“Stastical Analysis of Mutual Funds on the Basis of Risk and Return”
A PROJECT REPORT ON “STASTICAL ANALYSIS OF MUTUAL FUNDS ON THE BASIS OF RISK AND RETURN” AT ADITYA BIRLA MONEY MART, PUNE IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE DEGREE MASTERS IN BUSINESS MANAGEMENT (PUNE UNIVERSITY) SUBMITTED BY: NIKET S. BHOYE UNDER THE GUIDANCE OF PRAKASH PISE SINHGAD INSTITUTE OF BUSINESS ADMINISTATION & COMPUTER APPLICATION, LONAVALA, MAHARASHTRA. (20010-2012) “STASTICAL ANALYSIS OF MUTUAL FUND ON THE BASIS OF RISK AND RETURN” A Study Project Submitted to University of Pune in partial fulfillment of the requirements for the Award of Master’s Degree Course in Business Administration 2010-2012
Submitted by Under Guidance Niket S . Bhoye Prakash Pise [pic][pic] Sinhgad Technical Education Society’s Sinhgad Institute of Business Administration and Computer Application (SIBACA) Lonavala Certificate This is to certify that Project Report Titled “STASTICAL ANALYSIS OF MUTUAL FUND ON THE BASIS OF RISK AND RETURN” is the bonafide work carried out by NIKET SURESH BHOYE, Student of MBA-Finance of Sinhgad Institute of Business Administration & Computer Application, Lonavala for the partial fulfillment of MBA degree of University of Pune.
He has worked under our guidance & direction. His work is found to be satisfactory & complete in all respect. Project Guide Director Prakash Pise Dr. Parag C. Kalkar Date: Place: Lonavala ACKNOWLEDGEMENT The completion of any project is always due to efforts from numerous people. I take this opportunity to express my gratitude to all those who have helped me in undertaking this project successfully.
First & foremost I would like to thank God Almighty for providing me with his heavenly guidance in all that I have undertaken. With great pleasure I would like to thank Mr. Manish Songara for giving me this opportunity to undertake this summer project under his guidance. I also take this opportunity to express whole heart thanks to Mr. Suyog Aparajit area sales manager of Aditya Birla Money Mart LTD. , Pune His continued support, experience & extensive knowledge on the subject, brought to light the in-depth aspects of the research.
He has been very helpful & co-operative & always ensured that I get the maximum knowledge out of this study. I would also like to express my sincere thanks & gratitude to all the employees of Aditya Birla Money Mart, Pune. for their kind co-operation during this project. Not to forget the divine blessing of my parents who have being a great support & help during this period & without whom I could have managed to do anything. Lastly it’s a moment of great pleasure for me in venturing out this project report to SIBACA, Lonavala.
NIKET S. BHOYE DECLARATION I, Niket S. Bhoye a student of MBA 2010-2012 of SINHGAD INSTITUTE OF BUSINESS ADMINISTRATION & COMPUTER APPLICATION, LONAVALA; hereby declare that the project report Entitled “Stastical Analysis Of Mutual Fund on the basis of Risk and Return” in ADITYA BIRLA MONEY MART, PUNE is the outcome of my own work and the same has not being submitted to any University/institute for the award of any or any professional diploma.
Student’s signature Place: Date: INDEX TI | | | | |Sr. No. |CONTENT |Page No. |01 |Executive summary | | | | |7 | |02 |Overview Company | | | | |8 | |03 | | | | |Objective |11 | |04 | | | | | |12 | | |Concept of Mutual Fund | | |05 |Methodology | | | | |19 | | | | | |06 |Data Analysis | | | | 34 | | | | | |07 |Data Interpretation | | | | |45 | | | | | |08 |Findings | | | | |51 | | | | | |09 |Recommendations | | | | |53 | | | | | |10 |Conclusion | | | | |55 | | | | | | | | | | | | | | | | | |11 |References | | | | |56 | Executive Summary ABSTRACT This project offers a valuable opportunity to take a glimpse of the mutual fund in India. In today’s increasingly competitive and complex world there are large numbers of mutual funds claiming to provide maximum return with minimum risk. It is become very difficult to select the best mutual fund. There are more than 1000 schemes available for the investors in India. It is very difficult to select a particular scheme on the basis of their past records.
This project will try to analyse few popular mutual funds statistically on the basis of the risk involved in each fund and the return of the same. Also an in-depth analysis of their portfolio will be done which will give a better view for a fund’s resultant performance. This project identifies the key factors that is making a fund perform better than is competitors. The factors identified in this study will help fund manager design their fund’s portfolio and provide optimum return to its investors. Also they said project will be used by Tata Asset Management Company in the Eastern Zone to train its Relationship Managers in helping them giving an in-depth view about their fund. INTRODUCTION 1. LITERATURE REVIEW 1. 1. 1ORIGIN OF MUTUAL FUND:
When three Boston securities executives pooled their money together 1924 to create the first mutual fund, they had no idea how popular mutual funds would become. The idea of pooling money together for investing purposes started in Europe in the mid-1800s. The first pooled fund in the U. S. was created in 1893 for the faculty and staff of Harvard University. On March 21st, 1924 the first official mutual fund was born. It was called the Massachusetts Investors Trust. After one year, the Massachusetts Investors Trust grew from $50,000 in assets in 1924 to $392,000 in assets (with around 200 shareholders). In contrast, there are over 10,000 mutual funds in the U. S. oday totaling around $7 trillion (with approximately 83 million individual investors) according to the Investment Company Institute. The stock market crash of 1929 slowed the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the SEC and provide prospective investors with a prospectus. The SEC (U. S. Securities and Exchange Commission) helped create the Investment Company Act of 1940 which provides the guidelines that all funds must comply with today. With renewed confidence in the stock market, mutual funds began to blossom.
