CHAPTER I

INTRODUCTION

1.1 INTRODUCTION ABOUT THE STUDY

The Indian financial market today is one of the fastest growing

emerging markets of the world. The new government policy of economic
liberalization, deregulation and measures of restructuring the economy, has
dismantled entry barriers in the financial market and created an environment
for efficient allocation of resources one of the new economic scene is the
mutual fund industry, which has emerged as the most dynamic segment of the
Indian financial system. Through out the world, mutual funds have played a
very significant role as financial intermediaries and have contributed to the
development of capital markets and the growth of the corporate sector.

Though the mutual fund industry in India is relatively new, it has grown
rapidly influencing various sectors of the financial market and the national
economy. Till 1987, the Unit Trust of India (UTI) was the only mutual fund in
India. The industry witnessed an unprecedented level of growth with the
entry of public sector mutual funds, sponsored by nationalized banks and
insurance companies, in 1987. The mutual fund activity attained momentum
in 1993 with the opening up of the industry to private sector fund operators.

After an enthusiastic beginning Indian mutual funds lost their

momentum and slowed down after 1994-95. The industry showed sluggish
growth in spite of market reforms inducements to competition, increased
operational transparency. And an expanding savings market. The overall
macro-economic uncertainties, particularly the fluctuating stock markets have
had an adverse impact on mutual fund resource mobilization. This has
affected the private sector considerably, unlike the public sector mutual funds
and UTI does not have government resources to full back.
 Indian financial system has witnessed revolutionary changes,
developments and innovations since 1991 due to economic reforms
undertaken by the government. With the advent of liberalization, privatization
and globalization, the financial services sector has become more dynamic and
vibrant. Many innovative methods of finance products, services, business and
regulatory bodies have emerged to make the Indian capital market more liquid
and strong to face the global challenges. Emergence of increasing role of
mutual fund industry in financial intermediation is one such development
following the structural reforms initiated in the Indian economy.

MUTUAL FUND

Mutual funds have emerged as dynamic financial intermediaries

between the suppliers and the users of money. Mutual Fund (MF) is basically
a trust that pools the savings of a number of investors who share a common
goal and invests the same in different types of securities as per pre-
determined objectives. The income earned through such investment by the
MF and capital appreciations realized by the scheme are shared by its unit
holders in proportion to the number of units owned by them.

Investment in securities was spread across a wide cross-section of

industries and sectors and thus the risk is reduced. Diversification reduces
the risk because all stocks may not move in the same direction in the same
proportion at the same time. Investors of Mutual Funds are known as unit
holders.
CONCEPTS AND DEFINITIONS OF MUTUAL FUNDS

DEFINITION

According to JHON A. HALIN “a mutual fund is almost like a co-

operative society of investors; that is why the word ‘mutual’ is used. It collects
money from investors by issuing mutual fund shares invests this in shares and
securities and divides whatever dividend and interest is received among it
members”

According to securities and exchange board of India regulations

“mutual fund means a fund established in the form of trust by a sponsor to rise
money by the trustee through sale of units to the public under one or more
schemes for investing or securities in accordance with the regulation thus a
mutual fund collects money from the investors issues certificates to them
known as units and invests the money collected in securities so as to achieve
mutual benefit in terms of capital appreciates in such securities.

CONCEPTS

CAPITAL MARKET

It is that segment of the financial markets in which securities having

maturities exceeding one year are traded.

STOCK MARKET

An institution where stocks and shares are traded. Companies that

wish their stocks to be bought or sold list their shares in the Stock exchange
and members registered at the stock exchange either buy or sell these stocks
on behalf of their investor clientele.

STOCK MARKET INDICES

Stock market indices are numbers that measure the general movement
of the market. They represent the entire market or segments thereof.
BSE SENSEX

Bombay stock Exchange Sensitive Index reflects the price movement

of 30 selected shares on the BSE.

NSE NIFTY

National stock exchange Nifty index reflects the price movements of 50

selected shares on the NSE.

NET ASSET VALUE

Net Asset Value (NAV) denotes the performance of a particular

scheme of a mutual fund. In simple words, Net Asset Value is the market
value of the securities changes every day NAV per unit is the market value of
securities of a scheme divided by the total number of units of the scheme on
any particular date.

NAV= (market value of the scheme investment +other current asset +

deposit – all liabilities –liabilities expect unit capital reserve and profit and loss
account) /number of scheme units outstanding.

SALES OR REPURCHASE/REDEMPTION PRICE

The price or NAV a unit holder is charged while investing in an open-

ended scheme is called sales price. It may include sales load if applicable.
Re-purchase or Redemption price is the price or NAV at which an open-ended
scheme purchases or redeems its units from the unit holders. It may include
exit load if applicable.

LOAD OR NO-LOAD FUND

A load fund is one that charges a percentage of NAV for entry or exit.
The investors should take the loads into consideration while making
investment as these affect their yields/returns. A no load fund is one that
does not charge for entry or exit.
ADVANTAGES OF MUTUAL FUNDS FOR INVESTORS

Investors derive a number of advantages by investing their money in

mutual funds. Some of these advantages are as under:

REDUCED RISK

Mutual funds invest in a number of reputed and well managed blue

chip companies. So, the fall in the price of a few scrips, will not affect them
much. Because of such diversification and economies of scale in transaction
cost, the risk of loss due to a fall in the value of few scrips is minimized.

EXPERTISE OF PROFESSIONAL MANAGEMENT

The investors get the expertise of professional money managers who

watch the funds portfolio and take necessary decisions on what scrips are to
be purchased, what scrips are to be sold and when they should be bought
and sold. The fund managers maximize the income of the fund.

DIVERSIFICATION OF PORTFOLIO

When a person invests in a mutual fund, he participates in a large

basket of shares of many different companies in a number of different
industries which are included in the fund’s portfolio. To achieve a similar
degree of diversification, an individual investor has to spend considerable time
and money. Further, since a fund purchases shares in large volumes it has
the advantage of paying the minimum brokerage.

AUTOMATIC REINVESTMENT

In a mutual fund it is possible to reinvest the dividends and capital

gains. An individual investor, on the other hand, may not always find it easy
to reinvest his dividends, which usually get frittered away. The automatic
reinvestment feature of a mutual fund is a form of forced saving and can make
a big difference in the long run.
SELECTION AND TIMINGS OF INVESTMENT

Expertise in the selection of shares, debentures, etc., and timing is

made available to investors so that invested funds generate higher returns to
them.

LIQUIDITY OF INVESTMENT

Mutual funds are required by the Securities and Exchange Board of

India (SEBI) to provide liquidity to investors. Mutual funds are ready on any
day (after the initial lock-in period is over) to buy back the units from the
investors at the net asset value of the investment. They announce through
daily newspapers their re-purchase price of the units issued under different
schemes.

SAVING HABIT

Mutual funds encourage saving and investment habit among the public
at large. In India, the saving habit is very important for development of
economy.

TAX SHELTER

Some mutual funds are permitted by the Government to launch Equity-

Linked Tax Saving Schemes. Investors who invest in such schemes get tax
relief or tax rebate.

SAFETY OF FUNDS

Mutual funds are governed by SEBI (Mutual Funds) Regulations. 1993.

The SEBI acts as a watchdog and tries to protect the interest of investors.
So, the invested in Mutual Funds are generally regarded as safe.
DIVERSIFICATION OF MUTUAL FUNDS

Mutual funds were subsequently allowed to diversify their activities in

the following areas:

 Portfolio management services

 Management of offshore funds

 Providing advice to offshore funds

 Management of pension or provident

 Management of venture capital funds

 Management of money market funds

 Management of real estate funds

TYPES OF MUTUAL FUND SCHEME

There are two types of mutual funds are available. These are

I. Scheme according to maturity period.

II. Scheme according to investment objectives.

I. SCHEME ACCORDING TO MATURITY PERIOD

a. OPEN-ENDED FUND/SCHEME

An open-ended fund or scheme is available for subscription and re-

purchase on a continuous basis. These schemes do not have maturity period
but investors can conveniently buy and sell units at Net Asset Value (NAV).
The key feature of open-ended scheme is liquidity.
b. CLOSE-ENDED FUND/SCHEME

A close-ended fund or scheme has a stipulated maturity period. The

fund is open for subscription only during a specified period at time of launch of
scheme. Investors can invest in the scheme at the time of the initial public
scheme and thereafter they can buy or sell the units of the scheme on the
stock exchange.

