A PROJECT REPORT ON COMPARITIVE STUDY ON TOP 5 EQUITY DIVERSIFIED SCHEMES

MAHINDRA & MAHINDRA FINACE PRIVATE LIMITED

SUBMITTED TO: Ms. AARTI DHANRAJANI LECTURER (BPIT) SUBMITTED BY: REEMAMITTAL
EN.NO.0322083908

BHAGWAN PARSHURAM INSTITUTE OF TECHNOLOGY (Affiliated to Guru Gobind Singh Indraprastha University)
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CERTIFICATE

This is to certify that Ms. Reema Mittal student of MBA of Bhagwan Parshuram Institute Of Technology, New Delhi session 2008-2010 has worked & completed this project titled Comparative Analysis of Top Five Equity Diversified Schemes under my guidance and supervision. She was sincerely involved in the working of this project till its completion.

Ms. AARTI DHANRAJANI (Project guide)

DECLARATION

This is to certify that I have completed the Summer project titled comparative analysis of top five equity diversified schemes in Mahindra & Mahindra Financial Services Ltd. under the guidance of Ms. Aarti Dhanrajani in partial fulfillment of the requirement for the award of degree of Master of Business Administration at Bhagwan Parshuram Institute Of technology ,Delhi . This is an original piece of work & I have not submitted it earlier elsewhere.

ACKNOWLEDGEMENT
Working with Mahindra & Mahindra Finance has been a wonderful experience. It is a great pleasure to have the opportunity to undergo my summer training in Mahindra & Mahindra Company. I extend my heartfelt gratitude to everybody without whom this training could not have been successfully accomplished. For this I am thoroughly indebted to Ms. Aarti Dhanrajani my project guide, for guiding my way through the project and given their valuable time in solving my project related problems. They have shaped my understanding through their rich contribution, experience and guidance. I would also like to acknowledge my sincere thanks to my teacher at Bhagwan Parshuram Institute of Technology, whose guidance, cooperation and support helped me a lot in completing my project efficiently. Lastly, I would like to thank my parents and my friends who have always supported me and have been the pillars of strength for me. Without there support and encouragement it would have been impossible to complete this project.

REEMA MITTAL

LITERATURE REVIEW

A mutual fund is a common pool of money in to which investors with common investment objective place their contributions that are to be invested in accordance with the stated investment objective of the scheme. The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective of the scheme. For example, an equity fund would invest equity and equity related instruments and a debt fund would invest in bonds, debentures, gilts etc. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund.

EXCUTIVE SUMMARY
MF is a form of collective investment that pools money from investors, and invests the money in stocks, bonds, short-term money market instruments, and for other securities. The portfolio manager trades the funds underlying securities, realizing a gain or loss, and collects the dividend or interest income. The investment proceeds are then passed on to the individual investors. The rationale behind a MF is that there are large numbers of investors who lack the time or the skills to manage their money. Hence, professional fund managers, acting on behalf of the MF, manage the investments (investors money) for their benefit in return for a management fee. The organization that manages the investment is called the Asset Management Company (AMC). Thus a MF 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. There are certain criteria on the basis of which the performance of a MF can be assessed such as NAV, portfolio turnover, risk and return as well as various expense ratios like Sharp Ratio, Beta Ratio, etc. this article also aims to give an insight on the futuristic outlook of the MFs in India. New funds, real estates fund etc. the various new funds in the field are explored to understand diversified growth and opportunities that are prevalent and that could be the probable future of mutual funds.