By the end of the 1960s there were around 270 funds with $48 billion in assets. In 1976, John C. Bogle opened the first retail index fund called the First Index Investment Trust. It is now called the Vanguard 500 Index fund and in November of 2000 it became the largest mutual fund ever with $100 billion in assets. One of the largest contributors of mutual fund growth was Individual Retirement Account (IRA) provisions made in 1981, allowing individuals (including those already in corporate pension plans) to contribute $2,000 a year. Mutual funds are now popular in employer-sponsored defined contribution retirement plans (401k), IRAs and Roth IRAs.
Mutual funds are very popular today, known for ease-of-use, liquidity, and unique diversification capabilities. BRIEF HISTORY OF BIRLA SUN LIFE COMPANY LTD. : A joint venture between the Aditya Birla Group and Sun life Financial, Birla sun life mutual fund forayed into the mutual fund industry in India. In just over 2 years of its launch, the company has catapulted to second position in new business premium in the highly competitive mutual fund industry. THE ADITYA BIRLA GROUP: “Aditya Birla”, a name that evokes all that is positive in business and life. It typifies integrity, quality, performance, innovation, perfection and above all, character. In operation for over 50 years now, the Aditya Birla Group is one of India’s largest business houses.
A highly respected and admired group, rooted in performance ethics based on value creation for its multiple stakeholders. The Aditya Birla Group’s operations span over 40 units across 18 countries, anchored by a 72,000 strong committed workforce, a group turnover exceeding Rs. 27, 000 crore, an asset base which exceeds Rs. 20, 000 crore and a market capitalization of over Rs. 13, 000 crore spread over 7 lakh shareholders. Known for its rack solid fundamentals it nurtures a culture where success does not come in the way of the need to keep learning afresh to continue innovating and to carry on experimenting. Being one of the largest corporate houses in India, and Aditya Birla Group enjoys a dominant position in all the sectors in which it operates.
It is the world’s largest producer of viscose staple fiber, largest single location aluminum plant and the largest single location refiner of palm oil. What’s more, it is the second largest producer of insulators and the fifth largest producer of carbon black in the world. The flagship companies of the Aditya Birla Group include some of the largest and most respected companies in India such as grasim industries limited, Hindalco industries limited, Indian Aluminum Company limited, Indian Rayan Industries Limited, Indo Gulf Corporation Limited. The Group has larged power relationship with large corporations like Hindustan Petroleum, Tata, Powergen Plc and AT&T. The group fosters a culture that promotes excellence and rewards entrepreneurship.
It endeavors to make the workplace a source of creativity, innovation and self-fulfillment for its employees. Nurturing a corporate culture imbedded with a high level of commitment and a sense of shared destiny. SUN LIFE FINANCIAL: Sun life financial is a leading international financial services organization. With a history that dates back to 1871, Sun life financial has evolved from a single mutual life insurance to one of the most highly rated insurance and wealth management institution in the world. Sun life financial knows its value lies in more than assets and history. It also lies in the culture of the integrity and the pursuit of excellence that have marked all of the organization endeavors.
Today the sun life financial group of comp anise and the partners are represented globally in Canada, the United States, the Philippines, Japan, Indonesia, India and Bermuda. In March of 2000, Sun life financial services of Canada, Inc. , Sun life financier’s parent company, listed its shares on stock markets in Toronto, New York, London, and Philippines. This new access to shareholders equity provides Sun life financial with even greater opportunities to grow around the world. The Sun life financial group of companies around the world, offer innovative and practical financial solutions to individuals and corporations: ? Life, Health and Disability ? Mutual Funds and different tax saving Plans ? Investment Management Annuities and Savings ? Trust, Brokerage and Banking Sun life assurance Company of Canada, sun life financier’s primary insurance business, has excellent ratings with the world’s top ratings agencies. With assets under management as on September 30, 2000 totaling more than CDN$345 billion, it ranks amongst the largest international financial services organizations in the world. Sun life financial enjoys independent rating that place us at the top of the financial sector in North America. VISION: To be a world-class of financial security to individuals and corporate and to be amongst the top three private sectors mutual fund companies in India.
MISSION: To be the first preference of our customers by providing innovative need based mutual funds to individual as well as corporate. Well –trained professionals through a multi-channel distribution network and superior technology will make these solutions available. Our endeavor will be to provide constant value addition to customers throughout their relationship with us, within the regulatory framework. We will provide career development opportunities to our employees and the highest possible returns to our shareholders. OUR VALUES: • INTEGRITY • TRANSPERENCY • CUSTOMER FOCUS • EXCELLENCE • INNOVATION • MERITOCRACY • RESPECT FOR THE INDIVIDUAL Objective and scope of the study: The Mutual Fund Industry is fast gaining popularity in today’s unpredictable financial scenario. It is emerging as one of the most lucrative investment options. • The primary objective of the project is to gain detailed insight into this Industry. • I have tried to systematically and objectively look into all-important aspects. • A combination of primary and secondary data has been used. The former, though limited, has helped us give first hand information on company and investor sentiments. • The latter has been used to understand the theoretical aspects. • Strategic importance has been given to both current and past trends and we have tried to correlate both in a manner to gain maximum insight. This document has been designed to serve a two-fold purpose. The first, which is also the main objective of the project, is to reflect our understanding of this industry. • The second is to provide the reader similar detailed knowledge Some Important Primary objective: 1. To find out the risk and return of BSL Mutual fund 2. To reduce the risk by proper diversification. 3. To understand the financial need of the customers. 4. To understand the consumer behavior regarding risk, rate of return, safety of investment etc. 5. To analyze the preferences given by the retail investor while investing in mutual fund on different grounds. STATISTICAL ANALYSIS CONCEPT OF MUTUAL 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 a s 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 common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The low chart below describes broadly the working of a mutual fund: [pic]
Mutual Fund gets their earnings in two ways:- 1. First is the most organic way, which is the dividend they get on the securities they hold. 2. If the fund sells securities that have increased in price, the fund has a capital gain. This is reflected in NAV of each unit. 3. Third is by the redemption of their units by investors will be at discount to the Current NAV [net asset value] ABOUT MUTUAL FUNDS: MUTUAL FUNDS A mutual fund is a company that invests in a diversified portfolio of securities. People who buy shares of a mutual fund are its owners or shareholders. Their investments provide the money for a mutual fund to buy securities such as stocks and bonds.
