EXECUTIVE SUMMARY

Most of us have the same idea when it comes to money.

All we want to do is spend it, with a fantastic range of
consumer products out there, investment seem like a most
boring things that we can consider. In fact, if it were not
for the tax saving purpose, most of us would not end up
investing anything at all.

We need to realize, however, that someday , our hard earned money is not going to be able to
buy the same thing as it used to do. This is because of ‘Inflation’, the phenomenon that
slowly eats up ones purchasing power without even realizing it. In such a situation it will be
profitable to invest systematically.

Mutual Fund is one of the investment avenues, which provides enormous facilities in a basket
like Insurance, Fixed maturity, Tax rebate, High return and so on. Inflation rate of 6% has
become a serious concern for the government. To hedge against inflation and live the high
life style is a prime motive of every individual.

The investment in Mutual Fund is risky investment. A very useful and simple Way of
defining risk is simply the volatility of returns. There are a number of risk indicators that can
be used to analyze risk by all stake holders: the investor , the fund manager as well as the
senior management of the asset management company.

From the investor perspective, the focus is on the performance related indicator which
provide him or her with the perspective of the risk adjusted performance of the fund. For
example the performance ratio tells an investor how well the fund is doing in terms of relative
performance vis-a-vis relative risk. The Sharpe ratio conveys how well the fund is performing
in terms of providing incremental returns over the risk - free rate, per unit of risk taken.
Investor can thus evaluate the performance of the manger in terms of the risk- reward trade-
off and can compare performance across funds.

So how to minimize risks associated with fund is an important phenomenon. My objective of

undertaking this project is to understand the risks and their measures related with mutual
funds. I have taken sufficient attention to draw a full picture on mutual funds. Readers
constructive suggestion and objective criticisms will be great fully acknowledged.

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 CONCEPT OF THE TOPIC

The first modern-day mutual fund, Massachusetts Investors Trust, was created on March 21,
1924. It was the first mutual fund with an open-end capitalization, allowing for the
continuous issue and redemption of shares by the investment company. After just one year,
the fund grew to $392,000 in assets from $50,000.

Mutual fund is a mechanism by means of which a lot many investors chip in their
savings to form a common pool of money. Now, this is invested in line with some
pre decided objectives. Ownership of fund is “Mutual” and it belongs to everyone
who invested in the same proportion of the amount contributed by them to the fund.
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 appreciation realised 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:

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 COMPANY PROFILE

INTRODUCTION OF THE COMPANY:

JM Financial is an integrated financial services group, offering a wide range of

services to a significant clientele that includes corporations, financial

institutions, high net-worth individuals and retail investors.
The Group has interests in investment banking, institutional equity sales,
trading, research and broking, private and corporate wealth management, equity
broking, portfolio management, asset management, commodity broking, NBFC
(Non Banking Finance Company) activities, private equity and asset
reconstruction. While each of these businesses is independent in itself, they
share the Group’s belief of trust being the most important factor for the
organization. The values of integrity, teamwork, innovation, performance and
partnership shape the corporate vision and drive it to its purpose.

Our people bring knowledge, experience and diversity to bear in our every
endeavor. Their talent and passion has powered us to the pre-eminent position
we occupy in the Indian financial services landscape.

VISION :

JM Financial will be the most trusted partner for every stakeholder in the
financial world.

We believe:
 Earning trust is a process (it can be gained and lost every day!)
 Sharing trust creates great teams (whether between employees or
between organisations)

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  Being trustworthy is the most efficient way of generating and
retaining long- term business
 Se1f—trust is the starting point of trusting others.
VALUES

We have always sought to be a value-driven organisation, where our values

direct our growth and success.

 Integrity
 Team work
 Client focus
 Innovation
 Implementation
 Performance
 Partnership

Integrity
Integrity is fundamental to our business. We adhere to moral and ethical
principles in everything we do as professionals, colleagues and corporate
citizens. Our reputation based on our high standards of integrity is invaluable.

Teamwork:
We believe extensive teamwork is what makes it possible for us to work together
towards a common goal. We value and respect each individual's commitment to
group effort.

Client Focus:
We always put the interest of our clients before our own. We understand our
client needs, seek new opportunities for them, address them and deliver unique
solutions as per their expectations. The success of our clients is the biggest
reward for us. '

Innovation:
We understand our clients‘ needs and develop solutions for the most complex or
the simplest, the biggest or the smallest financial transactions, whether for
individuals or institutions. Creativity and innovation are key factors to
everything we do. We encourage new ideas which help us address unique
opportunities.