II. SCHEME ACCORDING TO INVESTMENT OBJECTIVE

A Scheme can also be classified as growth scheme income scheme

considering its investment objective, such scheme may be open-ended or
close-ended schemes and such schemes may classify mainly as follows:

a. GROWTH/EQUITY ORIENTED SCHEME

The aim of growth funds is to provide capital appreciation over the

medium to long-term, such scheme normally invest a major part of their
corpus in equities, such schemes provide different options to the investors like
dividend option, capital appreciation etc. Normally these funds have the risk
at very high comparatively to other.

b. INCOME/DEBT ORIENTED

The aim of income funds is to the investors. Such scheme generally

invests in bonds, corporate debentures, Government securities and money
market instruments. Such schemes are less risky compared to equity
schemes. These funds are not affected by the fluctuations in equity market.
However the opportunities of capital appreciation are also limited in such
funds.
c. BALANCED FUND

The aim of balanced fund is to provide both growth and regular income
as such funds invest both in equities and fixed income securities in the
proportion indicated ion the document. These funds are also affected
because of fluctuations in share prices in the stock market.

d. MONEY MARKET OR LIQUID FUND

These funds are also income funds and their aim is to provide easy
liquidity, preservation of capital and moderate income. These schemes invest
exclusively in safer short-term instruments such as Treasury Bills, Certificates
of Deposit, Commercial Paper and Inter-Bank Call Money, Government
Securities, etc. Returns on the scheme fluctuate much less compared to
other funds.

e. GILT FUNDS

These funds invest exclusively in government securities. Government

securities have no default risk. Net Asset Value (NAV) of their schemes also
fluctuates due to change in interest rates.

f. INDEX FUNDS

Index funds replicate the portfolio of a particular index such as the BSE
Sensitive Index, S&P CNX Nifty, etc. These schemes invest in the securities
in the same weightage comprising of an index. Net Asset Value (NAV) of
such schemes would rise or fall in accordance with the rise or fall in index,
through not exactly by the same percentage due to some factors known as
“tracking error” in technical terms.

There are also exchange traded index funds launched by the mutual
funds, which are traded on the stock exchanges.
g. SECTOR SPECIFIC FUNDS

There are the funds/schemes, which invest in the securities of only

those sectors or industries as specific in the offer document, (e.g.)
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), etc. The
returns in there funds are dependent on the respective sectors. While there
funds are may give higher returns, they are more risky compared to diversified
funds.

h. TAX SAVING SCHEMES

These schemes offer tax rebates to the investor under the provision of
the income tax act, 1961 as the government offer tax incentives for invest in
specified avenues, (e.g.) Equity linked Savings Schemes (ELSS). Pension
schemes launched by the mutual funds also offer tax benefits.

i. LEVERAGE FUND

It was also known as borrowed funds; these are used to increase the
size of value of portfolio and benefit to members by gains arising out of
excess of gains over cost of borrowed funds. Such mutual funds invest in
risky investments and indulge in speculative trading.

j. HEDGE FUNDS

Mutual funds, which employ their funds by speculative trading i.e.,

buying shares whose prices, are likely to rise and selling shares whose prices
are likely to dip, are called hedge funds.
STRUCTURE OF INDIA MUTUAL FUNDS

As per the 1996 regulations, ‘a mutual fund shall be constituted in he

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 (16 of
1908), executed by the sponsor in favor of trustees named in such an
instrument.

A mutual fund comprises four separate entities – sponsor, mutual fund

trust, Asset Management Company (AMC) and custodian. These are, of
course, assisted by; other independent administrative entities, such as banks,
registrars and transfer agents.
Establishes MF as a
Sponsor trust Registers MF with
Company SEBI

Holds unit -holders fund

Managed by a in MF Ensures
board of Mutual
Fund compliance to SEBI
trustees Enters into agreement
with AMC

Floats MF finds
Asset management Manages fund as per
Company SEBI guidelines and
AMC agreement

Provides necessary
Custodian Custodian services

Provides banking
Bankers Services

Provide registrar
Registrars and services and act as
Transfer agents transfer agents

STRUCTURE OF MUTUAL FUNDS IN INDIA

SPONSOR

The Sponsor for a mutual fund can be any person who, acting alone or
in combination with another corporate body, establishes the mutual fund and
gets it registered with SEBI. The sponsor is required to contribute at least
40% of the minimum net worth (Rs.10 crore) of the Asset Management
Company (AMC). He must have a sound track record and a reputation for
fairness and integrity in all his business transactions.

BOARD OF TRUSTEES

The mutual fund is managed by the board of trustees of trustee

company, and the sponsor executes the trust deeds in favor of the trustees.
The trustees must see to it that the schemes floated and managed by the
AMC are in accordance with the trust deeds and SEBI guidelines. The
trustees have the right to obtain relevant information from the AMC and they
can also dismiss the AMC under certain conditions, as per SEBI regulations.
The trustee of a particular mutual fund cannot be appointed as a trustee of
any other mutual fund, unless he is an independent trustee and obtains prior
permission from the mutual fund in which he is a trustee.

ASSET MANAGEMENT COMPANY

A mutual fund is managed through on Asset Management Company

(AMC). The AMC is appointed by the sponsor company or by the trustees.
The AMC should be registered with SEBI. Its net worth should be in the form
of cash and all assets should be held in its name. In case it wants to carry out
other fund management business, it should satisfy the capital adequacy
requirement for each such business independently. It is required to disclose
the scheme particulars and the base of calculation of the NAV. The
appointment of the AMC can be terminated by a decision of 75% of the unit-
holders or a majority of the trustees.
CUSTODIAN

The SEBI regulations provide for the appointment of a custodian by the

trustees for ‘carrying on the activity of safekeeping of the
securities of participating in any clearing system’ on behalf of the
mutual fund. The custodian must have a sound track record and
adequate relevant experience. At the time of appointment, he
should not be associated with the AMC, or act as a sponsor or
trustee to any mutual fund.

SEBI GUIDELINES FOR MUTUAL FUNDS

The Securities and Exchange Board of India had issued a set of

regulations and code of conduct on 20th January, 1993 for the smooth conduct
and regulation of mutual funds.

 Mutual funds cannot deal in option trading, short selling or

carrying forward transactions in securities.

 They can invest only in transferable securities in the money and

capital market or any privately placed debenture or debt
securities.

 Mutual funds are required to be formed as trusts and managed

by separately formed asset management companies. The
minimum net worth of the asset management company is
stipulated at Rs. 5 crore out of which the minimum contribution
of the sponsor shall be 40%.

 Restrictions to ensure that investments under an individual

scheme do not exceed 5% of the corpus of any company’s
shares, and investments under all schemes do not exceed 10%
of the funds in the shares, debentures or securities of a single
company.
  Investments under all the schemes cannot exceed 15% of the
funds in the shares and debentures of a single company.

 Curbs on the transfer of investment from one scheme to another

and borrowing to finance investment.

 SEBI will grant registration to only those mutual funds, which

can prove an efficient and orderly conduct of business.
Parameters for deciding this will include the track record of
sponsors, a minimum experience of five years in the relevant
field of financial services, integrity in business transactions and
financial soundness.

 The application forms for granting registration, seeking detailed

information of the sponsor, trustees of the fund and the AMC.

 The advertisement code for marketing schemes of the mutual

funds, the contents of the trust deed, investment management
agreement and the scheme-wise balance sheet have tot be in
prescribed form.

 The minimum net worth of AMC is Rs. 5 crores, of which the

minimum contribution of the sponsor should be 40%.

MUTUAL FUNDS IN INDIA

In India the MF industry started with the setting up of UTI in 1964 and
the same was the only player in the segment till 1987. The Government of
India allowed Public Sector Bank and Financial Institutions to set up MF’s in
1987. As a result, leading public sector banks viz, SBI, Canara bank, Punjab
National bank, Bank of India and Insurance companies such as LIC, GIC, etc.,
entered this new segment. In 1993 the Indian private institutions were
allowed to set up MF were the first entrants respectively into this field after
liberalization.
 Starting with an asset base of Rs.0.25 billion in 1964, the industry has
grown at a compounded average growth rate of 26.34% to its current size of
Rs.1130 billion. Of the total 31 players, 11 are in the public sector including
UTI, 758 schemes offered by all the Funds, of which around 120 are close-
ended and the remaining are open-ended. Several innovative schemes, viz
income, growth, balanced, money market, gilt, tax saving, sector specific, etc
have been designed to suit the needs of the different types of investors. In
India the activities of this fast growing industry is regulated by the norms of
Securities Exchange Board of India (SEBI).

The Mutual Funds industry has witnessed three different phases of

development.

- Phase I : July 1964- November 1987

- Phase II : November 1987 – October 1993

- Phase III: October 1993 onwards,

PHASE-I – UNIT TRUST OF INDIA (UTI)

Until 1987, UTI was the only financial institution in the mutual fund
industry. The first and most popular product launched by UTI was unit 64.
UTI launched a reinvestment plan in 1966-67 and another popular scheme,
Unit Linked Insurance Plan (ULIP) was launched in 1971. By the end of June
1987 the unit capital of UTI was worth Rs.3, 72611 crore and investable funds
totaled over Rs.4.563 crore, while unit holding accounts amounted to 29.79
lakhs.

PHASE-II – PUBLIC SECTOR COMPETITION

This period was marked by the entry of Non-UTI public Sector Mutual
Funds into the market, which brought in a degree of competition. With the
opening up of the economy, many public sector financial institutions
established mutual funds in India. However, the mutual funds industry
remained the exclusive domain of the public sector in this period.
 The first Non-UTI Mutual Fund – SBI Mutual Fund – was launched by
State Bank of India in November 1987. In 1990 the registration of mutual
funds with SEBI was mandatory. The guidelines were revised and the
Securities and Exchange Board of India (Mutual Funds) regulations, 1993,
came into effect on 20, January 1993. Rules for the formation, administration
and management of mutual funds in India were clearly laid down. The
regulations made the formation of Asset Management Company (AMC) and
the listing of close-ended schemes compulsory. With a view to protecting
investors’ rights, disclosure norms were also tightened.

