Capstone
Content
Preface
A mutual fund is nothing more than a collection of stocks and/or bonds. Mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.
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 of India.
It is registered with SEBI and functions under the Mutual Fund Regulations.
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.
LITERATURE REVIEW
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 appreciation realized is 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 common man
as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Portfolio managers evaluate their portfolio performance and identify the sources of strength and weakness. The evaluation of the portfolio provides a feed back about the performance to evolve a better management strategy. Even through evaluation of portfolio performance is considered to be the last stage of investment process, the managed portfolios are commonly known as mutual funds. Various managed portfolios are prevalent in the capital market. Their relative merits of return and risk criteria have to be evaluated.
Sharpe¶s performance index gives a single value to be used for the performance ranking of various funds or portfolios. Sharpe index measures the risk premium of the portfolio relative to the total amount of risk in the portfolio. This risk premium is the difference between the portfolio¶s average rate of return and risk less rate of return. The standard deviation of the portfolio indicates the risk. The index assigns the highest values to assets that have best riskadjusted average rate of return. The Sharpe ratio provides me with a return for unit of the risk measure.
A few research studies that have influenced the preparation of this paper substantially are discussed in this section. Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance. Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has suggested a new predictor of mutual fund performance, one that differs from virtually all those used previously by incorporating the volatility of a fund's return in a simple yet meaningful manner. Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance
(Jensen¶s alpha) that estimates how much a manager¶s forecasting ability contributes to fund¶s returns. As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the portfolio over the return of the benchmark index, where the portfolio is leveraged to have the benchmark index¶s standard deviation. S.Narayan Rao , et. al., evaluated performance of Indian mutual funds in a bear market through relative performance index, risk-return analysis, Treynor¶s ratio, Sharpe¶s ratio, Sharpe¶s measure , Jensen¶s measure, and Fama¶s measure. The study used 269 open-ended schemes (out of total schemes of 433) for computing relative performance index. Then after excluding funds whose returns are less than risk-free returns, 58 schemes are finally used for further analysis. The results of performance measures suggest that most of mutual fund schemes in the sample of 58 were able to satisfy investor¶s expectations by giving excess returns over expected returns based on both premium for systematic risk and total risk. Bijan Roy, et. al., conducted an empirical study on conditional performance of Indian mutual funds. This paper uses a technique called conditional performance evaluation on a sample of eighty-nine Indian mutual fund schemes .This paper measures the performance of various mutual funds with both unconditional and conditional form of CAPM, Treynor- Mazuy model and Henriksson-Merton model. The effect of incorporating lagged information variables into the evaluation of mutual fund managers¶ performance is examined in the Indian context. The results suggest that the use of conditioning lagged information variables improves the performance of mutual fund schemes, causing alphas to shift towards right and reducing the number of negative timing coefficients. Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In this paper, measures of evaluating portfolio performance based on lower partial moment are developed.
Risk from the lower partial moment is measured by taking into account only those states in which return is below a pre-specified ³target rate´ like risk-free rate. Kshama Fernandes(2003) evaluated index fund implementation in India. In this paper, tracking error of index funds in India is measured .The consistency and level of tracking errors obtained by some well-run index fund suggests that it is possible to attain low levels of tracking error under Indian conditions. At the same time, there do seem to be periods where certain index funds appear to depart from the discipline of indexation. K. Pendaraki et al. studied construction of mutual fund portfolios, developed a multi-criteria methodology and applied it to the Greek market of equity mutual funds. The methodology is based on the combination of discrete and continuous multi-criteria decision aid methods for mutual fund selection and composition. UTADIS multi-criteria decision aid method is employed in order to develop mutual fund¶s performance models. Goal programming model is employed to determine proportion of selected mutual funds in the finalportfolios. Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched to randomly selected conventional funds of similar net assets to investigate differences in characteristics of assets held, degree of portfolio diversification and variable effects of diversification on investmentperformance. The study found that socially responsible funds do not differ significantly from conventional funds in terms of any of these attributes. Moreover, the effect of diversification on investment performance is not different between the two groups. Both groups underperformed the Domini 400 Social Index and S & P 500 during the study period.