Different funds, different features. There are three basic types of mutual fund stocks (also called equity), bond and money market. Stock mutual funds invest primarily in stocks issued by an Indian company or foreign companies. Bond mutual funds invest primarily in bonds. Money market mutual funds invest mainly in short-term securities issued. Why Invest in a Mutual Fund? Mutual funds make saving and investing simple, accessible, and affordable. The advantages of mutual funds include professional management, diversification, variety, liquidity, affordability, convenience, and ease of recordkeeping as well as strict government regulation and full disclosure.
Professional Management: Even under the best of market conditions, it takes an astute, experienced investor to choose investments correctly, and a further commitment of time to continually monitor those investments. With mutual funds, experienced professionals manage a portfolio of securities for you full-time, and decide which securities to buy and sell based on extensive research. A fund is usually managed by an individual or a team choosing investments that best match the fund’s objectives. As economic conditions change, the managers often adjust the mix of the fund’s investments to ensure it continues to meet the fund’s objectives. Diversification: Successful investors know that diversifying their investments can help reduce the adverse impact of a single investment.
Mutual funds introduce diversification to your investment portfolio automatically by holding a wide variety of securities. In short, funds allow you the opportunity to invest in many markets and sectors. That’s the key benefit of diversification. Variety: Within the broad categories of stock, bond, and money market funds, you can choose among a variety of investment approaches. Today there are more then 1000 types of mutual fund available for the Indian investors. Low Costs: Mutual funds usually hold dozens or even hundreds of securities like stocks and bonds. The primary way you pay for this service is through a fee that is based on the total value of your account.
Because the fund industry consists of hundreds of competing firms and thousands of funds, the actual level of fees can vary. But for most investors, mutual funds provide professional management and diversification at a fraction of the cost of making such investments independently. Liquidity: Liquidity is the ability to readily access your money in an investment. Mutual fund shares are liquid investments that can be sold on any business day. Mutual funds are required by law to buy, or redeem, shares each business day. The price per share at which you can redeem shares is known as the fund’s net asset value (NAV). NAV is the current market value of all the fund’s assets, minus liabilities, divided by the total number of outstanding shares.
Convenience: You can purchase or sell fund shares directly from a fund or through a broker, financial planner, bank or insurance agent, by mail, over the telephone, and increasingly by personal computer. You can also arrange for automatic reinvestment or periodic distribution of the dividends and capital gains paid by the fund. Funds may offer a wide variety of other services, including monthly or quarterly account statements, tax information, and 24-hour phone and computer access to fund and account information. Protecting Investors: Not only are mutual funds subject to compliance with their self-imposed restrictions and limitations, they are also highly regulated by the federal government through the U. S. Securities and Exchange Commission (SEC).
As part of this government regulation, all funds must meet certain operating standards, observe strict antifraud rules, and disclose complete information to current and potential investors. These laws are strictly enforced and designed to protect investors from fraud and abuse. But these laws obviously cannot help you pick the fund that is right for you or prevent a fund from losing money. You can still lose money by investing in a mutual fund. A mutual fund is not guaranteed or insured by the FDIC or SIPC, even if fund shares are purchased through a bank. TYPES OF MUTUAL FUNDS SCHEMES: OF MUTUAL FUNDS SCHEMES Following chart shows different types of mutual fund schemes. Types of Mutual Fund Scheme By Structure Other Schemes | | |Tax Saving Scheme |Special Schemes | |Open-ended |Close ended |Interval | | | | | |By investment Objectives | | |Growth Schemes |Income Schemes |Balanced Schemes |Money Market Schemes | BY STRUCTURE: Open Ended Schemes: These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at Net Asset Value related prices. Close Ended Schemes: Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called closed ended schemes. You can invest directly in the scheme at time of the initial issue and thereafter you can buy and sell the units of the scheme on the
Stock exchanges where they are listed. The market price of the stock exchange could from the scheme’s NAV on account of demand and supply situation, unit holders’ expectation and other market factors. Interval Schemes: These combine the features of open ended and closed ended schemes. They may be traded at stock exchange or may be open for sale or redemption during pre determined intervals at NAV related prices. BY INVESTMENT OBJECTIVE: Growth Schemes: Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds and equities and are willing to bear short term decline in value for possible future appreciation.
These schemes are not for investors seeking regular income or needing their money back in the short term. Income Schemes: aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Balanced Schemes: Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest both in shares and fixed income securities in the proportion indicated in their offer documents. Money market Schemes: Aim to provide easy liquidity, preservation of capital gains and moderate income.
