05-11-2016, 04:37 PM
1465564757-FINALPROJECTONMUTUALFUND.docx (Size: 374.52 KB / Downloads: 7)
EXECUTIVE SUMMARY
A mutual fund is a scheme in which several people invest their money for a common financing cause. The collected money invests in the capital market and the money, which they earned, is divided based on the number of units, which they hold.
Mutual funds are easy to buy and sell. You can either buy them directly from the fund company or through a third party. Before investing in any funds one should consider some factor like objective, risk, fund manager’s and scheme track record, cost factor etc.
A code of conduct and registration structure for mutual fund intermediaries, which were subsequently maintained by SEBI. In addition, also AMFI was involved in a number of developments and enhancements to the regulatory framework.
This project “MUTUAL FUND (a comparative analysis)” gave me a great learning experience and at the same time it gave me enough scope to implement my analytical ability. This project is basically taken various mutual fund schemes of the some top companies in India. The analysis of the project will give the performance of selected schemes on the basis of risk and return.
This Project report will also give the performance of selected schemes with benchmarks index to see whether the schemes is outperforming or underperforming the benchmark.
This project as a whole can be divided into two parts.
The first part gives an insight about mutual fund and its various aspects, the company profile, objectives of the study, research methodology. One can have a brief knowledge about mutual fund and its basics through the project.
The second part of the project consists of data interpretation and its analysis part. The analysis part of the project is consisting of various mutual fund schemes of some top companies.
This project undertaken deals with Investors with regard to mutual funds that is the schemes they prefer, the plans they are opting, the reasons behind such selections and also this project dealt with different investment options, which people prefer along with and apart from mutual funds. Like postal saving schemes, recurring deposits, bonds and shares. The findings from this project is that most of the people are hesitant in going for new age investments like mutual funds and prefer to avert risks by investing in less riskier investment options like recurring deposits and so. Also people going for investment in mutual funds are not going for high-risk portfolios and schemes but want to go for medium risk elements. And another finding is that most of the working women do not prefer this type of investments.
COMPANY PROFILE
Bhubaneswar Stock Exchange (BhSE) was initially incorporated on the 17th April, 1989 as a Company limited by guarantee without having share capital with an object to facilitate, assist, regulate and control the business of dealing in stocks, shares and like securities in the State of Orissa. Ministry of Finance, Govt. Of India, New Delhi granted recognition to Company on 5th June, 1989 under the provisions of the Securities Contracts (Regulation) Act, 1956 and the Rules made there under for an initial period of five years to perform the role of a Stock Exchange. At present, the said recognition of BhSE is being renewed by Securities and Exchange Board of India (SEBI) from time to time.
The affairs of the BhSE are managed by a Board of Directors consisting 9 Directors from the following categories :-
1. 4 (Four) Public Interest Directors
2. 4 (Four) Shareholder Directors
3. 1 (One) Director in the capacity of Managing Director (BhSE)
The trading membership strength of Bhubaneswar Stock Exchange is 196 at present against the sanctioned strength of 350.
The present paid-up capital of Bhubaneswar Stock Exchange (BhSE) is Rs.57,98,980/- as against the authorised capital of Rs.1,00,00,000/- arising out of issue of Rs. 57,98,980/- equity shares of Re. 1/- each . In that 100 trading members of BhSE are holding Rs. 20,51,980/- equity shares of Re.1/- each, while 44% including the corporate bodies other than trading member shareholders are holding Rs.37,47,000/- equity shares of Re.1/-.
INTRODUCTION & REVIEW OF LITRATURE
Introduction of Mutual Fund
There are al lot of investment avenues available today in the financial market for an investor with an investable surplus. He can invest in Bank deposits, corporate debentures and Bonds where there is low risk but low return. He may invest in stock of companies where the risk is high and the returns are also proportionately high. The recent trend in stock market have shown that an average retail investor always lost with periodic bearish tends. People began opting for portfolio managers with expertise in stock markets who would invest on their behalf.
Thus we had wealth management services provided by many institutions. ; However, they proved costly for a small investor. These investors have found a good shelter with the mutual funds.