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Implementation:
Our expertise, experience and our continuous focus on the quality of execution
ensures

OUR LOGO
It is a simple thought; simply expressed. It is representative of the
organization’s solid character, clear thinking, respectability & dependability.

The emphasis is provided Visually through the bold font & red underline and
verbally through the brand statement of

Trust is always the answer’.

Trust IS always the answer

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PRODUCT MIX OF JM FINANCIAL:

JM financial is one of the pioneers in the Indian capital market. Since its
inception, over three decades ago, it has gathered enormous expertise and
experience.
Through a prudent mix of Fundamental Research and Technical Analysis, it
Offers a wide a range of Equity, Derivatives and Other investment products.

LONG TERM
VALUE
INVETSING
IDEAS MEDIUM TO
DEPOSITORY
SHORT-TERM
SERVICE
MID CAP-CAP
IDEA

DERIVATIVE
IPO AND
STRATEGIES
MUTUAL PRODUCTS
FUNDS

STRUCTURED
PORTFOLIO
PRODUCTS MANAGEIVIENT
SERVICE

6|Page
INTRODUCTION

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
appreciation realised are shared by its unit holders in proportion to the number
of units owned by them. Thus a Mutual Fund is A 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

CHARACTERISTICS
A mutual fund is a financial intermediary that pools the savings of several
investors and invests the collected money into different types of securities like
shares, debentures, money market instruments, etc. based on the fund’s
investment objective.

HISTORY OF MUTUAL FUND:

The mutual fund industry in India started in 1963 with the formation of Unit
Trust of India, at the initiative of the Government of India and Reserve Bank.
The history of mutual funds in India can be broadly divided into four distinct
phases:
FIRST PHASE — 1964-1987
(The first scheme launched by UTI was Unit)

SECOND PHASE – 1987-1993

(Entry of Public Sector Funds)

Third phase-1993-2003
(Entry of private sector funds)

Since February -2003

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MUTUAL FUND OPERATION FLOW CHART
How surplus money of the investor flows into the market and managed by
experts in order to give investors better returns.

The operation of mutual funds starts with Investors who invests their surplus
money in the market for its appreciation. This collected money is managed by a
panel of experts who are known as Fund managers. The investor does not
invest in different kinds of security but they are the fund managers who
performs this work, in order to diversify the investors risk. Thus surplus money
invested in the capital market generates return, which is again passed back to
identified investors after a specified period of time.

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ORGANISATION STRUCTURE OF A MUTUAL FUND
BUSINESS: 1

the organization structure of the mutual fund is given below:

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ADVANTAGES & DISADVANTAGES OF MUTUAL
FUNDS

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DRAWBACKS
No mutual fund can be judged by the return it yields to its investors, unless the
risk, which the fund exposes its investors to in earning its return, is also factored
in. Calculation of the return as well as the risk inherent in mutual fund is not the
straightforward business.
The dictionary meaning of risk is the possibility of loss or injury: the degree or
probability of such loss. Often risk is interchangeably used with uncertainty. In
uncertainty, the possible events and probabilities of their occurrences are not
known. Hence, risk and uncertainty are different from each other. :

Types of risk:
Risk consists of two components
 Systematic risk
 Unsystematic risk

TYPES OF RISK

Systematic Risk Unsystematic Risk

 Market risk  Business risk

 Interest rate  Internal
risk business risk
 External
 Purchasing
business risk
power risk  Financial risk

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Systematic risk:
The systematic risk is caused by factors external to the particular company and
uncontrollable by the company. The systematic risk affects the market as a
whole.

 Market risk:
Jack Clark Francis has defined market risk as that portion of total variability of
return caused by the alternating forces of bull and bear markets. When the
security index moves upward haltingly for a significant period of time, it is
known as bull market.
Bear market is just a reverse t the bull market; the index declines haltingly from
the peak to a market low point.
The forces that affect the stock market are tangible and intangible events. The
tangible events are the real events such as earthquake , war, political uncertainty
and fall in the value of currency.

For example: US elections is having a great bearing on the stock market who
will be the new President is a major question.
Intangible events are related to the market psychology. The market is affected
by the real events.

