THEORETICAL BACKGROUND

A mutual fund is a special type of company that pools together money from many investors and invests it on behalf of the group, in accordance with a stated set of objectives. Mutual funds raise the money by selling shares of the fund to the public, much like any other company which can sell stock of itself to the public. Fund Houses then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money which the investors give to the Fund House when purchasing shares (or mutual funds units), shareholders (unit holders) receive an equity position in the fund and, in effect, in each of its underlying securities. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund fluctuates daily, depending upon the performance of the securities held by the fund. In other words Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with the objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI), which regulates the securities markets, before it can collect funds from the public. 1

An investor who wants to invest in the mutual funds has to do his homework of selecting the fund which matches his objectives and the one which is performing better i.e. out of thousands of funds floated by many mutual funds, he has to recognize the right kind of fund. He is always in a dilemma as he is not able to evaluate the funds, as funds with different objectives have different parameters on which the fund has to be evaluated. In this case, it is considered that any rational investor would try to maximize his returns for the amount of the risk he undertakes. Investors often get lost in judging the best fund, hence an attempt is made to evaluate the mutual funds i.e. to rank the funds on Sharpe ratio, Treynor ratio, Information ratio, alpha and three year annualized returns. Sharpe Ratio The Sharpe ratio measures the risk-adjusted return of a fund. Simply put the ratio measures the variability of ' excess returns' (defined by returns of the fund over the 'risk free return). Mathematically, the formula takes a fund's return in excess of a risk-free investment and divides this by the standard deviation of the returns. Higher the Sharpe ratio better is the fund. Treynors Ratio It measures the returns earned in excess of that which could have been earned on a risk less investment per unit of market risk. The Treynor ratio is calculated as: (Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of the Portfolio Information Ratio It is a measure of portfolio's performance against risk and return relative to a benchmark or an alternative measure. It is a straightforward way to evaluate the return a fund manager achieves, given the risk they take on.

RESEARCH DESIGN
STATEMENT OF THE PROBLEM Every individual investor who invests in the equity market wants to minimize his risk, wants to reduce his transaction expenses and wants to pick up the right stock so that he makes good money either through capital appreciation or dividends. He may see mutual funds as his best bet because mutual funds are special type of companies which provide all the above stated services in an unique way i.e. they pool money from many investors under a scheme and invests it on behalf of the group, in accordance with the stated set of objective and the investors are given units of that particular scheme or fund. In return for the money which the investors give to the Fund House when purchasing shares (or mutual funds units), shareholders (unit holders) receive an equity position in the fund and, in effect, in each of its underlying securities. Individual investors want to minimize their risk and expect a good amount of return for that particular risk; hence they opt for mutual funds. But, they are always in a confused state of mind as they are not sure where to invest i.e. which fund to prefer as there are thousands of schemes floated by various Fund Houses with various objectives and terms. There is a tendency that investor selects his funds based on the returns generated by the funds and ignoring the other factors. A hypothetical situation is considered where an investor wants long term growth in his capital and thus invests in the growth or capital appreciation scheme of the mutual funds. It seems rational that any ordinary investor would try and invest in the best performing scheme which would suit his objectives. Hence, an attempt is made to evaluate the performance of some of the various available schemes which have a common objective of capital appreciation i.e. growth over three years from May 2002- May 2005.

OBJECTIVES OF THE RESEARCH The objective of the research is to rank the best performing growth funds, which has invested into equities, over a three year period of time based on the parameters like three year annualized returns, Sharpe ratio, Treynors ratio, Alpha and Information ratio.

SCOPE OF THE RESEARCH The study is limited to the following areas: Only growth funds are considered Schemes which are operating over a three year period are taken Top ten funds are considered based on their three year annualized returns Schemes of only mutual funds are considered The study is restricted to the Indian Capital markets

RESEARCH METHODOLOGY Research Methodology is the study of research methods and rules for doing research work. Research is defined as A search for facts-answers to question and solutions to problem. It is a purposive investigation, a systematic inquiry. The major aim of the study is to rank the best performing growth funds over a three year time period across all the fund houses operating in India. Type of the Study The study is generally exploratory in nature, as it studies the performances of various schemes and ranks them based on a cumulative ranking generated by the various parameters and a hypothesis testing based on Friedmans test. Sources of Data The data (i.e. NAV) for the study has been downloaded from the internet (i.e. websites of the mutual funds) and is converted to returns and used for the study which formed the primary data for the study. Sampling Plan Any study requires information about the elements of the population which is common to most of the units and the conclusions which can be generalized to the entire population. The process of extracting some units, or a sample, from the population is termed as sampling. Types of Sampling There are basically two types of sampling technique Probability Sampling Non-Probability Sampling

Probability Sampling: Probability sampling is also known as Random Sampling or Chance Sampling. Under this sampling design, every item of the universe has an equal chance of inclusion in the sample. It is, so to say, a lottery method in which individual units are picked up from the whole group not deliberately but by some mechanical process. Non-Probability Sampling: under this sampling technique, the probability of an element getting selected is unknown and its left to the choice of the researcher. For the purpose of this study judgment sampling under non-probability sampling method is used. As there are not more than sixty funds satisfying the conditions of the study, therefore only the top ten funds based on their three year annualized returns are considered.

Sample Size The study has been conducted by considering only the top ten funds based on their three year annualized returns.

Sampling Unit The sampling unit represents those mutual fund companies which have invested their growth funds corpus in the equities of the Indian capital market.

Research Tools The research has been done by using the following statistical and financial techniques Statistical tools used are: Average Standard Deviation Variance Co-variance Correlation Friedman Test (non-parametric measure) 6

Financial tools used are: Compounded return Beta Systematic and Unsystematic Risk measure Sharpe ratio Treynor ratio Measure of Alpha Information Ratio

Plan of Analysis Three year annualized returns are calculated based on the daily returns NSE Nifty is considered as the benchmark index and the risk free return is calculated using the NSE treasury bill index All the above mentioned Statistical measures are calculated and used in the financial techniques to get the results All the funds and the index are ranked based on the results generated by the financial techniques All the funds are arranged with their respective ranks and variables Friedman test is conducted using the SPSS package and the results are obtained

Limitations of the Study The following are the limitations of the study: As many statistical and financial tools are used, the limitations of these subjects cannot be denied Each evaluation measure or variable has its own drawbacks Study is based only on the growth objective of a scheme and cannot be extrapolated to other objectives as each objective has its own evaluation techniques There are very few funds available as the industry hasnt expanded considerably

Operational Definitions of the Concepts

Alpha coefficient: It is the excess return of the fund above risk adjusted market return, given its level of risk as measured by beta. An investment with a positive alpha indicates that the fund has performed better than expected, given its beta. And a negative alpha indicates that the fund has under performed. Alpha = Excess Return - ((Beta x (Benchmark - RFR)) Benchmark = Total Return of Benchmark Index RFR = Risk free return or Treasury bill Annual Return: The percentage of change in net asset value over a year's time, assuming reinvestment of distribution such as dividend payment and bonuses. Annualized Return: This is the hypothetical rate of return, if the fund achieved it over a year's time, would produce the same cumulative total return if the fund performed consistently over the entire period. A total return is expressed in a percentage and tells you how much money you have earned or lost on an investment over time, assuming that all dividends and capital gains are reinvested. Asset Management Company: It is a company set up primarily for managing the investment of mutual funds and makes investment decisions in accordance with the scheme objectives, deed of Trust and other provisions of the Investment Management Agreement. For Tata Mutual Fund, Tata Asset Management Limited is the Asset Management Company. Benchmark: A parameter against which a scheme can be compared. For example, the performance of a scheme can be benchmarked against an appropriate index.

