CHAPTER1

INTRODUCTION:
A BRIEF OF MUTUAL FUNDS

Mutual funds are investment companies that pool money from investors at large and offer to
sell and buy back its shares on a continuous basis and use the capital thus raised to invest in
securities of different companies. The stocks these mutual funds have are very fluid and are
used for buying or redeeming and/or selling shares at a net asset value. Mutual funds posses
shares of several companies and receive dividends in lieu of them and the earnings are
distributed among the share holders.
Mutual funds can be either or both of open ended and closed ended investment companies
depending on their fund management pattern. An open-end fund offers to sell its shares
(units) continuously to investors either in retail or in bulk without a limit on the number as
opposed to a closed-end fund. Closed end funds have limited number of shares. Mutual
funds have diversified investments spread in calculated proportions amongst securities of
various economic sectors. Mutual funds get their earnings in two ways. First is the most
organic way, which is the dividend they get on the securities they hold. Second is by the
redemption of their shares by investors will be at a discount to the current NAVs (net asset
values).
Basically,

1. Collect money from investors
2. Invest through well diversified portfolio according to investors requirement
3. Earning as dividend, or assets appreciation
4. Redeem whenever investor want in open ended and at certain time in close ended













HISTORY OF MUTUAL FUNDS IN INDIA

The mutual fund industry is a lot like the film star of the finance business.
Though it is perhaps the smallest segment of the industry, it is also the most glamorous
in that it is a young industry where there are changes in the rules
of the game everyday, and there are constant shifts and upheavals. The mutual fund is
structured around a fairly simple concept, the mitigation of risk through the spreading of
investments across multiple entities, which is achieved by the pooling of a number of
small investments into a large bucket. Yet it has been the subject of perhaps the most
elaborate and prolonged regulatory effort in the history of the country. The mutual fund
industry started in India in a small way with the UTI Act creating what was effectively a
small savings division within the RBI. Over a period of 25 years this grew fairly successfully
and gave investors a good
return, and therefore in 1989, as the next logical step, public sector banks and financi
al institutions were allowed to float mutual funds and their success emboldened the
government to allow the private sector to foray into this area. The initial years of the industry
also saw the emerging years of the Indian equity market, when a number of mistakes
were made and hence the mutual fund schemes, which invested in lesser-
known stocks and at very high levels, became loss leaders for retail investors. From those
days to today the retail investor, for whom the mutual fund is actually intended, has not yet
returned to the industry in a big way. But to be fair, the industry too has focused on brining in
the large investor, so that it can create a significant base corpus, which can make the retail
investor feel more secure. A Retrospect:
The last year was extremely eventful for mutual funds.
The aggressive competition in the business took its toll and two more mutual funds bit the
dust. Alliance decided to remain in the ring after a highly public bidding war did not yield an
acceptable price, while Zurich has been sold to HDFC Mutual. The growth of the industry
continued to be corporate focused barring a few initiatives by mutual funds to expand the
retail base. Large money brought with
it the problems of low retention and consequently low profitability,
which is one of the problems plaguing the business. But at the same time, the industry did
see spectacular growth in assets, particularly among the private sector players, on the back
of the continuing debt bull run. Equity did not find favor with investors since the
market was lack-luster and performances of funds, barring a few, were quite disappointing
for investors. The other aspect of this issue is that institutional investors do not
usually favor equity. It is largely a retail segment product and without retail depth, most
mutual funds have been unable to tap this market. The tables given below are a snapshot of
the AUM story, for the industry as a whole and for debt and equity separately.
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at
the initiative of the Government of India and Reserve Bank of India. The history of mutual
funds in India can be broadly divided into four distinct phases

First Phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by
the Reserve Bank of India and functioned under the Regulatory and administrative control of
the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took
over the regulatory and administrative control in place of RBI. The first scheme launched
by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700 crores of assets under
management.

Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks
and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India
(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987
followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89),
Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund
(Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund
in December 1990. At the end of 1993, the mutual fund industry had assets under
management of Rs. 47,004 crores.

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
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 Rs. 1,21,805
crores. The Unit Trust of India with Rs. 44,541 crores of assets under management was way
ahead of other mutual funds.

