INTODUCTION TO FINANCIAL MARKET:

In economics, a financial market is a mechanism that allows

people and entities to buy and sell (trade)

financial securities (such as stocks and

bonds),commodities (such as precious metals or agricultural

goods), and other fungible items of value at low transaction

costs and at prices that reflect supply and demand.

Both general markets (where many commodities are traded) and

specialized markets (where only one commodity is traded)

exist. Markets work by placing many interested buyers and

sellers in one "place", thus making it easier for them to find

each other. An economy which relies primarily on interactions

between buyers and sellers to allocate resources is known as

a market economy in contrast either to a command economy or to

a non-market economy such as a gift economy.

In finance, financial markets facilitate:

The raising of capital (in the capital markets)

The transfer of risk (in the derivatives markets)

The transfer of liquidity (in the money markets)

International trade (in the currency markets)

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– and are used to match those who want capital to those

who have it.

Typically a borrower issues a receipt to the lender promising

to pay back the capital. These receipts are securities which

may be freely bought or sold. In return for lending money to

the borrower, the lender will expect some compensation in the

form of interest or dividends.

In mathematical finance, the concept continuous-time Brownian

motion stochastic process is sometimes used as a model.

Definition

In economics, typically, the term market means the aggregate

of possible buyers and sellers of a certain good or service

and the transactions between them.

The term "market" is sometimes used for what are more

strictly exchanges, organizations that facilitate the trade in

financial securities, e.g., a stock exchange orcommodity

exchange. This may be a physical location (like the NYSE) or

an electronic system (like NASDAQ). Much trading of stocks

takes place on an exchange; still,corporate actions (merger,

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spinoff) are outside an exchange, while any two companies or

people, for whatever reason, may agree to sell stock from the

one to the other without using an exchange.

Trading of currencies and bonds is largely on a bilateral

basis, although some bonds trade on a stock exchange, and

people are building electronic systems for these as well,

similar to stock exchanges.

Financial markets can be domestic or they can be

international.

Types of financial markets

The financial markets can be divided into different subtypes:

Capital markets which consist of:

Stock markets, which provide financing through the

issuance of shares or common stock, and enable the

subsequent trading thereof.

Bond markets, which provide financing through the

issuance of bonds, and enable the subsequent trading

thereof.

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Commodity markets, which facilitate the trading of

commodities.

Money markets, which provide short term debt financing and

investment.

Derivatives markets, which provide instruments for the

management of financial risk.

Futures markets, which provide standardized forward

contracts for trading products at some future date; see

also forward market.

Insurance markets, which facilitate the redistribution of

various risks.

Foreign exchange markets, which facilitate the trading

of foreign exchange.

The capital markets consist of primary markets and secondary

markets. Newly formed (issued) securities are bought or sold

in primary markets. Secondary markets allow investors to sell

securities that they hold or buy existing securities. The

transaction in primary market exist between investors and

public while secondary market its between investors.

[edit]Raising the capital

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To understand financial markets, let us look at what they are

used for, i.e. what where firms make the capital to invest

Without financial markets, borrowers would have difficulty

finding lenders themselves. Intermediaries such as banks help

in this process. Banks take deposits from those who

have money to save. They can then lend money from this pool of

deposited money to those who seek to borrow. Banks popularly

lend money in the form of loans andmortgages.

More complex transactions than a simple bank deposit require

markets where lenders and their agents can meet borrowers and

their agents, and where existing borrowing or lending

commitments can be sold on to other parties. A good example of

a financial market is a stock exchange. A company can raise

money by selling shares to investors and its existing shares

can be bought or sold.

The following table illustrates where financial markets fit in

the relationship between lenders and borrowers:

Relationship between lenders and borrowers

Lenders Financial Financial Borrowers

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Intermediaries Markets

Individua

ls

Companies

Banks

Insurance Companies

Pension Funds

Mutual Funds

Interbank

Stock Exchange

Money Market

Bond Market

Foreign

Exchange

Individuals

Companies

Central

Government

Municipalities

Public

Corporations

Lenders

Who have enough money to lend or to give someone money from

own pocket at the condition of getting back the principal

amount or with some interest or charge, is the Lender.

Individuals & Doubles

Many individuals are not aware that they are lenders, but

almost everybody does lend money in many ways. A person lends

money when he or she:

puts money in a savings account at a bank;

contributes to a pension plan;

pays premiums to an insurance company;

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invests in government bonds; or

invests in company share

Companies

Companies tend to be borrowers of capital. When companies have

surplus cash that is not needed for a short period of time,

they may seek to make money from their cash surplus by lending

it via short term markets called money markets.

There are a few companies that have very strong cash flows.

These companies tend to be lenders rather than borrowers. Such

companies may decide to return cash to lenders (e.g. via

a share buyback.) Alternatively, they may seek to make more

money on their cash by lending it (e.g. investing in bonds and

stocks.)

[edit]Borrowers

Individuals borrow money via bankers' loans for short term

needs or longer term mortgages to help finance a house

purchase.

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Companies borrow money to aid short term or long term cash

flows. They also borrow to fund modernisation or future

business expansion.

Governments often find their spending requirements exceed

their tax revenues. To make up this difference, they need to

borrow. Governments also borrow on behalf of nationalised

industries, municipalities, local authorities and other public

sector bodies. In the UK, the total borrowing requirement is

often referred to as the Public sector net cash

requirement (PSNCR).

Governments borrow by issuing bonds. In the UK, the government

also borrows from individuals by offering bank accounts

and Premium Bonds. Government debt seems to be permanent.

Indeed the debt seemingly expands rather than being paid off.

One strategy used by governments to reduce the value of the

debt is to influence inflation.

Municipalities and local authorities may borrow in their own

name as well as receiving funding from national governments.

In the UK, this would cover an authority like Hampshire County

Council.

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Public Corporations typically include nationalised industries.

These may include the postal services, railway companies and

utility companies.

Many borrowers have difficulty raising money locally. They

need to borrow internationally with the aid of Foreign

exchange markets.

Borrowers having similar needs can form into a group of

borrowers. They can also take an organizational form like

Mutual Funds. They can provide mortgage on weight basis. The

main advantage is that this lowers the cost of their

borrowings.

Derivative products

During the 1980s and 1990s, a major growth sector in financial

markets is the trade in so called derivative products,

or derivatives for short.

In the financial markets, stock prices, bond prices, currency

rates, interest rates and dividends go up and down,

creating risk. Derivative products are financial products

which are used to control risk or paradoxically exploit risk.

It is also called financial economics.

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Derivative products or instruments help the issuers to gain an

unusual profit from issuing the instruments. For using the

help of these products a contract has to be made. Derivative

contracts are mainly 3 types: 1. Future Contracts 2. Forward

Contracts 3. Option Contracts.

Currency markets

Main article: Foreign exchange market

Seemingly, the most obvious buyers and sellers of currency are

importers and exporters of goods. While this may have been

true in the distant past,[when?] when international trade created

the demand for currency markets, importers and exporters now

represent only 1/32 of foreign exchange dealing, according to

the Bank for International Settlements.[1]

The picture of foreign currency transactions today shows:

Banks/Institutions

Speculators

Government spending (for example, military bases abroad)

Importers/Exporters

Tourists

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Analysis of financial markets

See Statistical analysis of financial

markets, statistical finance---

Much effort has gone into the study of financial markets and

how prices vary with time. Charles Dow, one of the founders

of Dow Jones & Company and The Wall Street Journal,

enunciated a set of ideas on the subject which are now

called Dow Theory. This is the basis of the so-

called technical analysis method of attempting to predict

future changes. One of the tenets of "technical analysis" is

that market trends give an indication of the future, at

least in the short term. The claims of the technical

analysts are disputed by many academics, who claim that the

evidence points rather to therandom walk hypothesis, which

states that the next change is not correlated to the last

change.

The scale of changes in price over some unit of time is

called the volatility. It was discovered by Benoît

Mandelbrot that changes in prices do not follow a Gaussian

distribution, but are rather modeled better by Lévy stable

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distributions. The scale of change, or volatility, depends

on the length of the time unit to a power a bit more than

1/2. Large changes up or down are more likely than what one

would calculate using a Gaussian distribution with an

estimated standard deviation.

A new area of concern is the proper analysis of

international market effects. As connected as today's global

financial markets are, it is important to realize that there

are both benefits and consequences to a global financial

network. As new opportunities appear due to integration, so

do the possibilities of contagion. This presents unique

issues when attempting to analyze markets, as a problem can

ripple through the entire connected global network very

quickly. For example, a bank failure in one country can

spread quickly to others, which makes proper analysis more

difficult.

Financial market slang

Poison pill, when a company issues more shares to prevent

being bought out by another company, thereby increasing

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the number of outstanding shares to be bought by the

hostile company making the bid to establish majority.

Quant, a quantitative analyst with a PhD (and above)

level of training in mathematics and statistical methods.

Rocket scientist, a financial consultant at the zenith of

mathematical and computer programming skill. They are

able to invent derivatives of high complexity and

construct sophisticated pricing models. They generally

handle the most advanced computing techniques adopted by

the financial markets since the early 1980s. Typically,

they are physicists and engineers by training; rocket

scientists do not necessarily build rockets for a living.

White Knight, a friendly party in a takeover bid. Used to

describe a party that buys the shares of one organization

to help prevent against a hostile takeover of that

organization by another party.

History

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Established in 1875, the Bombay Stock Exchange is Asia's first

stock exchange.

In 12th century France the courratiers de change were

concerned with managing and regulating the debts of

agricultural communities on behalf of the banks. Because these

men also traded with debts, they could be called the

first brokers. A common misbelief is that in late 13th

century Bruges commodity traders gathered inside the house of

a man called Van der Beurze, and in 1309 they became the

"Brugse Beurse", institutionalizing what had been, until then,

an informal meeting, but actually, the family Van der Beurze

had a building in Antwerp where those gatherings occurred; the

Van der Beurze had Antwerp, as most of the merchants of that

period, as their primary place for trading. The idea quickly14

spread around Flanders and neighbouring counties and "Beurzen"

soon opened in Ghent and Amsterdam.

In the middle of the 13th century, Venetian bankers began to

trade in government securities. In 1351 the Venetian

government outlawed spreading rumours intended to lower the

price of government funds. Bankers

in Pisa, Verona, Genoa and Florence also began trading in

government securities during the 14th century. This was only

possible because these were independent city states not ruled

by a duke but a council of influential citizens. The Dutch

later started joint stock companies, which

let shareholders invest in business ventures and get a share

of their profits – or losses. In 1602, the Dutch East India

Company issued the first share on the Amsterdam Stock

Exchange. It was the first company to issue stocks and bonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said

to have been the first stock exchange to introduce continuous

trade in the early 17th century. The Dutch "pioneered short

selling, option trading, debt-equity swaps, merchant banking,

unit trusts and other speculative instruments, much as we know

them". There are now stock markets in virtually every

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developed and most developing economies, with the world's

biggest market being in the United States, United Kingdom,

Japan, India, China, Canada, Germany's (Frankfurt Stock

Exchange), France, South Korea and the Netherlands.

Importance of stock market

Function and purpose

The main trading room of the Tokyo Stock Exchange, where

trading is currently completed through computers.

The stock market is one of the most important sources

for companies to raise money. This allows businesses to be

publicly traded, or raise additional capital for expansion by

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selling shares of ownership of the company in a public market.

The liquidity that an exchange provides affords investors the

ability to quickly and easily sell securities. This is an

attractive feature of investing in stocks, compared to other

less liquid investments such as real estate.

History has shown that the price of shares and other assets is

an important part of the dynamics of economic activity, and

can influence or be an indicator of social mood. An economy

where the stock market is on the rise is considered to be an

up-and-coming economy. In fact, the stock market is often

considered the primary indicator of a country's economic

strength and development.

Rising share prices, for instance, tend to be associated with

increased business investment and vice versa. Share prices

also affect the wealth of households and their consumption.

Therefore, central banks tend to keep an eye on the control

and behaviour of the stock market and, in general, on the

smooth operation of financial system functions. Financial

stability is the raison d'être of central banks.

Exchanges also act as the clearinghouse for each transaction,

meaning that they collect and deliver the shares, and

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guarantee payment to the seller of a security. This eliminates

the risk to an individual buyer or seller that

the counterparty could default on the transaction.

The smooth functioning of all these activities

facilitates economic growth in that lower costs and enterprise

risks promote the production of goods and services as well as

employment. In this way the financial system contributes to

increased prosperity.

Relation of the stock market to the modern financial system

The financial system in most western countries has undergone a

remarkable transformation. One feature of this development

is disintermediation. A portion of the funds involved in

saving and financing, flows directly to the financial markets

instead of being routed via the traditional bank lending and

deposit operations. The general public's heightened interest

in investing in the stock market, either directly or

through mutual funds, has been an important component of this

process.

Statistics show that in recent decades shares have made up an

increasingly large proportion of households' financial assets

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in many countries. In the 1970s, in Sweden, deposit

accounts and other very liquid assets with little risk made up

almost 60 percent of households' financial wealth, compared to

less than 20 percent in the 2000s. The major part of this

adjustment in financial portfolios has gone directly to shares

but a good deal now takes the form of various kinds of

institutional investment for groups of individuals, e.g.,

pension funds, mutual funds, hedge funds, insurance investment

of premiums, etc.

The trend towards forms of saving with a higher risk has been

accentuated by new rules for most funds and insurance,

permitting a higher proportion of shares to bonds. Similar

tendencies are to be found in other industrialized countries.

