FT India Life Stage 20s (G)

This scheme has launched by the fund house “Franklin Templeton”. The structure of the scheme
is open ended fund of funds. The ratio of investment in equity and debt in this fund is 80:20.
Therefore ,this scheme is appropriate for investors with high risk appetite. The minimum
investment in the scheme is Rs. 5000 and minimum additional investment is Rs.1000.

Snapshot of the scheme

Fund Name Franklin Templeton Mutual Fund
Scheme Name FT India Life Stage FOFs-20(G)
Franklin Templeton Asset Management (India) Private
AMC
Limited
Type Open ended scheme
Category FOF - Equity
Launch Date 12-Dec-03
Fund Manager Sukumar Rajah , Sachin Padwal-Desai , Pallab Roy
Face Value 10
Custodian Citibank N.A
Net Assets (Rs. cr) 14.14
Latest NAV Rs. 38.29 (as on 5th Jan , 2011)

Objective of the Scheme

FT India Life Stage Fund of Funds scheme is a open-end Fund of Funds Scheme. The primary
objective of the scheme is to generate superior risk adjusted returns to investors in line with their
chosen asset allocation. The scheme will invest in a combination of FT India’s equity and
income funds. The debt and equity allocation will be automatically rebalanced every 6 months to
revert to the steady state levels.
From the investors’ point of view the objective of investing in the scheme would be to earn
higher returns as a high risk is being taken by investing 80% of the scheme holdings in equity.
Therefore, an investor would like to earn a high risk-relative return.
Performance Evaluation

FT India Life Stage FoFs 20s (G) is one of the best performers in its category.

Returns as on 5th January, 2011

Period Returns
1 month 0.4
3 months -1.8
6 months 11.6
1 year 15.3
2 years 39.0
3 years 6
5 years 15.9

The Absolute Returns(%) for the scheme for last 5 years is as follows :-

Year Quarter 1 Quarter 2 Quarter 3 Quarter 4 Absolute

Returns (%)
2010 3.5 -0.3 12.1 - -
2009 -0.9 34.5 12.7 -0.2 68.9
2008 -18.2 -11.3 -3.5 -17.5 -40.1
2007 -5.7 14.4 11.0 14.2 35.8
2006 16.1 -9.2 11.1 8.5 30.1
2005 -2.2 4.1 17.9 5.9 32.4

Since
  1 Week 1 Month 3 Month 6 Month 1 Year 3 Year 5 Year
Inception
  [%] [%] [%] [%] [%] [%] [%] [%]
Scheme Return 0.42 0.19 -1.21 12.43 15.72 5.98 15.95 20.79
Category Avg 0.31 0.07 -1.40 10.04 13.53 3.18 15.21 19.23
Category Best 0.59 1.13 0.18 14.29 18.05 8.05 17.65 31.44

Category Worst -0.27 -0.81 -3.61 6.55 9.36 -1.70 12.99 12.46
SENSEX 0.22 1.67 -0.52 16.40 14.78 -0.63 16.12 NA
NIFTY NA 1.45 -1.07 16.12 15.19 -1.04 15.96 NA

CNX500 0.61 0.56 -2.85 16.40 14.78 -0.63 16.12 NA

*Equity - Returns up to 1 year are absolute and over 1 year are CAGR.
*Debt - Returns up to 1 year are annualized and over 1 year are CAGR.
Comparing Performance of the scheme with Category’s average, best and worst
returns

The above figure summarizes the returns of the scheme (FT India Life Stage FOF 20S (G)) at
various time intervals. It also shows the category (Fund of Funds) average , worse and Best
returns during various intervals. It can be observed that FT India Life Stage FOF 20 s (G) may
not be the best performing scheme in its category but it is definitely one of the good schemes to
invest in as the returns generated by this scheme is more than the average returns produced by
other schemes in the same category.

Ratios
Statistical Ratios

Standard Deviation (%) 1.0442

Beta 1.4601
Sharpe Ratio 0.0520
 R Sqaure Ratio 0.9486
Expense Ratio 0.7500

Other Ratios

Jenson Ratio (%) -0.0276

Treynor Ratio(%) 0.0372
Turnover Ratio(%) 8.0100

Analysis of Ratios
Standard Deviation is the measure of the deviation in the returns of the portfolio. In Simple
Words it tells us how much the return on the fund is deviating from the expected normal return.

Beta is a measure of the volatility of the portfolio to that of the index. In simple words it shows
the movement of the portfolio in comparison. The Higher the Beta, higher is the volatility of the
scheme to the index. If its greater than 1 , then the portfolio is highly volatile to the movements
in the index. If the beta is lesser than 1 , then scheme is less volatile to the index and beta which
is close to 1 implies that the scheme is closely following the index.

