INTRODUCTION TO MUTUAL FUNDS:

Mutual fund is a trust that pools the savings of a number of investors who share a common
financial goal. This pool of money is invested in accordance with a stated objective. The joint
ownership of the fund is thus “Mutual”, i.e. the fund belongs to all investors. The money thus
collected is then invested in capital market instruments such as shares, debentures and other
securities. The income earned through these investments and the capital appreciations realized
are shared by its unit holders in proportion the number of units owned by them. Thus a Mutual
Fund is the most suitable investment for the common man as it offers an opportunity to invest
in a diversified, professionally managed basket of securities at a relatively low cost. A Mutual
fund is an investment tool that allows small investors access to a well-diversified portfolio of
equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund.
Units are issued and can be redeemed as needed. The fund’s Net Asset Value (NAV) is
determined each day.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets
of the fund in the same proportion as his contribution amount put up with the corpus (the total
amount of the fund). Mutual fund investor is also known as mutual fund shareholder or a unit
holder.
Any change in the value of the investments made into capital market instruments (such as shares
debentures etc.) is reflected in the Net asset Value (NAV) of the scheme. NAV is defined as
the market value of the Mutual Fund scheme’s assets net of its liabilities. NAV of a scheme is
calculated by dividing the market value of scheme’s assets by total number of units issued to
the investors.

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 HISTORY OF MUTUAL FUNDS:

A strong financial market with broad participation is essential for a developed economy. With
this broad objective India’s first mutual fund was establishment in 1963, namely, Unit Trust of
India (UTI), at the initiative of the Government of India and Reserve Bank of India ‘with a
view to encouraging saving and investment and participation in the income, profits and
gains accruing to the Corporation from the acquisition, holding, management and
disposal of securities’.
In the last few years the MF Industry has grown significantly. The history of Mutual Funds in
India can be broadly divided into five distinct phases as follows:
FIRST PHASE – 1964-1987:
The Mutual Fund industry started in 1963 with formation of UTI in 1963 by an Act of
Parliament and functioned under the Regulatory and administrative control of the Reserve Bank
of India (RBI). 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. Unit
Scheme 1964 (US ’64) was the first scheme launched by UTI. At the end of 1988, UTI had ₹
6,700 crores of Assets Under Management (AUM).
SECOND PHASE- 1987-1993 – ENTRY OF PUBLIC SECTOR MUTUAL FUNDS:
The year 1987 marked the entry of 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 Canara bank, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank
of India Mutual Fund, and Bank of Baroda Mutual Fund. 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
MF industry had assets under management of ₹ 47,004 crores.
THIRD PHASE – 1993-2003 – ENTRY OF PRIVATE SECTOR MUTUAL FUNDS:
The Indian securities market gained greater importance with the establishment of SEBI in April
1992 to protect the interests of the investors in securities market and to promote the
development of, and to regulate, the securities market.
In the year 1993, the first set SEBI Mutual Fund Regulations came into being for all mutual
funds, except UTI. The erstwhile Kothari Pioneer (now merged with Franklin Templeton MF)
was the first private sector MF registered in July 1993. With the entry of private sector funds
in 1993, a new era began in the Indian MF industry, giving the Indian investors a wider choice
of MF products.
The number of MFs increased over the years, with many foreign sponsors setting up mutual
funds in India. As at the end of January 2003, there were 33 MFs with total AUM of ₹1,21,805
crores, out of which UTI alone had AUM of ₹44,541 crores.

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FOURTH PHASE – SINCE FEBRUARY 2003 – APRIL 2014:
In February 2003, following the repel of Unit Trust of India Act 1963, UTI was bifurcated into
two separate entities, viz., the Specified Undertaking of the Unit Trust of India (SUUTI) and
UTI Mutual Fund which functions under the SEBI MF Regulations. With the bifurcation of the
erstwhile UTI and several mergers taking place among different private sector funds, the MF
industry entered its fourth phase of consolidation.
Following the global melt-down in the year 2009, securities markets all over the world had
tanked and so was the case in India. The abolition of Entry Load by SEBI, coupled with the
after-effects of the global financial crisis, deepened the adverse impact on the Indian MF
Industry, which struggled to recover and remodel itself for over two years, in an attempt to
maintain its economic viability which is evident from the sluggish growth in MF Industry AUM
between 2010 to 2013.
FIFTH (CURRENT) PHASE – SINCE 2014:
Taking cognizance of the lack of penetration of MFs, especially in Tier II and Tier III cities,
and need greater alignment of the interest of various stakeholders, SEBI introduced several
progressive measures in September 2012 to “re-energize” the Indian Mutual Fund industry and
increase MFs penetration.
Since May 2014, the industry has witnessed steady inflows and increase in AUM as well as the
number of investor folios (accounts).
 The Industry’s AUM crossed the milestone of ₹10 Trillion (₹10 Lakh Crore) for the
first time as on 31st May 2014 and in a short span of two years the AUM size has crossed
₹15 lakh crore in July 2016.
 The overall size of the Indian MF Industry has grown from ₹ 15.63 trillion as on August
2016, the highest AUM ever and a five-fold increase in a span of less than 10 years!!
 The number of investor folios has gone up from 3.95 crore folios as on 31-03-2014 to
4.98 crore as on 31-08-2016.
 On an average 3.38 lakh new folios are added every month in the last 2 years since June
2014.
The growth in the size of the Industry has been possible due to the twin effects of the regulatory
measures taken by SEBI in re-energizing the MF Industry in September 2012 and the support
from mutual fund distributors in expanding the retail base.
MF distributors have also had a major role in popularizing Systematic Investment Plans (SIP)
over the years. In April 2016, the number of SIP accounts has crossed 1 crore mark and
currently each month retail investors contribute around ₹3,500 crore via SIPs.