Beta: A measure of the relative sensitivity of a stock or mutual fund to the market. The higher the beta, the more volatile (or more sensitive) the stock or fund is considered to be relative to the market as a whole. The NSE Nifty is assigned a beta of 1. Capital Appreciation: As the value of the securities in a portfolio increases, a fund's Net Asset Value (NAV) increases, meaning that the value of your investment rises. If you sell units at a higher price than you paid for them, you make a profit, or capital gain. If you sell units at a lower price than you paid for them, you'll have a capital loss. Compounding: When you deposit money in a bank, it earns interest. When that interest also begins to earn interest, the result is compound interest. Compounding occurs if bond income or dividends from stocks or mutual funds are reinvested. Because of compounding, money has the potential to grow much faster. Entry Load: Load on purchases/ switch-out of units. Equity Schemes: Schemes where more than 50% of the investments are made in the equity shares of various companies. The objective is to provide capital appreciation over a period of time. Expense Ratio: It is the percentage of fund's value that is paid as expenses. Expenses include management fees and all the other fees associated with the fund's daily operations. Exit Load: Load that is charged on redemptions i.e. during the exit of the fund Fund Category: It is a type of scheme which the mutual fund company invests its corpus in a particular category. It could be a growth, debt, balanced, gilt or liquid scheme Fund Family: It is the AMC which manages the various types of funds. Fund Management Costs: It is the charge levied by an AMC on the investors for managing their funds.

Fund Manager: The person who makes all the final decisions regarding investments of a scheme, i.e. the person who makes all the investment decisions. Investment Objective: The identification of attributes associated with an investment or investment strategy, designed to isolate and compare risks, define acceptable levels of risk, and match investments with personal goals. Information Ratio: It measures average return in excess of benchmark portfolio divided by the standard deviation of this excess return. Load: A charge that is levied as a percentage of NAV at the time of entry into the Scheme/Plans or at the time of exiting from the Scheme/Plans. No-Load Scheme: A Scheme where there is no initial Entry or Exit Load. Mutual Funds: An investment company/trust that pools money from unitholders and invests that money into a variety of securities, including stocks, bonds, and money-market instruments in line with the funds objective. NAV: Net Asset Value (NAV) is the value of the fund which is obtained by the following formula : Market/Fair Value of Scheme's investments (+) Receivables (+) Accrued Income (+) Other Assets (-) Accrued Expenses (-) Payables (-) Other Liabilities NAV = Number of Units outstanding

NAV Change: The difference between today's closing net asset value (NAV) and the previous day's closing net asset value (NAV). NAV %Change: The percentage change between today's closing net asset value (NAV) and the previous day's closing net asset value (NAV)

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Net Worth: A person's net worth is equal to the total value of all possessions, such as a house, stocks, bonds, and other securities, minus all outstanding debts, such as mortgage and revolving credit lines. Net Yield: Rate of return on a security net of out-of-pocket costs associated with its purchase, such as commissions or markups. Offer Document Or Prospectus: The official document issued by mutual funds prior to the launch of a fund describing the characteristics of the proposed fund to all its prospective investors. It contains all the information required as per the Securities and Exchange Board of India, such as investment objective and policies, services, and fees. Individual investors are encouraged to read and understand the fund's prospectus. Risk Adjusted Returns%: Generally, the expected returns from an investment are dependent on the risk involved in the investment. For the purpose of comparing returns from investments involving varying levels of risk, the returns are adjusted for the level of risk before comparison. Such returns (reduced for the level of risk involved) are called risk-adjusted returns. R2 : R squared ranges from 0 to 100 and reflects the percentage of a fund's movements that are explained by movements in its benchmark index. An R-squared of 100, means that all the movements of a fund are completely explained by the movements in the index. Thus, index funds that invest only in S&P 500 stocks will have an R-squared very close to 100. Conversely, a low R-squared indicates that very few of the fund's movements are explained by movements in its benchmark index. An R-squared measure of 35, for example, means that only 35% of the fund's movements can be explained by movements in its benchmark index. Therefore, R-squared can be used to ascertain the significance of a particular beta or alpha. Generally, a higher R-squared will indicate a more useful beta figure. If the R-squared is lower, then the beta is less relevant to the fund's performance. Sale Price: The price at which a fund offers to sell one unit of its scheme to investors. This NAV is grossed up with the entry load applicable, if any.

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Sales Charge: Fee on the purchase of new shares of a mutual fund. A sales charge is similar to paying a premium for a security in that the customer must pay a higher offering price. Sometimes, it is called a load. Scheme: It is a fund or plan where the money contributed by the unit holders are maintained and managed and the profit/loss from the scheme accrue only to the unit holders. A mutual fund can launch more than one scheme. SEBI: The Securities and Exchange Board of India. SEBI Regulations: Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 or such other SEBI (MF) Regulations as may be in force from time to time and would include Circulars, Guidelines etc., unless specifically mentioned to the contrary. Sharpe Ratio: The Sharpe ratio measures the risk-adjusted return of a fund. Simply put, the ratio measures the variability of ' excess returns' (defined by returns of the fund over the 'risk free return). Mathematically, the formula takes a fund's return in excess of a riskfree investment and divides this by the standard deviation of the returns. Higher the Sharpe ratio better is the fund. Spread: The difference between the rates at which money is deposited in a financial institution and the higher rates at which the money is lent out. Also, the difference between the bid and ask price for a security. Standard Deviation: It is a statistical measurement of the dispersion of a fund's return over a specified time period. Investors may examine historical standard deviation in conjunction with historical returns to decide whether a fund's volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate the absolute performance, but merely indicates the volatility of its returns over time.

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Total Return%: Return on an investment, taking into account capital appreciation, dividends or interest, and individual tax considerations adjusted for present value and expressed on an annual basis. Unit: Unit representing a share in the assets of the corresponding plan of the Scheme. Unit Holder: A person who holds Unit(s) under any plan of the Scheme. Valuation: Calculating the market value of the assets of a mutual fund scheme at any point of time. Volatility: In investing, volatility refers to the ups and downs of the price of an investment. Greater the ups and downs, more volatile the investment is. Volatility Measures: Volatility measures the variability of historical returns. Relative Volatility, Beta, and R2 compare a portfolio's total return to those of a relevant market, represented by the benchmark index. Standard Deviation is calculated independent of an index. Yield: The percentage of return an investor receives based on the amount invested or on the current market value of holdings. Yield Curve: The relationship at a given point in time between yields on a group of fixedincome securities with varying maturities -- commonly, Treasury bills, notes, and bonds. The curve typically slopes upward since longer maturities normally have higher yields, although it can be flat or even inverted. Yield to Maturity: Used to determine the rate of return an investor will receive if a longterm, interest-bearing investment, such as a bond is held to its maturity date. It takes into account purchase price, redemption value, time to maturity, coupon yield and the time between interest payments.

