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WINTER PROJECT REPORT (MBA) RISK MANAGEMENT IN DEBT FUNDS OF STATE BANK OF INDIA

INVERTIS INSTITUTE OF MANAGEMENT STUDIES, BAREILLY 2009-2011

Submitted in partial fulfillment of the requirement for MBA Degree Programme of Uttar Pradesh Technical University, Lucknow

Project Guide:
Mr.Nitin Pathak Invertis university Bareilly Presented By: Rahul Kumar Srivastava MBA IVth sem. 0901570089 IIMS, Bareilly
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ACKNOWLEDGEMENT

There is always a sense of gratitude which one express to other for the helpful so needy services they render during all phases of life. I would like to express my gratitude towards all those who have been helpful to me in preparing my winter project. First of all, I consider it a pleasant duty to express my heartfelt appreciation, gratitude and indebtedness to Mr.Nitin Pathak, project guide for his keen interest, invaluable pain taking & excellent guidance, patience, endurance, encouragement & thoughtful advice throughout the project work duration. I am also thankful to all my friends and family who gave me constant & continuous inspiration to complete this project.

(RAHUL KUMAR SRIVASTAVA)

PREFACE
The post liberalization era has seen significant changes in product offerings by the mutual fund industry. Today, they have a wide variety of products and services offered by a large number of players. Investors are wooed by fund houses and distribution companies which have their focus on investor servicing. While the Indian customer is thrilled by the variety, he finds it difficult to make the right choice due to similar returns offered by the schemes. Before investing, one should take into consideration various factor such as risk taking ability, short and long term financial goal and liabilities. For instance, if the goal is to save for retirement, one should pick up high risk, high reward equity schemes. Investors should identify their needs and goals instead of following the herd. Following global trends, most fund houses are gearing up to launch schemes specifically for commodities, derivatives and real estate, thus increasing opportunities for the investors. Besides investing in mutual funds, investors are advised to have a mix of previous metal like gold and property in their investment portfolio.

Let us consider some investment options for different age groups. If you are young and have a risk taking ability, buy aggressive equity schemes. But invest prudently in equity funds at current sensex levels. If you buy equity scheme at high levels, ensure that some money is invested when sensex returns to lower levels. Regular investing will take care of market volatility and give decent returns. Young investors can also opt for high risk and high reward sectoral schemes. Also, investing in derivative dedicated scheme is associated with more risk; the returns from this scheme in a

Volatile market will be relatively high. For middle Aged investor, a combination of equity and debt instruments is advised. Middle aged investors should invest in balanced schemes instead of buying vanilla equity schemes.

Most funds have launched balanced funds and equity linked savings schemes where investors, as per the income tax act, qualify for income tax deduction. For an investor looking for regular income, several monthly income schemes have been launched. These schemes have been trailing the market in the past few months, but a look at their long term record reveals that these schemes are good investment vehicles. Before investing in any fund, investors should priorities goals and their financial needs so that short term swings of the market do not affect their overall returns.

EXECUTIVE SUMMARY
At the present time of cut throat competition in every industry every company want to top the chart and want to show as big as possible figure of profits in its balance sheet. It is quite clear today that at present time the growth of any organization is possible onl y wi th the help of hard working and well focused staffs that are the backbone of any

organizations. It was m y great pleasure that I completed m y summer training from State Bank of India Mutual Fund where I got to know that in Mutual Fund Industry the skills o f the man power matters most and increasing number of mutual fund Consultants help the organization to increase its mutual fund of policies which in turn result in growth for the organization. So it is quite clear that mutual fund Consultants matter most for State bank of India Mutual Fund. My job was to create the database for the organization so that the number if mutual fund Consultants could be increased. My job was to approach the individuals and aware them about mutual funds and the way of investment. By this, I am able to understand the needs of the investor at the time of investment. By approaching the individuals, I could understand about the different level of risk bearing capacity. I visited various areas of Lucknow in order to meet different t ypes of people. I was allotted to the branch of SBI.

TABLE OF CONTENT

Sr. No
1.

Page No. 7 11 21 28
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2. 3. 4. 5.

Introduction Organization Profile Mutual Fund Theoretical Concept SBI Mutual Fund Debt Fund Risk Management

Chapter-1 INTRODUCTION
INTRODUCTION

1.1

ABOUT THE PROJECT:

The post liberalization era has seen significant changes in product offerings by the mutual fund industry. Today, they have a wide variety of products and services offered by a large number of players. Investors are wooed by fund houses and distribution companies which have their focus on investor servicing. While the Indian customer is thrilled by the variety, he finds it difficult to make the right choice due to similar returns offered by the schemes. Before investing, one should take into consideration various factor such as risk talking ability, short and long term financial goal and liabilities. For instance, if the goal is to save for retirement, one should pick up high risk, high reward equity schemes. Investors should identify their needs and goals instead of following the herd. Following global trends, most fund houses are gearing up to launch schemes specifically for commodities, derivatives and real estate, thus increasing opportunities for the investors. Besides investing in mutual funds, investors are advised to have a mix of previous metal like gold and property in their investment portfolio. Let us consider some investment options for different age groups. If you are young and have a risk taking ability, buy aggressive equity schemes. But invest prudently in equity funds at current sensex levels. If you buy equity scheme at high levels, ensure that some money is invested when sensex returns to lower levels. Regular investing will take care of market volatility and give decent returns. Young investors can also opt for high risk and high reward sectoral schemes. Also, investing in derivative dedicated scheme is associated with more risk; the returns from 7

this scheme in a volatile market will be relatively high. For middle aged investor, a combination of equity and debt instruments is advised. Middle aged investors should invest in balanced schemes instead of buying vanilla equity schemes. Most funds have launched balanced funds and equity linked savings schemes where investors, as per the income tax act, qualify for income tax deduction. For an investor looking for regular income, several monthly income schemes have been launched. These schemes have been trailing the market in the past few months, but a look at their long term record reveals that these schemes are good investment vehicles. Before investing in any fund, investors should priorities goals and their financial needs so that short term swings of the market do not affect their overall returns.

1.2 OBJECTIVE OF THE STUDY:


The objectives of the study are as follows: 1. To find the number of schemes of mutual funds offered by the SBI-MF. 2. To find the participation of the investors in the decision making process and the degree of involvement exhibited by them while investing in mutual funds. 3. To analysis the risk level of the funds. 4. To know about the investors risk bearing power at every stages of life. 5. To know about the management of risk and to determine the optimum scheme for different different age groups. 6. To ascertain the brand image of SBI mutual fund schemes among available other mutual funds.

1.3 SCOPE OF STUDY:


At the present time of cut thro competition in every industry every company want to top the chart and want to show as big as possible figure of profits in its balance sheet. It is quite clear today that at present time the growth of any organization is possible only with the help of hard working and well focused staffs that are the backbone of any organizations. It was my great pleasure that I completed my summer training from State Bank of India Mutual Fund where I got to know that in Mutual Fund Industry the skills of the man power matters most and increasing number of mutual fund Consultants help the organization to increase its mutual fund of policies which in turn result in growth for the organization. So it is quite clear that mutual fund Consultants matter most for State bank of India Mutual Fund.

1.4-LIMITATIONS:
This study is based on investors expectations on the bases of risk for different different schemes. These expectations are majored on the interaction bases. Interaction was with different different age group people. Risk level is different and the way of managing the risk is also different because different schemes are managed by different managers.

Chapter-2 RESEARCH METHODOLOGY


RESEARCH METHODOLOGY:
Since the objective of the study requires an understanding of the nature of information collected and its usage at the time of the investment in mutual funds. For the information on different attributes of the different schemes of SBI-MF, interact with the investors or the potential investors from Lucknow. In the initial stage, we interacted with the present investor in mutual funds. These lists of investors were provided by the banks. After this, we were interacted with the potential customers of bank. Mutual funds are based on bank transactions. So it is necessary that potential customers have bank account. Thats why we were basically concentrating on the bank customers. For getting the information about the requirement of the investors, I visit the different different areas of Lucknow and interact with them. I found that the awareness of the mutual fund is very low. My main motive was to aware the people about the mutual fund its risk level and to learn the risk management with the help of mutual fund staff. The main objective of the study was management of risk. In this study, I was able to know how much risk in different different schemes and on the point of you of fund manager, how he or she is able to manage the risk.

