34.22

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Coefficient of determination (r^2) r^2 = (0.94)^2 = 0.88 The interpretation is that 88% of variations in Reliance growth Fund schemes return is explained by the variations in the Master index returns. Alpha of the Scheme Alpha = Ri(mean) Beta [ Mi(mean) ] = 29.99 - 1.23 (16.49) = + 9.71 The interpretation is that since the alpha value is positive i.e.(9.71) it is a healthy sign for the schemes portfolio and it indicates that the portfolio would yield profitable returns.

Performance Evaluation of the Scheme Sharpes Performance Index St = Ri Rf / S.D(Ri) = 29.99 7.01 / 44.47 = 0.52 [Risk Free rate assumed to be 7.01% - (reference: 10 year T-bill)]. 0.52 is the risk adjusted average rate of returns or risk premium of the portfolio relative to the total amount of risk in the portfolio. Treynors Performance Index Tn = Ri Rf / Beta = 29.99 7.01 / 1.23 = 18.68 18.68 is the risk premium per unit of systematic risk. The higher the index value the better is performance of the scheme in relation to its systematic risk.

Jensens Performance Index

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Rp = Rf + Beta ( Mi Rf ) = 7.01 + 1.23 (16.49 7.01) = 18.67 Now by comparing the actual return with expected return we get 29.99 18.67 = 11.32 Hence, Ri >Rp and the portfolio is considered to be functioning in an efficient manner. Alpha (p) = (Rp Rf) Beta (Mi Rf) = 19.32 1.23(9.48) = 19.32 9.48 = 9.84 The scheme has a positive alpha (9.84) so it considered that the predictability of price movements by the fund manager is satisfactory. Note:Rf = Risk Free Reurn ( assumed to be 7.01%) Mi = Average absolute market return (Master Index) Rp = Expected return of the scheme. Ri = Average absolute return of the scheme Alpha(p) = Fund managers ability to forecast price movements in securities. Fama Model Rr = Rf + Si/Smi*(Mi - Rf) = 7.01 + 44.47 / 34.22 (9.48) = 19.33 Net selectivity is then calculated by subtracting this required return from the actual return of the fund.

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Actual Return Required Return 29.99 19.33 = 10.66 Hence, the net selectivity of the scheme is positive i.e.10.66. So, this indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. It represents the stock selection skill of the fund manager is very good , as it is the excess return over and above the return required to compensate for the total risk taken by the fund manager. Si = S.D of Scheme Returns Sm = S.D of Index Returns

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Comparing results of Reliance Growth Fund with respect to BSE 100 and Master Index Measures Beta Alpha Correlation Coefficient (R^2) Coefficient of Determination Treynors Performance Index Jensens Performance Index (Actual-Expected) Returns Alpha(p) Fama Model Net selectivity The above table shows the changes in the values of the major performance indices due to the change of the Benchmark Index(Master Index). Betas value of the fund has increased from 1.22 to 1.23 making the fund returns more volatile in comparison to the master index. Alpha value has increased from 9.12 to 9.84 making it more independent from the master index (benchmark Index) returns than before. The profitability of the fund also increases. There is no change in the correlation Coefficient and coefficient of determination, they remained at 0.94 and 0.88 respectively. The Trenyors Performance Index Value has decreased from 18.84 to 18.68 which 171 7.01 9.89 9.84 10.66 RGF with BSE 100 1.22 + 9.12 + 0.94 0.88 18.84 10.62 RGF with Master Index 1.23 +9.84 + 0.94 0.88 18.68 11.32

shows that the risk adjusted return after taking into consideration Beta(systematic risk) has decreased. This is due to the increase in Beta. Jenesens Performance Index has increased from 10.62 to 11.32. This is nothing but the difference between actual and expected return, which indicates the efficiency of the scheme. Hence, the efficiency has increased. Alpha(p) value has also increased from 7.01 to 9.84 which indicates an increase in the ability to forecast price movements of securities by the fund manager. In case of Fama model, the net selectivity of the Reliance Growth increases from 9.89 to 10.66. Whereas net selectivity refers to the stock selection ability by the Fund Manager increases if the Master Index is considered instead of BSE 100 as the Benchmark Index.

Conclusion and Recommendations After conducting extensive analysis of 5 mutual Funds namely Reliance Growth Fund, Reliance Vision Fund, HDFC Top 200, HSBC Equity Fund, Birla

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Advantage Fund, it can be said that the overall ranking with respect to the performance evaluation of the funds are the following: 1st Reliance Growth Fund 2nd HDFC Top 200 3rd HSBC Equity Fund 4th Reliance Vision Fund 5th Birla Advantage Fund These rankings are subject to changes in the future. Recommendations (Scheme specific) from my side will be the following: 1) Reliance Growth Fund:It is recommended that an investor should invest for a longer horizon of time (3 years and above) to reap the benefit of substantial returns from the Reliance Growth Fund. This fund is suitable for both Institutional investors and small investors of the retail segment. 2) HSBC Equity Fund: I recommend that an investor should invest for a medium horizon of time (1 year and above) to reap the benefit of substantial returns. It has also shown a positive return in times of bearish trends. The HSBC Equity Fund must have had a strategy to counter the bear market. Hence it is a dependable scheme. It maintains a conservative Portfolio. 3) HDFC Top 200: I recommended that an investor should invest for a longer horizon of time because from the graph it is seen that the longer is the term of investment the higher is the returns of HDFC Top 200 Fund. 4) Birla Advantage Fund: It is recommended that one must take advantage of the scheme by investing for a short time period ( 7-8 months) so that he can redeem whenever he sees a considerable profit (rise in NAV) . Since presently its NAV is low. But it is not a performance-oriented scheme.

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5) Reliance Vision Fund: I recommend that an investor should invest for a longer horizon of time (3 years and above) to reap the benefit of substantial returns from the Reliance Vision Fund. The fund management needs improvement so that it can consistently beat the Benchmark Index.

All the schemes have a well-diversified portfolio and maximum share of the AUM is invested in equities because they are equity-oriented scheme with the ultimate aim to get superior capital appreciation.

The major sector and stocks in which the schemes has invested all fundamentally strong sectors and stocks who are either in a matured stage or have a tremendous growth potential in them. Through this kind of investing the fund manager can provide superior returns to the unit holders.

The hypothetical study made by me may induce the fund managers to adopt a Master Index as their Benchmark Index rather than using the conventional stock indices for equity oriented schemes. This study was conducted by comparing Reliance Growth Fund (1st Rank) using Master Index and the same fund using its traditional BSE 100. The performance was found to be better when the Master Index was considered. Hence I, recommend the fund manager to consider the Master Index to manage the portfolio of the scheme rather than using the conventional BSE 100.

Bibliography Websites : www.nseindia.com

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www.bseindia.com amfiindia.ac.in moneycontrol.ac.in investopedia.com

Books Referred: AMFI Text Book (Advisory Module) SAPM Fischer& Jordan

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