Mutual Fund Report(for reference)

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Chapter I: INTRODUCTION
1.1. Abstract
This report is a comparative analysis of different categories of mutual funds prevailing in
India. The primary objective is to find out the risk adjusted return of each fund category and
the ancillary objective is to evaluate the return after inflation. We want to find out whether
mutual funds have provided adequate returns for the systematic risk inherent in them and rank
each of the nine fund categories selected by us in descending order of their risk-adjusted
return.
The chapter of this report introduces the reader to the concept of a mutual fund, its working,
structure of a mutual fund organization, regulations related to them and its advantages and
disadvantages to provide a bird’s eye view of the industry. The second half of the chapter
deals with the format and design of out report. The time frame taken into consideration, the
sample design of the study and the research methodology have been mentioned. It is almost
impossible to achieve a study of this scale without reference to the works of others who have
thought and worked on the same lines as us. The next chapter – Review of literature deals
mentions all the other papers studies by us and notes they contribution to this report. The
following chapter – The company profile introduces the reader to Larsen & Toubro Finance
and its products.
The fourth chapter – data analysis and interpretation shows our entire quantitative research
followed by our conclusion. We have also provided suggestions after coming to our
conclusion.

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1.2. Concepts of Mutual Funds
1.2.1. What is a Mutual Fund?
A Mutual Fund is an investment vehicle that, in India, is organized as a trust that pools the
investible corpus of a number of investors who share a common financial goal. The money
thus collected is invested in capital and debt market instruments such as shares of listed
companies, debentures, corporate bonds, treasury bills, G-secs and other securities. The
income earned though capital appreciation, interest or dividend from these instruments is
shared by the investors in proportion to their investment in the fund.
Figure 1.2.1 (a) – Working of a Mutual Fund.
(Source: AMFI)
A large number of investors with a common investment objective and risk profile pool in their
money with a Mutual Fund. The money thus collected (called AUM), is invested by the fund
manager of the AMC is designated securities. The securities earn returns in the form of
interests (in case of instruments like G-secs, T-bills, debentures and bonds) and capital gains
(equities, gold, commodities). These returns are passed on to the investor after accounting for
expenses related to running the mutual fund. In case of a loss generated on the securities (for

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example, in case of decrease in the rice of shares held by the fund), the losses are also
charged to the investors.
Mutual Fund investors invest in funds by buying ‘units’. Each unit is an ownership right in
the fund. Units are to Mutual Funds what shares are to companies. Each unit has a face value
of `10 as per SEBI regulations. NAV is the worth of one unit at any point of time. NAV is
calculated by dividing the AUM by the number of units. NAV changes as the value of the
portfolio of the fund goes up and down. One important factor affecting investor’s return is the
expense ratio1. Expense ratio is the ratio of total expenses incurred by a scheme to its Average
Weekly Net Assets. The ratio should be as low as possible as it is charged to the AUM of the
scheme and lowers the NAV. Another factor contributing to expenses is portfolio turnover2.
Fund managers keep churning their portfolios either to keep the scheme in line with its
objectives or to let go of underperforming investments and increase positions in more
profitable securities or sectors.
Chart 1.2.1 (a) - AUM Growth in select countries
(CAGR for 2006 – 2011)
(Source: ICI Fact Book 2011, AMFI data)
The above figure shows the growth rate of AUM of the Mutual Fund industries in various
countries. As can be seen above, India’s AUM growth rate is only second to that of China in
1 Expense ratio is the ratio of the operating costs related to running of a mutual fund as a ratio of the net average
weekly AUM of the fund
2 Portfolio turnover is a measure of how frequently assets within a fund are bought and sold by the managers.
Portfolio turnover is calculated by taking either the total amount of new securities purchased or the amount of
securities sold - whichever is less - over a particular period, divided by the total net asset value (NAV) of the
fund. The measurement is usually reported for a 12-month time period

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% terms. This is because of the late entry of the concept into the country and recent
acceptance of the product where as the sector has reached a saturation point.
Chart 1.2.1 (b) – Contribution of Mutual Funds to Gross Household Financial Savings
(Source: RBI data)3
The increasing share of Mutual Funds investments in the gross household financial savings
shows the increasing confidence and acceptance of the product.
Chart 1.2.1(c) – Composition of India’s Gross Financial Savings in FY2011-12
(Source: RBI data)
3 As of 31st March of each year.

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The remaining constituents that make up the gross financial savings of an average Indian
household are shows in the pie chart above. Bank deposits still dominate Indian savings and
investment mentality with a 52% share.
1.2.2 Advantages and Disadvantages of Mutual Funds
o Advantages
 Professional Management
Mutual Fund houses employ trained analysts who are acquainted with the
functioning of the security markets. Investment decisions are taken by a
highly experienced fund manager who has several years of experience and
exceptional stock picking skills. This reduces the risk of bad investment
decisions which the layman might make. Eg. Mr. Prashant Jain, Fund
Manager of HDFC 200 and HDFC Equity has achieved returns of
approximately 28% over the last decade.
 Reduced Costs
With large amount of the investment from many investors, economies of
scale set in, mutual funds pay lesser transaction costs (eg. Brokerage)
because of large volumes; operating and administrative expenses are also
shared. The benefits are passed on to the investors. Eg. ICICI Prudential Top
100 had an expense ratio 1.00% in 2011 where as for Religare AGILE it was
2.47%.
 Diversification
Diversification generally lowers risk. A pre-requisite for diversification is
the availability of a large corpus of investible money which is available to
Mutual Funds. For retail investors with small sums of cash, proper
diversification across a number of sectors and asset classes would be almost
impossible.

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Chart 1.2.2 (a) – Diversified nature of L&T Growth fund4
The pie chart above shows the diversified nature of L&T Growth Fund. The fund is invested
in fifteen different sectors and 39 different scrips.5This offers substantial diversification to
investors across sectors and scrips.
 Choice of Schemes
Today there are thousands of Mutual Fund Schemes available in the
market. There are large cap funds for those with low risk profiles and an
appetite for consistent dividends. Risk taking investors may also go for
small cap funds. Debt funds are available for capital protection. The list
goes on. The number of schemes available in the market stands at 50426.
 Transparency and Safety
Funds provide investors with updated information pertaining to the markets
and the schemes. All material facts are disclosed to investors as required by
the regulator which includes sector allocation, names of securities held,
fund performance versus performance of benchmark, various volatility
measures among others. The industry is part of a well-regulated investment
environment where the interests of the investors are protected by the
regulators. All funds are registered with SEBI and complete transparency is
forced.
4 Source of information – L&T fund fact sheet May 2012.
5 As of 1st May 2012.
6 As of 31st March 2012

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o Disadvantages
 Loss of Control
Investors in Mutual Funds do not have any control over how their money is
invested i.e. particular securities bought or sold by the fund manager.
 Fees and Expenses
SEBI Regulations cap the fees that can be charged to investors at 2.5% of
AUM for equity schemes and 2.25% for debt schemes. Fees and Expenses
such as Exit loads also diminish investor’s returns.
 Cost control not in the hands of the investors
Investor have to pay investment management fees and fund distribution
costs as a percentage of the value of his investments (as long as he holds
the units), irrespective of the performance of the fund.

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1.2.3. Structure of Mutual Funds.
Mutual Funds in India follow three tier architecture as depicted in the diagram below.
Figure 1.2.3 (a) – Three tier structure of a Mutual Fund
Tier I: The Sponsor
The sponsor is the person who starts the fund. The Sponsor approaches the SEBI, which is the
market regulator for Mutual Funds. SEBI checks whether the person has a sound financial
track record over preceding 5 years, enough experience in the financial sector, adequate net
worth etc. Sponsor must contribute at least 40% of the net worth of the amount managed and
meet other eligibility criteria prescribed under SEBI (Mutual Funds) Regulation Act, 1996.
Tier II: The Trust
Once approved by SEBI, the sponsor creates a Public Trust as per the Indian Trusts Act,
1882. Trusts have no legal identity in India and cannot enter into contracts, hence the
Trustees are the people authorized to act on behalf of the Trust. Contracts are entered into in
the name of the Trustees. Once the Trust is created, it is registered with SEBI after which this
trust is known as the Mutual Fund or just Fund.

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Tier III: The AMC, Distributors, RTA & Custodian
The Asset Management Company manages the investor’s money. Trustees appoint the AMC,
to manage investor’s money. The AMC in return charges a fee for the services provided and
this fee is borne by the investors as it is deducted from the AUM of the fund. The AMC has to
be approved by SEBI. The AMC functions under the supervision of its Board of Directors, and
also under the direction of the Trustees and SEBI. At least 50% of the directors of the AMC
should be independent directors and not be associated with the sponsor in any manner. The
AMC must have a net worth of 10 crores at any given time. It is the AMC, which in the name
of the Trust, floats new schemes and manages these schemes by buying and selling securities.
In order to do this the AMC needs to follow the rules and regulations prescribed by SEBI and
as per the Investment Management Agreement it signs with the Trustees.
The roles of an AMC are:
o Manage investor’s money on a daily basis.
o AMC cannot deal with a single broker beyond a certain limit of transactions.
o AMC cannot act as a Trustee for some other Mutual Fund.
o The responsibility of preparing the OD.
o Appointments of intermediaries like IFAs.
o AMC is responsible for the acts of its employees and service providers.

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Chart 1.2.3 (a) – Market Share of various AMCs (all figures are a % of total)
(Source: ICRA)
The Indian Mutual Fund Sector is highly fragmented with a large number of players
competing for a piece of the pie. The above chart shows the market share under each of the
major AMC’s with HDFC, ICICI, Reliance, Birla and UTI being the biggest players.
Chart 1.2.3 (b) – Growth of number of AMCs in India
(Source: AMFI)
If the fund manager intends to buy or sell some securities, the permission of the Compliance
Officer is necessary. A Compliance Officer is one of the most important employees of the
AMC. Whenever the fund intends to launch a new scheme, the AMC has to submit a draft OD
to SEBI. This draft OD, after being approved by SEBI becomes the OD of the scheme.

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Every fund must have a custodian. A custodian’s role is safe keeping of physical securities
and also keeping a watch on the corporate actions like dividends declared by companies in
which the fund has invested. The Custodian is appointed by the Board of Trustees. Securities
are no longer held in physical form but mostly in demat form with the Depositories. The
holdings are held in the Depository through DPs. Only the physical securities are held by the
Custodian. RTAs perform the important role of maintaining investor records. All the NFO
forms, redemption forms go to the RTA’s office where the information is converted from
physical to electronic form. Distributors are SEBI recognized agents, either individuals or
corporations who are involved in selling schemes of various funds to investors.
1.2.4. Regulatory Framework of Mutual Funds
SEBI formulates policies and regulates the sector to protect the interest of the investors. The
Mutual Funds industry in India is regulated by the SEBI (Mutual Fund) Regulations Act,
1996.
SEBI regulations pertaining to structure of Mutual Funds
o Mutual Funds must be constituted as a trust.
o SEBI regulations make it mandatory for Mutual Fund to have the three tier
architecture described above.
o SEBI Regulations require that at least two thirds of the directors of trustee company or
board of trustees must be independent i.e. they should not be associated with the
sponsors in any way.
o A mutual fund shall be constituted in the form of a trust and the instrument of trust
shall be in the form of a deed, duly registered under the provisions of the Indian
Registration Act, 1908 (Sec. 16) executed by the sponsor in favor of the trustees
named in such an instrument.
o The sponsor should have a soundtrack record.
o Sponsor should have been doing business in financial services for not less than 5 years
with positive net worth in all the immediately preceding 5 years.
o Sponsors, director or any principal officer should not have been found guilty of fraud
or convicted of an offence involving moral & economic turpitude.
o He/she cannot be trustee of any other mutual fund.
o The trustees appoint the AMC with the prior approval of the SEBI.