Table of Contents
S.NO 1. 2. TOPIC Research Methodology Company profile 1.1 About the company 1.2 History 1.3 About their business 1.4 Vision & mission 1.5 Strengths 1.6 Management 1.7 Group structure 1.8 products Portfolio 3. Mutual Fund 3.1 Definition 3.2 Pros & cons of investing in mutual funds 3.3 Types of mutual funds in India 3.4 Net asset value 4. 5. Performance of mutual funds in India Equity diversified scheme 5.1 Concept 5.2 Advantages of EDS 5.3 Disadvantage of EDS 6. 7. 8. 9. A comparative study of performance of top 5 EDS Limitation of study Recommendations Questionnaire
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Annexure

CHAPTER - 1 RESEARCH METHODOLOGY

RESEARCH OBJECTIVE
To evaluate investment performance of selected equity diversified schemes in terms of risk and return. To evaluate and create an ideal portfolio consisting the best mutual fund schemes which will earn highest possible returns and will minimize the risk. To analyze the performance of mutual fund schemes on the basis of various parameters. To suggest the organization various schemes that suit the investors needs and preferences as found by their responses in the questionnaire. To find out the preference of the target population for Equity Diversified Mutual Funds.

Research Methodology Research Design First an exploratory research was conducted to get some insights about the topic. Secondary data analysis was performed. It was followed by questionnaire filling. Findings of the exploratory research were regarded as input to further research.

DATA COLLECTION There are two types of data: Primary data - In Primary data, structured questionnaire was made and the target respondents were asked to fill the questionnaire

Secondary data - Secondary data was collected from various sources such as internet, books, articles and journals.

The survey is conducted through the following phases:1. Planning the survey:To know the preference of investors the first step was to identify or select the parameter. On the basis of which the questionnaire can be framed and then selecting the customer to be surveyed. 2. Identification of the Parameters:The different parameters that were selected for the questionnaire is: Main objective of investment. Capability to handle risk involved in investment. Return on investment. Investors requirement Investors satisfaction

3. Framing the questionnaire;After identification and selection of the parameter, the next step was frame the Questionnaire. The questionnaire was made up of multiple choice questions. For the purpose of survey, give choice of Yes and No. It also provides options are very good, good, average, and poor

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CHAPTER 2 COMPANY PROFILE

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2.1 About The Company

Mahindra & Mahindra Finance Private Limited is one of Indias leading non-banking finance companies focused on the rural and semi-urban sectors providing finance for Utility Vehicles (UVs), tractors and cars. It is a subsidiary of Mahindra & Mahindra Limited, a leading tractor and UV manufacturer with over 60 years experience in the Indian market. Their goal is to be the preferred provider of retail financing services in the rural and semiurban areas of India, while their strategy is to provide a range of financial products and services to their customers through their nationwide distribution network. They seek to position their selves between the organized banking sector and local money lenders, offering their customers competitive, flexible and speedy lending services. They principally finance UVs used both for commercial and personal purposes, tractors and cars. While they predominantly finance M&M UVs and tractors, they have continued to expand their lending to vehicles not manufactured by Mahindra & Mahindra Ltd.

2.2 HISTORY OF THE COMPANY

M&M was incorporated on January 1, 1991 as Maxi Motors Financial Services Limited and received certificate of commencement of business on February 19, 1991. Their name was changed to Mahindra & Mahindra Financial Services Limited on November 3, 1992. M&M is registered with the RBI as an NBFC with effect from September 4, 1998 under Section 45IA of the Reserve Bank of India Act 1934. Key events in business history 1993 Commenced financing of M&M UVs.

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1999 Commenced tractor retail financing in rural and semi-urban areas. 2001 Total Assets crossed Rs. 10 billion. 2002 Commenced financing of non-M&M vehicles. Received Tier II debt from International Finance Corporation. Made their first securitization transaction of Rs. 434.8 million. 2004 Received a long-term credit rating of AA+/Stable. Opened a branch in Port Blair. Listing of non convertible debentures on BSE on the wholesale debt market segment. Securitization of tractor assets of Rs. 256.6 million. 2005 Tied up with HPCL. Made MIBL their wholly owned subsidiary. 2006 Issued their IPO. Tied up with Maruti. Launched their marketing campaign Reached a new benchmark with 400 branches.

2.3

THEIR BUSINESS
The loan products designed by them, both in terms of amount and tenure, are based on usage and the economic life of the vehicle. Commercially, UVs are used both for passenger as well as goods transport. Their innovative and flexible repayment schedule is designed on a case to case basis and suits the need of every borrower, with convenient and comfortable repayment schedules and methods. They offer quarterly, monthly, half-yearly repayment schedules and one can reply via post-dated checks, demand drafts and cash.

