A Project on Portfolio

Management in
Mutual Fund

In partial fulfillment of the requirement of two years full time

Masters of Business Administration (MBA) Programme (2009-2011)
Of Chetana’s Institute of Management & Research, Mumbai

SUBMITTED BY

ASHISH SOMANI
PDGM-C
ROLL N O . :54

UNDER THE GUIDANCE OF

PROF . LAXMI NAIDU
 DECLARATION

I, hereby, declare that the Project titled “Portfolio Management in Mutual Funds” is original
to best to my knowledge & has not published elsewhere. This is for the purpose of partial
fulfillment of Chetana’s Institute of Management & Research requirement for the award of
the degree of Master of Business Administration.

ASHISH SOMANI

Date:
 PREFACE

Investing money where the risk is less has always been risky to decide. The first factor, which an
investor would like to see before investing, is risk factor. Diversification of risk gave birth to the
phenomenon called Mutual Fund.

I am preparing comprehensive report of Mutual Fund industry in India. The basic idea of
assignment of this project is to augment our knowledge about the industry in its totality and
appreciate the use of an integrated loom. It is concerned the environmental issues and
tribulations. This makes us more conscious about Industry and its pose and makes us capable of
analyzing Industry’s position in the competitive market. This may also enhance our logical
abilities.

The Mutual Fund Industry is in the growing stage in India, which is evident from the flood of
mutual funds offered by the Banks, Financial Institutes & Private Financial Companies.

There are various aspects, which have been studied in detail in the project and have been added
to this project report.

Hope this report would help one understand the mutual Industry of India in detail.
 ACKNOWLEDGEMENT

I am indebted to a multitude of persons who have provided me with valuable help during our
endeavor of research. The project would not have seen the illumination of the day without the
efforts of the many who managed the show in the wings. I am thankful to all people who have
put in great efforts and gave me guidance for the successful completion of the project.

I am indeed grateful to MR. ASHISH SETHIYA(TRAINING MANAGER ,PRAMERICA) for

providing me the guidance, advice, constructive suggestions and faith in my ability inspired to
perform well who gave me a valuable opportunity of involving our self in studying this project.

I am also grateful to Ms. LAXMI NAIDU (PROJECT GUIDE,CHETANA’S INSTITUTE OF

MANAGEMENT & RESEARCH ) for providing me the guidance and suggestions wherever
needed to fulfilling this project.

Preparing a project of this nature is an arduous task and I am fortunate enough to get support
from a large number of people to whom we shall always remain grateful.

Finally, I thank all those who directly and indirectly contributed to this project.

ASHISH SOMANI

TABLE OF CONTENTS
1. ABSTRACT…………………………………………………………………………………………………1

2. ABOUT THE COMPANY………………………………………………………………………………….2

3. INTRODUCTION………………………………………………………………………………………….5

4. OBJECTIVE OF THE PROJECT…………………………………………………………………………..6

5. RESEARCH METHODOLOGY……………………………………………………...................................8

6. INDIAN MUTUAL FUND INDUSTRY…………………………………………………………………..9

7. HISTORY OF MUTUAL FUND…………………………………………………………………………..12

8. WORKING OF MUTUAL FUND…………………………………………………………………………16

9. ADVANTAGES OF INVESTING IN MUTUAL FUND………………………………………………….17

10. FEATURES OF MF’S IN TERMS OF PORTFOLIO MANAGEMENT………………………………….19

11. DISADVANTAGES OF INVESTING IN MUTUAL FUND……………………………………………...19

12. TYPES OF MUTUAL FUND

SCHEMES………………………………………………………………….20

13. PERFORMANCE MEASURES OF MUTUAL FUND……………………………....................................25

14. RISK FACTORS……………………………………………………………………………………………30

15. TYPES OF RISK……………………………………………………………………………………………31

16. MEASURING RISKS………………………………………………………………………………………33

17. WEALTH
MANAGEMENT………………………………………………………………………………..34

18. PORTFOLIO MANAGEMENT……………………………………………………………………………35

19. PROCESS OF PORTFOLIO MANAGEMENT……………………………………………………………43

20. WHAT DRIVES PORTFOLIO PERFORMANCE………………………………………………………...47

21. DIFFERENT PORTFOLIO…………………………………………………………………………………49

22. DIFFERENT AMC’S IN INDIA……………………………………………………………………………

53

23. FUND ANALYSIS PARAMETERS……………………………………………………………………….54

 24. CONCLUSION……………………………………………………………………………………………...5
5

25. WEBOGRAPHY……………………………………………………………………………………………56

26. BIBLIOGRAPHY…………………………………………………………………………………………..56

ABSTRACT

The rise in the level of capital market has manifested the importance Mutual Funds as investment
medium. Mutual Funds are now are becoming a preferred investment destination for the
investors as fund houses offer not only the expertise in managing funds but also a host of other
services.