PHASE-III – EMERGENCE OF PRIVATE SECTOR

A new era in the mutual funds industry began in 1993 with the entry of
private sector funds, which posed serious competition to the existing public
sector funds. Private sector funds have distinct operational advantages, such
as the following:

 Most of them are floated jointly by Indian organizations and

experienced foreign asset management companies, which
facilitate access to the latest technology and foreign fund
management strategies.

 Private sector funds are able to attract the best managerial

talent from the public sector.

 Their job has been made easier by the infrastructure inputs

already created by the public sector mutual funds.

The first private sector mutual fund to launch a scheme was the
Madras-based Kothari Pioneer Mutual Fund. It was launched the open-ended
Prima Fund in November 1993.
MILESTONES IN THE JOURNEY OF MUTUAL FUNDS IN INDIA

It is quite interesting to know the path of historical developments of

Mutual Fund industry in India. It can be understood from the following
historical events that the MF’s industry has taken almost three decades to
reach from infancy to adolescent stage in India.

YEAR MILESTONES

1963 The UTI Act enacted

1964 The first Mutual Fund scheme US 64 was launched

1978 Rs.100 crores mobilized by UTI

1985 Rs.1000 crores mobilized by UTI

1986 End of UTI monopoly and allowing public sector banks to

start Mutual Funds

1990 Mutual Funds by LIC and GIC

1990 Rs. 5000 crores mobilized by UTI and Rs.3000 crores

mobilized by other PSU mutual funds.

1991 Stock market gets into bull frenzy. Overheated markets crash
as the magnitude of the of the stock market scam unfolds.

1993 Mutual funds book heavy losses. And allowing Private sector
participation in mutual funds.

1994 Entry of Foreign Mutual Fund Morgan Stantly; Allowing the

entry of FII’s to participate in Stock market investment; 20
new mutual funds registered with SEBI; Total corpus of all
mutual funds reached Rs.72000 cores; UTI alone accounts
for Rs.55000 crores.
1995 Annual sales of mutual funds total Rs.15000 crores,
representing around 7% of all household savings.

1996 Stock markets crash, Fresh funds inflow reduced to a trickle.

Mutual funds as a derivative of equity market reflect poor
performance.

1997 Mutual fund 2000 vision documents from SEBI, new

guidelines introduced, government announces tax sops, fund
with proven performance attract steady subscriptions.

1998 Funds riding on it, Pharma, FMCG and IT wave whip up

spectacular performance.

1999 Budget announces further concessions and the Bull Run for
mutual funds’ begin all over again.

2000 Establishment of the Association of Mutual Funds of India

(AMFI).
RECENT TREND IN MUTUAL FUND INDUSTRY

The most important trend in the mutual fund industry is the aggressive
expansion of the foreign-owned mutual fund companies and the decline of the
companies floated by nationalized banks and smaller private sector players.
Private players have been largely dependent upon big customers and have
generally failed to get retail. Many nationalized banks got into the mutual fund
business in the early nineties prevailing then. These banks did not really
understand the mutual fund business and they just viewed it as another kind
of banking activity. Few hired specialized staff and generally chose to transfer
staff from the parent organizations. The performance of most of the schemes
floated by these funds was not good. Some schemes had offered guaranteed
returns and their parent organizations had to bail out these Asset
Management Company (AMC) by paying large amounts of money as the
difference between the guaranteed and actual returns. The service levels
were also very poor. Most of these Asset Management Company’s (AMC)
have not been able to retain staff, float new schemes etc. and it is doubtful
whether, barring a few exceptions, they have serious plans of continuing the
activity in a major way. The experience of some of the Asset Management
Company (AMC) floated by private sector Indian companies was also very
similar. The quickly realized that the Asset Management Company (AMC)
business is a business, which makes money in the long term and requires
deep-pocketed support in the intermediate years. Some have sold out to
foreign owned companies, some have merged with others and there is
general restructuring going on.

The foreign owned companies have deep pockets and have come in
here with the expectation of a long haul. They can be credited with
introducing many new practices such as new product innovation, sharp
improvement in service standards and disclosure, usage of technology, broker
education and support etc. In fact, they have forced the industry to upgrade
itself and service levels of organizations like UTI have improved dramatically
in the last few years in response to the competition provided by them. Those
directly associated with the fund management industry like distributors,
registrars and transfer agents and even the regulators have become more
mature and responsible. Considering the changing trend in the capital
market, the funds have shifted their focus to the recession-free sector like
Pharma, FMCG etc. Mutual funds are now also competing with commercial
banks in the race to retain investor’s savings and corporate float money.
Recent figures indicate that mutual fund assets went up by only 17%. It is just
that mutual funds are going to change the way banks do business in the
future.
1.2 STATEMENT OF PROBLEM

In recent years lot of studies relating to stock markets, have been

given importance to the mutual funds and their trends. Only few studies are
on the performance of mutual funds in the stock markets. And that to, it is very
difficult to find a simple study in the context. The important problem, we must
identify that is whether mutual fund will have any impact or influence on BSE
Sensex and S&P CNX Nifty in the stock market.

Many Medias had stated that market sentiment in BSE and NSE had
made an improvement only because of mutual funds. But this might not be
true. Since many factors might have contributed to the better sentiment like
transaction from Indian financial institutions, better economic indicator and
other political factors. To capture this issue, the researcher had undertaken
the present study to bring out the relevant facts by titling “A STUDY ON
IMPACT OF MUTUAL FUNDS IN INDIAN STOCK MARKET”.
1.3 OBJECTIVE OF THE STUDY

The main objectives of the study are:

 To analyze the effect of purchase and sale of mutual funds on

the performance of SENSEX and S&P CNX NIFTY.

 To estimate the effect of resource mobilization of private, public

and UTI mutual funds on the performance of SENSEX and S&P
CNX NIFTY.

 To observe the trends of mutual funds on the Indian market.

1.4 SCOPE OF THE STUDY

The present study confined only to the performance of mutual funds in

gross purchase/sales of equity and debt and the resource mobilization of
public, private and UTI sector on the benchmark index of Sensex and Nifty.
The study does not confined to any investment company and also the returns
earned by the scheme.

This study also helps to understand the movement of BSE Sensex and
S&P CNX Nifty which is considered as the important indicator of the Indian
stock market. As an investor one could identify the reasons behind the
volatility in the Indian stock market. But this might not be a helping tool in
selecting a stock. Further research can be done on the mutual fund with the
help of daily data on mutual fund and its impact on market capitalization,
volatility.
1.5 LIMITAITONS OF THE STUDY

 The study points out the trends in mutual funds as factors which
have a relationship with benchmark index and testing and the inter
relationship is on the further side of scope of the study.

 The study considered the trends in mutual funds from January 2000
to July 2004.

 The study considered only the monthly closing price of the SENSEX
and S&P CNX NIFTY.

 Out of the variables, the study has not considered the variables
other than those mentioned in the methodology.
 CHAPTER II

REVIEW OF LITERATURE

In this chapter an attempt has been made to review the related

empirical investigation relation to mutual funds as follows:

Dulari Pancholi1 in his study, “The Benefits of Hybrid Mutual Funds”, for
this purpose of the study he collected data form Morningstar for the period
1998-2002 and representative hedge fund data was obtained from Evaluation
Associates Hedge Fund Indices and CISDM Alternative Investment Database.

These funds were examined and classified into Return Enhancers, risk
Reducers, Total Diversifiers, Pure diversifiers and Return Modifiers based on
their correlation with an equal weighted stock (S&P 500) and bond (Lehman
US Government/Credit bond index) [schneeweis and Spurgin, 2000].
Classification was made primarily as:

 Return Enhancer: High return and High correlation with the existing
stock/bond portfolio.

 Risk Reducer: Lower return and Low correlation with the existing
stock/bond portfolio.

 Total Diversifier: High return and low correlation with the existing
stock/bond portfolio.

 Pure diversifiers: Low or Negative returns and High Negative

correlation with the existing stock/bond portfolio.

 Return Modifies: Low return and High positive correlation with

existing stock bond portfolio.

1
DULARI PANCHOLI (2003), “The Benefits Of Hybrid Mutual Funds”,
Submitted to Isenberg School of Management, University of Massachusetts.
 This classification was than used to create an equal weighted index for
all the return enhancer, return modifiers and risk reducer funds in the sample
to study their risk-return performance and to examine the types of
diversification benefits that could be extracted by inclusion of these funds in
existing portfolios. To analyze factor sensitivity for each fund, monthly returns
of the fund were regressed on monthly returns of the factor.

Finally his results of this study provide important information to the

investment community about the benefits of hybrid mutual funds:

First, hybrid mutual funds provide small investors a unique risk-return

opportunity not usually provided by most of the traditional investment vehicles.
Some of these funds are even able to offer positive Sharpe ratio in a declining
market at affordable price. Thus hybrid mutual fund provides affordable
hedge fund-like mutual funds to small investors.

Second, as a part of a larger portfolio, hybrid mutual funds can provide

efficient diversification. They provide the investors with exposure to benefits
of derivatives instruments which most of traditional mutual funds fail to offer.
This may increase the risk of the investment, but if handled by a good
manager it could help the investor achieve positive results in a declining
market.