There are many reasons why investors prefer mutual funds . Buying shares directly from the market is one way of investing. But this requires spending time to find out the performance of the company whose share is being purchased, understanding the future business prospects of the company, finding out the track record of the promoters and the dividend, bonus issue history of the company etc. An informed investor needs to do research before investing. However, many investors find it cumbersome and time consuming to pore over so much of information, get access to so much of details before investing in the shares. Investors therefore prefer the mutual fund route.
They invest in a mutual fund scheme which in turn takes responsibility of investing in stocks and shares after due analysis and research. The investor need not bother with researching hundreds of stocks. It leaves it to the mutual fund and it is professional fund management team. Another reason why investors prefer mutual funds is because mutual funds offer diversification. An investor’s money is invested by the mutual fund in a variety of shares, bonds and other securities thus diversifying the investors portfolio across different companies and sectors. This diversification helps in reducing the overall risk of the portfolio. It is also less expensive to invest in a mutual fund since the minimum investment amount in mutual fund units is fairly low (Rs. 500 or so). With Rs. 500 an investor may be able to buy only a few stocks and not get the desired diversification. These are some of the reasons why mutual funds have gained in popularity over the years.
Indians have been traditionally savers and invested money in traditional savings instruments such as bank deposits. Against this background, if we look at approximately Rs. 7 lakh crores which Indian Mutual Funds are managing, then it is no mean an achievement. A country traditionally putting money in safe, risk-free investments like Bank FDs, Post Office and Life Insurance, has started to invest in stocks, bonds and shares – thanks to the mutual fund industry.
However, there is still a lot to be done. The Rs. 7 lakh crores stated above, includes investments by the corporate sector as well. Going by various reports, not more than 5% of household savings are channelized into the markets, either directly or through the mutual fund route. Not all parts of the country are contributing equally into the mutual fund corpus. 8 cities account for over 60% of the total assets under management in mutual funds. These are issues which need to be addressed jointly by all concerned with the mutual fund industry. Market dynamics are making industry players to look at smaller cities to increase penetration. Competition is ensuring that costs incurred in managing the funds are kept low and fund houses are trying to give more value for money by increasing operational efficiencies and cutting expenses. As of today there are around 40 mutual funds in the country. Together they offer around 1051 schemes to the investor. Many more mutual funds are expected to enter India in the next few years. All these developments will lead to far more participation by the retail investor and ample of job opportunities for young Indians in the mutual fund industry. This module is designed to meet the requirements of both the investor as well as the industry professionals, mainly those proposing to enter the mutual fund industry and therefore require a foundation in the subject. Investors need to understand the nuances of mutual funds, the working of various schemes before they invest, since their money is being invested in risky assets like stocks/bonds (bonds also carry risk). .
Concept of Mutual Fund
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. They money thus collected is then invested in capital market instruments such as equities, debentures and other securities. The income earned through these investments and the capital appreciation realized (after deducting the expenses and profits of mutual fund managers) is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund strives to meet the investment needs of the common man by offering him or her opportunity; to invest in a diversified, professionally managed basket of securities at a relatively low cost. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with a surplus of as little as a few thousand rupees can invest in Mutual Funds.
Organization of a Mutual Fund
There are many entities involved and the diagram below illustrates the organizational set up of a Mutual Fund.
Working of Mutual Fund :-
A Mutual Fund is a collection of stocks, bonds, or other securities owned by a group of investors and managed by a professional investment company. For an individual investor to have a diversified portfolio is difficult. But he can approach to such company and can invest into shares. Mutual funds have becomes very popular since they make individual investors to invest in equity and debt securities easy. When investors invest a particular amount in Mutual Funds, he becomes the unit holders of corresponding units. In turn, mutual funds invest unit holders’ money in stocks, bonds or other securities that earn interest or dividend. This money is distributed to unit holders. If the fund gets money by selling some stocks at higher price the unit holders also are liable to get capital gains.
Mutual Funds :-Structure in India
For anybody to become well aware about mutual funds, it is imperative for him or her to know the structure of a mutual fund. How does a mutual fund come into being? Who are the important people in a mutual fund? What are their roles? Etc. We will start our understanding by looking at the mutual fund structure in brief.
Mutual Funds in India follow a 3 tier structure. There is a Sponsor (the First tier), who thinks of starting a mutual fund. The Sponsor approaches the Securities and Exchanges Board of India (SEBI), which is the market regulator and also the regulator for mutual funds.