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SEBI regulations pertaining to operations of Mutual Fund
o CEO is required to ensure mutual fund compliance as per the regulations and the fund
managers are required to ensure investment as per the objective of the scheme and
interest of unit holders.
o The time validity of transactions by employees of AMCs and Mutual fund trust
companies has been cut down to one week and the time limit for purchase and sale has
been reduced to 30 days.
o Regulations do not permit funds to invest over 10% of their AUM in a single
company; this is done to ensure that the investors are not subjected to unwarranted
risk.
o The funds of a scheme shall not in any manner be used in option trading or in short
selling or carry forward transactions.
o Investors can wind up a scheme or even terminate the AMC if until the holders
representing 75%.
o Mutual funds have been instructed to obtain UCC either from the BSE or NSE before
commencing trading on behalf of schemes/clients.
o No scheme of a mutual fund other than the offering period of any equity ELSS shall
be open for subscription for more than 45 days.
Mutual funds have been advised to collect information regarding bank account number and
PAN from investors, wherever the total volume of investment is `50,000 or more.
o No scheme shall be launched by the asset management company unless such scheme
is approved by the trustees and a copy of the offer document has been filed with the
Board.
o Sale and redemption requests for all schemes except liquid funds, made before 3 pm
shall be at the closing NAV of the same day. For all outstanding instruments, the next
day’s NAV shall be applicable. For all liquid schemes, all requests received till 10 am
should be at the previous day’s NAV and thereafter at day’s closing NAV.

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SEBI regulations pertaining to advertisement & marketing
o Mutual funds shall indicate in all advertisements, the names of the Settlor, Trustee,
Manager and or Financial Advisor to the Fund, bringing out clearly their legal status
and liability of these entities.
o All advertisements shall also make a clear statement to the effect that all mutual funds
and securities investments are subject to market risks, and there can be no assurance
that the fund's objectives will be achieved.
o In any advertisement a mutual fund guarantees or assures any minimum rate of return
or yield to prospective investors, resources to back such a guarantee shall also be
indicated.
o Mutual Funds must refrain from using exaggerated or unwarranted claims,
superlatives and opinions, which cannot be substantiated by the available public data.
Avoid future forecasts and estimates of growth.
o All advertisements displaying returns/yields must disclose in the main body of the
advertisement, immediately after the returns/yields and in the same font that past
performance may or may not be sustained in future. If the returns/yield are
unrealistically higher due to extraordinary circumstances (e.g. rise/fall in interest rates)
may be clarified in the advertisement.
o The risk factors of a scheme should be present at bottom of the add covering at least
10% of the printed area.
SEBI regulations pertaining to fees and expenses
1. SEBI regulations put a ceiling on the expenses that can be charged to the investors.
The table below explains it:

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Table 1.2.4 (a) – Maximum Expense Ratio allowed under SEBI guidelines.7
Net Asset (` Crores) Equity Schemes Debt Schemes
Up to `100 crores 2.50% 2.25%
Next `300 crores 2.25% 2.00%
Next `300 crores 2.00% 1.75%
Excess over `700 crores 1.75% 1.50%
The maximum expense ratio cap set up SEBI for debt funds is lower than that of an equity
fund with corresponding AUM range since equity funds have significantly higher portfolio
turnover hence resulting in higher brokerage and transaction fees. On the other hand, debt
securities are purchased with longer time frames and hence portfolio turnover and
subsequent brokerage is lesser. Additionally, operating costs associated with debt funds are
comparatively lower. Funds with larger AUM must accommodate within lower expense ratio
since they enjoy economies of scale such as office space, salary of analysts, marketing and
advertisement costs etc.
o In terms of SEBI circular no. Cir/ IMD/ DF/13/ 2011 dated August 22, 2011,
transaction charges are allowed to be paid to Mutual Fund distributors.
o Entry load fees were abolished in June 2009.
o The investors are free to negotiate the fee that they give to the agents for investing in
mutual funds.
o The fraction of 2.25% that was paid by fund houses to the distributors will be paid by
investors directly. Depending on the services offered by distributors, investor could
also pay as less as 0.25%.
SEBI regulations pertaining to AUM and NAV
o According to SEBI (mutual funds, second amendment) Regulations, 2000, a mutual
fund can invest up to 5% of its AUM in the unlisted equity shares or equity related
instruments in case of open ended schemes; while in case of close ended schemes,
mutual funds can now invest up to 10% of its AUM.
7 Source: SEBI (Mutual Fund) Regulations Act 1996.

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o Mutual funds are required to declare their NAV and sale repurchase prices of all
schemes updated daily on a regular basis on the AMFI website by 8:00 pm and declare
NAVs of their close ended schemes every Wednesday.
1.2.5. Taxationin Mutual Fund
Securities Transaction Tax (STT)
This is the tax on the value of transactions in equity stares, derivates and equity mutual fund
units. STT is not payable in debt or debt-oriented mutual fund units.
Table 1.2.5 (a) – Security Transaction Tax
On purchase of the units in stock exchange 0.125%
On sale of the units in stock exchange 0.125%
On re-purchase of units (by AMC) 0.250%
Additional Tax on Income Distributed
This is a tax on dividend distributed by debt-oriented mutual fund schemes. This additional
tax on income distributed is not payable on dividend distributed by equity oriented mutual
fund schemes
Table 1.2.5 (b) – Additional Tax on Income Distributed for Debt schemes
Liquid Schemes (Money market funds) 25% + Surcharge + Education Cess
Other debt funds (individual investors) 12.5% + Surcharge + Education Cess
Other debt funds (other investors ) 20% + Surcharge + Education Cess
Dividend Distribution Tax (DDT)
Dividend Distribution Tax on dividends distributed to corporate investors by all categories of
debts funds been increased to 30% from June, 2011.
Capital Gain Tax
Capital Gain is the difference between sale price and acquisition cost of the investment. Since
mutual funds are exempted from tax, the scheme does not pay a tax on the capital gains they
earns.
Investors in mutual fund schemes however need to pay a tax on their capital gains:

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Table 1.2.5 (c) - Taxation of Equity & Debt Mutual funds
Equity
Oriented
Mutual
Funds
Capital
Gains
If STT is
paid
Sold within one year Sold after one year
Short term capital gains are
taxable at base rate of
15.45%. Also Surcharge on
education cess 2% and
secondary higher education
cess 1% to be paid
Long Term capital
gain is exempted
from income tax
If STT is not
paid
Short term capital gain on
such transaction are taxable
at rates depending on the
individual tax bracket they
fall into
Long Term capital
gain in tax rate would
be 10% without
indexation & 20%
with indexation
Capital Loss
(Selling Price > Buying
Price)
A Taxable 'capital loss' can
be set-off only against
'capital gains'. An exempt
capital loss cannot be set-
off against taxable capital
gains.
A taxable long-term
capital loss can be
set-off only against
long-term capital
gains. However, a
taxable short-term
capital loss can be
set-off against both
short -term and long-
term capital gains
Dividends
Dividend Income is Exempt from Income
Tax
Debt
Oriented
Mutual
Fund
Capital Gain
Short term capital gain
are added to the income &
get taxed as per tax slabs
applicable
Long term capital gain
are taxed at 10% plus
surcharge and
education cess without
indexation & 20%
plus surcharge and
education cess with
indexation

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1.3. Types of Mutual Funds in India
A Mutual Fund company can have several funds called “schemes” under its management.
These different funds can be categorized by structure, investment objective and others.
Figure 1.3 (a) - Types of Mutual Funds

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The fund types in the diagram above have been described below:
(Source: AMFI)
The most popular type of fund in India is those which invest in debt and money market
securities. This is in line with the observation that Indians are more risk averse.
Equity Mutual Fund
Also known as stock Mutual Fund, these funds invest in the equity market. Equity Mutual
Funds invest pooled amounts of money in the stocks of public companies. Stocks represent
part ownership, or equity, in companies. The aim of stock ownership is to see the value of the
companies increase over time. Stocks are often categorized by their market capitalization -
small, medium, and large. Most equity Mutual Funds invest primarily in companies in one of
these sizes and are thus classified as large-cap, mid-cap or small-cap funds. Multi-cap funds
invest in shares irrespective of market capitalization.
o Large Cap Mutual Funds
Large cap Mutual Funds are those which restrict their stock selection to large cap
stocks - typically the top 100 or 200 stocks with maximum market capitalization and
liquidity. One of the major advantages of large cap funds is that they are less volatile
than mid cap and small cap funds and the near term prospects of large cap funds can
be more accurately predicted. On the flip side, the large cap funds offer lower returns
than mid cap or small cap funds. But when compared in totality, large cap funds
Chart 1.3(a) – Distribution of AUM according to investment vehicles

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outperform all other funds. These funds come under low risk low return category. In
volatile times it is advisable to invest in large cap funds.
Examples,
o Mid Cap Mutual Funds
After Large cap funds comes the Mid-cap funds which invest in the mid cap segment
of the market. Many of these mid cap funds are also known to be as “emerging blue
cap” or “tomorrows large caps”. Big investors like Mutual Fund and foreign
institutional investors are increasingly investing in mid cap companies.
Examples,
o Small Cap Funds
Small-cap funds are those Mutual Funds which invest in small companies with a
good future prospect. Small-cap funds are more volatile than mid-cap and large-
cap funds and generally do not seek income from dividends.
Examples,
Fund Name Year of Inception AUM
HDFC Top 200 September , 1996 11189.8 Cr
Baroda Pioneer Growth September , 2003 111.69 Cr
Kotak 50 December , 1998 781.74 Cr
HSBC Dynamic August , 2007 72.93 Cr
Fund name Year of Inception AUM
Birla-Sunlife Midcap October , 2002 1257.50 Cr
Axis Midcap February , 2011 114.25 Cr
BNP Paribas Midcap April , 2006 27.83 Cr
Edelweiss select Midcap August , 2011 3.66 Cr