DATA
Data are simply facts, or recorded measures of certain phenomena. Data are in raw

form for all. But to use the data for any organization or work, we need it make it in the suitable format. This form at is known as information.

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Data can be in forms, one is primary data and other can be secondary data. Primary data is that which is gathered and assembled specifically for This data is not published till now. Secondary data or historical data are data previously collected and assembled for some project other than the one in hand. This data can often be found inside the company, in the library, and on the internet. For this project, I used the secondary data, which is taken by the SBI MF. This data is from the SBI MF fact sheet and some internet sites. For the justification of the data, I directly meet with the investor of SBI- MF & the potential investors (Lucknow city). the research project at hand.

METHODOLOGY:
Research is an organized inquiry designed and carried out to provide information to solve the problem. Research is the process of systematically obtaining accurate answers to significant pertinent questions by the use of gathering data, interpretation and work.

DATA COLLECTION:
Data is collected through the company STATE BANK OF INDIA and the internet websites. Data collection is the most important part of any research and mainly it should be trustable. For this purpose, I interact with the general people from the lower class and middle class as well as the high class. By this, I am able to surely and confidently say that collected data are trustable.

MODE OF COLLECTION:
Data collection is the collecting work of our team including four trainees from various institutes with the help of SBI-MF staff members.

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INTERPRETATION:
Interpretation is based on the financial concepts. Interpretations are very important part of any research and it should base on the concepts. I tried to be this project very particular as on concept.

HYPOTHESS OF THE STUDY:


The following hypotheses are formulated for the present study: Age is an influencing factor for the investment in the schemes of mutual funds. There is no relationship between the occupation of the user and category of investors. The income of the investor influences the risk level and schemes of the mutual fund. Advertisement and sources of the awareness effects the decision of the investors. Risk level and investors age are not fully interdependent. Investors decisions are very much effected by the investors needs.

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CHAPTER-3 ORGANIZATION PROFILE


ORGANIZATION PROFILE ORGANIZATION STATE BANK OF INDIA
2.1 ABOUT SBI:
State Bank of India (SBI) is that country's largest commercial bank. The governmentcontrolled bank--the Indian government maintains a stake of nearly 60 percent in SBI through the central Reserve Bank of India--also operates the world's largest branch network, with more than 13,500 branch offices throughout India, staffed by nearly 220,000 employees. SBI is also present worldwide, with seven international subsidiaries in the United States, Canada, Nepal, Bhutan, Nigeria, Mauritius, and the United Kingdom, and more than 50 branch offices in 30 countries. Long an arm of the Indian government's infrastructure, agricultural, and industrial development policies, SBI has been forced to revamp its operations since competition was introduced into the country's commercial banking system. As part of that effort, SBI has been rolling out its own network of automated teller machines, as well as developing anytime-anywhere banking services through Internet and other technologies. SBI also has taken advantage of the deregulation of the Indian banking sector to enter the banc assurance, assets management, and securities brokering sectors. In addition, SBI has been working on reigning in its branch network, reducing its payroll, and strengthening its loan portfolio. In 2003, SBI reported revenue of $10.36 billion and total assets of $104.81 billion.

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2.2 HISTORY OF SBI:


The State Bank of India traces its roots to the first decade of 19th century when the Bank Of Calcutta, later renamed the Bank Of Bengal, was established on 2 June 1806. The government amalgamated Bank of Bengal and two other Presidency banks, namely, the Bank of Bombay (incorporated on 15 April 1840 and the Bank Of Madras on 27 January 1921, and named the reorganized banking entity the Imperial Bank Of India. All ,these Presidency banks had been incorporated as joint stock companies and were the result of the royal charters The Imperial Bank of India continued as a joint stock company. Until the establishment of a central bank in India the Imperial Bank and its early predecessors served as India's central bank, at least in terms of issuing the currency. The State Bank of India Act 1955, enacted by the Parliament Of India, authorized the Reserve Bank Of India, which is the central banking organization of India, to acquire a controlling interest in the Imperial Bank of India, which was renamed the State Bank of India on 30 April 1955.

2.3 ASSOCIATE BANKS:


There are seven other associate banks that fall under SBI. They all use the "State Bank of" name followed by the regional headquarters' name. These were originally banks belonging to princely states before the government nationalized them in1959. In tune with the first Five Year Plan, emphasizing the development of rural India, the government integrated these banks with the State Bank of India to expand its rural outreach. The State Bank group refers to the seven associates and the parent bank. All the banks use the same logo of a blue keyhole. Currently, the group is merging all the associate banks into SBI, which will create a "mega bank", and one hopes, streamline operations and unlock value. State Bank Of Bikaner & Jaipur State Bank OF Hyderabad 14

State bank Of Indore State Bank Of Mysore State Bank Of Patiala State Bank Of saurashtra State Bank Of Travancore

2.4 FOREIGN OFFICES:


State Bank of India is present in 32 countries, where it has 84 offices serving the international needs of the bank's foreign customers, and in some cases conducts retail operations. The focus of these offices is India-related business. SBI has branches in these countries: Australia Bahrain Germany Hong Kong Israel U.S.A. Republic Of Maldives Bangladesh Belgium Japan Sri Lanka The Bahamas Canada Dubai France U.K. South Africa Singapore Sultanate Of Oman

Peoples Republic Of

China

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2.5 GROWTH OF SBI:


State Bank of India has often acted as guarantor to the Indian Government, most notably during Chandra Shekhars tenure as Prime Minister of India. With more than 9400 branches and a further 4000+ associate bank branches, the SBI has extensive coverage. Following its arch-rival ICICI Bank, State Bank of India has electronically networked most of its metropolitan, urban and semi-urban branches under its Core Banking System (CBS), with over 4500 branches being incorporated so far. The bank has the largest ATM network in the country having more than 5600 ATMs The State Bank of India has had steady growth over its history, though the Harshad Mehta scam in 1992 marred its image. In recent years, the bank has sought to expand its overseas operations by buying foreign banks. It is the only Indian bank to feature in the top 100 world banks in the Fortune Global 500 rating and various other rankings. According to the Forbes 2000 listing it tops all Indian companies.

2.6 GROUP COMPANIES:


SBI Mutual funds ( A Trust )

SBI Capital Market Ltd SBI Factors And Commercial Services Ltd SBI DFHI Ltd SBI Cards And Payment Services Ltd SBI Life Insurance Co. Ltd ( Life Insurance ) SBI Funds Management Pvt. Ltd SBI Canada

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2.7 Socit Gnrale Asset Management :


SGAM has a strong global research wing and strong products in the capital guaranteed and real estate categories. SGAM stands for Socit Gnrale Asset Management. SGAM is a French company and have its business in France. SGAM is one of the world leading fund management company managing assets of US$ 330bn world wide. SGAM has global markets expertise and significant strengths in Risk management and compliance.