In all developed economic systems, such as the European Union,

the United States, Japan and other developed nations, the

trend has been the same: saving has moved away from

traditional (government insured) bank deposits to more risky

securities of one sort or another

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The behaviour of the stock market

From experience we know that investors may 'temporarily' move

financial prices away from their long term aggregate price

'trends'. (Positive or up trends are referred to as bull

markets; negative or down trends are referred to as bear

markets.) Over-reactions may occur—so that excessive optimism

(euphoria) may drive prices unduly high or excessive pessimism

may drive prices unduly low. Economists continue to debate

whether financial markets are 'generally' efficient.

According to one interpretation of the efficient-market

hypothesis (EMH), only changes in fundamental factors, such as

the outlook for margins, profits or dividends, ought to affect

share prices beyond the short term, where random 'noise' in

the system may prevail. (But this largely theoretic academic

viewpoint—known as 'hard' EMH—also predicts that little or no

trading should take place, contrary to fact, since prices are

already at or near equilibrium, having priced in all public

knowledge.) The 'hard' efficient-market hypothesis is sorely

tested by such events as the stock market crash in 1987, when

the Dow Jones index plummeted 22.6 percent—the largest-ever

one-day fall in the United States.

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This event demonstrated that share prices can fall

dramatically even though, to this day, it is impossible to fix

a generally agreed upon definite cause: a thorough search

failed to detect any 'reasonable' development that might have

accounted for the crash. (But note that such events are

predicted to occur strictly by chance, although very rarely.)

It seems also to be the case more generally that many price

movements (beyond that which are predicted to occur

'randomly') are not occasioned by new information; a study of

the fifty largest one-day share price movements in the United

States in the post-war period seems to confirm this.

However, a 'soft' EMH has emerged which does not require that

prices remain at or near equilibrium, but only that market

participants not be able to systematically profit from any

momentary market 'inefficiencies'. Moreover, while EMH

predicts that all price movement (in the absence of change in

fundamental information) is random (i.e., non-trending), many

studies have shown a marked tendency for the stock market to

trend over time periods of weeks or longer. Various

explanations for such large and apparently non-random price

movements have been promulgated. For instance, some research

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has shown that changes in estimated risk, and the use of

certain strategies, such as stop-loss limits and Value at

Risk limits, theoretically could cause financial markets to

overreact. But the best explanation seems to be that the

distribution of stock market prices is non-Gaussian (in which

case EMH, in any of its current forms, would not be strictly

applicable).

Other research has shown that psychological factors may result

in exaggerated (statistically anomalous) stock price movements

(contrary to EMH which assumes such behaviors 'cancel out').

Psychological research has demonstrated that people are

predisposed to 'seeing' patterns, and often will perceive a

pattern in what is, in fact, just noise. (Something like

seeing familiar shapes in clouds or ink blots.) In the present

context this means that a succession of good news items about

a company may lead investors to overreact positively

(unjustifiably driving the price up). A period of good returns

also boosts the investor's self-confidence, reducing his

(psychological) risk threshold.

Another phenomenon—also from psychology—that works against

an objective assessment is group thinking. As social animals,

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it is not easy to stick to an opinion that differs markedly

from that of a majority of the group. An example with which

one may be familiar is the reluctance to enter a restaurant

that is empty; people generally prefer to have their opinion

validated by those of others in the group.

In one paper the authors draw an analogy with gambling. In

normal times the market behaves like a game of roulette; the

probabilities are known and largely independent of the

investment decisions of the different players. In times of

market stress, however, the game becomes more like poker

(herding behavior takes over). The players now must give heavy

weight to the psychology of other investors and how they are

likely to react psychologically.

The stock market, as with any other business, is quite

unforgiving of amateurs. Inexperienced investors rarely get

the assistance and support they need. In the period running up

to the 1987 crash, less than 1 percent of the analyst's

recommendations had been to sell (and even during the 2000–

2002 bear market, the average did not rise above 5 %%). In the

run up to 2000, the media amplified the general euphoria, with

reports of rapidly rising share prices and the notion that

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large sums of money could be quickly earned in the so-

called new economy stock market. (And later amplified the

gloom which descended during the 2000–2002 bear market, so

that by summer of 2002, predictions of a DOW average below

5000 were quite common.)

Irrational behaviour

Sometimes the market seems to react irrationally to economic

or financial news, even if that news is likely to have no real

effect on the fundamental value of securities itself. But this

may be more apparent than real, since often such news has been

anticipated, and a counter reaction may occur if the news is

better (or worse) than expected. Therefore, the stock market

may be swayed in either direction by press releases,

rumours, euphoria and mass panic; but generally only briefly,

as more experienced investors (especially the hedge funds)

quickly rally to take advantage of even the slightest,

momentary hysteria.

Over the short-term, stocks and other securities can be

battered or buoyed by any number of fast market-changing

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events, making the stock market behaviour difficult to

predict. Emotions can drive prices up and down, people are

generally not as rational as they think, and the reasons for

buying and selling are generally obscure. Behaviourists argue

that investors often behave 'irrationally' when making

investment decisions thereby incorrectly pricing securities,

which causes market inefficiencies, which, in turn, are

opportunities to make money.]However, the whole notion of EMH

is that these non-rational reactions to information cancel

out, leaving the prices of stocks rationally determined.

The Dow Jones Industrial Average biggest gain in one day was

936.42 points or 11 percent, this occurred on October 13,

2008.

Crashes

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Robert Shiller's plot of the S&P Composite Real Price Index,

Earnings, Dividends, and Interest Rates, from Irrational

Exuberance, 2d ed. In the preface to this edition, Shiller

warns, "The stock market has not come down to historical

levels: the price-earnings ratio as I define it in this book

is still, at this writing [2005], in the mid-20s, far higher

than the historical average... People still place too much

confidence in the markets and have too strong a belief that

paying attention to the gyrations in their investments will

someday make them rich, and so they do not make conservative

preparations for possible bad outcomes."

Price-Earnings ratios as a predictor of twenty-year returns

based upon the plot by Robert Shiller (Figure 10.1). The

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horizontal axis shows the real price-earnings ratio of the S&P

Composite Stock Price Index as computed in Irrational

Exuberance (inflation adjusted price divided by the prior ten-

year mean of inflation-adjusted earnings). The vertical axis

shows the geometric average real annual return on investing in

the S&P Composite Stock Price Index, reinvesting dividends,

and selling twenty years later. Data from different twenty

year periods is color-coded as shown in the key. See also ten-

year returns. Shiller states that this plot "confirms that

long-term investors—investors who commit their money to an

investment for ten full years—did do well when prices were low

relative to earnings at the beginning of the ten years. Long-

term investors would be well advised, individually, to lower

their exposure to the stock market when it is high, as it has

been recently, and get into the market when it is low."

Stock market index

The movements of the prices in a market or section of a market

are captured in price indices called stock market indices, of

which there are many, e.g., the S&P, the FTSE and

the Euronext indices. Such indices are usually market

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capitalization weighted, with the weights reflecting the

contribution of the stock to the index. The constituents of

the index are reviewed frequently to include/exclude stocks in

order to reflect the changing business environment.

Derivative instruments

Financial innovation has brought many new financial

instruments whose pay-offs or values depend on the prices of

stocks. Some examples are exchange-traded funds (ETFs), stock

index and stock options, equity swaps, single-stock futures,

and stock index futures. These last two may be traded

on futures exchanges (which are distinct from stock exchanges—

their history traces back to commodities futures exchanges),

or traded over-the-counter. As all of these products are

only derived from stocks, they are sometimes considered to be

traded in a (hypothetical) derivatives market, rather than the

(hypothetical) stock market.

Leveraged strategies

Stock that a trader does not actually own may be traded

using short selling; margin buying may be used to purchase

stock with borrowed funds; or, derivatives may be used to

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control large blocks of stocks for a much smaller amount of

money than would be required by outright purchase or sale.

Short selling

In short selling, the trader borrows stock (usually from his

brokerage which holds its clients' shares or its own shares on

account to lend to short sellers) then sells it on the market,

hoping for the price to fall. The trader eventually buys back

the stock, making money if the price fell in the meantime and

losing money if it rose. Exiting a short position by buying

back the stock is called "covering a short position." This

strategy may also be used by unscrupulous traders in illiquid

or thinly traded markets to artificially lower the price of a

stock. Hence most markets either prevent short selling or

place restrictions on when and how a short sale can occur. The

practice of naked shorting is illegal in most (but not all)

stock markets.

Margin buying

In margin buying, the trader borrows money (at interest) to

buy a stock and hopes for it to rise. Most industrialized

countries have regulations that require that if the borrowing

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is based on collateral from other stocks the trader owns

outright, it can be a maximum of a certain percentage of those

other stocks' value. In the United States, the margin

requirements have been 50 %% for many years (that is, if you

want to make a $1000 investment, you need to put up $500, and

there is often a maintenance margin below the $500).

A margin call is made if the total value of the investor's

account cannot support the loss of the trade. (Upon a decline

in the value of the margined securities additional funds may

be required to maintain the account's equity, and with or

without notice the margined security or any others within the

account may be sold by the brokerage to protect its loan

position. The investor is responsible for any shortfall

following such forced sales.)

Regulation of margin requirements (by the Federal Reserve) was

implemented after the Crash of 1929. Before that, speculators

typically only needed to put up as little as 10 percent (or

even less) of the total investment represented by the stocks

purchased. Other rules may include the prohibition of free-

riding: putting in an order to buy stocks without paying

initially (there is normally a three-day grace period for

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delivery of the stock), but then selling them (before the

three-days are up) and using part of the proceeds to make the

original payment (assuming that the value of the stocks has

not declined in the interim).

New issuance

Global issuance of equity and equity-related instruments

totaled $505 billion in 2004, a 29.8 %% increase over the

$389 billion raised in 2003. Initial public offerings (IPOs)

by US issuers increased 221 %% with 233 offerings that raised

$45 billion, and IPOs in Europe, Middle East and Africa (EMEA)

increased by 333 %%, from $ 9 billion to $39 billion.

Investment strategies

One of the many things people always want to know about the

stock market is, "How do I make money investing?" There are

many different approaches; two basic methods are classified as

either fundamental analysis or technical analysis. Fundamental

analysis refers to analyzing companies by their financial

statements found in SEC Filings, business trends, general

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economic conditions, etc. Technical analysis studies price

actions in markets through the use of charts and quantitative

techniques to attempt to forecast price trends regardless of

the company's financial prospects. One example of a technical

strategy is the Trend following method, used by John W.

Henry and Ed Seykota, which uses price patterns, utilizes

strict money management and is also rooted in risk

control and diversification.

Additionally, many choose to invest via the index method. In

this method, one holds a weighted or unweighted portfolio

consisting of the entire stock market or some segment of the

stock market (such as the S&P 500 or Wilshire 5000). The

principal aim of this strategy is to maximize diversification,

minimize taxes from too frequent trading, and ride the general

trend of the stock market (which, in the U.S., has averaged

nearly 10 %%/year, compounded annually, since World War II).

Taxation

According to much national or state legislation, a large array

of fiscal obligations are taxed for capital gains. Taxes are

charged by the state over the transactions, dividends

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and capital gains on the stock market, in particular in

the stock exchanges. However, these fiscal obligations may

vary from jurisdictions to jurisdictions because, among other

reasons, it could be assumed that taxation is already

incorporated into the stock price through the different taxes

companies pay to the state, or that tax free stock market

operations are useful to boost economic growth

INTRODUCTION TO MUTUAL FUNDS:

A mutual fund is a professionally managed type of collective

investment scheme that pools money from many investors to

buy stocks, bonds, short-term money market instruments, and/or

other securities.

Overview

In the United States, a mutual fund is registered with

the Securities and Exchange Commission (SEC) and is overseen

by a board of directors (if organized as a corporation)

or board of trustees (if organized as a trust). The board is

charged with ensuring that the fund is managed in the best

33

interests of the fund's investors and with hiring the fund

manager and other service providers to the fund. The fund

manager, also known as the fund sponsor or fund management

company, trades (buys and sells) the fund's investments in

accordance with the fund's investment objective. A fund

manager must be a registered investment advisor. Funds that

are managed by the same fund manager and that have the same

brand name are known as a "fund family" or "fund complex".

The Investment Company Act of 1940 (the 1940 Act) established

three types of registered investment companies or RICs in the

United States: open-end funds, unit investment trusts (UITs);

and closed-end funds. Recently, exchange-traded funds (ETFs),

which are open-end funds or unit investment trusts that trade

on an exchange, have gained in popularity. While the term

"mutual fund" may refer to all three types of registered

investment companies, it is more commonly used to refer

exclusively to the open-end type.

Hedge funds are not considered a type of mutual fund. While

they are another type of commingled investment scheme, they

are not governed by the Investment Company Act of 1940 and are

not required to register with the Securities and Exchange

34

Commission (though many hedge fund managers now must register

as investment advisors).

Mutual funds are not taxed on their income as long as they

comply with certain requirements established in the Internal

Revenue Code. Specifically, they must diversify their

investments, limit ownership of voting securities, distribute

most of their income to their investors annually, and earn

most of the income by investing in securities and currencies.

[2] Mutual funds pass taxable income on to their investors. The

type of income they earn is unchanged as it passes through to

the shareholders. For example, mutual fund distributions of

dividend income are reported as dividend income by the

investor. There is an exception: net losses incurred by a

mutual fund are not distributed or passed through to fund

investors.

Outside of the United States, mutual fund is used as a generic

term for various types of collective investment vehicles

available to the general public, such as unit trusts, open-

ended investment companies, unitized insurance

funds, Undertakings for Collective Investment in Transferable

Securities, and SICAVs.