Sharpe Ratio tells us whether the returns of the scheme are due to smart investment decisions or
a result of excess risk taken. This measure is important, since even if the scheme earns a higher
return than its peers, it is a better investment only if the higher returns do not come with too
much additional risk. In Simple words, the greater the Portfolios Sharpe ratio, the better is the
risk adjusted performance. In case of FT India Life Stage FoF 20 s (g) scheme, it is the second
best scheme as compared to its peers as far as sharpe ratio is concerned. The Sharpe ratio of
almost all other schemes in its category is less than the Sharpe Ratio of FT India Life Stage Fof
20 s (G) scheme which indicates better risk adjusted performance. The Sharpe Ratio for its peers
is as follows :-

ICICI PRU aggressive (G) - .0520

ING OptiMix 5 Star Multi-Mgr FoF(G) - .0642

Kotak Equity FOF(G) - .0520

Quantum Equity FOF (g) - .0520

The R-squared value shows how reliable the beta number is. It varies between zero and one. An
R-squared value of one indicates perfect correlation with the index. Thus, an index fund
investing in the Sensex should have an R-squared value of one when compared to the Sensex.
For equity-diversified funds, an R-squared value greater than 0.8 is generally accepted to mean
that the underlying beta value is reliable and can be used for the fund. Beta and R-squared should
thus be used together when examining a fund's risk profile. FT India Life Stage Fof 20 s (G) has
a R-Square Ratio of more than 0.8 thereby indicating that the underlying beta is reliable.

Expense ratio states how much you pay a fund in percentage term every year to manage your
money. For example, if you invest Rs 10,000 in a fund with an expense ratio of 1.5 per cent, then
you are paying the fund Rs 150 to manage your money. In other words, if a fund earns 10 per
cent and has a 1.5 per cent expense ratio, it would mean an 8.5 per cent return for an investor.
Lower the expense ratio, better it is for investors. All the schemes under the category of Funds of
Fund – equity have reported same expense ratio of 0.75 %. Therefore, all the schemes stand at
par in terms of expense ratio.

Jenson Ratio measures whether the Scheme is generating excess returns over the normal returns.
For example, if there are two mutual funds that both have a 12% return, a rational investor will
want the fund that is less risky. If the value is positive, then the portfolio is earning excess
returns. In other words, a positive value for Jensen's alpha means a fund manager has 'beat the
market' w with his or her stock picking skills. The Higher the value the better the performance.
All the schemes under the category of Fund Of funds- equity have reports negative Jenson ratio
indicating that none of the schemes or the fund managers have beat the market. However, FT
India Life Stage Fofs 20 s(G) is one of the schemes that has earned reaosonable returns as
compared to its peers.

While Sharpe Ratio measures the returns for excess total risk taken, Treynor ratio measures the
returns for market risk taken. It is a better measure of performance for equity funds as it takes
into account market volatility.

Turnover ratio

The turnover ratio represents the percentage of a fund's holdings that change every year. To put it
simply, a turnover rate of 100 per cent implies that the fund manager has replaced his entire
portfolio during the period given. Technically, the turnover ratio is the lower of the total sales or
total purchases over the period divided by the average of the net assets. Higher the turnover ratio,
greater is the volume of trading carried out by the fund. The current turnover ratio is not justified
as the scheme’s major asset class is equity and a turnover ratio of 8.01 indicates that frequent
changes are not being made in the portfolio. Moreover the scheme is balanced after every 6
months which is a very long duration for equity based fund. Although increase in turnover ratio
increases the transaction cost which in turn decreases the overall return for the investor. On the
other hand making very little changes in the portfolio may prevent the scheme from taking
advantages of the movement of prices in the market. Therefore a turnover ratio of 8.01 is very
less for an equity based fund. Hence, turnover ratio should be increased to the extent that the
increase in transaction cost should not be more than the benefits derived because of volatility in
the market.
 TOP 10    OPEN ENDED  -FUND OF FUNDS  FUNDS
-  PERIOD  (LAST  12 MONTHS)

Scheme Name Date NAV Last 12

(Rs.) Months %
DSP BlackRock World Gold Fund - Jan 3 , 2011 19.4904 29.0454 
Growth 
ING OptiMix 5 Star Multi Manager FoF Jan 3 , 2011 16.4384 21.2446 
Scheme - Growth 
Quantum Equity FoF - Growth  Jan 4 , 2011 15.041 19.5849 

FT India Life Stage Fund of Funds - 20s Jan 4 , 2011 38.5233 17.7316 
Plan - Growth 
Kotak Equity Fund Of Funds - Growth  Jan 4 , 2011 40.265 16.6346 

Birla Sun Life Asset Allocation Fund - Jan 4 , 2011 36.2648 15.6987 
Aggressive Plan - Growth 
ICICI Prudential Aggressive Plan - Jan 4 , 2011 30.9244 14.9851 
Growth 
Mirae Asset China Advantage Fund - Jan 4 , 2011 11.535 14.4277 
Regular - Growth 
ICICI Prudential Very Aggressive Plan - Jan 4 , 2011 36.0141 14.2084 
Growth 

