Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------INTRODUCTION Mutual fund is one of the most preferred investment

route by small investor, who allocate part of their funds to capital market. In India, the mutual funds industry has been in existence for more than four decades. Unit Trust of India (UTI) was the first mutual fund to be set up in India under the UTI Act 1963. In 1987, the Government allowed mutual funds to be promoted by public sector banks and other financial institutions and in 1993 the doors were opened for private sector mutual funds. As on June 3, 2006, Association of Mutual Funds of India (AMFI) reported that there are 29 mutual funds in India offering 592 schemes with an investment in assets of about 60 billion US dollars. In view of large investor interest, the performance of mutual fund managers needs continuously evaluated. The performance studies deal mainly with two aspects (1) evaluating stock selection skills and (2) examining the market timing abilities of the fund managers. Studies of stock selection date back to Jensen (1969) who finds that managers deliver negative abnormal returns. Using more recent data Ippolito (1989) finds evidence of positive abnormal returns. However, Elton et al (1992) show that the benchmark chosen by Ippolito causes this result. Using, multi-factor model, they find that abnormal fund returns are on average negative. CONCEPTUALIZATION OF MUTUIAL FUND 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 then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are 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 investment-illiterate people as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

-1------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------INDIAN MUTUAL FUINDS The origin of Mutual Fund Industry in India is with the introduction of the concept of mutual fund by Unit Trust of India (UTI) in the year 1963. Though the growth was slow initially, it has been accelerated from the year 1987 when non-UTI players entered the industry. With the boom of June 1990 and then again 1991 due to the implementation of new economic policies leading to structural change of securities pricing in stock market, the performance of the mutual fund industry is encouraging. Because, individual investors have been emphasized in India in contrast to advanced countries where mutual funds depend largely on institutional investors. In general, it appears that the mutual fund in India have given a good account of itself so far. 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. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses goes 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 2005, there were 33 mutual funds with total assets of Rs.121805 cores. The industry has grown in size and manages total assets of more than $30351 million. Of the various sectors, the private sector accounts for nearly 91% of the resources mobilized showing their overwhelming dominance in the market. Individuals constitute 98.04% of the total number of investors and contribute US $12062 million, which is 55.16% of the net assets under management.

-2------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

STRUCTURE OF MUTUAL FUND IN INDIA

Sponsor Akin to the promoter of the company Establishes the fund Gets it registerd with SEBI Forms the trust, and appoints board of trustees

Trustees Hold assets on behalf of the unit holders in the trust Appoint asset management company and ensure that all the activities of the AMC are in accordance with the SEBI regulations Appoint the custodian of the fund

Custodian Holds the funds securities in safekeeping Settles securities transactions for the fund Collects interests and dividends paid on securities, and Records information on stock splits and other corporate actions. Distributors/agents Sell units on behalf of the fund Banker Facilitates financial transactions Provide remittance facilities

Asset Management Company Floats schemes and manages them in accordance with the SEBI regulations

Registrar and transfer agents Maintains records of unit holders accounts and transactions Disburses and receives funds from the unit holder transactions, prepares and distributes account statements and tax information, handles unit holder communication, and Provides unit holder transaction services.

-3Banker ----------------------------------------------------------------------------------------------------------- Facilitates financial transactions Provide remittance facilities

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------The Models of Mutual Fund Performance Prior studies of mutual funds performance focus on stock selection or market timing ability. In this section, we describe the models for evaluating both the managerial skills along with innovations applied in recent literature. 1) Stock Selection A traditional approach to measure selectivity is to regress the excess returns of a portfolio on the market factor. Assuming that market beta (or slope coefficient) is constant, then the unconditional alpha (or intercept) is a measure of average performance, as in Jensen (1968), i.e.

where RPt - RFt and RMt - RFt are excess portfolio and market returns. And et is an error term. We can also measure selectivity using the Carhart (1997) four-factor model are the intercept and slope coefficients.