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Open Ended Mutual Fund
An open-end Mutual Fund is a fund which does not have a fixed number of shares or a fixed
maturity period. It continues to sell shares to investors and buys back shares when investors
wish to sell. Open Ended fund allows the investor to enter or exit freely at his convenience.
Units are bought and sold at their NAV. Open-end funds are required to calculate their NAV
daily. Since the NAV of an open-end fund is calculated daily, it serves as a useful measure of
its fair market value on a per-share basis. Open-end funds usually charge an entry or exit load
from the investors.
Examples,
Close Ended Mutual Fund
A closed-end Mutual Fund has a set number of shares issued to the public through an IPO.
These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund
is open for subscription only during a specified period i.e. NFO. Investors can invest in the
scheme at the time of the initial public issue and thereafter they can buy or sell the units of the
scheme on the stock exchanges where they are listed. Once underwritten, closed-end funds
can be traded on stock exchanges. The market price of closed-end funds is determined by
supply and demand and not by NAV, as is the case in open-end funds. Usually closed Mutual
Funds trade at discounts to their UAV
Examples,
Fund Name Month &Year of Inception AUM
L&T Midcap July, 2004 55.17 Cr
UTI Master Value June, 1998 640.20 Cr
Tata Dividend Yield October , 2004 299.05 Cr
Sahara Star Value August , 2009 1.57 Cr
Fund Name Month & Year of Inception AUM
Axis Short term Inst March , 2010 204.78 Cr
HDFC Short Term February , 2002 1334.65 Cr
Religare Banking June , 2008 41.23 Cr
Reliance Banking Retail May , 2003 1671.49 Cr

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Interval Funds
Interval funds combine the features of the “open ended” and “close ended” schemes. These
are open for sale or redemption during pre-determined intervals at their NAV related prices.
Growth Funds
Growth funds are Mutual Funds that seek capital appreciation by investing in growth stocks.
They focus on companies which experience a considerable revenue growth or earnings, rather
than focusing on companies that pay out dividend.
Examples
Escorts Infrastructure August , 2007 2.50 Cr
HSBC Unique Opportunities February , 2007 64.12 Cr
Fund name Month &Year of Inception AUM
Reliance Interval Fund 15th March, 2007 16.23 Cr
ICICI Prudential Interval Fund 11th June , 2007 6.96 Cr
LIC Nomura Interval Fund 8th May, 2008 82.50 Cr
Fund name Year of Inception AUM
Templeton India Growth Fund 31st August , 1996 677.04 Cr
Fidelity India Growth Fund 26th September , 2007 292.65 Cr
HDFC Growth August , 2000 1226.22 Cr

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Income Funds
Income funds aim to provide a regular income to the investors. Investors invest a large
portion of their asset in fixed income earning instruments such as government securities,
corporate bonds & such instruments.
Examples,
Hybrid Funds
Also known as Balanced Funds, this is a type of Mutual Fund that buys a combination of
stock & bonds. It provides both income and capital appreciation while avoiding excessive risk
to the fund. Such diversification ensures that these funds will manage a downturn in the
equity market without too much of a loss. It generally follows a 60-40% ratio of equity &
bonds.
Examples,
Money Market Funds
Money market funds or liquid funds are Mutual Fund that invests solely in money market
instruments. Money market instruments are forms of debt that mature in less than one year
and are very liquid in nature. Money market funds are generally the safest and most secure of
HDFC Income Fund 11th September , 2011 592.62 Cr
Sahara Income Fund 6th February, 2002 4.16 Cr
Sundaram Select Thematic Fund 4th December , 2007 727.10 Cr
JP Morgan India Hybrid 21st May , 2012 22.07 Cr
SBI Magnum NRI Inv FlexiAsset 13th January , 2004 7 Cr
ING OptiMix Asset Allocator FoF 31st July , 2006 3.81 Cr

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Mutual Fund investments. The goal of a money-market fund is to preserve principal while
yielding a modest return
Examples,
UTI MMF 6th July , 2009 1147.34 Cr
Tata MMF Plan A 22nd December , 2003 18.21 Cr
ICICI Prudential MMF 27th February , 2002 2.89 Cr
Tax Saving Fund
Also referred to as “Equity Linked Saving Scheme” (ELSS). ELSS is normal diversified
equity funds which gives an investor tax benefits under section 80C of the Income Tax Act.
These funds have a lock in period of three years. Investing in such funds, an investor can
avail a tax deduction of amount up to `1 lakh.
Examples,
Exchange Traded Fund
ETF’s represents a basket of securities that is traded on an exchange, similar to a stock. ETFs
are listed on a recognized stock exchange and their units are directly traded on stock
exchange during the trading hours
L&T Tax Saver October , 2005 27.26 Cr
Principal Tax Saving March , 1996 212.40 Cr
Franklin India Tax Shield April , 1999 821.06 Cr
Birla Sun Life Tax Plan February , 1999 121.31 Cr

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Examples,
Index Funds
Index fund is a Mutual Fund or Exchange traded fund that aims to replicate the movement of
a particular index of a specific financial market. It allows a passive index strategy called
indexing which involves tracking index say for example, the Sensex or the Nifty and builds a
portfolio with the same stocks in the same proportions as the index.
Examples,
Sector Specific Fund
Sector specific fund focus their investment on specific sectors which the fund managers feel
would do well. These funds restrict their investment to a particular segment or sector of the
economy. These funds concentrate on one industry such as infrastructure, technology, energy,
real estate, power, FMCG etc. They come in high risk reward category.
Examples,
Birla Sun Life NIFTY ETF 18th July , 2011 57.80 Cr
IIFL NIFTY ETF 12th October , 2011 578.01 Cr
Kotak NIFTY ETF 19th January , 2012 586.95 Cr
Can Robeco Index Fund July , 2009 4.19 Cr
Edelweiss NIFTY Enhancer March , 2008 5.51 Cr
HDFC Index Nifty Plan July , 2007 101.69 Cr
UTI Nifty Index Fund September , 2007 164.36 Cr
SBI Magnum FMCG July , 1999 83.6 Cr

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Thematic Funds
Thematic funds are Mutual Funds that invests predominately or exclusively in securities
representing a single thing. For example a theme fund may invest only in energy stock,
securities related to real estate, or in investment vehicles that conform to a set of ethical
standards, similarly a fund built on an agriculture theme might invest in the equities of farm
equipment manufacturers, chemical companies, and other firm that sells agricultural products.
IDFC Infrastructure Fund February , 2011 72.8 Cr
Reliance Infrastructure Fund 17th July , 2009 671 Cr
Fund of Funds
A fund of funds is an investment fund that holds a portfolio of other investment funds rather
than investing directly in shares, bonds or other securities. Fund of Funds are Mutual Funds
that invest in other Mutual Funds. Just as a Mutual Fund invests in a number of different
securities, a fund of funds holds units of many different Mutual Funds.
HDFC Infrastructure February , 2008 682.09 Cr
Kotak PSU Bank ETF November , 2007 12.05 Cr
UTI Banking Sector April , 2004 358.29 Cr
Birla Sun Life Asset Fund 20th January , 2004 34.83 Cr
Axis Gold Fund 14th October 2011 11.56 Cr
HDFC Gold Fund 21st October , 2011 11.26 Cr

26
1.4. History
The Evolution of the Industry
The formation of UTI marked the evolution of the Indian Mutual fund industry in the year
1963. The primary objective at that time was to attract retail investors and it was made
possible through the collective efforts of the Government of India and the RBI. The history of
Mutual fund industry in India can be better understood when divided into following phases:
First Phase: 1964-1987
UTI enjoyed complete monopoly when it was established in the year 1963 by an act of
Parliament. UTI was set up by the RBI and it continued to operate under the regulatory
control of the RBI until the two were de-linked in 1978 and the entire control was transferred
to the hands of IDBI. UTI launched its first scheme in 1964, named as Unit Scheme 1964
(US-64), which attracted the largest number of investors in any single investment scheme
over the years.
UTI launched more innovative schemes in 1970s and 1980s to suit the needs of different
investors. It launched ULIP in 1971, six more schemes between 1981 and 1984, Children's
Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Mastershare (India's
first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured
returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to
`6700 crores.
Second Phase: 1987-1993 (Entry of Public Sector Mutual Funds)
The Mutual fund industry witnessed a number of public sector players entering the market in
the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the
first non-UTI Mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual
Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual
Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased
seven times to `47,004 crores. However, UTI remained to be the leader with about 80%
market share
Third Phase: 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian Mutual fund

27
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year
in which the first Mutual Fund regulations came into being, under which all Mutual funds,
except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged
with Franklin Templeton) was the first private sector Mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI
(Mutual Fund) Regulations 1996. The number of Mutual fund houses went on increasing,
with many foreign Mutual funds setting up funds in India and also the industry has witnessed
several mergers and acquisitions. As at the end of January 2003, there were 33 Mutual funds
with total assets of `1,21,805 crores. The UTI with `44,541 crores AUM was way ahead of
other Mutual funds.
Fourth Phase – Since February 2003
The Mutual fund industry witnessed robust growth and stricter regulation from the SEBI after
the year 1996. The mobilization of funds and the number of players operating in the industry
reached new heights as investors started showing more interest in Mutual funds.
Investors’ interests were safeguarded by SEBI and the Government offered tax benefits to the
investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced
by SEBI that set uniform standards for all Mutual funds in India. The Union Budget in 1999
exempted all dividend incomes in the hands of investors from income tax. Various Investor
Awareness Programs were launched during this phase, both by SEBI and AMFI, with an
objective to educate investors and make them informed about the Mutual fund industry.
In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status
as a trust formed by an Act of Parliament. The primary objective behind this was to bring all
mutual fund players on the same level. UTI was re-organized into two parts:
1. The Specified Undertaking
2. The UTI Mutual Fund
Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past
schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI

28
Mutual Fund is still the largest player in the industry. In 1999, there was a significant growth
in mobilization of funds from investors and assets under management which is supported by
the following data:
Table 1.4 (a) – Gross Fund Mobilization by UTI, Public Sector and Private Sector Funds
since April 19988
GROSS FUND MOBILISATION (RS. CRORES)
FROM TO UTI
PUBLIC
SECTOR
PRIVATE
SECTOR
TOTAL
01-April-98 31-March-99 11,679 1,732 7,966 21,377
01-April-99 31-March-00 13,536 4,039 42,173 59,748
01-April-00 31-March-01 12,413 6,192 74,352 92,957
01-April-01 31-March-02 4,643 13,613 1,46,267 1,64,523
01-April-02 31-Jan-03 5,505 22,923 2,20,551 2,48,979
01-April-03 31-March-04 - 68,558 5,21,632 5,90,190
01-April-04 31-March-05 - 1,03,246 7,36,416 8,39,662
01-April-05 31-March-06 - 1,83,446 9,14,712 10,98,158
Phase V: Growth and Consolidation (2004 Onwards)
The industry has also witnessed several mergers and acquisitions recently, examples of which
are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund
and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual
fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc.
8 Source: SEBI

29
Chart 1.4 (a) – Growth in Assets Under Management
The graph above shows the different phases in which the history of the mutual fund industry is
defined above and the growth in AUM throughout each phase.
1.5. Research Problem
The Indian Mutual Fund industry has grown eight fold over the last decade. The growth has
been graphically represented below:
Chart 1.5 (a) – Assets Mobilized Under Mutual Funds
(Source: AMFI)