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Their customers for retail loans are small entrepreneurs or self-employed individuals such as transport operators, taxi operators and agriculturalists. They also provide trade finance to automobile and tractor dealers, which following the sale of a vehicle, are converted into direct retail loan customers. Their customers usually provide part of the amount and the balance of the vehicles price is financed by them. They believe that to operate effectively in rural and semi-urban areas, it is necessary to be familiar with the local culture, practices and environment. They endeavor to recruit local employees into our branches and provide them training on our tailor-made training programmers. They conduct most of their own field executives and branch personnel, as they believe it is preferable to relying on outsourced marketing agents and sales agents.

2.4 Vision & Mission

Vision:Their vision is to be the leading Rural Finance Company and continue to retain the leadership position for Mahindra Products. Mission:They will be recognized as the premier provider of financial services on the basis of their contribution to sale of Mahindra range of vehicles, tractors, services and help M&M protect its sale through availability of finance. They will specialize in financing products based on applications and build on the competence developed in its focus area. They will target all segments of vehicle financing and deploy the skills acquired through an in-depth understanding of the chosen product market. They will provide products and services tailored to the needs of M&M, their most favored customer, and always meet their needs. In case of demand-supply mismatch of funds, they will do everything to find a solution. They will help M&M develop better products by providing first-hand information received from the target market .

2.5 Strengths:-

In-depth knowledge of the rural and semi-urban market

They were early entrants into the rural and semi-urban markets, initially providing financing solely for products of M&M which has been selling its products in those 14

markets for over 60 years. Credit in these markets was principally provided by banks from the organized finance sector or by the local money-lenders. There was a large section of the rural population which did not have access to credit largely due to their inability to meet the lending covenants of the banks or because they could not service the high rates of the money lenders. They adopted simple and prompt loan approval and documentation procedures and set their offer rates between those of the banks and the money-lenders.

Branch network
Their nationwide network, covering 25 states and two union territories, is the largest amongst NBFCs covering rural and semi-urban areas. This network has enabled them to develop and maintain their customer relationships. They believe that their branch network enables them to service and support their existing customers from proximate locations, which gives customers easy access to their services, and also enables them to reach new customers. The broad geographic spread of the network also provides some protection against crop failures or natural calamities, which can from time to time affect parts of India

Association with dealers

They provide finance to customers of approximately 1,000 M&M and other dealers. Their relationship with these dealers is a critical resource in sourcing customers and in their efforts to provide customers with financial products and services suited for the rural and semi-urban markets. Loan approval and administration procedures The experience in the rural finance market has enabled them to price their products appropriately and their relationship with dealers and customers has enabled them to develop prudent credit appraisal procedures. Their review process and the regular visits by field executives enable them to monitor and evaluate their customers ability to repay on a regular basis. Their collection and enforcement procedures are designed to maximize recoveries following any payment default. Experienced Board and executive management team The Board consists of 10 directors, 5 of who are board members or senior executives of M&M and 4 are independent directors from the banking and financial services background and together provide extensive automobile and financial services sector experience. The members of their executive management team have experience in financial services sector and most of the senior management team has been with them for more than 5 years.

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2.6Management
Board & Management At Mahindra Finance currently have 10 Directors vested with the charge of the general supervision, direction and management of the operations and business of their Company. The primary responsibility of the Board of Directors includes: Overseeing high standards of corporate governance and compliance with various laws Shaping policies and procedures Monitoring performance and evolving the growth strategy Setting up counter-party and other prudential risk management limits Overseeing financial management and approving various lines of business Mr. Ramesh Iyer - Managing Director Mr. V.Ravi - Chief Financial Officer