Where, RPt - RFt is the excess portfolio return FK = returns on the factors including the excess market return, the Fama-French (1993) size and book to market factors and Carhart's momentum factor. K = sensitivity coefficient = intercept term -4------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------Previous research shows that the last three factor capture most of the anomalies of Sharpe's (1964) single-factor CAPM. We include these additional factors to avoid rewarding managers for simply exploiting these anomalies. 2) Market Timing Market timing refers to the dynamic allocation of capital between broad asset classes.Treynor and Mazuy (1966) use the following regression to test for market timing:

Where Rpt - RFt is the excess return on a portfolio at time t, RMt - RFt is the excess return on , on the market and is a measure of timing ability. If a mutual fund manager

increases (decreases) the portfolio's market exposure prior to a market increase (decrease) then the portfolio's return will be a convex function of the market's return, and will be positive. Henriksson and Merton (1981) develop a different test of market timing. In their model, the mutual fund manager allocates capital between risk free assets and equities based on forecasts of the future excess market return, as we test a model with two target betas via the following regression:

Where r = 1 when RMt - RFt > 0, equal to 0 otherwise is used as a market timing measure in HM framework. We use both timing models to measure timing ability in our sample of mutual funds. Grinblatt and Titman (1994) show that the tests of market performance are quite sensitive to choice of benchmark. For this reason, we use the four-factor versions of

-5------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------equation (3) and (4) based on Carhart (1997) model and those that control for prominent CAPM anomalies as stated in the previous sub-section. The modified market timing models are used in Bollen and Busse [(2001), (2005)] and look like

For the TM model where F2 1t is the square value of factor 1, i.e., the excess market return while additional factors in the summation represent size, value and momentum factors; and

For the HM model, where Dt = 1 for F1 (RM - RF) to be positive and Dt = 0 for F1 (RM RF) to be zero or negative. However, timing measures in (5) and (6) do not provide a complete picture. In these versions, -market timing simply means increasing (decreasing) the sensitivity (or slope coefficient) of fund returns to market returns using market upturns (downturns). The presence of additional factors that control for investment style characteristics may warrant a multi-dimensional market timing ability. For instance, besides timing the market factor, the fund managers may be timing the size, value as well as the momentum factors. Thus, market timing also implies increasing (decreasing) the sensitivity of fund returns to size, value and momentum factors during the periods when small firms are expected to outperform (underperform) big firms, high book to market equity or BE/ME firms are expected to outperform (underperform) low BE/ME firms and stocks with high short-term past returns (past winners) are expected -6------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------to outperform (underperform) stocks with low short-term past returns (past osers). This requires measuring of additional timing coefficients in the multi-factor regressions. This ill lead to the following versions of the abovesaid models:

for TM model where rs represent timing measures for each factor, and

where DK s are dummy variables for the slope coefficient of each factor, such that

-7------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

The RM - RF, SMB, HML and WML depict market size, value and momentum factors respectively whose construction is explained in a later section. We believe that our model versions given in (7) and (8) shall provide a more comprehensive inference about market timing abilities of fund managers.

-8------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------3) Data The data comprises of dividend-adjusted Net Asset Values (NAVs) for 59 natural fund schemes fromJanuary 2000 to December 2004. 57 of the sample schemes have a reinvestment option and hence weuse their re-investment based NAVs. All the sample schemes are open-ended in nature and are predominantly equity-based with growth and growth-income as their objectives. The NAV values are used to estimate percentage daily and monthly returns for the sample schemes. We also collectinformation about entry load and management expenses for the sample funds. The data source is ICRA Mutual Funds Software. The data set is limited due to non-availability of regular NAV and expenses information both cross-sectionally as well as over long periods of time. We also use individual securities data for the construction of size, value and momentum factorsin returns both on daily and monthly basis. The data includes daily share prices for 452 companies thatform part of BSE-500 index from January 1999 to December 2003. The sample securities account formore than 90% of market capitalisation and market trading activity. Hence, the sample set is fairlyrepresentative of market performance. The share prices are adjusted for capitalisation changes, such asbonus, rights and stock splits and are used to compute percentage returns on the sample securities. Theshare prices are obtained from Smart Investor, a technical software.