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 MUTUAL FUND CLASSIFICATION:

Mutual fund can be classified as follows:

Based on their structure:
 Open-ended funds: Investors can buy and sell the units from the fund, at any point of
time.
 Close-ended funds: These funds arise money from investors only once. Therefore, after
the offer period, fresh investments cannot be made into the fund. If the fund is listed on
a stock exchange the units can be traded like stocks (E.g. Morgan Stanley Growth
Fund). Recently, most of the New Fund Offers of close-ended funds provided liquidity
window on a periodic basis such as monthly or weekly. Redemption of units can be
made during specified intervals. Therefore, such fund have relatively low liquidity.
Based on their investment objective:
 Equity Funds:
An equity fund is a mutual fund scheme that invests predominantly in equity stocks. As, per
current SEBI Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65%
of the scheme’s assets in equities and equity related instruments. Equity Funds are principally
categorized according to company size, investment style of the holdings in the portfolio and
geography.
There are different types of equity mutual fund schemes and each offers a different type of
underlying portfolio that have different levels of market risk.
Large Cap Equity Funds invest a large portion of their corpus in companies with large market
capitalization are called large-cap funds. This type of fund is known to offer stability and
sustainable returns, over a period of time.
Mid-Cap Equity Funds invest in stocks of mid-size companies, which are still considered
developing companies. Mid-cap stocks tend to offer more growth potential than large-cap
stocks.
Small-Cap Funds invest in stocks of smaller-sized companies. Small-cap company is generally
regarded as a company with a market capitalization of less than ₹100 crores. Small-cap stocks
tend to be more the more volatile than large-cap and mid-cap stocks because of greater risk of
failure.
Multi Cap Equity Funds or Diversified Funds invests in stocks of companies across the stock
market regardless of size and sector. These funds provide the benefit of diversification by
investing in companies spread across sectors and market capitalization.
Thematic Equity Funds: These funds invest in securities of specific sectors such as IT, Banking,
Service and pharma sector etc., which is specified in their scheme information documents. So,
the performance of these schemes depends on the performance of the respective sector.

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  Debt Fund:
A debt fund is a mutual fund scheme that invests in fixed income instruments, such as Corporate
and Government Bonds, corporate debt securities, and money market instruments etc. that offer
capital appreciation. Debt funds are also referred to as Income Funds or bond Funds.
There are various types of schemes in the debt fund category, which are classified on the basis
of the type of instruments they invest in and the tenure of the instruments in the portfolio, as
explained below:
Liquid & money Market Funds:
Liquid Funds, as the name suggests, invest predominantly in highly liquid money market
instruments and debt securities very short tenure and hence provide high liquidity. Redemption
requests in these funds are processed within one working (T+1) day.
Income funds:
They invest primarily in debt instruments of various maturities in line with the objective of the
funds and any remaining funds in short-term instruments such as Money Market instruments.
These funds generally invest in instruments with medium-to-long-term maturities.
Short-Term Funds
Short-term debt funds primarily invest in debt-instruments with shorter maturity or duration.
These primarily consist of debt and money market instruments and government securities,
Floating Rate Funds (FRF)
FRFs are a variant of income funds with the primary aim of minimizing the volatility of
investment returns that is usually associated with an income fund. FRFs invest primarily in
instruments that offer floating interest rates. The objective of FRFs is to offer steady returns to
investors in line with the prevailing market interest rates.
Gilt Funds:
A gilt fund invests in government securities of various tenures issued by central and state
governments. These funds generally do not have the risk of default, since the issuer of the
instruments is the government. Gilt funds a high degree of interest rate risk, depending on their
maturity profile.
Interval Funds
Interval fund is a mutual fund scheme that combines the features of open-ended and closed-
ended schemes, wherein the fund is open for subscription and redemption only during specified
transaction periods (STPs) at pre-determined intervals. In other words, Interval funds allow
redemption of Units only during STPs.
Multiple Yield Funds:
Multiple yield funds (MYFs) are hybrid debt-oriented funds that invest predominantly in debt
instruments and to some extent in dividend-yielding equities.

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Dynamic Bond Funds:
DBFs invest in debt securities of different maturity profiles. These funds are actively managed
and portfolio varies dynamically according to the interest rate view of the fund managers. DBFs
follow an active portfolio duration management strategy by keeping a close watch on various
domestic and global macro-economic variables and interest rate outlook.
Fixed Maturity Plans (FMPs)
FMPs as the name indicates, have a pre-determined maturity date and are closed-ended debt
mutual fund schemes. FMPs invest in debt instruments with a specific date of maturity, lesser
than or equal to the maturity date of the scheme. The tenure of FMP may range from as low as
30 days to 60 months.
Monthly Income Plans (MIPs)
MIPs are hybrid schemes that invest in a combination of debt and equity securities, but are
typically debt oriented mutual fund schemes, as they invest pre-dominantly in debt securities
and a small portion (15-25 per cent) in equities. MIPs offer income in the form of periodic
(monthly, quarterly, half-yearly) dividend pay-outs.
Capital Protection-Oriented Funds:
As the name suggests, Capital Protection-Oriented Funds (CaPrOF) are mutual fund schemes
that aim to protect at least the capital, i.e. the initial investment, providing an opportunity to
make additional gains, as per the investment objectives of the fund.

