Professional Documents
Culture Documents
This is certify that the Final Project report entitled Investment avenues: a
comparative study of mutual funds v/s equities submitted Dissertation report
of
the
requirement
for
the
.is
degree
of
work
carried
MBA,
out
affiliated
to
the
by ..,
Roll
Project Guide:
DECLARATION
I, the undersigned, hereby declare that the dissertation report submitted to my
college i.e. in partial fulfillment for the Degree
of Master of Business administration on Investment avenues: a comparative
study of mutual funds v/s equities, is a result of my own work under continuous
guidance and kind co-operation of our college faculty member, ..
I have not submitted this training report to any other university for the award of
any degree.
ACKNOWLEDGEMENT
I have been extremely fortunate that I have had the opportunity of working under
.. I would especially like to thank
him for his guidance and support in completing this report and giving his valuable
insights and giving me suggestions regarding the same, which has helped my
project to shape up the way it, is now. It was only because of his helpful nature
that I was given absolute freedom to explore new directions in this project.
I would take this opportunity to thank, Mr. ..
for giving me the opportunity to pursue my summer internship at a world class
organization like Reliance, and for assigning me a good project, under
responsible persons. I would be committing a grave injustice if I did not mention
the
help
extended
to
me
by
the
Operations
Team
(Specially
EXECUTIVE SUMMARY
Dissertation work is a part of our curriculum that gives us the knowledge about
the practical work in any organization and makes are stand in an organization.
This also helps to understand & correlate the theoretical concepts better which
remains uncovered in the classrooms. I have prepared this report in the process of
my postgraduate degree in business management.
The topic that has been taken for the project is Investment avenues: a
comparative study of mutual funds v/s equities.
Any kind of learning is incomplete till it is practically applied in the concerned
field. Only then a person understand and get hold of even the minutest details of
what he/she has learnt in his stay at the institute doing his/her MBA. So, to
practically apply what I had gained in the past two semesters in the MBA
programme, I underwent two months summer training at Reliance Mutual Fund,
Chandigarh. It has been a wonderful learning experience, which has given me an
insight into what goes on in the corporate world and this stay at the Reliance
office has helped me learn the intricate details of the corporate culture and what
life has in store for most of us doing our MBA. I have compiled this report to
share all my experiences with all of you. In this report, I have explained the
project, which I undertook with Reliance Mutual.
TABLE OF CONTENTS
S No.
1
Topic
Chapter 1
Chapter 2
Chapter 3
Page No.
Industry Profile
1.1 Introduction to Mutual Funds
2-20
20-22
Company Profile
2.1 Reliance Capital Asset Management Ltd.
24-26
26-35
Research Methodology
3.1 Research Problem
37
37
37
37-40
Chapter 4
Analysis
42-72
Chapter 5
Conclusion
74-75
Chapter 6
77
Bibliography
78
List of Tables
79
List of Charts
80
Annexure
..
LIST OF TABLES
S.NO
1
TOPIC
PORTFOLIO DIVERSIFICATION
PAGE NO.
43 44
2
3
4
5
BETA
MARKET PRICE OF EQUITY STOCKS
ONE YEAR RETURN
SCHEME RETURN V/S BENCHMARK
47
49-50
50
52
RETURN
INITIAL EXPENSES OF INVESTING IN
54
STOCKS
BROKERAGE ON DIFFERENT EQUITY
54
8
9
10
INVESTMENTS
LONG TERM CAPITAL GAIN
SHORT TERM CAPITAL GAIN
TAXES ON EQUITY AT TIME OF
55
55
56
11
12
13
14
WITHDRAWAL
SYSTEMATIC INVESTMENT
TREND ANALYSIS
CORRELATION
SHARPE RATIO
58
68
70
71
LIST OF GRAPHS
S.NO
1
2
3
4
5
6
7
8
9
TOPIC
ASSETS UNDER MANAGEMENT
RISK HIERARCHY
MUTUAL FUNDS V/S FIIs
BETA
ONE YEAR RETURN %
SCHEME RETURN V/S BENCHMARK
RETURN
TREND ANALYSIS
CORRELATION
SHARPE RATIO
PAGE NO.
10
20
22
48
51
52
69
70
72
INDUSTRY
PROFILE
10
11
12
Sponsors: The sponsors initiate the idea to set up a mutual fund. It could be a
registered company, scheduled bank or financial institution. A sponsor has to
satisfy certain conditions, such as capital, record (at least five years operation in
financial services), de-fault free dealings and general reputation of fairness. The
sponsors appoint the Trustee, AMC and Custodian. Once the AMC is formed, the
sponsor is just a stakeholder.
