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` V A PROJECT REPORT ON PERFORMANCE EVALUATION OF MUTUAL FUNDS By NAVNIT P KASUNDRA IN

PARTIAL FULFILLMENT OF POST GRADUATE PROGRAM IN FINANCIAL SERVICES UNITEDWORLD SCHOOL OF
BUSINESS (2009 ± 20``
`

2 V ACKNOWLEDGEMENT A summer project is a golden opportunity for learning and self development It is really a matter of
great pleasure for me to present this creative and practical work At this stage, project report is an important part of learning and
it is presented by every student to get practical knowledge I consider myself very lucky and honored to have so many wonderful
people lead me through in completion of this project I take this opportunity to express my sincere thanks to all those who helped
me in the preparation of this report I would like to express my thanks to all those who assisted me in the preparation of the
project My grateful thanks to Mr Raghavendra Poddar, Proprietor who in spite of being extraordinarily busy with his duties,
took time out to hear, guide and keep me on the correct path I do not know where I would have been without him A humble
ÄThank you Sir Prof Mala Subramaniam whose patience I have probably tested to the limit She was always so involved in the
entire process, shared her knowledge, and encouraged me to think Thank you, Dear Madam I would like to thanks Mr Amit Sir,
a placement manager Unitedworld School of Business, for his efforts and help provided to me to get such an excellent
opportunity Last but not the least there were so many who shared valuable information that helped in the successful completion
of this project Navnit Kasundra 2

3 V DECLARATION I the undersigned, NAVNIT P KASUNDRA the student of PGPM of Unitedworld School of Business hereby
declare that the project work presented in this report is my own work and has been carried out under the supervision and guidance
of Prof Mala madam and Project Gide from JD Financial Services Mr Raghavedra Podder This work has not been previously
submitted to any other intuition or university for examination Date: Place: Signature, (Navnit Kasundra
3

4 V INDEX Sr No Particular Page No ` Title Page ` 2 Acknowledgement 2 3 Declaration 3 4 Table of Content 4 5 List of table 4 6
Abstract 5 7 Experience at Internship 5 8 Brief of Mutual Fund 7 9 History of Mutual Fund in India 8 `0 Terms of Mutual Funds
`2 `` Tax Benefit in Mutual Funds `4 `3 Rights of Investors `7 `4 Advantages of Mutual Funds `7 `5 Selection of Best Mutual
Funds `9 `6 Risk Involve in Investing in Mutual Funds 2` `7 Different Types of Mutual Funds 22 `8 Analysis of Mutual Fund
Performance 26 `9 Data and Data Analysis Methodology 28 20 Analysis of Performance of Sample Funds 29 2` Outcome of
Evaluation 30 22 ICICI Prudential Discovery Funds 3` 23 Summary and Conclusion 37 24 Recommendation 37 25 Learning 37
26 Bibliography and Reference 37 List of Tables and Graphs Graph of growth of assets in Mutual Funds `0 Risk Return Graph
2` Performance Measurement Table 30 Rank of Diversified Funds 30 ICICI fund feature and Facts 32 ICICI Graph of Fund
Performance Vs S&P CNX Nifty 33 ICICI History of Return and Risk Measurement Table 34 ICICI Portfolio Allocation Table
36 4

5 V ABSTRACT I prepared these papers as a part of internship In this report I included activities at internship Company, mainly
general information about Mutual Fund When investors show interest to invest, I request them for an appointment and meet
him/her at the prescribed place 5 Now we began the marketing and actual activities as mutual fund advisors to help investors
and sell mutual fund products I had a company data base to contact people who want to invest in mutual funds Company
subscribed mutual fund investor alert from ³Just Dial´ I got contact details from ³Just Dial´ and approached investors to invest
in mutual funds  After I obtained the general information, I started evaluating mutual funds in equity diversified and ELSS
areas I studied past performance of funds, return for 6 months, ` year, 3 years, 5 years, etc , after analyzing funds, I selected best
performing mutual funds who are always in top `0 since 6 months, ` years, 3 years, and 5 years I did this to recommend
investors, the best possible funds  In the first week, I studied about mutual funds, understood the difference between all types of
funds, became aware about terminologies of mutual funds, studied the application form for mutual fund investment, understood
the available options in mutual funds, specific benefits of particular fund types and option, etc Shortly, I collected general
information about mutual funds and how to fill up common application form in first week  After I got selected in JD Financial
Services in area of Mutual Funds, I started understanding Mutual Fund products by surfing the net I had basic knowledge of
 Mutual Funds before my internship began I cleared AMFI test which is required before I started working as mutual fund
distributer This helped me to go ahead product and evaluate the performance of `0 Equity Diversified Mutual Funds of India I
gave brief description of various terms of Mutual Fund What is Mutual Fund, various types of Mutual Funds, advantages, risk
associated with funds, growth history of Mutual fund, how to select best mutual fund, tax benefit available, etc I use risk
adjusted performance measures suggested by Treynor, Sharpe, and Jensen to analyze the selected funds From the evaluation of
funds, I found that all ratios i e Treynor, Sharpe, and Jensen show almost same result ICICI Prudential Discovery Fund obtains
first rank in all three measurements So further I give detail analysis of these funds to help investors in how to evaluate particular
fund I was as interns in JD Financial Services I was selected there for Mutual Fund area There I evaluate all types of Mutual
Funds and select best performing mutual funds to recommend the investors Here in this report I describe what I have done to
study Mutual Funds EXPERIENCE AT INTERNSHIP Objective Internship is a part of my study of P G P M I joined JD
financial services as summer internship program The objective to do internship is to get practical knowledge, in addition to
theoretical knowledge After joining JD Financial Services as an intern in area of Mutual Funds, my objective was to study all
types of Mutual Funds, advise investors and help them to invest in Mutual Funds And I did it Activities at SIP

6V Mutual funds in India cover tier ` and metro cities, but there is great opportunity in tier 2 The company gave me an opportunity
to go Rajkot (Gujarat
to study market there for mutual funds When I went there I faced following problems: o Most of people
had already invested in ULIPS They were facing problems like; low return, high commission to agents, etc So they didn t want
to invest in mutual funds also o Many even don t know about mutual funds, how it work and what return of investments is o
Trust is main thing to invest earning, people don t trust on me who don t know me o In Gujarat, many people have money, but
they don t know how to earn money on money Mainly they invest money in business and earn money, but they don t know
other options o Market showed worst performance in last 2 years, it also one of the hinders for mutual fund  I learned that
different age group investors demand different mutual fund product according to risk and return, young prefer equity related
product and senior people prefer balance funds and debt funds At present, investment through SIP is most preferable in market
scenario  I got great, valuable experience from conversation with clients All the persons whom I call are different Some don t
talk with me, some cut call without replying, some were insurance agents who offer me to join insurance company and sell
insurance The main part of my learning in internship is how to approach clients and convince him/her to invest  & Here, I
prepared report on performance evaluation of mutual funds on the base of what I have learnt at internship 6 As a conclusion, I
have learnt the marketing and financial aspect of mutual fund product  As a part of finance I learned how to evaluate particular
fund and how to give a rank according to return, risk, performance and diversification I used performance measurement ratios of
Treynor s, Sharpe s, and Jensen s to evaluate diversified funds and gave rank accordingly  As a success, I met 80 people in
Gujarat They don t know about mutual funds and how it works, in spite of that I convinced `8 people to invest 3 There is
need of awareness in such small and medium cities There is big money in small cities and villages, which is lying idle without
any use Mutual funds houses should establish their distributors channels in such areas