 Liquid Funds:
Liquid funds, as the name suggests, invest predominantly in highly liquid money market
instruments and debt securities of very short tenure and hence provide high liquidity.
Redemption requests in these liquid funds are processed within one working (T+1) day.
The aim of the fund manager of a Liquid Fund is to invest only into liquid investments with
good credit rating with very low possibility of a default. The returns typically take the back seat
as protection of capital remains of utmost importance. Control over expenses in the form of low
expense ratio, good overall credit quality of the portfolio and a disciplined approach to investing
are some of the key ingredients of a good liquid fund.
Liquid funds typically do not charge any exit loads. Investors are offered growth and dividend
options. Within dividend option, investors can choose daily, weekly or monthly dividends
depending on their investment horizon and investment amount.

 Balanced Funds
A balanced fund combines equity stock component, a bond component and sometimes a money
market component in a single portfolio. Generally, these hybrid funds stick to a relatively fixed
mix of stocks and bonds that reflects either a moderate, or higher equity, component, or a
conservative, or higher fixed-income, component orientation. These funds invest in a mix of
equities and debt, giving the investor the best of the both worlds. Although they are in the “asset
allocation” family, balanced fund portfolios do not materially change their asset mix. This is

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unlike life-cycle, a target-date and actively managed asset-allocation funds, which make
changes in response to an investor’s changing risk-return appetite and age or overall investment
market conditions.

 Exchange Traded Funds (ETFs):

An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity,
bonds, or a basket of assets like an index fund. In simple terms, ETFs are funds that track
indexes such as CNX Nifty or BSE Sensex, etc. The main difference between ETFs and other
types of index funds is that ETFs don’t try to outperform their corresponding index, but simply
replicate the performance of the index. They don’t try to beat the market, they try to be the
market.

INVESTMENT STRATEGIES:

1) Systematic Investment Plan: Under this a fixed sum is invested each month on a fixed
date of a month. Payment is made through postdated cheques or direct debit facilities.
The investor gets fewer units when the NAV is high and more units when the NAV is
low. This is called as benefit of Rupee Cost Averaging (RCA).
2) Systematic transfer Plan: Under this an investor invest in debt oriented fund and give
instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same
mutual fund.
3) Systematic Withdrawal Plan: If someone wishes to withdraw from a mutual fund than
he/she can withdraw a fixed amount each month.

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 ADVANTAGES OF INVESTING IN MUTUAL FUNDS:

There are several that can be attributed to the growing popularities and suitability of mutual
funds as an investment vehicle especially for retail investors.
Professional management: Mutual funds provide the services of experienced and skilled
professionals, backed by a dedicated investment research team that analysis the performance
and prospects of companies and selects suitable investments to achieve the objectives of the
scheme.

Diversification: Mutual funds invest in a number of companies across a broad cross- section of
industries and sectors. This diversification reduces the risk because seldom do all stocks decline
at the same time and in the same proportion. You achieve this diversification through a mutual
fund with far less money than you can do on your own.

Convenient administration: Investing in a mutual fund reduces paperwork and helps you avoid
many problems such as bad deliveries, delayed payment and follow up with brokers and
companies. Mutual funds save your time and make investing easy and convenient.

Return potential: Over a medium to long term, mutual funds have the potential to provide a
higher return as they invest in a diversified basket of selected securities.

Low costs: Mutual funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage, custodial and other
fees translate into lower costs for investors.

Liquidity: In open ended schemes, the investors get the money back promptly at net asset value
related prices from the mutual fund. In closed end schemes, the units can be sold on a stock

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exchange at the prevailing market price or the investor can avail of the facility of direct
repurchase at NAV related prices by mutual fund.

Transparency: You get regular information on the value of your investment in addition to
disclosure on the specific investments made by your scheme, the proportion invested in each
class of assets and the fund manager’s investment strategy and outlook.

Flexibility: Through features such as regular investment plans, regular withdrawal plans and
dividend reinvestment plans, you can systematically invest or withdraw funds according to your
needs and convenience.

Affordability: Investors individually may lack sufficient funds to invest in high-grade stocks.
A mutual fund because of its large corpus allows even a small investor to take the benefit of its
investment strategy.

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 Importance of Mutual Fund:
Small investors face a lot of problems in the share market, limited resources, lack of
professional advice, lack of information etc. Mutual funds have come as a much needed help
to these investors. It is a special type of institutional device or an investment vehicle through
which the investors pool their savings which are to be invested under the guidance of a team of
experts in wide variety of portfolios of corporate securities in such a way, so as to minimize
risk, while ensuring safety and steady return on investment. It forms an important part of the
capital market, providing the benefits of a diversified portfolio and expert fund management to
a large number, particularly small investors. Now days, mutual fund is gaining its popularity
due to the following reasons.

With the emphasis on increase in domestic savings and improvement in deployment of

investment through markets, the need and scope for mutual fund operation has increased
tremendously.

The basic purpose of reforms in the financial sector was to enhance the generation of domestic
(Tripathy, Mutual Fund in India: A Financial Service in Capital . . . 87) resources by reducing
the dependence on outside funds. This calls for a market based institution which can tap the
vast potential of domestic savings and chanalise them for profitable investments. Mutual funds
are not only best suited for the purpose but also capable of meeting this challenge.

An ordinary investor who applies for share in a public issue of any company is not assured of
any firm allotment. But mutual funds who subscribe to the capital issue made by companies get
firm allotment of shares. Mutual fund latter sell these shares in the same market and to the
Promoters of the company at a much higher price. Hence, mutual fund creates the investors’
confidence.

The psyche of the typical Indian investor has been summed up by Mr. S. A. Dave, Chairman
of UTI, in three words; Yield, Liquidity and Security. The mutual funds, being set up in the
public sector, have given the impression of being as safe a conduit for investment as bank
deposits. Besides, the assured returns promised by them have investors had great appeal for the
typical Indian investor.