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of
India with assets under management of
Rs. 29,835 crores as at the end of January 2003, representing broadly, the assets of US
64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit
Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered
with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the
erstwhile UTI which had in March 2000 more than Rs. 76,000 crores of assets under
management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among different private sector funds,
the mutual fund industry has entered its current phase of consolidation and growth.



Impact of local and international developments

During the year we had two major political developments that affected the mutual fund
industry. The standoff between India and Pakistan at the beginning of the financial year saw
the debt
market being extremely volatile. Investors pulled out of funds and this also put
pressure on fund managers to hold returns and at the same time meet redemption
commitments. The equity markets were equally subdued but the industry did not react greatly
to this since equity funds were in any case not a significant part of the mobilization in the last
few years. With the stand down on the Indian side, the debt markets recovered and with that
the inflow of funds into our industry soared once again. But at the end of the year the industry
was hit by another war the impending US attack on Iraq and consequent oil price pressures
once again made the debt market volatile. It is a mark of the
maturing of the Indian investor that redemptions were only need based and the industry
did not see as much outflows as one feared. Product innovations
With the bond yields plateauing and with the mutual fund industry trying to attract people to
the equity market, the year also saw some remarkable products flavors for Indian investors.
Birla Sunlife Mutual Fund led the pack with an equity fund focused on dividend yield stock,
a bond index fund and a bond-for-units swap product. Some of the other innovative products
were the series of exchange-traded funds from Benchmark, including
a liquid index traded fund. Prudential- ICICI also launched an exchange-
traded fund, the SPICE, in association with BSE. The industry focused also on making
existing products more attractive by adding on a number of service features and cost
control measures. Same day redemption in liquid funds, institutional plans which
would reduce the overall cost of investment and bonus units in lieu of dividend were some
of these features.

A new Emphasis on Risk Management

The year also saw a tremendous emphasis on risk management. A number of mutual funds
were already taking steps to mitigate risks not only in operations as in the past, but also in the
area of management of funds. A committee constituted by AMFI carried the initiative taken
under the FIRE Project forward and developed a risk management framework for the
industry. The subsequent circular by SEBI is perhaps one of the most comprehensive
attempts to address the issue of risk in the mutual fund business and carries with it the added
advantage of phase wise escalation starting with mandatory items and moving towards best
practices.

AMFI and its role

One of the most effective industry bodies today is probably the Association of Mutual Funds
in India (AMFI). It has been a forum where mutual funds have been able to present their
views, debate and participate in creating their own regulatory framework.
The association was created originally as a body that would lobby with the regulator to
ensure that the fund viewpoint was heard. Today, it is usually the body that is consulted on
matters long before
regulations are framed, and it often initiates many regulatory changes that prevent
malpractices that emerge from time to time. This year some of the major initiatives were the
framing of the risk management structure, a code of conduct and registration structure for
mutual fund intermediaries, which were subsequently mandated by SEBI. In addition, this
year AMFI was involved in a number of developments and enhancements to the regulatory
framework. AMFI works through a number of committees, some of which are standing
committees to address areas where there is a need for constant vigil and improvements and
other which are
ad hoc committees constituted to address specific issues. These committees consist of
industry professionals from among the member mutual funds. There is now some thought that
AMFI should become a self-regulatory organization since it has worked so effectively as an
industry body.

An Overview:
Overall FY2003 can be summed up as the year of the maturing of the mutual fund industry. It
was a year when fund houses went through turmoil and consolidation and the strong ones
emerged stronger. Investors too became savvier, and began investing based on far
more scientific criteria than in the past, and with clearly defined investment horizons.
Distribution
gave way increasingly to intermediation and more and more distributors graduated to
providing technical advice to their clients. Thus the industry has come of age in FY2003, and
we hope that FY2004 and beyond will see us come out of a stormy adolescence to become a
trusted avenue for saving.

TERMS OF MUTUAL FUNDS

Asset Management Company An Asset Management Company (AMC):

is a highly regulated organization that pools money
from investors and invests the same in a portfolio. They charge a small
management fee, which is normally 1.5 per cent of the total funds managed.