2.8 MUTUAL FUND INDUSTRY IN INDIA:

2.8.1 HISTORY:
The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry. In the past decade, Indian mutual fund industry had seen dramatic improvements, both quality wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets under Management (AUM) was Rs.67bn. The private sector entry to the fund family rose the AUM to Rs.470 bn in March 1993 and till April 2004, it reached the height of 1,540 bn. Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. 17

2.8.2 MUTUAL FUND IN INDIA:


Mutual Funds have been around for a long time, dating back to the early 19th century. The first modern American Mutual fund opened in 1924, yet was only in the 1990s that mutual funds became mainstream investments, as the number of households owning them nearly tripled during that decade. With recent surveys showing that over 88% of all investors participate in mutual funds, you are probably already familiar with these investments, or perhaps ever own same. In any case, its important that you know exactly how these investments work and how you can use them to your advantage. A Mutual fund represents a vehicle for collective investment. When you participate in the scheme of a mutual fund, you become part owner of the investments held under that scheme. Mutual funds mobilize savings from a large number of investors and invest these funds in shares and other securities. The return obtained from the mutual funds investments is shared among the investors, called shareholders or unit holders, in proportion to their investment. Mutual funds employ a professional team to carry out the investment activities on behalf of unit holders. The main feature of a mutual fund is that it makes diversification of portfolio a possibility for the small investors who otherwise may not be able to do so with their limited resources. These investors are also able to get professional investment management services and are relieved in investing in securities like book keeping and transaction. The mutual fund is constituted as a trust under the Indian Trust Act, 1881, and registered with SEBI. In India the following entities are involved in a mutual fund operation: The sponsor The mutual fund The trustees The asset management company The custodian The registrars and transfer agents 18

2.9 SBI-MUTUAL FUNDS


SBI Mutual Fund, one of the countrys premier fund houses, with over 20 years of rich experience in the fund management, was founded with a vision To reach out to the small investor and provide them with alternate investment options to help achieve their financial goals. It is Indias largest bank sponsored mutual fund and has an enviable track record in judicious investments and consistent wealth creation. SBI Mutual Fund is a joint venture between The State bank Of India and Socit Gnrale Asset Management, one of the worlds leading fund management companies. Today, SBI Mutual Fund is among the largest AMC in the country managing assets of over Rs.25,878 crores as on July 31st 2007 across 40 active schemes. The trust reposed by 3.8 million investors is a testimony to our fund management expertise.

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Joint agreement with SocGen unit signed - SBI MF seeks to be second biggest:

A joint venture between State Bank of India and Socit Gnrale Asset Management. SGAM has global markets expertise and significant strengths in Risk management and compliance. JV strengths include cultural similarity and clear demarcation of activities based on mutual strengths. SBI Mutual is the first bank-sponsored fund to launch an offshore fund Resurgent India Opportunities Fund. Net worth of Rs.63 Crores and assets over Rs.7000 crores under management. Choice of 28 open ended schemes. Investor base of over 9 lakhs investors. 17 years of Fund Management expertise. Schemes of the Mutual fund have consistently outperformed benchmark indices and have emerged as the preferred investment for millions of investors and HNIs.

2.10 COMPOUNDING GROWTH OF SBI-MUTUAL FUND:


In twenty years of operation, the fund has launched 38 schemes and successfully redeemed fifteen of them. In the process it has rewarded its investors handsomely with consistently high returns. A total of over 5.4 million investors have reposed their faith in the wealth generation expertise of the Mutual Fund. Schemes of the Mutual fund have consistently outperformed benchmark indices and have emerged as the preferred investment for millions of investors and HNIs. Today, the fund manages over Rs.31,794 crores of assets and has a diverse profile of investors actively parking their investments across 36 active schemes. 20

The fund serves this vast family of investors by reaching out to them through network of over 130 points of acceptance, 28 investor service centers, 46 investor service desks and 56 district organizers. SBI Mutual is the first bank-sponsored fund to launch an offshore fund Resurgent India Opportunities Fund. Growth through innovation and stable investment policies is the SBI MF credo.

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State Bank of India


100%

SBI Mutual Fund Trustee Company Pvt. Ltd

State Bank of India

Socit Gnrale Asset Management

63%

37%

SBI Funds Management Pvt. Ltd


(Asset Management Company)

SBI Mutual Fund

[Fig. 2.1: CAPITAL STUCTURE]

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2.11 COMPETITORS OF SBI MUTUAL FUND


SBI was allowed to dominate the Indian banking sector for more than two decades. In the early 1990s, the Indian government kicked off a series of reforms aimed at deregulating the banking and financial industries. SBI was now forced to brace itself for the arrival of a new wave of competitors eager to enter the fast-growing Indian economy's commercial banking sector. Yet years as a government-run institution had left SBI bloated--the civilservant status of its employees had encouraged its payroll to swell to more than 230,000. The bureaucratic nature of the bank's management left little room for personal initiative, nor incentive for controlling costs. By the beginning of 2004, SBI appeared to be well on its way to meeting the challenges offered by the deregulated Indian banking sector. In a twist, the bank had become an aggressor into new territories, launching its own line of banc assurance products, and also initiating securities brokering services. In the meantime, SBI continued its technology rollout, boosting the number of networked branches to more than 4,000 at the end of 2003. SBI promised to remain a central figure in the Indian banking sector as it entered its third century. Major competitors regarding mutual funds are given below:

COMPETITORS: 1-ABN AMRO Mutual Fund


ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund.

2- HDFC Mutual Fund


HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely Housing Development Finance Corporation Limited and Standard Life Investments Limited.

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3- HSBC Mutual Fund


HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund.

4-Prudential ICICI Mutual Fund


The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on 13th of October, 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June, 1993.

5-Kotak Mahindra Mutual Fund


Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having more than 1,99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities.

6- Unit Trust of India Mutual Fund


UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI Asset Management Company presently manages a corpus of over Rs.20000 Crore. The sponsors of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank , State Bank of India, and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds and Balance Funds.

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7- Reliance Mutual Fund


Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities.

8- Standard Chartered Mutual Fund


Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated with SEBI on December 20,1999.

9-Franklin Templeton India Mutual Fund


The group, Franklin Templeton Investments is a California (USA) based company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through their website. They have Open end Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes, Closed end Income schemes and Open end Fund of Funds schemes to offer.

10-Morgan Stanley Mutual Fund India


Morgan Stanley is a worldwide financial services company and its leading in the market in securities, investment management and credit services. Morgan Stanley Investment Management (MISM) was established in the year 1975. It provides customized asset management services and products to governments, corporations, pension funds and non25

profit organizations. Its services are also extended to high net worth individuals and retail investors. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close end diversified equity scheme serving the needs of Indian retail investors focusing on a long-term capital appreciation.

11-LIC Mutual Fund


Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs.2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund.

CONCLUTION
Mutual fund is really a booming industry now a day. SBI is a major player in this field. Concept of mutual fund is very old as it is since 1980s but till now this industry is suffering a lot. So this needs the extra focus on this particular industry. SBI is one of the well recognized banks in this sector. There is enough opportunity for this industry as well as SBI bank. SBI is also having good efforts and result for the investor and from the investment.

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CHAPTER 4 MUTUAL FUND THEORICAL CONCEPT


MUTUAL FUND THEORICAL CONCEPT

HISTORY OF MUTUAL FUND:


Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies. At the beginning of this millennium, mutual funds out numbered all the listed securities in New York Stock Exchange. Mutual funds have an upper hand in terms of diversity and liquidity at lower cost in comparison to bonds and stocks. The popularity of mutual funds may be relatively new but not their origin which dates back to 18th century. Holland saw the origination of mutual funds in 1774 as investment trusts before spreading to AngloSaxon countries in its current form by 1868.

CONCEPT OF MUTUAL FUND:


Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares. Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values). 27

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund: -

[Fig. 3.1: CYCLE OF MUTUAL FUND]


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ADVANTAGES:
It may not be obvious at first why we would want to purchase shares in different securities though a mutual fund middle man instead of simply purchasing the securities own. Mutual funds can offer the following benefits: Diversification can reduce your overall investment risk by spreading your risk across many different assets. With a mutual fund you can diversify your holdings both across companies (e.g. by buying a mutual fund that owns stock in 100 different companies) and across asset classes (e.g. by buying a mutual fund that owns stocks, bonds, and other securities). When some assets are falling in price, others are likely to be rising, so diversification results in less risk than if you purchased just one or two investments. Choice: Mutual funds come in a wide variety of types. Some mutual funds invest exclusively in a particular sector, while others might target growth opportunities in general. There are thousands of funds, and each has its own objectives and focus. The key is for you to find the mutual funds that most closely match your own particular investment objectives. Liquidity is the ease with which you can convert your assets--with relatively low depreciation in value--into cash. In the case of mutual funds, it's as easy to sell a share of a mutual fund as it is to sell a share of stock. Low Investment Minimums: Most mutual funds will allow you to buy into the fund with as little $1,000 or $2,000, and some funds even allow a "no minimum" initial investment, if you agree to make regular monthly contributions of $50 or $100. Whatever the case may be, you do not need to be exceptionally wealthy in order to invest in a mutual fund. Convenience: When you own a mutual fund, you don't need to worry about tracking the dozens of different securities in which the fund invests; rather, all you need to do is to keep track of the fund's performance. It's also quite easy to make monthly contributions to mutual funds and to buy and sell shares in them. 29

Low Transaction Costs: Mutual funds are able to keep transaction costs -- that is, the costs associated with buying and selling securities -- at a minimum because they benefit from reduced brokerage commissions for buying and selling large quantities of investments at a single time. Of course, this benefit is reduced somewhat by the fact that they are buying and selling a large number of different stocks. Annual fees of 1.0% to 1.5% of the investment amount are typical.