These schemes generally invest in safer, short term instruments such as treasury bills, certificate of deposits, commercial papers etc. Return on these schemes may fluctuate, depending upon the interest rates prevailing in the market. OTHER SCHEMES Tax Saving Schemes: These schemes offer tax rebates to the investor under tax law as prescribed from time to time. This is made possible because the government offers tax incentives for investment in specified avenues. For example: Equity Linked Saving Schemes, and Pension Schemes. Special Schemes: This category includes index schemes that attempt to replicate the performance of a particular index such as BSE Sensex or the NSE or industry specific schemes or sectorial schemes.
Index Fund Schemes: They are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectorial Fund: These schemes are ideal for investors who have already decided to invest in a particular sector or segment Research Methodology Research in this project will be conducted with the help of the following:- ? This research is exploratory in nature . I shall be collected data from various primary and secondary sources. The choice of sample scheme will be guided by the fact that a reasonable amount of information will available and representing true picture of Indian mutual fund industry. The methodology adopted for the completion of this project will be divided into four stages. The first stage included understanding the Concept, Structure and policy (related to Mutual funds) in the Indian mutual fund industry and Secondary data for this purpose will be collected through various books on mutual funds, business newspapers, business magazines, trade journals, annual & quarterly performance reports of the concerned mutual funds companies and the World wide web (www Information- concerned websites mentioned in the Bibliography). ? The second stage included the input stage in which various types of information data would be collected related to various mutual funds. The data was collected through discussions & interviews with the representatives of the companies. ? In the third stage all the gathered data will be arranged and tabulated to arrive at the necessary conclusion. All the information was correlated into tabulation charts and in figures to make the information easy to understand.
Primary collection of data included preparation of tools like Questionnaires to evaluate various schemes mutual funds and to determine the perception of the Indian investor towards the mutual funds. ? The last stage, i. e. the output stage included analyzing of the processed information in to final findings and comparing the information with the data of mutual fund companies and then arriving of final conclusions and policy recommendations to BSL. This research is exploratory in nature. I collected data from various secondary sources. The choice of sample scheme was guided by the fact that a reasonable amount of information was available and representing true picture of Indian mutual fund industry. I met 50 people in and around Thane city to know more about the Mutual Funds from the consumer’s point of view. Special care was taken to include people from all income brackets. About 35 people had no idea of Mutual Funds, which showed the low awareness level among the people of Thane about the Mutual Funds. ? This stresses the need for better marketing In India, the trend is that investors invest when there is a boom in the stock market and withdraw their holdings in times of slump. ? This is absolutely contrary to how the system works abroad as their investments take place in the slump period when greater units can be purchased with same amount of money. Withdrawals are correspondingly done in boom times as maximum return is achieved. This is the right strategy and Mutual Fund companies are trying to create this awareness among consumers. In the end it is concluded and recommended that there is a need for Better marketing to increase awareness level, focus on building a relationship of trust and commitment with the investors, and provide better rate of returns a lower risk. Significance: Backed by one of the most trusted and valued brands in India, Birla Sun life Mutual fund Has earned the trust of lakhs of investors with consistent performance. Birla Sun Life Mutual Fund manages around Rs. 22,980. 76 corers (as on March 31, 2010) worth of assets across its varied offerings.
Birla Sun Life Mutual Fund offers an investment option for everyone, whether you are a businessman or salaried professional, a retired person or housewife, an aggressive investor or a conservative capital builder. The Birla Asset Management (BSAM) philosophy is centered on seeking consistent, long-term results. Birla Sunlife Asset Management aims at overall excellence, within the framework of transparent and rigorous risk controls. Areas of Business A leading player in the mutual fund arena, BSAM offers a wide array of product for institutional and individual investors at various life stages across the risk- reward spectrum. The company offers investment products under three main categories for every financial need and under varied market conditions: • Equity funds • Balanced funds • Debt funds •
The core strength of BSAM stems not only from its sound systems and processes but also from the quality of its intellectual capital, which is made up of the best and brightest minds. At the same time, the company provides a robust risk management framework with inbuilt controls and balances. The title of the project is “Statistical Analysis of Mutual Fund On the Basis Of Risk and Return” This will through light on Risk and Return funds as a potential. Quantify the results of our fund marketing strategy and improve the quality of our investor communications with valuable investor feedback. Core Values The BSL Group has always sought to be a value-driven organization. These values continue to direct the Group’s growth and businesses. The five core Birla values that underpin the way we do business are: ?
Integrity: We must conduct our business fairly, with honesty and transparency. Everything we do must stand the test of public scrutiny. ? Understanding: We must be caring, show respect, compassion and humanity for our colleagues and customers around the world, and always work for the benefit of the communities we serve. ? Excellence: We must constantly strive to achieve the highest possible standards in our day-to-day work and in the quality of the goods and services we provide. ? Unity: We must work cohesively with our colleagues across the Group and with our customers and partners around the world, building strong relationships based on tolerance, understanding and mutual cooperation. Responsibility: We must continue to be responsible, sensitive to the countries, communities and environments in which we work, always ensuring that what comes from the people goes back to the people many times over. [pic] GROWTH IN ASSET UNDER MANAGERMENT It can be seen that there is constant rise in the mutual fund’s asset under management. For the past four years, the mutual fund industry is rising at the pace of 33% each year. Looking at the current trend we can assume great boost in this sector. STATISTICAL TOOLS: Mean An average of the sub-period returns, calculated by summing the sub-period returns and dividing by the number of sub-periods . This shows the average return earned by a fund over particular period of time. It is a good comparative tool to assess different types of fund. Standard Deviation
Standard deviation is a representation of the risk associated with a given security (stocks, bonds, property, etc. ), or the risk of a portfolio of securities. Risk is an important factor in determining how to efficiently manage a portfolio of investments because it determines the variation in returns on the asset and/or portfolio and gives investors a mathematical basis for investment decisions. The overall concept of risk is that as it increase s, the expected return on the asset will increase as a result of the risk premium earned – in other words, investors should expect a higher return on an investment when said investment carries a higher level of risk Where, ? = denoted standard deviation = average return
N = number of period, x = number actual return, The larger the Standard Deviation in a period, the greater risk the security carries. Beta A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole also known as “Beta coefficient”. Where, – ra measures the rate of return of the asset, – rp measures the rate of return of the portfolio of which the asset is a part; Cov (ra, rp) is the covariance between the rates of return. Beta is calculated using regression analysis, and you can think of beta as the tendency of a security’s returns to respond to swings in the market.