Saravanambiga Devi.S2, in her study, “A study on the perception of

investors towards UTI”, she tries to find out the,

1. To highlight the features of various UTI schemes.

2. To review the progress and prospects of UTI.

3. To study the portfolio structure UTI.

2
SARAVANAMBIGA DEVI. S (2002), “A Study on The Perception of
Investors Towards UTI”, Dissertation submitted to Master of Philosophy,
Bharathiar University, Coimbatore.
 4. To identify the factors which influence the investors for the
selection of UTI scheme.

5. Examine the perception of investors towards UTI services.

For this purpose of the study she collected both primary and secondary
data relating to the progress of UTI. From the annual reports or UTI and
interviewed 50 UTI investors by judgment sampling method.

She used the statistical tools for analysis such as compound growth
rate, average rate, and coefficient of range. And to test the hypotheses
various non-parametric tests viz, chi-square test, kruskal-wallis, H-test,
Wilcoxon-mann-whitney ‘u’test and kolmogrov simirnov ‘n’ test cox and Stuart
test was used to evaluate the progress of UTI.

Finally, she concludes that UTI has to take necessary steps to retain
unit holders as will as to attract new invests by offering varies of schemes.

Lubos Pastor and Robert F. Stambaugh3 in their study, “Investing in

Equity Mutual Funds” they construct optimal portfolios of equity funds by
combining historical returns of funds and passive indexed with prior views
about asset pricing and skill. By including both benchmark and non-
benchmark indexes, they distinguished pricing-model inaccuracy form
managerial skill. Even modest confidence in a pricing model helps construct
portfolios with high Sharpe ratios. Investing in active mutual funds can be
optimal even for investors who believe active managers cannot outperform
passive indexes. Optimal portfolios exclude not-hand funds even for investors
who believe momentum is priced. Our large universe of funds offers no close
substitutes for the Fama-French and momentum benchmark.

3
LUBOS PASTOR and ROBERT F. STAMBAUGH (2001), “Investing in
Equity Mutual Funds” submitted to the Rodney L. White Center for Financial
Research, The Wharton School, University of Pennsylvania.
 For this study they collected the data from the 1998 CRSP Survivor
Bias Free Mutual Fund Database. They took an initial sample of 2,609
domestic equity mutual funds. They exclude multiple share classes for the
same fund as well as funds with only a year or less of available returns.

They construct portfolios having the ex ante maximum Sharpe ratio

based on a Bayesian predictive distribution that combines the information in
historical returns with an investor’s prior beliefs, accounting for parameter
uncertainty. They entertain priors representing a range of beliefs about
managerial skill as well as the accuracy of each of three pricing models: the
CAPM, the three-factor Fama-French model, and the four-factor model of
Carhart (1997).

The last model supplements the three Fama-French benchmarks with

a “momentum” factor, the current month’s difference in returns between the
previous year’s best-and worst-performing stocks. They used Bayesian
econometric framework for performance estimation rather than investment
decision making.

Finally they found that portfolios with maximum Sharpe ratios from a
universe of 503 no-load equity mutual funds. The optimal portfolios are
substantially affected by prior beliefs about pricing and skill as well as by
including the information in non-benchmark assets. A pricing model is useful
to an investor seeking a high Sharpe ratio, even if the investor has less than
complete confidence in the model’s pricing accuracy and cannot invest
directly in the benchmarks. With investment in the benchmarks precluded,
even investors who believe completely in a pricing model and rule out the
possibility of manager skill can include active funds in their portfolios. The
fund universe offers no close substitutes for the benchmarks than passive
funds. We also find that the “hot-hand” portfolio of the previous year’s best-
performing funds does not appear in the portfolio of funds with the highest
Sharpe ratio, even when momentum is believed to the priced.
 Richard K. Lyons et al4 in their study, “Mutual Fund in Emerging
Markets: An Overview” International mutual funds are key contributors to the
globalization of financial markets and one of the main sources of capital flows
to emerging economies. First, they describe their relative size, asset
allocation, and country allocation.

Second, they focus on funds’ behavior during emerging markets crises

in the 1990’s, analyzing data at both the fund-manager and fund-investor
levels. Due to large redemptions and injections, funds’ flows are not stable.

The data collected form the World Bank and the Bank for International
Settlements (BIS), the Securities and Exchange commission (SEC), the
Investment Company Institute, Morningstar, Emerging market Funds
Research, frank Russell, AMG Data services, Lipper analytical Services, and
State Street Bank have partial information on institutional investors.

Finally they found that the importance and behavior of international

mutual funds, institutional investors were the main channel of financial flows
to emerging markets, and mutual funds were large among the institutional
investors. Moreover, they were the only class of institutional investors for
which reliable data was available on an ongoing basis. Several general
findings emerged.

First, equity investment in emerging markets has grown rapidly in the

1990’s. A significant proportion of that equity flow was channeled through
mutual funds. Collectively, these funds were large investors, and hold a
sizeable share of market capitalization in emerging countries.

Second, at the same time that mutual funds in many cases have
experienced growth, Asian and Latin American funds were the ones achieving

4
RICHARD K. LYONS et al (2001), “Mutual Fund In Emerging Markets: An
Overview”, World Economic Review, 15:2, Pp.315-340.
the fastest growth. Their size remains small, however, when compared to
domestic U.S. funds and global funds.

Third, when investing abroad, U.S. Mutual funds invest mostly in equity
rather than bonds. Funds in the global category mainly invest in developed
nations (the U.S., Canada, Europe, and Japan).

Ten percent of their investment is devoted to Asia and Latin America.

Mutual funds mainly invest in only a subset of countries within each region. In
Latin America, they primarily invest in Brazil and Mexico, then in Argentina
and Chile. In Asia, the largest shares are in Hong Kong, India, Korea,
Malaysia, Taiwan, and Thailand. In transition economies, mutual funds invest
most of their assets in the Czech Republic, Hungary, Poland, and Russia &
CIS.

Fourth, mutual fund investment was very responsive during the crises
of the 1990’s. The Mexican crisis mostly affected Latin America, while the
Asian and Russian crises had a large impact on Asian and Latin American
funds.

Fifth, the investment of underlying investors of Asian and Latin

American funds was volatile. Injections and redemptions were large relative
to total funds under management. The cash held by managers during
injections/redemptions does not fluctuate significantly, so the investors’
actions are typically reflected in emerging market inflows and outflows.

Sitalakshmi Ramanan5 in her study, “Performance Evaluation of Private

sector Mutual Fund growth schemes”. In her study tries

1. To evaluate the portfolio returns of private sector growth

schemes in comparison with the returns of market portfolio.

5
SITALAKSHMI RAMANAN (2000), “Performance Evaluation of Private
Sector Mutual Fund Growth Schemes”, Dissertation submitted to Master of
Philosophy, Bharathiar University, Coimbatore, India.
 2. To analyze the impact of differ market indices on portfolio
returns of private sector growth schemes.

3. To examine the returns from private sector growth schemes vis-

à-vis returns from risk free asset.

4. To determine the ability of fund managers to earn superior

returns from selection of securities.

She collected the data from Sensex and BSE 100 from the BSE Official
Directory for 1996, 1997 and 1998. She calculated the returns on the basis of
month end net asset values published in Express Investment Week.

The tools for this analysis of evaluating the portfolio performance was
based on the Capital Asset Pricing Model which specifies that in equilibrium,
there is a linear relationship between return on a security and the risk
associated with it.

Finally, she concluded that performance evaluation of private sector

growth funds reveals a very positive picture. The years 1996 to 1999 have
not been favorable to Indian stock market. The study indicates that private
sector mutual funds have on the whole, Performance creditably and in most of
the cases was consistent.

Roger M. Edelen et al6 in their study, “Transaction-cost Expenditures

and the Relative Performance of Mutual Funds” they directly estimate annual
trading costs for a sample of equity mutual funds and find that these costs are
large and exhibit substantial cross sectional variation. Trading costs average
0.78% of fund assets per year and have inter-quartile range of 0.59%.

6
ROGER M. EDELEN et al (1999), “Transaction-cost Expenditures and the
Relative Performance of Mutual Funds”, Submitted to the Rodney L. White
Center for Financial Research, The Wharton School, University of
Pennsylvania.
 Trading costs, like expense ratios, was negatively related to fund
returns and they found no evidence that on average trading costs was
recovered in higher gross fund returns.

They found that direct estimates of trading costs have more

explanatory power for fund returns than turnover. Finally, trading costs are
associated with investment objectives. However, variation in trading costs
within investment objectives was greater than the variation across objectives.

They collected the data from the 1987 summer volume of Morningstar’s
Source book, they took a sample size of 165 funds, out of them 29 funds was
dropped because portfolio holdings data were not available. Four funds were
dropped because the funds held less than 50% of their assets in equity for the
entire sample period (1984-1991). They require a minimum of 50% of assets
in equity because their trading cost data was limited to equity securities. The
sample of 132 funds represents a variety of investment objectives. Using
CRSP mutual fund investment objective classifications, their sample was 25%
aggressive growth funds, 39% growth funds, 28% growth and income funds,
and 8% income funds. They used the correlation and regression as tools for
analysis.Finally, they found that the negative association between fund
returns and trading costs suggests that it pays to have fund managers who
mitigate the cost of such trades. The poor returns cause higher trading costs
because investors leave funds with poor returns which generate additional
trading costs.