Over the last five year period from Mar’03 to Mar’08, the money invested by FIIs was
Rs.2,09,213cr into the stock market as compared to Rs.38,964cr by mutual funds, yet MFs
collectively made an annualized return of 34% while it was 30% in case of FIIs.

Total Assets Under Management (AUM) in India as of today is $92b. Volatile markets and year
end accounting considerations have shaved 6% off in March, but much of that money should
flow back in April. The next five years will see the Indian Asset Management business grow at
least 33% annually says a study by McKinsey.

Funds in the diversified equity category which has the largest number of funds(194) as well as
the highest investor interest lost an average of 28.3% in Q4,2007-08 but gained an average of
21.4% over the four quarters. Equity funds are estimated to have had net inflows of Rs.7000cr
for March 2008.More than 80% of equity funds managed to outperform Sensex in terms of
returns over the last five years.

Investor’s money inflow to mutual funds has sidelined for the time being but the overall long
term fundamental outlook on the economy remains intact. To lower the impact of volatility one
can stay invested in diversified equity funds over a longer period of time through the route of
Systematic Investment Plan.
 ABOUT THE COMPANY

Pramerica Financial is a brand name used by Prudential Financial Inc. of the United States and
its affiliates in select countries outside of the United States.*

Pramerica Financial is one of the largest financial services institutions in the U.S., serving
millions of individual and institutional clients in the United States and approximately 30
countries. With over a century of experience, Pramerica Financial is uniquely suited to help
clients both grow and protect their wealth. Pramerica Financial offers a variety of products and
services and administration, asset management, securities brokerage, banking and trust services,
real estate brokerage franchises and relocation services.

The strength of Pramerica Financial is built on a foundation of integrity and a commitment to the
highest ethical standards. Known for its distinctive Rock logo, Pramerica Financial is recognized
by millions as a symbol of financial strength, quality and trust in helping our clients achieve
financial security.

 CONSTRUCTION OF PRAMERICA MUTUAL FUND

Pramerica Mutual Fund has been constituted as a trust under Indian Trusts Act, 1882, with
Prudential Financial, Inc. (PFI) as the sponsor and Pramerica Trustees Private Limited as the
trustee. The Trust Deed has been registered under the Indian Registration Act, 1908. Pramerica
Mutual Fund has been registered with Securities and Exchange Board of India (SEBI) on May
13, 2010 under Registration Code MF/065/10/02.
 SPONSOR OF PRAMERICA MUTUAL FUND

PFI, a company incorporated and with its principal place of business in the United States of
America (U.S.A.) is the sponsor of Pramerica Mutual Fund and has entrusted a sum of
Rs.1,00,000/- (Rupees One Lakh only) to the Trustee as the initial contribution towards the
corpus of Pramerica Mutual Fund.

PFI is represented by directors on the Board of the Trustee Company and the Asset Management
Company in accordance with the SEBI Regulations and shall be responsible for discharging its
functions and responsibilities towards Pramerica Mutual Fund in accordance with SEBI (Mutual
Funds) Regulations, 1996, and the various constitutive documents of Pramerica Mutual Fund.

PFI and its affiliated companies constitute one of the world’s leading financial services groups
with approximately $693 billion (USD) of assets under management as of March 31, 2010 and
with over 41,000 employees worldwide. PFI is headquartered in Newark, NJ (U.S.A.) and has
more than 134 years of financial services experience with operations in the U.S., Asia, Europe,
and Latin America. PFI is focused on helping individual and institutional customers grow and
protect their wealth and offers a variety of products and services, including life insurance,
annuities, retirement-related services, mutual funds, investment management, and real estate
services. The firm is ranked 2nd on Fortune Magazine’s 2010 List of World’s Most Admired
Companies in the Insurance: Life and Health Category,65th on the 2010 Fortune 500 List of
America’s Largest Corporations and 298th on the 2009 Fortune Global 500 List of the World’s
Largest Corporations. Pramerica is a trade name used by PFI and its affiliated companies in
select countries outside the U.S.A.

SIGNIFICANT MARKET STRENGTH

 ASSET MANAGEMENT INSURANCE
10th largest manager of U.S. institutional, tax- Over $2.97 trillion total life insurance in force
exempt, assets worldwide
12th largest manager of worldwide institutional More than 2,400 Agents in the U.S. and over
assets under management 13,000 Life Planners outside the U.S.,
including Gibraltar Life Advisors.
14th largest manager of worldwide assets 2nd largest life insurer in the United States
(life and group combined) based on total
admitted assets
6th largest individual life insurer in the United
States based on statutory net written premiums
2nd on Fortune Magazine’s 2010 List of
World’s Most Admired Companies in the
Insurance: Life and Health Category

Unless otherwise noted, all figures as of 31 December2009 (in USD).