Fund Managers/ AMC: They are the ones who manage money of the
investors. An AMC takes decisions, compensates investors through dividends,
maintains proper accounting and information for pricing of units, calculates the
NAV, and provides information on listed schemes. It also exercises due diligence
13
on investments, and submits quarterly reports to the trustees. A funds AMC can
neither act for any other fund nor undertake any business other than asset
management. Its net worth should not fall below Rs. 10 crore. And, its fee should
not exceed 1.25 percent if collections are below Rs. 100 crore and 1 percent if
collections are above Rs. 100 crore. SEBI can pull up an AMC if it deviates from
its prescribed role.
14
SPONSOR
REGISTRAR
TRUSTEE COMPANY
SETS UP
INVESTORS
CUSTODIAN
15
JOURNEY SO FAR
The mutual fund industry in India started in 1963 with the formation of Unit Trust
of India, at the initiative of the Government of India and Reserve Bank the. The
history of mutual funds in India can be broadly divided into four distinct phases
17
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 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 March 2007, total assets under management are Rs.326388 crores.
18
19
FUTURE SCENARIO:
The asset base will continue to grow at an annual rate of about 30 to 35 % over
the next few years as investors shift their assets from banks and other traditional
avenues. Some of the older public and private sector players will either close shop
or be taken over.
Out of ten public sector players five will sell out, close down or merge with
stronger players in three to four years. In the private sector this trend has already
started with two mergers and one takeover. Here too some of them will down their
shutters in the near future to come.
But this does not mean there is no room for other players. The market will witness
a flurry of new players entering the arena. There will be a large number of offers
from various asset management companies in the time to come. Some big names
like Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously.
One important reason for it is that most major players already have presence here
and hence these big names would hardly like to get left behind.
In the U.S. most mutual funds concentrate only on financial funds like equity and
debt. Some like real estate funds and commodity funds also take an exposure to
physical assets. The latter type of funds are preferred by corporates who want to
hedge their exposure to the commodities they deal with.
For instance, a cable manufacturer who needs 100 tons of Copper in the month of
January could buy an equivalent amount of copper by investing in a copper fund.
20
For Example, Permanent Portfolio Fund, a conservative U.S. based fund invests a
fixed percentage of its corpus in Gold, Silver, Swiss francs, specific stocks on
various bourses around the world, short term and long-term U.S. treasuries etc.
In U.S.A. apart from bullion funds there are copper funds, precious metal funds
and real estate funds (investing in real estate and other related assets as well.).In
India, the Canada based Dundee mutual fund is planning to launch a gold and a
real estate fund before the year-end.
In developed countries like the U.S.A there are funds to satisfy everybodys
requirement, but in India only the tip of the iceberg has been explored. In the near
future India too will concentrate on financial as well as physical funds.
The mutual fund industry is awaiting the introduction of DERIVATIVES in the
country as this would enable it to hedge its risk and this in turn would be reflected
in its Net Asset Value (NAV).
SEBI is working out the norms for enabling the existing mutual fund schemes to
trade in Derivatives. Importantly, many market players have called on the
Regulator to initiate the process immediately.
ROAD TO FUTURE
By December 2004, Indian mutual fund industry reached Rs 1,50,537 crores. It is
estimated that by 2010 March-end, the total assets of all scheduled commercial
banks should be Rs 40,90,000 crores.
21
The annual composite rate of growth is expected 13.4% during the rest of the
decade. In the last 5 years we have seen annual growth rate of 9%. According to
the current growth rate, by year 2010, mutual fund assets will be double.
limited products.
SEBI allowing the MF's 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.
22
23
A.
Operational Classification
(a) Open Ended Schemes: As the name implies the size of the scheme
(Fund) is open i.e., not specified or pre-determined. Entry to the fund is always
open to the investor who can subscribe at any time. Such fund stands ready to buy
or sell its securities at any time. It implies that the capitalization of the fund is
constantly changing as investors sell or buy their shares. Further, the shares or
units are normally not traded on the stock exchange but are repurchased by the
fund at announced rates. Open-ended schemes have comparatively better liquidity
despite the fact that these are not listed. The reason is that investors can any time
approach mutual fund for sale of such units. No intermediaries are required.
Moreover, the realizable amount is certain since repurchase is at a price based on
declared net asset value (NAV). No minute to minute fluctuations in rates haunt
the investors. The portfolio mix of such schemes has to be investments, which are
actively traded in the market. Otherwise, it will not be possible to calculate NAV.
This is the reason that generally open-ended schemes are equity based. Moreover,
desiring frequently traded securities, open-ended schemes hardly have in their
portfolio shares of comparatively new and smaller companies since these are not
generally traded. In such funds, option to reinvest its dividend is also available.
Since there is always a possibility of withdrawals, the management of such funds
24
becomes more tedious as managers have to work from crisis to crisis. Crisis may
be on two fronts, one is, that unexpected withdrawals require funds to maintain a
high level of cash available every time implying thereby idle cash. Fund managers
have to face questions like what to sell. He could very well have to sell his most
liquid assets. Second, by virtue of this situation such funds may fail to grab
favorable opportunities. Further, to match quick cash payments, funds cannot
have matching realization from their portfolio due to intricacies of the stock
market. Thus, success of the open-ended schemes to a great extent depends on the
efficiency of the capital market and the selection and quality of the portfolio.