7 V MUTUAL FUNDS A BRIEF OF MUTUAL FUNDS Definition 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 The stocks these mutual funds have are very fluid and are used for buying or redeeming and/or
selling shares at a net asset value Mutual funds posses shares of several companies and receive dividends in lieu of them and the
earnings are distributed among the share holders 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
Basically, ` Collect money from investors 2 Invest through well diversified portfolio according to investors
requirement 3 Earning as dividend, or assets appreciation 4 Redeem whenever investor want in open ended and at certain time
in close ended Above cycle show the process of invest in Mutual Fund 7
8 V HISTORY OF MUTUAL FUNDS IN INDIA The mutual fund industry is a lot like the film star of the finance business Though
it is perhaps the smallest segment of the industry, it is also the most glamorous ± in that it is a young industry where there are
changes in the rules of the game everyday, and there are constant shifts and upheavals The mutual fund is structured around a
fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by
the pooling of a number of small investments into a large bucket Yet it has been the subject of perhaps the most elaborate and
prolonged regulatory effort in the history of the country The mutual fund industry started in India in a small way with the UTI
Act creating what was effectively a small savings division within the RBI Over a period of 25 years this grew fairly successfully
and gave investors a good return, and therefore in `989, as the next logical step, public sector banks and financial institutions
were allowed to float mutual funds and their success emboldened the government to allow the private sector to foray into this
area The initial years of the industry also saw the emerging years of the Indian equity market, when a number of mistakes were
made and hence the mutual fund schemes, which invested in lesser-known stocks and at very high levels, became loss leaders for
retail investors From those days to today the retail investor, for whom the mutual fund is actually intended, has not yet returned
to the industry in a big way But to be fair, the industry too has focused on brining in the large investor, so that it can create a
significant base corpus, which can make the retail investor feel more secure A Retrospect: The last year was extremely eventful
for mutual funds The aggressive competition in the business took its toll and two more mutual funds bit the dust Alliance
decided to remain in the ring after a highly public bidding war did not yield an acceptable price, while Zurich has been sold to
HDFC Mutual The growth of the industry continued to be corporate focused barring a few initiatives by mutual funds to expand
the retail base Large money brought with it the problems of low retention and consequently low profitability, which is one of the
problems plaguing the business But at the same time, the industry did see spectacular growth in assets, particularly among the
private sector players, on the back of the continuing debt bull run Equity did not find favor with investors since the market was
lack-luster and performances of funds, barring a few, were quite disappointing for investors The other aspect of this issue is that
institutional investors do not usually favor equity It is largely a retail segment product and without retail depth, most mutual
funds have been unable to tap this market The tables given below are a snapshot of the AUM story, for the industry as a whole
and for debt and equity separately The mutual fund industry in India started in `963 with the formation of Unit Trust of India, at
the initiative of the Government of India and Reserve Bank of India The history of mutual funds in India can be broadly divided
into four distinct phases First Phase ± `964-87 Unit Trust of India (UTI
was established on `963 by an Act of Parliament It was
set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India
In `978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI
took over the regulatory and
administrative control in place of RBI The first scheme launched by UTI was Unit Scheme `964 At the end of `988 UTI had
Rs 6,700 crores of assets under management 8

9 V Second Phase ± `987-`993 (Entry of Public Sector Funds
`987 marked the entry of non- UTI, public sector mutual funds set up
by public sector banks and Life Insurance Corporation of India (LIC
and General Insurance Corporation of India (GIC
SBI
Mutual Fund was the first non- UTI Mutual Fund established in June `987 followed by Canbank Mutual Fund (Dec 87
, Punjab
National Bank Mutual Fund (Aug 89
, Indian Bank Mutual Fund (Nov 89
, Bank of India (Jun 90
, Bank of Baroda Mutual Fund
(Oct 92
LIC established its mutual fund in June `989 while GIC had set up its mutual fund in December `990 At the end of
`993, the mutual fund industry had assets under management of Rs 47,004 crores Third Phase ± `993-2003 (Entry of Private
Sector Funds
With the entry of private sector funds in `993, a new era started in the Indian mutual fund industry, giving the
Indian investors a wider choice of fund families Also, `993 was the year in which the first Mutual Fund Regulations came into
being, under which all mutual funds, except UTI were to be registered and governed The erstwhile Kothari Pioneer (now merged
with Franklin Templeton
was the first private sector mutual fund registered in July `993 The `993 SEBI (Mutual Fund

Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in `996 The industry now
functions under the SEBI (Mutual Fund
Regulations `996 The number of mutual fund houses went on increasing, with many
foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions As at the end
of January 2003, there were 33 mutual funds with total assets of Rs `,2`,805 crores The Unit Trust of India with Rs 44,54`
crores of assets under management was way ahead of other mutual funds Fourth Phase ± since February 2003 In February 2003,
following the repeal of the Unit Trust of India Act `963 UTI was bifurcated into two separate entities One is the Specified
Undertaking of the Unit Trust of India with assets under management of Rs 29,835 crores as at the end of January 2003,
 representing broadly, the assets of US 64 scheme, assured return and certain other schemes The Specified Undertaking of Unit
Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under
the purview of the Mutual Fund Regulations The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC It is
registered with SEBI and functions under the Mutual Fund Regulations With the bifurcation of the erstwhile UTI which had in
March 2000 more than Rs 76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming
to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual
fund industry has entered its current phase of consolidation and growth The following graph indicates the growth of assets over
the years 9

`0 V Impact of local and international developments During the year we had two major political developments that affected the mutual
fund industry The standoff between India and Pakistan at the beginning of the financial year saw the debt market being
extremely volatile Investors pulled out of funds and this also put pressure on fund managers to hold returns and at the same time
meet redemption commitments The equity markets were equally subdued but the industry did not react greatly to this since
equity funds were in any case not a significant part of the mobilization in the last few years With the stand down on the Indian
side, the debt markets recovered and with that the inflow of funds into our industry soared once again But at the end of the year
the industry was hit by another war ± the impending US attack on Iraq and consequent oil price pressures once again made the
debt market volatile It is a mark of the maturing of the Indian investor that redemptions were only need based and the industry
did not see as much outflows as one feared Product innovations With the bond yields plateauing and with the mutual fund
industry trying to attract people to the equity market, the year also saw some remarkable products flavors for Indian investors
Birla Sunlife Mutual Fund led the pack with an equity fund focused on dividend yield stock, a bond index fund and a bond-for-
units swap product Some of the other innovative products were the series of exchange-traded funds from Benchmark, including a
liquid index traded fund Prudential- ICICI also launched an exchange-traded fund, the SPICE, in association with BSE The
industry focused also on making existing products more attractive by adding on a number of service features and cost control
measures Same day redemption in liquid funds, ³institutional´ plans which would reduce the overall cost of investment and
bonus units in lieu of dividend were some of these features `0