NAV

NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund
net of its liabilities. NAV per unit is simply the net value of assets divided by the number of
units outstanding. Buying and selling into funds is done on the basis of NAV-related prices.
NAV is calculated as follows:
NAV= Market value of the fund's investments + Receivables + Accrued Income- Liabilities-
Accrued
Expenses Number of Outstanding units

How often is the NAV declared?

The NAV of a scheme has to be declared at least once a week. However many Mutual Fund
declare NAV for their schemes on a daily basis. As per SEBI Regulations, the NAV of a
scheme shall be calculated and published at least in two daily newspapers at intervals not
exceeding one week. However, NAV of a close-ended scheme targeted to a specific segment
or any monthly income scheme (which is not mandatorily required to be listed on
a stock exchange) may be published at monthly or quarterly intervals.

What is Exit Load?

The non refundable fee paid to the Asset Management Company at the time of redemption/
transfer of units between schemes of mutual funds is termed as exit load. It is deducted from
the NAV (selling price) at the time of such redemption/ transfer.

What is redemption price?

Redemption price is the price received on selling units of open-ended scheme. If the fund
does not levy an exit load, the redemption price will be same as the NAV. The redemption
price will be lower than the NAV in case the fund levies an exit load.

What is repurchasing price?

Repurchase price is the price at which a close-ended scheme repurchases its units.
Repurchase can either be at NAV or can have an exit load.

What is a Switch?

Some Mutual Funds provide the investor with an option to shift his investment from one
scheme to another within that fund. For this option the fund may levy a switching fee.
Switching allows the Investor to alter the allocation of their investment among the schemes in
order to meet their changed investment needs, risk profiles or changing circumstances during
their lifetime.

What is Shut-Out Period?

After the closure of the Initial Offer Period, on an ongoing basis, the Trustee reserves a right
to declare Shut-Out period not exceeding 5 days at the end of each month/quarter/half-year,
as the case may be, for the investors opting for payment of dividend under the respective
Dividends Plans. The declaration of the Shut-Out period is envisaged to facilitate the
AMC/the Registrar to determine the Units of the unit holders eligible for receipt of dividend
under the various Dividend Options. Further, the Shut-Out period will also help in
expeditious processing and dispatch of dividend warrants. During the Shut-Out period
investors may make purchases into the Scheme but the Purchase Price for subscription of
units will be calculated using the NAV as at the end of the first Business Day in the following
month/quarter/half-year as the case may be, depending on the Dividend Plan chosen by the
investor. Therefore, if investments are made during the Shut -Out period, Units to the credit
of the Unit holder's account will be created only on the first Business Day of the following
month/ quarter/half year, as the case may be, depending on the dividend plan chosen by the
investor. The Shut-Out period applies to new investors in the Scheme as well as to Unit
holders making additional purchases of Units into an existing folio. The Trustee reserves the
right to change the Shut-Out period and prescribe new Shut- Out period, from time to time.

Minimum lock-in period for investment

There is no lock-in period in the case of open-ended funds. However in the case of tax saving
funds a minimum lock-in period is applicable. The lock-in period for different tax saving
schemes are as follows:
section minimum lock-in period
U/s 88 3 yrs.
U/s 54EA 3 yrs.
U/s 54EB 7 yrs.

Who are the issuers of Mutual funds in India?

Unit Trust of India was the first mutual fund which began operations in 1964. Other issuers
of Mutual funds are Public sector banks like SBI, Canara Bank, Bank of India, Institutions
like IDBI, ICICI, GIC, LIC, and Foreign Institutions like Alliance, Morgan Stanley,
Templeton and Private financial companies like Kothari Pioneer, DSP Merrill Lynch,
Sundaram, Kotak Mahindra, and Cholamandalam etc. there are many new upcoming fund
houses like Edelweiss, J.P. Morgan, Axis,

SYSTEMATIC INVESTMENT PLAN
SIP is an investment option that is presently available only with mutual funds. The other
investment option comparable to SIPs is the recurring deposit schemes from Post office and
banks. Basically, under an SIP option an investor commits making a regular
(monthly/quarterly) investment in a particular mutual fund/deposit. Investor can now use auto
debit (ECS) facility from Banks to automatically debit SIP amount from your account.
There is no need to give bulk of cheques for SIP. For that you should have account in
nationalized banks. For SIP through ECS, you have to provide bank details like account no.,
branch name, MICR no. etc.