(1) Source: Pensions & Investments survey of top asset managers, 31 May 2010, based on U.S.
institutional, tax-exempt assets under management as of 31 December 2009
(2) Source: Pensions & Investments survey of top asset managers, 31 May 2010, based on worldwide
institutional assets under management as of 31 December 2009
(3) As of 31 December 2009.
(4) Source: A.M. Best, as of 31 December 2008.

INTRODUCTION
Mutual funds have been a significant source of investment in both government and corporate
securities. It has been for decades the monopoly of the state with UTI being the key player, with
invested funds exceeding Rs.300 bn. (US$ 10 bn.). The state-owned insurance companies also
hold a portfolio of stocks. Presently, numerous mutual funds exist, including private and foreign
companies. Banks - mainly state-owned too have established Mutual Funds (MFs). Foreign
participation in mutual funds and asset management companies is permitted on a case by case
basis.

A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal. The money thus collected is then invested in capital market instruments such as
shares, debentures and other securities. The income earned through these investments and the
capital appreciations realized are shared by its unit holders in proportion to the number of units
owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed basket of securities at a
relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Fig.(a) : Working of Mutual Fund

OBJECTIVE OF THE PROJECT

The objectives of the study on this topic are as follows:

Primary objectives:

• To study the influence and role of mutual funds in managing a portfolio.

 • To analyze the various risk-return characteristics of Mutual funds and attempt to establish
a link between the demographics (age, income, employment status etc), risk tolerance of
investors.

• To analyze the performance of Top Mutual Funds in India.

Secondary objectives:

• Understanding the various characteristics of different Mutual funds.

• Understanding the Investment pattern of AMC’s

• To come up with recommendations for investors and mutual fund companies in India
based on the above study.

PURPOSE OF THE PROJECT

Investment in mutual funds gives you exposure to equity and debt markets. These funds are
marketed as a safe haven or as smart investment vehicles for novice investors.

The middle-class Indian investor who plays hot tips for a quick buck at the bourses is the stuff of
legends. The middle-class Indian investor who runs out of luck and loses not only his money but
his peace of mind too is somewhat less famous by choice. Mutual funds, on the other hand, sell
us middling miracles. Consequently proof enough for a research on Mutual Funds, which has
exacting returns.

Every investor requires a healthy return on his/her investments. But since the market is very
volatile and due to lack of expertise they may fail to do so. So a study of these mutual funds will
help one to equip with unwarranted knowledge about the elements that help trade between risk
and return thereby improving effectiveness. A meticulous study on the scalability at which the
mutual funds operate along with diagnosis of the market conditions would endure managing the
investment portfolio efficiently. The study would also immunize on risks and foresee healthy
returns; incidentally in worst of conditions it has given a return of 18 per cent.

SCOPE OF THE PROJECT

The project covers the financial instruments mobilizing in the Indian Capital market in particular
the Mutual Funds.

The mutual funds analysed for their performance are determined over a period of 5 years
fluctuations and returns. The elements taken into consideration for choosing some of the top
funds is on the basis of their respective sharpe , beta, ratio, .

The project shelves some of the top asset management companies operating in India , segregated
on the basis of their performance over a period of time. Scooping further the project inundates
the success ratio of the funds administered by top AMC’s.
RESEARCH METHODOLOGY

A thorough study of literature on the mutual fund industry both in India and abroad will be done.
Different measures will be adopted to understand and evaluate the risks and returns of funds
efficiently and effectively.

An extensive study of various articles and publications of SEBI, AMFI and government of India
and other agencies with respect to the demographics of the population of the country and their
investing pattern will be a part of the methodology adopted. The project will be carried out
mainly through two researches:

Primary research:
• Field visits
• Meeting with the clients

Secondary research:
• Internet.
• AMFI book.
• Fact sheets of various mutual fund houses.

LIMITATIONS

• It is based on Secondary Data

• Time Constraint

• Lack of resources
 INDIAN MUTUAL FUND INDUSTRY

The Indian mutual fund industry has evolved from a single player monopoly in 1964 to a fast
growing, competitive market on the back of a strong regulatory framework.