30
Assets mobilized by mutual funds have continuously shows a rising trend in our period of
study except in FY0809 when the sector was affected by the global financial crisis.
The growth of the industry has attracted a number of private and public players into the field.
As of April 2012, 43 Fund houses cater 5042 different schemes to the market.9 Scores of new
schemes are being introduced every month. With so many schemes to choose from, it has
become difficult for the layman to select the best scheme. Funds with more marketing muscle
or those sponsored by reputed sponsors tend to have disproportionately large AUM. Blinded
less by brand equity and more by their own financial illiteracy, people take wrong investment
decisions.
Indians, on an average, are considered to be less financially knowledgeable compared to
western countries. The fact that 55% of American households are directly or indirectly
invested in the capital markets versus 11% compared to that of India.10
Since the financial meltdown in 2008, the Indian stock markets have been range bound. The
Sensex has hovered between the 14,000 and 17,000 marks. It becomes impossible for
investors to get market beating returns in such range bound markets. For this reason, investors
must know which category of funds has outperformed the benchmarks in the past and
probably will in the future, and the grounds behind the latter assumption.
The reason for this thesis is exactly this – rank the different category of fund according to
returns provided by them YoY over a period of 5 to 10 years and find out the reasons for
outperformance or underperformance as the case may be.
9 Source: “Indian Mutual Fund Handbook” by Sundar Sankaran; Vision Books,2011
10 Source: www.amfiindia.com/statistics

31
Chart 1.5(b) – Reasons provided by Survey Respondents for not investing in Mutual Funds
(Source: CII-KMPG Survey)
Respondents to the survey conducted by KPMG shows that the majority of them (26% of the
people surveyed) do not invest in mutual funds because of too many available scheme.
Chart 1.5 (c) – Factors influencing investor’s choice of funds

32
Most investors select Mutual Funds depending upon the brand name of the fund house (reputed
fund houses are Birla, Reliance, HDFC Asset Management and ICICI Mutual Funds). This
report aims at section of funds based on long term inflation adjusted and risk adjusted returns
that a fund has delivered in the period of study.
1.6. Need & Significance
Opening of the mutual fund industry to the public sector banks and financial institutions, led
to the launching of large number of new schemes. The mutual fund industry in India has
grown rapidly in the recent years. The performance is encouraging especially because the
emphasis in India has been on individual investors rather in contrast to advanced countries
where mutual funds depend largely on institutionalized investors.
Chart 1.6 (a): Rise of Mutual Fund Schemes.
(Source: AMFI & SEBI Data)
The number of mutual fund schemes has been growing year on year as shown in the chart
above. Presently there are 5042 schemes11. Availability of such a vast number of schemes
confuses the layman investor (Refer Chart 1.5(b), p. 30). For safety, they flock to invest in
funds of reputed AMCs (Refer Chart 1.5(c), p. 31)
As we see that the number of schemes in Mutual Fund has increased giving the Indian
investors a choice of wide variety of funds to chose from each sector.
This report will inform the investors which type of fund has performed the best and which one
has underperformed taking into account the long term returns in the last five years. The report
11 As of 31st March 2012

33
will also emphasize on the reasons for such performance. Based on this, the report will
suggest possible sectors or fund categories that are likely to outperform the broader market.
There arises a need on the part of the investors to be informed about the sector giving
maximum returns rather than individual funds. This in turn will help the investors to invest in
those sectors with a serene mind with the knowledge of the most outperforming sector.
1.7. Objectives of Study
In the light of the above discussion the specific objectives of the study are as follows:
o The primary objective of this study is discover which category of Mutual Funds has
given maximum long term risk adjusted returns using statistical tools and technique
like absolute return, CAGR, Beta (β), Alpha (α), R-squared, Standard Deviation (σ)
and Sharpe Ratio based on scores derived from the data analysis.
o To calculate the returns given by Mutual Funds after inflation.
o To conclude by justifying the high and low returns of the funds and provide reasons
for them.
1.8. Scope ofStudy
With the entry of private players in Mutual Fund industry in 1993, a new era started in the
mutual fund industry, giving the Indian investors a wider choice of fund families. The entry
of private sector mutual funds has imparted competitive efficiency in the industry, helped
investors to choose from funds with different maturity periods, and offered different risk-
return tradeoffs. There are approximately 5042 schemes under 43 Fund houses in India. 12
Therefore selecting a Mutual Fund for maximum return can be challenging.
12 As on 30th April 2012 (AMFI)

34
Chart 1.8 (a) - Funds with large number of schemes
The report will help an investor to know which fund has given the maximum return in the
long term, and the reasons for such performances. Report will also help the investors to
predict the growth in the sectoral funds and assist him in investing in further investment
decisions. The report analyses various category of Mutual Funds and ranks them according to
their YoY risk adjusted return using statistical tools such as Alpha (α), Beta (β), R-squared
and Standard deviation (σ) which will help the investors to understand the rating of the
Mutual Fund and broaden their horizon about the industry. Good investment is an outcome of
good predictions and good predictions are only possible through analysis. We are analyzing
the mutual fund industry so as to figure out which category of fund has provided the
maximum risk adjusted return and which sector will probably boom in future.
1.9. Sample Design
Sampling is concerned with the selection of a subset of samples from within a population in a
particular way so that the subset replicates the characteristics of the population as a whole.
Sampling may be whether probability based or non-probability based.
Probability based sampling methods:
o Simple random sampling

35
A simple random sample is obtained by choosing elementary units in a way that each
unit is equally probable to be selected.
o Stratified Sampling
A stratified sampling is obtained by independently selecting a separate simple random
sample from each population strata (groups based on common characteristics)
o Cluster Sampling
It is obtained by selecting clusters from the population on the basis of simple random
sampling.
For the purpose of our study, we shall be dealing with only probability based sampling
techniques. The total population of Mutual Fund schemes to be sampled includes around
504213 schemes under different fund houses. This population is divided into groups or strata
depending on the investment nature of the scheme using Stratified Sampling technique. From
each strata, the sample space has been further narrowed down to the top 10014 schemes in the
market. We select the top 100 as per AUM since about around 80% to 85% of fund
mobilization is with the top 100 funds of each strata.
Figure 1.9 (a) – Sample Design used for our research
13 As of March 31, 2012
14 Based on AUM as on 31st March.

36
The above figure depicts the sample design of this study. All the schemes selected were first
classified on the basis of the three broad kinds of funds existing in the market. Namely –
equity funds, debt funds and hybrid funds. Each color represents a strata – Equity oriented
funds (green), debt oriented funds (red) and hybrid funds (blue). Each of these strata is
further divided into sub-strata with each one representing a fund category as mentioned
below. Each block (say, C2) is a 10x10 block consisting 100 units. Each unit represents a
scheme selected as mentioned above. They have been numbered 1 to 100 starting from the top
left hand side. Applying simple random technique, the selected scheme has been market with
the black dots.
Equity Funds
A1 – Large cap
A2 – Medium and Small cap
A3 – Multi cap
B1 – Sectoral (Banking)
B2 – Sectoral (Infrastructure)
B3 – ELSS
Debt Funds
C1 – Gilt Funds
C2 – Liquid Funds
C3 – Ultra Short Term Fund
Hybrid Funds
D1 – Debt Oriented Aggressive
1.10. Sources of Information.
The study focuses on analyzing the long term returns of mutual funds, the risk adjusted
returns and ranking them using statistical tools and the reasons behind the underperformance
of the fund. For the study mentioned above both debt and equity funds have been taken. For
comparison various categories of funds have been selected like Large cap funds, Small and
Mid cap funds, Hybrid funds, MIP, Index funds, Guilt funds, Liquid Funds, Sectoral funds,
Thematic funds and Equity linked Saving Scheme. Each objective study period is from 1st
April 2007 to 31st March 2012 i.e. for 5 years.
For the first objective which is to determine which Mutual Funds have given maximum long
term returns, the time period is from 1st April 2007 to 31st March 2012. This covers equity,
debt, hybrid funds. The equity category has six schemes and each scheme has five funds. The
debt category has three schemes and each scheme has five funds. The hybrid category has one
scheme which consists of five funds. These three categories consist of open ended Mutual
Funds and the data is sourced from the AMFI and ICRA website. To examine the risk
adjusted returns from funds based on their returns and rank each category, Sharpe ratio and

37
expense ratio has been sourced from the respective Mutual Fund/sponsor/AMC’s and the
other ratios have been calculated on the basis of available information such as closing value of
NAVs and NIFTY during the period studied.
For the second objective, which is to calculate the returns given by Mutual Funds after
inflation the CAGR of the Mutual Fund is calculated; from this we subtract the CAGR of
inflation, the valued the resultant gives us the inflation adjusted returns. The website sourced
to get the values of inflation is that if the Office of the Economic Advisor of India.
For the third objective which is to justify the high and low returns of the funds with probable
reasons for them, the data sourced is from the Indian Mutual Fund Industry Review published
by AMFI.
1.11. Tools and Techniques
For the purpose of comparing the different types of mutual funds, the following ratios and
statistical tools will be used.
o Absolute Return
o CAGR
o Beta (β)
o Alpha (α)
o R-squared
o Standard Deviation (σ)
o Sharpe Ratio
They have been explained in order below.
Absolute Returns
Absolute Return is a percentage measure of the total return from an investment portfolio
(either positive or negative) in a particular period of time. Mathematically it can be expressed
as:
𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑅𝑒𝑡𝑢𝑟𝑛 (%) =
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑠𝑡𝑢𝑑𝑦 𝑝𝑒𝑟𝑖𝑜𝑑
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑠𝑡𝑢𝑑𝑦 𝑝𝑒𝑟𝑖𝑜𝑑
× 100
For a Mutual Fund, the formula can be expressed as:
𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑅𝑒𝑡𝑢𝑟𝑛 (%) =
𝑁𝐴𝑉 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑢𝑛𝑑 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑠𝑡𝑢𝑑𝑦 𝑝𝑒𝑟𝑖𝑜𝑑
𝑁𝐴𝑉 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑢𝑛𝑑 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑡ℎ𝑒 𝑠𝑡𝑢𝑑𝑦 𝑝𝑒𝑟𝑖𝑜𝑑
× 100

38
It must be noted here that absolute return to the investor will differ for dividends reinvested
and dividends redeemed options.
Compounded Annual Growth Rate (CAGR)
CAGR is the compounded year-on-year growth rate of a security or fund. It is not the growth
rate in reality, rather an imaginary number which shows the rate of growth had it been the
same every year.
CAGR = [(
𝑉𝑎𝑙𝑢𝑒 𝑎𝑡 𝑒𝑛𝑑 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑
𝑉𝑎𝑙𝑢𝑒 𝑎𝑡 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑
)
(
1
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑦𝑒𝑎𝑟𝑠
)
– 1] х 100 %
Difference between Absolute Return and CAGR
Chart 1.11 (a) –Value of a hypothetical portfolio for 10 years (Base is 100)
The graph above shows the 10 year movement of a hypothetical portfolio. The portfolio is
assumed to have a base value equal to 100 in the first year.