`` V A new Emphasis on Risk Management The year also saw a tremendous emphasis on risk management A number of mutual
funds were already taking steps to mitigate risks not only in operations as in the past, but also in the area of management of
funds A committee constituted by AMFI carried the initiative taken under the FIRE Project forward and developed a risk
management framework for the industry The subsequent circular by SEBI is perhaps one of the most comprehensive attempts to
address the issue of risk in the mutual fund business and carries with it the added advantage of phase wise escalation starting with
mandatory items and moving towards best practices AMFI and its role One of the most effective industry bodies today is
probably the Association of Mutual Funds in India (³AMFI´
It has been a forum where mutual funds have been able to present
their views, debate and participate in creating their own regulatory framework The association was created originally as a body
that would lobby with the regulator to ensure that the fund viewpoint was heard Today, it is usually the body that is consulted on
matters long before regulations are framed, and it often initiates many regulatory changes that prevent malpractices that emerge
from time to time This year some of the major initiatives were the framing of the risk management structure, a code of conduct
and registration structure for mutual fund intermediaries, which were subsequently mandated by SEBI In addition, this year
AMFI was involved in a number of developments and enhancements to the regulatory framework AMFI works through a
number of committees, some of which are standing committees to address areas where there is a need for constant vigil and
improvements and other which are ad hoc committees constituted to address specific issues These committees consist of industry
professionals from among the member mutual funds There is now some thought that AMFI should become a self-regulatory
organization since it has worked so effectively as an industry body An Overview: Overall FY2003 can be summed up as the year
of the maturing of the mutual fund industry It was a year when fund houses went through turmoil and consolidation and the
strong ones emerged stronger Investors too became savvier, and began investing based on far more scientific criteria than in the
past, and with clearly defined investment horizons Distribution gave way increasingly to intermediation and more and more
distributors graduated to providing technical advice to their clients Thus the industry has come of age in FY2003, and we hope
that FY2004 and beyond will see us come out of a stormy adolescence to become a trusted avenue for saving ``
`2 V TERMS OF MUTUAL FUNDS Asset Management Company An Asset Management Company (AMC
is a highly regulated
organization that pools money from investors and invests the same in a portfolio They charge a small management fee, which is
normally ` 5 per cent of the total funds managed NAV 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 How often is the NAV declared? The NAV of a scheme has to be declared at least once a week However many Mutual
Fund declare NAV for their schemes on a daily basis As per SEBI Regulations, the NAV of a scheme shall be calculated and
published at least in two daily newspapers at intervals not exceeding one week However, NAV of a close-ended scheme targeted
to a specific segment or any monthly income scheme (which is not mandatorily required to be listed on a stock exchange
may be
published at monthly or quarterly intervals What is Exit Load? The non refundable fee paid to the Asset Management Company
at the time of redemption/ transfer of units between schemes of mutual funds is termed as exit load It is deducted from the NAV
(selling price
at the time of such redemption/ transfer What is redemption price? Redemption price is the price received on
selling units of open-ended scheme 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 What is repurchasing price? Repurchase price
is the price at which a close-ended scheme repurchases its units Repurchase can either be at NAV or can have an exit load What
is a 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 What is Shut-Out Period? After the closure of the Initial Offer Period, on an ongoing basis, the Trustee reserves a
right to declare Shut-Out period not exceeding 5 days at the end of each month/quarter/half-year, as the case may be, for the
investors opting for payment of dividend under the respective Dividends Plans The declaration of the Shut-Out period is
envisaged to facilitate the `2

`3 V AMC/the Registrar to determine the Units of the unit holders eligible for receipt of dividend under the various Dividend Options
Further, the Shut-Out period will also help in expeditious processing and dispatch of dividend warrants During the Shut-Out
period investors may make purchases into the Scheme but the Purchase Price for subscription of units will be calculated using the
NAV as at the end of the first Business Day in the following month/quarter/half-year as the case may be, depending on the
Dividend Plan chosen by the investor Therefore, if investments are made during the Shut -Out period, Units to the credit of the
Unit holder's account will be created only on the first Business Day of the following month/ quarter/half year, as the case may be,
depending on the dividend plan chosen by the investor The Shut-Out period applies to new investors in the Scheme as well as to
Unit holders making additional purchases of Units into an existing folio The Trustee reserves the right to change the Shut-Out
period and prescribe new Shut- Out period, from time to time Minimum lock-in period for investment There is no lock-in period
in the case of open-ended funds However in the case of tax saving funds a minimum lock-in period is applicable The lock-in
period for different tax saving schemes are as follows: section minimum lock-in period U/s 88 3 yrs U/s 54EA 3 yrs U/s 54EB 7
yrs Who are the issuers of Mutual funds in India? Unit Trust of India was the first mutual fund which began operations in `964
Other issuers of Mutual funds are Public sector banks like SBI, Canara Bank, Bank of India, Institutions like IDBI, ICICI, GIC,
LIC, and Foreign Institutions like Alliance, Morgan Stanley, Templeton and Private financial companies like Kothari Pioneer,
DSP Merrill Lynch, Sundaram, Kotak Mahindra, and Cholamandalam etc there are many new upcoming fund houses like
Edelweiss, J P Morgan, Axis, SYSTEMATIC INVESTMENT PLAN SIP is an investment option that is presently available only
with mutual funds The other investment option comparable to SIPs is the recurring deposit schemes from Post office and banks
Basically, under an SIP option an investor commits making a regular (monthly/quarterly
investment in a particular mutual
fund/deposit Investor can now use auto debit (ECS
facility from Banks to automatically debit SIP amount from your account
There is no need to give bulk of cheques for SIP For that you should have account in nationalized banks For SIP through ECS,
you have to provide bank details like account no , branch name, MICR no etc `3

`4 V No TDS on any income distribution by mutual fund Capital Gains on Sale of Units However, if the investor sells his units and
earns ³Capital Gains´, the investor is subject to the Capital Gains Tax as under: `4 Income distributed by a fund is exempted in
 the hands of investors  The fund cannot avoid the tax eve if the investor chooses to reinvest the distribution back into the fund
For example, the fund will still pay Rs `0 20 tax on the announced distribution, even if the investor chooses to reinvest his
dividends in the concerned scheme Tax benefits to the Investor Dividends Received From Mutual Funds  In fact, since the tax
is on distributions, it makes income schemes less attractive in comparison to growth schemes, because the objective of income
schemes is to pay regular dividends  Also, the tax bears no relationship to the investor s tax bracket and is payable by the fund
even if the investor s income does not exceed the taxable limit prescribed by the Income Tax Act  It should be noted that
although this tax is payable by the fund on its distributions and out of its income, the investor are indirectly since the fund s
NAV, and therefore the value of his investment will come down by the amount of tax paid by the fund For example, if a closed-
end or debt fund declares a dividend distribution of Rs `00, Rs `0 20, if tax rate is `0 20%
will be the tax in the hands of the
fund While the investor will get Rs `00, the fund will have Rs `0 20 less to invest The fund s current cash flow will diminish
by Rs `0 20 paid as tax, and its impact will be reflected in the lower value of the fund s NAV and hence investor s investment
on a compounded basis in future periods  However, income distributed to unit-holders by a closed-end debt fund is liable to a
dividend distribution tax at a rate stipulated by the Government This tax is not applicable to distributions made by open-end
equity-oriented funds Impact on the Fund and the Investor  Generally, income earned by mutual fund registered with SEBI is
exempt from tax TAX BENEFITS IN MUTUAL FUNDS When we talk about a mutual fund for taxation purposes, we mean
the legally constituted trust that holds the investors money It is trust that earns and receives income from investments it makes
on behalf of the investors Most countries do not impose any tax on this entity ± the trust ± because the income it earns is meant
for the investors The trust is considered to be only a pass-through vehicle It would amount to double taxation if the trust first
pays a tax and then investor also is made to pay Generally, the trust that is exempted and the investor pay the taxes on his share
of the income After the `999-2000 Budget, the investors are totally exempt from paying any tax on the dividend income they
receive from the mutual funds, while certain types of schemes pay some taxes This section explains what the fund or the trust
pays by way of tax Tax Provision