(b) Close Ended Schemes: Such schemes have a definite period after which
their shares/ units are redeemed. Unlike open-ended funds, these funds have fixed
capitalization, i.e., their corpus normally does not change throughout its life
period. Close ended fund units trade among the investors in the secondary market
since these are to be quoted on the stock exchanges. Their price is determined on
the basis of demand and supply in the market. Their liquidity depends on the
efficiency and understanding of the engaged broker. Their price is free to deviate
from NAV, i.e., there is every possibility that the market price may be above or
below its NAV. If one takes into account the issue expenses, conceptually close
ended fund units cannot be traded at a premium or over NAV because the price of
a package of investments, i.e., cannot exceed the sum of the prices of the
investments constituting the package. Whatever premium exists that may exist
only on account of speculative activities. In India as per SEBI (MF) Regulations
every mutual fund is free to launch any or both types of schemes.
25
facilities in long run. An investor who selects such funds should be able to assume
a higher than normal degree of risk.
26
iii. Conservative Funds: The fund with a philosophy of all things to all issue
offer document announcing objectives as: (i) to provide a reasonable rate of
return, (ii) To protect the value of investment and, (iii) to achieve capital
appreciation consistent with the fulfillment of the first two objectives. Such funds
which offer a blend of immediate average return and reasonable capital
appreciation are known as middle of the road funds. Such funds divide their
portfolio in common stocks and bonds in a way to achieve the desired objectives.
Such funds have been most popular and appeal to the investors who want both
growth and income.
27
28
Debt Funds
Gilt funds
ST debt funds
Liquid funds
Risk
Latest Developments
SEBI has capped mutual funds' exposure to short-term bank deposits at 15 per
cent in order to ensure that the money they have collected are deployed in line
with investment objectives. "Short term" will be treated as a period not exceeding
91 days, SEBI has stated, adding that no fund can put more than 15 per cent of its
net assets in deposits of all scheduled commercial banks put together.
This, however, may be increased to 20 per cent, provided the trustees give prior
approval. Additionally, parking of funds in short-term deposits of associate and
sponsor scheduled commercial banks together will not exceed 20 per cent of the
total deployment in short-term deposits.
29
No fund will park more than 10 per cent of its net assets in short-term deposits
with any one scheduled commercial bank (including its subsidiaries). Incidentally,
trustees will need to ensure that no money is put in short-term deposits of a bank
which has invested in that fund.
For liquid and debt-oriented funds, an asset management company (AMC) will
not be able to charge any investment management and advisory fee for parking
money in short-term deposits.
SEBI
had
formed
committee
to
look
at
launching
Dedicated
30
for investors as stock markets rallied to close in positive terrain. The BSE Sensex
posted a gain of 6.12% to close at 13,872 points; the S&P CNX Nifty ended at
4,088 points (up by 6.96%). But the winners were clearly the mid cap stocks; the
CNX Midcap rose by 8.16%, before settling at 5,246 points.
GRAPH 3: MUTUAL FUNDS V/S FIIs
Foreign Institutional Investors (FIIs) and mutual funds were both buyers in the
domestic stock markets. In April, FIIs bought equities to the tune of Rs 51,739 m
and out-purchased mutual funds (Rs 11,241 m) by a huge margin.
Some trend or the other continues to grip the mutual fund industry. After SEBI
(Securities and Exchange Board of India) made it difficult for the AMCs (asset
management companies) to launch open-ended mutual funds, closed-ended funds
have become the order of the day.
31
COMPANY
PROFILE
32
33
34
activity wise and there exists systems to prohibit access to inside information of
various activities. As per SEBI Regulations, it will further ensure that AMC meets
the capital adequacy requirements, if any, separately for each such activity.
RCAM has been appointed as the Investment Manager of "Reliance India Power
Fund", a Venture Capital Fund registered with SEBI vide Registration
no.IN/VCF/05-06/062 dated June 16, 2005 but this activity is yet to commence.
Capital
Trustee
Co.
Limited
(RCTCL),
as
the
Trustee.
RMF has been registered with the Securities & Exchange Board of India (SEBI)
vide registration number MF/022/95/1 dated June 30, 1995. The name of Reliance
Capital Mutual Fund has been changed to Reliance Mutual Fund effective 11th.
March 2004 vide SEBI's letter no. IMD/PSP/4958/2004 date 11th. March 2004.
Reliance Mutual Fund was formed to launch various schemes under which units
are issued to the Public with a view to contribute to the capital market and to
provide investors the opportunities to make investments in diversified securities.
35
To deploy Funds thus raised so as to help the Unit holders earn reasonable returns
on their savings and
To take such steps as may be necessary from time to time to realize the effects
without any limitation.