2.7Group structure
They are a company with a strong foundation and a shining legacy, growing every day to create a legacy of their own. Their leading promoter Mahindra & Mahindra holds the majority of their Equity Shares and is also a leading tractor and UV manufacturer with over 60 years experience in the Indian market. As a supplement to their business, in May 2004, they started an insurance broking business through their wholly owned subsidiary, Mahindra Insurance Brokers Limited. About Mahindra Group: The US $6 billion Mahindra Group is among the top 10 industrial houses in India. Mahindra & Mahindra is the only Indian company among the top tractor brands in the world. Mahindras Farm Equipment Sector has recently won the Japan Quality Medal, the only tractor company worldwide to be bestowed this honor. It also holds the distinction of being the only tractor company worldwide to win the Deming Prize. Mahindra is the market leader in multi-utility vehicles in India. It made a milestone entry into the passenger car segment with the Logan. The Group has a leading presence in key sectors of the Indian economy, including the financial services, trade and logistics, automotive components, information technology, and infrastructure development. With over 62 years of manufacturing experience, the Mahindra Group has built a strong base in technology, engineering, marketing and distribution which are key to its evolution 16

as a customer-centric organization. The Group employs over 50,000 people and has several state-of-the-art facilities in India and overseas. M&M has entered into partnerships with international companies like Renault SA, France, and International Truck and Engine Corporation, USA. Forbes has ranked the Mahindra Group in its Top 200 list of the Worlds Most Reputable Companies and in the Top 10 list of Most Reputable Indian companies. Mahindra has recently been honored with the Bombay Chamber Good Corporate Citizen Award for 2006-07.

2.8Products portfolio
At Mahindra Finance they have a wide range of products and services, with something to suit everyones needs. Right from finance for two wheelers, tractors, farm equipment, cars and utility vehicles to commercial vehicles and construction equipment, they also have a group of experts providing investment advice, surveying available market products and choosing the most suitable to their customers needs. Investment Advisory Services They at Mahindra Finance are all-encompassing of clients needs. So while they believe in making assets easily available, they also believe in catering to those who want to create wealth from these assets. Our Investment Advisory Services act as an avenue to help create and multiply wealth. Mutual Fund Distribution Recently they have received the necessary permission from Reserve Bank of India (RBI) to start the distribution of Mutual Fund products through their network. Hitherto they were only participating in the liability requirements of their customers but with a mutual fund distribution business, they can also participate in their asset allocation. When it comes to investing, everyone has unique needs based on their own objectives and risk profile. While many investment avenues such as fixed deposits, bonds etc. exist, it is usually seen that equities typically outperform these investments, over a longer period of time. Hence they are of the opinion that, systematic investment in equity allows one to create substantial wealth. However, investing in equity is not as simple as investing in bonds or bank deposits, because only proper allocation of portfolio gives maximum returns with moderate risk, and this requires expertise and time. Their Investment Advisory Services help you invest your money in equity through different Mutual Fund Schemes. They ensure the best for their clients by identifying products best suited to individual needs. Risk Documentation 17

This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Mahindra & Mahindra Financial Services Ltd, (M&MFSL) does not warrant its completeness and accuracy. Whilst we are not soliciting any action based upon this information, all care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument receipt of this information should rely on their own investigations and take their own professional advice. Neither M&MFSL nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. M&MFSL and its affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein. M&MFSL may at any time solicit or provide, credit, advisory or other services to the issuer of any security referred to herein, Accordingly, information may be available to M&MFSL, which is not reflected in this material, and M&MFSL may have acted upon or used the information prim to, or immediately following its publication.

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CHAPTER- 3 ABOUT MUTUAL FUNDS

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3.1 DEFINITION
"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 realized is 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. Operation Cycle in Mutual fund

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UNDERSTANDING MUTUAL FUND

Mutual fund is a trust that pools money from a group of investors (sharing common financial goals) and invest the money thus collected into asset classes that match the stated investment objectives of the scheme. Since the stated investment objectives of a mutual fund scheme generally form the basis for an investor's decision to contribute money to the pool, a mutual fund can not deviate from its stated objectives at any point of time. Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary research works ensures much better return than what an investor can manage on his own.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors.