A beta of 1 indicates that the security’s price will move with the market. A Beta less than 1 means, the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1. 2, it’s theoretically 20% more volatile than the market. Many utilities stocks have a beta of less than 1. Conversely, most high-tech Sensex-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk. Sharpe Ratio A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance.
The Sharpe ratio is calculated by subtracting the risk-free rate – such as that of the 10-year U. S. Treasury bond – from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. . ? R is return from the security Rf is the Risk free return ? ?= standard deviation The Sharpe ratio tells us whether a portfolio’s returns 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. A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movement’s on standard deviation to measure only return against downward price volatility. Sortino Ratio A ratio developed by Frank A. Sortino to differentiate between good and bad volatility in the Sharpe ratio. This differentiation of upwards and downwards volatility allows the calculation to provide a risk-adjusted measure o f a security or fund’s performance without penalizing it for upward price changes It is calculated as: , DR is downside risk, R is portfolio Return T is Target Return
The Sortino ratio is similar to the Sharpe ratio, except it uses downside deviation for the denominator instead of standard deviation, the use of which doesn’t discriminate between up and down volatility. P/E ratio: P/E (price-to-earnings ratio) of a stock (also called its “earnings multiple”, or simply “multiple”, “P/E”, or “PE”) is a measure of the p rice paid for a share relative to the annual income or profit earned by the firm per s hare. A higher P/E ratio means that investors are paying more for each unit of income. It is a valuation ratio included in their financial ratios. The reciprocal of the P/E ratio is known as the earnings yield.
P/E Ratio = Price per share_____ Annual Earnings per Share. The price per share (numerator) is the market price of a single share of the stock. The earnings per share (denominator) is the net income of the company for the most recent 12 month period, divided by number of shares outstanding. The earnings per share (EPS) used can also be the “diluted EPS” or the “comprehensive EPS”. The P/E ratio can also be calculated by dividing the company’s market capitalization by its total annual earnings. For example, if stock A is trading at $24 and the earnings per share for the most recent 12 month period is $3, then stock A has a P/E ratio of 24/3 or 8.
Put another way, the purchaser of stock A is paying $8 for every dollar of earnings. Companies with losses (negative earnings) or no profit have an undefined P/E ratio (usually shown as Not applicable or “N/A”); sometimes, however, a negative P/E ratio may be shown. By comparing price and earnings per share for a company, one can analyze the market’s stock valuation of a company and its shares relative to the income the company is actually generating. Investors can use the P/E ratio to compare the value of stocks: if one stock has a P/E twice that of another stock, all things being equal (especially the earnings growth rate), it is a less attractive investment.
Companies are rarely equal, however, and comparisons between industries, companies, and time periods may be misleading. Treynor Ratio A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless investment per each unit of market risk. The Treynor ratio is calculated as 🙁 Average Return of the Portfolio – Average Return of the Risk-Free Rate) / Beta of the Portfolio) In other words, the Treynor ratio is a risk-adjusted measure of return based on systematic risk. It is similar to the Sharpe ratio, with the difference being that the Treynor ratio uses beta as the measurement of volatility. Also known as the “reward-to-volatility ratio”. Fama
A factor model that expands on the capital asset pricing model (CAPM) by adding size and value factors in addition to the market risk factor in CAPM. This model considers the fact that value and small cap stocks outperform markets on a regular basis. By including these two additional factors, the model adjusts for the outperformance tendency, which is thought to make it a better tool for evaluating manager performance. Here r is the portfolio’s return rate, Rf is the risk-free return rate, and Km is the return of the whole stock market. The “three factor” ? is analogous to the classical ? but not equal to it, since there are now two additional factors to do some of the work.
SMB and HML stand for “small [Market Capitalization] minus big” and “high [book-to-price ratio] minus low”; they measure the historic excess returns of small caps over big caps and “value stocks” over “growth stocks”. Fama and French attempted to better measure market returns and, through research, found that value stocks outperform growth stocks; similarly, small cap stocks tend to outperform large cap stocks. As an evaluation tool, the performance of portfolios with a large number of small cap or value stocks would be lower than the CAPM result, as the three factor model adjusts downward for small cap and value out performance. INFRASTRUCTURE MUTUAL FUNDS:NFRASTRUCTURE MUTUAL FUND An Infrastructure fund is a managed vehicle through which investors gain exposure to the underlying characteristics of infrastructure assets.