Sponsor
Reliance Capital Asset Management Ltd. is a wholly owned subsidiary of
Reliance Capital Limited, the sponsor. The entire paid-up capital (100%) of
Reliance Capital Asset Management Ltd is held by Reliance Capital Ltd.
Reliance Mutual Fund (RMF) has been sponsored by Reliance Capital Ltd (RCL).
Reliance Capital is Indias fastest growing private sector financial services
company. Ranking among the top 3 private sector banking and finance companies
in India, with a shareholder base of over 1.3 million. Reliance Capital has
interests in asset management and mutual funds, life and general insurance,
private equity and proprietary investments, stock broking and other financial
services with a net worth in excess of Rs. 5,262 crore (as of March 31, 2007)
36
Particulars
(Rs.in crores)
2005-06
2004-05
2003-04
2002-03
Total Income
652.02
295.69
356.79
458.78
550.61
111.21
105.79
102.63
537.61
105.81
105.79
102.63
3849.58
1310.08
1271.84
1208.5
Net Worth
4122.46
1437.92
1399.81
1336.33
29.74
(Basic +
Diluted)
8.31
(Basic +
Diluted)
8.31
(Basic +
Diluted)
8.06
(Basic +
Diluted)
112.95
112.95
109.96
104.54
30%
30%
29%
29%
223.40
127.84
127.84
127.83
Reliance Capital Ltd. has contributed Rupees One Lac as the initial contribution
to the corpus for the setting up of the Mutual Fund. Reliance Capital Ltd. is
responsible for discharging its functions and responsibilities towards the Fund in
accordance with the Securities and Exchange Board of India (SEBI) Regulations.
The Sponsor is not responsible or liable for any loss resulting from the operation
of the Scheme beyond the contribution of an amount of Rupees one Lac made by
them towards the initial corpus for setting up the Fund and such other accretions
and additions to the corpus.
37
Corporate
Governance,
which
includes
transparency and
timely
and
usage
and
host
of
other
issues.
38
The Custodian.
Deutsche Bank, AG
The Trustee has appointed Deutsche Bank, AG located at Kodak House, Ground
Floor, 222 Dr. D.N.Road, Mumbai-400 001, as the Custodian of the securities that
are bought and sold under the Scheme. A Custody Agreement has been entered
with Deutsche Bank in accordance with SEBI Regulations. The Custodian is
approved by SEBI under registration no. IN/CUS/003 to act as Custodian for the
Fund.
Deutsche Bank AG, the Custodian shall, inter alias:
Keep Securities and other instruments belonging to the Scheme in safe custody.
Ensure that the benefits due to the holdings of the Mutual Fund are recovered and
Be responsible for loss of or damage to the securities due to negligence on its part
on the part of its approved agents.
39
The Registrar
Reliance Capital Asset Management Limited has appointed M/s. Karvy
Computershare Pvt. Limited to act as the Registrar and Transfer Agent to the
Schemes of Reliance Mutual Fund. Reliance Capital Asset Management Ltd. and
the Trustee have satisfied themselves, after undertaking appropriate due diligence
measures, that they can provide the services required and have adequate facilities,
including systems facilities and back up, to do so. The Trustee has also laid down
broad parameters for supervision of the Registrar. As Registrar to the Schemes,
KCL will accept and process investor's applications, handle communications with
investors, perform data entry services, dispatch Account Statements and also
perform such other functions as agreed, on an ongoing basis. The Registrar is
responsible for carrying out diligently the functions of a Registrar and Transfer
Agent and will be paid fees as set out in the agreement entered into with it and as
per any modification made thereof from time to time.
Trustees
Reliance Capital Trustee Co. Limited (RCTC), a company incorporated under the
Companies Act, 1956, has been appointed as the Trustee to the Fund vide the
Trust Deed dated April 25, 1995 executed between the Sponsor and the Trustee.
40
Management Team
Board of Directors
1.
Amitabh Chaturdevi
2.
Kanu Doshi
3.
Manu Chadha
4.
Sushil Tripathi
Management Team
President Vikrant Gugnani
Chief Investment Officer K.Rajagopal
Head Equity Investments Madhusudan Kela
1.
Sunil B Singhania
2.
Ashwani Kumar
3.
1.
Amitabh Mohanty
2.
Amit Tripathi
41
3.
Prishant Pimple
Head of Departments
Abraham Alapatt
Amit Bapna
Human Resource
Rajesh Derhgawen
Development
Information Technology
Vinay Nigudkar
Balkrishna Kini
Risk Management
Lav Chaturvedi
Geeta Chandran
Infrastructure &
Pradeep Andrade
Administration
R&T operations
Prashanth D Pereira
Sundeep Sikka
Zonal Heads
Northern Zone Head
Aashwin Dugal
Devendra Daga
Gurbir Chopra
Branches
42
REGISTERED
OFFICE
CORPORATE OFFICE
Service Providers
Registrar to the schemes of Reliance Capital Asset
Management:
Karvy Computershare Pvt. Ltd
Custodians to the schemes of Reliance Capital Asset
Management
Deutsche Bank AG
Web Services
Reliance Infocomm
43
Citibank N.A.