 Interest rate risk:

Interest rate risk is the variation in the single period rates of return caused by the
fluctuation in the market interest rate. Most commonly interest rate risk affects
the price of bonds, debentures and stocks. The fluctuation in the interest rates
are caused it by the changes in the government monetary policy and the changes
that occur in the interest rates of treasury bills and government bonds.

 Purchasing power risk:

Variation in the returns are caused also by the loss of purchasing power of
currency. Inflation, is the reason behind the loss of purchasing power. The level
of inflation proceeds faster than the increase in capital value Purchasing power
risk is the robable loss in the urchasing ower of the returns to be received. The
rise in the price penalizes the returns to the investor, and every potential rise in
the price is a risk to the investor.

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Unsystematic risk:
Unsystematic risk is unique and peculiar to affirm or an industry. Unsystematic
risk seems from managerial inefficiency, technological change in the production
process, availability in the raw material and changes in the consumer
preferences .

 Business risk
Business risk is that portion of the unsystematic risk caused by the operating
environment of the business. Business risk arises from the inability of a firm to
maintain its competitive edge and the growth or stability of the earnings.

 Internal business risk

Internal business risk is associated with the operational efficiency of the firm.
The operational efficiency differs from firm to firm.. The efficiency of the firm
reflects in the company’s achievements, its goal and the fulfillment of the
promises of the investors.

 External risk:
External risk is the result of the operating conditions imposed on the firm by
circumstances beyond its control. The external environment under which it
operates exert some pressure on the firm. The external factors are social,
economical, technological and so on.

 Financial risk:

Financial risk refers to the variability of the income to the equity capital due to
the debt capital. Financial risk in the company is associated with the, capital
structure of the company. Capital structure of the company is composed of
Equity fund and borrowed funds.

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ROLE OF BUSINESS

TYPES OF
MUTUAL FUND

ON THE BASIS
O N THE BASIS ON THE BASIS
OF GEOGRAPHIC
OF OBJECTIVE OF FLEXIBILITY
LOCAION

ON THE BASIS OF OBJECTIVE

Equity Funds/ Growth Funds

Funds that invest in equity shares are called equity funds. They carry the
principal objective of capital appreciation of the investment over the medium to
long-term. The returns in such funds are volatile since they are directly linked to
the stock markets. They are best suited for investors who are seeking capital
appreciation. There are different types of equity funds such as Diversified funds,
Sector specific funds and Index based funds.
Example:- Reliance equity fund, Bharti Axa Equity fund reliance
Diversified Power sector fund.

Diversified funds -
These funds invest in companies spread across sectors. These funds are
generally meant for risk-taking investors who are not bullish about any
particular sector.
Example: - Reliance Diversified Power sector fund

Sector funds
These are the funds/schemes which invest in the securities of only those sectors
or industries as specified in the offer documents. e.g. Pharmaceuticals,
Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The
returns in these funds are dependent on the performance of the respective
sectors/industries. While these funds may give higher returns, they are more

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risky compared to diversified funds. Investors need to keep a watch on the
performance of those sectors/industries and must exit at an appropriate time.
They may also seek advice of an expert.
Example:- Reliance Pharma fund,
Magnum Sector Funds Umbrella: FMCG fund I

Index funds
These funds invest in the same pattern as popular market indices like S&P 500
and BSE Index. The value of the index fund varies in proportion to the
benchmark index.
Example:- HDFC Index fund,
Magnum Index fund

Tax Saving Funds

These funds offer tax benefits to investors under the Income Tax Act.
Opportunities provided under this scheme are in the form of tax rebates U/s 88
as well saving in Capital Gains U/s 54EA and 54EB. They are best suited for
investors seeking tax concessions.
Example:- Sundaram BNP Paribas Tax Saver ‘
Birla Sun Life Tax Relief’ 96
Debt / Income Funds
 The aim of balanced funds is to provide both growth and regular
income.
 Such schemes invest both in equities and fixed income securities in
the proportion indicated in their offer documents.
 These are appropriate for investors looking for moderate growth.
They generally invest 40-60% in equity and debt instruments.
 These funds are also affected because of fluctuations in share
prices in the stock markets.
 NAVs of such funds are likely to be less volatile compared to pure
equity funds.

Liquid Funds / Money Market Funds

 These funds are also income funds and their aim is to provide easy
liquidity, I preservation of capital and moderate income.

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  These schemes invest exclusively in safer short-term instruments such as
treasury bills, certificates of deposit, commercial paper and inter-bank
call money, government securities, etc.
 Returns on these schemes fluctuate much less compared to other funds.
 These funds are appropriate for corporate and individual investors as a
means to park their surplus funds for short periods.