TAX BENEFITS IN MUTUAL FUNDS

When we talk about a mutual fund for taxation purposes, we mean the legally constituted
trust that holds the investors money. It is trust that earns and receives income from
investments it makes on behalf of the investors. Most countries do not impose any tax on this
entity the trust because the income it earns is
meant for the investors. The trust is considered to be only a pass-through vehicle. It
would amount to double taxation if the trust first pays a tax and then investor also is made to
pay. Generally, the trust that is exempted and
the investor pay the taxes on his share of the income. After the 1999-2000
Budget, the investors are totally exempt from paying any tax on the dividend income they
receive from the mutual funds, while certain types of schemes pay some taxes. This section
explains what the fund or the trust pays by way of tax.

Tax Provision

Generally, income earned by mutual fund registered with SEBI is exempt from tax.
However, income distributed to unit-holders by a closed-end debt fund is liable to a
dividend distribution tax at a rate stipulated by the Government. This tax is not
applicable to distributions made by open-end equity-oriented funds.

Impact on the Fund and the Investor

It should be noted that although this tax is payable by the fund on its distributions and out of
its income, the investor are indirectly since the funds NAV, and therefore the
value of his investment will come down by the amount of tax paid by the fund. For example,
if a closed-end or debt fund declares a dividend distribution of Rs. 100, Rs.
10.20, if tax rate is 10.20%) will be the tax in the hands of the fund. While the
investor will get Rs. 100, the fund will have Rs. 10.20 less to invest. The funds
current cash flow will diminish by Rs. 10.20 paid as tax, and its impact will be
reflected in the lower value of the funds NAV and hence investors investment on a
compounded basis in future periods.
Also, the tax bears no relationship to the investors tax bracket and is payable by the fund
even if the investors income does not exceed the taxable limit prescribed by the Income Tax
Act.
In fact, since the tax is on distributions, it makes income schemes less attractive in
comparison to growth schemes, because the objective of income schemes is to pay regular
dividends.
The fund cannot avoid the tax eve if the investor chooses to reinvest the distribution
back into the fund. For example, the fund will still pay Rs. 10.20 tax on the
announced distribution, even if the investor chooses to reinvest his dividends in the
concerned scheme.

Tax benefits to the Investor

Dividends Received From Mutual Funds

Income distributed by a fund is exempted in the hands of investors
No TDS on any income distribution by mutual fund
Capital Gains on Sale of Units However, if the investor sells his units and earns Capital
Gains, the investor is subject to the Capital Gains Tax as under:

If units are held for not more than 12 months, they will be treated as short term capital
asset, otherwise as long term capital asset.
Tax law definition of Capital Gains = Sale consideration (Cost of Acquisition + Cost
of Improvements + Cost of transfer)
If the units were held for over one year, the investor gets the benefit of Indexation,
which means his purchase price is marked up by an inflation index, so his capital gains
amount is less than otherwise. Purchase Price of a long term capital asset after Indexation is
computed as,

Cost of acquisition or improvement = actual cost of acquisition or improvement * cost
inflation index for year of transfer / cost inflation index for year of acquisition or
improvement or for 1981, whichever is less.

Since, April 1, 2003, all dividends, declared by debt-oriented mutual funds (i.e. mutual funds
with less than 50% of assets in equities), are tax-free in the hands of the investor. A dividend
distribution tax of 12.5% (including surcharge) is to be paid by the mutual fund on the
dividends declared by the fund. Long-term debt funds, government securities funds (G-
sec/gilt funds), monthly income plans (MIPs) are examples of debt-oriented funds. Dividends
declared by equity-oriented funds (i.e. mutual funds with more than 50% of assets in equities)
are tax-free in the hands of investor. There is also no dividend distribution tax
applicable on these funds under section 115R. Diversified equity funds, sector funds,
balanced funds are examples of equity-oriented funds. Amount invested in tax-saving funds
(ELSS) would be eligible for deduction under Section
80C, however the aggregate amount deductible under the said section cannot exceed Rs 1
lakh.