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INDUSTRY PROFILE
Introduction to mutual funds 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 invested in the 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. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund fluctuates daily, depending upon the performance of the securities held by the fund.

Chart 3.1: The flow chart describes broadly the working of a mutual fund

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Mutual Fund Operation Flow Chart

ORIGIN The origin of mutual fund industry in India goes back to 1963 when it was introduced by UTI .The mutual fund industry can be broadly classified into four phases according to the development of the sector. Each phase is briefly described as under: First Phase - 1964-87 Unit Trust of India (UTI) was established in 1963 by an Act passed by the 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

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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 Public Sector Funds) This phase was marked by the entry of non-UTI mutual funds i.e. other players. SBI Mutual Fund was the first to enter followed by the 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 in 1989 and GIC in 1990. During the end of 1993 all these funds collectively had Rs.47, 004 as assets under management. 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 registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 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. Fourth Phase - since February 2003 This phase had a bitter experience for UTI as 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

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under an administrator and under the rules framed by Government of India, 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 end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

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GROWTH IN ASSETS UNDER MANAGEMENT Graph 3.1: The graph shows the growth in assets under management

Performance of Mutual Funds in India The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People hardly understood the concept and of course investing was out of question. But yes, some 24 million shareholders were 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 and rose to Rs.470bn. in March 1993 and the figure had a three times higher performance by April 2004 going as high as Rs.1, 540bn. 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 18

stock market performance, mutual funds have not yet recovered, with funds trading at an average discount of 1020 percent of their net asset value. In the past decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as well as quantity wise. Before the ending situation of the monopoly rule, the Assets Under Management (AUM) was Rs. 67bn. and the entry of the private sector rose the AUM to Rs. 470bn in March 1993 and till April 2004, it reached the height of 1,540bn.

TYPES OF MUTUAL FUND SCHEMES Mutual fund schemes may be classified on the basis of its Structure Open - Ended Schemes Close - Ended Schemes Interval Schemes

Investment Objective Growth Schemes Income Schemes Balanced Schemes Money Market Schemes

Other Schemes Tax Saving Schemes Special Schemes Index Schemes Sector Specific Schemes

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By Structure Open-end Funds: An open-end fund is one that is available for subscription all through the year. These funds do not have a fixed maturity and investors can conveniently buy and sell its units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is its liquidity. Closed-end Funds: 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 and investors can invest in the scheme only 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. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. Interval Funds: Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.

By Investment Objective Growth Funds: The aim of growth funds is to provide capital appreciation over a period of time usually medium to long term. Such schemes normally invest a majority of their corpus in equities. It has been proved that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long term outlook seeking growth over a period of time. Income Funds: The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income.

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Balanced Funds: The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth. Money Market Funds: The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods.

Other Schemes Tax Saving Schemes: These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to investors to save capital gains u/s 54EA and 54EB by investing in Mutual Funds.

Special Schemes Industry Specific Schemes: Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, Pharmaceuticals, etc Index Schemes: The corpus of the Index Fund is invested in the index stocks and it attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE Nifty.

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Sectoral Schemes: Sectoral Funds are those which invest exclusively in a specified sector. This could be an industry or a group of industries or various segments such as 'A' Group shares or initial public offerings. ORGANIZATION OF MUTUAL FUNDS There are many entities involved in the entire structure of the mutual fund industry and the diagram below illustrates the organizational set up of a mutual fund: Chart 3.2: The picture shows the structure of the mutual fund industry

Organization of a Mutual Fund

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like the promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

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TAX STRUCTURE There are a variety of tax provisions that apply to mutual funds. Some basic tax provisions that apply to all mutual fund schemes relate to: No tax on earnings: Under section 10 (23D), the profits generated by mutual fund companies are not subject to any tax unlike a corporate, which has to pay tax on its earnings. No Tax Deduction at Source: Under sections 194K and 196A , any income credited or paid by the fund to the resident investors, theirs no tax deducted at source. Wealth Tax: No wealth tax is levied on the mutual fund units. This benefit comes to mutual funds by virtue of the fact that mutual fund units are not treated as 'assets' under the Wealth Tax Act. Capital Gains Tax: Capital gains tax needs to be paid on all mutual fund units. Further, in the case of long term capital gain, the investor is given the option of choosing between a) 20 per cent tax rate with indexation benefit and b) 10 per cent tax rate without the benefit of indexation. The latest budget has exempted capital gains from tax if the amount of gain is invested in Initial Public offerings (IPO). Dividend distribution tax: Under sections 115R to 115T tax is levied on the dividends distributed by mutual funds
Schemes with Section 88 benefit: Mutual Fund schemes that carry the benefit of Section 88 are essentially spread across three categories - ELSS, Insurance Linked and Pension Plans.

Future of Mutual Funds in India In December 2004, Indian mutual fund industry had reached to an AUM of Rs.1, 50, 537 crores and it is estimated that by the end of March 2010, mutual fund assets would be doubled. The annual composite rate of growth is expected 13.4% during the rest of the period and in the last 5 years there was an annual growth rate of 9%.

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Table 3.1: The table shows the growth of the scheduled banks in India
Aggregate deposits of Scheduled Commercial Banks in India (Rs. Crores) Month/Year Deposits Change in % over last yr Mar-98 605410 Mar-00 851593 15 Mar-01 989141 14 Mar-02 Mar-03 Mar-04 Sep-04 1567251 18 4-Dec 1622579 3

1131188 1280853 13 12

Source RBI Table 3.2: The table shows the growth of the Mutual Fund AUMs Mutual Fund AUMs Growth
Month/Year MF AUMs Change in % over last yr Mar-98 68984 Mar-00 93717 26 Mar-01 83131 13 Mar-02 94017 12 Mar-03 75306 25 Mar-04 137626 45 Sep-04 151141 9 4-Dec 149300 1

Source AMFI From the above two tables it can be noticed that the percentage growth in the deposits of the scheduled commercial banks is lower than the percentage growth of the mutual funds AUM Some facts about the growth of mutual funds in India: 100% growth in the last 6 years. Foreign AMC's have entered the Indian markets like Fidelity Investments, US based, with has over US$1trillion assets under management worldwide. Saving rate is over 23%, which is highest in the world but these savings are not channelized properly. Mutual fund can penetrate the rural market like the Indian insurance industry with simple and limited products. SEBI has allowed the mutual funds 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.

The advantages of investing in a Mutual Fund are:

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Diversification: It can reduce the overall investment risk by spreading the risk across many different assets i.e. when some assets are falling in price, others are likely to be rising, so diversification results in less risk than one or two investments.

Professional Management: Mutual funds are managed by a team of professionals, which usually includes one mutual fund manager and several analysts. Presumably, professionals have more experience, knowledge, and information than the average investor when it comes to deciding which securities to buy and sell.

Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud. As of today mutual funds are regulated by the SEBI

Liquidity: is the ease with which one can convert his assets--with relatively low depreciation in value--into cash. In the case of mutual funds, its as easy to sell a share of a mutual fund as it is to sell a share of stock

Convenience: When one owns a unit of a mutual fund, he doesn't need to worry about tracking the dozens of different securities in which the fund invests; rather, all he needs to do is to keep track of the fund's performance. It's also quite easy to make monthly contributions to mutual funds and to buy and sell shares in them. Anyone can buy mutual fund shares by mail, phone, or over the Internet.

Low Transaction Costs: Mutual funds are able to keep transaction costs -- that is, the costs associated with buying and selling securities -- at a minimum level because as they benefit from reduced brokerage commissions for buying and selling large quantities of investments at a single time.

Transparency: the holding of the fund is declared by the fund manager regularly. Hence, its open to the public as where he makes his investments Choice of Schemes: Mutual funds come in a wide variety of types. Some mutual funds invest exclusively in a particular sector (e.g. energy funds), while others might target growth opportunities in general. There are thousands of funds, and each has its own objectives and focus.

Tax Benefits: Many funds provide various tax benefits so as to encourage investors to invest into it.

Mutual funds have their drawbacks: 25

No Guarantees: The return of any mutual fund scheme is not assured as the investment or the corpus of the fund is invested in the capital market which may or may not generate returns. 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 is but whatever the investor encounters fewer risks when they invest in mutual funds than when they buy and sell stocks on their own.

Fees and commissions: All funds charge administrative fees to cover their day-today expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if an investor doesn't uses a broker or other financial adviser, he will pay a sales commission if he buys 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 a fund makes a profit on its sales, the investor will pay taxes on the income he receives, even if he reinvests the money he made.

Management risk: When an investor invests in a mutual fund, he depends on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as he had hoped, he might not make as much money on his investment as he had expected. Of course, if the investor invests in the Index Funds, he foregoes management risk, because these funds do not employ managers.

The key drivers for mutual fund industry growth by 2010 would be: Participation of the retail segment Higher disposable income leading to higher savings Awareness of the mutual funds schemes Entry into the rural market Good economic growth

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Proportion of the Indian mutual fund industry over the global figure It is just a fraction of the global mutual fund industry as India has less than 35 mutual fund companies where as in US alone there are more than 800 mutual funds. Further, the world largest fund management company Fidelity is managing assets worth Rs54trillion while in India the total assets under management is near to Rs1.5trillion. Mutual funds increase in rural penetration Mutual fund can penetrate into rural population by taking the clues from the Indian insurance industry whereby they have separate set of products for the urban as well as rural sector. The products in the rural sector are simple and less in number, which are easy for them to understand.

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ANALYSIS AND INTERPRETATION

RELIANCE GROWTH FUND - (G) This fund is launched by Reliance Capital Asset Management Company Ltd with an objective of capital appreciation. It was floated on 10th of August, 1995 and Mr. Sunil Singhania as the fund manager. The fund has a total asset value of Rs.1135.44 crores as of today. This fund doesnt has any sort of entry and exit load i.e. any investor can buy or sell units of this fund without paying any sort of commission for either entering or exiting the fund. Investor entering into this fund has to subscribe for units worth at least Rs. 5000 and thereafter in multiple of Re. 1. He also gets tax benefits by investing in this fund u/s 112, 2(42A), 80L of the Income Tax Act. The following graph shows the movement of the fund and the index returns over the last three year period. Graph 4.1: The growth in the returns of Reliance Growth Fund and the Index Growth in the fund and index returns for past 3 years
25 Percentage change in value 20 15 10 5 0 -5 -10 -15 -20 Time line May 2002- May 2005 Index Reliance growth fund

28

The growth of the fund since its inception date has been consistent and in fact, beating the market several times. From the above graph it can be interpreted that the fund has been performing better than the index several times in the past three years. It means that the fund manager is well versed with the tricks of the trade and knows the market very well, as he has been outperforming the market over the three year period. The statistics of the fund can be seen in the following table Table 4.1A: The statistical results of the Index and the Reliance Growth fund Particulars 3 year annualized return (%) Average annual returns (%) Standard Dev. Annualized (%) Beta R R2 Index 20.28 21.36 22.21 1 Fund 65.83 53.96 21.09 0.47 0.442 0.196

From the above table it can be inferred that the fund was performing much better than the index as its three year annualized returns was 65.83%, approximately 41% more than the index returns. Also, the average annual return of the fund was much higher than the index. When standard deviation is compared, as the risk measure, the fund was lower than the index by 1.12%. The Beta of the fund was just 0.47 and the fund was correlated to the index to the extent of 0.442 and R2 i.e. coefficient of determination was 0.196 which means 19.6% of the fund returns are justified by the market or the index returns and it can be said that Beta is less relevant to the funds performance.

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Table 4.1B: The evaluation results of the Reliance Growth fund Particulars Sharpe Ratio Treynor Ratio Alpha Information Ratio Fund 2.303 1.042 0.411 1.546

The Sharpe ratio of the fund is 2.3 which means that the fund has performed very well in the given time period, the fund has a Treynor ratio of 1 which is satisfactory, but as this ratio is based on Beta and the funds Beta has very low relevance with its performance as only 19.6% of the returns can be explained by the market. The fund has a positive Alpha of 0.411 which means that returns are higher than its Beta would have predicted and its Information ratio is 1.546 which means that the fund manager has performed exceptionally well, as the average Information ratio ranges from 0.5-1 for many mutual funds. Overall, the fund has performed very well based on all the above parameters.

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FRANKLIN INDIA PRIMA FUND - (G) This fund was promoted by Templeton Asset Management (I) Pvt. Ltd. on 24th December 1993 having an objective of capital appreciation under the leadership of Mr. K.N. Srinivasan. The total asset value of the fund is Rs.1498.3244 crores as of today. The fund has an entry load of 0.0225% and no exit load i.e. an investor buying the units of the fund has to pay a commission or load charges for entering into the scheme and can easily exit the scheme without any charges. He has to subscribe for at least Rs. 5000 worth units and beyond that in the multiple of Rs 1000 and can claim tax benefits u/s 112, 2(42A), 80L, 10(33) Sub sect 11 of the Income Tax Act. The following graph shows the movement of the fund and the index returns over the last three year period. Graph 4.2: The growth in the returns of Franklin Prima Fund and the Index Growth in the fund and index returns for past 3 years
30 25 Percentage change in value 20 15 10 5 0 -5 -10 -15 -20 Time line May 2002- May 2005 Index Franklin prima fund

It can be inferred from the graph that initially i.e. during May 2002 the fund was performing excellently but as time passed the returns came in line with the index and even went below it. A bullish trend can be seen in between the graph during which the fund performed exceptionally well. But in the last one year period the fund was in line with the index, in fact a little over the index. 31

Table 4.2A: The statistical results of the Index and the Franklin Prima Fund Particulars 3 year annualized return (%) Average annual returns (%) Standard Dev. Annualized (%) Beta R R2 Index 20.28 21.36 22.21 1 Fund 62.11 51.61 20.89 -0.035 -.033 0.11

The above table gives the highlight of the funds performance, i.e. its three year annualized returns was approximately 42% more than the index and average annual returns was 51.61% as compared to the index which was just 21.36% whereas the risk measure i.e. standard deviation was 1.32% less than the index which means the fund was giving more returns for a lesser amount of risk. The fund had a negative Beta which was -0.035 and it had a negative correlation coefficient with the index which was low at -0.033 and only 11% of the returns were justified by the market which means very small portion of returns could be helped by Beta. Table 4.2B: The evaluation results of the Franklin Prima Fund Particulars Sharpe Ratio Treynor Ratio Alpha Information Ratio Fund 2.212 -13.028 0.468 1.448

The fund has a Sharpe ratio of 2.2 which means that the fund has performed very well but the Treynor ratio was on an extreme i.e. -13 because of negative Beta and negative correlation of the fund with the index. This also indicates that the fund can be used for a hedging strategy. Alpha and the Information ratio measured on the positive side which means that the fund had done exceptionally good. Overall, the fund was good and investors could think of investing.