Regulation: Mutual funds are regulated by the government under the Investment Company Act of 1940. This act requires that mutual funds register their securities with the Securities and Exchange Commission. The act also regulates the way that mutual funds approach new investors and the way that they conduct their internal operations. This provides some level of safety to you, although you should be aware that the investments are not guaranteed by anyone and that they can (and often do) decline in value.

Risk-free: Mutual funds are relatively risk free in the way they invest and manage the funds. The investment from the pool is well diversified across securities and shares from various sectors. The fundamental understanding behind this is not all corporations and sectors fail to perform at a time. And in the event of a security of a corporation or a whole sector doing badly then the possible losses from that would be balanced by the returns from other shares.

DIFFERENT TYPES OF MUTUAL FUNDS:


A mutual fund has several schemes in which we can invest. There are structure based schemes distinguished by their maturity periods. OPEN ENDED SCHEMES CLOSE ENDED SCHEMES INTERVAL SCHEMES

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OPEN ENDED SCHEMES:


These schemes have no fixed maturity period. Open ended schemes are available for subscription and redemption (purchase and sale) on an ongoing basis. The units are bought and sold at NAV related prices. In this type of scheme, we are free to exit. There is not locking time for the money.

CLOSE ENDED SCHEMES:


These schemes have a stipulated maturity period. Typically, we can invest in them for between 3 to 10 years. These schemes are open for subscription only during a specified period at the time of their launch. In case of listed schemes, we can invest at the time of the initial issue and thereafter units of the scheme can be bought or sold on the stock exchanges where the scheme is listed.

INTERVAL SCHEMES:
Interval schemes are a combination of open ended and close ended schemes. These schemes remain open for sale and repurchase only during a specified period.

BROAD TYPES OF MUTUAL FUNDS:


Equity Funds
Equity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket.

Debt / Income Funds


Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are 31

low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky.

Gilt Funds
Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.

Money Market / Liquid Funds


Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks).

Hybrid Funds
As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio.

32

Commodity Funds
These funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds.

Real Estate Funds


Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation.

Exchange Traded Funds (ETF)


Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad.

Fund of Funds
Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of 33

Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes.

[FIG. 3.2: GRAPHICAL REPRESENTATION PF RISK & TYPES OF MUTUAL FUNDS]

34

RATING OF MUTUAL FUND SCHEMES:


Mutual Fund Schemes are periodically evaluated by the Independent Institutions. CRISIL, Value Research India, and Economic Times are three such institutions whose ranking or evaluations are currently very popular.

A)-CRISIL:
Composite Performance Ranking that cover all open ended schemes that disclose their entire portfolio composition and have NAV information for at least two years. It currently ranks schemes in five categories viz. Equity Schemes, Debt Schemes, Gilt Schemes, Balanced Schemes and Liquid Schemes. Its ranking is based on four criteria, viz. risk adjusted return of the schemes NAV, diversification of the portfolio, liquidity, and asset size. The weights assigned to these criteria vary from category to category. Within each category, the top 10 percent are considered very good, the next 20 percent good, the next 40 percent average, the next 20 percentage below average, and the last 10 percentage poor.

B)- VALUE RESEARCH INDIA:


Like CRISIL, Value Research India rates schemes in different categories. Each scheme is a risk grade and a return grade and a composite measure of performance is calculated by subtracting the risk grade from the return grade. Within each category, the top 10 percentage are considered five star, the next 22.5 percentage four star, the next 35 percentage three star, the next 22.5 percentage two star, and the last 10 percentage one star.

C)-ECONOMIC TIMES LIPPER:


The Economic Times, powered by Lipper, evaluates mutual fund schemes using a return risk ratio which is defined as average return dividend by standard deviation of return. The Economic Times periodically reports the return risk ratio for top performing mutual fund schemes along with a few other parameters. 35

CHAPTER 5 SBI DEBT MUTUAL FUNDS


SBI DEBT MUTUAL FUNDS
INTERODUCTION:
The company may raise debt in a variety of ways. It may borrow funds from financial instruments or public either in the form of public either in the form of public deposit or debentures for a specified period of time at a certain rate of interest. A debenture may be issued at par at a discount or premium as compared to its face value. Debt Funds invest only in debt instruments such as Corporate Bonds, Government Securities and Money Market instruments either completely avoiding any investments in the stock markets as in Income Funds or Gilt Funds or having a small exposure to equities as in Monthly Income Plans or Children's Plan. Hence they are safer than equity funds. At the same time the expected returns from debt funds would be lower. Such investments are advisable for the risk-averse investor and as a part of the investment portfolio for other investors. Companies, like the governments, borrow money by issuing bonds called corporate bonds. The Government of India periodically issues bonds which are called Government bonds. A part from the central and State Governments, a number of Government agencies issue bonds that are guaranteed by the central government or some state Government. Interest payments on these bonds are typically semi annual.

36

ORGANISATION STRUCTURE OF DEBT FUNDS:


Headed by K. Ram Kumar, with over 14 years experience in Mutual Funds, with last 2 years with SBIMF manages liquid funds and floaters. Ganti Murthy with over 10 years experience in Mutual Funds, handles Long Term Funds. Bekxy Kuriakose, with 5 years experience all with SBIMF manages the hybrid funds. The funds management is supported by a Research Analyst and Dealer. The fund management process is driven by the objectives of the scheme. Decisions driven by Fund Managers view with close monitoring by Investment Committee.

CIO

Fund Manager

Head of Fixed Income

Fund Manager

Dealer

Research Analyst

[FIG. 4.1: ORGANISATION STRUCTURE OF DEBT FUNDS]

37

INVESTMENT METHODS:
Investment can be possible in two ways: One time investment Systematic Investment Plan

a) ONE TIME INVESTMENT


One time investment plan is also known as lum-sum deposit. In it investor has to invest full money at the time of investment. MINIMUM INVESTMENT LIMIT- Rs. 50,000 MAXIMUM INVESTMENT LIMIT - No limit

b) SYSTEMATIC INVESTMENT PLAN(SIP) This is for the systematic plan of saving. In this plan investor has to invest minimum Rs. 6000 in a year. This plan is mainly for the fixed income people. MINIMUM AMOUNT & TIME FOR S.I.P. AMOUNT Rs. 500 TIME For 12 months

Rs. 1000

For 6 months

Rs. 1500

For per quarter

38

SIP BENEFITS: Rupee Cost Averaging Capitalize on periodic dips in the stock market and get more units at lower NAV thus lowering your average unit cost resulting in higher returns. Disciplined Investing Approach Plan you investment, select a fund and invest small amounts regularly to build a sizable amount. For as little as Rs 1000/pm a sizable amount can be build. Compounding benefits - The amounts invested early and regularly, help not only in creating a substantial amount of wealth but also returns compounded over the years. Simple and Convenient You do not have to take time from your schedule to make your investments. With a completed application form, one can submit post dated cheques or avail the Magnum Easy Pay (auto-debit) facility.

REQUIREMENTS FOR SIP: For starting S.I.P., we need only three things Bank account Mutual fund scheme which offers SIP facility Rs 500 per month minimum AND every month amount will be debited from investors bank account and units will allocate to investor. EXAMPLE: If invest 1,000 Rs. Per month and get Rs. 70,00,000 in 30 years with 15% return39

Value of investment (Rs.)