35

Advantages of mutual funds

Mutual funds have advantages compared to direct investing in

individual securities. These include:

Increased diversification

Daily liquidity

Professional investment management

Ability to participate in investments that may be available

only to larger investors

Service and convenience

Government oversight

Ease of comparison

Disadvantages of mutual funds

Mutual funds have disadvantages as well, which include]:

Fees

Less control over timing of recognition of gains

Less predictable income

No opportunity to customize

36

History

The first mutual funds were established in Europe. One

researcher credits a Dutch merchant with creating the first

mutual fund in 1774. The first mutual fund outside the

Netherlands was the Foreign & Colonial Government Trust, which

was established in London in 1868. It is now the Foreign &

Colonial Investment Trust and trades on the London stock

exchange.

Mutual funds were introduced into the United States in the

1890s. They became popular during the 1920s. These early funds

were generally of the closed-end type with a fixed number of

shares which often traded at prices above the value of the

portfolio.

The first open-end mutual fund with redeemable shares was

established on March 21, 1924. This fund, the Massachusetts

Investors Trust, is now part of the MFS family of funds.

However, closed-end funds remained more popular than open-end

funds throughout the 1920s. By 1929, open-end funds accounted

for only 5% of the industry's $27 billion in total assets.

37

After the stock market crash of 1929, Congress passed a series

of acts regulating the securities markets in general and

mutual funds in particular. The Securities Act of

1933 requires that all investments sold to the public,

including mutual funds, be registered with the Securities and

Exchange Commission and that they provide prospective

investors with a prospectus that discloses essential facts

about the investment. The Securities and Exchange Act of

1934 requires that issuers of securities, including mutual

funds, report regularly to their investors; this act also

created the Securities and Exchange Commission, which is the

principal regulator of mutual funds. The Revenue Act of

1936 established guidelines for the taxation of mutual funds,

while the Investment Company Act of 1940 governs their

structure.

When confidence in the stock market returned in the 1950s, the

mutual fund industry began to grow again. By 1970, there were

approximately 360 funds with $48 billion in assets. The

introduction of money market funds in the high interest rate

environment of the late 1970s boosted industry growth

dramatically. The first retail index fund, First Index

38

Investment Trust, was formed in 1976 by The Vanguard Group,

headed by John Bogle; it is now called the Vanguard 500 Index

Fund and is one of the world's largest mutual funds, with more

than $100 billion in assets as of January 31, 2011.

Fund industry growth continued into the 1980s and 1990s, as a

result of three factors: a bull market for both stocks and

bonds, new product introductions (including tax-exempt bond,

sector, international and target date funds) and wider

distribution of fund shares. Among the new distribution

channels were retirement plans. Mutual funds are now the

preferred investment option in certain types of fast-growing

retirement plans, specifically in 401(k) and other defined

contribution plans and in individual retirement

accounts (IRAs), all of which surged in popularity in the

1980s. Total mutual fund assets fell in 2008 as a result of

the credit crisis of 2008.

In 2003, the mutual fund industry was involved in

a scandal involving unequal treatment of fund shareholders.

Some fund management companies allowed favored investors to

engage in late trading, which is illegal, or market timing,

which is a practice prohibited by fund policy. The scandal was

39

initially discovered by then-New York State Attorney

General Eliot Spitzer and resulted in significantly increased

regulation of the industry.

At the end of 2010, there were 7,581 mutual funds in the

United States with combined assets of $11.8 trillion,

according to the Investment Company Institute (ICI), a

national trade association of investment companies in the

United States. The ICI reports that worldwide mutual fund

assets were $24.7 trillion on the same date.

Leading mutual fund complexes

At the end of 2010, the top 10 mutual fund complexes in the

United States were:

1.Vanguard

2.Fidelity

3.American Funds (Capital Group)

4.PIMCO

5.JPMorgan Chase

6.Franklin Templeton

7.BlackRock

8.Federated

40

9.T. Rowe Price

10. BNY Mellon

Types of mutual funds

There are three basic types of registered investment companies

defined in the Investment Company Act of 1940: open-end funds,

unit investment trusts, and closed-end funds. Exchange-traded

funds are open-end funds or unit investment trusts that trade

on an exchange.

Open-end funds

Open-end mutual funds must be willing to buy back their shares

from their investors at the end of every business day at the

net asset value computed that day. Most open-end funds also

sell shares to the public every business day; these shares are

also priced at net asset value. A professional investment

manager oversees the portfolio, buying and selling securities

as appropriate. The total investment in the fund will vary

based on share purchases, share redemptions and fluctuation in

market valuation. There is no legal limit on the number of

shares that can be issued.

Closed-end funds

41

Closed-end funds generally issue shares to the public only

once, when they are created through an initial public

offering. Their shares are then listed for trading on a stock

exchange. Investors who no longer wish to invest in the fund

cannot sell their shares back to the fund (as they can with an

open-end fund). Instead, they must sell their shares to

another investor in the market; the price they receive may be

significantly different from net asset value. It may be at a

"premium" to net asset value (meaning that it is higher than

net asset value) or, more commonly, at a "discount" to net

asset value (meaning that it is lower than net asset value). A

professional investment manager oversees the portfolio, buying

and selling securities as appropriate.

Unit investment trusts

Unit investment trusts or UITs issue shares to the public only

once, when they are created. Investors can redeem shares

directly with the fund (as with an open-end fund) or they may

also be able to sell their shares in the market. Unit

investment trusts do not have a professional investment

manager. Their portfolio of securities is established at the

42

creation of the UIT and does not change. UITs generally have a

limited life span, established at creation.

Exchange-traded funds

Main article: Exchange-traded fund

A relatively recent innovation, the exchange-traded fund or

ETF is often structured as an open-end investment company,

though ETFs may also be structured as unit investment trusts,

partnerships, investments trust, grantor trusts or bonds (as

an exchange-traded note). ETFs combine characteristics of both

closed-end funds and open-end funds. Like closed-end funds,

ETFs are traded throughout the day on a stock exchange at a

price determined by the market. However, as with open-end

funds, investors normally receive a price that is close to net

asset value. To keep the market price close to net asset

value, ETFs issue and redeem large blocks of their shares with

institutional investors.

Most ETFs are index funds.

Investments and classification

Mutual funds may invest in many kinds of securities. The types

of securities that a particular fund may invest in are set

43

forth in the fund's prospectus, which describes the fund's

investment objective, investment approach and permitted

investments. The investment objective describes the type of

income that the fund seeks. For example, a "capital

appreciation" fund generally looks to earn most of its returns

from increases in the prices of the securities it holds,

rather than from dividend or interest income. The investment

approach describes the criteria that the fund manager uses to

select investments for the fund.

A mutual fund's investment portfolio is continually monitored

by the fund's portfolio manager or managers, who are employed

by the fund's manager or sponsor.

Mutual funds are classified by their principal investments.

The four largest categories of funds are money market funds,

bond or fixed income funds, stock or equity funds and hybrid

funds. Within these categories, funds may be subclassified by

investment objective, investment approach or specific focus.

The SEC requires that mutual fund names not be inconsistent

with a fund's investments. For example, the "ABC New Jersey

Tax-Exempt Bond Fund" would generally have to invest, under

normal circumstances, at least 80% of its assets in bonds that

44

are exempt from federal income tax, from the alternative

minimum tax and from taxes in the state of New Jersey.

Bond, stock and hybrid funds may be classified as either index

(passively-managed) funds or actively-managed funds.

Money market funds

Money market funds invest in money market instruments, which

are fixed income securities with a very short time to maturity

and high credit quality. Investors often use money market

funds as a substitute for bank savings accounts, though money

market funds are not government insured, unlike bank savings

accounts.

Money market funds strive to maintain a $1.00 per share net

asset value, meaning that investors earn interest income from

the fund but do not experience capital gains or losses. If a

fund fails to maintain that $1.00 per share because its

securities have declined in value, it is said to "break the

buck". Only two money market funds have ever broken the buck:

Community Banker's U.S. Government Money Market Fund in 1994

and the Reserve Primary Fund in 2008.

45

At the end of 2010, money market funds accounted for 24% of

the assets in all U.S. mutual funds.

Bond funds

Bond funds invest in fixed income securities. Bond funds can

be subclassified according to the specific types of bonds

owned (such as high-yield or junk bonds, investment-grade

corporate bonds, government bonds or municipal bonds) or by

the maturity of the bonds held (short-, intermediate- or long-

term). Bond funds may invest in primarily U.S. securities

(domestic or U.S. funds), in both U.S. and foreign securities

(global or world funds), or primarily foreign securities

(international funds).

At the end of 2010, bond funds accounted for 22% of the assets

in all U.S. mutual funds.

Stock or equity funds

Stock or equity funds invest in common stocks. Stock funds may

invest in primarily U.S. securities (domestic or U.S. funds),

in both U.S. and foreign securities (global or world funds),

or primarily foreign securities (international funds). They

may focus on a specific industry or sector.

46

A stock fund may be subclassified along two dimensions: (1)

market capitalization and (2) investment style (i.e., growth

vs. blend/core vs. value). The two dimensions are often

displayed in a grid known as a "style box."

Market capitalization or market cap is the value of a

company's stock and equals the number of shares outstanding

times the market price of the stock. Market capitalizations

are divided into the following categories:

Micro cap

Small cap

Mid cap

Large cap

While the specific definitions of each category vary with

market conditions, large cap stocks generally have market

capitalizations of at least $10 billion, small cap stocks have

market capitalizations below $2 billion, and micro cap stocks

have market capitalizations below $300 million. Funds are also

classified in these categories based on the market caps of the

stocks that it holds.

47

Stock funds are also subclassified according to their

investment style: growth, value or blend (or core). Growth

funds seek to invest in stocks of fast-growing companies.

Value funds seek to invest in stocks that appear cheaply

priced. Blend funds are not biased toward either growth or

value.

At the end of 2010, stock funds accounted for 48% of the

assets in all U.S. mutual funds.

Hybrid funds

Hybrid funds invest in both bonds and stocks or in convertible

securities. Balanced funds, asset allocation funds, target

date or target risk funds and lifecycle or lifestyle funds are

all types of hybrid funds.

Hybrid funds may be structured as funds of funds, meaning that

they invest by buying shares in other mutual funds that invest

in securities. Most fund of funds invest in affiliated funds

(meaning mutual funds managed by the same fund sponsor),

although some invest in unaffiliated funds (meaning those

managed by other fund sponsors) or in a combination of the

two.

48

At the end of 2010, hybrid funds accounted for 6% of the

assets in all U.S. mutual funds.

Index (passively-managed) versus actively-managed

Main articles: Index fund and active management

An index fund or passively-managed fund seeks to match the

performance of a market index, such as the S&P 500 index,

while an actively managed fund seeks to outperform a relevant

index through superior security selection.

Mutual fund expenses

Investors in mutual funds pay fees. These fall into four

categories: distribution charges (sales loads and 12b-1 fees),

the management fee, other fund expenses, shareholder

transaction fees and securities transaction fees. Some of

these expenses reduce the value of an investor's account;

others are paid by the fund and reduce net asset value.

Recurring expenses are included in a fund's expense ratio.

Distribution charges

Main article: Mutual fund fees and expenses

Distribution charges pay for marketing and distribution of the

fund's shares to investors.

49

Front-end load or sales charge

A front-end load or sales charge is a commission paid to

a broker by a mutual fund when shares are purchased. It is

expressed as a percentage of the total amount invested

(including the front-end load), known as the "public offering

price." The front-end load often declines as the amount

invested increases, through breakpoints. Front-end loads are

deducted from an investor's account and reduce the amount

invested.

Back-end load

Some funds have a back-end load, which is paid by the investor

when shares are redeemed depending on how long they are held.

The back-end loads may decline the longer the investor holds

shares. Back-end loads with this structure are called

contingent deferred sales charges (or CDSCs). Like front-end

loads, back-end loads are deducted from an investor's account.

12b-1 fees

A mutual fund may charge an annual fee, known as a 12b-1 fee,

for marketing and distribution services. This fee is computed

as a percentage of a fund's assets, subject to a maximum of 1%

of assets. The 12b-1 fee is included in the expense ratio.50

No-load funds

A no-load fund does not charge a front-end load under any

circumstances, does not charge a back-end load under any

circumstances and does not charge a 12b-1 fee greater than

0.25% of fund assets.

Share classes

A single mutual fund may give investors a choice of different

combinations of front-end loads, back-end loads and 12b-1

fees, by offering several different types of shares, known

as share classes. All of the shares classes invest in the same

portfolio of securities, but each has different expenses and,

therefore, a different net asset value and different

performance results. Some of these share classes may be

available only to certain types of investors.

Typical share classes for funds sold through brokers or other

intermediaries are:

Class A shares usually charge a front-end sales load

together with a small 12b-1 fee.

Class B shares don't have a front-end sales load. Instead

they, have a high contingent deferred sales charge, or CDSC

51

that declines gradually over several years, combined with a

high 12b-1 fee. Class B shares usually convert automatically

to Class A shares after they have been held for a certain

period.

Class C shares have a high 12b-1 fee and a modest contingent

deferred sales charge that is discontinued after one or two

years. Class C shares usually do not convert to another

class. They are often called "level load" shares.

Class I are subject to very high minimum investment

requirements and are, therefore, known as "institutional"

shares. They are no-load shares.

Class R are for use in retirement plans such as 401(k)

plans. They do not charge loads, but do charge a small 12b-1

fee.

No-load funds often have two classes of shares:

Class I shares do not charge a 12b-1 fee.

Class N shares charge a 12b-1 fee of no more than 0.25% of

fund assets.

Neither class of shares charges a front-end or back-end load.