Not everyone can start a mutual fund. SEBI checks whether the person is of integrity, whether he has enough experience in the financial sector, his networth etc. Once SEBI is convinced, the sponsor creates public trust(the second tier) as per the Indian Trusts Act,1882. Trusts have no legal identity in India and cannot enter into contracts, hence the Trustees are the people authorized to act on behalf of the Trust. Contracts are entered into in the name of the Trustees. Once the Trust is created, it is registered with SEBI after which this trust is known as the mutual fund.
It is important to understand the difference between the sponsor AND THE Trust. They are two separate entities. Sponsor is not the Trust: i.e. Sponsor is not the mutual fund. It is the Trust which is the Mutual Fund.
The Trustees role is not to manage the money. Their job is only to see, whether the money is being managed as per stated objectives. Trustees may be seen as the internal regulators of a mutual fund.
History of Mutual Fund :-
In 1774, a Dutch merchant invited subscriptions from investors to set up an investment trust by the name of Eendragt Maakt Magt (translated into English, it means, Unity Creates Strength), with the objective of providing diversification at low cost to small investors. Its success caught on, and more investment trust were launched, with verbose and quirky names that when translated read profitable and prudent or small maters grow by consent. The foreign land colonial Govt. Trust, formed in London in 1868, promised start the investor of modest means the same advantages as the large capitalist... by spreading the investment over a number of stock.
When three Boston securities executives pooled their money together in 1924 to create the first mutual fund, they had no idea how popular mutual funds would become. The idea of pooling money together for investing purposes started in Europe in the mid- 1800s. The first pooled fund in the U.S. was created in 1893 for the faculty and staff of Harvard University. On March 21st , 1924 the first official mutual fund was born. It was called the Massachusetts Investors Trust. After one year, the Massachusetts Investors Trust grew from $ 50,000 in assets in 1924 to $ 392,000 in assets (with around 200 shareholders). In contrast, there are over 10,000 mutual funds in the U.S. today totalling around $ 7 trillion ( with approximately 83 million individual investors) according to the Investment Company Institute.
HISTORY OF MUTUAL FUNDS IN INDIA :-
The Evolution :
The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual fund industry in India can be better understood divided into following phases :
Phase I. – 1964-87 (Establishment and Growth of Unit Trust of India) :
Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US – 64), which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children’s Gift Growth Fund and India Fund (India’s first offshore fund) in 1986, Master share (India’s first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI’s assets under management grew ten times to Rs. 6700 crores.
Phase II. – 1987-1993 (Entry of Public Sector Funds) :
The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share.
Phase III. – 1993 - 2003 (Entry of Private Sector Funds) :
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered 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.
Phase IV. – Since February 2003 :
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs. 29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund 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 assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund.
Advantages of Mutual Fund :-
1. Professional management : An average investor lacks the knowledge of capital market operations and does not have large resources to reap the benefits of investment. Hence, he requires the help of an expert. It, is not only expensive to ‘hire the services’ of an expert but it is more difficult to identify a real expert. Mutual funds are managed by professional managers who have the requisite skills and experience to analyse the performance and prospects of companies. They make possible an organised investment strategy, which is hardly possible for an individual investor.
2. Portfolio 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 riskiness of the investments.
3. Reduction in transaction costs : Compared to direct investing in the capital market, investing through the funds is relatively less expensive as the benefit of economies of scale is passed on to the investors.
4. Liquidity : Often, investors cannot sell the securities held easily while in case of mutual funds, they can easily encash their investment by selling their units to the fund if it is an open-ended scheme or selling them on a stock exchange if it is a close-ended scheme.
5. Convenience : Investing in mutual fund reduces paperwork, saves time and makes investment easy.
6. Flexibility : Mutual funds offer a family of schemes, and investors have the option of transferring thir holdings from one scheme to the other.
7. 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. 9,000 allowed under section 80L of the Income Tax Act.
In case of individual and Hindu Undivided Family a reduction upto Rs. 9000 from the total income will be admissible in respect of income from investments specified in section 80L including income from units of the mutual fund. Units of the scheme are not subjected to Wealth Tax and Gift-Tax.
8. 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.