 AUM GROWTH

The Assets under Management (AUM) have grown at a rapid pace over the past few years, at a
CAGR of 35percent for the five-year period from 31 March 2005 to 31 March 20091. Over the
10-year period from 1999 to 2009 encompassing varied economic cycles, the industry grew at 22
percent CAGR2. This growth was despite two falls in the AUM - the first being after the year
2001 due to the dotcom bubble burst, and the second in 2008 consequent to the global economic
crisis (the first fall in AUM in March 2003 arising from the UTI split).

(Average AUM in INR billion)

Note: As of 31 March for each year

Source: AMFI data

 AUM BASE AND GROWTH RELATIVE TO THE GLOBAL INDUSTRY

India has been amongst the fastest growing markets for mutual funds since 2004; in the five-
year period from 2004 to 2008 (as of December) the Indian mutual fund industry grew at 29
percent CAGR as against the global average of 4 percent3. Over this period, the mutual fund
industry in mature markets like the US and France grew at 4 percent, while some of the
emerging Fig.(b) : Growth in AUM in Mutual Fund Industry
markets viz. China and Brazil exceeded the growth witnessed in the Indian market.

However, despite clocking growth rates that are amongst the highest in the world, the Indian
mutual fund industry continues to be a very small market; comprising 0.32 percent share of the
global AUM of USD 18.97 trillion as of December 2008.

Fig.(c) : AUM Growth Rate

Source: ICI Factbook 2009, AMFI data

Note: Based on AUM as of 31 December

 AUM TO GDP RATIO

The ratio of AUM to India’s GDP, gradually increased from 6 percent in 2005 to 11 percent in
2009. Despite this however, this continues to be significantly lower than the ratio in developed
countries, where the AUM accounts for 20-70 percent of the GDP5.

Fig.(d) : AUM to GDP Ratio

Source: AMFI data, CSO
Note: Based on AUM as of 31 December of each year

 SHARE OF MUTUAL FUNDS IN HOUSEHOLD FINANCIAL SAVINGS

Investment in mutual funds in India comprised 7.7 percent of the gross household financial
savings in FY2008, a significant increase from 1.2 percent in FY 2004. The households in India
continue to hold 55 percent of their savings in fixed deposits with banks,18 percent in insurance
and 10 percent in currency as of FY 2008.In 2008, the UK had more than thrice the investments
into mutual funds as a factor of total household savings (26 percent), than India had in the same
time period. As of December 2008, UK households held 61 percent of the total savings in bank
deposits, 11.6 percent in equities and 1 percent in bonds7.

Fig.(e) : Share of Mutual Funds in Households’ Gross Financial Savings in India

Savings in India
Source: RBI data
Note: As of 31 March for every year

Fig.(f) : Composition of Households Gross Financial Savings

Source: RBI data

HISTORY OF MUTUAL FUNDS

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the
initiative of the Government of India and Reserve Bank. The history of mutual funds in India can
be broadly divided into four distinct phases.
First Phase – 1964-87

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

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

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

Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in
which the first Mutual Fund Regulations came into being, under which all mutual funds, except
UTI were to be registered and governed. The erstwhile Kothari Pioneer
(now merged with Franklin Templeton) was the first private sector mutual fund registered in July
1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.The number of mutual fund houses went on increasing, with many
foreign mutual funds setting up funds in India and also the industry has witnessed several
mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total
assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated
into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets
under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the
assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of
Unit Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund Regulations.
 Fig.(g) : Asset Under Management

Note:
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India
effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of
India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.
 MORE ABOUT MUTUAL FUNDS

According to SEBI "Mutual Fund" means a fund established in the form of a trust to raise
monies through the sale of units to the public or a section of the public under one or more
schemes for investing in securities, including money market instruments;"
To the ordinary individual investor lacking expertise and specialized skill in dealing proficiently
with the securities market a Mutual Fund is the most suitable investment forum as it offers an
opportunity to invest in a diversified, professionally managed basket of securities at a relatively
low cost. India has a burgeoning population of middle class now estimated around 300 million.
A typical Indian middle class family can pool liquid savings ranging from Rs.2 to Rs.10 Lacs.
Investment of this money in Banks keeps the fund liquid and safe, but with the falling rate of
interest offered by Banks on Deposits, it is no longer attractive. At best a small part can be
parked in bank deposits, but what are the other sources of remunerative investment possibilities
open to the common man? Mutual Fund is the ready answer, as direct PMS investment is out of
the scope of these individuals. Viewed in this sense India is globally one of the best markets for
Mutual Fund Business, so also for Insurance business. This is the reason that foreign companies
compete with one another in setting up insurance and mutual fund business shops in India. The
sheer magnitude of the population of educated white-collar employees with raising incomes and
a well-organized stock market at par with global standards, provide unlimited scope for
development of financial services based on PMS like mutual fund and insurance.
The alternative to mutual fund is direct investment by the investor in equities and bonds or
corporate deposits. All investments whether in shares, debentures or deposits involve risk: share
value may go down depending upon the performance of the company, the industry, state of
capital markets and the economy. Generally, however, longer the term, lesser is the risk.
Companies may default in payment of interest/ principal on their debentures/bonds/deposits; the
rate of interest on an investment may fall short of the rate of inflation reducing the purchasing
power. While risk cannot be eliminated, skillful management can minimise risk. Mutual Funds
help to reduce risk through diversification and professional management. The experience and
expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their
purchases and sales help them to build a diversified portfolio that minimises risk and maximises
returns
WORKING OF A MUTUAL FUND