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As mutual funds are managed by professionals, they are considered to have a better knowledge
of market behaviors. Besides, they bring a certain competence to their job. They also maximize
gains by proper selection and timing of investment.

Another important thing is that the dividends and capital gains are reinvested automatically in
mutual funds and hence are not fritted 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.

The mutual fund operation provides a reasonable protection to investors. Besides, presently all
Schemes of mutual funds provide tax relief under Section 80 L of the Income Tax Act and in
addition, some schemes provide tax relief under Section 88 of the Income Tax Act lead to the
growth of importance of mutual fund in the minds of the investors.

As mutual funds creates awareness among urban and rural middle class people about the
benefits of investment in capital market, through profitable and safe avenues, mutual fund could
be able to make up a large amount of the surplus funds available with these people.

The mutual funds attracts foreign capital flow in the country and secure profitable investment
avenues abroad for domestic savings through the opening of off shore funds in various foreign
investors. Lastly another notable thing is that mutual funds are controlled and regulated by S E
B I and hence are considered safe. Due to all these benefits the importance of mutual fund has
been increasing.

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 SCOPE OF STUDY:

The study was carried out for a period of 60 days, in which the main focus was to follow the
performance of the different-different mutual fund companies and assent management
companies. Since different companies come out with similar themes in the same season, it
becomes crucial for the company to constantly perform well so as to survive the competition
and provide maximum capital appreciation or return as the case may be. Other than the market
the performance of the fund depends on the kind of stock chosen by the fund managers of the
company.

The analysis is done on the performance of funds with the same theme or sector and reason out
why a fund performs better than the others in the lot.

NEED FOR THE STUDY:

The study first tries to understand the composition of the selected funds which determines the
scope of performance for the funds, followed by use of ratios that are relevant in quantifying
and understanding the risk and return relationships for each mutual fund scheme under
consideration. Then a comparative analysis of the mutual fund schemes is done to see which
fund has performed the best.

This study is significant to the company as it looks into the minute details that differentiate the
performances of funds of different companies with same theme or sector under similar market
conditions. This would help the company to develop.

OBJECTIVE:
 To understand the Functions of an Asset Management Company
 To understand the performances of various schemes using various tools to measure the
performances.
 To measure and compare the performance of selected mutual fund schemes of different
mutual fund companies and other Asset Management Companies.
 To give an idea about the regulation of mutual funds.

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 METHODOLOGY:
Data collection:

The data required for the study may be collected either from primary sources or from secondary
sources. A major portion of the data in this study has been collected through secondary sources
of data.

Secondary data sources include:

 Published material and annual reports of mutual fund companies

 Other published material of mutual funds.
 Sample Profile:

Sample Profile:

The sample required for the study has been selected through random sampling method from the
available list of mutual fund schemes in the market. Broadly the sample of 25 mutual fund
schemes includes equity funds, debt funds, balanced funds and gold funds.

For the purpose of estimating the performance of schemes in terms of returns, NAV of the
schemes are taken into consideration. As data relating to NAV is available more frequently than
any other data it is taken as the basis for estimation.

Period of the Study:

The study covered a period of 1 year from 1st July 2016 to 30th June 2017 to assess the
performance of the schemes in terms of returns.

Tools & Methods:

Beta: It measures a fund's volatility compared to that of a benchmark. It tells you how much a
fund's performance would swing compared to a benchmark.

Computation:

Standard Deviation of Fund

Beta = ---------------------- x R-Square
Standard Deviation of Benchmark

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Significance

Depicts how much a fund's performance would swing compared to a benchmark.

If a fund has a beta of 1.5, it means that for every 10% upside or downside, the fund's
NAV would be 15% in the respective direction.
Beta = 1: This happens when the stock price movement is same as that of market.

Beta > 1: Beta exceeds one when the stock price movement surpass market movement.
Beta < 1: This happens when the stock price moves less in comparison of market.

R-Squared:

R-Squared measures the relationship between a portfolio and its benchmark. It can be
thought of as a percentage from 1 to 100.

R-squared is not a measure of the performance of a portfolio. A great portfolio can have
a very low R-squared. It is simply a measure of the correlation of the portfolio's returns
to the benchmark's returns.

Computation:
R-Squared = Square of
Correlation ® Formula for
Correlation ®:
Covariance between index and portfolio
Correlationxy = --------------------------------------------------------------
--------------
Standard deviation of portfolio * standard deviation of index
Significance

If you want a portfolio that moves like the benchmark, you'd want a portfolio with a
high R-squared. If you want a portfolio that doesn't move at all like the benchmark,
you'd want a low R-squared.
General Range for R-Squared:

70-100% = good correlation between the portfolio's returns and the benchmark's
returns
40-70% = average correlation between the portfolio's returns and the
benchmark's returns
1-40% = low correlation between the portfolio's returns and the benchmark's returns
Index funds will have an R-squared very close to 100.

R-squared can be used to ascertain the significance of a particular beta or alpha.

Generally, a higher R-squared will indicate a more useful beta figure. If the R-squared
is lower, then the beta is less relevant to the fund's performance

Values range from 1 (returns are explained 100% by the market) to 0 (returns bear no
association with the market).

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Jensen’s Alpha:

The simplest definition is the excess returns of the fund over the benchmark. Alpha is
performance ratio to measure risk-adjusted performance of a portfolio, intended to help
investors determine the risk-reward profile of a mutual fund.

Alpha measures the difference between a fund's actual returns and its expected performance,
given its level of risk. A fund's alpha is often considered to represent the value that a portfolio
manager adds to or subtracts from a fund's return above and beyond a relevant index's
risk/reward profile.

Jensen's alpha was first used as a measure in the evaluation of mutual fund managers by
Michael Jensen in 1968.

