Mutual Fund Project

Project report on “Comparative study of mutual funds”

By:Rajesh Kumar Buwade MBA III Sem (finance) CH Institute of Management & Commerce

Under the Supervision of:

What is Mutual Fund? A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund. Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns. Types of Mutual Funds Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below. Open ended scheme: Being open-ended means that, at the end of every day, the fund issues new shares to investors and buys back shares from investors wishing to leave the fund. An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. Close ended scheme: A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended

funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. Interval scheme: Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profitbonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion.

Overview of existing schemes: By Investment objective: Income schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation. Growth schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation. Balanced schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50). Money Market schemes: They specialize in investing in short term money market instruments like treasury bills, and certificate of deposits. The objective of such scheme is high liquidity with low rate of return. By Nature: Equity Funds: These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:

•

Diversified Equity Funds

•

Mid-Cap Funds

•

Sector Specific Funds

•

Tax Savings Funds (ELSS)

Debt Funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:

•

Gilt Funds:

Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.

•

Income Funds:

Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.

•

MIPs:

Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities It gets benefit of both equity and debt market. These scheme ranks slightly high on the riskreturn matrix when compared with other debt schemes.

•

Short Term Plans (STPs):

These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

•

Liquid Funds and Balance Funds:

Liquid Funds also known as Money Market Schemes mentioned and balance Funds as the name suggest they, are a mix of both equity and debt funds.

Other schemes: •

Tax saving schemes:

Taxes saving schemes are designed on the basis of the policy with special tax incentives to investors. •

Capital protection schemes:

These schemes aim at protecting the initial capital investment of the investor and do not guaranteed any assured returns. •

Index schemes:

Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index. •

Sector specific schemes

These are the Funds/ schemes which invest in specific core sectors like energy, telecommunications, IT, construction, transportation and financial services. Working of a Mutual Fund

Advantages of Mutual Funds •

Diversification: An investor undertakes risk if he invests all his funds in a single scrip. Mutual funds invest in a number of companies across various industries and sectors. This diversification reduces the risk of the investment.

•

Professional Management: An investor lacks the knowledge of the capital market operations and does not have large resources to reap the benefits of investment. Hence, he requires the help of an expert. Mutual funds are managed by professional managers who have the requisite skills and experiences to analyse the performance and prospectus of companies.

•

Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud.

•

Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the cash.

•

Convenience: You can usually buy mutual fund shares by mail, phone, or over the Internet. It reduces paperwork, saves time and makes investment easy.

•

Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index

•

Transparency: Mutual funds transparently declare their portfolio every month. Thus, an investor knows where his/her money is being deployed and in case they are not happy with the portfolio they can withdraw at a short notice.

•

Flexibility: Mutual funds offer a family of schemes, and investors have the option of transferring their holdings from one scheme to other.

•

Tax benefits: Mutual fund investors now enjoy income tax benefits. Dividends received from mutual funds’ debt schemes are tax exempt to the overall limit of Rs 9000 allowed under section SOL of the Income Tax Act.

Drawbacks of Mutual Funds Mutual funds have their drawbacks and may not be for everyone: •

No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.

•

Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.

•

Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.

•

Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected.

Types of Mutual Funds on the Basis of Risk Vs Returns

Diversified Equity Funds

R e t u r n s

Balanced Funds MIPs Gilt Funds Income Funds Floaters Money Market Funds

Risk

Overview of schemes of selected companies: SBI Mutual Fund plans: Equity schemes

Other schemes



Magnum COMMA Fund



Magnum Children’s Benefit Plan



Magnum Equity Fund



Magnum Gilt Fund



Magnum Global Fund

o

Magnum Gilt Fund (Long Term)



Magnum Index Fund

o

Magnum Gilt Fund (Short Term)



Magnum Madcap Fund



Magnum Income Fund



Magnum Multicap Fund



Magnum Income Plus Fund



Magnum Multiplier Plus 1993



Magnum Sector Funds Umbrella

o

Magnum Income Plus Fund (Saving Plan)

o

o

(Investment Plan)