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RELIANCE VISION FUND - (G) This fund was floated by Reliance Capital Asset Management Company Ltd with an objective of capital appreciation on 8th October 1995 and Mr. Ashwani Kumar as its fund manager. The total asset value of the fund to this day is Rs. 640.13 crores The fund has an entry load of 0.02% and no exit load i.e. an investor buying the units of this fund has to pay a commission or load charges for entering into the scheme and can easily exit the scheme without any charges. He has to subscribe for at least Rs. 5000 worth units and beyond that in the multiple of Re 1 and can also claim tax benefits u/s 112, 2(42A), 80L of the Income Tax Act. The following graph shows the movement of the fund and the index returns over the last three year period. Graph 4.3: The growth in the returns of Reliance Vision Fund and the Index
Growth in the fund and index returns for past 3 years
25 Percentage change in value 20 15 10 5 0 -5 -10 -15 -20 Time line May 2002- May 2005 Index Reliance vision fund

In the above graph it can be noticed that initially the returns of the fund was much higher than the index, then gradually it came in line with the index for a short period and then during bullish trend it was much above the index and in the bearish trend it was mostly on par with the index, this shows that the fund manager is efficient enough to beat the market. Table 4.3A: The statistical results of the Index and the Reliance Vision Fund

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Particulars 3 year annualized return (%) Average annual returns (%) Standard Dev. Annualized (%) Beta R R2

Index 20.28 21.36 22.21 1

Fund 58.87 49.67 21.52 0.06 0.06 0.003

The above table shows the performance of the fund as compared to the index, the three year annualized returns is approximately 39% more and the average annual returns is approximately 28% more in case of the fund, whereas the standard deviation is less by 0.73% as compared to the index. The Beta of the fund is just 0.06 whereas the correlation and the coefficient of determination is 0.06 and 0.003 respectively, which means that the entire fund is not determined by the index returns and it proves the efficiency of the fund manager. Table 4.3B: The evaluation results of the Reliance Vision Fund Particulars Sharpe Ratio Treynor Ratio Alpha Information Ratio Fund 2.058 7.791 0.434 1.316

The Sharpe ratio is 2.058 which is a sign of good performance and a Treynor ratio as high as 7.8 which is because of very low Beta i.e. systematic risk which is negligible in this case. The Alpha ratio is positive and Information ratio as high as 1.316 again a sign of exceptional performance. Overall, the fund is worth investing for an investor who wants to make a maximum capital appreciation in the given time. PRINCIPAL RESURGENT INDIA FUND (G)

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This fund was launched by Principal PNB Asset Management Company with an objective of capital appreciation on 30th June 2000 The fund has an entry load of 0.025% and no exit load i.e. an investor buying the units of this fund has to pay a commission or load charges for entering into the scheme and can easily exit the scheme without any charges. He has to subscribe for at least Rs. 5000 worth units and beyond that in the multiple of Re 1 and can claim tax benefits u/s 112, 2(42A), 80L of the Income Tax Act. The following graph shows the movement of the fund and the index returns over the last three year period. Graph 4.4: The growth in the returns of Principal Resurgent Fund and the Index

25
Percentage change in value

Growth in the fund and index returns for past 3 years

20 15 10 5 0 -5 -10 -15 -20 Time line M ay 2002-May 2005

Index Principal resurgent India fund

It can be noticed in the above graph that initially returns were better than the index for a certain period of time but then it was moving along with the index and during a certain recession period it even underperformed as compared to the index.

35

Table 4.4A: The statistical results of the Index and the Principal Resurgent Fund Particulars 3 year annualized return (%) Average annual returns (%) Standard Dev. Annualized (%) Beta R R2 Index 20.28 21.36 22.21 1 Fund 48.71 45.19 30.48 0.23 0.316 0.1

The above table highlights the scenario that the average annual returns as well as three year annualized returns of the funds are in excess of the index by approximately 24% and 28% respectively, whereas the risk measure i.e. the standard deviation of the fund is much higher than the index as it was more by 8.27% which means that the fund is more riskier than the index. The Beta measure is also very low at 0.23, correlation with the index was 0.316 and only 10% of the returns are due to the market movements. Table 4.4B:The evaluation results of the Principal Resurgent Fund Particulars Sharpe Ratio Treynor Ratio Alpha Information Ratio Fund 1.305 1.729 0.361 0.782

The Sharpe ratio is 1.3 which is a pretty good measure for a mutual fund and Treynor ratio is at 1.7 again a considerable number. The Alpha measures in a positive sign which means that the fund is not in red and the Information ratio which is 0.782 is in the acceptable range. Overall, the fund is performing pretty well. HDFC CAPITAL BUILDER FUND (G)

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This fund was floated by HDFC Asset Management Company Ltd as on 1 st February, 1994, under Mr. Tushar Pradhan as the fund manager, with the objective of capital appreciation. The total asset value as of today is Rs. 921.9089 crores The fund does not has any sort of entry load or exit load i.e. an investor buying or selling the units of this fund does not have to pay a commission or load charges for either entering or exiting the scheme. He has to subscribe for at least Rs. 5000 worth units and beyond that in the multiple of Rs 100 and can claim tax benefit u/s 112, 2(42A), 80L, 10(33) Sub sect 11 of the Income Tax Act. The following graph shows the movement of the fund and the index returns over the last three year period. Graph 4.5:The growth in the returns of HDFC Capital Builder Fund and the Index Growth in the fund and index returns for past 3 years
30 25 Percentage change in value 20 15 10 5 0 -5 -10 -15 -20 Time line May 2002- May 2005 Index HDFC capital builder

The above graph pictures the performance of the fund, it can be seen that after a good performance initially the fund went lower than the index but overall it was in line with the fund and in the upward trend it performed better than the index.