The Bombay Stock Exchange (BSE)-500 index is used as the surrogate for aggregate economic wealth. The BSE-500 series is available from January 2000 onwards. We therefore splice this series with the BSE-100 series for the year 1999 as the correlation between the two indices is 0.93 for the 2000-2004 period. BSE-500 is a broad-based and value weighted market proxy constructed on lines of Standard & Poor, USA. The data source is BSE website. The 91-day treasury-bills are used as a riskfree proxy and are compiled from the Reserve Bank of India (RBI) website. We also collect information for company characteristics such as market capitalisation (price times number of shares outstanding) and book equity to market equity (BE/ME) ratios for the sample companies. The annual figures for market capitalisation and -9------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------BE/ME are obtained for December-end and March-end respectively from CMIE Provess, a financial software.

4) Estimation Procedure We estimate one measure of stock selectivity, i.e., the Jensen's model and two measures of market timing, i.e., TM and HM models. We deal with two important issues in the estimation process: (1) model selection and rectification of inherent biases and (2) observation frequencies and the related correction procedure. We estimate our performance measures of selectivity and market timing abilities using both one-factor as well as multi-factor benchmarks which are described in Section 2. The latter shall provide a selectivity measure (or alpha) that is net of compensations to investment style characteristics. It shall also provide a matrix of market timing measures for TM and HM models, where in addition to the market timing coefficient, we obtain timing measurers for characteristic-based portfolios. A comparison of results between onefactor (traditional) and four-factor (modified) versions of performance models shall bring to light how the style characteristics affect fund performance. The four-factor model needs construction of three additional factors, besides the excess market return factor provided by standard CAPM. Two of the additional factors, i.e., size and value factors are computed based on Fama-French (1993) methodology. Using the market capitalisation at the end of calendar year t-1, we sort the 452 sample stocks that form part of the BSE-500 index into two groups using median break point: small or S (bottom 50%) and big or B (top 50%). We re-rank the stocks on the basis of book equity to market equity (BE/ME) ratio observed in March t-1 and form three groups: low (bottom 33.3%), medium (between 33.3% - 66.6%) and high (above 66.6%). The BE/ME information is available only in March each-year as India has a April-March financial year. Combining the two size and three BE/ME groups, we generate six portfolios, i.e., S/L, S/M, S/H, B/L, B/M and B/H. While S/L represents small cap and low BE/ME stocks, B/H comprises of big cap high BE/ME firms. The equally-weighted monthly (daily) returns are calculated on each of the six portfolios for the year t. The portfolios are rebalanced at the end of t based on fresh information on company size and BE/ME for the sample stocks. -10------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------We use the six sample portfolios to construct the size (SMB) factor. SMB (small minus big) is measured as a difference between the average monthly (daily) returns on the small stock portfolios and the average returns on the big stock portfolios. The construction procedure ensures that the size factor is neutral of value effect. Similarly, we construct value (HML) factor in returns. The HML (High minus Low) factor is the monthly (daily) difference in the average returns on high BE/ME portfolios and the average returns on low BE/ME portfolios. The value effect is free of size effect by construction. We also construct the Carhart (1997) momentum factor. We rank the sample stocks based on their average monthly (daily) returns for one-calendar year prior to portfolio formation, i.e., year t 1 and form five groups. The bottom 20% based on past returns are referred to as losers portfolio, while top 20% past performers form the winners portfolio. The momentum factor is defined as the difference between the returns on equally-weighted winners and losers portfolios or WML (Winners minus Losers). The portfolios are rebalanced at the end of t on one-year prior return criterion. The momentum (WML) factor has been estimated on monthly as well as daily basis. We identify Jagannathan and Korajczyk (1986) bias in our mutual funds data that may distort the results of our market timing measures. We adopt the bias correction procedure suggested by Bollen and Busse (2001). We specifically construct synthetic funds. Synthetic funds are boggy portfolios that mimic the style characteristics of actual mutual funds but are expected to possess no market timing ability by construction. Since we don't have daily portfolio compositions, we follow a construction methodology different from Bollen and Busse. We regress the excess returns on a sample fund on the six sizeBE/ME portfolios and the momentum (WML) portfolio. The regression is estimated through the origin and is constrained to have nonnegative betas (slope) which add to one. In this way, we can interpret these betas as weights or relative exposures to the style characteristics. We then estimate weighted characteristics return on period to period basis, i.e, where is the characteristic and weights and Rkt is the characteristic return in period t. We refer to this weighted characteristic portfolio as synthetic fund, as its mimics the characteristic properties of the actual mutual fund but without any active market timing ability. We construct a synthetic fund as a shadow for every sample fund. We estimate the timing -11------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------coefficients for the synthetic funds using one-factor and four-factor versions of TM and HM models. The acid test is to demonstrate that the timing coefficients for the sample funds significantly exceed those of synthetic funds. In most of the studies conducted so far, observations of mutual fund returns are recorded monthly or annually. As discussed by Goetzmann, Ingersoll, and Ivkovic (2000), hereafter referred to as (GII), a monthly frequency might fail to capture the contribution of a manager's timing activities to fund returns, because decisions regarding market exposure are made more frequently than monthly for most of the funds. We have daily observations of mutual fund returns. This allows us to directly overcome the problem investigated by Goetzmann et al. To determine whether observation frequency matters, we use both daily and monthly data to test the selectivity and timing skills of fund managers. We shall use in the next section that the tests using daily data are more powerful than those based on monthly data. Scholes and Williams (1977) point out that when estimating the parameters of a factor model of daily stock returns, infrequent trading can result in biased estimates of variance, serial correlation, and contemporaneous correlation between assets. This holds for portfolios of infrequently traded assets as well because variance of a portfolio is largely determined by the average covariance of the individual assets in the portfolio. While using daily data, we employ Dimson's (1979) correction and include lagged values of the factors as additional independent variables in the regression to accommodate infrequent trading.