8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29


100000 10,00,0 00 70,00,000

6% p.a. 10% p.a. 15% p.a.

No. of years
[FIG. 4.2: GRAPHICAL REPRESENTATION OF YEAR & VALUES]
Systematic Transaction Plan:
Minimum amount- Rs.1000/- month - 6 months Rs.3000/ Quarter - 6 months In respect of STP transactions, an investor would now be permitted to transfer any amount from the switch-out scheme, subject to a minimum transfer of Rs.1000 pm or Rs.3000 per quarter, without any restriction on maintaining the minimum balance requirement as stipulated for the switch out scheme. The minimum period for STP will be at least 6 months.

40

SCHEMES IN DEBT FUNDS:


Some mutual fund schemes are given below: Magnum NRI Investment Fund Magnum Income Plus Fund Magnum Income Fund Magnum Childrens Benefit Plan Magnum Monthly Income Plan Magnum Gilt Fund Magnum Monthly Income Plan Float

41

CHAPTER 6 RISK MANAGEMENT IN DEBT SCHEME


RISK MANAGEMENT IN DEBT SCHEMES
INVESTMENT DECISION
Investor should take the decision by seeing the two sides of the investment: Return Risk

RETURN:
Return is the primary motivating force that drives investment. It represents the reward of undertaking investment. The game of investing is all about returns. The return of an investment consists of two components:

CURRENT RETURN:
Current return is measured as the periodic income in relation to the beginning price of the investment. As: - dividend or interest, generated by the investment.

FOR EXAMPLE: It gives 7.0 to 10.0% due to the holding of non convertible debentures which gives maximum interest in all debentures. If fund give 7% average for 3 years, current return for 1 unit-

Current return = (10* 7/100) *3 = 2.10 Rs.

42

CAPITAL RETURN:
Capital return is reflected in the price change. As: - change in assets like equity stocks, debt stocks etc.

CALCULATION: Capital return = sale of fund (NAV)-purchase of fund (NAV)

FOR EXAMPLE: For 3 years, NAV of 31-April- 2005 is 9.75 Rs. And on 31- April- 2008 is 10.29 Rs. Capital return = 10.29 9.75 = 0.54Rs. / Unit

RISK:
Now question arises what is risk? How an investor can measure it? Risk is called as BETA. Beta is risk factor which present in all type of investment. Risk refers to the possibility that the actual outcome of an investment will differ from its expected outcome. Means Risk is always present but only quantity of risk matters.

CALCULATION: BETA is directly related to the market returns and the fund return. Market is always unexpected and fund is always changeable.

43

NOTE: Risk can be measured due to three type of risk:

A)-BUSINESS RISK: As an Investor of corporate securities (Equity shares or Debentures), investor is exposed to the risk of poor business performance. This may be caused by a variety of factors like heightened competition, emergence of new technology, inadequate supply of essential inputs, change in government policies, and so on. It can affect the interest of debenture holders if the ability of the firm to meet its interest and principal payment obligation is impaired.

B)-INTEREST RISK: The changes in interest rate have a bearing on the welfare of investors. As the interest rate goes up, the market price of existing fixed income security falls, and vice versa. Fixed income securities price effect the return.

C)-MARKET RISK: There can be several reasons for the fluctuation; a major cause appears to be the changing psychology of the investors.

TOTAL RISK:
All type of risks is included in measure the total risk.

Total risk = Business risk + Interest risk + Market risk

After understanding only the meaning of risk and return, an investor can not take investment decision. For this, investor should understand the standards of risk and relationship between return and risk.

44

RISK AND RETURN:


Before taking any decision about investment investor should do the joint study on return and risk. Now investor has some question in his mind: Q.1- What is relationship between the return and risk? Q.2 On which ratio we should do the investment? Q.3 Are risk and return only factors to effect the investment decision? And so on .

There is no any hard and fast rule for any thing. Every decision or investment opportunity have different look to see.

AN EXAMPLE FOR RISK RETURN: If there is 1.00 risk and return is also 10%. QUS. -Do you think it is good?????????? No it is not. In this condition what is the benefit? In it you may lose your 1 Rs. Or can get 0.10 Rs. So return should as according to the level of risk.

RISK ANALYSIS:
Return and risk has relationship for decision only. For a good decision maker there should be inverse proportion. As: - Risk should be minimum and Return should be maximum.

45

Analysis for the risk (Beta):

RISK
Less than 0.5

DECISION
Risk is too less. Enough opportunity to invest. There is risk but not much. Investor can invest on this level. It is the maximum level of risk on which investor can invest. Not good for investment. On this level investor should not invest.

0.5 to 0.9

Equal to 1.00

More than 1.00

OPTIONS:
These options are related to the current or periodic return. Investor has two opportunity or option about to receive the current return. Investor has to choose one of them:

GROWTH: In growth option, investor doesnt get the return in money form. Fund managers invest the current return directly in the same fund and allot the units for this current return.

DIVIDEND: In dividend option, investor can get return in money form. Here investor has two options again. As: - Payout - Investor withdraw the current return.

Reinvestment- Investor got the return and than reinvest it. 46

QUANTITAVE DATA:
1)- STANDARD DEVIATION:
Standard deviation is often by the investors to measure the risk of a stock. The basic idea is that the standard deviation is a measure of volatility. In finance, S.D. is applied to the annual rate of return of an investment to measure the investments volatility. S.D. is known as historical volatility and is used by investors as a gauge for the amount of expected volatility.

S.D. ANALYSIS:The more a stocks return varies from the stocks average return, the more volatile of stock. Lesser the Standard Deviation means lesser the Volatility. And it is good condition for the investor.

2)- BETA ():


It is the risk factor which is always available in all type of investment. Risk is the factor which impacts the investors decision.

ANALYSIS: Minimum the risk, maximum the security for the investor.

47

3)- R-SQUARE:
R-SQUARE is known as variance. Variance shows how much it is affected by the market fluctuation. The relation between the market and investment return are basically known as variance.

R-SQUARE ANALYSIS: Lesser the variation lesser the risk. Variation should be less for the good investment.

4)- SHARPE RATIO:


This ratio shows the ratio between the return and risk. Sharpe Ratio = Return / Risk

SHARPE RATIO ANALYSIS: If Sharpe Ratio is higher than it is good for the investors.

ABOUT THE DEBT FUNDS

(BY VALUE RESEARCH)

Magnum NRI Investment Fund:


FUND MANAGER:
Mr. Ganti N. Murthy He has a great experience of 16 years in managing funds. In this fund he has only 1 month experience.

48

OBJECTIVE:
To provide attractive returns to the magnum holders either through periodic dividends or through capital appreciation through an actively managed portfolio of debt, equity, and money market instruments.

INCOME GENRATE:
Income may be generated through the receipt of coupon payments, the amortization of the discount on the debt instruments, receipt of dividends or purchase and sale of securities.

BENCHMARK:
Crisil Composite Bond Fund Index.

NAV OF THE FUND:


NAV of April is 10.31 (D) NAV of May is 10.29 (D)

SECTORAL BREAKDOWN:
Net Current Asset Non-convertible Debenture

Non-convertible Debenture are from Housing Development Finance Corporation Limited. Net Current Asset 64.08% Non-convertible debenture 35.92%

49

Non convertible deb., 35.92, 36%

Net cuurent asset, 64.08, 64%

Net cuurent asset Non convertible deb.

INFORMATION ABOUT NRI INVESTMENT FUND HEADING


Entry Load Exit Load

DETAILS
Nil Short Term - Nil Long Term With in 6 month- 0.5% After 6 month- Nil Growth Dividend Payout Reinvestment One Time Investment S.I.P. S.T.P.

Options

Investment way

50

FUND PERFORMANCE: YTD 1m 3m 6m 1y 3y 5y S.Inc

Fund

-.25

-.23

-.51

0.19

1.89

2.38

N.A.