ON THE BASIS OF FLEXIBILITY

Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for
subscription and redemption throughout the year. Their prices are linked to the
daily net asset value (NAV). From the investors’ perspective, they are much
more liquid than closed-ended funds. Investors are permitted to join or
withdraw from the fund after an initial lock-in period.
Example: HDFC growth fund
HDFC Top 200

Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO)
and thereafter closed for entry as well as exit. These funds have a fixed date of
redemption. One of the characteristics of the close—ended schemes is that they
are generally traded at a discount to NAV; but the discount narrows as maturity
nears. These funds are open for subscription only once and can be redeemed
only on the fixed date of redemption. The units of these funds are listed (with
certain exceptions), are tradable and the subscribers to the fund would be able to
exit from the fund at any time through the secondary market.
Example: Reliance long term Equity fund ;

Interval funds:

These funds combine the features of both open-ended and close-ended funds
wherein the fund is close-ended for the first couple of years and open-ended
thereafter. Some funds allow fresh subscriptions and redemption at fixed times
every year (say every six months) in order to reduce the administrative aspects
of daily entry or exit, yet providing reasonable liquidity.

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ON THE BASIS OF GEOGRAPHIC LOCATION

Domestic Funds
These funds mobilise the savings of nationals within the country.

Offshore Funds
These funds facilitate cross border fund flow. They invest in securities of
foreign companies. They attract foreign capital for investment.

Terminologies used in mutual funds: .

NAV (NET ASSET VALUE)
NAV or Net Asset Value of the fund is the cumulative market value of the
assets of the fund net of its liabilities. NAV per unit is simply the net value of
assets divided by the number of units outstanding. Buying and selling into funds
is done on the basis of NAV-related prices.

NAV is calculated as follows:

NAV= Market value of the fund's investments +Receivables+ Accrued Income-

Liabilities- Accrued Expenses

Number of Outstanding units

For example, if the market Value of securities of a mutual fund scheme is Rs

200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the
investors, then the NAV per unit of the fund. is Rs.20. NAV is required to be
disclosed by the mutual fiinds on a regular basis - daily or weekly - depending
on the type of scheme.(for calculation of NAV refer Appendix)

ASSET MANAGEMENT COMPANY (A UM)

An Asset Management Company (AMC) is a highly regulated organisation that
pools money from investors and invests the same in a portfolio. They charge a
small management fee, which is normally 1.5 per cent of the total funds
managed.

SALE PRICE/ PURCHASE PRICE

Is the price you pay when you invest in a scheme. Also called Offer Price. If the
fund has no entry load, then the sales price is the same as the NAV. If the fund

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levies an entry load, then the sales price would be higher than the NAV to the
extent of the entry load levied.

REPURCHASE PRICE

Is the price at which a close—ended scheme repurchases its units .This is also
called Bid Price. Repurchase can either be at NAV or can have an exit load.

REDEMPTION PRICE
Is the price at which open-ended schemes repurchase their units and close-ended
schemes redeem their units on maturity. Such prices are NAV related. If the
fund does not levy an exit load, the redemption price will be same as the NAV.
The redemption price will be lower than the NAV in case the fund levies an exit
load.

SWITCH
Some Mutual Funds provide the investor with an option to shift his investment
from one scheme to another within that fund. For this option the fund may levy
a switching fee. Switching allows the Investor to alter the allocation of their
investment among the schemes in order to meet their changed investment needs,
risk profiles or changing circumstances during their lifetime.

ENTRY/EXIT LOAD
A Load is a charge, which the AMC may collect on entry and/or exit from a
fund. A load is levied to cover the up—front cost incurred by the AMC for
selling the fund. It also covers one time processing costs. Some funds do not
charge any entry or exit load. These funds are referred to as ‘No Load Fund‘.
Funds usually charge an entry load ranging between 1.00% and 2.50%. Exit
loads vary between 0.25% and 2.00% .

For e g. Let us assume an investor invests Rs. l0,000/- and the current NAV is
Rs.13/-. If the entry load levied is 2.25%, the price at which the investor invests
is Rs.13.2925 per unit. investor receives 10000/ 13.2925 = 752.3039 units.
(Note 5 that units are allotted to an investor based on the amount invested and
net on "the basis of no. of units purchased).