Computation:

Alpha = {(Fund return-Risk free return) – (Funds beta) *(Benchmark return- risk free
return)}.

Example:

Fund return 10%

Risk free return 8%
Benchmark return 5%
Beta of Fund 0.8

By computing with above formula we will get alpha as 4.4 for this fund

Significance
The Alpha as represented by percentage indicates under performance or Outperformance
of a portfolio.

o A positive alpha means the fund has outperformed its benchmark

index. Correspondingly, a negative alpha would indicate an underperformance.
o As a fund's return and its risk both contribute to its alpha, two funds with the
same returns could have different alphas.

Sharpe Ratio:

Sharpe ratio measures how well the fund has performed vis-a vis the risk taken by it. It is the
excess return over risk-free return (usually return from treasury bills or government securities)
divided by the standard deviation. The higher the Sharpe Ratio, the better the fund has
performed in proportion to the risk taken by it.

The Sharpe ratio is also known as Reward-to-Variability ratio and it is named after William

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Forsyth Sharpe.

Computation:
SR = (TOTAL RETURN – RISK FREE RATE) / STANDARD DEVIATION OF FUND

The Sharpe Ratio is calculated by taking the return of the portfolio and subtracting the risk-
free return, then dividing the result (the excess return) by standard deviation of the portfolio
returns.

Basically, it is measuring excess return (over risk-free rate) per unit of risk. If Sharpe ratio is
1.25 p.a., then it implies 1.25%p.a. excess return for 1% annual volatility.

For example: Your investor gets 7 per cent return on her investment in a scheme with a standard
deviation/volatility of 0.5. We assume risk free rate is 5 per cent.
Sharpe Ratio is 7-5/0.5 = 4 in this case.

Significance
 The greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance. A
negative Sharpe Ratio indicates that a risk-less asset perform better than the security
being analyzed
 This measurement is very useful to compare funds with similar returns or high returns,
by analyzing the same in line with the risk taken.
 Risk adjusted financial performance of investment portfolios or mutual funds is
typically measured by Sharpe’s ratio. From an investor’s point of view, the ratio
describes how well the return of an investment compensates the investor for the risk he
takes.

Sortino Ratio:

Sortino ratio is the statistical tool that measures the performance of the investment relative
to the downward deviation.

The Sortino ratio is similar to the Sharpe ratio, except it uses downside deviation for the
denominator instead of Standard Deviation (SD). Standard deviation involves both the upward
as well as the downward volatility. Since investors are only concerned about the downward
volatility, Sortino ratio presents a more realistic picture of the downside risk ingrained in the
fund or the stock. The ratio was named after Frank A. Sortino.

Computation:

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Sortino ratio subtracts the risk-free rate of return from the portfolio’s return, and then divides
that by the downside deviation. A large Sortino ratio indicates there is a low probability of a
large loss.

Example: Assume investment A has a return of +10% in year one and -10% in year two.
Investment B has a 0% return in year one and a 20% return in year two. The total variance in
these investments is the same, i.e. 20%. However since there is negative volatility associated
with Investment A, Investment B will be the more suitable option?

Significance

The formula does not penalize a portfolio manager for volatility, and instead
focuses on whether returns are negative or below a certain threshold.
Sharpe ratios are better at analyzing portfolios that have low volatility while Sortino
ratio is better when analyzing highly volatile portfolios.
A large Sortino ratio indicates there is a low probability of a large loss.

Information Ratio:

The Information ratio is a measure of the risk-adjusted return of a financial security (or
asset or portfolio). It is also known as Appraisal ratio.

Information ratio is expected active return divided by tracking error, where active return
is the difference between the return of the security and the return of a selected benchmark
index, and tracking error is the standard deviation of the active return.

The information ratio (IR) IR is advanced version of Sharpe Ratio. Sharpe ratio is the excess
return of an asset over the return of a risk free asset divided by the variability or standard
deviation of returns, the information ratio is the active return to the most relevant benchmark
index divided by the standard deviation of the "active" return or tracking error.

Computation:
(Annualized Rp – Annualized Ri) /Standard Deviation of Monthly (Rp – Ri) * 3.4641)
A common mathematical definition of the information ratio for a portfolio is the excess
returns of the portfolio over the predefined benchmark divided by the standard deviation of
those excess returns, or the tracking error.

The information ratio is often annualized.

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Significance:

The information ratio is often used to gauge the skill of managers of mutual funds.
It measures the expected active return of the manager's portfolio divided by the
amount of risk that the manager takes relative to the benchmark.
The higher the information ratio, the better is the performance of the fund manager.
Information ratio is useful in comparing a group of funds with similar management
styles.
Information ratio shows the consistency of the fund manager in generating superior
risk adjusted performance.

Treynor Ratio:
Treynor ratio is also known as reward-to-volatility ratio, Treynor ratio is the excess return
generated by a fund over and above the risk free return (government bond yield). It is similar
to Sharpe ratio though one difference is that it uses beta as a measure of a measure of volatility.
The ratio is named after Jack L. Treynor

The higher the Treynor ratio, the better the performance of the portfolio under analysis.

Computation:

where: Treynor ratio,

Portfolio's return, risk free rate portfolio i's beta

For example: Your investor gets 7 per cent return on her investment in a scheme with a beta of
1.0. We assume risk free rate is 5 per cent.

Treynor Ratio is 7-5/1.0 = 2 in this case.

Significance
A fund with a higher Treynor ratio implies that the fund has a better risk adjusted return than
that of another fund with a lower Treynor ratio.