39
Chart 1.11(b) – Absolute Return and CAGR for the portfolio in Chart 1.11(a)15
The above chart shows the difference between absolute return and CAGR graphically.
Absolute return is calculated for a year based on the portfolio value at the end of a year and
the starting value. However, CAGR is the percentage rise required every year since the
beginning to obtain the current value of the portfolio.
Beta (β)
Also known as ‘Beta coefficient’, it is a measure of volatility of a security or portfolio in
comparison to a benchmark which represents the market as a whole in a particular period of
time. A Beta of 1 means that the security is as volatile as the benchmark, Beta greater than 1,
say 1.2, theoretically means that the security in question is 20% more volatile than the
benchmark. Similarly, a β less than one would imply less volatility.
For equity mutual funds, the benchmark would be a broad market index such as Sensex or
NIFTY. In a period of say a month, the NAV of a fund has decreased by 1% compared to an
upswing of 2% of the NIFTY. This is the case of a negative β of 2.
According to CAPM, the formula for Beta of an asset within a portfolio is calculated as:
𝛽 =
𝐶𝑜𝑣(𝑟𝑎, 𝑟𝑝)
𝑉𝑎𝑟(𝑟𝑝)
where 𝑟𝑎 is the return on the asset in the given period of time and 𝑟𝑝 is that of the portfolio.
Alpha
15 Dark grey line indicates absolute return whike light grey line indicates CAGR. Notice that Absolute Return
and CAGR might not be positively correlated (years 5, 6, 7).

40
Alpha is a risk-adjusted measure of the so-called active return on an investment. It is the
return in excess of the compensation for the risk borne, and thus commonly used to
assess active managers' performances. Sometimes the return of a benchmark is subtracted in
order to consider relative performance, which yields Jensen's alpha16. Alpha takes the
volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a
benchmark index. The excess return of the fund relative to the return of the benchmark index
is a fund's alpha.
In simple terms, a positive alpha of 1.0 means the fund has outperformed its benchmark index
by 1%. Correspondingly, a similar negative alpha indicates an underperformance of 1%.
An α < 0 indicates that the investment has earned too little for the risk taken. An α equalling
zero means that the returns earned were in line with risk taken. Similarly an α > 0 is a positive
situation where returns surpassed risks assumed.
Standard Deviation
Standard deviation is a statistical measurement that shows historical volatility. For example, a
volatile stock will have a high standard deviation while the σ of a stable blue chip stock will
be lower. A large dispersion tells us how much the return on the fund is deviating from the
expected normal returns.
16 Jensen’s Alpha is a risk-adjusted performance measure that represents the average return on a portfolio over
and above that predicted by the capital asset pricing model (CAPM), given the portfolio's beta and the average
market return. This is the portfolio's alpha also sometimes referred to as Jensen's alpha. It is denoted by the
below formula.
𝛼 𝑝 = 𝑟𝑝 - [𝑟𝑓 + 𝛽 𝑝 + (𝑟 𝑚 − 𝑟𝑓 )]
Where,
𝛼 𝑝is the Jensen’s Alpha of the portfolio
𝑟𝑝 is the expected total portfolio return
𝛽 𝑝 is the beta of the portfolio
𝑟𝑚 is the expected market return

41
Figure 1.11 (a)17 - A data set with a mean of 50 (shown in red) and σ of 20.
The above figure shows a distribution of 21 data points spread across a range of 0 to 100.
The mean of the distribution is 50 shown by the blue line. The distribution has a standard
deviation equal to 20. This means that most of the data points must be within 1 standard
deviation of the mean (shown by the pink band running on both sides of the mean). In the
figure above, 15 of the 21 data points lie within the band.
Figure 1.11 (b)18
– A typical bell curve showing standard deviation
The above figure is of a normal distribution also called a bell curve. It is used to graphically
represent distribution of data points. Each band has a standard deviation of 1. The inner two
darker blue bands show that a combines 68.1% (34.1% + 34.1%) of the data points lay within
1 standard deviation range of the mean (μ)
17 Source: Wikipedia
18 Source: Based on the original graph by Jeremy Kemp, 09/02/2005

42
Derivation of Standard Deviation
Considering there are two numbers, a1 and a2, and a1 is greater than a2. The mean of both the
numbers be ƞ and the standard deviation be σ. Standard deviation is the distance of each of
the numbers from ƞ.
Therefore, σ = a1- ƞ = ƞ – a2 . . . . . . . . . . (1)
Solving equation (1) gives
𝜇 =
𝑎1 + 𝑎2
2
And,
𝜎 =
𝑎1 − 𝑎2
2
squaring both equations and adding them gives us,
σ2
+ 𝜇2
= (
𝑎1+𝑎2
2
)
2
+ (
𝑎1−𝑎2
2
)2 =
𝑎12+ 𝑎22
2
The above expression is generalized to a case where there are n numbers involved, i.e., a1, a2,
a3, a4, a5 . . . an.
𝜇 =
∑ 𝑎𝑖
𝑛
𝑖=1
𝑛
𝜇2
+ 𝜎2
=
∑ 𝑎𝑖
2𝑛
𝑖=1
𝑛
Thus the general formula for σ becomes,
σ = √∑ 𝑎𝑖
2𝑛
𝑖=1
𝑛
+ (
∑ 𝑎𝑖
𝑛
𝑖=1
𝑛
)
22
R-squared
It is a statistical measure that represents the percentage of a fund or security's movements that
can be explained by movements in a benchmark index. For fixed-income securities, the
benchmark is the T-bill. For equities, the benchmark is the NIFTY. Also called coefficient of
determination.
R-squared values range from 0 to 100. An R-squared of 100 means that all movements of
a security are completely explained by movements in the index. A high R-squared (between
85 and 100) indicates the fund's performance patterns have been in line with the index. A fund

43
with a low R-squared (70 or less) doesn't act much like the index.
A higher R-squared value will indicate a more useful beta figure. For example, if a fund has
an R-squared value of close to 100 but has a beta below 1, it is most likely offering higher
risk-adjusted returns. A low R-squared means you should ignore the beta.
Figure 1.11 (c)19 – Diagram depicting R-squared
The better the linear regression (right) fits the data in comparison to the simple average (left),
the closer the value of R2 is to 1. The areas of the red squares represent the squared residuals
with respect to the average value.
Sharpe Ratio
The Sharpe ratio was developed by William F. Sharpe to measure risk adjusted performance.
It is calculated by subtracting the risk free rate of return such as that on Government bonds
from the rate of return of a portfolio and dividing the result by the standard deviation of the
portfolio.
The Sharpe ratio formula is:
𝑟𝑝 − 𝑟𝑓
𝜎𝑝
Where, 𝑟𝑝 is the return of the portfolio
𝑟𝑓 is the risk free return and
𝜎𝑝 is the standard deviation of the portfolio.
Sharpe ratio tells us whether a return in excess of the benchmark is due to good investment
decisions or because of excess risk. The greater a fund’s Sharpe ratio, the better is its risk
19 Source: Wikipedia

44
adjusted performance. On the other hand, a negative Sharpe ratio indicated that the risk-free
asset would have given better risk-adjusted returns.20
Chart 1.11(c) – Graph depicting difference between a high and low Sharpe ratio
The above graph is of two hypothetical funds, one with low Sharpe ratio (blue) and the other
with a high Sharpe ratio (blue). Funds or portfolios that have higher Sharpe Ratios are said
to be better since they fluctuate lesser (lower volatility). For the Sharpe ratio of a fund to be
higher, it must have a lower standard deviation. The same can be inferred from the formula.
A few other ratios
o Sornito ratio
The ratio was developed by Frank A. Sortino to basically differentiate between good
and bad volatility in the Sharpe ratio. The differentiation of upward and downward
volatility allows the calculation to provide a risk adjusted measure of a fund’s
performance without penalizing it for upward price movement. It can be calculated as
below:
20 A variation of Sharpe ratio is the Sortino ratio which removes the effects of upward price movements on
standard deviation to measure only movements against downward price volatility.

45
< 𝑅 > − 𝑅𝑓
𝜎𝑑
Where <R>, 𝑅𝑓 and 𝜎𝑑 represent expected return, risk free rate of return and standard
deviation of negative asset returns.
o Treynor Ratio
The Treynor ratio (sometimes called the reward-to-volatility ratio or Treynor
measure), is a measurement of the returns earned in excess of that which could have
been earned on an investment that has no diversifiable risk (e.g., a T-bill or a
completely diversified portfolio), per each unit of market risk assumed. The Treynor
ratio relates excess return over the risk-free rate to the additional risk taken; however,
systematic risk is used instead of total risk. The higher the Treynor ratio, the better
the performance of the portfolio under analysis
1.12. Structure of study
The process of evaluating the risk adjusted returns of the fund categories follows a step
process.
Each fund category is evaluated on the basis of seven parameters – risk related, return
related and fees/expenses related. Risk related parameters are Beta, Standard Deviation,
Alpha and Beta. Return related parameter is CAGR and fees/expenses related parameter
is the Expense Ratio.
Step 1- Listing of Parameters
All the above mentioned parameters are listed for each of the 5 fund in all the fund
categories.
Step 2- Parameter Average
For each parameter, the mean is calculated.
Step 3 – Establishment of Rage

46
In each parameter, the minimum and maximum is determined. The minimum is
subtracted from the maximum to get the range of values for that parameter. This range is
then divided into 5 equal parts.
Step 4 - Gradation
Depending upon the ascending/descending nature of the range, the grades are ascertained.
The convention of 5 being the best grade and 1 being the least is followed.
Table 1.12(a) – Justification of grading parameters
Standard Deviation
Lesser the better, since more standard
deviation means more volatility and
hence more risk.
Beta
The closer to 1, the better since beta > 1
signifies enhanced movements compared
to the benchmark where as beta < 1
signifies lesser correlation with the
market.
Sharpe Ratio
The more the better since Sharpe ratio is
a measure of risk adjusted returns.
Alpha
More the value of alpha the better for the
fund category since alpha means the
returns provided by the fund over the
benchmark as a % in the given time
period.
CAGR
A measure of YoY return of the fund
over the five year period taken.
Obviously, the more the better.
R2
The greater the value, the better since it
shows correlation with the benchmark.
Expense Ratio
Lesser the better since investor gets more
returns.