Let us now assume that the same investor decides to redeem his 752.3039units.
Let us also assume that the NAV is Rs l5/- and the exit load is 1%. Therefore
the redemption price per unit works out to Rs.14.85. The investor therefore
receives 752.3039x 14.85 = Rs.11171.7129

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Growth Plan and Dividend Plan
A growth plan is a plan under a scheme wherein the returns from investments
are reinvested and Very few income distributions, if any, are made. The investor
thus only realizes capital appreciation on the investment. This plan appeals to
investors in the high income bracket. Under the dividend plan, income is
distributed from time to time. This plan is ideal to those investors requiring
regular income.

Dividend Reinvestment Plan :

Dividend plans of schemes carry an additional option for reinvestment of
income distribution. This is referred to as the dividend reinvestment plan. Under
this plan, dividends declared by a fund are reinvested on behalf of the investor,
thus increasing the number of units held by the investors.

The above plans can be understood with the help of the following illustrations

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 CURRENT SCENARIO

“Never imagine mutual fund not to be otherwise than that what they might
appear to others that what they are or might have been was not otherwise than
what they had been would have appeared to them to be otherwise.”

Basis for selection of the mutual fund:

 Portfolio composition
 Performance
 Stability
 Expenses
 Investing mandate

Stability:
Whole return are important, they are not the only thing one should look
for while choosing a mutual fund. A fiind that consistently earns 15% to’l6%
annualized return over 5-6 years is better than one that has a very fluctuating
earning 20% to 25% in 1 year and 5% in the next year. As the table below
shown ,Fund B has given higher returns than Fund A even though the latter
gave very high return for two years.

Stability over volatility

Investment (Rs. 10000) FUND A FUND B

YEAR 1 16% 15%
YEAR 2 5% 16%
YEAR 3 25 % 15%
YEAR 4 20% 16%
YEAR 5 10% 15%
CORPUS AT THE END 20047 20465

Clearly slow and stable growth is better than spectacular, but volatile returns.

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Expenses:
How much your MUTUAL FUND charges you in terms of entry and exit
load and the annual fund management charge is another crucial factor to
keep in mind. Do not dismiss the 2.5% expense ratio so easily . As the below
table shows , a 1% difference in the ratio can mean a 20% difference in the
corpus in 20 years.

INVESTMENT EXPENSE 2.5 % EXPENSE 1.5 %

(Rs. 10000)
CORPUS AFTER Rs. 15386 Rs. 16105
5 YEARS
CORPUS AFTER Rs. 23673 Rs. 25937
10 YEARS
CORPUS AFTER Rs. 26425 Rs. 41772
15 YEARS
CORPUS AFTER Rs. 56044 Rs. 67275
20 YEARS

Performance:
Before selecting mutual funds schemes, one should look to the past performance
of a particular fund in which he/she wants to invest , though past performance
may or may not sustained in the future. Past performance is just an indicator of
near future.

Investing mandates:
Before investing in mutual funds one should have all the necessary documents
like Pan card etc. without which application for mutual fund would not be
acceptable.

Portfolio construction:
One should also go for portfolio of a particular fund. Portfolio means collection
of securities in which the company has invested.

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Parameters used to calculate risks in mutual funds:

There are five main indicators of investment risk that apply to the analysis of
stocks, bonds and mutual fund portfolios. They are alpha, beta, r-squared,
standard deviation and the Sharpe ratio. These statistical measures are historical
predictors of Investment risk/volatility and are all major components of modern
portfolio theory (MPT). The MPT is a standard financial and academic
methodology used for assessing the performance of equity, fixed—income and
mutual fund investments by T V comparing them to market benchmarks.

1. Alpha
Alpha (α) = Actual Returns- Expected Returns

2. Beta

A beta of 1.0 indicates that the investments price will move in lock-step with
the market.
β=1 it is a measure of security risk which is equally sensitive to benchmark
Index A beta of less than 1.0 indicates that the investment will be less volatile
than the market.

β <1 it is a measure of security risk which is less sensitive to benchmark Index

and, correspondingly, a beta of more than 1.0 indicates that the investment's
price will be more volatile than the market. ;

B >1 it is a measure of security risk which is more sensitive to benchmark Index

For example, if a fund portfolio's beta is 1.2, it's theoretically 20% more volatile
than the market.