5) Empirical Results-Tests of Stock Selection Table 1 provides the results for one-factor and four-factor Jensen's selectivity measure, using both monthly and daily data. We estimate mean alpha values for the sample -12------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------funds and provide the number of significantly positive alpha values at 5% level (on one-tail basis). 25% of the sample schemes (15 out of 60) exhibit statistically significant selectivity skills on the basis of one-factor benchamrk, when we use monthly data. The mean alpha decline marginally from .0040 to .0036 on monthly basis, once one accounts for investment style characteristics by shifting from one-factor to four-factor model. The number of significantly positive alpha values increase from 15 to 17 based on four factor benchmark as one employs daily instead of monthly data. Further, the mean alpha improves from 4.32% to 7.5% on annualised basis when we use daily instead of monthly return data. The mean alpha values have been annualised on the assumption of 250 trading days in a year. Thus, we observe that after controlling for style characteristics (by employing fourfactor benchmark), the evidence on stock selectivity improves, though not substantially, with higher observation frequency. This probably reflects that weak results on stock selectivity reported by most previous studies, may partially be an outcome of large data interval say use of monthly or annual data.

Table 1: Tests of selectivity based on Jensen Model Panel -A-Monthly Data -13------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------One factor Four factor Mean +ve significant Mean +ve significant values 0.0040712 15 0.0036 values 15

+ve- positive alpha values Panel -B-Daily Data One factor Mean 0. 0.00036 +ve 23 values Four factor Mean 0.0003 +ve significant values 17

+ve- positive alpha values

-14------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------Measures of Mutual Fund Holdings and Trades The holdings and trades of mutual funds to evaluate the stockselection abilities of fund managers. To examine which stocks are most widely held by mutual funds at the end of a given quarter, we compute a measure of aggregate stockholdings,

where Number of Shares Heldi,t is the aggregate number of shares of stock i held at the end of quarter t by all mutual funds, and Total Shares Outstandingi,t is the total number of stock i shares outstanding as of that date. If all mutual funds hold the market portfolio, then all stocks will have the same FracHoldings measure, which would be roughly 12.5 percent at the beginning of 1995. However, mutual fund managers actively managing their portfolios will have different levels of investments in different stocks and, hence, FracHoldings measures will vary substantially across stocks. If these managers have stock-selection talents, then we would expect that stocks with larger FracHoldings measures would have higher future returns than stocks with smaller FracHoldings measures. We measure aggregate trades of a stock by mutual funds as the quarterly change in the FracHoldings measure for that stock. Specifically, we define the aggregate trades of stock i during quarter t as