3.2 CATEGORIES OF MUTUAL FUND

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 Based on their structure:

Open-ended funds: Investors can buy and sell the units from the fund, at any point of time. Close-ended funds: These funds raise money from investors only once. Therefore, after the offer period, fresh investments cannot be made into the fund. If the fund is listed on a stocks exchange the units can be traded like stocks (E.g., Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of closeended funds provided liquidity window on a periodic basis such as monthly or weekly. Redemption of units can be made during specified intervals. Therefore, such funds have relatively low liquidity.

Based on their investment objective:

Equity funds: These funds invest in equities and equity related instruments. With fluctuating share prices, such funds show volatile performance, even losses. However, short term fluctuations in the market, generally smoothens out in the long term, thereby offering higher returns at relatively lower volatility. At the same time, 22

such funds can yield great capital appreciation as, historically, equities have outperformed all asset classes in the long term. Hence, investment in equity funds should be considered for a period of at least 3-5 years. It can be further classified as: i) Index funds- In this case a key stock market index, like BSE Sensex or Nifty is tracked. Their portfolio mirrors the benchmark index both in terms of composition and individual stock weight ages. ii) Equity diversified funds- 100% of the capital is invested in equities spreading across different sectors and stocks. iii) Dividend yield funds- it is similar to the equity diversified funds except that they invest in companies offering high dividend yields. iv) Thematic funds- Invest 100% of the assets in sectors which are related through some theme v) Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking sector fund will invest in banking stocks. vi) ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.

Balanced fund: Their investment portfolio includes both debt and equity. As a result, on the risk-return ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments. Following are balanced funds classes: i) Debt-oriented funds -Investment below 65% in equities. ii) Equity-oriented funds -Invest at least 65% in equities, remaining in debt. Debt fund: They invest only in debt instruments, and are a good option for investors averse to idea of taking risk associated with equities. Therefore, they invest exclusively in fixed-income instruments like bonds, debentures, Government of India securities; and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. Put your money into any of these debt funds depending on your investment horizon and needs. i) Liquid funds- These funds invest 100% in money market instruments, a large portion being invested in call money market. ii) Gilt funds ST- They invest 100% of their portfolio in government securities of and T-bills. iii) Floating rate funds - Invest in short-term debt papers. Floaters invest in debt instruments which have variable coupon rate. iv) Arbitrage fund- They generate income through arbitrage opportunities due to mis-pricing between cash market and derivatives market. Funds are allocated to equities, derivatives and money markets. Higher proportion (around 75%) is put in money markets, in the absence of arbitrage opportunities. v) Gilt funds LT- They invest 100% of their portfolio in long-term government securities. vi) Income funds LT- Typically, such funds invest a major portion of the portfolio in long-term debt papers.

3.3(a) ADVANTAGES OF A MUTUAL FUND

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1. Professional Management Qualified professionals manage money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme, so you see that it is a continuous process that takes time and expertise that will add value to investment. These fund managers are in a better position to manage investments and get higher returns. 2. Diversification Diversification lowers risk of loss by spreading money across various industries. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds will spread investment across only one industry and it would not be wise for portfolio to be skewed towards these types of funds for obvious reasons. 3. Affordability A small investor may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes that allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. One can invest with a minimum of Rs. 500 in a Systematic Investment Plan on a regular basis. 4. Tax Benefits Investments held by investors for a period of 12 months or more qualify for Capital gains and will be taxed accordingly (10% of the amount by which the investment appreciated, or 20% after factoring in the benefit of cost indexation, whichever is lower). These investments also get the benefit of indexation. 5. Liquidity With open-end funds, you can redeem all or part of investment any time you wish and receive the current value of the shares or the NAV related price. Funds are more liquid than most investments in shares, deposits and bonds and the process is standardized, making it quick and efficient so that you can get cash in hand as soon as possible 7. Easy To Administer Mutual funds units in modern times are not issued in the form of certificates, with a minimum denomination rather they are issued as account statement switch a facility to hold units in fraction up to 4 decimal points. 8. Highly Regulated The governing of mutual funds by SEBI ensures that the fund activities are carried out in the best interest of the investors.