3. R-Squared

R-Squared is a statistical measure that represents the percentage of a fund

portfolio’s or security's movements that can be explained by movements in a
benchmark index. For fixed—income securities and their corresponding mutual
funds, the benchmark is the U.S. Treasury Bill and, likewise with equities and
equity funds, the benchmark is the S&P 500 Index.

R-squared values range from 0 to 100. According to Morningstar, a mutual fund

with an R-squared value between 85 and 100 has a performance record that is
closely correlated to the index. A fund rated 70 or less would not perform like
the index.

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4. Standard Deviation (σ)
Standard deviation measures the dispersion of data from its mean. In plain
English, the more that data is spread apart, the higher the difference is from the
norm. In finance, standard deviation is applied to the annual rate of return of an
investment to measure its volatility (risk). A volatile stock would have high
standard deviation. With mutual funds, the standard deviation tells us how much
the return on a fund is deviating from the expected returns based on its historical
performance.

5. Sharpe Ratio

Sharpe ratio = Return for the portfolio — Risk free return

Standard deviation

Performance Measures of Mutual Funds

The most important and widely used measures of performance are:

 The Treynor Measure

 The Sharpe Measure
 Jenson Model
 Fama Model

The Treynor Measure

Developed by Jack Treynor, this performance measure evaluates funds on the

basis of Treynor‘s Index. This Index is a ratio of return generated by the fund
over and above risk free rate of return (generally taken to be the return on
securities backed by the government, as there is no credit risk associated),
during a given period and systematic risk associated with it (beta).
Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta
of the fund.

Illustration:1

A large equity fund earned a return of 32.60% over three year period and had a
beta(β) 1.121 .Assuming that the risk free rate was 6%.

The Risk Premium for the fund portfolio is 32.60%-6% = 26.60%

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(Risk premium is the return earned by the fund portfolio over and above the risk
free rate.)

Thus Treynor’s measure( in %)=32.60 — 6/1.121=23.72%

All risk-averse investors would like to maximize this value. While a high and
positive Treynor's Index shows a superior risk-adjusted performance of a fund, a
low and negative Treynor‘s Index is an indication of unfavorable performance.

The Sharpe Measure

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio,

which is a ratio of returns generated by the fund over and above risk free rate of
return and the total risk associated with it. According to Sharpe, it is the total
risk of the fund that the investors are concerned about. So, the model evaluates
funds on the basis of reward per unit of total risk. Symbolically, it can be
written as:

Sharpe Index (Si) = (Ri - Rf)/Si

Where, Si is standard deviation of the fund.

Illustration:2

A large equity fund earned a return of 32.60% over three year period and had
standard deviation of returns on the mutual fund’s portfolio is
26.30%.Assuming that the risk free rate was 6%.

The Sharpe Measure (in %) =32.60 - 6/26.30=1.01%

While a high and positive Sharpe Ratio shows a superior risk adjusted
performance of a fund, a low and negative Sharpe Ratio is an indication of
unfavorable performance.

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 FUTURE PROSPECTUS

Systematic investment plan (SIP)

Systematic investment plan have become a popular mode of investment in

mutual fund. They enable investor to ride out fluctuation in the market by
purchasing units at regular intervals. An SIP investor gain in all market
conditions. If the market goes down, he benefits because he gets to buy at lower
price. If the market goes up, he still benefit because the value of the past
investment rises. This systematic investing averaging out the buying cost of
units overtime. SIP’s promote s disciplined and in regular investments and are
particularly useful for the risk averse investors.

Though SIP’s averages out the cost for an investor during a volatile phase , they
tend to under perform, if there is lump sum investment in a consistency rising
market. That’s because the lump sum investment was made when the market
was low and the SIP investment was done over a period during which stock
pieces and therefore the NAV of the funds was rising . But this comparison
assumes that the it investor had bulk money to invest at he beginning of the
bullish phase. Not many people can commit large sums at one go, which is one
reason they choose the SIP route.

Some Good reasons to invest in SIP-

 Light on the wallet:- If you cannot put aside large sums of money as
investment on a monthly basis, the SIP route will trigger your mutual
fund investment with an amount as low as Rs. 100
 Makes market timing irrelevant :- Most investors are not experts on
stocks and are even more out-of-sorts with stock market oscillations.
With an SIP investment, disciplined investing over the long term sees to
it that an investor is not guided by the market-timing strategy.