9. Stability to the stock market Mutual funds have a large amount of funds which provide them economics of scale by which they an absorb any losses in the stock market and continue investing in the stock market. In addition, mutual funds increase liquidity in the money and capital market.
10. Equity research Mutual funds can afford information and data required for investment as they have large amount of funds and equity research teams available with them.
Regulatory Framework :-
Securities and Exchange Board of India (SEBI)
The Government of India constituted Securities and Exchange Board of India, by an Act of Parliament in 1992, the apex regulator of all entities that either raise funds in the capital markets or invest in capital market securities such as shares and debentures listed on stock exchanges. Mutual funds have emerged as an important institutional investor in capital market securities. Hence they come under the purview of SEBI. SEBI requires all mutual funds to be registered with them. It issues guidelines for all mutual fund operations including where they can invest, what investment limits and restrictions must be complied with, how they should account for income and expenses, how they should make disclosures of information to the investors and generally act in the interest of investor protection. To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. MF either promoted by public or by private sector entities including one promoted by foreign entities are governed by these Regulations. SEBI approved Asset Management Company(AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody. According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent.
Associations of Mutual Funds in India (AMFI)
With the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non-profit organisation. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August, 1995.
AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its member. It functions under the supervision and guidelines of its Board of Directors.
Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical line enhancing and maintaining standards. It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders.
The objectives of Association of Mutual Funds in India
The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows:
This mutual fund association of India maintains high professional and ethical standards in all areas of operation of the industry.
It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of mutual fund and asset management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association.
AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry.
Association of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry.
It develops a team of well qualified and trained Agent distributors. It implements a program of training and certification for all intermediaries and other engaged in the mutual fund industry.
AMFI undertakes all India awareness program for investors in order to promote proper understanding of the concept and working of mutual funds.
At last but not the least association of mutual fund of India also disseminate information on Mutual Fund Industry and undertakes studies and research either directly or in association with other bodies.
Open – Ended Schemes : 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 Schemes : 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. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.
Interval Schemes: 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.
Overview of existing schemes existed in mutual fund category : BY NATURE
Equity fund: 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)
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk return matrix.
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.
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.
Monthly income plans (MIPs): Invest 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 risk-return matrix when compared with other debt schemes.
Short Term Plans (STPs): Meant for investment horizon for three to six months. 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: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate house and are meant for an investment horizon of 1 day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.
Balanced funds: They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.
Further the mutual funds can be broadly classified on the basis of investment parameter. It means each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and can invest accordingly.
By investment objective:
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.
Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
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.
Money Market Schemes: Money Market Schemes aim 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.
Other schemes
Tax Saving Schemes:
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec. 80C of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.
Index Schemes:
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the Nifty 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 the securities of only those sectors or industries as specified in the offer documents. Ex-Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.
1.1 Terms used in Mutual Fund
• Asset Management Company (AMC)
An AMC is the legal entity formed by the sponsor to run a mutual fund. The AMC is usually a private limited company in which the sponsors and their associates or joint venture partners are the shareholders. The trustees sign an investment agreement with the AMC, which spells out the functions of the AMC. It is the AMC that employs fund managers and analysts, and other personnel. It is the AMC that handles all operational matters of a mutual fund - from launching schemes to managing them to interacting with investors.
• 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 Act, 1908. The Trust appoints the Trustees who are responsible to the investors of the fund.
• Trustees
Trustees are like internal regulators in a mutual fund, and their job is to protect the interests of the unit holders. Trustees are appointed by the sponsors, and can be either individuals or corporate bodies. In order to ensure they are impartial and fair, SEBI rules mandate that at least two-thirds of the trustees be independent, i.e., not have any association with the sponsor.
Trustees appoint the AMC, which subsequently, seeks their approval for the work it does, and reports periodically to them on how the business being run.
• NAV
Net Asset Value is the market value of assets of the scheme minus its liabilities. The per unit NAV is the asset value of the scheme divided by the number of its units outstanding on the Valuation Date. The NAV is usually calculated ON A DAILY BASIS.In terms of corporate valuations, the book values of assets less liability.
The NAV is usually below the market price because the current value of the fund’s assets is higher than the historical financial statements used in the NAV calculation.