Management fee

52

The management fee is paid to the fund manager or sponsor who

organizes the fund, provides the portfolio management or

investment advisory services and normally lends its brand name

to the fund. The fund manager may also provide other

administrative services. The management fee often has

breakpoints, which means that it declines as assets (in either

the specific fund or in the fund family as a whole) increase.

The management fee is paid by the fund and is included in the

expense ratio.

Other fund expenses

A mutual fund pays for other services including:

Board of directors' (or board of trustees') fees and

expenses

Custody fee: paid to a bank for holding the fund's portfolio

in safekeeping

Fund accounting fee: for computing the net asset value daily

Professional services fees: legal and accounting fees

Registration fees: when making filings with regulatory

agencies

53

Shareholder communications expenses: printing and mailing

required documents to shareholders

Transfer agent services fee: keeping shareholder records and

responding to customer inquiries

These expenses are included in the expense ratio.

Shareholder transaction fees

Shareholders may be required to pay fees for certain

transactions. For example, a fund may charge a flat fee for

maintaining an individual retirement account for an investor.

Some funds charge redemption fees when an investor sells fund

shares shortly after buying them (usually defined as within

30, 60 or 90 days of purchase); redemption fees are computed

as a percentage of the sale amount. Shareholder transaction

fees are not part of the expense ratio.

Securities transaction fees

A mutual fund pays any expenses related to buying or selling

the securities in its portfolio. These expenses may include

brokerage commissions. Securities transaction fees increase

the cost basis of the investments. They do not flow through

the income statement and are not included in the expense

54

ratio. The amount of securities transaction fees paid by a

fund is normally positively correlated with its trading volume

or "turnover".

Expense ratio

The expense ratio allows investors to compare expenses across

funds. The expense ratio equals the 12b-1 fee plus the

management fee plus the other fund expenses divided by average

net assets. The expense ratio is sometimes referred to as the

"total expense ratio" or TER.

Controversy

Critics of the fund industry argue that fund expenses are too

high. They believe that the market for mutual funds is not

competitive and that there are many hidden fees, so that it is

difficult for investors to reduce the fees that they pay.

Many researchers have suggested that the most effective way

for investors to raise the returns they earn from mutual funds

is to reduce the fees that they pay. They suggest that

investors look for no-load funds with low expense ratios.

Definitions

Definitions of key terms.

55

Net asset value or NAV

Main article: Net asset value

A fund's net asset value or NAV equals the current market

value of a fund's holdings minus the fund's liabilities

(sometimes referred to as "net assets"). It is usually

expressed as a per-share amount, computed by dividing by the

number of fund shares outstanding. Funds must compute their

net asset value every day the New York Stock Exchange is open.

Valuing the securities held in a fund's portfolio is often the

most difficult part of calculating net asset value. The fund's

board of directors (or board of trustees) oversees security

valuation.

Average annual total return

The SEC requires that mutual funds report the average annual

compounded rates of return for 1-year, 5-year and 10-year

periods using the following formula]

P(1+T)n = ERV

Where:

P = a hypothetical initial payment of $1,000.

T = average annual total return.

56

n = number of years.

ERV = ending redeemable value of a hypothetical

$1,000 payment made at the beginning of the 1-, 5-,

or 10-year periods at the end of the 1-, 5-, or 10-

year periods (or fractional portion).

Turnover

Turnover is a measure of the volume of a fund's

securities trading. It is expressed as a percentage

of net asset value and is normally annualized.

Turnover equals the lesser of a fund's purchases or

sales during a given period (of no more than a year)

divided by average net assets. If the period is less

than a year, the turnover figure is annualized.

MUTUAL FUNDS IN INDIA:

The first introduction of a mutual fund in India occurred in

1963, when the Government of India launched Unit Trust of

India (UTI). Until 1987, UTI enjoyed a monopoly in the Indian

mutual fund market. Then a host of other government-controlled

Indian financial companies came up with their own funds. These

57

included State Bank of India, Canara Bank, and Punjab National

Bank. This market was made open to private players in 1993, as

a result of the historic constitutional amendments brought

forward by the then Congress-led government under the existing

regime

of Liberalization, Privatizationand Globalization (LPG). The

first private sector fund to operate in India was Kothari

Pioneer, which later merged with Franklin Templeton.

Current Scenario

The major fund houses which have operated in India include:

Fortis

Birla Sunlife

Bank of Baroda

HDFC

ING Vysya

ICICI Prudential

SBI Mutual Fund

Tata

Kotak Mahindra

Unit Trust of India

Reliance

58

IDFC

Franklin Templeton

Sundaram Mutual Fund

Religare Mutual Fund

Principal Mutual Fund

Mutual funds are an under tapped market in India

Despite being available in the market for over two decades now

with assets under management equaling Rs 7,81,71,152 Lakhs (as

of 28 February 2010) (Source: Association of Mutual Funds,

India), less than 10% of Indian households have invested in

mutual funds. A recent report on Mutual Fund Investments in

India published by research and analytics firm, Boston

Analytics, suggests investorsare holding back from putting

their money into mutual funds due to their perceived high risk

and a lack of information on how mutual funds work. This

report is based on a survey of approximately 10,000

respondents in 15 Indian cities and towns as of March 2010.

There are 43 Mutual Funds recently.

The primary reason for not investing appears to be correlated

with city size. Among respondents with a high savings rate,

close to 40% of those who live in metros and Tier I cities

59

considered such investments to be very risky, whereas 33% of

those in Tier II cities said they did not how or where to

invest in such assets.

Reasons for not investing in mutual funds in India

On the other hand, among those who invested, close to nine out

of ten respondents did so because they felt these assets were

more professionally managed than other asset classes. Exhibit

2 lists some of the influencing factors for investing in

mutual funds. Interestingly, while non-investors cite “risk”

as one of the primary reasons they do not invest in mutual

funds, those who do invest consider that they are

“professionally managed” and “more diverse” most often as

their reasons to invest in mutual funds versus other

investments.

60

MUTUAL FUND MARKET TREND:

A lone UTI with just one scheme in 1964, now competes with as many as 400 odd

products and 34 players in the market. In spite of the stiff competition and

losing market share, UTI still remains a formidable force to reckon with.

Last six years have been the most turbulent as well as exiting ones for the

industry. New players have come in, while others have decided to close shop by

either selling off or merging with others. Product innovation is now passé

with thegame shifting to performance delivery in fund management as well as

service. Those directly associated with the fund management industry like

distributors, registrars and transfer agents, and even the regulators have

61

become more mature and responsible.

The industry is also having a profound impact on financial markets. While UTI

has always been a dominant player on the bourses as well as the debt markets,

the new generation of private funds which have gained substantial mass are now

seen flexing their muscles. Fund managers, by their selection criteria for

stocks have forced corporate governance on the industry. By rewarding honest

and transparent management with higher valuations, a system of risk-reward has

been created where the corporate sector is more transparent then before.

Funds have shifted their focus to the recession free sectors like

pharmaceuticals, FMCG and technology sector. Funds performances are improving.

Funds collection, which averaged at less than Rs.100bn per annum over five-year

period spanning 1993-98 doubled to Rs.210bn in 1998-99. In the current year

mobilization till now have exceeded Rs.300bn. Total collection for the current

financial year ending March 2000 is expected to reach Rs.450bn.

What is particularly noteworthy is that bulk of the mobilization has been by

the private sector mutual funds rather than public sector mutual funds. Indeed

private MFs saw a net inflow of Rs.7819.34 crore during the first nine months

of the year as against a net inflow of Rs.604.40 crore in the case of public

62

sector funds.

Mutual funds are now also competing with commercial banks in the race for

retail investor’s savings and corporate float money. The power shift towards

mutual funds has become obvious. The coming few years will show that the

traditional saving avenues are losing out in the current scenario. Many

investors are realizing that investments in savings accounts are as good as

locking up their deposits in a closet. The fund mobilization trend by mutual

funds in the current year indicates that money is going to mutual funds in a

big way. The collection in the first half of the financial year 1999-2000

matches the whole of 1998-99.

India is at the first stage of a revolution that has already peaked in the

U.S. The U.S. boasts of an Asset base that is much higher than its bank

deposits. In India, mutual   fund  assets are not even 10% of the bank deposits,

but this trend is beginning to change. Recent figures indicate that in the

first quarter of the current fiscal year mutual   fund   assets  went up by 115%

whereas bank deposits rose by only 17%. (Source: Thinktank, The Financial

Express September, 99) This is forcing a large number of banks to adopt the

concept of narrow banking wherein the deposits are kept in Gilts and some other

assets which improves liquidity and reduces risk. The basic fact lies that

63

banks cannot be ignored and they will not close down completely. Their role as

intermediaries cannot be ignored. It is just that Mutual Funds are going to

change the way banks do business in the future.

BANKS V/S MUTUAL FUNDS

  BANKS MUTUAL FUNDS

Returns Low Better

Administrative exp. High Low

Risk Low Moderate

Investment options Less More

Network High penetration Low but improving

Liquidity At a cost Better

Quality of assets Not transparent Transparent

Interest calculationMinimum balance between 10th.

& 30th. Of every monthEveryday

Guarantee Maximum Rs.1 lakh on deposits None

  

Finance

Accounts Investment in India - Functions

64

ATM - Automatic Teller Machine

Banks of India

Company Shares   / Debentures

Credit card - Costs

Credit Card - Glossary

Credit Card - Hard Facts

Credit Cards - Eligibility

Criteria

Credit Cards

Direct Investment with

Repatriation Benefits

Electronic Banking

Euro Issues by Indian Companies

Financial sector and Banking

Financial Sector Reforms in

India

Credit Card - Find the one that

suits your needs

Fixed Deposits

FIPB - Foreign Investment

Investment in Government

Securities

Investments by Non-Residents

  Mutual Funds - Frequently Asked

Questions

Regulatory Aspects Of Mutual

Fund

Benefits Of Investing In Mutual

Funds

Mutual Funds - Glossary

Mutual Funds - History

Types of Mutual Fund

Mutual Funds

Mutualfund - Market Trends

Mutualfunds - Global Scenario

Mutual Funds - Net Asset Value

(NAV)

NRI - FAQ

NRI Investments - Company

65

Promotion Board

IDBI - Industrial Development

Bank of India

Internet Banking

Investing in india

Investment by Foreign Companies

Investment in India - Approval

by FIPB

Investment in India -

Composition

Deposits

NRI Investments - Government

Securities/Units

Overdraft

Portfolio Investment Scheme

Portfolio Investment in

Shares/Debentures

Private Banking

R B I - Reserve Bank of India

Sale / Transfer of Shares /

Securities

Purchase of Shares and

Securities by Non-Residents

Transfer of Shares/Securities by

Non-Residents to Residents

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RANKING OF MUTUAL FUND:

Mutual funds have become a very common mode to enter into

financial market. Simpler way to enter the market but it can

go all wrong if an investor fails to select the right fund.

The big question is how to select the best mutual fund to

invest? An investor would probably go with the fund which is

the best ranked, one with a good NAV, having a good nav does

not mean the fund is good, it is one the criteria’s to rank a

mutual fund.

Ranking criteria’s:

Scores

Particular 5 4 3 2 1 Rules

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No of years 5 4 3 2 1

Higher is

better

Aum >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Expense Ratio <0.9x <1x <1.1x <1.2x >1.2x least

Single Company 4 5 6 7 least

Top 5 <20 <25 <30 <35 least

Top 10 <15 <17.5 <20 <22.5 least

Industry

Concentration <=1 2 3 4 least

Mean >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Standard Deviation <0.9x <1x <1.1x <1.2x >1.2x least

Beta >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Sharpe >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Jenson' Alpha >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Treynor Ratio >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Peer 3months >1.2x >1.1x >1x >0.9x <0.9x Higher is

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Annualized better

Peer 6 months

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Peer 1 years

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Peer 2 years

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Peer 3 years

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Benchmark 3 month

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Benchmark 6 month

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Benchmark 1 year

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Benchmark 2 years

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Benchmark 3 years

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Stock liquidity <0.9x <1x <1.1x <1.2x >1.2x least

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Weightage:

Note: ‘X’ is referred to the peer

group, it is nothing but the

average the peer group funds.

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Parameters

Weightag

e (%)

Basic 5

Company

concentration 7

Industry

concentration 8

Risk Analysis 15

Performance 60

Liquidity 5

Total 100

COMPANY

PROFILE:

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CANARA ROBECO:

Robeco is a Dutch asset management firm founded in 1929 as

the Rotterdamsch Beleggings Consortium (Rotterdam Investment

Consortium). By year end 2009, the company had over € 130

billion of assets under management.It was acquired in 2001 by

the Rabobank Groep.

Robeco offers assets management services to

both institutional and private investors. The funds for

private investors are available through Robeco itself and

other financial institutions, a number of these funds are also

listed on major European stock exchanges. Since 1981 the

company also offers savings accounts through its own savings

bank Roparco.

Canara Robeco Asset Management Company Limited (CRAMC), the

investment managers of Canara Robeco Mutual Fund, is a joint

venture between Canara Bank andRobeco of the Netherlands, a

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global asset management company that manages about US$180

Billion worldwide. The joint venture brings together Canara

Bank's experience in the Indian market and Robeco's global

experience in asset management.

Canara Robeco Mutual Fund is the oldest Mutual Fund in India,

established in December 1987 as Canbank Mutual Fund.

Subsequently, in 2007, Canara Bank partnered Robeco and the

mutual fund was renamed as Canara Robeco Mutual Fund. Since

then, it has consistently been one of the fastest growing

mutual funds in India in terms of AuM, having grown 94% year-

on-year from March 2009 to March 2010. Our solutions offer a

range of investment options, including diversified and

thematic equity schemes, hybrid and monthly income funds and a

wide range of debt and treasury products.