Robert and Jack7 in their study, “Evaluation of Performance of

international mutual fund” they examined the performance of sample of 15 US
based internationally diversified mutual funds between 1981 and 1982. Two
measures of performance was developed which were utilized in this study.

7
ROBERT E. CUMBY and JACK D. GLEN (1999) in their study, “Evaluation
of Performance of International Mutual Fund”, The Journal of Finance, vol.
XLV, No. 2, June-99, Pp. 497-520.
They first use the security market line to evaluate fund performance. The
second used positive period weighting measure.

In section II, it examined the efficiency of a single portfolio benchmark

and multiple portfolio benchmarks; section III presented evidence on the
performance of a sample of internationally diversified mutual.

The second was two-portfolio benchmark consisting of the world index

and equally weighted portfolio of Euro currency deposit. Section IV examines
the performance of funds relative to the US market and conducted test for
market time ability.

JAYADEV.M 8 in his study “Mutual Fund Performance: An Analysis of

Monthly Returns”

He attempts to answer two questions relating to mutual fund performance:

1. Whether the growth oriented Mutual Fund are earning higher returns
than the Benchmark returns (or market Portfolio/Index returns) in
terms of risk.

2. Whether the growth oriented mutual funds are offering the

advantage of Diversification, Market timing and Selectivity of
Securities to their investors

This paper attempts to answer the questions raised, by initially

describing some basic concepts and later by employing a methodology, which
was used, by Jenson (1968), Treynor (1965), and Sharpe (1966). Two
growth oriented mutual funds selected for the purpose of this study are
‘Capital Growth Unit Scheme’ or popularly ‘Mastergain 1991’ of UTI and
‘Magnum Express’ of SBI Mutual Fund. The study period is 21 months (June
1992 to March 1994). The data source is monthly Net Asset Values (NAVs)

8
JAYADEV. M,(1996) ”Mutual Fund Performance: An Analysis of Monthly
Returns”, FINANCE INDIA, Vol. X, No. 1, March 1996, Pp. 73–84.
published in ‘The Economic Times’. ‘The Economic Times Ordinary Share
Price Index’ (ETOSHPI) is assumed as Market Index or the Benchmark.

From the above analysis, it can be noted that the two growth oriented
mutual funds have not performed better than their benchmark indicators.
Though Master Gain has performed better than the benchmark of its
systematic risk (volatility) but with respect to total risk the fund has not out
performed the Market Index.

Growth oriented mutual funds are expected to offer the advantages of

Diversification, Market timing and Selectivity. In the sample, Magnum Express
is found to be highly diversified fund and because of high diversification it has
reduced total risk of the portfolio. Whereas, Master gain is low diversified and
because of low diversification its total risk is found to be very high. Further,
the fund managers of two funds are found to be poor in terms of their ability of
market timing and selectivity. The fund manager of Master gain can improve
the returns to the investors by increasing the systematic risk of the portfolio,
which in turn can be one by identifying highly volatile shares.

Alternatively, Mastergain can take advantage by diversification, which

goes to reduce the risk if the same return is given to the investor at a reduced
risk level, the compensation for risk might seem adequate. The fund manager
of Magnum Express can earn better returns by adopting the marketing timing
strategy and selecting the under priced securities.

Sharpe9 (1996), developed a composite performance measure to

evaluate Mutual Funds, which used total risk measured by standard deviation.
The Sharpe ratio relates risk premium to standard deviation of rates of return
for the fund. Sharpe studied 34 open-ended mutual funds during the period
1944-63 and found that the ration varied from 0.43 to 0.78 compared to the
Dow Jones Industrial Average (DJIA) Performance of 0.667 Sharpe studied to
relationship between good performance and expense ratios and found that

9
WILLLIAM F.SHARPE (1996), “Mutual Fund Performance”, journal of
business, vol. 39, no. 1, Pp 138-199.
they inversely related with a rank correlation coefficient of 0.505. A high and
positive Sharpe ration is a sign of good performance. White a low and
negative ratio indicates inferior performance of fund.

Grinblatt and Titman10 (1994) in their “A study on monthly mutual fund

returns and performance evaluation Techniques” examined the mutual fund
returns and three different performance evaluation techniques on a sample of
279 mutual funds and 109 positive portfolios, using a variety of benchmark
portfolios. They found that difference performance measures generally yield
similar inferences when using the same benchmark but inferences varied
even from the same measures, when using difference benchmark. They also
analyzed the determinants of mutual funds performance and found that
turnover is significantly positively related to the ability of fund managers to
earn abnormal returns.

Shome (1994)11 studied growth scheme, which had completed at least

one year before April 1993. There were 17 such schemes .911 of them
belonging to UTI and the public sector financial intuitions and bank
sponsored. The performance of the mutual funds industry during the period
April 1993 to march 1994 was examined in relation to the BSE sensitive index
which was considered the market index. The study reveled that the average
returns of mutual funds were marginally lower than market returns. The
average returns of the industry was 5.16 percent against market returns of
5.78 percent and six schemes had out performed the market in term of
returns. The total risk of the portfolios varied from 3.9813 to 18.8265. The
standard deviation of the industry (10.0140) was higher than that of the
market (9.0504). The beta of the industry was low (0.6580) compared with
the market (1.00)

10
GRINBLATT.M and TITMAN.S, (1994) “A Study of Monthly Mutual Fund
Returns and Performance Evaluation Technologies”, Journal of Financial and
Quantitative Analysis, vol.29, No.3, September 1994, Pp. 419 – 444.

11
SHOME, SUJAN (1994), “A Study of the Performance of Indian Mutual
Funds” unpublished study, Jhansi University.
Ramola12 in her study says that in India the concept of mutual fund has its
baptism in the form of the creation of UTI under the UTI Act 1964. The first
open-ended scheme was floated by UTI in 1964. However the original
concept different substantially form the shape and content of the present day
mutual fund schemes. The present day mutual fund schemes are close-
ended funds. They not only provide fixed income at regular intervals but also
have the benefits of capital appreciation at the end. These funds which are
earlier limited to UTI have new been given practical relevance and a large
number of mutual funds have recently been floated and many other are in the
process of being so.

Ippolito (1989) and Droms and Walker13 (1992), “Efficiency with costly
information: A study of mutual fund performance” examined the effects of
asset size, expense ratio, portfolio turnover, and load and no load status on
investment performance of domestic mutual funds. In both studies, it was
found that domestic mutual fund risk adjusted returns, net of fees and
expenses are comparable to returns to index funds. They found that portfolio
turnover is unrelated to fund performances.

In a study of 108 international equity mutual funds operating during

various periods from 1971 through 1990, Droms and Walker (1994) found that
risk-adjusted returns and expense ratios for international equity funds are
generally unrelated and that load funds generally under perform no-load funds
on a risk-adjusted basis for 1985-90. They also found that asset size and
turnover rates are not related to investment performance contradicting the
commonly held view that increases in asset size and high turnover rates
detract form investment performance results.

Roy and Merton14 analyzed the investment performance of 116 open

ended mutual fund in USA for the period 1968 – 80. The empirical results
12
RAMOLA, (1992) “Mutual Fund and the Indian Capital Market”, Yojana,
vol.36, No.11, June 30, 1992, Pp.9 – 10.
13
IPPOLITO. R.A. (1989), “Efficiency With Costly Information: A Study of
Mutual Fund Performance”, 1965-84, Quarterly Journal of Economics, 104,
Pp. 1-23.
obtained in his study used the hypothesis that mutual fund mangers were able
to follows are investment strategy that successfully timed the return on the
market portfolio. In addition, no evidence was found that forecasts were more
successful in our market timing activity with respect to predicting large
charges in the value of the market portfolio relative to smaller changes.

14
ROY D HERRIKASAN AND MERTON, (1984) “Market Tuning Mutual Fund
Performance”, Journal of Business, vol.57, No.1, 1984, Pp.678 – 698.
 CHAPTER III

RESEARCH METHODOLOGY

RESEARCH DESIGN

A research design is the arrangement of conditions for collection and

analysis of data in a manner that aims to combine relevance to the research
purpose with economy in procedure.

The purpose of the study was to analyze the effect of Mutual Fund
transactions on the BSE Sensex and NSE Nifty as well as the statistical
estimation of the selected variables. The collection of data was time series
because the data was on monthly basis and was tested through statistical
application like correlation and multiple regression. Hence it was both
descriptive and analytical.

SOURCE OF DATA

The study was based on the secondary data. The required data had
been collected from the web site of Bombay Stock Exchange (BSE), National
Stock Exchange (NSE) and Securities Exchange Board of India (SEBI).

PERIOD OF STUDY

For this study the data were collected for 4 years and 7 months and it
is a monthly data from January 2000 to July 2004.

I period – January 2000 – December 2000

II period – January 2001 – December 2001

III period – January 2002 – December 2002

IV period – January 2003 – December 2003

V period – January 2004 – July 2004

TOOLS FOR ANALYSIS

CORRELATION

Karl-Pearson correlation co-efficient has been used to find out the

relationship between the selected variables viz, Gross Equity purchase, Gross
Debt purchase, Gross Equity Sales, Gross Debt Sales, Gross Public sector,
Gross Private Sector, Gross UTI, Redemption public sector, Redemption
private sector, Redemption UTI, BSE Sensex and S&P CNX Nifty.