Fig.(h) : Working of Mutual Fund

To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds.
It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time.
MF either promoted by public or by private sector entities including one promoted by foreign
entities is governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the funds by making investments
in various types of securities. Custodian, registered with SEBI, holds the securities of various
schemes of the fund in its custody.
According to SEBI Regulations, two thirds of the directors of Trustee Company or board of
trustees must be independent.

The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual
funds that the mutual funds function within the strict regulatory framework. Its objective is to
increase public awareness of the mutual fund industry.
 ADVANTAGES OF INVESTING IN A MUTUAL FUND

The advantages of investing in a Mutual Fund extending PMS to the small investors are as
under:

Fig.(i) : Advantage factors of Mutual Fund

• Professional Management- The investor avails of the services of experienced and skilled
professionals who are backed by a dedicated investment research team, which analyses
the performance and prospects of companies and selects suitable investments to achieve
the objectives of the scheme.

• Diversification- Mutual Funds invest in a number of companies across a broad cross-

section of industries and sectors. This diversification reduces the risk because seldom do
all stocks decline at the same time and in the same proportion. You achieve this
diversification through a Mutual Fund with far less money than you can do on your own.

• Convenient Administration - Investing in a Mutual Fund reduces paperwork and helps

you avoid many problems such as bad deliveries, delayed payments and unnecessary
follow up with brokers and companies. Mutual Funds save your time and make investing
easy and convenient.
• Return Potential Over a medium to long-term - Mutual Funds have the potential to
provide a higher return as they invest in a diversified basket of selected securities.

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

• Liquidity- In open-ended schemes, you can get your money back promptly at net asset
value related prices from the Mutual Fund itself. With close-ended schemes, you can sell
your units on a stock exchange at the prevailing market price or avail of the facility of
direct repurchase at NAV related prices which some close-ended and interval schemes
offer you periodically.

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

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

• Choice of Schemes- Mutual Funds offers a family of schemes to suit your varying needs
over a lifetime.

• Well Regulated- All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of investors. The
operations of Mutual Funds are regularly monitored by SEBI.
 FEATURES OF MF’s IN TERMS OF PORTFOLIO FUNCTIONS

These are special safeguards for the investor prescribed by SEBI.

• Portfolio Investment operations are entrusted to a professional company, i.e. The Asset
Management Company. (AMC). Thus while MFs offer PMS functions on behalf of its
unit holders, the actual PMS services are rendered by the AMCs.

• Physical custody of the securities is not with the AMC but with a custodian, an
independent organisation, appointed for the purpose. For instance, the Stock Holding
Corporation of India Ltd. (SCHIL) is the custodian for most fund houses in the country.

DISADVANTAGES OF INVESTING IN MUTUAL FUND

• No Control over Costs

• No Tailor-made Portfolios

• Managing a Portfolio of Funds

 TYPES OF MUTUAL FUND SCHEMES

The expertise and professional skill developed by different Mutual Funds in Portfolio
Management can be better expressed by listing the different financial products they have
developed to be offered to the investors:

Fig.(j) : Mutual Fund schemes

1. Schemes according to Maturity Period:

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme
depending on its maturity period.
○ An open-ended fund or scheme is one that is available for subscription and
repurchase on a continuous basis. These schemes do not have a fixed maturity
period
○ Close-ended Fund/Scheme: A close-ended fund or scheme has a stipulated
maturity period e.g. 5-7 years. The fund is open for subscription only during a
specified period at the time of launch of the scheme. Investors can invest in the
scheme at the time of the initial public issue and thereafter they can buy or sell the
units of the scheme on the stock exchanges where the units are listed. In order to
provide an exit route to the investors, some close-ended funds give an option of
selling back the units to the mutual fund through periodic repurchase at NAV
related prices. These mutual funds schemes disclose NAV generally on weekly
basis.

2. Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme
considering its investment objective. Such schemes may be open-ended or close-ended
schemes as described earlier. Such schemes may be classified mainly as follows:
 ○ Growth / Equity Oriented Scheme: The aim of growth funds is to provide capital
appreciation over the medium to long- term. Such schemes normally invest a
major part of their corpus in equities. Such funds have comparatively high risks.
These schemes provide different options to the investors like dividend option,
capital appreciation, etc. and the investors may choose an option depending on
their preferences. The mutual funds also allow the investors to change the options
at a later date. Growth schemes are good for investors having a long-term outlook
seeking appreciation over a period of time.
○ Income / Debt Oriented Scheme: The aim of income funds is to provide regular
and steady income to investors. Such schemes generally invest in fixed income
securities such as bonds, corporate debentures, Government securities and money
market instruments. Such funds are less risky compared to equity schemes. These
funds are not affected because of fluctuations in equity markets. However,
opportunities of capital appreciation are also limited in such funds. The NAVs of
such funds are affected because of change in interest rates in the country. If the
interest rates fall, NAVs of such funds are likely to increase in the short run and
vice versa. However, long term investors may not bother about these fluctuations.
○ Balanced Fund: The aim of balanced funds is to provide both growth and regular
income as such schemes invest both in equities and fixed income securities in the
proportion indicated in their offer documents. These are appropriate for investors
looking for moderate growth. They generally invest 40-60% in equity and debt
instruments. These funds are also affected because of fluctuations in share prices
in the stock markets. However, NAVs of such funds are likely to be less volatile
compared to pure equity funds.

3. Money Market or Liquid Fund:

These funds are also income funds and their aim is to provide easy liquidity, preservation
of capital and moderate income. These schemes invest exclusively in safer short-term
instruments such as treasury bills, certificates of deposit, commercial paper and inter-
bank call money, government securities, etc. Returns on these schemes fluctuate much
 less compared to other funds. These funds are appropriate for corporate and individual
investors as a means to park their surplus funds for short periods.
4. Gilt Fund:
These funds invest exclusively in government securities. Government securities have no
default risk. NAVs of these schemes also fluctuate due to change in interest rates and
other economic factors as is the case with income or debt oriented schemes.
5. Index Funds:
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index,
S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same
weightage comprising of an index. NAVs of such schemes would rise or fall in
accordance with the rise or fall in the index, though not exactly by the same percentage
due to some factors known as "tracking error" in technical terms. Necessary disclosures
in this regard are made in the offer document of the mutual fund scheme. There are also
exchange traded index funds launched by the mutual funds which are traded on the stock
exchanges.

6. Sector specific funds/schemes:

These are the funds/schemes, which invest in the securities of only those sectors, or
industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast
Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are
dependent on the performance of the respective sectors/industries. While these funds may
give higher returns, they are more risky compared to diversified funds. Investors need to
keep a watch on the performance of those sectors/industries and must exit at an
appropriate time. They may also seek advice of an expert.

7. Tax Saving Schemes:

These schemes offer tax rebates to the investors under specific provisions of the Income
Tax Act, 1961 as the Government offers tax incentives for investment in specified
avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the
mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-
 dominantly in equities. Their growth opportunities and risks associated are like any
equity-oriented scheme
8. Load or no-load Fund:
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time
one buys or sells units in the fund, a charge will be payable. This charge is used by the
mutual fund for marketing and distribution expenses. However, the investors should also
consider the performance track record and service standards of the mutual fund, which
are more important. Efficient funds may give higher returns in spite of loads.
9. No-load fund: is one that does not charge for entry or exit. It means the investors can
enter the fund/scheme at NAV and no additional charges are payable on purchase or sale
of units.
10. Monthly Income Plan:
• To generate regular income through investments in debt and money market
instruments and also to generate long-term capital appreciation by investing a
portion in equity related instruments.
• Fund Objective :-Investors seeking regular income through investments in fixed
income securities so as to get monthly/quarterly/half yearly dividend. The
secondary objective of the scheme is to generate long term capital appreciation by
investing a portion of scheme’s assets in equity and equity related instruments.
Suitable for investor with medium risk profile and seeking regular income.

1. FMP’s ( Fixed Maturity Plans ): These are close-ended income schemes with a fixed
maturity date. The period could range from fifteen days to as long as two years or more.
When the period comes to an end, the scheme matures and money is paid back. Like an
income scheme, FMPs invest in fixed income instruments i.e. bonds, government
securities, money market instruments etc. The tenure of these instruments depends on the
tenure of the scheme.
 • FMPs effectively eliminate interest rate risk. This is done by employing a specific
investment strategy. FMPs invest in instruments that mature at the same time their
schemes come to an end. So a 90-day FMP will invest in instruments that mature
within 90 days.
• For all practical purposes, an FMP is an income scheme of a mutual fund. Hence,
the tax incidence would be similar to that on traditional income schemes. The
dividend from an FMP will be tax free in the hands of an individual investor.
However, it would be subject to the dividend distribution tax.
• Redemptions from investments held for less than a year will be short-term gains
and added to the investor's income to be taxed at slab rates applicable. If such an
investment were held for more than a year, the long-term gains would get taxed at
20 per cent with indexation or at 10 per cent without. These rates are subject to
the surcharge and education cess as normally applicable. One can avail the benefit
of double indexation and save tax on FMPs held for more than one year.