Infrastructure is emerging strongly as an asset class which can be particularly well suited to pension funds and other investors with a long-term outlook. Infrastructure assets tend to display comparatively stable, long-term real return and provide a good match for long-dated liabilities. They invest in private infrastructure companies, but the funds themselves can be listed or unlisted. For example, Macquarie has been investing in infrastructure for more than a decade and now manages over 20 infrastructure funds around the world. Half of these are listed on the stock exchange, with investors from pension funds and other institutions to retail investors. The rest are unlisted funds in which the investors are largely pension funds and other institutions.
The fund tens to either specialize in one class of infrastructure – for example invest only in airport or only in toll-roads – or they invest across various infrastructure sectors which meet specified investment criteria. For example The infrastructure assets can include telecommunications and broadcast infrastructure, utilities, toll road, airport and other transport infrastructure. Fundamentally, infrastructure assets are distinguished by displaying the following key characteristics: • Provide essential community services • Have strategic competitive advantage • Have predictable long-term cash flow These characteristics lead to the investment benefits outlined below. Infrastructure assets display unique characteristic.
Their essential and long-term nature, combined with strong competitive position, lead to stable and predictable consumer demand and cash generation. These assets tend to have a high fixed capital base with comparatively low Operating costs on average of between 10% and 30% of revenue . Along with the long-term operating license and predictable demand, often in a regulated environment, this allows the manager to forecast cashflows with accuracy. Infrastructure assets have a low correlation to equity markets and other asset classes. For the reason, it can provide valuable diversification in an investment portfolio. It also provides a good match for the long-dated liabilities of pension funds due its long-life and inflation protected returns.
This stability in operating cashflows can reduce the overall volatility of returns for investors and, in our experience; investors are finding this combination of sustainable yields, lower volatility and inflation-linked return increasingly appealing. By investing in infrastructure through a specialized fund, investors not only gain access to infrastructure as an asset class, but they benefit from the expertise that the fund manager can bring to asset selection and management. Infrastructure funds are part of a mutual fund category called thematic funds. While sectorial funds invest in particular sectors like, say, information technology, power, metals, oil and gas, etc. thematic funds invests in themes like infrastructure, consumption-led categories like the retail industry and outsourcing companies. Today, there is a huge buzz about the Great Indian Gold Rush and its three themes infrastructure, consumption and outsourcing. Of these three, infrastructure funds have caught the fancy of a lot of mutual funds; many new funds have been launched in this category in the last couple of years. But there are only five that have sizeable money under management; and these four were launched before 2006: These funds include: 1. DSP ML TIGER Fund 2. Prudential ICICI Infrastructure Fund 3. Birla Sun life Infrastructure Fund 4. UTI Thematic Infrastructure Fund These are open-ended funds; this means you can invest in them whenever you like.
We expect some more infrastructure funds to hit the market but most of them would be close-ended (in open-ended funds, investors are free to sell their units anytime; in close-ended funds, investors cannot sell their units for a minimum period of time – this minimum period is decided by the funds). Infrastructure, as a theme, covers several sectors like power equipment and construction companies. Unlike technology sector mutual funds (at best, technology sector funds could buy stocks from telecom and media besides the software stocks it traditionally invests in), infrastructure funds are not restricted to a few sectors. DSP Merllynch Tiger Fund Here’s a fund suitable for all types of investors.
The aggressive ones will like the returns it offers while the conservative ones will find peace in its diversification. DSP T. I. G. E. R. Fund was launched at a very opportune time when the Sensex was around 7,500 and the India economy had begun to witness high growth. DSP India T. I. G. E. R Fund was Launched in April 2004. In the past four years DSP India has performed excellent and has become one of the best funds for the investor. DSP T. I. G. E . R. Fund is an open ended fund which can be purchase or sold anytime when the market is open. Its Market capitalization as at 31/03/08 was 19,005. 59 cr. The broad investment mandate, large-cap tilt and intense diversification should alleviate all their fears.
An acronym for The Infrastructure Growth and Economic Reforms, the fund focuses on sectors that are likely to prosper from growth related to economic reforms and infrastructure development. With this as a starting point, the fund manager follows a top-down approach (for sector selection) before resorting to bottom-up stock picking. Unlike other infrastructure offerings, its broader mandate has enable d it to tap into sectors that core infrastructure funds do not – healthcare, FMCG, textiles, consumer non-durables. ICICI Prudential Infrastructure Fund ICICI Prudential Infrastructure has protected the downside well while growing at a fast pace. In fact the fund emerged as the fourth best diversified equity fund in 2006. ICICI Prudential Infrastructure fund was launched in August 2005.
It is an open ended fund having market capitalization of Rs. 38,317. 95 cr. as at 31/03/08. Its last 52 weeks highest NAV was 36. 61, while 52 weeks lowest was 18. 53. As infrastructure funds go, the fund is structured to exclude technology, FMCG and pharmaceutical companies. But beyond this similarity, there exist discernible characteristics in the fund’s portfolio that set it apart from other infrastructure based funds. Birla sun life Infrastructure Fund Birla sun life Infrastructure Fund is one of the best fund and highly rated fund. [pic] It has recently received as a best equity fund award by CRISIL. It is considered as one of the best infrastructure fund.