MSFU - Emerging Businesses Fund

Magnum Income Plus Fund



Magnum InstaCash Fund



Magnum InstaCash Fund -Liquid

o

MSFU - IT Fund

o

MSFU - Pharma Fund

o

MSFU - Contra Fund



Magnum Institutional Income Fund

o

MSFU - FMCG Fund



Magnum Monthly Income Plan

Floater Plan



SBI Arbitrage Opportunity Fund



Magnum Monthly Income Plan Floater



SBI Blue chip Fund



Magnum NRI Investment Fund



SBI Infrastructure Fund



SBI Debt Fund Series



SBI Magnum Tax gain scheme 1993



SBI Premier Liquid Fund





SBI ONE India Fund

SBI Short Horizon Fund

o

Balanced scheme:



Magnum Balanced Fund



Magnum NRI Investment Fund - Flexi

SBI Short Horizon Fund - Liquid Plus Fund

o

SBI Short Horizon Fund - Short Term Fund

Asset Plan LIC Mutual Fund plans: Equity scheme

Debt scheme



LICMF Equity Fund - (D)



LICMF Equity Fund - (G)

LICMF Bond Fund - (D) LICMF Bond Fund - (G) LICMF FMP: Series 32 - 13Mth (D) LICMF FMP: Series 32 - 13Mth (G)



LICMF Growth Fund (D)



LICMF Growth Fund (G)



LICMF Index Fund - Nifty

LICMF G-Sec Fund - (D) LICMF G-Sec Fund - (G)

Plan (D)

LICMF Interval Fund - Annual - Sr.1 (D) LICMF Interval Fund - Monthly - Sr.1(D) LICMF Interval Fund - Monthly - Sr.1(G)

Advantage Plan

(D)

 LICMF Index Fund - Sensex Advantage Plan (G)

 LICMF Index Fund - Sensex Plan (D)  LICMF Index Fund - Sensex Plan (G)  LICMF India Vision Fund (D)

LICMF G-Sec Fund - PF Plan (G) LICMF Interval Fund - Annual - Sr.1 (G)

 LICMF Index Fund - Nifty Plan (G)  LICMF Index Fund - Sensex

LICMF G-Sec Fund - PF Plan (D)

LICMF Interval Fund - Qrtly - Sr.1 (D) LICMF Interval Fund - Qrtly - Sr.1 (G) LICMF Liquid Plus Fund (Div-D) LICMF Liquid Plus Fund (Div-M) LICMF Liquid Plus Fund (Div-W) LICMF Liquid Plus Fund (G) LICMF Short Term Plan - (D) LICMF Short Term Plan - (G) Liquid scheme:

 LICMF India Vision Fund (G) 

LICMF Infrastructure Fund (D)



LICMF Floating Rate Fund - STP (Div-W)



LICMF Floating Rate Fund - STP (G)



LICMF Liquid Fund - (G)



LICMF Liquid Fund (Div-D)

LICMF Infrastructure Fund (G)





LICMF Opportunities Fund (D)



LICMF Opportunities Fund (G)



LICMF Tax Plan - (D)



LICMF Tax Plan - (G)



LICMF Top 100 Fund (D)



LICMF Top 100 Fund (G)

HDFC Mutual Fund Plans: Equity / Growth Fund



HDFC Mid-Cap Opportunities Fund



HDFC Prudence Fund



HDFC Index Fund - Nifty Plan



HDFC Capital Builder Fund



HDFC Infrastructure Fund



HDFC Long Term Advantage Fund (ELSS)



HDFC Index Fund - Sensex Plus Plan



HDFC Core and Satellite Fund

Liquid Funds



HDFC Cash Management Fund Savings Plan



HDFC Liquid Fund Premium Plus Plan



HDFC Liquid Fund



HDFC Cash Management Fund Call Plan



HDFC Liquid Fund premium plan

Debt/ Income Fund

HDFC Growth Fund



HDFC Floating Rate Income Fund - Long



HDFC Tax Saver (ELSS)