2.29

Benchmark 1.44

0.39

0.38

2.89

7.96

5.26

N.A.

3.97

QUANTITATIVE DATA: Standard deviation 1.20% Beta 0.45 R-Squared 0.50 Sharpe Ratio -4.04

Ratio

ANALYSIS OF QUANTITATIVE DATA:

S.D.: Standard Deviation of the Fund is 1.20% It is very less. So it is good condition.

BETA: There is 0.45 beta which is very less. So in this fund there is more security. It is good condition for the investor.

R SQUARE: R2 is 0.50 which is good for the investor.

51

SHARPE RATIO: Sharpe Ratio of NRI Fund is -4.04 This is negative. It means one of them (risk and return) is negative. Risk can be negative. Return is negative. So it is not beneficial for the investor.

(BY VALUE RESEARCH)

Childrens Benefit Plan

FUND MANAGER:
Mr. Ganti N. Murthy He has a great experience of 16 years in managing funds. In this fund he has only 1 month experience.

OBJECTIVE:
To provide attractive returns to the magnum holders / unit holders by means of capital appreciation through an actively managed portfolio of debt, equity and money market instruments. Income generated though the receipt of coupon payments, the amortization of the discount on the debt instruments, receipt of dividends or purchase and sale of securities in the underlying portfolio, will be reinvested.

RATIO OF EQUITY AND DEBT:


Under this scheme, your money is invested using what is called the 80:20 principles. This means that 80% of your savings is put into debt instruments, ensuring stability and security in a volatile market. The balance 20% can ride the crest of the

52

equity market to maximize returns. The ratio can be altered to 75:25 depending on market conditions.

BENCHMARK:
Crisil MIP Blended Index

SECTORAL BREAKDOWN:
Preference Shares 0.05 Net Current Asset 27.91 Certificate of Deposits 9.24 Commercial Paper 20.85 Non-Commercial Paper 26.17 Equity Shares 15.78

Preference share Net equity share,Preferenc curreent 15.78, e share, asset, 16% 0.05, 0% 27.91, 28% non certificate commerci of commerci al paper, deposits, al paper, 26.17, 9.24, 9% 20.85, 26% 21% Net curreent asset certificate of deposits commercial paper non commercial paper equity share

53

ABOUT THE MAGNUM CHILDRENS BENEFIT:


Minimum Investment of Rs. 1500 only In multiples of Rs. 100 - no maximum limit. Entry Load: 1.50% SIP /STP - Nil Exit Load: Within 1 year: 3% Within 2 years: 2% Within 3 years: 1%

SIP /STPAs applicable to the normal transaction in the respective Debt Schemes. NAV: NAV of the month APRIL 18.1804 NAV of the month MAY 18.6053

FUND PERFORMANCE: YTD 1m 3m 6m 1y 3y 5y S.Inc

Fund

-1.00

2.34

1.76

0.90

9.24

10.61

10.82

10.48

Benchmark -1.01

1.68

0.62

0.87

11.23

10.28

9.79

N.A.

54

QUANTITATIVE DATA:
S.D. RATIO 4.72% BETA 0.97 R - SQUARE 0.83 SHARPE RATIO 0.72

ANALYSIS OF QUANTITATIVE DATA: S.D.:


Virility of the fund is very low. It is only 4.72%. It shows that market risk does not affect much to the returns of the funds. It is better for the investor.

BETA:
Beta of this fund is too high. It means risk level in this fund is too much. But till level of 1.00, beta is acceptable. It has high market risk.

R SQUARE:
R2 shows the variance. The variance of this fund is 0.83 which is more than enough. It is better the lower for the investor. So it is not good on the investors point of you.

SHARPE RATIO:
It is the relation between the return and risk. Ratio in this fund is 0.72 which shows that returns are less in compare to risk.

55

(BY VALUE RESEARCH)

5.4.3 Magnum Income Fund


FUND MANAGER:
Mr. Ganti N. Murthy Total experience is 16 years and experience with this fund is 3 years & 10 month.

OBJECTIVE:
To provide the investors an opportunity to earn, in accordance with their requirements, through capital gains or through regular dividends, return that would be higher than the returns offered by comparable investment avenues through investment in debt & money market securities.

RATIO OF EQUITY & DEBT:


This 100% debt fund, offers benefits of investment in a high quality bond portfolio, with liquidity and tax efficiency of returns.

BENCHMARK:
Crisil Composite Bond Fund Index

SECTORAL BREAKDOWN:
Zero Coupon Bond 5.25% Net Current Asset 23.07% Securitized Debt 9.07% Certificate of Deposit 3.22% Commercial Paper 13.73% Dated Govt. Securities 0.70% Non Convertible Debenture 44.96%

56

23.07, 23% 44.96, 46% 0.07, 0% 3.22, 3% 13.73, 14% 5.25, 5% 9.07, 9%

Net curreent asset certificate of deposits commercial paper Zero Coupon Bond Securitized Debt Dated Govt. Securities Non Convertible Debenture

NAV:
NAV of April is 10.2101 (D) NAV of May is 10.1989 (D)

ABOUT THE FUND:


A 100% debt fund, investing in high-quality debt instruments Open ended from December 1998 Minimum investment of Rs. 2000 Entry Load : Nil Exit Load: Up Rs. 50 lacs: 0.5%; upto 6 months. Above Rs. 50 lacs : Nil SIP/STP- As applicable to the normal transaction in the respective Debt Schemes.

57

FUND PERFORMANCE:
YTD 1m 3m 6m 1y 3y 5y S.Inc

Fund

-1.04

-.11

-2.4

0.35

4.90

4.26

3.68

7.96

Benchmark 1.44

0.39

0.38

2.89

7.96

5.26

4.50

N.A.

QUANTITATIVE DATA:
S.D. RATIO 2.29% BETA 0.98 R - SQUARE 0.64 SHARPE RATIO -1.29

ANALYSIS OF QUANTITATIVE DATA:

S.D.:
S.D. shows the fluctuation in the returns. There is 2.29% S.D. It shows that expected returns are not more differ to the actual return. So, it is good for investor.

BETA:
is 0.98. Which is too high? But in respect of analysis, it is acceptable till 1.00.

R - SQUARE:
R2 of the fund is 0.64. It shows returns are affected by market and market risk. For this fund, R2 is high. So market conditions effects the returns.

SHARPE RATIO:
Ratio of the fund is -1.29. It shows the returns are in negative. This is not good for the investors. 58

(BY VALUE RESEARCH)

Intra Cash Fund


FUND MANAGER:
Mr. Ganti N. Murthy Total experience is 16 years and experience with this fund is 2 years & 4 months.

OBJECTIVE:
To provide the investors an opportunity to earn returns through investment in debt & money market securities, while having the benefit of a very high degree of liquidity to meet unexpected needs of cash.

BENCHMARK:
Crisil Liquid Fund Index

NAV:
NAV of April is 10.7024(D) NAV of May is 10.7126(D)

SECTORAL BREAKDOWN:
Net Current Asset 3.89% Securitized Debt 4.15% Certificate of Deposits 25.61% Commercial Paper 49.98% Non Convertible Debenture 16.37%

59

3.89, 4% 16.37, 16% 4.15, 4% 25.61, 26% 49.98, 50%

Net curreent asset Securitized Debt certificate of deposits commercial paper Non Convertible Debenture

ABOUT THE FUND:


Entry Load - Nil Exit Load Nil Option Growth & Dividend SIP NA Min. Inv. Rs. 10,000

FUND PERFORMANCE:
YTD 1m 3m 6m 1y 3y 5y S.Inc

Fund

2.74

0.64

2.04

4.06

7.60

6.84

6.00

6.91

Benchmark 2.48

0.75

1.96

3.59

7.17

6.37

5.49

N.A.

60

QUANTITATIVE DATA:
S.D RATIO 0.35% BETA 0.43 R - SQUARE 0.53 SHARPE RATIO -1.05

ANALYSIS OF QUANTITATIVE DATA:

S.D.:
Standard Deviation shows the difference between expected return and actual return. Here it is only 0.35%. It means there is not any difference. Its good for investor.