Investments goals vary from person to person. While somebody wants security, others might give more weightage to returns alone. Somebody else might want to plan for his child's education while somebody might be saving for the proverbial rainy day or even life after
retirement. With objectives defying any range, it is obvious that the products required will vary as well. Indian Mutual Funds industry offers a plethora of schemes and serves broadly all types of investors. The range of products includes equity funds, debt, liquid, gilt and balanced funds. There are also funds meant exclusively for young and old, small and large investors. Moreover, the setup of a legal structure, which has enough teeth to safeguard investors¶ interests, ensures that the investors are not cheated out of their hard earned money. All in all, benefits provided by them cut across the boundaries of investor category and thus create for them, a universal appeal. Investors of all categories could choose to invest on their own in multiple options but opt for Mutual Funds for the sole reason that all benefits come in a package. The Mutual Fund industry is having its hands full to cater to various needs of the investors by coming up with new plans, schemes and options with respect to rate of returns, dividend frequency and liquidity. In view of the growing competition in the Mutual Funds industry, it was felt necessary to understand the working of mutual funds industry in India, its merits and demerits, various types of schemes available in the Indian market and the investor¶s orientation towards Mutual Funds i.e. their pattern of risk appetite and preferences in various schemes and plans. Apart from this the report also includes the details of the work that I have learnt during the project, which according to me is the best part of the project as it provided me a practical exposure to the Mutual fund industry and the working of an AMC.
Articles
The barrage of liquidity is finally finding its way into riskier assets across markets. Credit spreads collapsed, high yield currencies gained against safe heavens and bond yields rose as investors migrate from defensives to risk-assets. Volatility and risk premiums are touching multi-month low as confidence is coming back into financial markets. Incremental economic data is less negative, pile of cash is humongous and policy remains extremely supportive. As we have been writing that the scale, magnitude and synchronized nature of policy response this time is simply unprecedented in history. Fundamental problems of global imbalances that led to this crisis can¶t get resolved so easily and one might argue that the policy response so far is something like treating a µhangover¶ with more alcohol. But the fact remains, that in the short term, the sheer power of liquidity can take prices of risk assets to levels far beyond what fundamentals may justify. Commodity prices have also shot up with Reuters CRB index posting one of the biggest monthly gain since 1974. Normally, commodities perform during the late stage of the bull market, however, investors seem to be playing a paper currency debasement play through investment in real assets. While central bankers are still maintaining probably the most accommodative policy ever to combat deflation, market wisdom as reflected in prices seem to be getting worried about onset of inflation. Indian equities were one of the best performing market this month as investors jumped in after the decisive verdict in favor of UPA government. Foreign Institutional Investors invested over $ 4 billion in the month of May and their yeartodate investment has also crossed $ 4 billion. Investors draw comfort from the fact
that a major victory for UPA means greater ability to carry out critical reforms. Immediate priority for the government would be to provide adequate fiscal stimulus in order to cushion the economy against headwinds from the global downturn. The finance minister would have to balance between keeping the fiscal deficit under control and providing more fiscal stimulus. The government must show a roadmap to bring down fiscal deficit over the medium term. Some of the long pending reforms related to FDI in sectors like insurance and retail, rationalization of subsidies, introduction of GST from 2010-11, continued thrust on agriculture and rural sector and restarting disinvestment programme should be on the agenda. Apart from the physical infrastructure, there should be equal focus on building the social infrastructure and higher outlays on education and healthcare which would go a long way in building a solid foundation for sustained economic growth. The other point we would like to highlight is that the focus for the government this time should be on outcome, not outlays; execution, not just big bang announcements. This election is a game changer. At a time when the global economy is faced with severe challenges, the world is looking for new engines of economic growth. India with its demographic advantage, high savings rate and a domestic consumption and investment oriented economy has the potential to de-couple from the rest of the world and deliver higher growth rate on a sustained basis. At this time, we needed a proreforms and stable government which can push structural reforms to unleash the full potential of Indian economy and corporate sector. People of India have delivered that decisive mandate. Our sectoral bets and stock picks in equity funds are rightly positioned to take advantage of the upturn in equity market. We have been focussing on investing in
companies leveraged on domestic consumption and infrastructure build up. While one can expect liquidity inflows from domestic and foreign investors, several corporates are likely to use the opportunity to raise equity. We will continue to keep a close watch on evolving economic scenario, policy announcements and valuation. Bond yields moved up on fears of higher government borrowing. Run up in commodity prices and increase in bond yields globally have also weighed on the sentiments. Interest rates are likely to be range-bound for some time and will offer more trading opportunities. Over the last several months, we have consistently been advising investors to focus on long term growth potential of Indian economy and take advantage of the downturn to build exposure to equities. The recent rally in equity markets further highlights the importance of discipline in asset allocation in investor¶s portfolios
A mutual fund is nothing more than a collection of stocks and/or bonds. Mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.