`5 V If the units were held for over one year, the investor gets the benefit of ³Indexation´, which means his purchase price is marked
up by an inflation index, so his capital gains amount is less than otherwise Purchase Price of a long term capital asset after
Indexation is computed as, Cost of acquisition or improvement = actual cost of acquisition or improvement * cost inflation index
for year of transfer / cost inflation index for year of acquisition or improvement or for `98`, whichever is less Since, April `,
2003, all dividends, declared by debt-oriented mutual funds (i e mutual funds with less than 50% of assets in equities
, are tax-
free in the hands of the investor A dividend distribution tax of `2 5% (including surcharge
is to be paid by the mutual fund on
the dividends declared by the fund Long-term debt funds, government securities funds (G-sec/gilt funds
, monthly income plans
(MIPs
are examples of debt-oriented funds Dividends declared by equity-oriented funds (i e mutual funds with more than 50%
of assets in equities
are tax-free in the hands of investor There is also no dividend distribution tax applicable on these funds
under section ``5R Diversified equity funds, sector funds, balanced funds are examples of equity-oriented funds Amount
invested in tax-saving funds (ELSS
would be eligible for deduction under Section 80C, however the aggregate amount
deductible under the said section cannot exceed Rs `00,000 Se Tax law definition of Capital Gains = Sale consideration ± (Cost
of Acquisition + Cost of Improvements + Cost of transfer
 If units are held for not more than `2 months, they will be treated as
short term capital asset, otherwise as long term capital asset  Resident Individualction 2(42A
: Under Section 2(42A
of the
Act, a unit of a mutual fund is treated as short- term capital asset if the same is held for less than `2 months The units held for
more than twelve months are treated as long-term capital asset Section `0(38
: Under Section `0(38
of the Act, long term
capital gains arising from transfer of a unit of mutual fund is exempt from tax if the said transaction is undertaken after October
`, 2004 and the securities transaction tax is paid to the appropriate authority This makes long-term capital gains on equity-
oriented funds exempt from tax from assessment year 2005-06 Short-term capital gains on equity-oriented funds are chargeable
to tax @`0% (plus education cess, applicable surcharge
However, such securities transaction tax will be allowed as rebate under
Section 88E of the Act, if the transaction constitutes business income Long-term capital gains on debt-oriented funds are subject
to tax @20% of capital gain after allowing indexation benefit or at `0% flat without indexation benefit, whichever is less Short-
term capital gains on debt-oriented funds are subject to tax at the tax bracket applicable (marginal tax rate
to the investor
Section ``2: Under Section ``2 of the Act, capital gains, not covered by the exemption under Section `0(38
, chargeable on
 transfer of long-term capital assets are subject to following rates of tax: & Partnership firmsHUF -- 20% plus surcharge,
education cess & Foreign companies -- 20% (no surcharge
`5Indian companies -- 20% plus surcharge

`6 V Issued on or after April `, 2002 by the National Housing Bank or by the Small Industries Development Bank of India Such
capital gains can also be invested in any residential house property in accordance with Section 54F of the Act and one can claim
exemption from capital gains `6 Issued on or after April `, 200` by the Rural Electrification Corporation Ltd  Issued on or
after April `, 2000 by NABARD (National Bank for Agriculture and Rural Development or NHA (National Highways Authority
of India Capital gains will be computed after taking into account the cost of acquisition as adjusted by Cost Inflation Index,
notified by the central government 'Units' are included in the proviso to the sub-section (`
to Section ``2 of the Act and hence,
unit holders can opt for being taxed at `0% (plus applicable surcharge, education cess
without the cost inflation index benefit or
20% (plus applicable surcharge
with the cost inflation index benefit, whichever is beneficial Under Section ``5AB of the
Income Tax Act, `96`, long term capital gains in respect of units, purchased in foreign currency by an overseas financial, held
for a period of more than `2 months, will be chargeable at the rate of `0% Such gains will be calculated without indexation of
cost of acquisition No surcharge is applicable for taxes under section ``5AB, in respect of corporate bodies Offset the capital
loss on a mutual fund investment after a dividend declaration This is a practice that is popularly referred to as 'dividend stripping '
The capital loss from a dividend declaration can be offset if you have remained invested in the mutual fund 3 months before and
9 months after the dividend declaration If you haven't adhered to this guideline then you cannot offset the capital loss arising
from a dividend declaration Avoid payment of capital gains on mutual fund investments The capital gain, which is not exempt
from tax as explained above, can be invested in the specified asset, mentioned below, within 6 months of the sale Specified asset
means any bond redeemable after 3 years:

`7 V THE RIGHTS OF INVESTORS As per SEBI Regulations on Mutual Funds, an investor is entitled to ` Receive Unit certificates
or statements of accounts confirming your title within 6 weeks from the date your request for a unit certificate is received by the
Mutual Fund 2 Receive information about the investment policies, investment objectives, financial position and general affairs
of the scheme; 3 Receive dividend within 42 days of their declaration and receive the redemption or repurchase proceeds within
`0 days from the date of redemption or repurchase 4 The trustees shall be bound to make such disclosures to the unit holders as
are essential in order to keep them informed about any information which may have an adverse bearing on their investments 5
75% of the unit holders with the prior approval of SEBI can terminate the AMC of the fund 6 75% of the unit holders can pass a
resolution to wind-up the scheme 7 An investor can send complaints to SEBI, who will take up the matter with the concerned
Mutual Funds and follow up with them till they are resolved Are Mutual Funds Risk Free and What are the Advantages? One
must not forget the fundamentals of investment that no investment is insulated from risk Then it becomes interesting to answer
why mutual funds are so popular To begin with, we can say 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 This logic has seen the mutual funds to be perceived as risk free investments in the market Yes, this is not entirely untrue
if one takes a look at performances of various mutual funds This relative freedom from risk is in addition to a couple of
advantages mutual funds carry with them So, if you are a retail investor and planning an investment in securities, you will
certainly want to consider the advantages of investing in mutual funds The advantages of investing in a Mutual Fund are:
Management Convenient Administration Return Potential `7

`8 V Professional expertise: Investing requires skill It requires a constant study of the dynamics of the markets and of the various
industries and companies within it Anybody who has surplus capital to be parked as investments is an investor, but to be a
successful investor, you need to have someone managing your money professionally Just as people who have money but not
have the requisite skills to run a company (and hence must be content as shareholders
hand over the running of the operations to
a qualified CEO, similarly, investors who lack investing skills need to find a qualified fund manager Mutual funds help investors
by providing them with a qualified fund manager Increasingly, in India, fund managers are acquiring global certifications like
CFA and MBA which help them be at the cutting edge of the knowledge in the investing world Diversification: There is an old
saying: Don't put all your eggs in one basket There is a mathematical and financial basis to this If you invest most of your
 savings in a single security (typically happens if you have ESOPs (employees stock options
from your company, or one
investment becomes very large in your portfolio due to tremendous gains
or a single type of security (like real estate or equity
become disproportionately large due to large gains in the same
, you are exposed to any risk that attaches to those investments In
order to reduce this risk, you need to invest in different types of securities such that they do not move in a similar fashion
Typically, when equity markets perform, debt markets do not yield good returns Note the scenario of low yields on debt
securities over the last three years while equities yielded handsome returns Similarly, you need to invest in real estate, or gold, or
international securities for you to provide the best diversification If you want to do this on your own, it will take you immense
amounts of money and research to do this However, if you buy mutual funds -- and you can buy mutual funds of amounts as low
as Rs 500 a month! -- you can diversify across asset classes at very low cost Within the various asset classes also, mutual funds
hold hundreds of different securities (a diversified equity mutual fund, for example, would typically have around hundred
different shares
Low cost of asset management: Since mutual funds collect money from millions of investors, they achieve
economies of scale The cost of running a mutual fund is divided between a larger pool of money and hence mutual funds are
able to offer you a lower cost alternative of managing your funds Equity funds in India typically charge you around 2 25% of
your initial money and around ` 5% to 2% of your money invested every year as charges Investing in debt funds costs even less
If you had to invest smaller sums of money on your own, you would have to invest significantly more for the professional
benefits and diversification Liquidity: Mutual funds are typically very liquid investments Unless they have a pre-specified lock-
in, your money will be available to you anytime you want Typically funds take a couple of days for returning your money to
you Since they are very well integrated with the banking system, most funds can send money directly to your banking account
Ease of process: If you have a bank account and a PAN card, you are ready to invest in a mutual fund: it is as simple as that! You
need to fill in the application form, attach your PAN (typically for transactions of greater than Rs 50,000
and sign your cheque
and you investment in a fund is made `8