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  Helps you build for the future:- Most of us have needs that involve
significant amounts of money, like child’ s education, daughter’s
marriage, buying a house or a car. By saving a small amount, say Rs.
100/- every month through SIPS for some purpose, you actually subscribe
to a far more scientific process of building wealth.
 Compounds returns:- The early bird gets the worm is not just a part of
the jungle folklore. Even the ‘early’ investor gets a lion’s share of the
investment treasure vis-a-vis the investor who comes in later. This is
mainly due to a thumb rule of finance called compounding’. By starting
early, you give more time for your investment to perform for you, leaving
you with a sizably larger corpus compared to the late investor.
 Lowers the average cost:- Enjoy the benefit of rupee-cost averaging.
Under rupee-cost averaging an investor typically buys more mutual fund
units when prices are low. On the other hand, he will buy fewer mutual
fund units when prices are high. This is a good discipline since it forces
the investor to commit cash at market lows, when other investors around
him are wary and exiting the market. Investors may even be pleased when
prices fall because the fixed rupee investment would now fetch more
units.

How does it help you?

 You buy more when the market is down
 You buy less when the market is up
 Over time the market fluctuations are averaged

Most likely you will realize a saving on the cost per unit this leads to Higher
Returns through Rupee Cost Averaging

Thus we see that the average unit cost under Systematic Investment Plan will
always be less than the average purchase price per unit irrespective of the
market rising, falling or fluctuating.

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 SYSTEMATIC TRANSFER PLAN (STP)
While investing in a debt fund normally assures you of fairly consistent returns,
equities have the potential to create wealth. But the unpredictability in equity
funds can be quite a deterrent when you make a choice. To combine the best of
both Worlds, The concept of Systematic Transfer plan came into existence.

Who can invest in STP?

Investors who want to invest lump sum money in schemes -with stable returns
and ensure small exposure to equity schemes in order to avail of the potential
for higher growth through equities.

Invest a lump sum amount in a debt-oriented scheme (Debt scemes can be

either 100% debt or High Debt and Low equity). Specify a desired amount to be
transferred to any equity schemes of the same AMC . This works like a SIP
(Systematic Investment Plan) . Lowering Risk and increasing returns. This is
best suited when markets have peaked or the investor is unsure of the further
uptrend in the market.

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Lump sum investment :-

It is also a popular form of investment in which a lump sum payment (minimum

5000 Rs.) is made by an investor for the whole fund. In this plan the concept of
weighted average NAV does not apply rather the fund value is calculated at the
present NAV. The investor will not be enjoying the benefit of the up and down
position of the market because payment has been done on a lump sum basis

Comparison of LUMP SUM plan & SIP in volatile market

MR.A MR. B
LUMP SUM SIP
AMOUNT Rs. 95000 95000
INVESTED
ENTRY NAV 16 16
EXIT NAV 23 23
BUYING COST 16 15.46
PER UNIT
UNITS ACQUIRED 5937.50 6144
VALUE OF RS. 136563 RS. 141312
INVESTMENT
RETURN EARNED 43.75% 48.75%

In November 2013 , two investors Mr. A and Mr. B planned to invest in a fund.
Mr. A invested Rs. 95000 while Mr. B started Rs. 5000 in an SIP in the same
fund. At the time of entry, the NAV of the fund was Rs.16, Over the next 19
months the market witnessed a lot of volatility and fund’s grew by about
43.75% to Rs. 23 in May 2015. That’s when both decided to exit.

Investing systematically Mr. B acquired 206.5more units than Mr.A. He earned

a return of 48.75% as apposed to 43.75% earned by Mr.A.

CONCEPT OF RETURN

Historic mutual fund returns are the first thing most of us look at when
comparing mutual funds, and for good reason...that's what we're looking for.
But not all returns are created equally, so the first thing you must do is
determine how a particular source has calculated returns.

Mutual fund returns can be total returns, which would include the dividend
yield, or they could be net of the dividend yield. Most are net of fees other than

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loads and redemption fees. All are net of the funds' trading costs. Other
expenses may or may not be included. And there are two ways of computing
average returns: the arithmetic mean and the geometric mean.

Load mutual funds add a bit of difficulty to calculating returns. See Special
Considerations with Load Mutual Funds at the bottom of this page.