47
The following illustration clarifies the process.
Fund Type: Mid and Small Cap
Table 1.12 (b) – CanRebecco Fund Grading illustration
Scheme Name Parameter: Standard Deviation
CanRebecco Emerging Equities 31.31
TATA Growth Fund 27.27 (Minimum)
Kotak Mid Cap Fund 28.2
UTI Master Value Fund 28.42
HSBC Mid Cap Equities Fund 33.87 (Maximum)
Mean 29.814
Effective Range: Maximum – Minimum
= 33.87 – 27.27
= 6.60
To divide the effective range into 5 equal parts, we part must be 6.60 / 5 units wide.
6.60/ 5 = 1.32
Standard
Deviation
(σ)
Range
27.27 to
28.59
28.60 to
29.92
29.93 to
31.25
31.26 to
32.58
32.59 to
33.91
Grade 5 4 3 2 1

48
Chapter II: REVIEW OF LITERATURE
2.1. Introduction
The review of literature is to guide us in the methods to be used, estimation procedure and
interpretation of results. The Literature Review focuses on how the Mutual Fund industry
works, the different types of schemes available, types of investments to be made depending
on financial goals, the rules and regulation that have been specified by SEBI and approaches
to risk management and performance assessment of Funds. Mutual Funds play a crucial role
in reducing risk and transaction cost while investing in the stock market. They offer a more
efficient and easier route of investing. In the process of encouraging more investments they
help in realizing the true prices of securities.
This chapter focuses on both theoretical and empirical literature to understand the need for
regulations, the framework of regulation, approaches to risk and performance evaluation of
Funds.
This chapter is divided into two broad sections. The first section reviews theories related to
regulations, risk management and performance measurement. The second section is divided
into four subsections. The first subsection deals with the overview of Mutual Fund industry
which tells us about origin of Mutual Funds in India and on what basis to choose a Mutual
Fund. The second subsection deals with studies relating to Mutual Fund fees and expenses. It
focuses on the different types of fees that are charged by Funds. In the third subsection we
study how to compare and evaluate Mutual Funds on the basis of their risk and returns using
different statistical tools like Alpha (α), Beta (β), R-squared, Standard Deviation (σ) and
CAGR. In the fourth subsection we study the behavior of Mutual Fund investors. Investor’s
behavior is based on objective of investment and knowledge of the Mutual Funds.
2.2. Theoretical Review.
2.2.1. Theories of Regulation.
We have moved from a controlled economy in India (pre 1991) to one that is regulated. The
difference between control and regulation has to be distinct and the basis, extent and mode of

49
regulation have to be made clear. Regulation essentially seeks to control price, sale and
production decisions of firms, business ethics such that the business community’s interest
match the general public’s interest. Some of the research papers that have been referred on the
Regulations of Mutual Funds are:
“SEBI guideline related to Mutual Funds” by Agarwal, Vikas & Boyson, IIM.
The paper analyzes SEBI guidelines related to Mutual Funds. The guidelines identified by
them were - disclosure of their entire portfolio should be done on a half-yearly basis
according to a prescribed format. Along with this Mutual Fund schemes are required to
disclose the various types of instruments used (such as derivatives in case of hedging) and
percentage of investment in each scrip. Mutual Funds have been directed to fully revise and
update offer documents and memorandum at least once in two years. Mutual Funds are also
requested to carry out the following: bring uniformity in disclosures of various categories of
advertisement and reduce NFO period from a maximum of 45 days to 30 days. All the Mutual
Fund schemes shall be launched within six months from the date of the letter containing
observations from SEBI on the scheme offer document. Otherwise, a fresh offer document
along with filing fees shall be filed with SEBI. Mutual Funds are requested to disclose large
unit holdings in the scheme, which are 25 percent of the NAV. The paper studies the effects
of these regulations on the sector.
“SEBI Amendment Reg., 2003” by Simona Mola & Massimo Guidolin, 2007.
This paper analyzes the amendments that were made by SEBI in the year 2003. The
amendments brought in by SEBI checks the abuse of Mutual Funds for tax avoidance and
large allocations of units to investors. The regulations noticed by the authors are that Mutual
Funds have been advised to collect information regarding bank account number, KYC
information and PAN from investors whenever the total volume of investment is `50,000 or
more. Norms to check the abuse of Mutual Fund vehicle by large corporate investors for tax
benefits were issued in November 2003. The new regulations stipulate that each Mutual Fund
scheme should have at least 20 investors and no single investor should hold more than 25% of
the total corpus of the scheme. SEBI is working on a proposal making it mandatory for
Mutual Funds to allocate units to investors on NAVs at the time the repayment of cheques for
these units are cleared by banking system. Investors can use their Demat accounts with NSDL
and CSDL for buying and selling Mutual Funds online.

50
“SEBI and Mutual Funds” by Soham Sanyal, November 25, 2003.
This paper represents the SEBI guidelines regarding Sponsors. It states that the Sponsor
should have a sound track record, should have been doing business in financial services for
not less than 5 years with positive net worth in all the immediately preceding 5 years.
Sponsors, director or any principal officer should not have been found guilty of fraud or
convicted of an offence involving moral & economic turpitude. The Sponsor must have
contributed at least 40% of the initial investment managed.
“Regulations on Trustees” by Bannerjee and Mehta, Rajhans College (Delhi University).
This paper is based on the SEBI regulations for trustees. According to new SEBI regulations
at least two thirds of the trustees (Board of Trustees) must be independent, meaning that they
should not be associated with the sponsors in any manner. He/she cannot be a trustee of any
other Mutual Fund. The trustees appoint the AMC with the prior approval of SEBI.
2.2.2. Theories of Risk Management.
Risk is the potential of a chosen investment turning into a loss. Within the financial services
industry, risk management involves assessing and quantifying business risks, then taking
measures to control or reduce them. Risk managers calculate the risk adjusted performance of
the Fund and rank them accordingly. The rankings are obtained by Sharpe ratio, β and α
coefficients, R-squared, standard deviation and other volatility measures. A well diversified
fund will generally have ideal values of the above ratios. Further we discuss papers related to
risk management of Funds.
“Risk-Adjusted performance of Mutual Fund” published by Jagric, Boris and
Sebastjan, South-Eastern Journal of Economics, 2007.
The paper studies the mutual fund industry and applies various tests to evaluate the
performance capacity of mutual funds. First, the paper briefly explain the data relating to
sample space and then introduces the performance measures used to evaluate funds. Finally,
the paper calculates the performance of mutual funds and ranks them according to the results.

51
The authors find the rankings obtained by performing both the Sharpe and Treynor rules21 to
be almost the same, implying that funds are well diversified. The rankings reveal that all
analyzed funds outperformed the market on a risk-adjusted basis.
“Management Structure and the Risk of Mutual Fund Managers” by Lonnie L. Bryant,
College of Charleston.
This paper implements various risk measures to analyze the impacts on management
structure, Fund objective, Fund market capitalization and other Fund level characteristics that
have impact on investor wealth. They indicate that when Fund managers manage multiple
Funds simultaneously, the risk of one of the managed Funds is significantly increased,
minimizing the benefits of Mutual Fund stock diversification. Thus the more time that a
manager devotes to an individual Fund the more likely the Fund will reduce its risk exposure.
“Risk Management for Mutual Funds” by Aruna Nambiar, April 25, 2005.
The author classifies Mutual Funds based on three types. Equity Funds which invest in shares,
debt Funds, which invest in debt instruments such as bonds, debentures or gilts, and balanced
Funds that invests in a mix of equity and debt.
Equity Funds are considered to carry the highest risk. The underlying securities these Funds
invest in are stocks and shares, whose returns depend on a number of factors such as market
fluctuations, company performance and industry performance. The returns on equity Funds
are very volatile, a well-managed equity scheme can provide a high rate of return over a long
term.
Debt Funds invest in fixed return instruments however they are not risk free. The NAV of a
debt Fund depends on the market prices of the fixed instruments that it invests in and
fluctuates depending on prevailing market interest rates. The prices of bonds increase as
interest rates decrease and vice versa, thus affecting the NAV of debt Funds and investor’s
returns.
21 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.

52
2.3. Empirical Review.
2.3.1. Empirical Study on Industry Overview
This sections aims at the industrial overview of Mutual Funds. The different papers referred
are based on how the Indian market has been one of the fastest growing markets for Mutual
Funds. It also shows the year during which the Mutual Fund industry fell and rose, and the
different methods which can be adopted to choose a Mutual Fund. The various papers referred
to examine the operations of a Mutual Fund Industry are:
“Indian Mutual Fund Industry –The Future in a Dynamic Environment” by KPMG,
June 2009.
The Author analyzes that India has been amongst the fastest growing markets for Mutual
Funds since 2004, witnessing a CARG of 29 percent in the five year period from 2004 to
2008 as against the global average of 4 percent. The challenges pointed out are low customer
awareness levels and financial literacy poses the biggest challenge to channelizing household
savings into Mutual Funds.
KPMG conducted a ‘Voice of the Customer’ survey to help understand the buying behavior
of existing and potential investors in Mutual Funds, and to obtain feedback on their wish-list
from various stakeholders including Fund houses, distributors, service providers and the
regulator.
KPMG in India is of the view that the industry AUM is likely to continue to grow in the range
of 15 to 25 percent from the period 2010 to 2015 based on the pace of economic growth.
The action plan for achieving growth is that there is a need for a collaborative effort across the
stakeholders to improve the future growth potential and reach out to the customer.
o Customer awareness is the pre-requisite for the achievement of the industry growth
potential
o Focus on increasing customer engagement pre and post completion of the investment
will be beneficial.
o Harmonization of policies across multiple regulatory frameworks in the financial
services sector must be taken up on high priority.

53
“The Fall & Rise of Mutual Fund in India” by Kaushal Shah & Associates, year 2007.
The research takes us through the entire journey of Mutual Funds in India. With more than 40
years of its existence in the Indian market, introduced by UTI in year 1963, it witnessed some
dramatic pitfalls and a bumpy ride. After its underperformance in the years 1994-1995 it was
a slow & painful recovery. It tells how the growth was slow but accelerated in year 1987
when non-UTI players entered the market. With the entry of private players in the Mutual
Fund industry in 1993, a new era started in Mutual Fund industry. The research report focuses
on the structure of Mutual Funds (SEBI Regulations 1996) and as per regulation should
consist of
a) Sponsor
b) Trust/Trustee
c) Asset Management Company
d) Custodian, RTA, Distributors, Compliance Officer
It also tells us about importance of Mutual Fund as how investors pool their savings which are
to be invested under guidance of a team of experts in a wide variety of portfolios of corporate
securities in such a way so as to minimize the risk and ensuring safety and return. The
research ends us by explaining us the types of Mutual Funds in India.
“How to choose a Mutual Fund" by Tarun Wadha, Amity Business School.
Choosing a Mutual Fund scheme out of all the scheme’s can be a nightmare for investors. The
research paper gives a wise advice to all investors to first identify their investment objective
i.e. for regular income, tax saver, capital appreciation. Hence the type of Mutual Fund may
vary with age, lifestyle etc. It also categorizes three basic risk taking capacity (conservative,
moderate, aggressive) an investor can have and time horizon depending on it. Other factors as
stock allocation, sectoral allocation, asset allocation, turnover ratio, expense ratio and loads
(entry & exit) also make a difference. Final investment decision depends upon ones
investment goals: An MIP for an investor preferring recurring income or SIP/SWP for a
salaried person planning for his retirement.
2.3.2. Empirical Study on Mutual Fund Costs and Fees.
This section aims at the different types of costs and fees that are charged by the AMC. There
are certain fees that a Fund manager chargers like trading cost and upon withdrawal of
investment in the early stages. However the Fund manager also uses methods such as fee