37

Table 4.5A: The statistical results of the Index and the HDFC Capital Builder Fund Particulars 3 year annualized return (%) Average annual returns (%) Standard Dev. Annualized (%) Beta R R2 Index 20.28 21.36 22.21 1 Fund 45.34 40.04 18.95 0.32 0.27 0.073

In the above table it can be seen that the three year annualized return and the average annual returns of the fund is better than the index by approximately 25% and 19% respectively, and the standard deviation is very much low as compared to the index by 3.26% which means generating higher returns at a lower risk. The Beta measure is 0.32 and only 7.3% of the returns can be explained with the help of the Beta Table4.5B: The evaluation results of the HDFC Capital Builder Fund Particulars Sharpe Ratio Treynor Ratio Alpha Information Ratio Fund 1.828 1.092 0.296 0.986

The Sharpe and Treynor ratio measured at 1.83 and 1.09 respectively, the Sharpe ratio which shows a favorable number is a good sign. Alpha measure is also positive which means that the fund is doing well and the Information ratio which is close to 1 is also a good sign of a good fund. Overall, the fund is good as the risk measure is comparatively less and the fund is able to generate higher returns DSP ML OPPORTUNITIES FUND (G) 38

This fund was promoted by DSP Merrill Lynch Asset Management Company Ltd with the objective of capital appreciation as on 16th May 2000 under the leadership of Mr. Anup Maheshwari, as the fund manager. The total asset value as of today is Rs. 599.5162 crores. The fund does not has any sort of entry load or exit load i.e. an investor buying or selling the units of this fund does not have to pay a commission or load charges for either entering or exiting the scheme. He has to subscribe for at least Rs. 1000 worth units and beyond that in the multiple of Re 1 and can claim tax benefit u/s 112, 2(42A), 80L, 10(33) Sub sect 11 of the Income Tax Act. The following graph shows the movement of the fund and the index returns over the last three year period. Graph4.6:The growth in the returns of DSP ML Opportunities Fund and the Index

Growth in the fund and index returns for past 3 years

25 20 Percentage change in value 15 10 5 0 -5 -10 -15 -20 Time line May 2002- May 2005 Index DSP ML opportunities fund

In the above graph it can be seen that the fund has been in close proximity with the index during the downturn period and has also climbed upward with the index. So, there is not much deviation from the index. Table 4.6A:The statistical results of the Index and the DSP ML Opportunities Fund

39

Particulars 3 year annualized return (%) Average annual returns (%) Standard Dev. Annualized (%) Beta R R2

Index 20.28 21.36 22.21 1

Fund 45.28 40.59 21.86 0.358 0.353 0.124

The above table summarizes the situation that the funds returns for three year annualized and average annual returns are higher than the index by approximately 25% and 19.23% respectively, and the risk measure is almost closer to it, just varying by 0.5%. The Beta of the fund is just 0.358 and it can be said that only 12.4% of returns can be justified by the index. Table 4.6B: The evaluation results of the DSP ML Opportunities Fund Particulars Sharpe Ratio Treynor Ratio Alpha Information Ratio Fund 1.610 0.984 0.295 0.880

The Sharpe ratio is 1.61, which is a good measure and Treynor ratio is just 0.984 Alpha measures in a positive sign which means that fund is performing better than what its Beta could explain and the Information ratio is again in a positive number which indicates that the fund is healthy. Overall, the fund is good as its not that risky as its risk measure is close to that of the market.

TAURUS STARSHARE

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This fund was launched by Credit capital Asset Management Co as on 3rd January 1996 with the objective of capital appreciation and Mr. R K Gupta as its fund manager. The total asset value of the fund as of to day is Rs. 101.98 crores The fund has an entry load of 0.0175% and no exit load i.e. an investor buying the units of this fund has to pay a commission or load charges for entering into the scheme and can easily exit the scheme without any charges. He has to subscribe for at least Rs. 1000 worth units and beyond that in the multiple of Rs 1000 and can claim tax benefit u/s 112, 2(42A), 80L, 10(33) Sub sect 11 of the Income Tax Act. The following graph shows the movement of the fund and the index returns over the last three year period. Graph 4.7: The growth in the returns of Taurus Starshare Fund and the Index Growth in the fund and index returns for past 3 years
25 Perentage change in value 20 15 10 5 0 -5 -10 -15 -20 Time line M ay 2002-May 2005
Index Taurus starshare

The above graph shows that the initially the returns were good but for a very short period and it went lower than the index returns. The fund returns has followed the index but not in a consistent manner. By looking at the graph it can be inferred that the fund is much riskier than the market itself. Table 4.7A: The statistical results of the Index and the Taurus Starshare Fund 41

Particulars 3 year annualized return (%) Average annual returns (%) Standard Dev. Annualized (%) Beta R R2

Index 20.28 21.36 22.21 1

Fund 44.09 40.74 26 0.309 0.362 0.131

The above table shows that both the three year annualized returns as well as the average annual returns of the fund is higher than the index whereas the risk measure i.e. standard deviation of the fund is higher by 3.8%which means that the fund is riskier than the index. The fund has a beta of 0.309 and it contributes only 13% to the total returns of the fund. Table 4.7B: The evaluation results of the Taurus Starshare Fund Particulars Sharpe Ratio Treynor Ratio Alpha Information Ratio Fund 1.359 1.144 0.304 0.745

The fund has a Sharpe ratio of 1.359 which is a good sign for the fund and the Treynor ratio which is 1.144 also sounds healthy. Alpha measures in a positive sign i.e. 0.304 which conveys that the fund is not in a red position in spite of high risk. The Information ratio is also in the acceptable range of the fund. Overall the fund is riskier and the investors should study the fund properly before investing.

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ALLIANCE EQUITY FUND (G) This fund was floated by Alliance Capital Asset Management Company as on 27th August 1998 with the objective of capital appreciation and Mr. Ashit Kothari being as its fund manager. The total asset value of the fund till this day is Rs. 234.7582 crores. The fund does not have any sort of entry load or exit load i.e. an investor buying or selling the units of this fund does not have to pay a commission or load charges for either entering or exiting the scheme. He has to subscribe for at least Rs. 5000 worth units and beyond that in the multiple of Rs. 1000 and can claim tax benefit u/s 112, 2(42A), 80L, 10(33) Sub sect 11 of the Income Tax Act. The following graph shows the movement of the fund and the index returns over the last three year period. Graph 4.8: The growth in the returns of Alliance Equity Fund and the Index

Growth in the fund and index returns for past 3 years

25 Percentage change in value 20 15 10 5 0 -5 -10 -15 -20 Time line May 2002- May 2005 Index Alliance equity fund

It can be seen in the graph that the returns of the fund was below the index initially and then managed to rise above the returns of the index and has trailed the index from an acceptable angle. One thing can be noticed that during the bearish trend the fund has been in line with the index.