3.3(b) DISADVANTAGES OF MUTUAL FUNDS

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Costs despite Negative Returns Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive even if the fund went on to perform poorly after they bought shares. Lack of Control Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades. Price Uncertainty with an individual stock, you can obtain real-time (or close to real-time) pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stock's price changes from hour to hour or even second to second. By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the fund's NAV, which the fund might not calculate until many hours after you've placed your order. In general, mutual funds must calculate their NAV at least once every business day, typically after the major U.S. exchanges close.

Association of Mutual Funds in India (AMFI)

With the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non-profit organisation. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August, 1995. AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. It follows the principle of both protecting and promoting the interests of mutual funds as well as we unit holders. The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows:

This mutual fund association of India maintains high professional and ethical standards in all areas of operation of the industry. It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of mutual fund and asset management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association. 25

AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry. Associations of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry. It develops a team of well qualified and trained Agent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry. AMFI undertakes all India awareness programme for investors in order to promote proper understanding of the concept and working of mutual funds.

Working of Mutual Fund

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CHAPTER 4 PERFORMANCE OF MUTUAL FUND IN INDIA

4.1Mutual Funds Industry in India

The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry. Each phase is briefly described as under.

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FirstPhase1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase 1987-1993 Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canara bank 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 in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets under Third Phase 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered inJuly1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds. FourthPhase-sinceFebruary2003 This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). 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 Ltd, 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 AUM 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. As at the 28

end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

4.1Performance of Mutual Funds in India The performance of mutual funds in India from the day the concept of mutual fund took birth in India. The year was 1963. Unit Trust of India invited investors or rather to those who believed in savings, to park we money in UTI Mutual Fund. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders was accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the preparedness of risks factor after the liberalization. The Assets under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn. The net asset value (NAV) of mutual funds in India declined when stock prices started falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative investments. There was rather no choice apart from holding the cash or to further continue investing in shares. One more thing to be noted, since only closed-end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market. The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandal, the losses by disinvestments and of course the lack of transparent rules in the whereabouts rocked confidence among the investors. Partly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds trading at an average discount of 1020 percent of we net asset value. The supervisory authority adopted a set of measures to create a transparent and competitive environment in mutual funds. Some of them were like relaxing investment restrictions into the market, introduction of open-ended funds, and paving the gateway for mutual funds. At last to mention, as long as mutual fund companies are performing with lower risks and higher profitability within a short span of time, more and more people will be inclined to invest until and unless they are fully educated with the dos and donts of mutual funds

Future of Mutual Funds in India Some facts for the growth of mutual funds in India 29

Number of foreign AMCs is in the queue to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide. Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion. 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities. Mutual fund can penetrate rural like the Indian insurance industry with simple and limited products. SEBI allowing the MF's to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices. Introduction of Financial Planners who can provide need based advice

An investor can choose the fund on various criteria according to his investment objective, to name a few:

Thorough analysis of fund performance of schemes over the last few years managed by the fund house and its consistent return in the volatile market. The fund house should be professional, with efficient management and administration. The corpus the fund is holding in its scheme over the period of time. Proper adequacies of disclosures have to seen and also make a note of any hidden charges carried by them.

Evaluation Parameters Following are the evaluation parameters on the basis of which the analysis and comparison of various equity schemes is done. Standard Deviation Standard deviation is a measure of total risks of a fund. In other words it measures the volatility of returns of a fund. It indicates the tendency of the funds NAV to rise and fall in a short period. It measures the extent to which the NAV fluctuates as compared to the average returns during a period. 30