54
waiver. The research papers that have been referred to gain knowledge about costs and fees
are:
“Fee Waiver in money market Mutual Funds” by Susan E.K Christoffersen, University
of Pennsylvania, May 2000.
The author tells us that it is a widespread practice among the Mutual Fund manager to
voluntarily waive fees that they have a contractual right to claim. The initial fee charged may
be substantially less than that indicated in expense ratios and may vary over the year. The
paper focuses on difference in the waiving fees between retail and institutional Fund. In
absolute terms, retail investors are not affected much but institutional investors are. Retail
Fund managers use fee waivers to strategically adjust net advisory fees to current realizations
in performance & expected Fund flows.
Three main points written in the paper are:
a) Fee waivers are economically significant
b) Waivers provide flexibility in fees compared to fixed contacted fee
c) Retail and institutional Funds have different waiver patterns resulting from difference in
the waiver’s effectiveness in improving relative performance.
“Entry Load & Exit Load: Mutual Fund Industry” by Saloni Minochia, Amity Business
School, 2010.
The report focuses on the expenses that an investor has to bear to enter or exit a Mutual Fund.
Once the three – tier structure is in place, the AMC launches new schemes, under the name of
the Trust, after getting approval from the Trustees and SEBI. The launch of a new scheme is
known as a NFO.
Investors who wish to avail this new scheme or any other existing scheme have to bear
expenses for availing of the services (professional management) of the Mutual Fund. The first
expense that an investor has to incur is by way of entry load to meet the selling, distribution &
marketing expenses of the scheme. The report tells us about the various criteria on which this
entry load is charged.
Exit loads reduce the amount received by the investor. Not all schemes have an exit load, and
those which do have are dissimilar. Some schemes have CDSC. This is nothing but a
modified form of exit load, wherein the investor has to pay different exit loads depending

55
upon his investment period. Report tells us about how this entry/exit load is calculated & the
advantages to the AMC by this Load.
“An analysis of Mutual Fund trading cost” by John M.R. Chalmers, Roger M. Edelen,
Gregory B. Kadlec, Wharton, published in November 1999.
The research paper estimates annual trading costs for a sample of equity Mutual Funds and
finds that these costs are large. Trading costs average 0.78% of Fund’s average net assets per
year and have an inter-quartile range of 0.59%. Trading costs, like expense ratios, are
negatively related to Fund returns. Trading costs are associated with investment objectives.
The research also estimates the annual cost of Fund manager’s trades22 and finds out that
these costs have a negative impact on the performance. Grossman23 and Stiglitz (1980)
suggest that an informed trader will not trade in stocks where the expected value of the
information is less than the costs of executing the trade. The authors observe that Mutual
Fund managers do not follow this rule. Alternatively, the paper concludes mentioning that
Fund managers should trade in liquid securities so as to keep transaction cost low hence
maximizing investors return.
2.3.3. Empirical Study on Comparison and Evaluation.
This sections aims at studying the comparison and evaluation of Mutual Funds. The
comparison of a Mutual Fund is made between two countries – India and the USA. Evaluation
is the process by which Mutual Fund are rated on the basis of their risk-adjusted returns etc.
by using tool and techniques like Alpha (α), Beta (β), R-squared, Standard Deviation (σ) etc.
The various papers that describe how compare and evaluate a Mutual Fund are:
“Comparison between Indian and US Mutual Fund Industry” by Nikita Rao and
Heeshma Chhatralia, published in December 2009, Alliance School of Management
Bangalore.
The main objective of the study is to compare the performance of Mutual Funds between
USA and India. For analysis, four categories of Funds have been chosen, which are balanced
funds, large cap funds, index funds and tax saving funds. In each of the categories, five
22 Fund Manager trading or churning of the securities in the portfolio can be measured by “Turnover Ratio”.
Portfolio Turnover is defined as ‘Lesser of Assets bought orsold/ Net Assets’.
23 American economist and hedge fund manager specializing in quantitative finance

56
different schemes have been selected and then compared with each other in order to know
which country’s Mutual Funds have performed better. This evaluation has be done on the
basis of parameters like NAV, AUM, Beta (β), Standard deviation (σ), Sharpe ratio, P/E
Ratio, Portfolio Turnover, R-Squared, Alpha (α) and Expense Ratio. As a part of the primary
research, a sample of 50 investors has been taken each in US and India. A questionnaire
consisting of 12 questions pertaining to mutual funds were used to study the performance of
various schemes in both the countries. Research analysis showed there has been an increase in
the amount of business that mutual funds are getting in India and it is quite significant. US
mutual fund industry accounts to 51% of the total worldwide share due to the enormous size
of the market but when it comes to growth rate, Indian mutual fund industry comes in one of
the rapidly growing industries.
“Performance comparison of Mutual Funds in Pakistan” by Raheel Gohar, Sohail
Ahmed, Urfa Niazi, Business School, National University of Sciences and Technology.
The research paper focuses on analyzing and comparing different types of Mutual Funds in
Pakistan. This study also shows how the equity funds have outperformed the income funds.
They further mention that equity fund managers possess significant market timing ability and
institution fund managers are able to time their investments, but broker operated funds did not
show market timing ability.
“Competition in Mutual Fund Business”, by Investment Company Institute, January
2006.
The research paper is about how different Fund Sponsors compete in the industry. Hundreds
of Fund sponsors compete aggressively for investor’s business. None of the Mutual Fund
Sponsors have guaranteed base of investors because investors can move anytime to another
Fund or a competing product. Fund sponsors must work hard to deliver performance and
service at a competitive level of fees to their shareholders. These along with widely available
information about Funds that investors and their financial advisors use to compare Funds,
provide a strong market discipline to organizations that sponsor Funds.

57
“How to Rate a Mutual Fund” by Smasher Singh Yadav, Amity Business School.
The report focuses on Mutual Funds and how to rate them. As the diversity of Mutual Funds
increase day by day, so does the decision of selecting the Fund(s) to invest in. A Mutual Fund
can be rated through various means. Checking volatility using Beta Co-efficient is one such
means. Beta co-efficient is used as a measure to check the relative sensitivity of a Fund to the
market. The higher value of the beta means that the more volatile the Fund and hence more
risky.
“Performance Evaluation of Indian Mutual Funds” by Kanchan Chainani, Rounak
Jhawar and Sagar Bavishi.
The authors undertook to evaluate Mutual Fund returns vis-à-vis the stock market. The
sample space included weekly NAV of 21 open ended growth Funds and the daily closing of
the SENSEX for a 5 year period. Statistical tools such as absolute return, standard deviation,
Fund beta, R-squared, residual value and Performance index have been used to find the
correlation with the overall broad market. The result showed that returns were in sync with
the SENSEX with the sole exception of UTI CCP Advantage Fund.
2.3.4. Empirical Study on Investment Behavior.
This aims at the investment behavior of an investor. The behavior of a Mutual Fund investor
depends upon his/her knowledge on Mutual Fund. There are various schemes and styles that
are offered by Mutual Funds. Depending upon the objective the best possible scheme is
chosen. The various research papers referred to know about the investment behavior of an
investor are:
“Mutual Fund is a better investment Opinion” by Tushar Krishnan presented to
Religare.
The author tells us that Mutual Fund is one of the emerging financial instruments in India and
has not only contributed to the India’s growth story but has also helped families tap into the
success of Indian industry. He further educates the readers about various types of Mutual
Funds, in each equity & debt class, various investment strategies, and the risk-return ratio.
The report says that running a successful Mutual Fund requires complete understanding of the
peculiarities of the Indian stock market and also the psychology of the small investors. Many

58
investors in India have not invested in Mutual Fund due to lack of awareness although they
have the money to invest. He further compares the returns of Mutual Fund with other
investment vehicles such as shares, real estate, gold etc.
“Mutual Fund investment Styles” by Louis K. C. Chan, Hsiu-Lang Chen and Josef
Lankonishok, University of Illinois.
Most Mutual Funds adopt investment styles that cluster around a broad market benchmark.
The research paper analyses the Mutual Fund investment style on two issues. Firstly what are
the products offered by Mutual Funds, secondly, Fund manager’s choice considered with the
non performance. The procedure that they adopt for style identification are based on the
characteristics of Fund portfolio holdings and based on estimated loadings from factor
models. Most Mutual Funds adopt styles that bunch around an overall market index. When
Funds deviate from the index they are most likely to grow in value.
“The Behavior of Mutual Fund Investors” by Barber and Odean , published in
September 20, 2000.
The research paper identifies three primary results. First, investors buy Funds with strong past
performance, over half of all Fund purchases occur in those ranked in the top quintile of past
annual returns. Second, investors sell Funds with strong past performance and are reluctant to
sell their losing Fund investments - they are twice as likely to sell a winning Mutual Fund
rather than a losing Mutual Fund and, thus, nearly 40 percent of Fund sales occur in Funds
ranked in the top quintile of past annual returns. Third, investors are sensitive to the form in
which Fund expenses are charged, though investors are less likely to buy Funds with high
transaction fees (e.g., broker commissions), their purchases are relatively insensitive to a
Fund’s operating expense ratio.
“Do Mutual Fund relationships bias analyst recommendation”, by Yuhai Xuan,
Harvard Business School.
This paper investigates whether the business relations between Mutual Funds and brokerage
firms influence sell-side analyst recommendations. Using a unique data set that discloses
brokerage firms’ commission income derived from each Mutual Fund client as well as the
share holdings of these Mutual Funds, they find that an analyst’s recommendation on a stock
relative to consensus is significantly higher if the stock is held by the Mutual Fund clients of
the analyst’s brokerage firm. The optimism in analyst’s recommendations increases with the

59
weight of the stock in a Mutual Fund client’s portfolio and the commission revenue generated
from the Mutual Fund client. The authors explain that client Mutual Funds respond less in
their portfolio building decisions to optimistic recommendations issued by analysts subject to
client pressure.