During quarters with net inflows into (outflows from) the mutual fund industry, Trades will generally be positive (negative), with some dampening due to any changes in the cash holdings of the funds. If managers actively pick stocks rather than passively -15------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------holding the market portfolio, then Trades will vary across stocks and will reflect the consensus opinion about the value of those stocks.5 Our Trades measure is, in some ways, similar to the portfolio change measure used by Grinblatt and Titman (1993; GT), but there are important differences. The GT measure computes the change in portfolio weight of each stock for each fund, then averages this measure across funds. Therefore, if a small fund buys a stock, while a large fund sells the same number of shares of that stock, the GT portfolio change measure will be positive. In contrast, our Trades measure will be zero, since we measure the net share trades across all funds. Also, the GT measure captures active fund trading as well as passive changes in portfolio weights that occur because of stock price changes during a quarter. Thus, stocks increasing significantly in price receive a larger portfolio-weight change than other stocks and, hence, the GT measure is tilted toward past winners. Our Trades measure, however, is designed to track only active trades by funds, and will not change when there are no net buys or sells by funds, in aggregate. In a later section of this paper, we examine the performance of stocks held and traded by funds with varying levels of portfolio turnover in order to determine whether funds trading more frequently outperform other funds. Data on portfolio turnover are obtained from the CRSP Mutual Fund files. CRSP defines the turnover of fund k during year t as

where Buysk,t (Sellsk,t) is the total value of stock purchases (sales) during year t by fund k, and TNAk,t is the average total net assets of fund k during year t. Note that the CRSP definition of mutual fund turnover uses the minimum of buys and sells, since the dollar value of buys minus sells is equal to the net inflow (or outflow) of money (controlling for changes in cash holdings). This definition of turnover, therefore, captures fund trading that is unrelated to investor inflows or redemptions.

-16------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------ASSET CLASS FACTOR MODELS Factor models are common in investment analysis. Equation (1) is a generic representation:

Ri represents the return on asset i, Fi1represents the value of factor 1, Fi2 the value of factor 2, Fin the value of the n'th (last) factor and ei the "non-factor" component of the return on i. All these values are (potentially) unknown before-the-fact, as indicated by the tildes. The remaining values (bi1 through bin) represent the sensitivities of Ri to factors Fi1 through Fin . A key assumption makes a model of this sort more than simply an exercise in data description: The nonfactor return for one asset (ei) is assumed to be uncorrelated with that of every other (e.g. ej). In effect, the factors are the only sources of correlation among returns. An asset class factor model can be considered a special case of the generic type. In such a model each factor represents the return on an asset class and the sensitivities (bij values) are required to sum to 1 (100%). In effect, the return on an asset i is represented as the return on a portfolio (shown by the sum of the terms in the bracketed expression) invested in the n asset classes plus a residual component (ei). For expository convenience, the sum of the terms in the brackets can be termed the return attributable to style and the residual component (ei) the return due to selection. Indeed, a key contribution of this approach is the separation of return into these two main components.

-17------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------EVALUATING ASSET CLASS FACTOR MODELS The usefulness of an asset class factor model depends on the asset classes chosen for its implementation. While not strictly necessary, it is desirable that such asset classes be 1) mutually exclusive, 2) exhaustive and 3) have returns that "differ". Pragmatically, each should represent a market-capitalization weighted portfolio of securities; no security should be included in more than one asset class; as many securities as possible should be included in the chosen asset classe; and the asset class returns should either have low correlations with one another or, in cases in which correlations are high, different standard deviations. While the appropriate measure of the efficacy of any specific implementation depends on the uses to which the model is to be put, factor models are typically evaluated on the basis of their ability to explain the returns of the assets in question (i.e. the Ris). A useful metric is the proportion of variance "explained" by the selected asset classes. Using the traditional definition, for asset i:

The right-hand side of equation (2) equals 1 minus the proportion of variance "unexplained". The resulting R-squared value thus indicates the proportion of the variance of Ri "explained" by the n asset classes1. It is important to recognize that this measure indicates only the extent to which a specific model fits the data at hand. A better test of the usefulness of any implementation is its ability to explain performance out-of-sample. For this reason it is important to consider not only the ability of a model to explain a given set of data but also its parsimony. Other things equal (e.g. R-squared values), the fewer the asset classes, the more likely is the model to represent continuing fundamental relationships with predictive content2. To evaluate the exposures of funds to changes in the returns of key asset classes, the appropriate measure is the collective ability of a set of such classes to explain the timeseries variability in the returns on a typical fund (e.g. mutual fund or separately-managed -18------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------institutional account). Note that this criterion differs from that often applied in evaluating factor models designed to describe specific portions of the overall capital market. For example, when constructing an equity factor model, one might consider the ability of the selected factors to explain the time-series variation in the returns of a typical stock. Most stock market models include factors representing returns on industry groups and/or economic sectors -- factors that account for much of the typical security's return. If most managers diversify across industries and economic sectors,however, inclusion of factors related to differences in industry and sector returns will add little if any explanatory power to a model designed to explain fund returns.