Canara Robeco AMC manages the assets of Canara Robeco Mutual

Fund by virtue of an investment management agreement dated

16th June 1993 (as amended from time to time). As of 31

December 2010, the AMC has Rs. 7,392 crores of average assets

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under management and has a diverse profile of investors

invested across 20 active schemes.

The current equity shareholding structure of the AMC is as

below:

Shareholder % of paid up equity capital

Canara Bank 51%

Robeco Group N.V. 49%

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DSP BLACKROCK:

DSP BlackRock Investment Managers is one of the premier asset

management companies in India. It is a joint venture between

the DSP Group and BlackRock. Currently the firm manages and

advises assets worth INR 41,484 cr (as on Jul 29, 2011).

The DSP Group, headed by Mr. Hemendra Kothari, is one of the

oldest financial services firms in India. It has a track

record of over 145 years and was one of the founding members

of the Bombay Stock Exchange.

BlackRock is the largest listed asset management company in

the world. It is a premier provider of investment solutions

through a variety of product structures, including individual

and institutional separate accounts, mutual funds and other

pooled investment vehicles, and the industry-leading iShares®

ETFs to investors around the world. Currently the firm manages

assets worth USD 3.66 trillion (as on Jun 30, 2011).

BlackRock is a truly global firm that combines the benefits of

worldwide reach with local service and relationships. It has a

deep presence in every major capital market in the world,

which results in greater insights into increasingly

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interconnected financial markets. Managing assets for

investors in North and South America, Europe, Asia, Australia,

the Middle East and Africa, the firm today employs more than

9,300 talented professionals and maintains offices in 26

countries around the world. BlackRock's investor base includes

corporate, public, union and industry pension plans;

governments; insurance companies; third-party mutual funds;

endowments; foundations; charities; corporations; official

institutions; sovereign wealth funds; banks; financial

professionals; and individuals worldwide.

Culture of Investment Excellence

BlackRock emphasizes a single, globally integrated research &

portfolio management team, relying on the judgement of

experienced portfolio managers that it employs in regional

investment centers around the world. The investment team in

India is well integrated globally and has access to

BlackRock's significant investment expertise, advanced

technology platforms and robust risk management practices to

leverage team resources and facilitate the sharing of ideas in

the best manner possible.

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DSP BlackRock Investment Managers has an experienced team of

investment professionals with expertise in domestic capital

markets and access to more than 700 investment professionals

worldwide. We continually add to our resources by recruiting

talented individuals and training them alongside our most

experienced investment professionals.

We believe that experienced investment professionals using a

disciplined investment process and sophisticated analytical

tools can consistently add value to investor portfolios. This

philosophy, combined with a strong investment culture –

focused on excellence and teamwork – enables us to navigate

different market conditions, take measured risks and optimize

investment opportunities.

Investment Capabilities - Fixed Income & Equities

BlackRock has long been known among investment industry

professionals for its fixed income expertise. It today offers

investors an array of fixed income products designed to meet a

variety of risk/return profiles. The equity investment

philosophy combines focused portfolio management, proprietary

research and significant firm–wide resources. BlackRock

manages a range of equity strategies targeting opportunities

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in specific market sectors that span the entire risk/return

spectrum.

DSP BlackRock Investment Managers is committed to providing a

broad set of investment solutions for our investors, while

striving to constantly achieve the best balance between risk

and opportunity. Investors in India enjoy the expertise of an

award winning investment team, which concentrates on rigorous

fundamental and quantitative active management approaches

aimed at maximizing outperformance. Our disciplined and well

researched approach to investing combined with robust risk-

management controls and processes has been recognised by

various reputed financial rating agencies such as Lipper,

CRISIL & ICRA. Access to BlackRock's investment capabilities

only strengthens this expertise further and offers us an

unparalleled investment perspective, both within India as well

as globally.

Global Perspective and Connectivity

BlackRock today has a major presence in most key markets

across the United States, Europe, Asia and Australia and has a

deep understanding of local markets around the world. One

measure of such scale and presence is that it conducts more

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than 5,000 company research visits across the world, annually.

DSP BlackRock Investment Managers is in a unique position to

gain from such extensive global market knowledge and research

capabilities. This means that our investors benefit from this

extensive global investment perspective that BlackRock's

worldwide presence delivers.

Robust Risk Management and Powerful Investment Technology

DSP BlackRock Investment Managers aims at investment

excellence within the framework of transparent but rigorous

risk controls. The team in India is well supported by

BlackRock's Risk and Quantitative Analysis Group, which is a

global team that supports investment managers across asset

classes, styles and markets. The group ensures that its

investment professionals have the most up-to-date information

available of the portfolios they manage, understand risk and

seize appropriate investment opportunities as they evolve.

The specialized risk management team at BlackRock leads the

endeavor to develop some of the most sophisticated and

powerful investment technologies available anywhere in the

world. They ensure the delivery and management of up-to-date

market knowledge in the hands of all BlackRock fund management

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teams across the world. DSP BlackRock's investment team has

the advantage of access to such robust risk management

practices and powerful technology expertise in managing our

various products.

Our Core Philosophy

The story of the DSP Group and BlackRock has always been one

of evolution. Since our formative years as distinct

organizations, we have always looked for ways to enhance our

ability to serve investors. Not only have we sought to broaden

and deepen our capabilities, but also capitalized on the key

macro trends that are shaping the future.

We at DSP BlackRock Investment Managers today have assembled a

team of investment professionals with significant expertise in

capital markets. Our investment approach is based on our

conviction that we can combine our market insights, our reach

and scale, our proprietary technology, our culture of

exchanging perspectives and our unwavering focus on risk

management, into an ability to deliver performance in all

market environments. Our focus on investment excellence and

state-of-the-art analytics is complemented by a strong

80

commitment to service; this results in dynamic investor

relationships across a wide range of products and services.

The foundation of our business lies in our belief that our

investors' needs are of paramount importance and that our sole

business is managing assets on their behalf. Our commitment to

investment excellence is anchored in a shared culture that

always places the interests of investors first, from

individuals to institutions. We believe in always acting as a

fiduciary for our investors and our steadfast integrity has

helped us earn their long-term trust.

There is a fine line between just wanting things to happen and

working towards making them happen. That line is called

opportunity. And we at DSP BlackRock Investment Managers

strive to look for it in everything that we do.

BIRLA SUN LIFE MUTUAL FUND:

Birla Sun Life Asset Management Company Ltd. (BSLAMC), the

investment managers of Birla Sun Life Mutual Fund, is a joint

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venture between the Aditya Birla Group and the Sun Life

Financial Services Inc. of Canada. The joint venture brings

together the Aditya Birla Group's experience in the Indian

market and Sun Life's global experience.

Established in 1994, Birla Sun Life Mutual fund has emerged as

one of India's leading flagships of Mutual Funds business

managing assets of a large investor base. Our solutions offer

a range of investment options, including diversified and

sector specific equity schemes, fund of fund schemes, hybrid

and monthly income funds, a wide range of debt and treasury

products and offshore funds.

Birla Sun Life Asset Management Company has one of the largest

team of research analysts in the industry, dedicated to

tracking down the best companies to invest in. BSLAMC strives

to provide transparent, ethical and research-based investments

and wealth management services.

Heritage 

The Aditya Birla Group

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The Aditya Birla Group is one of India's largest business

houses. Global in vision, rooted in Indian values, the Group

is driven by a performance ethic pegged on value creation for

its multiple stakeholders.

The Group operates in 26 countries – India, UK, Germany,

Hungary, Brazil, Italy, France, Luxembourg, Switzerland,

Australia, USA, Canada, Egypt, China, Thailand, Laos,

Indonesia, Philippines, UAE, Singapore, Myanmar, Bangladesh,

Vietnam, Malaysia, Bahrain and Korea.

A US $29 billion corporation in the League of Fortune 500, the

Aditya Birla Group is anchored by an extraordinary work force

of 130,000 employees, belonging to 40 different nationalities.

Over 60 per cent of its revenues flow from its operations

across the world.

The Aditya Birla Group is a dominant player in all its areas

of operations viz; Aluminium, Copper, Cement, Viscose Staple

Fibre, Carbon Black, Viscose Filament Yarn, Fertilisers,

Insulators, Sponge Iron, Chemicals, Branded Apparels,

Insurance, Mutual Funds, Software and Telecom. The Group has

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strategic joint ventures with global majors such as Sun Life

(Canada), AT&T (USA), the Tata Group and NGK Insulators

(Japan), and has ventured into the BPO sector with the

acquisition of TransWorks, a leading ITES/BPO company.

Sun Life Financial

Sun Life Financial Inc is a leading international financial

services organization providing a diverse range of wealth

accumulation and protection products and services to

individuals and corporate customers. Chartered in 1865, Sun

Life Financial Inc and its partners today have operations in

key markets worldwide, including Canada, the United States,

the United Kingdom, Hong Kong, the Philippines, Japan,

Indonesia, India, China and Bermuda.

SBI MUTUAL FUND:

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With over 24 years of rich experience in fund management, we

at SBI Funds Management Pvt. Ltd. bring forward our expertise

by consistently delivering value to our investors. We have a

strong and proud lineage that traces back to the State Bank of

India (SBI) - India's largest bank. We are a Joint Venture

between SBI and AMUNDI (France), one of the world's leading

fund management companies.

With our network of over 222 points of acceptance across

India, we deliver value and nurture the trust of our vast and

varied family of investors.

Excellence has no substitute. And to ensure excellence right

from the first stage of product development to the post-

investment stage, we are ably guided by our philosophy of

‘growth through innovation’ and our stable investment

policies. This dedication is what helps our customers achieve

their financial objectives.

Our Vision

“To be the most preferred and the largest fund house for all

asset classes, with a consistent track record of excellent

returns and best standards in customer service, product

innovation, technology and HR practices.”

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Our Services

Mutual Funds

Investors are our priority. Our mission has been to establish

Mutual Funds as a viable investment option to the masses in

the country. Working towards it, we developed innovative,

need-specific products and educated the investors about the

added benefits of investing in capital markets via Mutual

Funds.

Today, we have been actively managing our investor's assets

not only through our investment expertise in domestic mutual

funds, but also offshore funds and portfolio management

advisory services for institutional investors.

This makes us one of the largest investment management firms

in India, managing investment mandates of over 4.5 million

investors.

Portfolio Management and Advisory Services

SBI Funds Management has emerged as one of the largest player

in India advising various financial institutions, pension

funds, and local and international asset management companies.

We have excelled by understanding our investor's requirements

and terms of risk / return expectations, based on which we

86

suggest customized asset portfolio recommendations. We also

provide an integrated end-to-end customized asset management

solution for institutions in terms of advisory service,

discretionary and non-discretionary portfolio management

services.

Offshore Funds

SBI Funds Management has been successfully managing and

advising India's dedicated offshore funds since 1988. SBI

Funds Management was the 1st bank sponsored asset management

company fund to launch an offshore fund called 'SBI Resurgent

India Opportunities Fund' with an objective to provide our

investors with opportunities for long-term growth in capital,

through well-researched investments in a diversified basket of

stocks of Indian Companies.

LITERATURE REVIEW:

How Morningstar Ratings for mutual funds are used as

a marketing tool

87

Review: Mutual fund families use ratings as a very useful

instrument for promoting and market their funds. Mutual fund

families only promote those funds which have either 4 or 5

star rating and funds with 3 stars or less than 3 are

completely ignored.

It is easier to promote mutual funds with 4 or 5 star rating

because every investor wants to invest in a fund which has

high rates as compare to other because they find such funds

safe and secure, even if they don’t have returns.

Mutual funds offer fund summary sheets known variously as

“fact sheets,” “sales flyers,” “performance or commentary

sheets,” etc. that are available for downloading from their

websites. If you inspect them, you will notice a common, if

not standard, practice relating to Morningstar Ratings. The

star rating for a fund will be featured prominently at the top

the summary sheet, but only if it has a four- or five-star

rating. These flyers tend to be used by commissioned sales

agents or financial “advisors” to induce their clients to

purchase funds.

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Instead, they treat the stars as a convenient marketing tool

that exploits investor beliefs about performance prediction.

Do mutual fund Morningstar Ratings changes influence

individual investors?

Summary: An analysis of the flow of investments into and out

of mutual funds demonstrated a direct relationship between

Morningstar Rating changes and investor reactions. Morningstar

ratings upgrades resulted in positive abnormal mutual fund

investment inflows, and downgrades caused lower than

normal inflows or increased outflows. The dollar effects of ratings

involving 4 and 5 stars we the strongest.

In a 2004 article, William Reichenstein cited a study by

Financial Research Corporation.1 He said, “in 1999 funds with

four or five stars took in $233.6 billion, while lower rated

funds had outflows of $132 billion.”2 Do the stars really have

such a direct impact on investor behavior, or is this just a

coincidence?

While Morningstar3 itself largely avoids making performance

prediction claims about its Morningstar Rating* system, there

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is significant evidence that investors believe that the stars

have predictive powers and they buy accordingly. (See: What

does Morningstar, Inc. say its mutual fund stars can do?

and What does Morningstar, Inc. say its mutual fund stars

cannot do?)

In “Star Power: The Effect of Morningstar Ratings on Mutual

Fund Flows,” Professor Diane Del Guercio of the University of

Oregon and Ms. Paula Tkac of the Federal Reserve Bank of

Atlanta studied investor behavior, when the Morningstar

Ratings of mutual funds changed.4 Through an analysis of the

flow of investments into and out of mutual funds, they

demonstrated a direct relationship between star rating changes

and investor reactions. 