Section 2(42A):
Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short-term capital asset
if the same is held for less than 12 months. The units held for more than twelve months are
treated as long-term capital asset.

Section 10(38):
Under Section 10(38) of the Act, long term capital gains arising from transfer of a unit
of mutual fund is exempt from tax if the said transaction is undertaken after October 1, 2004
and the securities transaction tax is paid to the appropriate authority. This makes long-
term capital gains on equity-oriented funds exempt from tax from assessment year 2005-
06. Short-term capital gains on equity-
oriented funds are chargeable to tax @10% (plus
education cess, applicable surcharge). However, such securities transaction tax will be
allowed as rebate under Section 88E of the Act, if the transaction constitutes business
income. Long-term capital gains on debt-oriented funds are subject to tax @20% of capital
gain after allowing indexation benefit or at 10% flat without indexation benefit, whichever is
less. Short-term capital gains on debt-oriented funds are subject to tax at the tax bracket
applicable (marginal tax rate) to the investor.

Section 112:
Under Section 112 of the Act, capital gains, not covered by the exemption
under Section 10(38), chargeable on transfer of long-term capital assets are subject to
following rates of tax:
Resident Individual & HUF -- 20% plus surcharge, education cess.
Partnership firms & Indian companies -- 20% plus surcharge.
Foreign companies -- 20% (no surcharge).

Capital gains will be computed after taking into account the cost of acquisition as adjusted by
Cost Inflation Index, notified by the central government. 'Units' are included in the proviso to
the sub-section (1) to Section 112 of the Act and hence,
unit holders can opt for being taxed at 10% (plus applicable surcharge, education cess
) without the cost inflation index benefit or 20% (plus applicable surcharge)
with the cost inflation index benefit, whichever is beneficial. Under Section 115AB
of the Income Tax Act, 1961, long term capital gains in respect of units, purchased in
foreign currency by an overseas financial, held for a period of more than 12 months,
will be chargeable at the rate of 10%. Such gains will be calculated without indexation
of cost of acquisition. No surcharge is applicable for taxes under section 115AB, in respect of
corporate bodies.

Offset the capital loss on a mutual fund investment after a dividend declaration

This is a practice that is popularly referred to as 'dividend stripping.' The capital loss from a
dividend declaration can be offset if you have remained invested in the mutual fund 3 months
before and 9 months after the dividend declaration. If you haven't adhered to this guideline
then you cannot offset the capital loss arising from a dividend declaration.

Avoid payment of capital gains on mutual fund investments

The capital gain, which is not exempt from tax as explained above, can
be invested in the specified asset, mentioned below, within 6 months of the sale. Specified
asset means any bond redeemable after 3 years: Issued on or after April 1, 2000 by
NABARD (National Bank for Agriculture and Rural Development or NHA (National
Highways Authority of India Issued on or after April 1, 2001 by the Rural Electrification
Corporation Ltd. Issued on or after April 1, 2002 by the National Housing
Bank or by the Small Industries Development Bank of India. Such capital gains can also be
invested in any residential house property in accordance with section 54F of the Act and one
can claim exemptions from capital gains.

THE RIGHTS OF INVESTORS

As per SEBI Regulations on Mutual Funds, an investor is entitled to 1. Receive
Unit certificates or statements of accounts confirming your title within 6 weeks from the
date your request for a unit certificate is received by the Mutual Fund.
2. Receive information about the investment policies, investment objectives, financial
position and general affairs of the scheme; 3. Receive dividend within 42 days of their
declaration and receive the redemption or repurchase proceeds within 10 days from the date
of redemption or repurchase 4. The trustees shall be bound to
make such disclosures to the unit holders as are essential in order to
keep them informed about any information which may have an adverse bearing on their
investments 5. 75% of the unit holders with the prior approval of SEBI can terminate the
AMC of the fund. 6. 75% of the unit holders can pass a resolution to wind-up the scheme.
7. An investor can send complaints to SEBI, who will take up the matter with the
concerned Mutual Funds and follow up with them till they are resolved.