Deutsche Bank AG
HSBC Bank
UTI Bank
IDBI Bank
44
RESEARCH
METHODOLOGY
45
RESEARCH PROBLEM
The purpose of my project is to analyse the advantages of mutual funds over
equity. However objectives of my study are as follows:
RESEARCH OBJECTIVES
To study the differences between investment in equities and mutual funds.
To check whether it is possible to reduce risk by investing in mutual funds.
To study comparative returns of equities and mutual funds
To study various equity diversified schemes of reliance mutual funds
To rate mutual funds on the basis of their performance.
To establish relationship of equity diversified schemes with Sensex.
SOURCES OF DATA
In order to achieve the various stated objectives secondary data available on the
subject was used and other necessary information has been collected from the
Reliance Mutual Fund Chandigarh and other Mutual Fund Houses, newspapers,
journals, magazines etc.
TOOLS APPLIED
Data collected from various secondary sources was used for comparing the
Mutual fund scheme using Standard Deviation, Beta, Correlation and Sharpe
Ratio measures of risk and performance of mutual funds.
46
STANDARD DEVIATION
Standard deviation is a measure of the dispersion of a set of data from its mean.
The more spread apart the data is, the higher the deviation. Here, standard
deviation is applied to the annual rate of return of an investment to measure the
investment's volatility (risk). A volatile stock would have a high standard
deviation. In mutual funds, the standard deviation tells us how much the return on
the fund is deviating from the expected returns.
A security that is volatile is also considered higher risk because its performance
may change quickly in either direction at any moment.
A fund that has a consistent four-year return of 3%, for example, would have a
mean, or average, of 3%. The Standard Deviations for this fund would then be
zero because the funds return in any given year odes not differ formats four-tear
mean of 3%. On the other hand, a fund that in each of the last four years returned5%, 17%,2% and 30% will have mean return of 11%.The fund Will also exhibit a
high standard deviation because each year the return of the fund differs from the
mean return This fund is therefore more risky because it fluctuates widely
between negative and positive returns within a short period.
BETA
Beta is a fairly commonly used measure of risk. It basically indicates the level of
volatility associated with the fund as compared to the benchmark.
47
48
additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted
performance has been.
CORRELATION
Correlation = co-variance of X and Y/number of variations (standard deviation
of X series)(standard deviation of Y series)
Correlation is a statistical technique that measures and describes a relationship
between two variables. The measure of correlation is called correlation index or
correlation coefficient. It gives one figure which shows the degree and direction
of correlation. It means the coefficient of correlation helps us in determining the
closeness of relationship between two or more variables.
49
ANALYSIS
50
Equity investment generally refers to the buying and holding of shares of stock
on a stock market by individuals and funds in anticipation of income from
dividends and capital gain as the value of the stock rises. It also sometimes refers
to the acquisition of equity (ownership) participation in a private (unlisted)
company.
The equities held by private individuals are often held via mutual funds or other
forms of pooled investment vehicle, many of which have quoted prices that are
listed in financial newspapers or magazines; the mutual funds are typically
managed by prominent fund management firms or fund managers. Such holdings
allow individual investors to obtain the diversification of the fund(s) and to obtain
the skill of the professional fund managers in charge of the fund(s).
Analysis
Portfolio Diversification
51
in others. In other words, the more stocks and bonds you own, the less any one of
them can hurt you. Large mutual funds typically own hundreds of different stocks
in many different industries.
Example:
Portfolio of reliance growth fund as on June30, 2007
TABLE 1 - PORTFOLIO DIVERSIFICATON
Holdings
Equities
Jindal Saw Ltd
Divis Laboratories Ltd
JSW Steel Ltd
Reliance Industries Ltd
Bharat Earth Movers Ltd
Gujrat Mineral
Weightage
88.12
4.23
4.22
3.88
3.36
3.26
2.35
Development
Corp Ltd
Jaiprakash Assssociates
2.28
Ltd
Northgate Technologies
2.14
Ltd
Lupin Ltd
Reliance Communications
2.13
1.98
Ltd
State Bank of India
Jain Irrigation Systems Ltd
Gujrat State Fertilizers &
1.94
1.91
1.83
Chemicals Ltd
Cambridge Solutions Ltd
Jindal Steel & Power Ltd
Adani Enterprises Ltd
Maruti Udyog Ltd
Bank of Baroda
HCL Technologies Ltd
AIA Engineering Ltd
Bombay Dyeing &
1.79
1.76
1.76
1.76
1.72
1.58
1.57
1.54
Manufacturing Co Ltd
52
1.54
1.51
1.49
1.43
1.42
1.36
1.32
1.32
1.31
1.24
Ltd
Radico Khaitan Ltd
United Phosphorus Ltd
NDTV Ltd
BPCL
Oswal Chemicals &
1.16
1.15
1.06
1.04
1.03
Fertilizers Ltd
Gammon India Ltd
Shiv-Vani Oil & Gas
1.03
1.03
17.70
corpus
Derivatives, Cash &
11.88
Other Receivables
Grand Total
100
Professional management
To try to identify good shares to invest in, two main schools of thought exist:
technical analysis and fundamental analysis. The former involves the study of the
price history of a share(s) and the price history of the stock market as a whole;
53
technical analysts have developed an array of indicators, some very complex, that
seek to tease useful information from the price and volume series. Fundamental
analysis involves study of all pertinent information relevant to the stock and
market in question in an attempt to forecast future business and financial
developments including the likely trajectory of the share price(s) itself. The
fundamental information studied will include the annual report and accounts,
industry data (such as sales and order trends) and study of the financial and
economic environment (e.g. the trend of interest rates).