Their approach was to study “events,” which were defined as

either 1) first publication of an initial star rating for a

fund with three years of returns or 2) changes in the overall

star rating of a fund that had previously received a star

rating. By focusing on change events and by measuring

subsequent mutual fund investment flows and performance, Del

Guercio and Tkac developed insights about investor behavior

90

and linked these behaviors directly to changes in

Morningstar’s star ratings.

For the period November 1996 to October 1999, Del Guercio and

Tkac analyzed 1,637 initial star rating events and 10,735

changes in star ratings. The data indicated that about 10% of

funds experience a star rating upgrade or downgrade each

month. Del Guercio and Tkac analyzed the impact of these

events on the flow of funds into or out of these mutual funds.

They compared this post-event investment flow with a baseline

of investment flows before the event. By using this method,

they associated ratings change events with “abnormal” changes

in investment flows above or below baseline cash flows in or

out of funds.

Del Guercio and Tkac found different investor behaviors.

Apparently, some investors actively monitored star rating

changes and invested additional money or took money out of

mutual funds very quickly in response to star rating changes.

Morningstar reported that their website traffic picked up

significantly around the beginning of the month, when rating

changes were announced.

91

Other investors took longer to react – probably because they

learned of rating events though other channels. For example,

it takes up to several months for mutual funds to revise their

advertising in publications to include new star rating

information. Del Guercio and Tkac found that “of the 37

domestic equity ads that report a star rating (in June 1999),

only 10% use the most recent rating (as of May 1999), while

32% use a one-month old rating and 54% use a two-month old

rating.”5 Additionally, it can take financial advisors several

months to react to ratings changes and to induce their clients

to make purchases. For advisors, 4 and 5 star funds seem to be

much easier to sell than lower star rated funds.

Del Guercio and Tkac suggested that trustees of defined

contribution retirement plans, such as 401(k)s, might also

affect abnormal fund flows, because they are more likely to

choose funds with higher, particularly 5 star, ratings.

Trustees seem to use star ratings as a naïve means to fulfill

their fiduciary duties to choose the “best” investment

vehicles. For example, John Hancock Funds EVP, Keith

Hartstein, said, “(Morningstar) ratings are a significant part

of marketing. I can’t tell you the number of times we as an

92

industry sit in front of people picking managers for their

401(k) plan and hear them start the conversation saying,

“We’re only selecting four- and five-star funds”.”6 

Del Guercio and Tkac found that an initial or new 5 star

rating very significantly affected investment flows. On

average, such funds experienced a $26 million abnormal

increase in investment flows over seven months or about 53%

above normal. More mature funds that experienced an upgrade to

a 4 to a 5 star rating experienced on average a $44 million

increase in investment, which represented a 35% abnormal

increase.

Del Guercio and Tkac said, “in contrast, a downgrade from 5 to

4 stars has a much smaller impact of only -$8 million in

abnormal flow, suggesting that flow response to a downgrade

from 5 star status is not symmetric to an upgrade to 5 stars.

Unlike a downgrade from 5 to 4 stars, we do find a large and

significant response to a downgrade from 4 to 3 stars,

suggesting that investors punish funds whose performance falls

below a 4 star rating.”7

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Concerning other star ratings changes, Del Guercio and Tkac

determined that for up-grades and downgrades of ratings that

were below 4 stars, the results were also significant. In

general, Morningstar ratings upgrades resulted in positive

abnormal mutual fund investment inflows, and downgrades caused

lower than normal flows. However, the dollar effects of lower

star ratings changes were not as strong as ratings changes

involving 4 and 5 stars.

Del Guercio and Tkac provided very convincing evidence that

Morningstar rating initiations and changes directly and

significantly affect investor behaviors.

Do these investor responses to changes in the star ratings

have a positive, negative, or neutral impact on investors’

financial welfare? To understand how investors who decide to

trade on Morningstar Ratings changes are likely to make

out, see this related article, Does it pay to trade when the

Morningstar Rating of a mutual fund changes?

What might be wrong with buying a mutual fund with a

4 or 5 star Morningstar Rating?

94

Summary: The star ratings are oversimplified. Many investors

and their advisors use the stars as their primary decision

criterion and as shorthand for fund selection. Alternate, more

sophisticated approaches are available, which are more likely

to lead to optimal returns.

Scientific investment studies do not demonstrate that higher

Morningstar Ratings* of mutual funds lead to higher returns.

In general, scientific studies on the performance of mutual

funds indicate that superior past performance is simply not an

indicator of future performance. So, what is wrong with an

investor chosing a fund, because it happens to have a 4 or 5

star rating? Perhaps nothing, unless the illusion that a 4 or

5 star rating predicts superior future performance will cause

him to buy a mutual fund that has, in fact, a greater

likelihood of under-performing in the future.

Here are some of the potential problems with blindly buying 4

and 5 star funds:

If an investor pays a higher management fee for a fund,

because it had a 4 or 5 star rating, then on average this

higher management fee is more likely to drag down future

95

performanceIf an investor pays a front- or back-end load

and/or incurs 12b-1 sales charges for a fund, because it had

a 4 or 5 star rating, then on average these sales fees are

more likely to drag down future performance. If an investor

buys into a high turnover fund with excess trading expenses

and higher market impact, because it had a 4 or 5 star

rating, then on average these higher transaction costs are

more likely to drag down future performance

If an investor buys into a fund with higher accrued capital

gains, because it had a 4 or 5 star-rated fund, then on

average these accrued taxes are more likely to drag down the

investor’s net returns.

In addition, the 4 and 5 star superior performance illusion

might cause investors to:

focus on gross returns rather than net returns

churn their portfolio, as they hop from one fund to another

as ratings fall

believe that active strategies were better and worth paying

more for

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In summary, the star ratings are oversimplified. Many

investors and their advisors use the stars as their primary

decision criterion and as shorthand for fund selection.

Alternate, more sophisticated approaches are available, which

are more likely to lead to optimal returns.

One of Morningstar’s primary stated themes about its star

rating system is that retail investors require simplification

and ease-of-use in their investment indicators. The Skilled

Investor is sympathetic with this desire for simplification on

the part of individual investors.

However, The Skilled Investor believes that it is incumbent upon

those who simplify the complex subject of investing for

individual investors, to be clear on the limitations of the

simplification methods that are used. This is especially true

when there is evidence that many investors are naive and

either are not knowledgeable enough or have limited

opportunities or time to perform deeper investment due

diligence. When the underlying methods of simplification used

to generate and easy-to-use investment indicators are

97

different from other methods that are scientifically grounded,

then there is a need to provide greater clarity.

Individual investors could benefit from a better understanding

of the likely information value of Morningstar’s stars as an

investment indicator. If investors simply think that mutual

funds with more stars are simply better, which many apparently

do, then their attempts to invest rationally could be

distorted. Investors could make decisions that they believe

are sensible, when in fact their beliefs may fall far short of

reality.

On the one hand, Morningstar cautions investors on the value

of their stars, while on the other hand the stars are very

heavily promoted by the industry – in effect as a seal of

approval. (See: “How Morningstar Ratings are used as a

marketing tool”) Morningstar’s five star rating system has

become a widely recognized brand within the retail financial

services industry. Just as Americans have fallen in love with

The Walt Disney Company’s Mickey Mouse brand, many individual

investors appear to have fallen in love with Morningstar’s

stars.

98

Morningstar allows brokers, investment advisers, mutual funds,

websites, and others to feature the star ratings prominently.

If you search for the information on Morningstar.com, you will

find that Morningstar offers many caveats about the utility of

its star ratings

It is unlikely that these caveats are being repeated

frequently by Morningstar’s business partners. Instead, there

seems to be a clear pattern of promoting funds when they

happen to have a 4 or 5 star rating, while neglecting to

feature the Morningstar Rating information prominently or at

all, when the rating is 3 or fewer stars. While brokers and

investment advisers heavily promote 4 and 5 star funds, one

wonders how many really take the time to explain to their

clients the same caveats that Morningstar offers on its

website

Furthermore, in 2002 the Morningstar Ratings underwent a very

significant change in how they are derived. The visible star

symbols remained the same, but the meaning was altered. One

wonders what portion of retail investors really understood the

investment implications of the star system before the change

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was made and how many understand the system now. Do they

understand that the “personality” of the stars was altered in

2002, while the look stayed the same?

Do Morningstar Ratings predict risk-adjusted equity

mutual fund performance?

Summary: Morningstar Ratings have demonstrated some modest

predictive information about performance. However, most

individual investors will probably be very surprised about

what kind of predictive information the stars provide. The

stars have been a mild predictor of inferior performance.

However, investors act as if the stars predict superior future

performance, yet they may contain no such information.

Some individual investors seem to use Morningstar Ratings* as

a shorthand selector of superior future mutual fund

performance.1 Mutual funds with 4 and 5 star ratings have

garnered the vast majority of new fund investment money

Furthermore, mutual fund companies promote higher star rated

funds heavily, but not lower star rated funds. In fact, often

the only performance information that many mutual funds supply

100

in their advertising are 4 or 5 star Morningstar Ratings. In

their study, “Morningstar Ratings and Mutual Fund

Performance,” Professor Christopher Blake of Fordham

University and Professor Matthew Morey of Pace University

analyzed the predictive powers of the Morningstar Ratings.2 In

line with other scientific finance studies of mutual fund

performance, Professors Blake and Morey found that mutual

funds with low star ratings – particularly 1 star funds – were

more likely to continue their below average performance in the

future.

However, in the mid- and higher-ranges of fund performance,

there was little statistical evidence of any real differences

in future performance between funds with 5, 4, and 3 star

ratings. Funds rated 3, 4, and 5 stars account for 67.5% or

about 2/3 of all funds. Differences in future performance

between them were trivial.

Professors Blake and Morey used Morningstar’s data for 1992 to

1997 and focused most of their analysis on “seasoned” domestic

equity funds that had at least 10 years of return information

101

for the study period. They also used all star rated funds in

1993 for certain comparisons.

Professors Blake and Morey were careful to ensure that they

included all mutual funds in their analysis. They tracked down

and determined what had happened to any fund that had gone out

of business or was merged into another fund, during the study

period. By doing this, they ensured that the data did not

suffer from “survivorship bias.” Survivorship bias can

significantly distort the conclusions of investment return

studies, if it is not accounted for properly.

They also made appropriate load adjustments to returns, since

Morningstar makes adjustments that allow it to combine loaded

and no-load funds, when it calculates the star ratings. About

half of the funds in the 1993 sample had front-end loads. Note

that sales loads tend to lead to suboptimal fund performance.

Professors Blake and Morey compared the predictive abilities

of the star ratings with four performance predictors that are

commonly used in the scientific investment literature. These

alternate predictors were:

102

average monthly historical returns, which they termed a

“naive predictor”

the Sharpe Ratio

the Jensen single index alpha

a four-index alpha, which was composed of a) the market, b) a

bond index, c) small versus large capitalization, and d)

growth versus value.

For the 1992 to 1997 “seasoned” domestic equity funds sample,

Professors Blake and Morey used several different statistical

tests and concluded that the future performance of 3, 4, and 5

star rated funds did not differ significantly. If anything,

they found that funds with 5 star ratings might slightly

under-perform 3 and 4 star rated funds going forward.

Professors Blake and Morey found that there was some evidence

that funds with a 1 star rating and perhaps a 2 star rating

had a slightly greater tendency to under-perform in the

future.

When the predictive abilities of the Morningstar star ratings

were compared with the alternate predictors using the 1992 to

1997 “seasoned” domestic equity funds sample, in general the

103

stars were similar in predictive ability to all to the other

predictors. All predictors – Morningstar star ratings and the

alternates – were very weak in predicting future high

performing funds, but all predictors had some ability to

predict future low performing funds. Professors Blake and

Morey said, “all predictors with the notable exception of the

Sharpe ratio, have problems in predicting high-performing

funds.”

Professors Blake and Morey concluded that: “First, Morningstar

is able to “predict” low-performing funds. Funds with less

than three stars generally have much worse future performance

than other groups. ... Second, there is only weak statistical

evidence that the five star funds outperform the four- and

three-star funds. ... Third, the Morningstar ratings, at best,

do only slightly better than alternative predictors in

foretelling future fund performance.”3

Professors Blake and Morey noted further that: “Our first two

results are broadly consistent with much of the mutual fund

performance persistence literature: while it is relatively

easy to predict poor performance, it is much more difficult to

104

predict superior performance. Our results also suggest that

investors should be very cautious about associating a highly

rated fund with superior future performance. Although previous

studies have shown that highly rated funds attract the bulk of

investor cash inflows, our results suggest that those cash

inflows are not necessarily justified by subsequent

performance.”4

Finally, you should note that in 2002 Morningstar changed some

aspects of how it defined its stars. In particular, it moved

from 4 to 48 fund categories. Therefore, the “new” stars are

defined across narrower groups of funds. Morningstar also

changed its risk adjustment assumptions to be more similar to

those used in investment science.

 In 2004, Morningstar published an article on performance

prediction related to the new stars. While the new stars

appear to have gained some performance predictability about

better performing funds, in its analysis Morningstar did not

control of the effects of fund fees and costs. If the new

stars simply act as a proxy for fund costs, then investors

should instead screen funds directly based on costs and not

105

the stars, which are subject to wide random fluctuations

related to lucky securities selection.

How stable have Morningstar Ratings for mutual funds

been over time?

Summary: Morningstar Ratings have been quite unstable over

time.  If an investor buys a 4- or 5-star rated fund and

expects it to stay that way, he is likely to be surprised.

In “The Persistence of Morningstar Ratings,” Mark Warshawsky,

Mary DiCarlantonio, and Lisa Mullin of the TIAA-CREF

Institute1 looked at Morningstar Ratings* to understand star

rating persistence.2 They found that Morningstar Ratings

changed frequently.