`9 V In the top 8-`0 cities, mutual funds have many distributors and collection points, which make it easy for them to collect and you
to send your application to Well regulated: India mutual funds are regulated by the Securities and Exchange Board of India,
which helps provide comfort to the investors Sebi forces transparency on the mutual funds, which helps the investor make an
informed choice Sebi requires the mutual funds to disclose their portfolios at least six monthly, which helps you keep track
whether the fund is investing in line with its objectives or not SELECTION OF BEST MUTUAL FUND Choice of any scheme
would depend to a large extent on the investor preferences For an investor willing to undertake risks, equity funds would be the
most suitable as they offer the maximum returns Debt funds are suited for those investors who prefer regular income and safety
Gilt funds are best suited for the medium to long-term investors who are averse to risk Balanced funds are ideal for medium- to
long-term investors willing to take moderate risks Liquid funds are ideal for Corporates, institutional investors and business
houses who invest their funds for very short periods Tax Saving Funds are ideal for those investors who want to avail tax
benefits An important aspect while selecting a particular scheme is the duration of the investment Depending on your time
horizon you can select a particular scheme Besides all this, factors like promoter's image, objective of the fund and returns given
by the funds on different schemes should also be taken into account while selecting a particular scheme When your investment
purpose is for saving for retirement, then risk minimization should be your mantra And one of the best avenues for you to invest
now is mutual funds as they have an average of 50 stocks in each portfolio for diversification and cushioning the risks Selecting
best mutual funds mean a lot more than deciding by indices and their past performances However, you need to remember one
thing that there is no quick gratification in investments of any kind Let us discuss the dos and don'ts of selecting the best mutual
funds These points should serve as guidelines for making decision on whether your pick is among the best in the industry or not
Dos In Selecting the Best Mutual Fund ` Draw down your investment objective There are various schemes suitable for different
needs For example retirement plan, capital growth etc Also get clear about your time frame for investment and returns Equity
funds are not advisable for short term because of their long term nature You can consider money market and floating rate funds
for short term gains This equals asking - What kind of mutual fund is right for me? 2 Once you have decided on a plan or a
couple of them, collect as much information as possible on them from different sources offering them Funds' prospectus and
advisors may help you in this 3 Pick out companies consistently performing above average Mutual funds industry indices are
helpful in comparing different funds as well as different plans offered by them Some of the industry standard fund indices are
 Sensex, Nifty, BSE 500 etc with the latter rating the Socially Responsible Funds only Also best mutual funds draw good results
despite market volatility `9

20 V 4 Get a clear picture of fees & Don't invest huge sums of money in a single fund or all the money in one Don't go by hearsay
about the reputations of a fund There are various rating agencies which index the mutual funds regularly based on multiple
factors It forms your first step in finding the best performing mutual funds  Don't go by the past performance alone For, an
average of performance over a period will not tell you whether the performance is growing or at least maintained in the recent
years associated cost, taxes (for non-tax free funds
for all your short listed funds and how they affect your returns Best mutual
funds have lower cost out go 5 Best mutual funds maximize returns and minimize risks A number called as Sharpe Ratio
explains whether a fund is risk free based on its expected returns compared against a risk free money market fund 6 Some funds
have the advantage of low minimum initial investments You can start investing even with Rs `000 a month This is advisable
for building asset bases over a long period with small regular investment Don'ts In Selecting Best Mutual Funds Like there are pit
falls in every investment sphere you must be careful about even while investing in mutual funds Here is a list of don'ts you must
consider for selecting best performing mutual funds Don't compare a mutual fund across the category This means a diversified
fund should not be compared with index fund While choosing a best one compare funds from the same category regardless of the
promoting companies It is definitely not easy to pick a few best mutual funds from those in the market It is like searching for the
proverbial needle in the stack of hay However, a best mutual fund is one that charges low fees, that sticks to principles and
investment styles, which puts your interest on top of everything else The most important character of best mutual funds is they
don't just know how to ride a bull run but also a bear market 20 Don't chase a mutual fund because it is performing great in a
bull run in the stock market Once the market stagnates or the trend reverses these funds will follow suit  Don't ignore absolute
returns NAVs and percentage growths don't factor-in the taxes and charges Higher loads can diminish you in absolute returns
Some of the funds load you at both buying as well as selling Even no load funds have fees such as Rule `2-b fees go Spread
out your investments rationally For example: Index funds for high returns, bond funds for lower risks, 40` (k
retirement plans
and so on

2` V Risks involved in investing in Mutual Funds Mutual Funds do not provide assured returns Their returns are linked to their
performance They invest in shares, debentures and deposits All these investments involve an element of risk The unit value
may vary depending upon the performance of the company and companies may default in payment of interest/principal on their
debentures/bonds/deposits Besides this, the government may come up with new regulation which may affect a particular industry
or class of industries All these factors influence the performance of Mutual Funds 2`

22 V Different types of Mutual funds (a
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 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 Sector funds These funds invest primarily in equity shares of
companies in a particular business sector or industry These funds are targeted at investors who are extremely bullish about a
particular sector 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 22

23 V 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 Debt / Income Funds These Funds invest predominantly in high-rated fixed-income-bearing
instruments like bonds, debentures, government securities, commercial paper and other money market instruments They are best
suited for the medium to long-term investors who are averse to risk and seek capital preservation They provide regular income
and safety to the investor Liquid Funds / Money Market Funds These funds invest in highly liquid money market instruments
The period of investment could be as short as a day They provide easy liquidity They have emerged as an alternative for savings
and short-term fixed deposit accounts with comparatively higher returns These funds are ideal for Corporates, institutional
 investors and business houses who invest their funds for very short periods Gilt Funds These funds invest in Central and State
Government securities Since they are Government backed bonds they give a secured return and also ensure safety of the
principal amount They are best suited for the medium to long-term investors who are averse to risk Balanced Funds These funds
invest both in equity shares and fixed-income-bearing instruments (debt
in some proportion They provide a steady return and
reduce the volatility of the fund while providing some upside for capital appreciation They are ideal for medium- to long-term
investors willing to take moderate risks Hedge Funds These funds adopt highly speculative trading strategies They hedge risks
in order to increase the value of the portfolio (b
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 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 23