The correlation co-efficient is to measure of the degree of co-variability

of the variables X and Y. The values that the correlation co-efficient may
assume vary from -1 to +1. When r is positive, X and Y increase or decrease
together.

r = +1 implies that there is positive correlation between X and Y when r

is zero, then the two variables are uncorrelated.

The formula to find out the Karl Pearson’s correlation

∑(X )( )
n

i − X Yi − Y
r= i =1

nσxσy

Where,

Xi – is the i’th observation of the variable X.

Yi – is the i’th observation of the variable Y

X - Mean of the observation of the variable X

Y - Mean of the observations of the variable Y

N – Number of pairs of observation of X and Y

X, Y – S.D. of the variable X and Y

MULTIPLE REGRESSION

It was assumed that BSE Sensex and NSE Nifty was a function of
Mutual Fund purchasing and sales of Equity and Debt. Hence the model took
the form:

SENSEX = f (GP, GS)

NIFTY = f (GP, GS)

Where, GP= Gross purchase of Equity and Debt Mutual Fund

GS = Gross Sales of Equity and Debt Mutual Fund
Before forming the above model into the equation it was mandatory to
transform all the original value of the colleted data in the natural log form.
After the transformation, the equation takes the following structure:

Y = b0 + b1 GP + b2 G + U
Y = b0 +b1 GPvt.S + b2 GPS + b3 GUTI + b4 RPvt.S + b5 RPS + b6
RUTI + U
Where
b0 = constant
GP = Gross Purchase of Equity and Debt Mutual Fund
GS = Gross Sales of Equity and Debt Mutual Fund
GPvt.S = Gross Private Sector
GPS = Gross Public Sector
GUTI = Gross UTI
RPvt.S = Redemption of Private Sector
RPS = Redemption of Public Sector
RUTI = Redemption of UTI
U = error term
SELECTION OF VARIABLES

The selected variables for the Correlation are Equity Gross Purchase
(EGP), Equity Gross Sales (EGS), Debt Gross Purchase (DGP), Debt Gross
Sales (DGS), Gross Private Sector (GPvt.S), Gross Public Sector (GPS),
Gross UTI Sector (GUTI), Redemption Private Sector (RPvt.S), Redemption
Public Sector (RPS), Redemption UTI Sector (RUTI), BSE Sensex and NSE
Nifty.

For the purpose of empirical analysis, Gross purchase and Gross

Sales of Mutual Fund in Equity and Debt had been selected as the
independent variables, while the BSE sensitive index (SENSEX) and NSE
Nifty index had been assumed to be the dependent variable. Resource
mobilization of Private, Public and UTI Mutual Fund had been selected as the
independent variables, while the BSE sensitive index (SENSEX) and NSE
Nifty index had been assumed to be the dependent variable
 CHAPTER IV

CORRELATION ANALYSIS

TABLE 4.1(1)

CORRELATION ANALYSIS OF EGP, EGS, DGP, DGS

EQUITY EQUITY DEBT

DEBT GROSS
INDEX GROSS GROSS GROSS
PURCHASE
PURCHASE SALES SALES

SENSEX 0.308* 0.228 -0.226* -0.285*

* - Correlation is significant at the 0.05 level (2 – tailed)

The correlation coefficient brings out the relationship between two

selected variables. In the present study, correlation was applied to find out
the interrelationship between, the selected variables.

The table 4.1(1) revealed that the mutual fund Gross Purchase of
Equity was positively correlated significant with BSE Sensex having 31
percent. The relationship between Sensex and Gross Sales of equity Mutual
funds was having 23 percent relationship but found to be insignificant. This
positive correlation showed that whenever there was an increase or decrease
in the purchase behavior of Mutual fund, the Sensex also increased positively.

The Mutual fund gross purchase of debt was negatively correlated

significant with BSE Sensex having 23 percent. It was also found that mutual
funds gross sales of debt were negatively correlated and significant with BSE
Sensex having 29 percent.
 TABLE 4.1(2)

CORRELATION ANALYSIS OF EGP, EGS, DGP, DGS

EQUITY EQUITY DEBT

DEBT GROSS
INDEX GROSS GROSS GROSS
PURCHASE
PURCHASE SALES SALES

NIFTY 0.791** 0.786** -0.073 -0.047

** - Correlation is significant at the 0.01 level (2 – tailed)

The Table 4.1(2) revealed that the mutual fund Gross Purchase of
Equity was positively correlated and significant with NSE Nifty having 79 per
cent relationship.

The relationship between Equity Gross Sales and NSE Nifty was
positively correlated and significant having 79 per cent. But the relationship
between Gross Purchase and Sales of Debt was negatively correlated having
7 per cent and 5 per cent respectively and it was found to insignificant.
 TABLE 4.1(3)

CORRELATION ANALYSIS OF GPvt.S, GPS, GUTI, RPvt.S, RPS, RUTI

GROSS GROSS GROSS REDEMPTION REDEMPTION

REDEMPTION
INDEX PRIVATE PUBLIC UTI PRIVATE PUBLIC
UTI SECTOR
SECTOR SECTOR SECTOR SECTOR SECTOR

SENSEX -0.187 -0.167 0.390** -0.177 -0.153 0.049

** - Correlation is significant at the 0.01 level (2 – tailed)

The correlation coefficient brings out the relationship between two

selected variables. In the present study, correlation was applied to find out
the inter-relationship between the Gross private sector, and BSE Sensex.

The Table 4.1(3) showed that it was found that relationship between
the Sensex and Gross private sector mutual fund was negatively correlated
having 19 percent relationship but it was found to be insignificant.

The mutual funds Gross public sector was negatively correlated with
BSE Sensex having 17 percent relationship but it was found to be
insignificant.

The Mutual funds Gross UTI was positively correlated significant with
BSE Sensex having 39 percent. This positive correlation showed that
whenever there was an increase or decrease in the Gross UTI sector Mutual
funds, the Sensex also increased positively.

It was also found that the relationship between Sensex and

Redemption private sector was negatively correlated having 18 percent
relationships, but it found to be insignificant.

It was also found that the relationship between Sensex and

Redemption public sector and Redemption private sector were negatively
correlated having 15 percent and 18 per cent relationship respectively but it
found to be insignificant. The Redemption UTI sector of Mutual funds was
positively correlated with BSE Sensex having 5 percent relationship but it was
found to be insignificant.
 TABLE 4.1(4)

CORRELATION ANALYSIS OF GPvt.S, GPS, GUTI, RPvt.S, RPS, RUTI

GROSS GROSS GROSS REDEMPTION REDEMPTION

REDEMPTION
INDEX PRIVATE PUBLIC UTI PRIVATE PUBLIC
UTI SECTOR
SECTOR SECTOR SECTOR SECTOR SECTOR

NIFTY 0.034 0.025 0.622** 0.060 0.069 0.387**

** - Correlation is significant at the 0.01 level (2 – tailed)

The table 4.1(4) showed that the Mutual Funds Gross private sector
was positively correlated with NSE Nifty having 3 percent relationship but it
was found to be insignificant. It was also found that relationship between Nifty
and a Gross public sector Mutual fund was positively correlated having 3
percent relationship but it was insignificant. .

The Redemption private sector in Mutual Fund was positively

correlated with NSE Nifty having 6 percent but it was insignificant. The
Redemption public sector mutual fund was positively correlated with NSE
Nifty having 7 percent but it was insignificant.

It was also found that the Redemption UTI sector mutual fund was
found significantly correlated with NSE Nifty having 39 percent relationship.
The positive correlation showed that whenever there was an increase or
decrease in the Redemption UTI sector Mutual Funds, the Nifty also
increased positively.
MULTIPLE REGRESSION ANALYSIS

TABLE 4.2(1)

MULTIUPLE REGRESSION OF SENSEX ON EGP, EGS, DGP, DGS

Dependent Coefficient of
R2 F
Variable b0 b1 b2 b3 b4

8.125 0.494* -0.272 -0.0246 -0.164

Sensex 0.242 3.996
(1.127) (0.236) (0.279) (0.186) (0.165)

* - Significant at 0.05 level= 2.565

() – Standard Error

The regression equation was used to find out the evidence of

influencing factors in the model framed. In this study, when Sensex was
regressed on the Equity and Debt purchase/sales respectively, it was found
that the coefficient of determination represented by R2 was 24 percent, i.e.,
the model was able to explain that 24 percent of the variation in the Sensex
could be explained by the selected explanatory variables. Since the table
value as F was less than the calculated F value, it was found to be significant
and presented a goodness of fit. Of the variable, which was regressed on, it
was made clear, that any mutual funds Equity purchase was found to be
significant, i.e., for every one percent increase in the Gross Purchase of
Equity, the Sensex increased by 49 percent.
 TABLE 4.2(2)

MULTIPLE REGRESSION OF SENSEX ON GPvt.S, GPS, GUTI, RPvt.S,

AND RPS, RUTI.