Individual investors might find the conclusions of Warshawsky,

et al. to be unexpected. This is particularly true for any

investor who wants to select a “superior” performing mutual

fund to hold for the long-term. Warshawsky, et al. noted that

individual investors increasingly have used mutual funds for

long-term investing purposes. They quoted Federal Reserve

Board data from 1998 indicating that more than 60% of net new

106

household asset investments went toward purchasing mutual

funds.

Warshawsky, et al. analyzed the stability of Morningstar

Ratings for equity and fixed income mutual funds and variable

annuities. Table 1 below summarizes selected data from this

study on the persistence of 4- and 5-star rated mutual funds

over one-year and two-year periods.

Table 1   Percentage of Mutual Funds Initially Rated 4 or 5

Stars by Morningstar that were Still Rated 4- or 5-Stars at

the End of 1 and 2 Year Periods

1999 1998-1999

All 4 and 5 Star Rated Mutual Funds 55% 32%

4 and 5 Star Rated Funds with 3-Year Ratings 23% Less than 1%

4 and 5 Star Rated Funds with 5-Year Ratings 54% 30%

4 and 5 Star Rated Funds with 10-Year Ratings 64% 37%

Across all mutual funds, half of the funds that initially had

a 4- or 5-star rating at the beginning of a year no longer had

a 4- or 5-star rating at the end of that year, and two-thirds

107

had fallen out after only two years. While there were

variations between the different years studied, both equity

and fixed income funds demonstrated low persistence in their

star ratings.

Among younger funds with 3-year ratings, the decline was more

striking. Only 23% to 31% of funds with 3-year Morningstar

Ratings still had their 4 or 5 star ratings, after one year

had elapsed. Even more incredible, after the two-year period

from January 1998 to December 1999, less that 1% still held

their 4 or 5 star ratings! Out of the 796 three-year rated

funds with 4 or 5 stars at the beginning of 1998, only 3 of

them were still rated 4 or 5 stars at the end of 1999! This

tendency for many apparently superior star ratings to fall

precipitously, should give investors concern when deciding

whether to pay attention to the stars.

To have between 2/3 and 3/4 of highly rated funds with 3 years

of data to drop out of the 4-star and 5-star rating range

after just one year, means that their most recent year’s

performance was inferior to other funds in their peer group.

Previously “mediocre” funds would then have become supposedly

108

“superior” 4- and 5-star rated funds. This ratings instability

might not inspire confidence in an investor looking for a fund

to hold for the long-term.

More mature funds with 5-year and 10-year ratings were

somewhat better able to hold on to their 4 and 5 star ratings

than younger funds, but the fallout rate was still

significant. For example, over the two-year period from 1998

to 1999, the percentage funds with 10-year ratings that

managed to hold on to their 4- and 5-star ratings was only

37%. This apparently higher stability provides little comfort

to individual investors.

The primary reason why older funds seem more stable is that

the Morningstar Rating system includes older data that can

mask higher variability in the more recent performance of a

fund. The same factors causing ratings instability that was

discussed above for 3-year ratings are at play with longer

term ratings. Longer periods of historical data just dampen

recent volatility, but the volatility is still there

Concerning variable annuities, Warshawsky, et al. presented

less comprehensive data, but the pattern of decline was

109

similar and even slightly more pronounced. For example, the

data indicated that the percent of all variable annuities that

held on to their 4 or 5 star rating after one year was 41%

during 1998 and 47% during 1999. This compared to 49% and 55%,

respectively, for all mutual funds.

Warshawsky, et al. concluded by stating: “for those many

investors to whom the overall Morningstar rating is useful

information in deciding which mutual funds and variable

annuities to include in their investment portfolios, the

persistence of a high rating should matter a great deal. The

results of this study indicate that persistence is hardly

assured and is somewhat variable across years and investment

categories.”

The scientific investment literature has long indicated that

apparently superior historical fund performance is not a

predictor of future performance. In fact, thousands of mutual

funds and variable annuities with many trillions of dollars in

assets compete to produce superior results. This competition

ensures that the securities markets will be more efficient and

110

thus be harder to “beat.” The bottom line is that superior

past performance is largely a matter of luck and not skill.

RESEARCH DESIGN AND METHODOLOGY:

111

RESEARCH DESIGN AND METHODOLOGY:

Title of the study:

“RANKING OF THE MUTUAL FUND”

Scope: The scope of the study is to find out the best mutual

fund in the market through ranking.

112

OBJECTIVES OF THE STUDY:

The main objective of the study is to find out the

various factors which contribute toward the ranking of

the mutual fund.

To study the various ranking factors

To rank the mutual funds on the given data using the

ranking factors

LIMITATION OF THE STUDY:

Limited study because only 4 funds are being ranked.

Neglecting the qualitative aspect like management of the

fund, AMC etc.

113

DATA

ANALYSIS

114

1.CANARA ROBECO:

Name of the Fund: CANARA ROBECO EMERGING

EQUITIES

Particulars Data

No. of years 6.1260274

AUM 36.81

Expense

Ratio 2.5

Call/Cash 0

Single

Company 0

Top 5 21.88

top 10 39.18

Industry

Concentratio

n 0

Mean 0.2652

115

SD 0.672

Beta 0.4208

Sharpe ratio 0.3702

Jenson's

Alpha 0.0806

Treynor

ratio 0.5911

3 Months

Actualized -7.1879

6 Months

Actualized -8.0766

1 Year

Annualized 12.5382

2 Years

Annualized 69.5582

3 Years

Annualized 9.0209

Stock

Liquidity 1463.39593

116

2.DSP BLACKROCK:

Name of the Fund: DSP BLACKROCK MICRO CAP

FUND

Particulars Data

No. of years 3.865753

AUM 438.4206

Expense

Ratio 2.29

Call/Cash 0.914

Single

Company 1

top 5 22.5749

top 10 37.7941

Industry

Concentratio

n 0

Mean 0.2811

SD 0.9036

Beta 0.637

Sharpe ratio 0.2929

117

Jenson's

Alpha 0.0216

Treynor

ratio 0.4155

3 Months

Actualized -13.8829

6 Months

Actualized -16.8255

1 Year

Annualized 9.2991

2 Years

Annualized 73.9032

3 Years

Annualized --

Stock

Liquidity 1463.396

118

3. BIRLA SUN

LIFE:

Name of the

fund: BIRLA

SUN LIFE MID CAP

FUND

119

Particulars Data

No. of years 8.564384

AUM 2003.173

Expense

Ratio 1.91

Call/Cash 1.7365

Single

Company 0

top 5 15.6539

top 10 28.4743

Industry

Concentratio

n 0

Mean 0.3898

SD 0.9514

Beta 0.6685

Sharpe ratio 0.3924

Jenson's

Alpha 0.1062

Treynor

ratio 0.5586

3 Months

Actualized -11.214

6 Months

Actualized -11.9111

1 Year

Annualized -1.0509

4.SBI MUTUAL FUND:

Name of the fund: SBI MAGNAM MIDCAP FUND

120

121

Particulars Data

No. of years 6.076712

AUM 255.8052

Expense

Ratio 2.35

Call/Cash 6.8

Single

Company 5

top 5 35.17

top 10 54.38

Industry

Concentratio

n 0

Mean 0.3028

SD 0.8583

Beta 0.5641

Sharpe ratio 0.3337

Jenson's

Alpha 0.061

Treynor

ratio 0.5077

3 Months

Actualized -12.8144

6 Months

Actualized -14.0834

1 Year

Annualized 0.5062

COMPARATIVE ANALYSIS AND RANKING OF MUTUAL FUND:

Combined Average- Benchmark for ranking

BASIC ANALYSIS:

Criteria

Particular 5 4 3 2 1 Rules

No of years 5 4 3 2 1

Higher is

better

Aum >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Expense Ratio <0.9x <1x <1.1x <1.2x >1.2x least

Single Company 4 5 6 7 least

Top 5 <20 <25 <30 <35 least

Top 10 <15 <17.5 <20 <22.5 least

Industry

Concentration <=1 2 3 4 least

Analysis:

122

Particulars

Canar

a Dsp Birla SBI AVERAGE

No. of

years

6.126

027

3.865

753

8.564

384

6.076

712

6.15821

9

AUM 36.81

438.4

206

2003.

173

255.8

052

683.552

1

Expense

Ratio 2.5 2.29 1.91 2.35 2.2625

Call/Cash 0 0.914

1.736

5 6.8

2.36262

5

Single

Company 0 1 0 5 1.5

top 5 21.88

22.57

49

15.65

39 35.17 23.8197

top 10 39.18

37.79

41

28.47

43 54.38 39.9571

Industry

Concentrati

on 0 0 0 0 0

123

Note: This is the basic about every mutual fund analysis which

an investor should do before going in for investing. One

should know how old a fund is? How many assets are under its

control and what are its expenses while investing into the

market? Concentration also plays a vital role while analysing

a fund. Concentration here means how many companies and

industries are these funds investing in. Lower is considered

to be better.

Ranks according to basic analysis:

PARTICULAR

S

CANAR

A

ROBEC

O

DSP

BLACKROC

K

BIRLA

SUNLI

FE SBI

No. of

years 5 3 5 5

AUM 1 1 1 1

Expense

Ratio 2 2 5 3

Call/Cash        

Single 5 5 5 1

124

Company

top 5 4 4 5 1

top 10 1 1 1 1

Industry

Concentrat

ion 5 5 5 5

RISK ANALYSIS:

Criteria:

Particular 5 4 3 2 1 Rules

Mean >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Standard

Deviation <0.9x <1x <1.1x <1.2x >1.2x least

Beta >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Sharpe >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Jenson'

Alpha >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

125

Treynor

Ratio >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Analysis:

Particul

ars

Canar

a Dsp

Birl

a SBI AVERAGE

Mean

0.265

2

0.28

11

0.38

98

0.30

28 0.309725

Std Dev 0.672

0.90

36

0.95

14

0.85

83 0.846325

Beta

0.420

8

0.63

7

0.66

85

0.56

41 0.5726

Sharpe 0.370 0.29 0.39 0.33 0.3473

126

ratio 2 29 24 37

Jenson's

Alpha

0.080

6

0.02

16

0.10

62

0.06

1 0.06735

Treynor

ratio

0.591

1

0.41

55

0.55

86

0.50

77 0.518225

Ranks:

PARTICULAR

S

CANARA

ROBECO

DSP

BLACKROCK

BIRLA

SUNLIFE SBI

Mean 1 2 5 2

Std Dev 5 3 2 3

Beta 1 4 4 2

Sharpe

ratio 3 1 4 2

Jenson's

Alpha 4 1 5 2

Treynor

ratio 4 1 3 2

127

KEY NOTES/TERMS:

Mean: It is the average of the values given.

Standard deviation: Standard deviation is a widely used

measure of variability or diversity used

in statistics and probability theory. It shows how much

variation or "dispersion" exists from the average (mean,

or expected value). A low standard deviation indicates

that the data points tend to be very close to the mean,

whereas high standard deviation indicates that the data

points are spread out over a large range of values.

Beta:  the Beta (β) of a stock or portfolio is a number

describing the relation of its returns with those of

the financial market as a whole. An asset has a Beta of

zero if its returns change independently of changes in

the market's returns. A positive beta means that the

asset's returns generally follow the market's returns, in

the sense that they both tend to be above their

respective averages together, or both tend to be below

their respective averages together. A negative beta means

that the asset's returns generally move opposite the

128

market's returns: one will tend to be above its average

when the other is below its average

Formula:

where ra measures the rate of return of the asset, rp measures

the rate of return of the portfolio, and cov(ra,rp) is

the covariance between the rates of return. The portfolio of

interest in the CAPM formulation is the market portfolio that

contains all risky assets, and so the rp terms in the formula

are replaced by rm, the rate of return of the market.

Sharpe ratio: The Sharpe ratio or Sharpe index or Sharpe

measure or reward-to-variability ratio is a measure of

the excess return (or risk premium) per unit of deviation

in an investment asset or a trading strategy, typically

referred to as risk (and is a deviation risk measure),

named after William Forsyth Sharpe. Since its revision by

the original author in 1994, it is defined as:

where R is the asset return, Rf is the return on a benchmark

asset, such as the risk free rate of return, E[R − Rf] is

129

the expected value of the excess of the asset return over

the benchmark return, andσ is the standard deviation of the

excess of the asset return. (This is often confused with the

excess return over the benchmark return; the Sharpe ratio

utilizes the asset standard deviation whereas theinformation

ratio utilizes standard deviation of excess return over the

benchmark, i.e. the tracking error, as the denominator.)

Note, if Rf is a constant risk free return throughout the

period,

Jenson’s Alpha: Jensen's alpha [1] (or Jensen's

Performance Index, ex-post alpha) is used to determine

the abnormal return of a security or portfolio of

securities over the theoretical expected return. Jensen's

alpha = Portfolio Return [Risk Free Rate + Portfolio Beta * (Market−

Return Risk Free Rate)]−

Treynor ratio: The Treynor ratio (sometimes called

the reward-to-volatility ratio or Treynor measure[1]),

named after Jack L. Treynor,[2] is a measurement of the

returns earned in excess of that which could have been130

earned on an investment that has no diversifiable risk

(e.g., Treasury Bills or a completely diversified

portfolio), per each unit of market risk

assumed.

where:

 Treynor ratio,

 portfolio i's return,

 risk free rate

 portfolio   i' s beta

131

RETURN AND LIQUIDITY ANALYSIS:

Criteria:

Particular 5 4 3 2 1 Rules

Peer 3months

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Peer 6 months

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Peer 1 years

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Peer 2 years

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Peer 3 years

Annualized >1.2x >1.1x >1x >0.9x <0.9x

Higher is

better

Stock liquidity <0.9x <1x <1.1x <1.2x >1.2x least

132

Analysis:

Particular

s

Canar

a Dsp Birla SBI AVERAGE

3 Months

Actualized

-

7.187

9

-

13.88

29

-

11.21

4

-

12.81

44

-

11.2748

6 Months

Actualized

-

8.076

6

-

16.82

55

-

11.91

11

-

14.08

34

-

12.7242

1 Year

Annualized

12.53

82

9.299

1

-

1.050

9

0.506

2 5.32315

2 Years

Annualized

69.55

82

73.90

32

56.11

71

48.45

32

62.0079

3

3 Years

Annualized

9.020

9 --

9.798

8

-

3.574

5

5.08173

3

Stock

Liquidity

1463.