A fund that has a consistent four year return of 3% for example would have a mean or average, of 3%. The standard deviation for this fund would then be zero because the fund's return in any given year does not differ from its four year mean of 3%. On the other hand, a fund that in each of the last four years returned -5%, 17%, 2%, and 30% will have a mean return of 11%. The fund will also exhibit a high standard deviation because each year the return of the fund differs from the mean return. The fund is therefore more risky because it fluctuates widely between negative and positive returns within a shorter period. A higher standard deviation means that the returns of the fund have been more volatile than a fund having low standard deviation. In other words high standard deviation means high risk. Sharpe Ratio The Sharpe ratio represents trade off between risk and returns. At the same time it also factors in the desire to generate returns, which are higher than those from risk free returns. Mathematically the Sharpe ratio is the returns generated over the risk free rate, per unit of risk. Risk in this case is taken to be the fund's standard deviation. As standard deviation represents the total risk experienced by a fund, the Sharpe ratio reflects the returns generated by undertaking all possible risks. It is thus one single number, which represents the trade off between risks and returns. A higher Sharpe ratio is therefore better as it represents a higher return generated per unit of risk. Sharpe ratio provides an unbiased look into fund's performance. This is because they are based solely on quantitative measures. However, these do not account for any risks inherent in a funds portfolio. For example, if a fund is loaded with technology stocks and the sector is performing well, then all quantitative measures will give such a fund high marks. But the possibility of the sector crashing and with it the fund sinking is not calculated. In view of these possibilities quantitative tools should be used along with information on the nature of the funds strategies, its fund management style and risk inherent in the portfolio. Quantitative tools can be used for screening but they should not be the only indicator of a fund's performance. The Sharpe ratio is one of the most useful tools for determining a fund's performance. This measure is used the world over and there is no reason why you as an in investor should not use it. Beta Beta is a statistical measure that shows how sensitive a fund is to market moves. If the Sensex moves by 25 per cent, a fund's beta number will tell you whether the fund's returns will be more than this or less. The beta value for an index itself is taken as one. Equity funds can have beta values, which can be above one, less than one or equal to one. By multiplying the beta value of a fund with the expected percentage movement of an index, the expected movement in the fund can be determined. Thus if a fund has a beta of 1.2 and the market is expected to move up by ten per cent, the fund should move by 12 per cent (obtained as 1.2 multiplied by 10). Similarly, if the market loses ten per cent, the fund should lose 12 per cent. Each dot represents a fund's returns plotted against the market returns in the same period. The line is the beta of these returns. While the beta is same in 31

both, it is far more representative of the returns in the left graph then right one. This shows that a fund with a beta of more than one will rise more than the market and also fall more than market. Clearly, if you would like to beat the market on the upside, it is best to invest in a high-beta fund. But you must keep in mind that such a fund will also fall more than the market on the way down. Similarly, a low-beta fund will rise less than the market on the way up and lose less on the way down. When safety of investment is important, a fund with a beta of less than one is a better option. Such a fund may not gain much more than the market on the upside; it will protect returns better when market falls. Essentially, beta expresses the fundamental trade-off between minimizing risk and maximizing return. A fund with a beta of 1 will historically move in the same direction of the market. A beta above 1 is more volatile than the overall market, while a beta below 1 is less volatile. So while you can expect a high return from a fund that has a beta of 2, you will have to expect it to drop much more when the market falls. The effectiveness of the beta depends on the index used to calculate it. It can happen that the index bears no correlation with the movements in the fund

CHAPTER 5
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EQUITY DIVERSIFIED SCHEMES

Equity Diversified Scheme

In Equity diversified scheme fund seeks to invest only in equities except for small portion in liquid money market securities. They have exposure to the equity market risk such general purpose diversified funds are clearly at a lower risk level than growth fund except for a small portion of investment in liquid money market diversified equity funds invest mainly in equities without any concentration on a particular sector. These funds are well diversified and reduced sector specific on company risk. However, like are other funds diversified equity funds too are exposed to equity market risk .Equity diversified funds investing its funds across large mid small cap companies as well as various industries across each cap, through large cap investment they are protecting money from huge volatilities through mid cap they are trying to tap the growth aspects from future blue chips and through small cap trying to get maximum profits. 5.2 Advantages:

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1. An investor get exposure to large, small and mid cap companies and his money will be less affected from the volatility to market compare with pure sectoral funds.

2. This kind of fund diversifies your investment across sectors. The fund manager can always increase or decrease the exposure this fund to any particular sector and when he may find it suitable.