Coefficient of
Dependen
R2 F
t variable
b0 b1 b2 b3 b4 b5 b6

- - -
8.145 0.279* 0.06252 -0.129
Sensex 0.0348 0.0628 0.0832 0.314 3.512
(0.800) (0.068) (0.179) (0.097)
(0.147) (0.102) (0.115)

* - Significant at 0.05 level= 2.295

() – Standard Error

The above table revealed that the Sensex was dependent variable and
it was regressed on the independent variables such as Gross Public sector,
Gross Private sector, Gross UTI, Redemption Private Sector, Redemption
Public Sector and Redemption UTI. The table found that the coefficient of
determination represented by R2 was 31 percent and it explained that 31
percent of the variation in the Sensex could be explained by the selected
explanatory variables. Since the table value as F was less than the calculated
F value, it was found to be significant and this model represented as a
goodness of fit. Since the Gross UTI mutual fund was to be significant,
therefore for every one percent increase in the Gross UTI mutual fund, the
Sensex extended by 28 percent.
 TABLE 4.2(3)

MULTIPLE REGREESION OF NIFTY ON EGP, EGS, DGP, DGS

Coefficient of R2 F
Dependen
t variable
b0 b1 b2 b3 b4

4.539 0.142 0.218* -0.137* 0.04696

NIFTY 0.734 34.509
(0.343) (0.072) (0.085) (0.057) (0.050)

* - Significant at 0.05 level= 2.565

() – Standard Error

The table, which was showed above, explains that Nifty of dependent
variable and it was regressed on the independent variable such as Equity
Gross Purchase, Equity Gross Sales, Debt Gross Purchase and Debt Gross
Sales. The analyze showed that coefficient of determination represented by
R2 was 73 percent and the model was explained that 73 percent of variation in
the Nifty could be explained by selected explanatory variables. It was found
that calculated value F was more than the table value at 5 percent level
significant and this model represented as a goodness of fit. The Equity Gross
Sales was found to be significant, there fore every one percent increase in
Gross sales of Equity, the Nifty increased by 22 percent. It was also found
that Debt Gross sales was significant, there fore every one percent decrease
in Debt Gross sales, the Nifty increased by 14 percent.
 TABLE 4.2(4)

MULTIPLE REGRESSION OF NIFTY ON GPvt.S, GPS, GUTI, RPvt.S AND

RPS, RUTI

Coefficient of
Dependen
R2 F
t variable
b0 b1 b2 b3 b4 b5 b6

- - -
6.144 0.152* 0.01609 0.004984
NIFTY 0.0119 0.0458 0.00507 0.490 7.373
(0.344) (0.029) (0.077) (0.097)
(0.063) (0.044) (0.049)

* - Significant at 0.05 level= 2.295

() – Standard Error

The regression equation was used to find out the evidence of

influencing factors in the model framed. In the above table showed that Nifty
as dependent variable and it was regressed on the independent variables
such as, Gross Private Sector, Gross public sector, Gross UTI Sector,
Redemption private sector, Redemption public sector and Redemption UTI
sector. It was found that the coefficient of determination represented by R 2
was 49 percent, which proved that 49 percent deviation in the Nifty could be
explained by the selected explanatory variables. Since the calculated value F
was more than the table value, and it was significant and this model proved as
a goodness of fit.

The above equation showed that out of the variables, which were
regressed on, it was made clear, that only Gross UTI sector was found to be a
significant, therefore, for every one percent increase in Gross UTI sector the
Nifty extended by 15 percent.
 CHAPTER V

FINDINGS

CORRELATION ANALYSIS

The study revealed that the mutual fund Gross Purchase of Equity was
positively correlated with BSE Sensex having 31 percent and NSE Nifty
having 79 percent. It was also found that Mutual funds Gross sales was
positively correlated with Nifty having 79 percent but the relationship between
Sensex and Gross Sales of mutual funds was having 23 percent relationship.
This positive correlation showed that whenever there was an increase or
decrease in the purchase behavior of Mutual fund, the Sensex and nifty also
increased positively.

From the interpretation we infer that mutual fund gross purchase of

debt was negatively correlated with BSE Sensex having 23 percent and the
relationship between NSE nifty and gross purchase of debt was negatively
correlated having 7 percent relationship. It was also found that mutual funds
gross sales of debt was negatively correlated with BSE Sensex having 29
percent but the relationship between NSE nifty and gross sales of debt was
negatively correlated having 5 percent relationship.

The analysis showed that the Mutual Funds Gross private sector was
positively correlated with NSE Nifty having 3 percent relationship. It was also
found that the relationship between the Sensex and Gross private sector
mutual fund was negatively correlated having 19 percent relationship. The
mutual funds Gross public sector was negatively correlated with BSE Sensex
having 17 percent relationship. It was also found that relationship between
Nifty and a Gross public sector Mutual fund was positively correlated having 3
percent relationship.

The Mutual funds Gross UTI was positively correlated BSE Sensex and
NSE Nifty having 39 percent and 62 percent respectively. This positive
correlation showed that whenever there was an increased or decreased in the
Gross UTI sector Mutual funds, the Sensex and Nifty also increased
positively.

The Redemption private sector in Mutual Fund was positively

correlated with NSE Nifty having 6 percent. It was also found that the
relationship between Sensex and Redemption private sector was negatively
correlated having 18 percent relationship.

The Redemption public sector in mutual fund was positively correlated

with NSE Nifty having 7 percent. It was also found that the relationship
between Sensex and Redemption public sector was negatively correlated
having 15 percent relationships.

The Redemption UTI sector of Mutual funds was positively correlated

with BSE Sensex having 5 percent relationship. It was also found that the
Redemption UTI sector mutual fund was positively correlated with NSE Nifty
having 39 percent relationship. The positive correlation showed that
whenever there was an increase or decrease in the Redemption UTI sector
Mutual Funds, the Nifty also increased positively.

MULTIPLE REGRESSION ANALYSIS

In this study, when Sensex was regressed on the Equity and Debt
purchase/sales respectively, the table value as F was less than the calculated
F value, it was found to be significant and presented a goodness of fit. Of the
variable, which was regressed on, it was made clear, that any mutual funds
Equity purchase was found to be significant, i.e., for every one percent
increase in the Gross Purchase of Equity, the Sensex increased by 49
percent.

The analysis revealed that the Sensex was dependent variable and it
was regressed on the independent variables such as Gross Public sector,
Gross Private sector, Gross UTI, Redemption Private Sector, Redemption
Public Sector and Redemption UTI. The table value as F was less than the
calculated F value, it was found to be significant and this model represented
as a goodness of fit. Since the Gross UTI mutual fund was to be significant,
therefore for every one percent increase in the Gross UTI mutual fund, the
Sensex extended by 28 percent.

The investigation, which was, identified that Nifty of dependent variable

and it was regressed on the independent variable such as Equity Gross
Purchase, Equity Gross Sales, Debt Gross Purchase and Debt Gross Sales.
It was found that calculated value F was more than the table value at 5
percent level significant and this model represented as a goodness of fit. The
Equity Gross Sales was found to be significant, there fore every one percent
increase in Gross sales of Equity, the Nifty increased by 22 percent. It was
also found that Debt Gross sales were significant, there fore every one
percent decrease in Debt Gross sales, the Nifty increased by 14 percent.

The interpretation showed that Nifty as dependent variable and it was

regressed on the independent variables such as, Gross Private Sector, Gross
public sector, Gross UTI Sector, Redemption private sector, Redemption
public sector and Redemption UTI sector. The calculated value F was more
than the table value, and it was significant and this model proved as a
goodness of fit. The Gross UTI sector was found to be a significant,
therefore, for every one percent increase in Gross UTI sector the Nifty
extended by 15 percent.

TRENDS IN EQUITY AND DEBT MUTUAL FUNDS

In the year 2000 the equity gross purchase and sales was under
performed with Sensex but not against Nifty. The debt gross purchase was
out performed with Nifty but not against Sensex. The debt gross sales was
under performed with Sensex and performed well against Nifty.

In the year 2001 the equity gross purchase was under performed with
Sensex and Nifty. The equity gross sales were performed well against Nifty
but not against Sensex. The debt gross purchase was out performed against
Sensex and Nifty. The debt gross sales were under performed with Sensex
and performed well against Nifty.

In the year 2002 the equity gross purchase was under performed with
Sensex but not against with Nifty. The equity sales were performed well
against Nifty and it out performed against Sensex. The Debt gross purchase
was under performed against Sensex and performed well against Nifty. The
debt gross sales were out performed with Nifty but not against Sensex.

In the year 2003 the equity gross purchase and sales were under
performed with Sensex and performed well against Nifty. The debt gross
purchase was performed well against Sensex and Nifty but the debt gross
sales were performed well against Nifty but not against Sensex.