396

1463.

396

1463.

396

1463.

396

1463.39

6

133

NOTE: Return and liquidity analysis will help us to know about

the returns these funds would give after various time

intervals that are 3 month, 6months, 1yr, 3 years etc. The

better conclusion could be driven only after a certain period

of time that is at least a year so that the fund is completely

used to the market fluctuation and variations.

Stock liquidity means in how much time the fund manager would

return back the money to its investors. The more is the lock

in period than it is better for the funds to perform, the

reason for it is that more money would be available to the

fund manager for investment otherwise if there is more

liquidity than the manager would have less money to invest.

Ranks:

PARTICULARS

CANARA

ROBECO

DSP

BLACKROCK

BIRLA

SUNLIFE SBI

3 Months

Actualized 5 1 4 3

6 Months

Actualized 5 1 4 2

134

1 Year

Annualized 5 5 1 1

2 Years

Annualized 4 4 2 1

3 Years

Annualized 5 1 5 1

Stock

Liquidity 3 3 3 3

INDIVIDUAL ANALYSIS OF THE FUNDS:

CANARA ROBECCO

Basic analysis

Particulars Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X) RANK

No. of years

6.12602

74

6.158219

178 5yr 4yr 3yr 2yr 5

AUM 36.81

683.5521

25

820.26

26

751.90

73

683.55

21

615.19

69 1

135

Expense

Ratio 2.5 2.2625 2.715

2.4887

5 2.2625

2.0362

5 2

Single

Company 0 1.5 1.8 1.65 1.5 1.35 5

top 5 21.88 23.8197 <20 <25 <30 <35 4

top 10 39.18 39.9571 <15 <17.5 <20 <22.5 1

Industry

Concentratio

n 0 0 0 0 0 0 5

Risk analysis

Particu

lars Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X) RANK

Mean

0.26

52

0.30972

5

0.37

167

0.340

698

0.309

725

0.278

753 1

Std Dev

0.67

2

0.84632

5

1.01

559

0.930

958

0.846

325

0.761

693 5

Beta

0.42

08 0.5726

0.68

712

0.629

86

0.572

6

0.515

34 1

136

Sharpe

ratio

0.37

02 0.3473

0.41

676

0.382

03

0.347

3

0.312

57 3

Jenson'

s Alpha

0.08

06 0.06735

0.08

082

0.074

085

0.067

35

0.060

615 4

Treynor

ratio

0.59

11

0.51822

5

0.62

187

0.570

048

0.518

225

0.466

403 4

Return and liquidity analysis:

Particular

s Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X) RANK

3 Months

Actualized

-

7.187

9

-

11.2748

-

13.52

98

-

12.40

23

-

11.27

48

-

10.14

73 5

6 Months

Actualized

-

8.076

6

-

12.7242

-

15.26

9

-

13.99

66

-

12.72

42

-

11.45

17 5

1 Year

Annualized

12.53

82 5.32315

6.387

78

5.855

465

5.323

15

4.790

835 5

2 Years

Annualized

69.55

82

62.0079

3

74.40

951

68.20

872

62.00

793

55.80

713 4

3 Years

Annualized

9.020

9

5.08173

3

6.098

08

5.589

907

5.081

733

4.573

56 5

Stock 1463. 1463.39 1756. 1609. 1463. 1317. 3137

Liquidity 396 6 075 736 396 056

CONCLUSION: ANALYSIS OF CANARA ROBECO EMERGING EQUITY FUNDS:

RANK- 2

Canara Robeco is a very stable and good fund to invest in. It

standard deviation is less which means that this fund is not

of fluctuating nature. It remains stable and composed, another

reason for investing in this fund is the return which this

fund gives at the end of different intervals. The biggest

issue with this fund is that is their beta ratio. This means

that it can react opposite to the market trend, for example if

there is a bearish trend in the market, this fund can still

give an investor a good return but in case of bullish trend,

it might fail to beat the benchmark.

Overall a ‘Above average’ fund.

Suggestion- ‘Buy’

DSP BLACKROCK MICRO CAP:

Basic analysis:

138

Particular

s Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X)

RANK

S

No. of

years

3.865

753

6.15821

9 5yr 4yr 3yr 2yr 3

AUM

438.4

206

683.552

1

820.2

626

751.9

073

683.5

521

615.1

969 1

Expense

Ratio 2.29 2.2625 2.715

2.488

75

2.262

5

2.036

25 2

Single

Company 1 1.5 1.8 1.65 1.5 1.35 5

top 5

22.57

49 23.8197 <20 <25 <30 <35 4

top 10

37.79

41 39.9571 <15 <17.5 <20 <22.5 1

Industry

Concentrat

ion 0 0 0 0 0 0 5

Risk analysis:

Particu

lars Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X) RANKS

Mean 0.28 0.3473 0.41 0.382 0.347 0.312 2

139

11 676 03 3 57

Std Dev

0.90

36 0.06735

0.08

082

0.074

085

0.067

35

0.060

615 3

Beta

0.63

7

0.51822

5

0.62

187

0.570

048

0.518

225

0.466

403 4

Sharpe

ratio

0.29

29

-

11.2748

-

13.5

298

-

12.40

23

-

11.27

48

-

10.14

73 1

Jenson'

s Alpha

0.02

16

-

12.7242

-

15.2

69

-

13.99

66

-

12.72

42

-

11.45

17 1

Treynor

ratio

0.41

55 5.32315

6.38

778

5.855

465

5.323

15

4.790

835 1

Return and liquidity analysis:

Particular

s Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X)

RANK

S

3 Months

Actualized

-

13.88

0.3473 0.41 0.382 0.347 0.312 1

140

29 676 03 3 57

6 Months

Actualized

-

16.82

55 0.06735

0.08

082

0.074

085

0.067

35

0.060

615 1

1 Year

Annualized

9.299

1

0.51822

5

0.62

187

0.570

048

0.518

225

0.466

403 5

2 Years

Annualized

73.90

32

-

11.2748

-

13.5

298

-

12.40

23

-

11.27

48

-

10.14

73 4

3 Years

Annualized --

-

12.7242

-

15.2

69

-

13.99

66

-

12.72

42

-

11.45

17 1

Stock

Liquidity

1463.

396 5.32315

6.38

778

5.855

465

5.323

15

4.790

835 3

CONCLUSION: ANALYSIS OF DSP BLACKROCK MICRO CAP FUND:

RANK- 3

DSP BLACKROCK is a good company which has given good returns

to their investors, but their micro cap fund is fails to reach

its standards. The biggest draw back with this fund is the

risk analysis, Micro cap fund is risky in nature which make

141

this fund vulnerable. On the positive side of this fund

reasonably good return for medium term but on will slow down

in long run. Another positive part from this fund is their

parent company which is one of the finest mutual fund company.

Overall a’ below average fund’.

Suggestion- ‘Don’t buy’

BIRLA SUNLIFE

Basic analysis:

Particular

s Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X)

RANK

S

No. of

years

8.564

384

6.15821

9 5yr 4yr 3yr 2yr 5

AUM

2003.

173

683.552

1

820.2

626

751.9

073

683.5

521

615.1

969 1

Expense

Ratio 1.91 2.2625 2.715

2.488

75

2.262

5

2.036

25 5

Single

Company 0 1.5 1.8 1.65 1.5 1.35 5

top 5 15.65 23.8197 <20 <25 <30 <35 5

142

39

top 10

28.47

43 39.9571 <15 <17.5 <20 <22.5 1

Industry

Concentrat

ion 0 0 0 0 0 0 5

Risk analysis:

Particu

lars Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X) RANKS

Mean

0.38

98 0.3473

0.41

676

0.382

03

0.347

3

0.312

57 5

Std Dev

0.95

14 0.06735

0.08

082

0.074

085

0.067

35

0.060

615 2

Beta

0.66

85

0.51822

5

0.62

187

0.570

048

0.518

225

0.466

403 4

Sharpe

ratio

0.39

24

-

11.2748

-

13.5

298

-

12.40

23

-

11.27

48

-

10.14

73 4

Jenson'

s Alpha

0.10

62

-

12.7242

-

15.2

69

-

13.99

66

-

12.72

42

-

11.45

17 5

Treynor 0.55 5.32315 6.38 5.855 5.323 4.790 3143

ratio 86 778 465 15 835

Return and liquidity analysis:

Particular

s Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X)

RANK

S

3 Months

Actualized

-

11.21

4 0.3473

0.41

676

0.382

03

0.347

3

0.312

57 4

6 Months

Actualized

-

11.91

11 0.06735

0.08

082

0.074

085

0.067

35

0.060

615 4

1 Year

Annualized

-

1.050

9

0.51822

5

0.62

187

0.570

048

0.518

225

0.466

403 1

2 Years

Annualized

56.11

71

-

11.2748

-

13.5

298

-

12.40

23

-

11.27

48

-

10.14

73 2

3 Years

Annualized

9.798

8

-

12.7242

-

15.2

69

-

13.99

66

-

12.72

42

-

11.45

17 5

Stock 1463. 5.32315 6.38 5.855 5.323 4.790 3

144

Liquidity 396 778 465 15 835

CONCLUSION: ANALYSIS OF BIRLA SUNLIFE FUND:

RANK-1

This is one of the finest fund, investor should look forward

to invest in the fund, the strongest aspect of this mutual

fund is its risk analysis. All it ratios are close to perfect,

this ,makes this fund stable and favourable but an investor

should note that its return in the first year is not great,

but keeping long term prospect in mind great fund to go for.

Overall a ‘ Very good fund’

Suggestion- ‘Buy’

SBI MAGNAM MID CAP FUND:

Basic analysis:

Particular

s Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X)

RANK

S

No. of

years

6.076

712

6.15821

9 5yr 4yr 3yr 2yr 5

AUM 255.8 683.552 820.2 751.9 683.5 615.1 1

145

052 1 626 073 521 969

Expense

Ratio 2.35 2.2625 2.715

2.488

75

2.262

5

2.036

25 3

Single

Company 5 1.5 1.8 1.65 1.5 1.35 1

top 5 35.17 23.8197 <20 <25 <30 <35 1

top 10 54.38 39.9571 <15 <17.5 <20 <22.5 1

Industry

Concentrat

ion 0 0 0 0 0 0 5

Risk analysis:

Particu

lars Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X) RANKS

Mean

0.30

28 0.5726

0.68

712

0.629

86

0.572

6

0.515

34 2

Std Dev

0.85

83 0.3473

0.41

676

0.382

03

0.347

3

0.312

57 3

Beta

0.56

41 0.06735

0.08

082

0.074

085

0.067

35

0.060

615 2

Sharpe

ratio

0.33

37

0.51822

5

0.62

187

0.570

048

0.518

225

0.466

403 2

Jenson' 0.06 - - - - - 2

146

s Alpha 1 11.2748

13.5

298

12.40

23

11.27

48

10.14

73

Treynor

ratio

0.50

77

-

12.7242

-

15.2

69

-

13.99

66

-

12.72

42

-

11.45

17 2

Return and liquidity analysis:

Particular

s Data

AVERAGE

(X)

1.2

(X)

1.1

(X) 1 (X)

0.9

(X)

RANK

S

3 Months

Actualized

-

12.81

44 0.5726

0.68

712

0.629

86

0.572

6

0.515

34 3

6 Months

Actualized

-

14.08

34 0.3473

0.41

676

0.382

03

0.347

3

0.312

57 2

1 Year

Annualized

0.506

2 0.06735

0.08

082

0.074

085

0.067

35

0.060

615 1

147

2 Years

Annualized

48.45

32

0.51822

5

0.62

187

0.570

048

0.518

225

0.466

403 1

3 Years

Annualized

-

3.574

5

-

11.2748

-

13.5

298

-

12.40

23

-

11.27

48

-

10.14

73 1

Stock

Liquidity

1463.

396

-

12.7242

-

15.2

69

-

13.99

66

-

12.72

42

-

11.45

17 3

CONCLUSION: ANALYSIS OF SBI MAGNAM MIDCAP FUND:

RANK-5

Very week fund, this biggest drawback of this fund is that it

return, this fund has failed to give good return as compare to

other funds, whereas they have pretty week risk handling

148

capacity. This fund is risky because it is dependent on single

companies, this means that if company does well than is fine

but in case of failure the unit prices will collapse.

Overall a ‘Bad’ fund

Suggestion- ‘Ignore it’

149

CONCLUSION AND RECOMMONDATION

150

To conclude Mutual funds are subject to market risk and all

the document should be read carefully before investing into

it. But an individual can reduce this risk if he does a

thorough study on the mutual fund and look into their rating

and it would be even better if he self ranks it. By doing this

he will know how powerful the fund is?

My recommendation would be to do a detail study about the fund

and understand the basics of the fund. An investor should do a

complete research with regards to fund, study the market trend

and on the basis of the analysis done the appropriate

investment should be done.

151