Market Value of the Assets in the Scheme + Receivables + Accrued Income- Liabilities – Accrued Expenses
NAV = -----------------------------------------------------------------------------------------------------
No. of units outstanding
Where,
Receivables: Whatever the profit is earned out of sold stocks by the mutual fund is called
Receivables
Accrued Income: Income received from the investment made by the Mutual Fund.
Liabilities: Whatever they have to pay to other companies are called liabilities.
Accrued Expenses: Day to day expenses such as postal expenses, printing, advertisement expenses etc.
It states that the value of the money has appreciated since it is more than the face value.
• Sale Price
Is the price we pay when we invest in a scheme. Also called Offer Price. It may include a sales load.
• Repurchase Price
Is the price at which units under open-ended schemes are repurchased by the Mutual Fund. Such prices are NAV RELATED.
• Redemption Price
Is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV related.
• Sales Load
Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes.
• Repurchase or ‘Black-end’ Load
Is a charge collected by a scheme when it buys back the units from the unit holders
• CAGR (Compounded annual growth rate)
The year-over-year growth rate of an investment over a specified period of time. The compounded annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.
1___
Ending Value # of years
CGAR = --------------------- - 1
Beginning Value
HOW TO CHECK THE FUND’S RISK :-
So how would you figure out how risky a mutual fund is ?
Value Research a mutual fund research outfit, carries out a rating every month which is also carried on rediff.com. If you would like to take a look at the latest rating, click on the relevant month viz March, April, May.
In this rating, each fund is given a star. The funds with a 5-star(*) rating are the best. Those with a 1-star(*) rating are the worst.
This star rating is based on risk-adjusted return. In a very simple way, it gives investors an understanding of whether a fund is taking an acceptable amount of risk in generating the kind of returns it is doing.
Basis Of Comparison Of Various Schemes Of Mutual Funds
• Beta
Beta measures the sensitivity of the stock to the market. For example if beta= 1.5; it means the stock price will change by 1.5% for every 1% change in Sensex. It is also used to measure the systematic risk. Systematic risk means risks which are external to the organization like competition, government policies. They are non-diversifiable risks.
Beta is calculated using regression analysis, Beta can also be defined as the tendency of a security’s returns to respond to swings in the market. A beta of 1 indicates that the security’s price will move with the market. A beta less than 1 means that the security will be less volatile than the market. A beta greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market.
Beta> 1 then aggressive stocks
If 1 beta< 1x then 1 defensive 1stocks
If beta=1 then neutral
So, it’s a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Calculation of BETA
Beta coefficient is given by the following formulas:
Covariance of Market Return with Stock Return
β = ¬¬¬¬¬¬¬¬¬¬———————————————————
Variance of Market return
Correlation Coefficient
β = ———————————
Between Market and Stock
Standard deviation of Stock returns
——————————————
Standard Deviation of Market Return
• Alpha
Alpha takes the volatility in price of a mutual fund and compares its risk adjusted performance to a benchmark index. The excess return of the fund relative to the returns of benchmark index is a fundamental ALPHA. It is calculated as a return which is earned in excess of the return generated by CAPM. Alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund’s return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate underperformance of 1%.
If a CAPM analysis estimates that a portfolio should earn 35% return based on the risk of the portfolio but the portfolio actually earns 40%, the portfolio’s alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model. This 5% is ALPHA.
• Sharpe Ratio
A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.
rp — rf
= ——————
Op
Where :
rp = Expected portfolio return
rf = Risk free rate
Op = Portfolio standard deviation.
The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been.
• Treynor Ratio
The treynor ratio, named after Jack Treynor, is similar to the Sharpe ratio, except that the risk measure used is Beta instead of standard deviation. This ratio thus measures reward to volatility.
Treynor Ratio = (Return from the investment - Risk free return) / Beta of the investment. The scheme with the higher treynor Ratio offers a better risk-reward equation for the investor.
Since Treynor Ratio uses Beta as a risk measure, it evaluates excess returns only with respect to systematic (or market) risk. It will therefore be more appropriate for diversified schemes, where the non-systematic risks have been eliminated. Generally, large institutional investors have the requisite funds to maintain such highly diversified portfolios.
Also since Beta is based on capital asset pricing model, which is empirically tested for equity. Treynor Ratio would be inappropriate for debt schemes.