In the year 2004 up to July, equity gross purchase and sales were
under performed with Sensex and performed well against Nifty. The Debt
gross purchase and sales were under performed well against Sensex and
Nifty.
 CONCLUSION

The analysis thus for made to show that equity Gross purchase of
mutual fund had a significant relationship on Sensex and Nifty. The Gross
sale of equity mutual fund had a significant relationship on Nifty. The Debt
gross purchase and sales of mutual fund had a significant relation with
Sensex. The gross UTI sector had a significant relationship on Sensex and
Nifty.
 BIBLIOGRAPHY

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WEB SITES

 www.amfi.com

 www.bseindia.com

 www.bestpapers.com

 www.equitymaster.com

 www.findarticles.com

 www.finance.Wharton.upenn.edu\~rlwctr

 www.indiainfoline.com

 www.mutualfundsindia.com

 www.nseindia.com

 www.sebi.gov.in

 www.venuscapital.com
LIST OF DATA

TRENDS IN TRANSACTION OF MUTUAL FUNDS

EQUITY(Rs. In croes) DEBT(Rs. In crores)

PERIOD GROSS PURCHASE GROSS SALES GROSS PURCHASE GROSS SALES
Jan-00 41890 35670 10200 3310
Feb-00 37120 47120 11560 6970
Mar-00 31670 32110 5870 8350
Apr-00 15500 15080 6610 1950
May-00 15500 11980 9190 7920
Jun-00 15990 20490 6700 3160
Jul-00 12530 14240 9130 6080
Aug-00 12410 12210 8630 6570
Sep-00 16010 14800 6340 4150
Oct-00 11620 10070 8930 4370
Nov-00 9270 13590 12000 5800
Dec-00 17290 16380 13310 9680
Jan-01 16800 25900 21670 12800
Feb-01 17000 28990 18980 12480
Mar-01 14070 17620 13710 9920
Apr-01 7465 10395 14645 7150
May-01 9944 14732 25483 14068
Jun-01 6586 7706 25195 18381
Jul-01 4753 9202 25535 14763
Aug-01 6437 10213 29520 17796
Sep-01 8785 7669 16146 18764
Oct-01 7514 14258 26260 16489
Nov-01 10035 13484 32817 16320
Dec-01 13404 12638 26178 16752
Jan-02 17222 21571 49223 28245
Feb-02 17053 20570 38913 30850
Mar-02 11783 16501 25659 26365
Apr-02 13001 16826 31543 17103
May-02 13662 15062 25119 20849
Jun-02 10832 14777 32669 23608
Jul-02 14446 17324 42327 25378
Aug-02 10202 12229 42612 27772
Sep-02 9595 9314 39524 29629
Oct-02 12476 12920 55980 31576
Nov-02 10594 13949 46378 23875
Dec-02 14124 14099 40125 37962
Jan-03 15342 19372 52590 41085
Feb-03 10777 10466 31153 36120
Mar-03 10157 9536 26530 25637
Apr-03 13328 15110 40190 22676
May-03 22182 21420 54950 28409
Jun-03 19975 21931 50510 28095
Jul-03 26422 25712 64854 33468
Aug-03 31485 27451 65599 33840
Sep-03 28126 31027 58968 42170
Nov-03 29173 27628 43759 23381
Dec-03 46474 37954 54041 36735
Jan-04 50983 41604 55653 38322
Feb-04 26062 31399 31841 35128
Mar-04 38878 38106 62887 43808
Apr-04 36753 38946 60997 36539
May-04 48572 38521 43116 36844
Jun-04 21301 23899 40666 53381
JUL-04 26789 31493 43569 40064

RESOURCE MOBILIZATION

GROSS (in crores)

PERIOD PVT.SEC PUB.SEC UTI
Jan-00 29770 2206 11317
Feb-00 35145 2608 12694
Mar-00 42242 3817 13698
Apr-00 43550 4090 6080
May-00 8938 365 2357
Jun-00 23560 4220 3930
Jul-00 54410 2440 21020
Aug-00 61460 2110 6460
Sep-00 62780 2350 12930
Oct-00 67240 8040 7310
Nov-00 51140 3000 4730
Dec-00 65500 5290 7920
Jan-01 51650 4730 17110
Feb-01 53740 4020 13770
Mar-01 57780 3802 8600
Apr-01 71040 3422 4500
May-01 64303 7462 3760
Jun-01 98884 13938 18580
Jul-01 113291 800 2370
Aug-01 95022 7240 1670
Sep-01 120960 10885 2310
Oct-01 104658 6813 1320
Nov-01 103317 8470 1200
Dec-01 153142 14415 2870
Jan-02 138113 14479 2530
Feb-02 188064 14164 3060
Mar-02 227188 18712 2260
Apr-02 195645 12236 2000
May-02 163851 11944 2070
Jun-02 163841 12220 2430
Jul-02 204479 17386 3110
Aug-02 191894 17316 3923
Sep-02 219133 16737 8299
Oct-02 250370 20975 11845
Nov-02 260453 25135 10118
Dec-02 279132 24957 4593
Jan-03 313381 33653 6659
Feb-03 275184 18820 7709
Mar-03 323591 23769 8202
Apr-03 379310 32600 7945
May-03 310804 30486 8780
Jun-03 420585 -1797 21918
Jul-03 389887 22143 21578
Aug-03 425548 22713 6677
Oct-03 489000 26899 7867
Nov-03 404951 25392 13411
Dec-03 589664 26530 26828
Jan-04 464315 35659 40659
Feb-04 393621 42354 18419
Mar-04 606307 22351 54503
Apr-04 637525 111930 42061
May-04 553557 -32270 33406
Jun-04 627765 39729 40905
Jul-04 57610 50048 66694

REDEMPTION (Rs. in Crores)

PERIOD REM.PVT.SEC REM.PUB.SEC REM.UTI
Jan-00 18208 2599 7014
Feb-00 21418 3188 7875
Mar-00 27573 4519 9150
Apr-00 27590 3660 6180
May-00 6456 674 1648
Jun-00 23710 2290 4120
Jul-00 41770 2950 24940
Aug-00 50400 2690 10250
Sep-00 57040 24260 4550
Oct-00 58870 2100 7480
Nov-00 42560 980 6890
Dec-00 54670 5210 18380
Jan-01 26960 1320 12720
Feb-01 32110 5890 8600
Mar-01 40338 3780 11245
Apr-01 49124 1998 7470
May-01 36555 3738 23020
Jun-01 67870 4120 22650
Jul-01 88339 5931 8730
Aug-01 82415 6153 6330
Sep-01 145717 10191 4260
Oct-01 92378 6047 10950
Nov-01 86451 5600 2760
Dec-01 132657 10942 3927
Jan-02 123064 12812 15694
Feb-02 172903 13111 5920
Mar-02 270011 26082 7560
Apr-02 173739 10926 7490
May-02 143645 10073 19480
Jun-02 160002 12632 36580
Jul-02 184411 13750 6457
Aug-02 158261 12144 4730
Sep-02 208796 15512 13458
Oct-02 200606 15490 8471
Nov-02 208761 17567 20753
Dec-02 289263 20029 8724
Jan-03 289914 35902 16109
Feb-03 329379 24986 11786
Mar-03 373483 30536 11262
Apr-03 299032 22851 7435
May-03 247877 26262 8098
Jun-03 378859 4657 15327
Jul-03 328853 15128 14827
Aug-03 368301 22988 13002
Sep-03 466098 27336 13175
Oct-03 459517 27266 10646
Nov-03 360425 20248 14308
Dec-03 536210 24215 27655
Jan-04 422945 27912 30864
Feb-04 385807 24920 13655
Mar-04 667126 45770 54263
Apr-04 504029 101941 45858
May-04 507934 -31780 24755
Jun-04 603268 39218 47925
Jul-04 587835 46568 64580
 MONTHLY CLOSING PRICE

PERIOD BSE SENSEX S&P CNX NIFTY

Jan-00 5205.29 1546.2
Feb-00 5446.98 1654.8
Mar-00 5001.28 1528.45
Apr-00 4657.55 1410
May-00 4433.61 1380.45
Jun-00 4748.77 1471.45
Jul-00 4279.86 1332.85
Aug-00 4477.31 1394.1
Sep-00 4090.38 1271.65
Oct-00 3711.02 1172.75
Nov-00 3997.99 1268.15
Dec-00 3960 1263.55
Jan-01 4326.72 1371.7
Feb-01 4247.04 1351.4
Mar-01 3604.58 1148.2
Apr-01 3519.16 1125.25
May-01 3631.91 1167.9
Jun-01 3456.78 1107.9
Jul-01 3329.28 1072.85
Aug-01 3244.95 1053.75
Sep-01 2811.6 913.85
Oct-01 2989.35 971.9
Nov-01 3287.56 1067.15
Dec-01 3262.33 1059.05
Jan-02 3311.03 1075.4
Feb-02 3562.31 1142.05
Mar-02 3469.35 1129.55
Apr-02 3338.16 1084.5
May-02 3125.73 1028.8
Jun-02 3244.7 1057.8
Jul-02 2987.65 958.9
Aug-02 3181.23 1010.6
Sep-02 2991.36 963.15
Oct-02 2949.32 951.4
Nov-02 3228.82 1050.15
Dec-02 3337.28 1093.5
Jan-03 3250.38 1041.85
Feb-03 3283.66 1063.4
Mar-03 3048.72 978.2
Apr-03 2959.79 934.05
May-03 3180.75 1006.8
Jun-03 3607.13 1134.15
Jul-03 3792.61 1185.85
Aug-03 4244.73 1356.55
Sep-03 4453.24 1417.1
Oct-03 4906.87 1555.9
Nov-03 5044.82 1615.25
Dec-03 5838.96 1879.75
Jan-04 5965.67 1809.75
Feb-04 5667.51 1800.3
Mar-04 5590.6 1771.9
Apr-04 5655.09 1796.1
May-04 4759.62 1483.6
Jun-04 4795.46 1505.6
Jul-04 5170.32 1632.3