Treynor measure and Jenson model use systematic risk based on the premise that the
unsystematic risk is diversifiable. These models are suitable for large investors like
institutional investors with high risk taking capacities as they do not face paucity of
funds and can invest in a number of options to dilute some risks.

Sharpe measure considers the entire risks associated with fund are suitable for small
investors, as the ordinary investor lacks the necessary skill and resources to diversify.
Moreover, the selection of the fund on the basis of superior stock selection ability of
the fund manager will also help in safeguarding the money invested to a great extent.

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 DATA ANALYSIS AND INTERPRETATION
Introduction:

Asset allocation strategies of various select mutual fund schemes are presented in the following
tables.

DEBT FUND SHORT TERM

Five funds namely Axis Mutual Fund, ICICI Prudential Mutual Fund, Kotak Mahindra Mutual
Fund, L&T Mutual Fund and Reliance Mutual Fund were taken in PSU & Debt funds category
and analysis on them are done and the result are interpreted as follows:

PARAMETER AXIS ICICI KOTAK L&T RELIANCE

Stdev(Funds) 0.04% 0.16% 0.10% 0.12% 0.12%
Stdev(O/P) 0.71% 0.72% 0.71% 0.71% 0.71%
Beta -0.00296 -0.00424 0.000653609 -0.003201489 -0.0003139
Alpha 0.000316 0.000442 0.000375866 0.000370741 0.00037136
Sharpe Ratio 1.98279 0.580956 0.838721444 0.717326314 0.72868878
Treynor Ratio -0.27545 -0.2221 1.342095528 0.121690051 -2.7786864
Information Ratio -0.03802 -0.01971 -0.02905861 -0.029873753 0.67302142
Downside Risk 0.000312 0.001389 0.000902727 0.001051098 0.00108929
Sortino Ratio 2.613278 0.677144 0.971728647 0.827548944 0.80064146
Maximum
Drawdown -0.27% -1.62% -1.02% -1.11% -1.28%
Jensen's Alpha 0.000818 0.000945 0.000876497 0.000873303 0.00087247
R-Square 0.002555 0.000337 1.92565E-05 0.000343695 3.3909E-06

 The Sharpe ratio measures risk calculating measures, the greater a security’s Sharpe
Ratio, the better its risk-adjusted performance has been. The value is highest for Axis
(with a value of 1.98, it says that for every 1% unsystematic risk, one can get 1.98%
return) followed by Kotak and Reliance.

 The Treynor ratio measures the excess returns of what could have been earned on a
riskless investment per unit of market risk. It is used to gauge portfolios not only by the
returns but also the risk taken to achieve those returns. The ratio is highest for Kotak
(with a value of 1.34, it says that for every 1% market risk, one can get 1.34% return)
followed by L&T.

 The Information ratio is a measure of the risk-adjusted return of a financial security.

Information ratio is the active return to the most relevant benchmark index divided by
the standard deviation of “active” return or tracking error. It is highest for Reliance
indicating that it has the most efficient performance.

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  The Jensen alpha measures how much of the portfolio's rate of return is attributable to
the manager's ability to deliver above-average returns, adjusted for market risk. The
higher the ratio, the better the risk-adjusted returns. ICICI has the highest value of
Jensen’s Alpha followed by L&T.

 The Sortino ratio takes the asset’s return and subtracts the risk-free rate, and then
divides that amount by the asset’s downside deviation. A higher Sortino ratio indicates
an efficient fund performance i.e. it indicates there is low probability of a large loss. It
is highest for AXIS followed by Kotak.

 Maximum drawdown measures the worst case scenario for a mutual fund. It measures
the largest peak-to-trough decline in the value of a portfolio (before a new peak is
achieved). It is lowest for AXIS followed by Kotak.

Thus, taking all the performance measurement tools into consideration, it can be concluded that
Kotak has the best risk adjusted returns followed closely by AXIS.

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 DEBT TERM LONG TERM

Five funds namely IDBI Mutual fund, IIFL Mutual Fund, LIC Mutual Fund, Sundram Mutual
Fund and Union Mutual Fund were taken in Dynamic Bond funds category and analysis on
them are done and the result are interpreted as follows:

PARAMETER IDBI IIFL LIC SUNDRAM UNION

Stdev(Funds) 0.002535 0.00136 0.002092 0.0020645 0.002587015
Stdev(O/P) 0.007545 0.007222 0.007367 0.0073403 0.007496307
Beta -0.01212 -0.01009 -0.00591 -0.0031549 -0.00197575
Alpha 0.000332 0.000341 0.000406 0.000412 0.000326959
Sharpe Ratio 0.325669 0.614847 0.431836 0.4413193 0.31958309
Treynor Ratio -0.06812 -0.08285 -0.15289 -0.2887974 -0.4184575

Information Ratio -0.03416 -0.03424 -0.02444 -0.0234673 -0.03423086

Downside Risk 0.002114 0.001223 0.001916 0.0019257 0.002357508
Sortino Ratio 0.390475 0.683607 0.47152 0.473142 0.350694927
Maximum Drawdown -3.85% -1.64% -3.36% -2.74% -4.56%
Jensen's Alpha 0.000839 0.000847 0.00091 0.0009145 0.000828907
R-Square 0.001127 0.002715 0.000393 0.0001151 2.87591E-05

 The Sharpe ratio measures risk calculating measures, the greater a security’s Sharpe
Ratio, the better its risk-adjusted performance has been. The value is highest for IIFL
(with a value of 0.61, it says that for every 1% unsystematic risk, one can get 0.61%
return) followed by Sundram and LIC.

 The Treynor ratio measures the excess returns of what could have been earned on a
riskless investment per unit of market risk. It is used to gauge portfolios not only by the
returns but also the risk taken to achieve those returns. Since both Treynor ratio as well
as Beta for all the funds are negative we can say that the funds reduce risk but getting a
return better than the risk free rate.