The geometric mean works like the basic compound return formula [(1 + r)n]
except r will vary from year to year or whatever period you are using. The
calculation of the geometric mean for a three year period would be done as
follows:

r = [(1 + r1)(1 + r2)(1+ r3)]1/3 - 1

If the returns for three consecutive years were 12%, -8% and 15% the holding
period return would be

r = [(1 + r1)(1 + r2)(1 + r3)] - 1

r = [(1 + 0.12)(1 - 0.08)(1 + 0.15)] - 1

r = [(1.12)(0.92)(1.15)] - 1 = 1.185 - 1

r = 0.185 = 18.5%

the geometric mean for the three years would be

r = [(1.12)(0.92)(1.15)]1/3 - 1

r = (1.185)1/3 - 1 = 1.0582 - 1

r = 0.0582 = 5.82% per year

and the holding period return can be calculated from the geometric mean

r = (1 + 0.0582)3 - 1 = (1.0582)3 - 1 = 0.185 = 18.5%

This also works over a number of periods. The S&P 500 index started 1997 at
740.74 and closed at 1418.30 at the end of 2006. The compound annual return
on the index (net of dividends) can be computed as follows:

r = (1418.30 ÷ 740.74)1/10 - 1 = (1.9147)0.10 - 1

r = 1.0671 - 1 = 0.0671 = 6.71%

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If you compounded all of the annual returns for that period, you'd get the same
result. This also works on a monthly basis, but you'd have 120 periods and have
to take the 120th root to get the same result. Here's what the 10 years looks like:

Tabular Computation of Geometric Mean

The returns in the table above represent only the growth of the index, i.e., they
do not include the dividend yield. The dividend yield for that period averaged
1.55%.

Note that the computed index values on the right match the actual index values
on the left. Also, computing the compound annual return using the beginning
and ending index values yields the same result (6.71%) as compounding period-
by-period.

Here's an example of risk adjustment: The large-cap growth fund used earlier as
an example has a 10-year average return of 13.4% and a standard deviation of
23.9%. A broad market index had a return of 9.6% and standard deviation of

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17.3% for the same 10 year period. The risk-adjusted rate of return of 10.4% for
the growth fund is calculated as follows:

[rfund ÷ sfund] smarket = [13.4% ÷ 23.9%] 17.3% = 9.7%

9.7% vs 9.6% for the market index

Where r = rate of return and s = standard deviation

In this example, the broad market index beat the growth fund by 0.1 percentage
points, which is essentially a dead heat and just what you'd expect given the
notion that investors are rational and factor risk into the prices they are willing
to pay for securities.

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 CONCLUSION
From the above analysis it is clear that people have less awareness about the
mutual funds and it’s working. The experience shows that people who became
panic in this market have lost their money. The capital market is a very sensitive
market, it gets affected by every news like changing in the government policy ,
mergers and acquisition , restructuring of companies etc.

People who have surplus money do not worry about risk and they invest in the
capital market and earn higher return after a stipulated period of time. For
enjoying higher return it is necessary to remain in the market for a longer period
of time because this market shows a compounding effect after 1 year like
investing in mutual funds.

As the performance of mutual funds depends upon the capital market it is clear
that the mutual funds carry more risk than other investment option like Fixed
Deposit, Life Insurance etc.

I EFFECT OF CONIPOUNDING IS ENJOYED BY INVESTORS IF THEY

INVEST FOR A LONG PERIOD.

“Patience is the companion of wisdom” – Anonymous

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 REFERENCES
1. Security Analysis and Portfolio Management (sixth Edition 1995) by Donald
E. Fisher and Ronald J. Jordan. Publication: Pearson education.

2. The Indian Financial System (second edition) by Bharati V. Pathak. Published

by Dorling Kindersley (India) Pvt. Ltd., licensees of Pearson Education in
South Asia.

3. Security Analysis and Portfolio Management by Khan and Jain.

BOOKS:

 MUTUAL INSIGHTS , AUGUST 2008

 OUTLOOK , CONSTRUCTION THE ANDHARAPRENEURS, SEPTEMBER 6 ,

2008

 OUTLOOK, THE BEST MUTUAL FUND , AUGUST 2008

WEBSITES:-

 JM FINANCIAL
http://www.jmfinancial.in/businesses/nbfc.aspx

 MONEY TODAY:-
http://moneytodaydigitaltoday.in/index.

 MORNING STAR
http://www.investopedia.com/article/mutualfund/1 12002.asp %

 MONEY CONTROL
www.moneycontrol.com/article/Symf/eva1uate

 ICICI DIRECT ;
www.icicidirect.com

 www.fundadvice.com/

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