RELIANCE GROWTH FUND INVESTMENT OBJECTIVE -19------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------The primary investment objective of the scheme is to achieve long-term growth of capital by investing in equity and equity-related securities through a research-based investment approach. FUND DATA Structure . . . . . Open-ended Equity Growth Scheme Date of allotment . . . . . . . . . . . . . October 8, 1995 Inception Date . . . . . . . . . . . . . . . . October 8, 1995 Corpus . . . Rs 4337.02 crore (September 30, 2008) Minimum Investment . . . .Retail Plan- Rs 5,000 and in multiples of Re 1 thereafter . . . . . . . . . . . . . Institutional Plan (IP)- Rs 5 cr and in multiples of Re 1 thereafter Fund Manager . . . . . . . . . . . . . . . . . .Sunil Singhania Entry Load . . . . . . . . . . . . Retail Plan <2cr - 2.25%; >_2cr<5cr - 1.25%; >_5cr - Nil . . . . . . . . . . . . . . . . . . . . . . . . Institutional Plan: Nil Exit Load ......Retail Plan - For subscription of less than Rs 5 crs per transaction - 1% if redeemed/switched on or before completion of 1 year from the date of allotment, NIL if redeemed/switched after completion of 1 year from the date of allotment For subscription of Rs 5 crs and above per purchase transaction, no exit load shall be charged, . . . . . . . . . . . . . . . . . . . . . . . , Institutional Plan: Nil No Entry Load for Direct Investments w.e.f January 4, 2008 Benchmark. . . . . . . . . . . . . . . . . . . . BSE 100 Index

ASSET ALLOCATION -20------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

PORTFOLIO OF RELIANCE GROWTH FUND as on September 30, 2008 Holdings Equities Divis Laboratories Ltd. Weightage (%) 73.31 4.75

-21------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------Reliance Industries Ltd. 3.31 Jindal Saw Ltd. 3.30 Bank of Baroda 2.94 Lupin Ltd. 2.89 Jindal Steel & Power Ltd. 2.66 Sintex Industries Ltd. 2.15 United Phosphorus Ltd. 1.95 Reliance Communications Ltd 1.95 Shiv-Vani Oil & Gas Exploration Services Limited 1.93 Jaiprakash Associates Ltd. 1.81 Adani Enterprises Limited 1.78 Jain Irrigation Systems Ltd. 1.76 BEML Limited 1.68 ICICI Bank Ltd. 1.63 Kotak Mahindra Bank Ltd. 1.59 Maruti Suzuki India Ltd. 1.53 HCL Technologies Ltd. 1.45 Gujarat Mineral Development Corp Ltd. 1.44 State Bank of India 1.41 Bharti Airtel Ltd. 1.39 Reliance Infrastructure Limited 1.37 Britannia Industries Ltd. 1.28 Crompton Greaves Ltd. 1.27 Bombay Dyeing & Manufacturing Co. Ltd. 1.20 Orient Paper & Industries Ltd. 1.13 Aia Engineering Ltd. 1.10 Gujarat State Fertilizers & Chemicals Ltd. 1.09 Radico Khaitan Ltd 1.06 Equity Less Than 1% of Corpus 18.49 derivatives,debt,Cash and Other Receivables 26.69 Grand Total 100.00

VOLATILITY MEASURES Beta 0.9036 Standard Deviation -22------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------3.9664 R Squared 0.824 Sharpe Ratio 0.068 Portfolio Turnover Ratio 0.86 Note: The above measures have been calculated by taking rolling return for a 3 year period from 29/09/2005 with 8.65% Risk Free returns (taken as 91days T-bill yield as on 29/09/2008)