Are Mutual Funds Risk Free and What are the Advantages?

One must not forget the fundamentals of investment that no investment is insulated from risk.
Then it becomes interesting to answer why mutual funds are so popular. To begin with, we
can say mutual funds are relatively risk free in the way they invest and manage the funds. The
investment from the pool is well diversified across securities and shares from various sectors.
The fundamental understanding behind this is not all corporations and sectors fail to perform
at a time. And in the event of a security of a corporation or a whole sector doing badly then
the possible losses from that would be balanced by the returns from other shares.

This logic has seen the mutual funds to be perceived as risk free investments in the market.
Yes, this is not entirely untrue if one takes a look at performances of various mutual funds.
This relative freedom from risk is in addition to a couple of advantages mutual funds carry
with them. So, if you are a retail investor and planning an investment in securities, you will
certainly want to consider the advantages of investing in mutual funds. The advantages of
investing in a Mutual Fund are:

Proffessional management
Diversification
Convenient Administration
Return Potential
Low Cost
Liquidity
Transparency
Flexibility
Choice of Schemes
Tax benefits
Well Regulated


Literature Review:
Performance evaluation of mutual funds is one of the preferred areas of research where a
good amount of study has been carried out. The area of research provides diverse views of
the same.
For instance one paper
1
evaluated the performance of Indian Mutual Fund Schemes in a
bear market using relative performance index, risk-return analysis, Treynors ratio, Sharpes
ratio, Jensens measure, Famas measure. The study finds that Medium Term Debt Funds
were the best performing funds during the bear period of September 98-April 2002 and 58 of
269 open ended mutual funds provided better returns than the overall market returns.

Another paper
2
used Return Based Style Analysis (RBSA) to evaluate equity mutual funds in
India using quadratic optimization of an asset class factor model proposed by William
Sharpe and analysis of the relative performance of the funds with respect to their style
benchmarks. Their study found that the mutual funds generated positive monthly returns on
the average, during the study period of January 2000 through June 2005. The ELSS funds
lagged the Growth funds or all funds taken together, with respect to returns generated. The
mean returns of the growth funds or all funds were not only positive but also significant. The
ELSS funds also demonstrated marginally higher volatility (standard deviation) than the
Growth funds.

One study
3
identified differences in characteristics of public-sector sponsored & private-
sector sponsored mutual funds find the extent of diversification in the portfolio of securities of
public-sector sponsored and private-sector sponsored mutual funds and compare the
performance of public-sector sponsored and private-sector sponsored mutual funds using
traditional investment measures. They primarily use Jensens alpha, Sharpe information
ratio, excess standard deviation adjusted return (eSDAR) and find out that portfolio risk
characteristics measured through private-sector Indian sponsored mutual funds seems to







have outperformed both Public- sector sponsored and Private-sector foreign sponsored
mutual funds and the general linear model of analysis of covariance establishes differences
in performance among the three classes of mutual funds in terms of portfolio diversification.