HDFC Arbitrage Fund



HDFC Premier Multi-Cap



HDFC Equity Fund- Growth



HDFC Multiple Yield Fund - Plan 2005



HDFC Long Term Equity Fund



HDFC Cash Management Fund - Savings



HDFC Balanced Fund



HDFC Index Fund - Sensex Plan



HDFC Gilt Fund - Short Term Plan



HDFC Top 200 Fund



HDFC Income Fund



HDFC MF Monthly Income Plan - Short

Term Plan 

HDFC High Interest Fund - Short term Plan

Plus Plan

Term Plan

Children's Gift Fund 

HDFC Gilt Fund - Long Term Plan



HDFC Children's Gift Fund - Savings Plan



HDFC High Interest Fund



HDFC Children's Gift Fund - Investment



HDFC MF Monthly Income Plan - Long Term Plan

Plan 

HDFC Floating Rate Income Fund -Short Term Plan



HDFC Short Term Plan

NAV value of the plans: Scheme/ date

Monday, October 31, 2005 Monday, November 28, 2005 Friday, December 30, 2005 Tuesday, January 31, 2006 Monday, February 27, 2006 Wednesday, March 29, 2006 Friday, April 28, 2006 Monday, May 29, 2006 Thursday, June 29, 2006 Monday, July 31, 2006 Tuesday, August 29, 2006 Friday, September 29, 2006 Monday, October 30, 2006 Tuesday, Nov… 28, 2006 Friday, December 29, 2006 Monday, January 29, 2007 Monday, February 26, 2007 Thursday, March 29, 2007 Monday, April 30, 2007 Tuesday, May 29, 2007 Thursday, June 28, 2007 Monday, July 30, 2007 Wednesday, Aug.. 29, 2007 Friday, September 28, 2007 Monday, October 29, 2007 Wednesday, Nov… 28, 2007

HDFC Equity Fund-

SBI Magnum COMMA

LICMF Equity Fund-

Growth

Fund -Growth

(Growth)

88.2950 100.5110 107.0090 113.0630 115.7450 126.3860 130.6070 119.1730 109.7930 115.6700 127.3630 133.8080 139.4070 143.9300 145.3860 151.9460 145.8800 141.2130 151.1600 160.1700 163.5090 168.1010 164.4060 182.8380 209.3570 201.9560

9.8200 10.5700 10.9500 12.1700 12.5100 13.5800 16.2000 14.0800 11.8900 12.4500 13.7900 14.4800 15.4700 16.0500 16.0800 16.5400 15.2800 14.2000 15.8600 16.8800 17.4800 18.6200 18.3100 21.8900 26.1800 26.4600

14.3852 15.9039 15.9089 17.6671 18.1360 19.6579 20.5878 17.6446 15.4089 16.1771 16.1771 18.3342 19.8655 20.7605 21.2689 22.5636 20.4645 18.9464 20.8280 21.0251 21.3006 22.5204 22.3072 25.1599 31.1340 31.0336

Monday, December 31, 2007 Tuesday, January 29, 2008 Wednesday, Feb... 27, 2008 Monday, March 31, 2008 Monday, April 28, 2008 Thursday, May 29, 2008 Monday, June 30, 2008 Tuesday, July 29, 2008 Friday, August 29, 2008 Tuesday, Sept… 30, 2008 Wednesday, Oct… 29, 2008 Friday, November 28, 2008 Tuesday, December 02, 2008

223.3240 192.1230 186.9590 165.7880 175.8090 168.5470 143.1710 146.8590 158.9240 145.7210 105.6300 101.8080 98.3520

29.9100 24.5100 24.7000 20.6500 22.4900 21.7400 18.3700 18.5700 19.2500 16.4600 11.5800 11.1100 10.9100

34.7053 29.2991 27.8625 22.4469 25.0160 23.6541 19.0817 20.6038 21.3990 19.2315 13.3605 13.2428 12.8192

29-Oct-08

27-feb-08

30-Jun-08

29-Oct-07

28-Jun-07

HDFCEquity Fund-G row th 26-Feb-07

29-Jun-06

October 30, 2006

31-Oct-05

250 200 150 100 50 0

27-Feb-06

These NAV can be viewed on www.mutualfundsindia.com

SBIM agnum CO M M AFundG rowth LICM FEquity Fund- (Growth)

Performance Measures of Mutual Funds Mutual Fund industry today, with about 34 players and more than five hundred schemes, is one of the most preferred investment avenues in India. However, with a plethora of schemes to choose from, the retail investor faces problems in selecting funds. Factors such as investment strategy and management style are qualitative, but the funds record is an important indicator too. Though past performance alone can not be indicative of future performance, it is, frankly, the only quantitative way to judge how good a fund is at present. Therefore, there is a need to correctly assess the past performance of different mutual funds. Return alone should not be considered as the basis of measurement of the performance of a mutual fund scheme, it should also include the risk taken by the fund manager because different funds will have different levels of risk attached to them. Risk associated with a fund, in a general, can be defined as variability or fluctuations in the returns generated by it. The higher the fluctuations in the returns of a fund during a given period, higher will be the risk associated with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces. First, general market fluctuations, which affect all the securities, present in the market, called market risk or systematic risk and second, fluctuations due to specific securities present in the portfolio of the fund, called unsystematic risk. The