BETA:
is 0.43, which is lesser than 0.5. It shows that risk level is very low.

R-SQUARE:
R2 is 0.53. Which is not much? It shows the effect of market risk on the funds return. It is good for investor point of you.

SHARPE-RATIO:
This ratio shows the return on risk. This is -1.05. This is negative so it is not good.

61

(BY VALUE RESEARCH)

SBI Premium Liquid Fund


FUND MANAGER:
Mr. Parijat Agarwal Total experience is 12 years and experience with this fund is 10 months.

OBJECTIVE:
To provide attractive returns to the magnum holders either through periodic dividends or through capital appreciation through an actively managed portfolio of debt & money market instruments. Income may be generated through the receipt of coupon payments, the amortization of the discount on the debt instruments, receipt of dividends or purchase and sale of securities in the underlying portfolio.

BENCHMARK:
Crisil Liquid Fund Index

NAV:
NAV of April is 10.0325(D) NAV of May is 10.0325(D)

62

SECTORAL BREAKDOWN:
Zero coupon Bond 1.18% Net Current Asset 17.37% Short Term Deposit 0.98 Securitized Debt 4.68% Certificate of Deposits 28.98% Commercial Paper 31.33% Non Convertible Debenture 15.47%

0.98, 1% 1.18, 1% 15.47, 15% 17.37, 17% 4.68, 5%

Net curreent asset Securitized Debt certificate of deposits commercial paper Non Convertible Debenture Zero Coupon Bond Short term Deposit

31.33, 32%

28.98, 29%

63

ABOUT THE FUND:


Entry Load Nil Exit Load Nil SIP Nil Min. Inv. Rs. For institutional plan Rs. 50 lacs and multiple of Rs. 1 lacs. For super Institutional Plan Rs. 5 crores and multiples of Rs. 1 lacs.

FUND PERFORMANCE:
YTD 1m 3m 6m 1y 3y 5y S.Inc

Fund

2.80

0.67

2.09

4.18

7.78

6.88

N.A.

6.22

Benchmark 2.48

0.75

1.96

3.59

7.17

6.37

N.A.

5.65

QUANTITATIVE DATA:
S.D. RATIO 0.31% BETA 0.34 R - SQUARE 0.44 SHARPE RATIO -1.06

ANALYSIS OF QUANTITATIVE DATA: S.D.:


Standard Deviation is 0.31% which shows that there is inconsiderable change between the expected return and actual return. It is very good condition for investor. 64

BETA:
of the fund is 0.34. It shows that risk level in this particular fund is very low.

R-SQUARE:
R2 of the fund is 0.44, which is less and good for the investor because returns are not highly effected by the market risk.

SHARPE RATIO:
Sharpe Ratio of the fund is 1.06 which is not good for investor.

RISK MANAGEMENT
A)-OPTIONS:
Options are valuable since they provide protection against unwanted, uncertain happenings. They provide alternatives to bail out from a difficult situation. Options can be exercised on the happening of certain events. Options may be explicit or implicit. Options have assumed considerable significance in finance. They can be written on any asset, including shares, bonds, portfolios, stock indices, etc. They are quite useful in risk management.

CALL OPTION:

A call option is a special contract under which the option owner enjoys the right to buy something without any obligation.

PUT OPTION:
The option to sell an asset is called a put option. It is without any obligation. 65

KEY WORDS:
The prices at which option can be exercised are called an exercise price or a strike price. Buyer of the option is called option holder. Seller of the option is called option writer.

QUS.-What condition is beneficial for whose person? There are three types of conditions:-

IN THE MONEYA put or call option is said to in the money when it is advantageous for the investor to exercise it. In the case of in the money call options, the exercise price is less than the current value of the underlying asset, while in the money put options, the exercise price is higher than the current value of the underlying asset.

OUT OF THE MONEYA put or a call option is out of the money if it is not advantageous for the investor to exercise it. In the case of the out of the money call options, exercise price is higher than the current value of the asset, while in the case of the out of the money put options, the exercise price is lower than the current value of the underlying asset.

AT THE MONEYWhen the holder of a put or call option does not lose or gain whether or not he exercise his option, the option is said to be at the money. In the case of at the money option exercise price is equal to the current value of the underlying asset.

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NOTE: - Option does not come free. The option premium is the price that the holder of
an option has to pay be obtaining a call or a put option. The price will have to be paid, generally in advance, whether or not the holder exercises his option.

EG. SHOWING THE PROFIT & LOSS IN CALL OPTION


Current price of the INFORCES is 75Rs. And it is expertise is 90Rs. In 3 months. But due to the fear of fall in the price below to 75Rs. To reduce the risk, we can buy a 3 month call option at agreed price of Rs.70 ignoring the option premium, taxes, and cost of Rs. 5. If the price is Rs.75, it is in the money. If it is Rs.70 you will not exercise the option. Share price at expiration exercise price DONT EXERCISE CALL OPTION WHEN Share price at expectation exercise price OR Share price at expectation = exercise price

The value of the call option at expiration = maximum (share price exercise price, 0)

CALL PREMIUM
The call premium is a cost to the option buyer and again to the call seller. What is the net pay off of the buyer and the seller of a call option when the call premium (that the buyer has to pay to the seller) is involved?

EXAMPLE:The share of Telco is selling for Rs.105. Radhey buys a 3 months call option at a premium of Rs.5. The exercise price is Rs.105. what is Radheys pay off if the share price is Rs.100 or Rs.110 or Rs. 115 at the option is exercised? 67

The call option Holders pay-off at expiration


Share price Buyers inflow Sale of share Rs. 100 Rs. 105 Rs. 110 110 Rs. 115 115

Buyers out flow Exercise option Call premium Net pay-off

5 -5

5 -5

105 5 0

105 5 5

The call option sellers pay-off at expiration


share price Sellers inflow Exercise price Call premium Sellers outflow Share price Net pay-off Rs.100 5 5 Rs.105 5 5 Rs.110 105 5 110 0 Rs.115 105 5 115 -5 Rs.120 105 5 120 -10

PUT OPTION: A put option is a contract that gives the holder a right to sell a specified share (or any other asset) at an agreed exercise price on or before a given maturity price.

ILLUSTRATIONSuppose you expect price of HPCLs share to fall in the near future. So you buy a 3 month put option at an exercise price of Rs.50. current market price is Rs.48.If the price 68

actually fall to Rs.35 after 3 months, you will exercise your option. You will purchase the share for Rs. 35 and sell for Rs.50 and gain is Rs.15. But you will forget your put option if price rise above the exercise price. A put buyer gains when the share price falls below the exercise price; the put option is worthless for you and its value is 0. Exercise price share price at expectation DONT EXERCISE THE PUT OPTION Exercise price = share price at expectation OR Exercise price share price at expectation

Value of put option at expiration = max. {Exercise price share price at expiration, o}

PUT OPTION PREMIUM & PAYOFFS


An investor hopes IPO (INDIAN PATROLIUM OIL)s share will fall after 3 months. Therefore, he purchases a put option on Wipros share with a maturity of 3 months at a premium of Rs.5. The exercise price is Rs. 30. The current value of Wipros is Rs.28, what could be his profit or loss of the put buyer and the put seller at the different oppturnity. The buyers maximum loss is confirmed to Rs. 5 that is put premium. His profit is equal to Exercise price less the sum of share price and premium. Since the share price cannot fall below zero, he has limited profit potential. The put buyer will always exercise his option if the exercise is more than the share price.