PERFORMANCE MEASURES OF MUTUAL FUNDS

Mutual Fund industry today, with about 34 players and more than five hundred schemes, is one
of the most preferred investment avenues in India. However, with a plethora of schemes to
choose from, the retail investor faces problems in selecting funds. Factors such as investment
strategy and management style are qualitative, but the funds record is an important indicator
too. Though past performance alone cannot be indicative of future performance, it is, frankly,
the only quantitative way to judge how good a fund is at present. Therefore, there is a need to
correctly assess the past performance of different mutual funds.
Worldwide, good mutual fund companies over are known by their AMCs and this fame is
directly linked to their superior stock selection skills. For mutual funds to grow, AMCs must be
held accountable for their selection of stocks. In other words, there must be some performance
indicator that will reveal the quality of stock selection of various AMCs.

Return alone should not be considered as the basis of measurement of the performance of a
mutual fund scheme, it should also include the risk taken by the fund manager because different
funds will have different levels of risk attached to them. Risk associated with a fund, in a
general, can be defined as variability or fluctuations in the returns generated by it. The higher
the fluctuations in the returns of a fund during a given period, higher will be the risk associated
with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces.

First, general market fluctuations, which affect all the securities present in the market, called
market risk or systematic risk and second, fluctuations due to specific securities present in the
portfolio of the fund, called unsystematic risk. The Total Risk of a given fund is sum of these
two and is measured in terms of standard deviation of returns of the fund.

Systematic risk, on the other hand, is measured in terms of Beta, which represents fluctuations
in the NAV of the fund vis-à-vis market. The more responsive the NAV of a mutual fund is to
the changes in the market; higher will be its beta. Beta is calculated by relating the returns on a
mutual fund with the returns in the market. While unsystematic risk can be diversified through
investments in a number of instruments, systematic risk can not. By using the risk return
relationship, we try to assess the competitive strength of the mutual funds vis-à-vis one another
in a better way.
In order to determine the risk-adjusted returns of investment portfolios, several eminent authors
have worked since 1960s to develop composite performance indices to evaluate a portfolio by
comparing alternative portfolios within a particular risk class.

The most important and widely used measures of performance are:

  The Treynor Measure
 The Sharpe Measure
 Jenson Model
 Fama Model

The Treynor Measure

Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's
Index. This Index is a ratio of return generated by the fund over and above risk free rate of
return (generally taken to be the return on securities backed by the government, as there is no
credit risk associated), during a given period and systematic risk associated with it (beta).
Symbolically, it can be represented as:

Treynor’s Index (Ti) = (Ri – Rf)/ Bi

Where ,
Ri – represents return on fund
Rf – risk free rate of return
Bi – Beta of the fund
All risk-averse investors would like to maximize this value. While a high and positive Treynor's
Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index
is an indication of unfavorable performance.

The Sharpe Measure

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio
of returns generated by the fund over and above risk free rate of return and the total risk
associated with it. According to Sharpe, it is the total risk of the fund that the investors are
concerned about. So, the model evaluates funds on the basis of reward per unit of total risk.
Symbolically, it can be written as:

Sharpe Index (Si) = (Ri – Rf) / Sd

 Where ,
Ri – represents return on fund
Rf – risk free rate of return
Sd – Standard Deviation of the fund

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a
low and negative Sharpe Ratio is an indication of unfavorable performance.

Comparison of Sharpe and Treynor

Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a
numerical risk measure. The total risk is appropriate when we are evaluating the risk return
relationship for well-diversified portfolios. On the other hand, the systematic risk is the relevant
measure of risk when we are evaluating less than fully diversified portfolios or individual
stocks. For a well-diversified portfolio the total risk is equal to systematic risk. Rankings based
on total risk (Sharpe measure) and systematic risk (Treynor measure) should be identical for a
well-diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly
diversified fund that ranks higher on Treynor measure, compared with another fund that is
highly diversified, will rank lower on Sharpe Measure.