60
Chapter III - COMPANY PROFILE
3.1. About L&T Finance
L&T Mutual Fund today is the tenth largest Fund house in India (after acquisition of Fidelity
Investment’s India business) on the basis of equity. L&T Mutual Fund is backed by L&T
Finance which was incorporated as the Non Banking Financial arm of the construction
behemoth Larsen & Toubro in November 1994.
Top Management and Key Personnel
o Mr. Kailash Kulkarni (Chief Executive Officer)
o Mr. Venkatesh Iyer (Senior VP & Head of Operations)
o Mr. Mandar Shendye (National Head – Institutional Sales)
o Mr. Sanjeev Kumar (National Head – Retail and Banking Sales)
o Mr.Venugopal Manghat (Co-head: Equity Investments)
o Ms. Bekxy Kuriakose (Senior Fund Manager- Fixed Income)
o Mr. Pankaj Gupta (Senior Fund Manager – Equities)
o Mr. Anant Deep Katare (Fund Manager – Equities)
o Ms. Richa Sharma (Fund manager – Fixed Income)
o Ms. Shobheta Manglik (Fund Manager – Fixed Income)
o Mr. Hareshwar P. Karekar (Fund manager – Fixed Income)
o Mr. Rahul Agarwal (Credit Analyst)
o Mr. Abhishek V. Iyer (Dealer – Fixed Income)
o Mr. Rudra Biswal (Head – IT and fund operations)
o Mr. Vikas Gandhi (Head – Finance & Accounts)
o Mr. Jaymeen D. Shah (Compliance Officer)
o Ms. Rekha Menon (Fund Accounts)
o Mr. B. John Vijayan (Operations & Investors Servicing)
AMC Directors
o Mr. Sunil V. Patel (Independent Director)
o Mr. R. Sankaran (Independent Director)
o Mr. N. Sivaraman (Associate Director)

61
o Mr. R. Shankar Raman (Associate Director)
o Mr. Ved Prakash Chaturvedi (Associate Director)
Trustee Directors
o Mr. Yeshwant M. Deosthalee (Associate Director)
o Mr. Pradip Roy (Independent Director)
o Mr. V. Natarajan (Independent Direcctor)
o Mr. Hemant Y. Joshi (Independent Director)
Custodian
o HDFC Bank Limited Custody Services
Registrars
o Computer Age Management Services Pvt. Ltd. (CAMS)
3.2. Mission, Vision & Values
Vision
“To be the most admired Asset Management Company by innovatively catering to the
investment requirements across asset classes for all investors. To fulfill our commitment of
bringing prosperity into the lives of our investors and create value for all stakeholders.”
Mission
o To establish L&T Investment Management Ltd. into a leadership position in the asset
management business.
o To be a one stop shop for all investment requirements.
o To create a stimulating environment to attract and retain the best talent.
o To be known for efficiency, ethics and professionalism in our approach and processes.
o To harness technology in all aspects of business - such as product innovation, investor
servicing & investment management
Values
o Solidity

62
We believe that a strong foundation is the key to building a great structure. We will
ensure that our foundations are based on thorough knowledge and expertise, and
constantly strengthen it.
o Commitment
We believe in utmost commitment to our responsibilities. And to you, we don't believe
in just selling a financial solution but building a long term partnership. We are with
you for life. And through every stage of your life.
o Innovation
We believe in constantly looking ahead, envisioning the future and anticipating and
adapting to it, rather than merely keeping pace with it, which is why you will always
find us devising innovative ways to build your wealth.
3.3. Mutual Fund Products
L&T finance provides various Mutual Funds as products to the clients. The product mix is
shown further.

63
L&T Product
Mix
Equity Funds
L&T Growth
Fund
L&T
Opportunity
Fund
L&T Tax Saver
Fund
L&T
Infrastructure
Fund
L&T Contra
Fund
L&T Tax
Advantage Fund
L%T Hedged
Fund
L&T Midcap
Fund
Debt Funds
L&T Ultra Short
Term Fund
L&T Gilt Fund
L&T Triple Ace
Fund
L&T Liquid Fund
L&t Select
Income Fund
L&T FMP
L&T Floating
rate Fund
Hybrid Funds
L&T Monthly
Income Plan
L&T MIP -
Wealth Builder
Plan
Figure 3.3(a) – Product Mix of L&T

64
How to read the Mutual Funds vs. Nifty chart
Figure 3.3(b) – Fund vs. Benchmark Chart24
Figures of the kind similar to the above have been used in the following pages to explain the
movement of a fund as compared to its benchmark. A benchmark might be an index, a stock, a
debt instrument or any security to compare the fund with. However the benchmark of a fund
must be related to it in terms of some common characteristics. For example, the benchmark of
a large cap equity fund will have the CNX NIFTY 50 as its benchmark whereas a small and
mid cap equity fund may be compared with the NIFTY Midcap index. In case of debt funds,
the yield on a 10 year Government bond or a T-Bill. In the figure above, the movement of the
fund is represented by the red line and the movement of its benchmark in black. Both the NAV
fund and the value of its benchmark have been rebased to 10,000. This is done by multiplying
both the numbers (NAV and the benchmark) by two constants so that the product of both
equals to 10,000 as on a particular date. All following calculations are done keeping the
constants in mind.
24 Source: Value Research Online

65
3.3.1. L&T Growth Fund
The scheme seeks to generate long term capital appreciation with a portfolio of equity related
instruments. The fund can invest up to 100 % in assets in equities while investing up to 20%
of the corpus in debt and money market instruments. The secondary objective is to generate
some current income and distribute dividend.
Chart 3.3.1 (a) - Fund Performance Vs NIFTY
Trailing Returns
Year-to-Date
Return Rank
Fund/Category
NIFTY
Fund Category
1- Year -4.93 -7.37 16/78 -8.13
2-Year 1.90 0.10 18/69 -0.60
3-Year 14.85 12.60 17/62 11.65
5-Year 2.76 4.34 34/43 4.31
Risk Analysis
Standard
Deviation
25.77
Sharpe Ratio 0.56
Beta 0.99
R-Squared 0.97
Alpha 2.72
Chart 3.3.1 (b) – Asset Allocation of Funds

66
3.3.2. L&T Opportunities Fund
The scheme aims at long term capital appreciation by investing in a universe of stocks, which
will be identified using fundamental analysis. The strategy will be to build up a diversified
portfolio of quality stocks, with medium to long term potential.
Chart 3.3.2 (a) - Fund Performance VS NIFTY
Trailing Returns
Year-to-Date
Return Rank
Fund/Category
NIFTY
Fund Category
1- Year -11.14 -6.55 37/41 -8.13
2-Year -5.61 -0.81 35/37 -0.60
3-Year 14.21 18.54 29/35 11.65
5-Year 5.61 6.86 22/29 4.31
Risk Analysis
Standard
Deviation
29.27
Sharpe Ratio 0.51
Beta 1.09
R-Squared 0.91
Alpha 1.97
Chart 3.3.2(b) – Asset Allocation of Funds

67
3.3.3. L&T Midcap Fund
The scheme aims at generating capital appreciation by investing primarily in midcap stocks.
The investment universe would primarily comprise of companies that have a market
capitalization ranging from `300 to `3000 crores.
Chart 3.3.3(a) - Fund Performance Vs NIFTY
Trailing Returns
Year-to-Date
Return Rank
Fund/Category
NIFTY
Fund Category
1- Year -4.93 -7.37 16/78 -8.13
2-Year 1.90 0.10 18/69 -0.60
3-Year 14.85 12.60 17/62 11.65
5-Year 2.76 4.34 34/43 4.31
Risk Analysis
Standard
Deviation
29.58
Sharpe Ratio 0.76
Beta 1.04
R-Squared 0.81
Alpha 10.07

68
3.3.4. L&T Tax Saver Fund
The scheme aims to generate long-term capital appreciation from a diversified portfolio of
equity and equity related securities and enable investors to avail the income tax rebate, as per
the prevailing tax laws
Chart 3.3.4(a) - Fund Performance Vs NIFTY
Trailing Returns
Year-to-Date
Return Rank
Fund/Category
NIFTY
Fund Category
1- Year -11.08 -6.04 33/36 -8.13
2-Year -5.04 -0.80 30/36 -0.60
3-Year 13.96 16.73 25/35 11.65
5-Year -0.18 5.23 26/28 4.31
Risk Analysis
Standard
Deviation
28.12
Sharpe Ratio 0.50
Beta 1.07
R-Squared 0.94
Alpha 1.42
Chart 3.3.4(a) – Asset Allocation of Funds

69
3.3.5. L&T MIP
The scheme aims to generate monthly income with minimum investments in debt instruments
to the extent of 80% of AUM. Equity & money market instruments can constitute a maximum
of 20% of the portfolio.
Chart 3.3.5(a) - Fund Performance Vs VR MIP
Trailing Returns
Year-to-Date
Return Rank
Fund/Category
VR MIP
Fund Category
1- Year 5.63 4.59 29/63 5.15
2-Year 4.91 5.66 37/54 4.29
3-Year 7.13 7.80 30/49 7.00
5-Year 9.24 7.36 9/44 6.32
Risk Analysis
Standard
Deviation
3.50
Sharpe Ratio 0.63
Beta 0.50
R-Squared 0.76
Alpha 1.06

70
3.3.6. L&T Ultra Short Term
The scheme seeks to provide regular and stable return and invests only in corporate bonds and
government securities predominantly with a rating of AA or above. Liquidity risk is contained
with these types of investment.
Chart 3.3.6(a) - Fund Performance Vs NSE T Bill
Trailing Returns
Year-to-Date
Return Rank
Fund/Category
NSE T-Bill
Fund Category
1- Year 9.56 9.40 81/174 4.20
2-Year 8.07 7.98 82/153 2.34
3-Year 6.90 6.84 70/129 1.78
5-Year 7.50 7.46 34/61 5.08
Risk Analysis
Standard
Deviation
0.16
Sharpe Ratio 16.51

71
3.3.7. L&T Triple Ace Fund
The scheme seeks to provide regular and stable income by investing in triple AAA rated fixed
income securities, at least to the extent of 80 % of its corpus, with the balance towards high
quality money market instruments.
Chart 3.3.7(a) - Fund Performance Vs VR Bond
Trailing Returns
Year-to-Date
Return Rank
Fund/Category
NSE G-
Sec Comp.Fund Category
1- Year 8.07 9.12 67/88 4.20
2-Year 6.08 7.02 63/76 2.34
3-Year 6.27 5.94 23/62 1.78
5-Year 3.25 7.35 43/45 5.08
Risk Analysis
Standard
Deviation
1.23
Sharpe Ratio 0.47

72
3.3.8. L & T Contra
The scheme aims to invest in equities by using a contrarian strategy. Contrarian refers to
buying into fundamentally sound scripts, which have underperformed or not performed to
their full potential in the recent past.
Chart 3.3.8(a) - Fund Performance VS NIFTY
Trailing Returns
Year-to-Date
Return Rank
Fund/Category
NSE G-
Sec Comp.Fund Category
1- Year -7.28 -6.55 23/41 -8.13
2-Year -2.53 -0.81 28/37 -0.60
3-Year 13.02 18.54 32/35 11.65
5-Year -4.20 6.86 29/29 4.31
Risk Analysis
Standard
Deviation
3.50
Sharpe Ratio 0.63
Beta 0.50
R-Squared 0.76
Alpha 1.06

73
3.3.9. L&T liquid Super Inst
The fund seeks to generate reasonable returns while maintaining safety and providing the
investor superior liquidity, investing predominately in a well-diversified and highly liquid
portfolio of money market instrument, government securities and corporate debt.
Chart 3.3.9(a) - Fund Performance VS NSE T Bill
Trailing Returns
Year-to-Date
Return Rank
Fund/Category
NSE T-
BillFund Category
1- Year 9.60 9.19 27/110 7.74
2-Year 8.18 7.88 39/106 6.68
3-Year 6.86 6.55 31/97 5.97
5-Year 7.31 7.11 33/81 6.74
Risk Analysis
Standard
Deviation
0.11
Sharpe Ratio 22.20

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