Most of us have neither the skill to find good stocks that suit our risk and returns
profile nor the time to track our investmentsbut still want the returns that can be
had from equities. Thats where mutual funds come in.
When you invest in mutual funds, it is your fund manager who will take care of
your investments. A fund manager is an investment specialist, who brings to the
table an in-depth understanding of the financial markets. By virtue of being in the
market, the fund manager is ideally placed to research various investment options,
and invest accordingly for you.
54
Amit Tripathi
Debt Fund Manager
B.Com.(Hons), PGDM has over 6 years
experience in Financial Services. At the age
of twenty-eight he is one of the youngest
debt Fund Manager at Reliance Capital Asset
Management Ltd.
From 1999 to 2003 he served at the New
India Assurance Co. Ltd as an admin officer
in the Investment Dept. Also featuring in his
profile are stints with Sun Invest Associates
Ltd as an Analyst for Equity Market
Operations and CFS Financial Services P.
Ltd as an Equity Dealer.
Ashwani Kumar
Equity Fund Manager
B.Sc., MBA - Finance, has over 10 years of
experience in this industry. At Reliance Capital
Asset Management Ltd. he is an Equity Fund
Manager.
Among his past learning is a long stretch with
Zurich Asset Management Co. India P. Ltd.
where he was the Senior Research Analyst,
responsible for tracking automotive, metals, and
engineering sectors.
55
Diversification of risk
An investor in a mutual fund acquires a diversified portfolio, no matter how small
his investment is. Diversification reduces the risk of loss, as compared to
investing directly in one or two shares or debentures or other instruments. When
an investor invests directly, all the risk of potential loss is his own. While
investing in the pool of funds with other investors, any loss on one or two
securities is also shared with other investors. This risk reduction is one of the
most important benefits of a collective investment vehicle.
Example:
Taking the beta values of 10 stocks from portfolio of reliance vision fund and
comparing it with beta value of fund. The Beta factor describes the movement in a
stock's or a portfolio's returns in relation to that of the market return.
TABLE 2: BETA
Stocks
ITC Ltd
Infosys Technologies Ltd
Grasim Industries Ltd
Beta
.66
.84
.86
56
.90
.95
.98
1.00
1.09
1.15
1.20
1.35
1.4
1.2
IT C Ltd
HDFC Bank
1
0.8
0.6
0.4
0.2
0
Beta
GRAPH 4: BETA
So we can see that beta of 7 stocks is more than that of Reliance Vision Fund.
Small investments
A mutual fund, gives you an ownership of the same investment pie at an outlay
of Rs 1,00-5,000. Thats because a mutual fund pools the monies of several
investors, and invests the resultant large sum in a number of securities. So, on a
small outlay, you get to participate in the investment prospects of a number of
securities.
57
Example stated below shows that to buy even one share of complete portfolio of
reliance vision fund will involve investment of Rs. 31146.62 (according to market
price on 30th july) and if a person invests through mutual funds he can take
advantage of all the stocks by investing just Rs.5,000.
Equity stocks
Market price as
on 30thjuly 2007
6831.2
2445.65
1847.85
1978.85
748.95
540.7
Communications Ltd
Siemens Ltd
HDFC Bank Ltd
Jaiprakash Associates
Grasim Industries Ltd
Tata Consultancy
1262.3
1159.8
811.6
2946.85
1137.57
services Ltd
Television Eighteen India
Maruti Udyog Ltd
Indian Hotels Co Ltd
Cummins India Ltd
Tata Motors Ltd
Network Eighteen Fincap
821.2
847.35
139.6
371.5
707.2
445.35
Ltd
Automotive Axles ltd
State Bank Of India
HPCL
Gujarat StateFertilizers &
477.15
1579
256.35
224.15
Chemicals Ltd
Tata Tea Ltd
770
58
ITC Ltd
Bharat Forge Ltd
Apollo Tyres Ltd
Ambuja Cements Ltd
Reliance Energy Ltd
Deccan Aviation Ltd
Grand total
167.3
282.75
374.95
1022.6
780.25
168.6
31146.62
Return Potential
Mutual Funds have the potential to provide a higher return as they invest in a
diversified basket of selected securities.
