Organisation Of Mutual Fund.docx

ORGANISATION OF MUTUAL FUND: SPONSOR Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute at least 40% of the net w o r t h o f t h e Investment managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Fund) Regulations, 1996. The sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund. TRUST The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Ac t, 1908. TRUSTEE Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals).The main responsibility of the Trustee is to safeguard the interest of the unit holders and e n s u r e t h a t t h e A M C f u n c t i o n s i n t h e i n t e r e s t o f i n v e s t o r s a n d i n a c c o r d a n c e w i t h t h e Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner. ASSET MANAGEMENT COMPANY (AMC) The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 cores at all times. REGISTRAR AND TRANSFER AGENT

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to theM u t u a l F u n d . T h e R e g i s t r a r p r o c e s s e s t h e a p p l i c a t i o n f o r m , r e d e m p t i o n r e q u e s t s a n d dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records . B. MEASURING AND EVALUATING MUTUAL FUNDSPERFORMANCE: Performance measures: Equity funds : the performance of equity funds can be measured on the basis of: NAV Growth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns and Distributions, Computing Total Return (Per Share Income and Expenses, Per Share Capital Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio Turnover Rate, Fund Size, Transaction Costs, Cash Flow, Leverage. Debt fund : Likewise, the performance of debt funds can be measured on the basis of: Peer Group Comparisons, The Income Ratio, Industry Exposures and Concentrations, NPAs, besides NAV Growth, Total Return and Expense Ratio. Liquid funds: The performance of the highly volatile liquid funds can be measured on the basis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio. Concept of benchmarking for performance evaluation: Every fund sets its benchmark according to its investment objective. The funds performances measured in comparison with the benchmark. If the fund generates a greater return than the b e n c h m a r k t h e n i t i s s a i d t h a t t h e f u n d h a s o u t p e r f o r m e d b e n c h m a r k , i f i t i s e q u a l t o benchmark then the correlation between them is exactly 1.And if in case the return is lower than the benchmark then the fund is said to be underperformed. A S T U D Y O F P O R T F O L I O A N A L Y S I S F R O M T H E P O I N T O F FUND MANAGER:

Effective use of portfolio management disciplines improves customer satisfaction, reduces the number of risks problems, and increases success. The goal of portfolio analysis is tor e a l i z e t h e s e s a m e b e n e f i t s a t t h e p o r t f o l i o l e v e l b y a p p l y i n g a c o n s i s t e n t s t r u c t u r e d management approach. Mutual funds do not determine risk preference. However, once investor determines his/her return preferences, he/she can choose a mutual fund a large and growing variety of alternative funds designed to meet almost any investment goal. Studies have showed that the funds generally were consistent in meeting investors stated goals for investment strategies, risk, and r e t u r n . T h e m a j o r b e n e f i t o f t h e m u t u a l f u n d i s t o d i v e r s i f y t h e p o r t f o l i o t o e l i m i n a t e unsystematic risk. The instant diversification of the funds is especially beneficial to the small investors who do not have the resources to acquire 100 shares of 12 or 15 different issues required to reduce unsystematic risk.

Mutual funds have generally maintained the stability of their correlation with the market because of reasonably well diversified portfolios. There are some measures for the analysisa n d e a c h o f t h e m p r o v i d e s u n i q u e p e r s p e c t i v e s . T h e s e m e a s u r e s e v a l u a t e t h e d i f f e r e n t components of performance. 1.2.7 MEASURES OF RISK AND RETURN: Risk is variability in future cash flows. It is also known as uncertainty in the distribution of possible outcomes. A risky situation is one, which has some probability of loss or unexpected results. The higher the probability of loss or unexpected results is, the greater the risk. It is the uncertainty that an investment will earn its expected rate of return. For an investor, evaluating a future investment alternative expects or anticipates a certain rate of return is very important. Portfolio risk management includes processes that identify, analyse, respond to, track, and control any risk that would prevent the portfolio from achieving its business objectives. These processes should include reviews of project level risks with negative implications for the portfolio, ensuring that the project manager has a responsible risk mitigation plan.