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The Put Option Holders Pay-off at Expiration


Share Price Buyers benefit: Exercise option Buyers Cost: Put Premium Buy Share Net Payoff(profit) Rs. 18 30 Rs. 25 30 Rs. 28 30 Rs. 30 _ Rs. 40 _

5 18 7

5 25 0

5 28 -3

5 _

5 _

-5

-5

The Put Option Sellers Pay-off at Expiration


Share Price Sellers benefit: Put Premium Sale Share Sellers cost: Exercise option Net Pay-off Rs. 18 5 Rs. 25 5 Rs. 28 5 Rs. 30 5 _ 18 30 25 30 28 _ 30 _ Rs. 40 5 _

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PROTECTIVE PUT & COVERED CALL


In a long position, it involves buying and holding shares to benefit from capital gains and dividend. An investor may create a long position in shares of firm. A long position investment strategy is risky. The investor will incur loss if the share declines. He will only gain if the share prices rise in the future. However, he will incur loss if the price in 70

future turns out to be lower than current price. Put option At-the-money is called a protective put. The combination of a long position in the share and a protective put helps to avoid the investors risk when the share price falls. A naked option is a portion where the option writer does not hold a share in her portfolio that has a counterbalancing effect. The investor can protect herself by taking a covered position. A covered call position is an investment in a share plus the sale of a call on that share. The position is covered because the investor holds a share against a possible obligation to deliver the share. The total value or pay off of a covered call at expiration is the share price minus the value of the call.

Factors Determining Option Value


The value of an option depends on the following factors:

Exercise Price & Value of Underlying Asset:

Two imp. Determinants of options are the value of the underlying asset and the exercise price. If the underlying asset were a share, the value of a call option would increase as the share price increases. At the expiration date, the holder will know the share price, and he will exercise his option if the exercise price is lower than the share price.

Interest Rate:
The holder of a call option pays Exercise price not when he buys the option, rather, later on, when he exercises his option. Thus, the present value of the exercise price will depend on the interest rate. The value of a call option will increase with rising interest rate since the present value of the exercise price will fall. The effect is reversed in the case of a put option.

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Time to expiration:
The present value of the exercise price also depends on the time to expiration of the option. The present value of the exercise price will be less if time to expiration is longer and consequently, the value of the option will be higher. Further, the possibility of share price increasing with volatility increases if the time to expiration is longer. Longer is the time to expiration, higher is possibility of the option to be more in-the-money.

B)-FUTURES
A forward and futures contract imposes a firm obligation to go through the transaction. A forward or futures contract is not an investment because no cash is paid to buy an asset. It is just a commitment to do a transaction in future. Yet, we study them as part of investments as they are powerful tools to modify portfolio characteristics and hedge other investment.

C)-FORWARD CONTRACT:
An agreement between two parties to exchange an asset for cash at a predetermined future date for a price that is specified today represents a forward contract.

EXAMPLEIf you are agree on January 1 to buy 100 bales of cotton dealer, you have bought forward cotton or you are long forward cotton, whereas the cotton dealer has sold forward cotton or is short forward cotton. No money or cotton changes hand when the deal is signed. The forward contract only specifies the terms of a transaction that will occur in the future. Short position which commits the seller to deliver an item at the contracted price on maturity. Long position which commits the buyer to purchase an item at the contracted price on maturity. 72

Pay-off to the forward buyer/ seller


When the spot price in future exceeds the contract price, the forward buyers gain is: spot price - contract price. The forward buyers loss is: contract price - spot price. The gain of the buyer is the loss of the seller, and vice versa.

DIFFERENCES BETWEEN FORWARD AND FUTURES

FORWARD It is tailor- made contract. There is no secondary market. It usually ends with deliveries. No collateral is required for it. These contracts are settled on maturity date.

FUTURE It is standardized contract. These are traded on organized exchanges. They are settled with the differences. A margin is required in it. These are marked to market on daily basis.

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D)- FINANCIAL FUTURES: INTEREST RATE FUTURE:


A future contract on an asset whose price depends solely on the level of interest rates is called an interest rate futures contract. There are interest rate futures contracts on assets like Eurodollars, Treasury bills, the treasury notes, and Treasury bonds.

FOR EXAMPLE:
The Treasury bond futures traded on the Chicago board of trade (CBOT) require the delivery of any treasury bond which has maturity of more than 15 years. Since bonds of different maturity and coupons have different prices, the CBOT applies a conversion factor to adjust for these differences. The conversion factor is based on the bond on the first day of the delivery month on the assumption that the interest rate for the maturity is equal to 8 percent per annum. To illustrate this procedure, let us consider a 10 % coupon bond with a maturity of 18 years. Working with a standard of $100 face value, the value of the bond can be calculated, using a discount rate of 8% Present value of bond = t=36t=1 5/ (1.04) t + 100/ (1.04)36 = 118.92 The conversion factor of the bond is: 118.92/100 = 1.1892 Bond is deemed equivalent to 1.1892. The seller of the features contract can deliver any one of a menu of Treasury bond to fulfill the obligation.

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USE OF FUTURE CONTRACTS A. HEDGERS:


Hedgers are parties who are expected to risk because they have a prior position in the commodity of the financial instrument mainly for the future contract. Example: The farmer may sell wheat futures and the investor may sell stock index futures. By doing so, they can shield themselves against the risk of unexpected price changes. Since one can take either along portion or a short position in the futures contract, there two basic hedge positions:

THE SHORT (SELL) HEDGE:

A party who has a long cash position, current or potential, may sell the futures.

THE LONG (BUY) HEDGE:

A party who is not currently in cash but who expects to be in cash in the future may buy a futures contract to eliminate uncertainty about the price.

B. SPECULATION:
Speculators buy or sell futures contracts in an attempt to earn a profit. Speculators do not have a prior position that they want to hedge against price fluctuation. Rather they are willing to assume the risk of price fluctuation in the hope of profiting from them. They absorb the excess demand or supply generated by hedgers and assumes the risk fluctuation that hedgers want to avoid. Speculators impart liquidity to the market and their actions, in general, dampen the variability in prices over time.

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C. ARBITRAGEURS:
An arbitrageur uses future contracts to exploits the price differences between different markets. There are two main kinds of arbitrage transactions: A futures arbitrage occurs when a dealer exploits the price differential between two futures markets. A cash-futures arbitrage occurs when a dealer exploits a price misalignment between the cash market and the futures market. SO, we can say that risk is the most important part of any investment. At the time of investment, we should be clear about the risk and then take decision. Risk calculation is not only enough for the investor but he/ she should know about risk management also. Risk management should done as according to the investment and taking all options and future in the mind.

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GOLDEN RULES FOR THE INVESTOR

Know your risk profile Can you live with volatility? Or are you a low-risk investor? Would you be satisfied if your fund invests in fixed-income securities, and yields low but sureshot returns? These are some of the questions you need to ask yourself before investing in a fund.

Identify your investment horizon how long you want to stay invested in a fund is as important as deciding upon your risk profile. A mutual fund is essentially a savings vehicle, not a speculation vehicledont get in with the intention of making overnight gains. Read the offer document carefully this is a must before you commit your money to a fund. The offer document contains essential details pertaining to the fund, including the summary information (type of scheme, name of the asset Management Company and price of units, among other things), investment objectives and investment procedure, financial information and risk factors. Go through fund fact sheet Fund fact sheets give you valuable information of how the fund has performed in the past. You can check the funds portfolio, its diversification levels and its performance in the past. The more fact sheets you examine, the better.

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Diversify across fund houses If you are routing a substantial sum through mutual funds, you should diversify across fund houses. That way, you spread your risk. Do not chase incentives Dont get lured by investment incentives. Some financial intermediaries give upfront incentives, in the form of a percentage of your initial investment, to invest in a particular fund. Dont buy it. Your focus should be to find a fund that matches your investment needs and risk profile, and is a performer. Track your investments One easy way to keep track of your fund is to keep track of the fund performance against its benchmark. In addition, you should run some basic checks in the fund fact sheets and the quarterly reports you get from your fund.

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BIBLOGRAPHY

Websites: http:www.sbimf.com http:www.safeheaven_debt.com http:www.google.com

Books: Investment Analysis and Portfolio Management By PRASANNA CHANDRA Financial Management By I M PANDAY

SBI-MF books
The A to Z of Mutual Funds Your Investment Canvas has grown Bigger (Fact Sheet) Benefiting From Mutual Funds Extra matter provided by the SBI-MF through power-point presentation.

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