TABLE 4: ONE YEAR RETURN
Stocks
Infosys Technologies Ltd
Larsen & Tourbo Ltd
Reliance Industries Ltd
Reliance Communications
Tata Consultancy Services
Grasim Industries Ltd
Maruti Udyog Ltd
Tata Motors Ltd
HDFC Bank
ITC Ltd
Sensex
Reliance Vision Fund
1 Year Return
19.55
135.78
93.29
112.67
23.77
42.43
7.20
-5.47
50.76
1.91
44.74
33.67
59
140
120
Infosys Tec hnologies Ltd
ITC Ltd
Sensex
100
80
60
40
20
HDFC Bank
0
-20
Here return of 5 stocks is less than Reliance Vision Funds return. While
other 5 stocks and Sensex returns are higher than funds return.
60
Schemes
Benchmark Return
Return
(BSE 100)
Last 1 year
14.11
11.70
Last 3 year
51.81
30.91
Last 5 year
60.72
30.81
Returns Since
32.79
12.88
Inception
70
60
50 Last 1 year
Last 3 year
Last 5 year
40
30
20 Returns Since Inception
10
0
Schemes Return Benchmark Return (BSE 100)
GRAPH 6: SCHEME RETURN V/S BENCHMARK
RETURN
61
Transaction Cost
Mutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage,
custodial and other fees translate into lower costs for investors.
While investing in Mutual funds investor has to pay the entry load which is
generally found to be 2.25%.
Entry Load: Example
If the entry load (sales load) for a scheme is 2.25% and the NAV of the scheme is
Rs. 10.00, the investor who wants to buy the units will not be able to buy at Rs.
10.00. He will pay:
= 10.00 + (10.00*2.25/100) = 10.00 + 0.225 = 10.225
When an investor withdraws his investment he has to pay variable exit load,
charged depending on duration of stay in the fund. This is generally:
Within 6 months: 1%
6 months 1 year: .5%
After 1 year: NIL
Exit Load: Example
If a fund imposes an exit load of 1.25%, the investor who repurchases his units,
will get a price that is:
= 10.00 (10.00*1.25/100)=10.00-0.125 = 9.875
62
Offline
Online
Account opening
Rs.436
Rs. 750
Not
Rs. 750
charges
Software
provided
AMC
Rs.299
Rs.299
P.A.
P.A.
0.30
Intraday
0.03
F&O
0.03
63
Taxation
In mutual funds investor can save tax under Section 80C which allows a
limit of Rs.1, 10,000 which is deducted from taxable income of investor. This can
be done by investing in Equity Linked Saving Schemes (ELSS).
Through investment in equity stocks investor cannot get redemption under
Section 80C.
Short term capital gain and long term capital gain are charged in the same
manner in equity stock and mutual funds.
TABLE 8: Long Term Capital Gain
Equity schemes
Debt schemes
NIL
Without
11.33%
indexation
With indexation
22.66%
11.33%
Debt schemes
33.99%
64
Deliver
Intraday
F&O
y
STT
.125
.0125
.017
Stamp
.01
.002
.002
Duty
65
66
Flexibility
Mutual funds offer features such as regular investment plans, regular withdrawal
plans and dividend reinvestment plans; you can systematically invest or withdraw
funds according to your needs and convenience
Systematic Investment Plan (SIP): Here an investor invests certain amount
monthly or quarterly or half yearly in a particular scheme. For doing this investor
can avail the facility of auto debit.
Example: A person has to invest Rs.12000 through SIP in some fund. Then he has
following options
TABLE 11: Systematic Investment
Rupees
Months
Amount
Time
* 100
60
6,000
1,000
12
12,000
Monthly
3,000
4
12,000
Quarterly
6,000
2
12,000
Half yearly
*Minimum investment in any fund through SIP is Rs.6000.
Systematic Withdrawal Plan (SWP): In this investor tells that he needs some fixed
amount of money per month. Then he will be paid this amount out of his capital
and return earned and rest of his money will remain invested.
Dividend Reinvestment: Allows the investor to reinvest amount of dividends or
other distributions made back into the same fund and receive additional units.
67
Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a
lifetime. Example: Reliance offers
Equity funds
Debt Funds
68
Equity option
Balanced option
Debt option
69
This is an ideal category for those who want to participate in stock market &
knows the risk involved in stock market but have few rupees to invest in blue chip
stocks.
HOW THEY PERFORMED
Though the short term out look is volatile in long-term equity diversified funds
have outperformed other categories & stock markets will lesser amount of risk
than stock markets. The average returns of equity diversified funds are 102%.
2.
3.
4.