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 of India.
It is registered with SEBI and functions under the Mutual Fund Regulations.
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.
LITERATURE REVIEW
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 appreciation realized is 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 common man
as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Portfolio managers evaluate their portfolio performance and identify the sources of strength and weakness. The evaluation of the portfolio provides a feed back about the performance to evolve a better management strategy. Even through evaluation of portfolio performance is considered to be the last stage of investment process, the managed portfolios are commonly known as mutual funds. Various managed portfolios are prevalent in the capital market. Their relative merits of return and risk criteria have to be evaluated.
Sharpe¶s performance index gives a single value to be used for the performance ranking of various funds or portfolios. Sharpe index measures the risk premium of the portfolio relative to the total amount of risk in the portfolio. This risk premium is the difference between the portfolio¶s average rate of return and risk less rate of return. The standard deviation of the portfolio indicates the risk. The index assigns the highest values to assets that have best riskadjusted average rate of return. The Sharpe ratio provides me with a return for unit of the risk measure.
A few research studies that have influenced the preparation of this paper substantially are discussed in this section. Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance. Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has suggested a new predictor of mutual fund performance, one that differs from virtually all those used previously by incorporating the volatility of a fund's return in a simple yet meaningful manner. Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance
(Jensen¶s alpha) that estimates how much a manager¶s forecasting ability contributes to fund¶s returns. As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the portfolio over the return of the benchmark index, where the portfolio is leveraged to have the benchmark index¶s standard deviation. S.Narayan Rao , et. al., evaluated performance of Indian mutual funds in a bear market through relative performance index, risk-return analysis, Treynor¶s ratio, Sharpe¶s ratio, Sharpe¶s measure , Jensen¶s measure, and Fama¶s measure. The study used 269 open-ended schemes (out of total schemes of 433) for computing relative performance index. Then after excluding funds whose returns are less than risk-free returns, 58 schemes are finally used for further analysis. The results of performance measures suggest that most of mutual fund schemes in the sample of 58 were able to satisfy investor¶s expectations by giving excess returns over expected returns based on both premium for systematic risk and total risk. Bijan Roy, et. al., conducted an empirical study on conditional performance of Indian mutual funds. This paper uses a technique called conditional performance evaluation on a sample of eighty-nine Indian mutual fund schemes .This paper measures the performance of various mutual funds with both unconditional and conditional form of CAPM, Treynor- Mazuy model and Henriksson-Merton model. The effect of incorporating lagged information variables into the evaluation of mutual fund managers¶ performance is examined in the Indian context. The results suggest that the use of conditioning lagged information variables improves the performance of mutual fund schemes, causing alphas to shift towards right and reducing the number of negative timing coefficients. Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In this paper, measures of evaluating portfolio performance based on lower partial moment are developed.
Risk from the lower partial moment is measured by taking into account only those states in which return is below a pre-specified ³target rate´ like risk-free rate. Kshama Fernandes(2003) evaluated index fund implementation in India. In this paper, tracking error of index funds in India is measured .The consistency and level of tracking errors obtained by some well-run index fund suggests that it is possible to attain low levels of tracking error under Indian conditions. At the same time, there do seem to be periods where certain index funds appear to depart from the discipline of indexation. K. Pendaraki et al. studied construction of mutual fund portfolios, developed a multi-criteria methodology and applied it to the Greek market of equity mutual funds. The methodology is based on the combination of discrete and continuous multi-criteria decision aid methods for mutual fund selection and composition. UTADIS multi-criteria decision aid method is employed in order to develop mutual fund¶s performance models. Goal programming model is employed to determine proportion of selected mutual funds in the finalportfolios. Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched to randomly selected conventional funds of similar net assets to investigate differences in characteristics of assets held, degree of portfolio diversification and variable effects of diversification on investmentperformance. The study found that socially responsible funds do not differ significantly from conventional funds in terms of any of these attributes. Moreover, the effect of diversification on investment performance is not different between the two groups. Both groups underperformed the Domini 400 Social Index and S & P 500 during the study period.