Total Risk of a given fund is sum of these two and is measured in terms of standard deviation of returns of the fund. Systematic risk, on the other hand, is measured in terms of Beta, which represents fluctuations in the NAV of the fund vis-à-vis market. The more responsive the NAV of a mutual fund is to the changes in the market; higher will be its beta. Beta is calculated by relating the returns on a mutual fund with the returns in the market. While unsystematic risk can be diversified through investments in a number of instruments, systematic risk can not. By using the risk return relationship, we try to assess the competitive strength of the mutual funds vis-à-vis one another in a better way. In order to determine the risk-adjusted returns of investment portfolios The most important and widely used measures of performance are:

•

The Treynor Measure

•

The Sharpe Measure

•

Jenson model (alpha ratio)

The Treynor Measure Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's Index. This Index is a ratio of return generated by the fund over and above risk free rate of return (generally taken to be the return on securities backed by the government, as there is no credit risk associated), during a given period and systematic risk associated with it (beta). Symbolically, it can be represented as: Treynor's Index (Ti) = (Ri - Rf)/Bi. Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the fund. The Sharpe Measure In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be written as: Sharpe Index (Si) = (Ri - Rf)/Si

Where, Si is standard deviation of the fund. Jenson Model Jenson's model proposes another risk adjusted performance measure. This measure was developed by Michael Jenson and is sometimes referred to as the Differential Return Method. This measure involves evaluation of the returns that the fund has generated vs. the returns actually expected out of the fund given the level of its systematic risk. The surplus between the two returns is called Alpha, which measures the performance of a fund compared with the actual returns over the period. Required return of a fund at a given level of risk (Bi) can be calculated as: Ri = Rf + Bi (Rm - Rf) Where, Rm is average market return during the given period. After calculating it, alpha can be obtained by subtracting required return from the actual return of the fund. Higher alpha represents superior performance of the fund and vice versa. Limitation of this model is that it considers only systematic risk not the entire risk associated with the fund and an ordinary investor can not mitigate unsystematic risk, as his knowledge of market is primitive. Calculation of Treynor and sharp ratio for selected mutual funds schemes: Measures/ schemes

HDFC equity fund

SBI Magnum comma

LICMF

Equity

(Growth)

fund ( Growth)

(Growth)

Return on fund (Ri) Risk free rate of return (Rf) Beta Standard deviation Treynor ratio

7.2% 9% 0.85 5.09 7.2-9/0.85

6% 8% 0.92 5.71 6-8/0.92

5% 7% 1.08 6.48 5-7/1.08

(Ti) = (Ri - Rf)/Bi. Sharp ratio

= -2.11 7.2-9/5.09

= -2.17 6-8/5.71

= -1.85 5-7/6.48

(Si) = (Ri - Rf)/Si

=

=

=

-0.353

-0.350

Fund-

-0.308

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

Findings: •

All these three mutual fund shows the unfavorable performance but HDFC equity growth plan having the low negative value so it will be the greater performer over the past three year.

•

Same as sharp ratio for SBI magnum comma fund growth and LIC equity fund growth are having high negative value that depicts the performance of these plans are lower comparison to HDFC equity growth plan.

Conclusion: Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a numerical risk measure. The total risk is appropriate when we are evaluating the risk return relationship for well-diversified portfolios. On the other hand, the systematic risk is the relevant measure of risk when we are evaluating less than fully diversified portfolios or individual stocks. For a well-diversified portfolio the total risk is equal to systematic risk. Rankings based on total risk (Sharpe measure) and systematic risk (Treynor measure) should be identical for a well-diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that ranks higher on Treynor measure, compared with another fund that is highly diversified, will rank lower on Sharpe Measure References: www.mutualfundsindia.com www.sbimutualfunds.com www.hdfcmutualfunds.com www.licmutualfunds.com Books:

•

Financial institutions and markets structure, Growth and innovation fourth edition by L.M. Bhole (Tata McGraw-hill publishing company limited)

•

The working of stock exchanges in India by H.R. machiraju

•

Financial services by shashi k. gupta

•

The Indian financial system markets, institutions and services by Bharati V. Pathak second edition (pearson education)