 The Information ratio is a measure of the risk-adjusted return of a financial security.

Information ratio is the active return to the most relevant benchmark index divided by
the standard deviation of “active” return or tracking error. Since the Information ratio
is negative for all the funds we can say that these funds were unable to produce any
excess return at all.

 The Jensen alpha measures how much of the portfolio's rate of return is attributable to
the manager's ability to deliver above-average returns, adjusted for market risk. The

[21]
 higher the ratio, the better the risk-adjusted returns. Sundram has the highest value of
Jensen’s Alpha followed by LIC.

 The Sortino ratio takes the asset’s return and subtracts the risk-free rate, and then
divides that amount by the asset’s downside deviation. A higher Sortino ratio indicates
an efficient fund performance i.e. it indicates there is low probability of a large loss. It
is highest for IIFL followed by Sundram.

 Maximum drawdown measures the worst case scenario for a mutual fund. It measures
the largest peak-to-trough decline in the value of a portfolio (before a new peak is
achieved). It is lowest for IIFL followed by Sundram and LIC.

Thus, taking all the performance measurement tools into consideration, it can be concluded that
it is best to invest in IIFL when investing in long term debt fund followed by Sundram and LIC.

[22]
 BALANCED FUND

Five funds namely Canara Robeco Mutual Fund, Kotak Mahindra Mutual Fund, LIC Mutual Fund,
TATA Mutual Fund and UTI Mutual Fund were taken in Balanced funds category and analysis on
them are done and the result are interpreted as follows:

PARAMETER CANARA KOTAK LIC TATA UTI

Stdev(Funds) 0.005965 0.005349 0.006739786 0.005531557 0.00557
Stdev(O/P) 0.003039 0.003115 0.003818757 0.002934331 0.003015
Beta 0.767223 0.691688 0.812752058 0.722967981 0.722443
Alpha 0.000251 0.000277 -2.55737E-05 7.90816E-05 0.000269
Sharpe Ratio 0.201023 0.220725 0.140767362 0.180980828 0.213732
Treynor Ratio 0.001563 0.001707 0.00116732 0.001384717 0.001648
Information Ratio 0.038108 0.031205 -0.035254756 -0.02803551 0.035548
Downside Risk 0.004976 0.004022 0.005084952 0.004237734 0.0042
Sortino Ratio 0.240966 0.293514 0.186578328 0.236236116 0.283487
Maximum Drawdown -9.43% -7.80% -8.56% -9.37% -7.48%
Jensen's Alpha 0.000368 0.000431 6.82297E-05 0.000217863 0.000408
R-Square 0.815619 0.824589 0.717023958 0.842273376 0.829373

 The Sharpe ratio measures risk calculating measures, the greater a security’s Sharpe Ratio,
the better its risk-adjusted performance has been. The value is highest for Kotak (with a
value of 0.22, it says that for every 1% unsystematic risk, one can get 0.22% return)
followed by UTI and Canara.

 The Treynor ratio measures the excess returns of what could have been earned on a riskless
investment per unit of market risk. It is used to gauge portfolios not only by the returns but
also the risk taken to achieve those returns. The ratio is highest for Kotak (with a value of
0.0017, it says that for every 1% market risk, one can get 0.17% return) followed by UTI
and Canara.

 The Information ratio is a measure of the risk-adjusted return of a financial security.

Information ratio is the active return to the most relevant benchmark index divided by the
standard deviation of “active” return or tracking error. It is highest for Canara indicating
that it has the most efficient performance followed by UTI and Kotak.

 The Jensen alpha measures how much of the portfolio's rate of return is attributable to the
manager's ability to deliver above-average returns, adjusted for market risk. The higher the
[23]
 ratio, the better the risk-adjusted returns. Kotak has the highest value of Jensen’s Alpha
followed by UTI and Canara.

 The Sortino ratio takes the asset’s return and subtracts the risk-free rate, and then divides
that amount by the asset’s downside deviation. A higher Sortino ratio indicates an efficient
fund performance i.e. it indicates there is low probability of a large loss. It is highest for
Kotak followed by UTI and Canara.

 Maximum drawdown measures the worst case scenario for a mutual fund. It measures the
largest peak-to-trough decline in the value of a portfolio (before a new peak is achieved).
It is lowest for UTI followed by Kotak.

Thus, taking all the performance measurement tools into consideration, it can be concluded that
Kotak has the best risk adjusted returns followed by UTI and Canara.

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 EQYITY DIVERSIFY

Five funds namely Birla Sun Life Mutual Fund, Franklin Templeton Mutual Fund, HDFC Mutual
Fund, India bulls Mutual Fund and SBI Mutual funds were taken in Bluechip funds category and
analysis on them are done and the result are interpreted as follows:

PARAMETER BIRLA FRANKLIN HDFC INDIABULLS SBI

Stdev(Funds) 0.007244 0.006587119 0.00872 0.008322704 0.007198161
Stdev(O/P) 0.002035 0.002011387 0.003217 0.003446636 0.002437113
Beta 0.990155 0.898973285 1.166204 1.081945287 0.965186296
Alpha 0.000141 -1.65882E-05 0.000187 0.00012974 4.614E-05
Sharpe Ratio 0.168232 0.153017399 0.156786 0.151493697 0.154099814
Treynor Ratio 0.001231 0.001121217 0.001172 0.001165343 0.001149245
Information Ratio 0.066496 -0.037500212 0.088242 0.051489623 0.010612575
Downside Risk 0.005472 0.004600821 0.006085 0.006678811 0.005489125
Sortino Ratio 0.222723 0.219079099 0.224681 0.188781697 0.202078706
Maximum
Drawdown -11.77% -10.68% -10.13% -12.57% -12.24%
Jensen's Alpha 0.000146 3.4022E-05 0.000104 8.86888E-05 6.35802E-05
R-Square 0.921159 0.918358619 0.881822 0.833280841 0.886520747