Portfolio Composition of FT India Life Stage FoFs 20s (G)

 PORTFOLIO COMPOSITION
10%

10%
FIBCF
FIPF
TIGF
TIIF
50%
TIIBA
15%

15%

FIBCF – Franklin India Blue chip Fund

FIPF – Franklin India Prima Fund

TIGF –Templeton India Growth Fund

TIIBA – Templeton India Income Builder Fund

TIIF – Templeton India Income Fund

Large cap focused diversified equity

Franklin India Bluechip Fund (FIBCF)
fund
Medium & Small cap focused diversified
Franklin India Prima Fund (FIPF)
equity fund
Large cap, 'Value' Focus, diversified
Templeton India Growth Fund (TIGF)
equity fund
Templeton India Income Builder Fund
Moderatly aggresive income fund Fund
(TIIBA)
Templeton India Income Fund (TIIF) Conservatively managed income fund Management
Templeton Floating Rate Income Fund Conservatively managed floating rate
(TFIF) fund
Style
FT India Life
Stage Fofs – 20s (G) is a scheme which is appropriate for investors with high risk appetite. FT
India Life Stage Fofs – 20s (G) aims at maintaining investment in equity and debt in the ratio of
80:20 i.e 80% of the fund holding is invested in equity whereas 20 % of the fund holding is
invested in long term debt.

The fund Managers - Sukumar Rajah , Sachin Padwal-Desai , Pallab Roy of FT India Life Stage
20s (G) follow an passive management style as the fund managers of the scheme balance the
portfolio after every 6 months. As scheme is majorly an equity scheme the fund managers should
keep a close check on the market. Balancing is done after every 6 months and when the ratio of
equity in the portfolio exceeds 80% of the total value then the excess money is transferred
towards the debt and if the ratio of debt in the portfolio exceeds 20% then the excess money is
transferred towards equity. Therefore, the fund managers should keep an active check on the
market so as to take the benefit from the movements of the market and generate higher returns.

Hence, the style of management that the fund managers of FT India Life Stage Fofs – 20s (G)
follow can be termed as passive style of management.

Short comings of the scheme

FT India Life Stage FoFs 20s (G) is one of the best performing schemes in its category .
However it is not the best scheme. It has various short comings.

FT India Life Stage FoFs 20 s (G) has a negative Jensen ratio. Jensen's alpha is used to
determine the abnormal return of a security or portfolio of securities over the theoretical
expected return.

The theoretical return is predicted by a market model, most commonly the Capital Asset Pricing
Model (CAPM) model. The market model uses statistical methods to predict the appropriate risk-
adjusted return of an asset. The CAPM for instance uses beta as a multiplier.

The CAPM return is supposed to be 'risk adjusted', which means it takes account of the relative
riskiness of the asset. After all, riskier assets will have higher expected returns than less risky
assets. If an asset's return is even higher than the risk adjusted return, that asset is said to have
"positive alpha" or "abnormal returns". Investors are constantly seeking investments that have
higher alpha.

Formula:

Jensen's alpha = Portfolio Return − [Risk Free Rate + Portfolio Beta * (Market Return − Risk Free Rate)]

By looking at the formula it can be observed that fund managers of the scheme can increase the
Jensen ratio by choosing the schemes which have relatively a lesser beta and including them in
the portfolio. This will help fund managers to increase the Jensen ratio of the scheme.

Another short coming of the scheme is that rebalancing of the portfolio is done after every six
months. As it is equity based scheme balancing should be done in shorter time duration so as to
take full advantage of the movements in the market and make higher returns.

Another aspect which can be looked upon is that the scheme invests only in the domestic funds
i.e the funds of the Asset Management Company (Franklin Templeton). It can invest in other
funds also which are run by other AMCs. It may help the company to diversify its funds further.

By working on these three aspects FT India Life Stage 20s (G) can generate higher returns and
can perform better than its peers.
Considering the NAV of the Recent Past , Create a pure hedge portfolio

.
The past NAV of FT India Life Stage FoFs 20s (G) scheme has been bullish. Although some
corrections have been made but the trend is more or less bullish.

FT India Life Stage FoFs 20s (G) belongs to fund of funds category i.e the scheme which invests
in other mutual funds .Hence, in my opinion in order to hedge the portfolio , the AMC can buy a
put option including the stocks which forms the portfolio composition of the funds or schemes
which further forms the composition of the fund of funds scheme(FT India Life Stage FoFs 20s
(G)) in the same proportion as the proportion of the stocks in the individual schemes.

If in future NAV of the fund increases then AMC will not exercise the put option .The only loss
to the AMC would be of the option premium and in case the NAV of the scheme goes down it
can still earn profit by exercising the option.

Therefore the fund manager of the scheme should go for Put Option.