CHAPTER 2
INDUSTRY PROFILE
BANKING INDUSTRY IN INDIA
Banking in India originated in the last decades of the 18th century. The first banks were
The General Bank of India, which started in 1786, and Bank of Hindustan, which started in
1790; both are now defunct. The oldest bank in existence in India is the State Bank of India,
which originated in the Bank of Calcutta in June 1806, which almost immediately became
the Bank of Bengal. This was one of the three presidency banks, the other two being
the Bank of Bombay and the Bank of Madras, all three of which were established under
charters from the British East India Company. For many years the Presidency banks acted
as quasi-central banks, as did their successors. The three banks merged in 1921 to form
the Imperial Bank of India, which, upon India's independence, became the State Bank of
India.
COMPANY PROFILES
The funds which have been evaluated for this study have been randomly selected from the
Indian fund houses like:
SBI
ICICI
AXIS
HDFC
SBI:
State Bank of India is an India-based bank. In addition to banking, the
Company, through its subsidiaries, provides a range of financial services,
which include life insurance, merchant banking, mutual funds, credit card,
factoring, security trading, pension fund management and primary
dealership in the money market. It operates in four business segments: the
treasury segment includes the entire investment portfolio and trading in
foreign exchange contracts and derivative contracts; the corporate /
wholesale banking segment comprises the lending activities of corporate
accounts group, mid corporate accounts group and stressed assets
management group; the retail banking segment comprises of branches in
National Banking Group, which primarily includes personal banking
activities, and other banking business. As of March 31, 2011, the Bank had
a network of 18,266 branches including 4,724 branches of its five Associate
Banks.
AXIS BANK:
Axis Bank Limited is an India-based bank. The Bank operates in four
segments: treasury operation, which includes investments in sovereign and
corporate debt, equity and mutual funds, trading operations, derivative
trading and foreign exchange operations on the account, and for customers
and central funding; retail banking, which includes lending to
individuals/small businesses subject to the orientation, product and
granularity criterion, and also includes liability products, card services,
Internet banking, automated teller machines (ATM) services, depository,
financial advisory services, and nonresident Indian services (NRI);
corporate/wholesale banking, which includes corporate relationships not
included under retail banking, corporate advisory services, placements and
syndication, management of publics issue, project appraisals, capital
market related services, and cash management services, and other
banking business, which includes para banking activities.
ICICI
ICICI Bank Limited (the Bank) is a banking company. The Bank, together
with its subsidiaries, joint ventures and associates, is a diversified financial
services group providing a range of banking and financial services,
including commercial banking, retail banking, project and corporate finance,
working capital finance, insurance, venture capital and private equity,
investment banking, broking and treasury products and services. It
operates under four segments: retail banking, wholesale banking, treasury
and other banking. Retail Banking includes exposures, which satisfy the
four criteria of orientation, product, granularity and low value of individual
exposures for retail exposures. Wholesale Banking includes all advances to
trusts, partnership firms, companies and statutory bodies, which are not
included under Retail Banking. Treasury includes the entire investment
portfolio of the Bank. Other Banking includes hire purchase and leasing
operations and other items.
HDFC
HDFC Bank Limited (the Bank) is a banking company. The Bank is
engaged in providing a range of banking and financial services. The Bank
operates in four segments: treasury, retail banking, wholesale banking and
other banking business. The treasury segment primarily consists of net
interest earnings from the Banks investments portfolio, money market
borrowing and lending, gains or losses on investment operations and on
account of trading in foreign exchange and derivative contracts. The retail
banking segment raises deposits from customers and makes loans and
provides other services. The wholesale banking segment provides loans,
non-fund facilities and transaction services to large corporates, emerging
corporates, public sector units, government bodies, financial institutions
and medium scale enterprises. The other banking business segment
includes income from para banking activities, such as credit cards, debit
cards and third party product distribution, primary dealership business.


















CHAPTER 3
RESEARCH DESIGN:
Problem statement: Performance evaluation of mutual funds in india.
Objective of the study: The study aims at:
1. Comparing the performance of the selected funds vies-a-vies the benchmark index,
BSE (Bombay Stock Exchange) Sensex
2. Capturing differences in the performance levels, if any.
3. Ascertaining whether the returns generated by the funds are purely attributable to
market movement or individual fund performance.
Scope of the study:
Over the last couple of years mutual funds have given impressive returns, especially equity
funds
4
. The growth period first started during early 2005 with markets appreciating
significantly. With 2006 approaching more towards 2007, markets rallied like never before.
The financial year 2007-08 was a year of reckoning for the mutual fund industry in many
ways. Most stocks were trading in green. All fund houses boasted of giving phenomenal
returns. Many funds outperformed markets. Equity markets were in the limelight. Investors
who were not exposed to equity stocks suddenly infused funds. AUM grew considerably and
fund houses were on a spree of launching new schemes.
Growth funds which aim at giving capital appreciation invest in growth stocks of the fastest
growing companies. Since these funds are more risky providing above average earnings,
investors pay a premium for the same. These funds have grown to become extensively
popular in India. All the leading fund houses offer several schemes under the growth funds
today.
The remarkable performance of this industry has attracted many researchers to study and
examine the growth, the performance of funds, the players in the market and the regulators.
It is interesting to learn the growth phase of these funds over this period.