Birla Sun life Infrastructure’s astute ability to spot sector trends has delivered handsomely. Birla Sun life Infrastructure Fund was launched in December 2004. It is an open ended fund having market capitalization of Rs. 2 4,081. 68 cr. as at 31/03/08. Its last 52 weeks highest NAV was 45. 515 and lowest was 23. 1237. The fund achieved this essentially on the back of a large-cap growth-oriented focus, with some help from the m id caps. To some extent one can attribute this stellar performance to the sector exposure that most infrastructure funds maintain. But the real clincher had been he fund manager’s ability to spot sector trends which has truly augmented the fun d’s returns. UTI Thematic Infrastructure Fund
Infrastructure sectors such as Airports, Banking Construction, Engineering, Energy, Mining, Ports and Power among others. The category pioneer, UTI Infrastructure has been going great guns. A runaways hit in 2005 and an exemplary success in 2006 & 2007, the fund is on a roll with the future looks just as promising. He first infrastructure fund to be launched, it was a classic example of the early bird getting the worm. It found a spot in the top quartile fund the category in 2005, generating 57 per cent returns and outdoing the average peer by a margin India’s infrastructure sector is expected to witness huge investments in the coming years. To enable you to take advantage of this boom, UTI now launches the UTI Infrastructure Advantage Fund.
As a 3 year close ended fund it focuses on investing in high growth of more than 10 per cent. In 2006, it leapt to the topmost slot with returns of 61. 48 per cent. UTI Infrastructure fund was launched in the year 2005. It is an open ended fund having market capitalization of Rs. 24,247. 71 cr. as at 31/03/08. Despite being a thematic fund, it has a reasonably diversified portfolio of 40-45 stocks. Naturally, capital goods, construction and energy dominate the portfolio, but this infrastructure fund also has a significant exposure to metals and technology. This one makes for a worthy and diversified selection if you want to bet on the capital expenditure wave sweeping across the country.
DATA ANALYSIS AND INTERPRETATION OF DATA [pic] The above graph shows that ICICI Prudential Infrastructure Fund has maximum fund under management as compared to other fund houses. It is followed by UTI Infrastructure fund, Birla Sun life Mutual Fund and DSP Merllynch Tiger Fund respectively. MEAN & STANDARD DEVIATION OF THE FUNDS: Calculated value of Mean and Standard Deviation of each types of Infrastructure fund is shown in the chart below: |50 | | | |43. 24 | | | | | |43. 88 |42. 74 | | |41. 72 | | |45 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |40 | | | | | |Mean | | |35 | | | |29. 29 |30. 26 | | | | |28. 68 | |28. | | | | | |30 | | | | | |Standard Deviation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |25 | | | | | | | | |20 | | | | | | | | |15 | | | | | | | | |10 | | | | | | | | |5 | | | | | | | | |0 | | | | | | | | | | | | | | | | | |DSP Merllynch |ICICI Prud ential |Birla Sunlife |UTI Thematic | | | |Infrastructure | | |Tiger Fund |Infrastructure |Fund |Infrastructure | | |Fun d | |Fund |
Mean Calculated above is for the period of past one year. We can se e that there is not much difference between the returns of these mutual funds. DSP Merllynch T. I. G. E. R fund has provided maximum return of 43. 88%, which means that it has been most successful fund f or the past year. DSP Merllynch T. I. G. E. R fund also has the lowest standard deviation. It means that it is the least volatile fund of the above mentioned fund. So, for both high risk earner and comparatively low risk earner, DSP Tiger fund is better option as it gives highest return with least volatility. ANALYSIS WITH STATISTICAL TOOLS: ATISTICAL ANALYSI ANALYSIS WITH STATIST Funds | |Beta |Sharpe |Treynor |Sortino |Expense | | | | |Ratio |Ratio |Ratio |Ratio | | | | | | | | | |DSP |Merllynch |0. 97 |0. 32 |1. 20 |0. 51 |1. 91% | |TIGER Fund | | | | | | |ICICI |Prudential |0. 93 |0. 36 |1. 38 |0. 58 |1. 2% | |Infrastructure | | | | | | |Fund | | | | | | | |BSL | |1. 01 |0. 31 |1. 19 |0. 50 |1. 95% | |Infrastructure | | | | | | |Fund | | | | | | | |UTI | |1. 04 |0. 30 |1. 10 |0. 48 |2. 3% | |Infrastructure | | | | | | |Fund | | | | | | | If Beta less than 1 means, the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. As seen from the above table UTI Infrastructure Fund is most volatile followed by BSL, DSP and ICICI Prudential respectively. Now if market rise, UTI Infrastructure Fund will rise at faster rate than other fund, but if market falls, UTI Infrastructure Fund will fall at faster rate too. The Sharpe ratio tells us whether a portfolio’s returns are due to smart investment decisions or a result of excess risk.
The greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been. ICICI Prudential has highest of Sharpe Ratio of 0. 36, which explains that the portfolio of ICICI Prudential is better of all. Treynor ratio is a risk-adjusted measure of return based on systematic risk. Greater the value of Treynor Ratio better is the fund. Here again ICICI Prudential Infrastructure fund scores higher than other funds. Expense Ratio allowed by SEBI is 2. 5% of the total asset under management. All the above funds mentioned are below the mentioned ratio. But UTI Infrastructure fund is having maximum expense ratio of 2. 03%. Here again ICICI Infrastructure fund has least expense ratio.
The reason might be that it is well established fund house and hence requires Type of Funds Listed below are different types of Equity Funds: Index Fund: – An index fund makes the investment in securities in order to reflect the market index. It entails buying and selling of securities in such a way that it replicates the composition of the selected index enabling it to track the underlying index performance. These funds have lower investment returns than the other funds, as the turnover of securities in these funds is bare minimum. This in turn results in lower management costs. Though these funds provide low investment returns, they offer the benefit of well-diversified funds.