5.
6.
70
71
Fund
22.07
15.74
Category
27.02
N.A
72
Fund
27.02
37.32
Category
27.02
N.A
73
Fund
34.96
32.86
Category
27.02
N.A
74
Fund
29.31
41.89
Category
27.02
N.A
75
Fund
26.97
24.43
Category
27.02
N.A
76
Fund
33.67
28.72
Category
27.02
N.A
TREND ANALYSIS
7/2/2007
100
100
100
100
100
100
100
7/3/2007
100.82
100.77
100.74
100.43
100.96
100.49
101.05
7/4/2007
101.80
100.46
101.11
101.12
101.8
101.12
101.45
7/5/2007
102.31
100.077
100.73
100.28
100.87
100.93
100.83
7/6/2007
102.18
100.85
101.79
101.26
101.91
101.64
101.53
7/9/2007
103.16
101.55
102.03
102.42
102.56
102.85
102.66
7/10/2007
103.45
101.32
101.99
102.24
102.07
102.28
102.58
7/19/2007
7/31/07
105.20
104.93
103.73
103.65
103.23
101.73
104.92
104.28
106.17
106.5
105.53
104.85
106.16
104.8
77
115
110
105
trends
sensex100
REF
REOF
RRSF
RNEF
RVF
RGF
95
90
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Days
The trend analysis shows that all the schemes show an upward trend with rise in
market and a downward trend with fall in market. This clearly shows that even
mutual funds are prone to market risk.
CORRELATION
On the basis of table no.
correlation
.224266
.571238
.667015
.719482
.79285
.826361
79
GRAPH 8: CORRELATION
Reliance NRI Equity Fund has the highest correlation. This means this fund is
more prone to market risk while Reliance Equity Opportunities Fund is least
prone to market risk.
SHARPE RATIO
Sharpe Ratio = Fund return in excess of risk free return/ Standard Deviation of
fund.
The Sharpe ratio tells us whether the returns of a portfolio are due to 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.
80
Scheme
s
REF
REOF
RRSF
RNEF
RVF
RGF
Standard
2-Jul
12.86
23.4114
17.413
26.9792
209.09
309.27
31-Jul
13.33
23.8177
18.1594
28.7346
219.24
324.13
Deviation
0.17299
0.274625
0.320357
0.675785
3.951993
6.178211
Return
3.6547
1.7354
4.2864
6.5064
4.8926
4.8048
Risk
Risk
Free
Adjuste
Sharpe
Return
0.005
0.005
0.005
0.005
0.005
0.005
d Return
3.6497
1.7304
4.2814
6.5014
4.8876
4.7998
Ratio
21.0977
6.3009
13.3647
9.6205
1.2367
0.7768
Reliance equity fund is having the highest Sharpe ratio. So it is the best fund
while reliance growth fund has the lowest Sharpe ratio.
81
CONCLUSION
82
Conclusion
Mutual funds have market risk to some extent but they help in covering
company risk.
Just like shares, mutual funds do not offer assured returns and protection of
capital and carry risk. For instance, unlike bank deposits, your investment in a
mutual fund can fall in value. In addition, mutual funds are not insured or
guaranteed by any government body.
Risk diversification helps, if risk minimization is your objective. Because funds
have small holdings in so many different companies, high returns from a few
investments often don't make much difference on the overall return.
83
84
Mutual funds offer regular investment plans, regular withdrawal plans and
dividend reinvestment plans; you can systematically invest or withdraw funds
according to your needs and convenience while in equities we have option of
intraday trading, delivery and derivatives.
If we consider various expenses and taxes, then mutual funds have higher
transaction cost.
Initial charges are their for making investments in equity stocks. While no such
charges are present in mutual funds.
While selling of equity stocks an investor may have to suffer loss, if buyers are
not their in market. In mutual funds redemption is done at NAV.
85
SUGGESTIONS AND
RECCOMENDATIONS
86
Recommendations
People who are ready to take high risk should go in for equity investments
while others should prefer mutual funds.
Looking at the inflation in India a person should understand that he will have to
enter the stock market directly or through mutual funds sooner or later.
More awareness among the people must be created about the mutual funds. There
should be better communication channels through which they can get to know
about different schemes and funds.
The people do not want to take risk. The AMC should launch more diversified
funds so that the risk minimizes. This will lure more and more people to invest in
mutual funds.
Entry load usually varies from 2 to 2.25%. Therefore, a few no load based funds
should be introduced. Thus, it would attract more and more customers for the
industry and lead to its expansion
87
BIBLIOGRAPHY
Search Engines:
www.google.com
Websites:
www.reliancemutual.com
www.mutualfundsindia.com
www.valueresearchonline.com
www.amfiindia.com
www.moneycontrol.com
www.nseindia.com
www.bseindia.com
www.reliancecapital.com
Magazine:
Author ICICI Bank, Investment Review, June 2007
Book:
88
89