BIRLA SUN LIFE MIDCAP FUND -23------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------Investment Objective An open-ended growth scheme with the objective to achieve long-term growth of capital at controlled level of risk by primarily investing in midcap stocks. Fund Manager : Mr. A. Balasubramaniam & Mr. Sanjay Chawla Date of inception : October 3, 2002 Load Structure (Incl. for SIP): Entry Load* :< Rs. 5 crores - 2.25% Rs. 5 crores - Nil Exit Load** :< Rs. 5 crores - 1% if redeemed / switched out within 12 months Rs. 5 crores - Nil Benchmark : CNX Midcap Average AUM: Rs. 337.05 Crore Investment Performance

Past performance may or may not be sustained in future. Returns are in % and absolute returns for period less than 1 year & CAGR for period 1 year or more.

ASSET ALLOCATION -24------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

PORTFOLIO SELECTION

-25------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

-26------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

-27------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

RELIANCE TAX SAVER (ELSS) FUND -28------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------INVESTMENT OBJECTIVE The primary objective of the scheme is to generate long-term capital appreciation from a portfolio that is invested predominantly in equity and equity related instruments.

FUND DATA -29------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------Structure . . .Open-ended Equity Linked Savings Scheme Date of allotment . . . . . . . . . .September 21, 2005 Inception Date . . . . . . . . . . . . .September 22, 2005 Corpus . . Rs 1621.85 crore (September 30, 2008) Minimum Investment . . . . . . . Rs 500 & in multiples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of Rs 500 Fund Manager . . . . . . . . . . . . . . . . . Ashwani Kumar Entry Load . . . . . <2cr - 2.25%; >_2cr <5cr - 1.25%; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .>_5cr - Nil Exit Load . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nil No Entry Load for Direct Investments w.e.f January 4, 2008 Benchmark. . . . . . . . . . . . . . . . . . . . BSE 100 Index

-30------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

-31------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------PORTFOLIO OF RELIANCE TAX SAVER (ELSS) FUND as on September 30, 2008 Holdings Equities Areva T & D India Ltd. ICICI Bank Ltd. Hindustan Unilever Ltd Cipla Ltd. State Bank of India ABB Ltd. Maruti Suzuki India Ltd. Tata Consultancy Services Ltd. KSB Pumps Ltd. Triveni Engineering And Industries Ltd. Reliance Industries Ltd. Cummins India Ltd. Eicher Motors Ltd. Pfizer Ltd. Divis Laboratories Ltd. Kingfisher Airlines Ltd Swaraj Mazda Ltd. Wipro Ltd Tata Steel Ltd. Asahi India Glass Limited Swaraj Engines Ltd Infotech Enterprises Ltd. Hindalco Industries Ltd Century Plyboard India Ltd. Bharat Heavy Electricals Ltd. Equity Less Than 1% of Corpus Preference Shares, derivatives, debt, Cash and Other Receivables Grand Total Weightage (%) 66.19 6.34 3.92 . 3.89 3.58 3.23 3.06 2.98 2.64 2.55 2.42 2.40 2.28 2.27 2.11 2.06 1.80 1.45 . 1.40 1.32 1.28 1.18 1.16 . 1.15 1.02 1.01 7.68 33.81 100.00

BIRLA SUN LIFE TAX RELIEF 96 -32------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 ----------------------------------------------------------------------------------------------------------An open-ended Equity Linked Savings Scheme (ELSS) with a lock-in of 3 years Investment Objective An open-ended equity linked savings scheme (ELSS) with the objective of long term growth of capital through a portfolio with a target allocation of 80% equity, 20% debt and money market securities Fund Manager : Mr. Ajay Garg Date of inception : March 29, 1996 Load Structure (Incl. for SIP): Entry Load* : s. 5 crores - 2.25% R s. 5 crores - Nil R Exit Load : NIL Benchmark : BSE 200 Average AUM: Rs. 395.50 Crores Investment Performance

-33------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

-34------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

-35------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

-36------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

-37------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

-38------------------------------------------------------------------------------------------------------------

Portfolio selection of the mutual fund company E-MBA/SEM-2 -----------------------------------------------------------------------------------------------------------

-39------------------------------------------------------------------------------------------------------------