Growth Fund: – The investments of Growth Fund are made in stock of companies, which grow at a swift pace. The growth companies re-invest almost their entire profit for R&D (Research and Development) rather than pay dividends. The main objective of Growth Funds is to provide Capital Gains than the regular income. Value Fund: – The Value Fund invests in Value Stock. The companies that are listed under the Value Stock are generally well established organizations that pay dividends. Sector Fund / Specialized Fund: – As the very name indicates, the Sector Funds tack a specific sector of the market i. e. , one area of the industry. These funds invest a minimum of 25% of their asset in their area of expertise.
These funds offer high appreciation accompanies by a high level of risk factor. The best examples of a sector fund are gold funds, technology funds, etc. Income Fund: – The Income Fund lays major emphasis on the income rather than the growth. The investments of these funds are made in stock of reputed companies, paying regular dividends, like preferred stocks, utility stocks, etc. The Option Income Funds invest in securities on which options can be written and one earn premium from writing options. Capital gains can also be earned from trading options at profit. These funds hunt for increasing the total return by adding income generated by the options to appreciation on the securities held. EQUITY FUND:
The term Equity Investment refers to the buying and holding of stocks in the stock market by individuals & companies, then expecting income from dividends and capital gains when there is a rise in the stock value. It also refers to the acquirement of ownership / equity participation in a start-up company or a private company. When you invest in a start-up company, the investment is termed as Venture Capital and is likely to be at a higher risk than the on-going concerns. The Equity Funds, also known as Stock Fund, is a fund that invests in equities / stocks. These funds are generally held in stock or cash unlike securities or bonds. This may be done by means of a mutual fund or exchange traded fund.
The main objective of investing in an equity fund is to have long-term growth via capital appreciation apart from dividends and interest as sources of revenue. Explicit equity funds may have their focus on specific market sector and also include certain amount of risk. The Equity Funds are either via the mutual funds or by any other pooled investment vehicle. These vehicles have their prices quoted, listed and publicized. The mutual funds are generally under the management of renowned fund management firms. Under these types of holdings, the investors can have diversified funds with the help and services of skilled professionals known as fund managers. These fund managers are in charge of these funds. These funds can be invested only in securities from one or more countries.
Fund managed by the fund managers are actively managed and the Index Fund reflects the specific market indices. Different types of Equity Funds are available based on the motive of investment. For instance, if you need to investment in equities for growth, the Stock Funds are best suited to you: ? Need Income invest in Bond Funds ? Need Safety of Principal amount invest in Government Bond Funds ? Need Maximizing Current Income invest in Corporate Bond Funds There has been quite rational move by all the fund houses in including and excluding right firm in their portfolio. ICICI Prudential made a huge change in its portfolio by introducing 4 new companies and withdrawing from 4 existing companies.
It invested into companies like ONGC, Gujarat Ambuja Cement ltd, India Cement Ltd and Mahindra & Mahindra Ltd, all having huge market potential. It let away with HDFC, GAIL which are at the moment hit by the market factors. Both UTI & DSP Merllynch had similar changes this month with both buying the share of Reliance Industries Infrastructure Ltd shares and selling Reliance Energy. DSP Merllynch T. I. G. E. R Fund also purchased some shares in Idea Cellular Ltd. It is expected that Idea Cellular is expected to do well in the recent future; hence it might be a good move. Tata Infrastructure also did a positive move by investing into Bharti Airtel and Reliance Petroleum which is expected to do well. Bharti Airtel is expected to merge with MTN of South Africa.
This merger is expected to benefit Bharti Airtel by giving global markets. Hence it’ll help its shareholder. Reliance Growth Fund Reliance Growth has not only emerged as the largest mid cap fund but is also the largest equity diversified fund with AUM of over Rs 5,600 crore. The fund has been able to generate investor interest due to its impressive performance by beating its peers by an impressive margin for the past so many years. The fund was launched in September 1996. After the 2001 dotcom crash, the fund made a smart comeback in 2002 with a return of 55. 75 per cent, the second-best among the 59 funds. Since then it maintained a top quartile position for the next four calendar years.
In 2007, the fund’s investors had a reason to cheer since the fund gave them a high return of over 76 per cent in the year consequently taking the fund’s rank to 25 among the 162 funds. While the fund’s allocation to large-, mid- and small-caps keep oscillating, during the past six months, the exposure to mid-cap stocks has increased from 43 per cent to over 50 per cent. In the past, the fund followed a strategy of buy-and-hold for some stocks, while in some it has gone for a quick profit taking. It is well known for its smart moves. In February 2006, the fund maintained highest exposure to technology and basic/engineering. Now energy and financial services sectors command the highest exposure of the fund. Over the past one year the fund has also pared its exposure to auto and basic/ engineering sectors also.
SBI Magnum Contra Fund When the goings great, the fund performs exceptionally and even when the goings not so smooth, Magnum Contra still manages to save face. Magnum Contra has consistently managed to stay ahead of the curve. The fund outperformed the category in every quarter since 2003. It emerged as the second and third best fund in 2004 and 2005 and was pretty impressive last year too. It has the third highest risk adjusted return in its category, i. e. for every unit of risk undertaken, the fund gives you more bang for your buck. When the market slips, it tends to fall much less than the category average as well. This fund was launched in July ’99.
The scheme of the fund is open ended and can be purchased and sold at any point of time. The fund has struck a fine balance between riding on consensus sectors and taking contrarian bets. While still holding on to its multi-cap orientation, the portfolio has expanded from 31 odd scripts to 57. 6. Balance Fund: – The investment in balance funds is made in stocks for appreciation and in the bonds for income. It maintains a balance by providing regular income to the fund holder and also increases the capital amount. 7.