24 V 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 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 (b
On the basis of geographic location Domestic funds These funds mobilize 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 Is there is any tax applicable on the redemption of mutual funds? Yes
The tax applicable is called as STT i e Security transaction tax which is 0 25% STT is applicable only in case of redemption of
equity linked schemes Different plans that Mutual Funds offer 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 Automatic Investment Plan Under the Automatic Investment Plan (AIP
also
called Systematic Investment Plan (SIP
, the investor is given the option for investing in a specified frequency of months in a
specified scheme of the Mutual Fund for a constant sum of investment AIP allows the investors to plan their savings through a
structured regular monthly savings program Automatic Withdrawal Plan Under the Automatic Withdrawal Plan (AWP
also
called Systematic Withdrawal Plan (SWP
, a facility is provided to the investor to withdraw a pre-determined amount from his
fund at a pre-determined interval 24

25 V What are the factors that influence the performance of Mutual Funds The performances of Mutual funds are influenced by the
performance of the stock market as well as the economy as a whole Equity Funds are influenced to a large extent by the stock
market The stock market in turn is influenced by the performance of the companies as well as the economy as a whole The
performance of the sector funds depends to a large extent on the companies within that sector Bond-funds are influenced by
interest rates and credit quality As interest rates rise, bond prices fall, and vice versa Similarly, bond funds with higher credit
ratings are less influenced by changes in the economy Expense Ratio Mutual funds charge fees, sometimes high fees A mutual
fund's EXPENSE RATIO is the most important fee to understand And is made up of the following: The investment advisory fee
or management fee is the money used to pay the manager(s
of the mutual fund This is usually taken annually as a percentage of
the fund's assets Administrative costs are the costs of record keeping, mailings, maintaining a customer service line, etc These
are all necessary costs, though they vary in size from fund to fund The thriftiest funds can keep these costs below 0 2 per cent of
fund assets Distribution fee: This fee is spent on marketing, advertising and distribution services If you're in a fund with a `2b-`
fee, you're paying every year for the fund to run commercials and try to sell it Only one third of all equity, mutual funds
 provided returns greater than the S&P 500, and that was before fees and expenses which range from 0 5% to 2 0% and 2 0%,
respectively So the next issue raised was if traditionally used methods of evaluation were accurate indicators of performance
Academicians criticized the frequently used measures of percentage annual growth rate of net asset value and absolute dollar
value today of an investment made at some point in the past because these two approaches failed to adjust for the riskiness of a
mutual fund After adjustments were made for the riskiness of a fund, mutual funds were reported as being able to perform up to
the market on gross returns, but were underperforming, as compared to the market, after the various expenses were factored in
Many analysts suggested that the average ` 3% expense ratio of mutual funds and the need for the retainment of cash as the
culprits of such underperformance Risk Risk can be a great ally when trying to estimate the reward potential of a stock
investment The greater the stock volatility, or risk, the greater also is the reward There are several new risk measurements that
give guidance for selecting mutual stocks that provide higher returns for lower risk Time Horizon: The time horizon of an
individual will also influence the performance measures he/she will look at more closely If you are investing for less than four
years, you need a fund with consistent performance, so all your money will be there when you need it You also do not have time
to earn back a large commission charge on the front end Conversely, if you plan to invest your money for 30 years, neither
consistency nor load is very important: you have plenty of time for the market to recover With a long-term horizon, your biggest
enemies are poor performance and high annual expenses, both of which can erode that all-important compounding 25

26 V ȕp = beta of the portfolio P Whenever Rp×
 Rf = Risk-free rate of return during the same period Treynor  P f  Rp =
Portfolio s actual return during a specified time period  R R ANALYSIS OF MUTUAL FUND PERFORMANCE Mutual
fund performance can be analyzed through performance measurement ratios which are use in portfolio analysis We here are
using Treynor, Sharpe, and Jensen ratio to evaluate mutual funds and rank accordingly Composite portfolio performance
measures have the flexibility of combining risk and return performance into a single value The most commonly used composite
measures are: Treynor, Sharpe and Jensen measures While Treynor measures only the systematic risk summarized by beta,
Sharpe concentrates on total risk of the mutual fund Treynor¶s performance index: Treynor (`965
was the first researcher
developing a composite measure of portfolio performance He measures portfolio risk with beta, and calculates portfolio s
market risk premium relative to its beta: Where: Ti = Treynor s performance index > Rf and ȕp > 0 a larger T value means a
better portfolio for all investors regardless of their individual risk preferences In two cases we may have a negative T value:
when Rp < Rf or when ȕp < 0 If T is negative because Rp < Rf, we judge the portfolio performance as very poor However, if
the negativity of T comes from a negative beta, fund s performance is superb Finally when Rp- Rf, and ȕp are both negative, T
will be positive, but in order to qualify the fund s performance as good or bad we should see whether Rp is above or below the
security market line pertaining to the analysis period (Reilly, `992
Demonstration of Comparative Treynor Measures: Assume
we have the following data for three mutual funds; ZBY, with their respective annual rate of return and systematic risk, Beta The
risk free rate is 8 % The systematic risk for M (market
is ` 0 and the rate of return for M is `4% Investment Manager Rate of
Return Beta Z 0 `2 0 90 B 0 `6 ` 05 Y 0 `8 ` 2 M 0 `4 ` 0 We can calculate the T values for each investment manager: Tm:
(0 `4-0 08
/` 00 =0 06 TZ: (0 `2-0 08
/0 90 =0 044 TB: (0 `6-0 08
/` 05 =0 076 TY: (0 `8-0 08
/` 20 =0 083 These results show
that Z did not even "beat-the-market " Y had the best performance, and both B and Y beat the market 26

27 V Subtracting Rf from both side he obtains: Rjt - Rf = ȕj (Rm - Rf
+ ujt This formula says that risk premium earned on jth
portfolio is equal to the market risk premium times ȕj plus a random error term In this form, one would not expect an intercept
for the regression equation, if all securities are in equilibrium But if certain superior portfolio managers can persistently earn
positive risk premiums on their portfolios, the error term ujt will always have a positive value In such a case, an intercept value
which measures positive differences from the model must be included in the equation as follows: Rjt - Rf = Įj + ȕj (Rm - Rf
+
ujt Jensen uses Įj as his performance measure A superior portfolio manager would have a significant positive Įj value because
of the consistent positive residuals Inferior managers, on the other hand, would have a significant negative Įj Average portfolio
managers having no forecasting ability but, still, cannot be considered inferior would earn as much as one could expect on the
basis of the CAPM 27  f
M  f P Rjt = Rf + ȕj (Rm - Rf
+ ujt P P
 R  R  ×  R   R   Jensen   P This formula
suggests that Sharpe prefers to compare portfolios to the capital market line(CML
rather than the security market line(SML

Sharpe index, therefore, evaluates funds performance based on both rate of return and diversification (Sharpe `967
For a
completely diversified portfolio Treynor and Sharpe indices would give identical rankings Demonstration of Comparative
 Sharpe Measures: Sample returns and SDs for four portfolios (and the calculated Sharpe Index
are given below: Portfolio Avg
Annual RofR SD of return Sharpe measure B 0 `3 0 `8 0 278 O 0 `7 0 22 0 409 P 0 `6 0 23 0 348 Market 0 `4 0 20 0 30 Thus,
portfolio O did the best, and B failed to beat the market We could draw the CML given this information The trouble with both
Sharpe and Treynor techniques for evaluating "risk-adjusted" returns is that they equate risk with short-term volatility Therefore
these measures may not be applicable in evaluating the relative merits of long-term investments 3- Jensen¶s Alpha: Jensen
(`968
, on the other hand, writes the following formula in terms of realized rates of return, assuming that CAPM is empirically
valid: Ô ıp = Portfolio standard deviation
 Si = Sharpe performance index Sharpe  P f  Where:  R R 2- Sharpe¶s
Performance index Sharpe (`966
developed a composite index which is very similar to the Treynor measure, the only difference
being the use of standard deviation, instead of beta, to measure the portfolio risk, in other words except it uses the total risk of the
portfolio rather than just the systematic risk:

28 V Define beta of funds and market, S Find average return  Define standard deviation on base of monthly return  Find return for
every month of each funds  Define NAVs for each month of period April- 2009 to March- 20`0  Select mostly preferable
funds from Indian Market Jensen performance criterion, like the Treynor measure, does not evaluate the ability of portfolio
managers to diversify, since the risk premiums are calculated in terms of ȕ If the value is positive, then the portfolio is earning
excess returns In other words, a positive value for Jensen's alpha means a fund manager has beat the market with his or her stock
picking skills Analysis: While studying the performance measurement of mutual funds, one particular area caught my attention
The fact that Sharpe uses STDV as a measurement of risk which is the total risk and Treynor uses Beta or systematic risk, but yet
it is claimed that, if we are examining a well-diversified portfolio, the rankings should be similar for all three methods This
interesting theory aroused my curiosity and made me think why not test this hypothesis: Are there funds which are fully
diversified? If such funds exist then they ought to be ranked identically according to all three; Sharpe-, Treynor- and Jensen s
performance measurement DATA For my analysis I have selected `0 mutual funds from Indian market All funds are in
diversified category I collect data from money control, value research online, and mutual fund India web sites I have selected
such funds which are mostly preferable by investors Fix deposit return was selected as risk free return, that is 7 5% p a I have
collected NAV of funds of each month for `2 months and define return DATA ANALYSIS/ METHODOLOGY & Evaluate
ICICI Prudential Discovery Fund individually to show how to select particular fund 28 Rank according to each ratio  Find
Treynor, Sharpe and Jensen ratio and performance P CNX Nifty index return take as market return

29 V Analysis of Performance of Sample Funds Sr Avg Treynor Sharpe's No NAME OF FUNDS Return S D BETA Ratio Ratio
Jensen Icici Prudential Discovery ` Fund 0 085`09 9 933534 0 8865027 0 088955 0 007939 0 039378 2 DSP BR Small and Mid
Cap 0 08`446 `` 02536 0 96`8964 0 078`75 0 00682 0 032358 3 Icici Prudential Emerging Star 0 077039 `0 4476` 0 903064
0 078387 0 006776 0 03057` 4 IDFC Premier Fund Plan A 0 066`73 7 854794 0 6979008 0 085862 0 007629 0 028842 SBI
Magnum Emerging 5 Business 0 087394 `3 87804 ` 2073479 0 067209 0 005847 0 027375 6 Birla SL Midcap Plan A 0 082959
`2 72428 ` `264585 0 068097 0 006029 0 026542 7 Birla SL Dividend Yield 0 0638 9 0`3342 0 80`7708 0 07`779
0 006385 0 02`843 Sundaram BNP Paribas 8 SMILE Fund 0 07684 `2 4384` ` `003``5 0 064`54 0 005675
0 02`587 9 UTI dividend Yield Fund 0 055069 7 279``7 0 664423` 0 073476 0 006707 0 0`9229 Reliance Regular Saving `0
Eqity Fund 0 067936 `` 057`7 0 9934204 0 062094 0 005579 0 0`7444 Above table shows performance of various funds by
using treynor, sharpe and Jensen ratio Now we can rank funds according to all ratios, higher ratio of fund get higher rank and so
on The table on next page shows rank of funds according to each ratio Ran k Treynor Rank Sharpe Rank Jensen ` Icici Dis `
Icici Dis ` Icici Dis 2 IDFC Pre 2 IDFC Pre 2 DSP S&M 3 Icici Emer 3 DSP S&M 3 Icici Emer 4 DSP S&M 4 Icici Emer 4
IDFC Pre 5 UTI Div 5 UTI Div 5 SBI Emer 6 Birla Div 6 Birla Div 6 Birla Mid 7 Birla Mid 7 Birla Mid 7 Birla Div
SundaramSMIL 8 SBI Emer 8 SBI Emer 8 E SundaramSMIL SundaramSMIL 9 E 9 E 9 UTI Div `0 Reliance RSF `0 Reliance
RSF `0 Reliance RSF 29

30 V Outcome of Evaluation From above table, we can evaluate that ICICI Pru Discovery find get highest rank in all three ratio, and
there is also good correlation between all ratio results From the above table which shows performance analysis by using
measurement ratios, we can define well diversified funds among all funds We can use same method for all funds available in
market and rank accordingly Arrange funds according to ascending order of Sharpe ratio, Treynor ratio, and Jensen ratio and
then give first rank to highest ratio, second to second highest and so on Here we can see that well diversified fund rank among
 top five funds Top five funds in ranking are almost same in all three measurements So as a conclusion we can say that all three
measurement ratios are equally valuable and show actual and reasonable result From my analysis I found that ICICI Prudential
Discovery Fund secure highest rank in all three ratios So here I further analyze ICICI Discovery fund to so investors that how to
choose particular fund 30

3` V ICICI Prudential Discovery Fund ICICI Prudential Discovery Fund is at top among all analyzed funds Here I am exploring this
fund to show how to analyze particular fund before investing There should be harmony between investor s requirement and
fund s activities I included fund objective, investment options , return compare with market return, assets allocation, etc
INVESTMENT OBJECTIVE To generate return through a combination of dividend income and capital appreciation by investing
primarily in a well diversified portfolio of value stocks Value stocks are those, which have attractive valuations in relation to
earning or book value or current and/or future dividends Here, investors should compare their investment objective with fund
objective Both objectives, of investors and fund should match and should in same direction Fund Features Fund Manager S
Naren , Rajat Chandak SIP STP SWP Expense ratio(%
2 04 Portfolio Turnover Ratio(%
`36 Last Divdend Declared NA
Minimum Investment (Rs
5000 Purchase Redemptions Daily NAV Calculation Daily Entry Load Entry Load is 0% Exit Load If
redeemed bet 0 Year to ` Year; Exit load is `% Fund features show information of investment option, facilities available to
invest, transfer and redeem, minimum investment plan, expense incur to invest, NAV valuation method, other charges, etc 3`

32 V FUND FACTS Increase/Decrease in Fund Size since Apr 30, ``7 26 20`0 (Rs in crores
Mutual Fund ICICI Prudential Mutual
Fund 8th Floor, Peninsula Tower, Ganpatrao Kadam Marg, Off Senapati Bapat Marg, Lower Parel Mumbai Tel -24997000
,24999777 Asset Management Company ICICI Prudential Asset Management Company Ltd 3rd Floor, Hallmark Business Plaza
Sant Dyaneshwar Marg, Bandra (East
, Mumbai - 40005` Tel - 26428000 , Registrar Computer Age Management Services
Private Limited A&B, Lakshmi Bhavan 609, Anna Salai , Chennai We can find fund house location, location of AMC and
registrar, so we can contact in future for any help regarding mutual fund, query for repurchase, withdrawal, change in SIP, stop
SIP investment, procedure to redeem, current investment statement, etc Fund Performance Vs S & P CNX Nifty Above graph
show the performance against Index performance in term of return From above graph of ICICI Discovery Fund, we can tall that
this fund is aggressive When market goes up, it gives more return than index benchmark and when market goes down, it goes
down more than market So the investors who are aggressive in investment and want to take high risk should invest in this fund
32