Simple measure of returns: The return on mutual fund investment includes both income (in the form of dividends or investment payments) and capital gains or losses (increase or decrease in the value of a security). The return is calculated by taking the change in a fund’s Net Asset Value, which is the market value of securities the fund holds divided by the number of the fund’s sharesd u r i n g a g i v e n t i m e p e r i o d , a s s u m i n g t h e r e i n v e s t m e n t a l l i n c o m e a n d c a p i t a l g a i n s distributions, and dividing it by the original net asset value. The return is calculated net of management fees and other expenses charged to the fund. Thus, a fund’s monthly return can be expressed as follows: Measure of risk Investors are interested not only in fund’s return but also in risk taken to achieve t h o s e returns. So risk can be thought as the uncertainty of the expected return, and uncertainty is generally equated with variability. Variability and the risk are correlated; hence high returns will tend to high variability. Standard deviation: In simple terms standard deviation is one of the commonly used statistical parameter to measure risk, which determines the volatility of a fund. Deviation is defined as any variation f r o m a m e a n v a l u e ( u p w a r d & d o w n w a r d ) . S i n c e t h e m a r k e t s a r e v o l a t i l e , t h e r e t u r n s fluctuate every day. High standard deviation of a fund implies high volatility and a low standard deviation implies low volatility. Beta analysis: Beta Co-efficient:

Systematic risk 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 Fundw i t h t h e r e t u r n s i n t h e m a r k e t . W h i l e u n s y s t e m a t i c r i s k c a n b e d i v e r s i f i e d t h r o u g h investments in a number of instruments, systematic risk cannot. Beta is used to measure the risk. It basically indicates the level of volatility associated with the fund as compared to the market. In case of funds ,bas compared to the market. In case of funds, beta would indicate the volatility against the benchmark index. It is used as a short term decision making tool. A beta that is greater than 1 means that the fund is more volatile than the benchmark index, while a beta of less than 1 means that the fund is more volatile than the benchmark index. A fund with a beta very close to 1 means the fund’s performance closely matches the index or benchmark. The success of beta is heavily dependent on the correlation between a fund a n d i t s benchmark. Thus, if the fund’s portfolio doesn’t have a relevant benchmark index then a beta would be grossly inappropriate. For example if we are considering a banking fund, we should look at the beta against a bank index. 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 Ratio (Si) = (Ri - Rf)/Si Where, Si Is standard deviation of the fund, Ri represents return on fund, and Rf Is risk free rate of return The Treynor Measure: Developed by Jack Treynor, this performance measure evaluates funds on the b a s i s o f 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 creditr i s k a s s o c i a t e d ) , d u r i n g a g i v e n p e r i o d a n d s y s t e m a t i c r i s k a s s o c i a t e d w i t h i t ( b e t a ) . 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. 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 fund1 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:

E(Ri) = Rf + Bi (Rm - Rf) Where,

E(Ri) Represents expected return on fund, and Rm is average market return during the given period, Rf Is risk free rate of return, and Bi Is Beta deviation of the fund. After calculating it, Alpha can be obtained by subtracting required return from the actual return of the fund.

2.1 OBJECTIVE OF THE STUDY    

W h e t h e r t h e g r o w t h o r i e n t e d M u t u a l F u n d a r e e a r n i n g h i g h e r r e t u r n s t h a n t h e bench mark returns (or market Portfolio/Index returns) in terms of risk. Whether the growth oriented mutual funds are offering the advantages of Diversification, Market timing and Selectivity of Securities to their investors This study provides a proper investigation for logical and reasonable comparison andselection of the funds.

  It also assists in analysing the portfolio of the selected funds. 2.2 LIMITATIONS OF THE STUDY  The study is limited only to the analysis of different schemes and its suitability to different investors according to their risk-taking ability.  The study is based on secondary data available from monthly fact sheets, websites andother books, as primary data was not accessible.  The study is limited by the detailed study of six schemes of HDFFC.  Many investors are all price takers.  The assumption that all investors have the same information and beliefs about the distribution of returns.  Banks are free to accept deposits at any interest rate within the ceilings fixed by theReserve Bank of India and interest rate can vary from client to client. Hence, there can be inaccuracy in the risk free rates.  The study excludes the entry and the exit loads of the mutual funds. 2.3 DATA COLLECTION The Methodology involves the selected Open-Ended equity schemes of HDFC mutual fundfor the purpose of risk return and comparative analysis the competitive funds. The data collected for this project is basically from secondary sources, they are;The monthly fact sheets of HDFC AMC fund house and research reports from banks. DATA INTERPRETATION