24-07-2012, 11:01 AM
PERFORMANCE EVALUATION OF MUTUAL FUNDS
PERFORMANCE EVALUATION.pdf (Size: 636.99 KB / Downloads: 84)
ABSTRACT
I prepared these papers as a part of internship. In this report I included activities at internship
Company, mainly general information about Mutual Fund product and evaluate the
performance of 10 Equity Diversified Mutual Funds of India. I gave brief description of
various terms of Mutual Fund. What is Mutual Fund, various types of Mutual Funds,
advantages, risk associated with funds, growth history of Mutual fund, how to select best
mutual fund, tax benefit available, etc. I use risk adjusted performance measures suggested
by Treynor, Sharpe, and Jensen to analyze the selected funds. From the evaluation of funds, I
found that all ratios i.e. Treynor, Sharpe, and Jensen show almost same result. ICICI
Prudential Discovery Fund obtains first rank in all three measurements. So further I give
detail analysis of these funds to help investors in how to evaluate particular fund.
I was as interns in JD Financial Services. I was selected there for Mutual Fund area. There I
evaluate all types of Mutual Funds and select best performing mutual funds to recommend
the investors. Here in this report I describe what I have done to study Mutual Funds.
A BRIEF OF MUTUAL FUNDS
Definition
Mutual funds are investment companies that pool money from investors at large and offer to
sell and buy back its shares on a continuous basis and use the capital thus raised to invest in
securities of different companies. The stocks these mutual funds have are very fluid and are
used for buying or redeeming and/or selling shares at a net asset value. Mutual funds posses
shares of several companies and receive dividends in lieu of them and the earnings are
distributed among the share holders.
Mutual funds can be either or both of open ended and closed ended investment companies
depending on their fund management pattern. An open-end fund offers to sell its shares
(units) continuously to investors either in retail or in bulk without a limit on the number as
opposed to a closed-end fund. Closed end funds have limited number of shares.
Mutual funds have diversified investments spread in calculated proportions amongst
securities of various economic sectors. Mutual funds get their earnings in two ways. First is
the most organic way, which is the dividend they get on the securities they hold. Second is by
the redemption of their shares by investors will be at a discount to the current NAVs (net
asset values).
HISTORY OF MUTUAL FUNDS IN INDIA
The mutual fund industry is a lot like the film star of the finance business. Though it is
perhaps the smallest segment of the industry, it is also the most glamorous – in that it is a
young industry where there are changes in the rules of the game everyday, and there are
constant shifts and upheavals.
The mutual fund is structured around a fairly simple concept, the mitigation of risk through
the spreading of investments across multiple entities, which is achieved by the pooling of a
number of small investments into a large bucket. Yet it has been the subject of perhaps the
most elaborate and prolonged regulatory effort in the history of the country.
The mutual fund industry started in India in a small way with the UTI Act creating what was
effectively a small savings division within the RBI. Over a period of 25 years this grew fairly
successfully and gave investors a good
return, and therefore in 1989, as the next logical step, public sector banks and financial
institutions were allowed to float mutual funds and their success emboldened the government
to allow the private sector to foray into this area. The initial years of the industry also saw the
emerging years of the Indian equity market, when a number of mistakes were made and
hence the mutual fund schemes, which invested in lesser-known stocks and at very high
levels, became loss leaders for retail investors. From those days to today the retail investor,
for whom the mutual fund is actually intended, has not yet returned to the industry in a big
way. But to be fair, the industry too has focused on brining in the large investor, so that it can
create a significant base corpus, which can make the retail investor feel more secure.
Impact of local and international developments
During the year we had two major political developments that affected the mutual fund
industry. The standoff between India and Pakistan at the beginning of the financial year saw
the debt market being extremely volatile. Investors pulled out of funds and this also put
pressure on fund managers to hold returns and at the same time meet redemption
commitments. The equity markets were equally subdued but the industry did not react greatly
to this since equity funds were in any case not a significant part of the mobilization in the last
few years.
With the stand down on the Indian side, the debt markets recovered and with that the inflow
of funds into our industry soared once again. But at the end of the year the industry was hit by
another war – the impending US attack on Iraq and consequent oil price pressures once again
made the debt market volatile. It is a mark of the maturing of the Indian investor that
redemptions were only need based and the industry did not see as much outflows as one
feared.
Product innovations
With the bond yields plateauing and with the mutual fund industry trying to attract people to
the equity market, the year also saw some remarkable products flavors for Indian investors.
Birla Sunlife Mutual Fund led the pack with an equity fund focused on dividend yield stock,
a bond index fund and a bond-for-units swap product. Some of the other innovative products
were the series of exchange-traded funds from Benchmark, including a liquid index traded
fund. Prudential- ICICI also launched an exchange-traded fund, the SPICE, in association
with BSE.
The industry focused also on making existing products more attractive by adding on a
number of service features and cost control measures. Same day redemption in liquid funds,
“institutional” plans which would reduce the overall cost of investment and bonus units in
lieu of dividend were some of these features.
SYSTEMATIC INVESTMENT PLAN
SIP is an investment option that is presently available only with mutual funds. The other
investment option comparable to SIPs is the recurring deposit schemes from Post office and
banks. Basically, under an SIP option an investor commits making a regular
(monthly/quarterly) investment in a particular mutual fund/deposit.
Investor can now use auto debit (ECS) facility from Banks to automatically debit SIP amount
from your account. There is no need to give bulk of cheques for SIP. For that you should
have account in nationalized banks. For SIP through ECS, you have to provide bank details
like account no., branch name, MICR no. etc.