3. Low risk with high returns.

4. The benefit of diversification is even if one of the sector not performing than the other may perform thus avoiding deep loss in the overall investment

5. It has no locking period, investor can invest a withdraw his units at any time form their funds

5.3

Disadvantages

1. Equity diversified schemes providing tax benefits.

2. Have not invested 100% in equities, there is a combination of equity and debt.

COMPARATIVE STUDY OF EQUITY DIVERSIFIED SCHEMES

Comparison had been done on various grounds like, Risk analysis tools, returns performance and funds portfolio. In todays time, mutual fund is getting very popular instrument for investment, as it involves less risk and high returns, people doing investments in it. Through comparison we get to know which fund is best, suitable and less risky, in both the category, for investment. This also gives knowledge to our investors and helps them in their investment decisions, so that they choose right fund for their investment. After analyzing all the above factors, I ranked the funds according to that. Shown as below:

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1) 2) 3) 4) 5)

IDFC premier equity fund-plan A-growth Reliance regular saving fund equity Dbs chola opportunity fund cumulative Reliance growth Tata equity P/E fund

1) IDFC PREMIER EQUITY FUND-PLAN A GROWTH

OBJECTIVE
To generate long-term capital growth from an actively managed portfolio of predominantly equity and equity related instruments. The Scheme portfolio would acquire, inter alia, small and medium size businesses with good long term potential, which are available at cheap valuations. Such securities would be identified through disciplined fundamental research keeping in view medium to long-term trends in the business environment.

FUND FEATURE
Type of scheme Nature Option Inception date Face value(Rs/unit Fund size in Rs.Cr. Open ended Equity Growth Sep 28, 2005 10 1094.48 as on oct 30, 2009

RETURN
SCHEME PERFORMANCE (%) AS ON NOV 12, 2009
1 Month 3 Months 6 Months 1 Year 3 Years 5 Years Since Inception

4.08

17.57

58.06

91.45

26.52

NA

24.56

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Mean Standard Deviation Sharpe Beta

-0.51 4.49 -0.14 0.69

Trey nor Sortino Correlation Fama

-0.89 -0.23 0.68 -0.05

2) RELIANCE REGULAR SAVING FUND EQUITYY GROWTH

OBJECTIVE
The primary investment objective is to seek capital appreciation and or consistent returns by actively investing in equity / equity related securities.

Type of Scheme Nature Option Inception Date Face Value (Rs/Unit) Fund Size in Rs. Cr.

Open Ended Equity Growth Jun 9, 2005 10 1432.87 as on Jul 31, 2009

RETURN
SCHEME PERFORMANCE (%) AS ON AUG 7, 2009 1 Month 3 Months 6 Months 1 Year 3 Years 5 Years Since Inception 21.70

6.67

38.30

80.41

11.12

25.14

NA

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RISK Mean Standard Deviation Sharpe Beta -0.55 5.26 -0.13 0.88 Trey nor Sortino Correlation Fama -0.75 -0.22 0.86 0.01

3) BN DBS CHOLA OPPORTUNITY FUND CUMULATIVE

OBJECTIVE
The investment objective of the scheme is to primarily achieve capital appreciation by investing in diversified stocks that are generally termed as small and mid caps and by investing in other equities. However there is no assurance that the investment objective of the scheme will be achieved. The scheme does not guarantee/indicate any return.

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FUND FEATURES Type of Scheme Nature Option Inception Date Face Value (Rs/Unit) Fund Size in Rs. Cr. RETURN Open Ended Equity Growth Feb 15, 2005 10 399.94 as on Oct 30, 2009

SCHEME PERFORMANCE (%) AS ON NOV 11, 2009 1 Month 4.46 3 Months 23.22 6 Months 82.11 1 Year 106.61 3 Years 18.73 5 Years NA Since Inception 26.66

Mean Standard Deviation Sharpe Beta

-0.57 5.62 -0.12 0.92

Treynor Sortino Correlation Fama

-0.74 -0.21 0.90 0.03

4) RELIANCE GROWTH OBJECTIVE Seeks to provide Long Term Capital Appreciation. FUND FEATURES Type of Scheme Nature Option Inception Date Open Ended Equity Growth Oct 8, 1995

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Fund Size in Rs. Cr.

5624.56 as on Jul 31, 2009

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40

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