 The Sharpe ratio measures risk calculating measures, the greater a security’s Sharpe Ratio,
the better its risk-adjusted performance has been. The value is highest for Birla (with a
value of 0.168, it says that for every 1% unsystematic risk, one can get 0.168% return)
followed by HDFC and SBI

 The Treynor ratio measures the excess returns of what could have been earned on a riskless
investment per unit of market risk. It is used to gauge portfolios not only by the returns but
also the risk taken to achieve those returns. The ratio is highest for Birla (with a value of
0.0012, it says that for every 1% market risk, one can get 0.12% return) followed by HDFC
and India bulls.

 The Information ratio is a measure of the risk-adjusted return of a financial security.

Information ratio is the active return to the most relevant benchmark index divided by the
standard deviation of “active” return or tracking error. It is highest for HDFC indicating
that it has the most efficient performance followed by Birla.

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  The Jensen alpha measures how much of the portfolio's rate of return is attributable to the
manager's ability to deliver above-average returns, adjusted for market risk. The higher the
ratio, the better the risk-adjusted returns. Birla has the highest value of Jensen’s Alpha
followed by HDFC.

 The Sortino ratio takes the asset’s return and subtracts the risk-free rate, and then divides
that amount by the asset’s downside deviation. A higher Sortino ratio indicates an efficient
fund performance i.e. it indicates there is low probability of a large loss. It is highest for
HDFC followed by Birla.

 Maximum drawdown measures the worst case scenario for a mutual fund. It measures the
largest peak-to-trough decline in the value of a portfolio (before a new peak is achieved).
It is lowest for HDFC followed by Franklin and Birla.

Thus, taking all the performance measurement tools into consideration, it can be concluded that
Birla has the best risk adjusted returns followed closely by HDFC.

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 GOLD FUND

Five funds namely AXIS Mutual Fund, Canara Robeco Mutual Fund, HDFC Mutual Fund,
Reliance Mutual Fund and SBI Mutual Fund were taken in Gold Savings funds category and
analysis on them are done and the result are interpreted as follows:

PARAMETER AXIS CANARA HDFC RELIANCE SBI

Stdev(Funds) 0.007479681 0.007642 0.005948 0.0067071 0.006842276
Stdev(O/P) 0.009906185 0.011064 0.009417 0.0098462 0.010061758
Beta 0.072203164 -0.14909 -0.04055 -0.0269178 -0.05186983
Alpha -0.000536253 -0.00026 -0.00034 -0.0003209 -0.00044349
Sharpe Ratio 0.000903427 0.020511 0.022828 0.024503 0.00398409
Treynor Ratio 9.3588E-05 -0.00105 -0.00335 -0.0061054 -0.00052555
Information Ratio -0.108680985 -0.08375 -0.10063 -0.0933384 -0.10496287
Downside Risk 0.004705961 0.004638 0.003759 0.0044585 0.004825175
Sortino Ratio 0.001435912 0.033793 0.036124 0.036861 0.005649587
Maximum Drawdown -14.84% -12.87% -12.95% -13.40% -16.70%
Jensen's Alpha -7.14655E-05 0.000318 0.00018 0.0001935 8.34545E-05
R-Square 0.004594689 0.018769 0.002292 0.0007942 0.002833597

 The Sharpe ratio measures risk calculating measures, the greater a security’s Sharpe Ratio,
the better its risk-adjusted performance has been. The value is highest for Reliance (with a
value of 0.024, it says that for every 1% unsystematic risk, one can get 0.024% return)
followed by HDFC and Canara.

 The Treynor ratio measures the excess returns of what could have been earned on a riskless
investment per unit of market risk. It is used to gauge portfolios not only by the returns but
also the risk taken to achieve those returns. The ratio is highest for Axis (with a value of
0.01, it says that for every 1% market risk, one can get 0.01% return).

 The Information ratio is a measure of the risk-adjusted return of a financial security.

Information ratio is the active return to the most relevant benchmark index divided by the
standard deviation of “active” return or tracking error. Since the Information ratio is
negative for all the funds we can say that these funds were unable to produce any excess
return at all.

[27]
  The Jensen alpha measures how much of the portfolio's rate of return is attributable to the
manager's ability to deliver above-average returns, adjusted for market risk. The higher the
ratio, the better the risk-adjusted returns. Canara has the highest value of Jensen’s Alpha
followed closely by Reliance and HDFC.

 The Sortino ratio takes the asset’s return and subtracts the risk-free rate, and then divides
that amount by the asset’s downside deviation. A higher Sortino ratio indicates an efficient
fund performance i.e. it indicates there is low probability of a large loss. It is highest for
Reliance followed by HDFC and Canara.

 Maximum drawdown measures the worst case scenario for a mutual fund. It measures the
largest peak-to-trough decline in the value of a portfolio (before a new peak is achieved).
It is lowest for Canara followed by HDFC and Reliance.

Thus, taking all the performance measurement tools into consideration, it can be concluded that
Reliance has the best risk adjusted returns.

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 Bibliography and References

Books:
 “Security Analysis and portfolio Management” by Donald Fischer & Ronald Jordan,
6th edition.
 “Security Analysis and Portfolio Management” by Punithavathy Pandian

Websites:
 www.amfi.com
 www.moneycontrol.com
 www.nseindia.com
 www.yahoofinancial.com

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