43

Table 4.8A: The statistical results of the Index and the Alliance Equity Fund Particulars 3 year annualized return (%) Average annual returns (%) Standard Dev. Annualized (%) Beta R R2 Index 20.28 21.36 22.21 1 Fund 42.87 38.96 22.23 0.267 0.268 0.072

The above table summarizes that the three year annualized returns and the average annual returns are in excess of the index returns, whereas the risk was similar in both the cases is at 22% The Beta measure was 0.267 which is a low number and this measure could contribute to only 7.2% of the overall returns of the fund. Table 4.8B: The evaluation results of the Alliance Equity Fund Particulars Sharpe Ratio Treynor Ratio Alpha Information Ratio Fund 1.510 1.256 0.293 0.792

The Sharpe ratio is 1.5 which is a good measure and the Treynor ratio is at 1.26 a healthy measure for a fund. Alpha measures at 0.293 which is a positive measure meaning the fund is performing well. The Information ratio is at 0.792 which is also within the acceptable range. Overall, the fund is satisfactory as its risk is similar to that of the index. TATA PURE EQUITY FUND (G) 44

This fund was promoted by Tata TD Waterhouse Asset Management Pvt. Ltd as on 23rd March 1998 with the objective of capital appreciation and Mr. Venugopal M as its fund manager. The total asset value of the fund as of today is Rs. 202.1437 crores. The fund does not have any sort of entry load or exit load i.e. an investor buying or selling the units of this fund does not have to pay a commission or load charges for either entering or exiting the scheme. He has to subscribe for at least Rs. 5000 worth units and beyond that in the multiple of Re.1 and can claim tax benefit u/s 112, 2(42A), 80L, 10(33) Sub sect 11 of the Income Tax Act. The following graph shows the movement of the fund and the index returns over the last three year period. Graph 4.9: The growth in the returns of TATA Pure Equity Fund and the Index

Growth in the fund and index returns for past 3 years

Percentage change in value 25 20 15 10 5 0 -5 -10 -15 -20 Time line May 2002- May 2005
Index TATA pure equity fund

From the above graph it can be inferred that initially the fund was underperforming than the index, and then it followed an upward trend for a short period and then closely followed the index returns This means that there was not much deviation from the index i.e. the risk would be equivalent to that of the index. Table 4.9A: The statistical results of the Index and the TATA Pure Equity Fund 45

Particulars 3 year annualized return (%) Average annual returns (%) Standard Dev. Annualized (%) Beta R R2

Index 20.28 21.36 22.21 1

Fund 43.44 39.31 21.99 0.268 0.265 0.070

The above table highlights that the three year annualized returns of the fund is higher by 23% as compared to the index returns and the average annual returns is high by only 18%. Both, the index as well as the fund had a similar amount of risk i.e. 22%. In particular, funds risk is low by 0.22% Fund has a Beta of 0.268 which contributes only to the extent of 7% of the returns generated by the fund. Table 4.9B: The evaluation results of the TATA Pure Equity Fund Particulars Sharpe Ratio Treynor Ratio Alpha Information Ratio Fund 1.542 1.267 0.296 0.816

The Sharpe ratio for the fund is 1.542 where as the Treynor ratio is about 1.267 which is a healthy sign for a fund. The Alpha measure for the fund is positive which shows that the fund is in a sound position and the Information ratio which is at 0.816 also substantiates the above point. Overall, the fund has performed well with the similar amount of risk measure.

UTI - GROWTH & VALUE FUND - (G)

46

This fund was launched by UTI Assets Management Company Pvt. Limited as on 28th October 1999 with the objective of capital appreciation and Mr. Sanjay Sinha being as is fund manager. The total asset value of the fund to this day is Rs. 177.0707 crores. The fund does not have any sort of entry load or exit load i.e. an investor buying or selling the units of this fund does not have to pay a commission or load charges for either entering or exiting the scheme. He has to subscribe for at least Rs. 5000 worth units and beyond that in the multiple of Rs.1000 and can claim tax benefit u/s 112, 2(42A), 80L, 10(33) Sub sect 11 of the Income Tax Act. The following graph shows the movement of the fund and the index returns over the last three year period. Graph 4.10: The growth in the returns of UTI Growth Value Fund and the Index

Growth in the fund and index returns for past 3 years

25 Percentage change in value 20 15 10 5 0 -5 -10 -15 -20 Time line May 2002- May 2005
Index UTI growth value fund

From the above graph it can be pictured that the fund was performing better than the index at several points and during recession in the market the fund managed to be in line with the index. As it is seen that the returns of the fund do not have much variations with respect to the index, it can be said that the fund is not much riskier than the index. Table 4.10A: The statistical results of the Index and the UTI Growth Value Fund

47

Particulars 3 year annualized return (%) Average annual returns (%) Standard Dev. Annualized (%) Beta R R2

Index 20.28 21.36 22.21 1

Fund 41.62 37.98 21.85 0.098 0.097 0.009

The three year annualized returns as well as the average annual returns is higher than the index by approximately 21% and 17%, where as the risk measure of the fund is almost similar. The Beta measure of the risk is just 0.098 and contributes less than 1% to the total fund returns. Table 4.10B: The evaluation results of the UTI Growth Value Fund Particulars Sharpe Ratio Treynor Ratio Alpha Information Ratio Fund 1.491 3.309 0.310 0.760

The Sharpe ratio of the fund is 1.491 which is a good sign and the Treynor ratio is 3.309 because of relatively low Beta. Alpha measures in a positive sign that means the returns generated by the fund is more than the Beta generated returns, the Information ratio which is well within the range of 1 indicates that the fund has performed well Overall, the fund has generated considerable amount of returns for the similar risk carried as by the index.

Ranking of the funds based on the measures

48

Table 4.11: The ranks of the funds based on the Three Year Annualized Returns Funds Reliance Growth Franklin Prima India Reliance Vision Principal Resurgent India HDFC Capital Builder -(G) DSP Ml Opportunities Fund (G) Taurus Starshare Tata Pure Equity Fund - (G) Alliance Equity Fund (G) UTI - Growth & Value Fund - (G) Index 3 Year Annualized Return 65.83 62.11 58.87 48.71 45.34 45.28 44.09 43.44 42.87 41.62 20.28 Ranks 1 2 3 4 5 6 7 8 9 10 11

Table 4.12: The ranks of the funds based on the Sharpe Ratio Funds Reliance Growth Fund Franklin Prima India Reliance Vision Fund HDFC Capital Builder DSP ML Opportunities Fund Tata Pure Equity Fund Alliance Equity Fund UTI- Value And Growth Fund Taurus Starshare Principal Resurgent India Index Sharpe Ratio 2.3028 2.2123 2.0576 1.8281 1.6098 1.5423 1.5096 1.4905 1.3589 1.3054 0.7187 Table 4.13: The ranks of the funds based on the Treynor Ratio Ranks 1 2 3 4 5 6 7 8 9 10 11

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Funds Reliance Vision Fund UTI- Value And Growth Principal Resurgent India Tata Pure Equity Fund Alliance Equity Fund Taurus Starshare HDFC Capital Builder Fund Reliance Growth Fund DSP Ml Opportunities Fund Index Franklin Prima India Fund

Treynor Ratio 7.7911 3.3093 1.7286 1.2668 1.2558 1.1437 1.0918 1.0425 0.9840 0.1598 -13.0283

Ranks 1 2 3 4 5 6 7 8 9 10 11

Table 4.14: The ranks of the funds based on the Measure of Alpha Funds Franklin Prima India Fund Reliance Vision Fund Reliance Growth Fund Principal Resurgent India Fund UTI-Value And Growth Taurus Starshare Tata Pure Equity Fund HDFC Capital Builder Fund DSP Ml Opportunities Fund Alliance Equity Fund Index Alpha 0.4677 0.4336 0.4113 0.3612 0.3100 0.3041 0.2964 0.2957 0.2948 0.2930 0.0002 Ranks 1 2 3 4 5 6 7 8 9 10 11