Investments goals vary from person to person. While somebody wants security, others might give more weightage to returns alone. Somebody else might want to plan for his child's education while somebody might be saving for the proverbial rainy day or even life after
retirement. With objectives defying any range, it is obvious that the products required will vary as well. Indian Mutual Funds industry offers a plethora of schemes and serves broadly all types of investors. The range of products includes equity funds, debt, liquid, gilt and balanced funds. There are also funds meant exclusively for young and old, small and large investors. Moreover, the setup of a legal structure, which has enough teeth to safeguard investors¶ interests, ensures that the investors are not cheated out of their hard earned money. All in all, benefits provided by them cut across the boundaries of investor category and thus create for them, a universal appeal. Investors of all categories could choose to invest on their own in multiple options but opt for Mutual Funds for the sole reason that all benefits come in a package. The Mutual Fund industry is having its hands full to cater to various needs of the investors by coming up with new plans, schemes and options with respect to rate of returns, dividend frequency and liquidity. In view of the growing competition in the Mutual Funds industry, it was felt necessary to understand the working of mutual funds industry in India, its merits and demerits, various types of schemes available in the Indian market and the investor¶s orientation towards Mutual Funds i.e. their pattern of risk appetite and preferences in various schemes and plans. Apart from this the report also includes the details of the work that I have learnt during the project, which according to me is the best part of the project as it provided me a practical exposure to the Mutual fund industry and the working of an AMC.
Articles
The barrage of liquidity is finally finding its way into riskier assets across markets. Credit spreads collapsed, high yield currencies gained against safe heavens and bond yields rose as investors migrate from defensives to risk-assets. Volatility and risk premiums are touching multi-month low as confidence is coming back into financial markets. Incremental economic data is less negative, pile of cash is humongous and policy remains extremely supportive. As we have been writing that the scale, magnitude and synchronized nature of policy response this time is simply unprecedented in history. Fundamental problems of global imbalances that led to this crisis can¶t get resolved so easily and one might argue that the policy response so far is something like treating a µhangover¶ with more alcohol. But the fact remains, that in the short term, the sheer power of liquidity can take prices of risk assets to levels far beyond what fundamentals may justify. Commodity prices have also shot up with Reuters CRB index posting one of the biggest monthly gain since 1974. Normally, commodities perform during the late stage of the bull market, however, investors seem to be playing a paper currency debasement play through investment in real assets. While central bankers are still maintaining probably the most accommodative policy ever to combat deflation, market wisdom as reflected in prices seem to be getting worried about onset of inflation. Indian equities were one of the best performing market this month as investors jumped in after the decisive verdict in favor of UPA government. Foreign Institutional Investors invested over $ 4 billion in the month of May and their yeartodate investment has also crossed $ 4 billion. Investors draw comfort from the fact
that a major victory for UPA means greater ability to carry out critical reforms. Immediate priority for the government would be to provide adequate fiscal stimulus in order to cushion the economy against headwinds from the global downturn. The finance minister would have to balance between keeping the fiscal deficit under control and providing more fiscal stimulus. The government must show a roadmap to bring down fiscal deficit over the medium term. Some of the long pending reforms related to FDI in sectors like insurance and retail, rationalization of subsidies, introduction of GST from 2010-11, continued thrust on agriculture and rural sector and restarting disinvestment programme should be on the agenda. Apart from the physical infrastructure, there should be equal focus on building the social infrastructure and higher outlays on education and healthcare which would go a long way in building a solid foundation for sustained economic growth. The other point we would like to highlight is that the focus for the government this time should be on outcome, not outlays; execution, not just big bang announcements. This election is a game changer. At a time when the global economy is faced with severe challenges, the world is looking for new engines of economic growth. India with its demographic advantage, high savings rate and a domestic consumption and investment oriented economy has the potential to de-couple from the rest of the world and deliver higher growth rate on a sustained basis. At this time, we needed a proreforms and stable government which can push structural reforms to unleash the full potential of Indian economy and corporate sector. People of India have delivered that decisive mandate. Our sectoral bets and stock picks in equity funds are rightly positioned to take advantage of the upturn in equity market. We have been focussing on investing in
companies leveraged on domestic consumption and infrastructure build up. While one can expect liquidity inflows from domestic and foreign investors, several corporates are likely to use the opportunity to raise equity. We will continue to keep a close watch on evolving economic scenario, policy announcements and valuation. Bond yields moved up on fears of higher government borrowing. Run up in commodity prices and increase in bond yields globally have also weighed on the sentiments. Interest rates are likely to be range-bound for some time and will offer more trading opportunities. Over the last several months, we have consistently been advising investors to focus on long term growth potential of Indian economy and take advantage of the downturn to build exposure to equities. The recent rally in equity markets further highlights the importance of discipline in asset allocation in investor¶s portfolios