33 V History 2004 2005 2006 2007 2008 2009 20`0 NAV (Rs
`2 88 2` 09 27 `4 37 9 `7 22 40 35 44 44 Total Return (%
63 74
28 69 39 65 -54 56 `34 32 `0 `4 S&P CNX Nifty 27 40 -`` `4 -`5 `2 -2 77 58 56 `` 88 Sensex 2` 4` -`8 0` -7 50 -2 `` 53 29
`2 67 Rank (Fund/Category
7/`00 `0`/`45 `48/`62 92/`93 3/2`4 7/256 52 Week High (Rs
2` 09 28 98 37 90 39 66 40 35 - 52
Week Low (Rs
2 4` `8 70 23 52 `4 36 `4 69 - Net Assets (Rs Cr
932 45 ```7 59 6`3 4` 204 96 590 05 `088 60 Expense Ratio
(%
`` 95 2 08 2 03 2 23 2 34 2 04 From above table, we can analyze historical NAV movement and fund return as compare to
market return Total fund value which is invested by investors in this fund show growth in assets and increase in trust of
investors From last year, this fund rank first by valuable analyst, so more investors attract to invest in this fund Expense ratio
show the percentage that fund house charge to maintain investors fund It charges annually Absolute Returns (in %
Year Qtr `
Qtr 2 Qtr 3 Qtr 4 Annual 20`0 5 6 - - - - 2009 -5 7 62 0 34 5 `0 0 `28 9 2008 -32 5 -8 5 -4 3 -22 6 -55 8 2007 -`` 0 2` 9 3 2 26 3
38 8 2006 `9 ` -`5 2 `9 8 3 7 28 ` 2005 ` 5 9 4 28 8 6 8 60 6 Returns (as on Jun ``, `0
Period Returns (%
Rank # ` mth ` ` 55
3 5 9 29 mths 6 `3 ` `2 mths ` year 63 9 2 2 year 3` 3 2 3 year `7 7 7 5 year 24 3 `9 Above two table show return history of
Discovery fund First table show absolute return quarterly for last five years and second table show annual return for last `
month, 3 months, 6 months, ` year, 3 years, and 5 years and rank according to performance among other diversified funds 33

34 V Risk Measurement Mean -0 48 Treynor -0 7` Standard Deviation 5 `3 Sortino -0 `9 Sharpe -0 `` Correlation 0 8` Beta 0 82
Fama 0 06 Risk measurement table evaluate fund return, probability of return, deviation in return for specific time and define
standard deviation, measure Beta associate with fund as compare to market By using S D and Beta of fund, we can find sharpe
and treynor ratio which are measurement of performance of fund Portfolio Attributes Style Box P/E 2` 72 as on May - 20`0 P/B
2 93 as on May - 20`0 Dividend Yield ` 26 as on May - 20`0 Market Cap (Rs 30,7`6 39 as on in crores
May - 20`0 Large
32 37 as on May - 20`0 Mid 43 47 as on May - 20`0 Small `0 87 as on May - 20`0 Top 5 Holding (%
22 26 as on May - 20`0
 No of Stocks 58 Expense Ratio (%
2 04 Whats in Whats out Standard Chartered Bank Maruti Suzuki India Ltd ICICI Bank
Ltd State Bank of India Grasim Industries Ltd Corporation Bank Akzo Nobel India Ltd ICI Ltd 34

35 V Top `0 Holding Stock Sector P/E Percentage Qty Value Percentage of Net of Change Assets with last month Bharti Airtel
Telecom `0 57 5 73 2,372,570 62 37 24 29 Ltd Services Cadila Pharmaceuticals 24 77 4 38 782,948 47 7` 9 59 Healthcare &
Biotechnology Ltd Standard Banks NA 4 36 NA 47 44 NA Chartered Bank United Fertilizers, 44 24 4 29 2,562,370 46 67 8 76
Phosphorus Pesticides & Limited Agrochemicals (New
Sterlite Non Ferrous 59 77 3 50 574,689 38 07 -` 56 Industries metals
(India
Ltd FDC Ltd Pharmaceuticals `2 02 3 32 3,796,`40 36 `0 6 9` & Biotechnology Great Eastern Shipping `9 22 3 07
`,``6,580 33 40 -3 47 Shipping Company Ltd Oil & Natural Petroleum, Gas `4 89 3 05 284,708 33 25 -24 83 Gas Corpn and Ltd
petrochemical products ICICI BANK Banks 24 02 3 03 379,6`` 32 96 NA LTD Rain Construction 7 78 3 0` 2,386,870 32 75
64 47 Commodities materials Ltd 35

36 V Sector Allocation (%
Auto & Auto Ancillaries 4 90 Banks `2 85 Chemicals 2 33 Computers - Hardware and Peripherals 0 67
Construction and Infrastructure 0 `5 Construction materials 7 85 Current Assets 8 43 Engineering and Capital Goods 0 43
Fertilizers, Pesticides & Agrochemicals 7 `8 Food & Food Processing, Beverages 2 45 NBFC 2 47 Non Ferrous metals 3 50
Paper and Natural fibre 3 `5 Petroleum, Gas and petrochemical products 3 `7 Pharmaceuticals & Banking, agriculture,
pharmaceutical, and I T are major contributor in this fund As per my opinion, these sectors always show high growth and it will
give good return in future also 36 It invests in all three areas i e large, mid, and small cap companies  Well diversified,
because it invests almost in all sectors In addition, top `0 holdings do not contribute more than 30%, no any sector, other than
banking; contribute more than `0% holding So it decrease standard deviation i e risk Biotechnology 9 7` Power Generation
3 55 Power Transmission ` 02 Shipping 3 07 Software and Consultancy Services 6 59 Steel and Ferrous Metal 3 3` Sugar ` 95
Telecom Services 5 73 Textiles 2 92 Utilities - Gas, Power 2 60 By portfolio analysis, we can come to know investment
objective, major stake, contribution of top `0 holding, risk associated, investment style, changes in portfolio, contribution of
sectors, dominate sectors, etc ICICI Prudential Discovery is:

37 V SUMMARY & www rediff com 37 www icicidirect com  www bseindia com  www mutualfundindia com 
www valueresearchonline com  www moneycontrol com  AMFI test workbook  How to recommend suitable fund to investors
BIBILIOGRAPHY AND REFERENCE  Upto some extend I realize life as an employee  How to convince investors  How to
choose best funds  Performance measurement of funds  As per my opinion, investor should invest around 30% in mutual fund
LEARNING  For high return invest in diversified funds, for tax saving invest in ELSS equity funds, for moderate risk and return
invest in balance funds, for assure return invest in debt and liquid funds  There should be similarity in your and fund s
objective  Study historical return of funds, risk measurement ratios to evaluate fund  Mutual Fund is subject to market risk,
analyzing particular fund before investing CONCLUSION Mutual funds are one of the most highly growing products in
financial services market Mutual funds are suitable for all types of investors from risk adverse to risk bearer Mutual funds have
many options of return, risk free return, constant return, market associated return, etc mutual funds are suitable to all age of
investors, businessmen, salary person, etc Investors need not to be expert in equity market; mutual funds can satisfy their need
Fund managers are expert in this area and invest fund in well diversified portfolio, high return with low risk is possible inn
mutual fund In today s world, investors are showing more trust in mutual fund than any other financial product There is no
need of a financial consultant, if you have good knowledge of mutual funds and their type to invest Mutual fund is subject to
market risk, despite of that it have low risk than stock market This is proved in performance evaluation section of this report
Performance evaluation measurement ratios i e Treynor s, Sharpe s and Jensen s are used by fund managers to take decision
of investment and to diversify portfolio