Table 4.15: The ranks of the funds based on the Information Ratio Funds Information Ratio Ranks

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Reliance Growth Fund Franklin Prima India Fund Reliance Vision Fund HDFC Capital Builder Fund DSP Ml Opportunities Fund Tata Pure Equity Fund Alliance Equity Fund Principal Resurgent India Fund UTI-Value And Growth Fund Taurus Starshare Index

1.55 1.45 1.32 0.99 0.88 0.82 0.79 0.78 0.76 0.75

1 2 3 4 5 6 7 8 9 10 11

Table 4.16: The funds with their respective ranking Funds Reliance Growth Franklin Prima India Reliance Vision Principal Resurgent India HDFC Capital Builder DSP Ml Opportunities Fund Taurus Starshare Tata Pure Equity Fund Alliance Equity Fund UTI - Growth & Value Fund Index 3 Year Annualized Returns 1 2 3 4 5 6 7 8 9 10 11 Sharpe Treynor Information Alpha Ratio Ratio Ratio 1 2 3 10 4 5 9 6 7 8 11 8 11 1 3 7 9 6 4 5 2 10 3 1 2 4 8 9 6 7 10 5 11 1 2 3 8 4 5 10 6 7 9 11

The above table shows the rankings of the funds based on all the five measures. The rankings thus obtained is used in the Fishermans test for hypothesis testing so as to obtain a mean ranking for all the funds and to re rank them based on the ascending order of the mean ranks.

HYPOTHESIS TESTING
H0: All the funds are equally ranked 51

H1: The funds are unequally ranked The Friedman test The Friedman test is a nonparametric test that compares three or more paired groups. It is also called Friedman two-way analysis of variance by ranks (because repeated measures one-way ANOVA is the same as two-way ANOVA without any replicates.) Calculation The Friedman test statistic is distributed approximately as chi-square, with (k - 1) degrees of freedom, where k is the number of groups in the criterion variable, from i = 1 to k. Let n be the number of subjects and let Ti be the sum of ranks for each group. Friedman chi-square is then computed by this formula:
2 Chi-square Friedman = 12 nk ( k +1) SUM Ti 3n( k +1)

([

][

( )]

SPSS prints out Friedman chi-square, degrees of freedom, n, and the corresponding significance level. Table 4.17: Test Statistics N Chi-Square Df Asymp. Sig. 5 18.6 9 0.0288

Interpretation The Friedman test can be seen as a two-way analysis of variance with one observation per cell. It can also be seen as a repeated measures analysis of variance for one group.

52

Friedman statistic tests the hypothesis that there is no systematic difference in the ratings. If the significance level is less than .05, test concludes that the groups do not differ on the criterion variable. As it can be seen in the table the significance value is 0.0288 which is less than 0.5, it can be concluded that there is significant difference among the ranking of the funds. Hence, the funds with re-ranking based on mean ranking are shown in the following table. Table 4.18: The Ranking Based On the Friedman Test Funds Reliance Vision Fund Reliance Growth Fund Franklin Prima India Fund HDFC Capital Builder Fund Principal Resurgent India Fund Tata Pure Equity Fund DSP ML Opportunities Fund UTI Value And Growth Fund Taurus Starshare Alliance Equity Fund Mean Ranks 2.4 2.8 3.4 5.6 5.8 6.2 6.8 6.8 7.6 7.6 Ranks 1 2 3 4 5 6 7 8 9 10

From the above table it can be noticed that funds are re-arranged based on there mean ranking. The lowest mean rank gets the highest rank i.e. Rank 1 and the highest mean rank gets the lowest rank i.e. Rank 10. Hence, it can been seen that Reliance Vision Fund ranks at the top most position, followed by Reliance Growth Fund at second position and Taurus Starshare and Alliance Equity Fund share the last position in the ranking as per the Friedmans test results.

FINDINGS
The returns of the Reliance Growth Fund is as high as 66% with a standard deviation of 21% much efficient than the index and the Sharpe ratio measures at 2.3 which is a very high measure for a mutual fund.

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Franklin Prima Fund has a high return of 62% for a risk measure of 21% and Sharpe ratio of 2.1 which is a good measure but the fund looses on Treynor ratio as it is on an extreme of -13 because of its negative correlation with the index.

Reliance Vision Fund has a return of 59% with a standard deviation of 21.5% and ranks high on all the other ratios.

Principal Resurgent India fund generates around 49% of returns but has a very high risk measure of 30%. Hence, the fund is very risky.

HDFC Capital Builder Fund has returns of 45% and a very low risk measure of 19% and has a Sharpe ratio of 1.8 which is a good measure

DSP ML Opportunities Fund has returns of 45% with a risk measure of 22% Taurus Starshare has a return around 44% but a very high risk of 26% it has a Sharpe ratio measure of 1.8

UTI Value and Growth Fund has a return of 42% with a risk measure of 22% which is a good performance by a firm

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RECOMMENDATIONS
Investors can invest in the Reliance Growth and Vision Fund as it has generated the highest returns and at a lower risk than the market. Franklin Prima Fund has a negative correlation with the index. Hence, investors should be careful and can be used for hedging the risk. Principal Resurgent India Fund has been the riskiest fund and the standard deviation as high as 30%, investors can avoid this fund as returns are not justified by its high risk. HDFCs Fund is also one of the good funds as it is generating good returns for a risk level much lower than the market. Taurus Starshare is again a fund which has a high risk measure and generates comparatively lower returns, so investors can avoid it.

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CONCLUSION
Every investor wants to maximize his returns at the lowest possible risk or he tries to minimize his risk keeping his returns equivalent, both gives him higher profits. In evaluating mutual funds, investors usually consider only the past returns generated by the fund without considering the risk associated with it. Considering all the factors, the funds were re-ranked and the best fund was Reliance Vision Fund which had scored the lowest mean rank obtained by Friedmans test. Reliance Growth Fund was close to it at the second position and Franklin Prima Fund was at the third. Alliance Equity Fund and Taurus Starshare Fund were the worst performing funds as both had a very high mean rank and sharing the last position. The research can be extended to many other funds, i.e. those investing in the foreign markets, other investment vehicles, etc The growth level of the Indian mutual fund industry, when compared to US is very slow. As India has a very few number of mutual fund companies and the contribution of these companies to the global mutual fund industry is negligible. Indian mutual fund industry has a long way to go; a lot of new developments can be witnessed as many foreign companies are entering in the scenario, mutual funds are trying to tap the savings of the general public in form of investments, creating awareness about their services, getting into the rural markets trailing the insurance industry and tapping resources. The major challenge that mutual funds have to face is the transition path for investor funds away from Government-sponsored, risk free products to market related instruments. Hence, the road ahead goes on

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BIBLIOGRAPHY
www.amfiindia.com www.mutualfundsindia.com www.mutualfundanalysis.com www.investsmartindia.com www.personalfn.com www.finance.yahoo.com S.Anand and Dr. V. Murugaiah, Mutual Funds In India, JIMS 8M, September 2004 Cooper and Schindler, Business Research Methods, eighth edition Frank K. Reilly and Keith C. Brown, Investment Analysis and Portfolio Management

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