Jenson Model

Jenson's model proposes another risk adjusted performance measure. This measure was
developed by Michael Jenson and is sometimes referred to as the Differential Return Method.
This measure involves evaluation of the returns that the fund has generated vs. the returns
actually expected out of the fund given the level of its systematic risk. The surplus between the
two returns is called Alpha, which measures the performance of a fund compared with the
actual returns over the period. Required return of a fund at a given level of risk (Bi) can be
calculated as:
 Ri = Rf + Bi (Rm –Rf)

Where,
Rm - average market return during the given period

After calculating it, alpha can be obtained by subtracting required return from the actual return
of the fund.

Higher alpha represents superior performance of the fund and vice versa. Limitation of this
model is that it considers only systematic risk not the entire risk associated with the fund and an
ordinary investor cannot mitigate unsystematic risk, as his knowledge of market is primitive.

Fama Model
The Eugene Fama model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return commensurate
with the total risk associated with it. The difference between these two is taken as a measure of
the performance of the fund and is called net selectivity.

The net selectivity represents the stock selection skill of the fund manager, as it is the excess
return over and above the return required to compensate for the total risk taken by the fund
manager. Higher value of which indicates that fund manager has earned returns well above the
return commensurate with the level of risk taken by him.
Required return can be calculated as:

Ri = Rf + Si/Sm*(Rm - Rf)
Where,
Sm – Standard Deviation of market returns fund

The net selectivity is then calculated by subtracting this required return from the actual return of
the fund.
Among the above performance measures, two models namely, Treynor measure and Jenson
model use systematic risk based on the premise that the unsystematic risk is diversifiable. These
models are suitable for large investors like institutional investors with high risk taking
capacities as they do not face paucity of funds and can invest in a number of options to dilute
some risks. For them, a portfolio can be spread across a number of stocks and sectors. However,
Sharpe measure and Fama model that consider the entire risk associated with fund are suitable
for small investors, as the ordinary investor lacks the necessary skill and resources to
diversified. Moreover, the selection of the fund on the basis of superior stock selection ability of
the fund manager will also help in safeguarding the money invested to a great extent. The
investment in funds that have generated big returns at higher levels of risks leaves the money all
the more prone to risks of all kinds that may exceed the individual investors' risk appetite.

RISK FACTOR

All investments involve some form of risk. Even an insured bank account is subject to the
possibility that inflation will rise faster than your earnings, leaving you with less real purchasing
power than when you started (Rs. 1000 gets you less than it got your father when he was your
age).
The discussion on investment objectives would not be complete without a discussion on the risks
that investing in a mutual fund entails.
At the cornerstone of investing is the basic principle that the greater the risk you take, the greater
the potential reward. Remember that the value of all financial investments will fluctuate.
Typically, risk is defined as short-term price variability. But on a long-term basis, risk is the
possibility that your accumulated real capital will be insufficient to meet your financial goals.
Some investors can accept short-term volatility with ease, others with near panic. So whether
you consider your investment temperament to be conservative, moderate or aggressive, you need
to focus on how comfortable or uncomfortable you will be as the value of your investment
moves up or down.

Managing risks
Mutual funds offer incredible flexibility in managing investment risk. Diversification and
Systematic Investing Plan (SIP) are two key techniques you can use to reduce your investment
risk considerably and reach your long-term financial goals.

Diversification
When you invest in one mutual fund, you instantly spread your risk over a number of different
companies. You can also diversify over several different kinds of securities by investing in
different mutual funds, further reducing your potential risk. Diversification is a basic risk
management tool that you will want to use throughout your lifetime as you rebalance your
portfolio to meet your changing needs and goals. Investors, who are willing to maintain a mix of
equity shares, bonds and money market securities have a greater chance of earning significantly
higher returns over time than those who invest in only the most conservative investments.

TYPES OF RISKS

Consider these common types of risk and evaluate them against potential rewards when you
select an investment.
 Fig.(k) : Types of Risk

Market Risk
At times the prices or yields of all the securities in a particular market rise or fall due to broad
outside influences. When this happens, the stock prices of both, an outstanding, highly profitable
company and a fledgling corporation may be affected. This change in price is due to "market
risk.”
Inflation Risk
Sometimes referred to as "loss of purchasing power." Whenever inflation sprints forward faster
than the earnings on your investment, you run the risk that you'll actually be able to buy less, not
more. Inflation risk also occurs when prices rise faster than your returns.
Credit Risk
In short, how stable is the company or entity to which you lend your money when you invest?
How certain are you that it will be able to pay the interest you are promised, or repay your
principal when the investment matures?
Interest Rate Risk
Changing interest rates affect both equities and bonds in many ways. Investors are reminded that
"predicting" which way rates will go is rarely successful. A diversified portfolio can help in
offsetting these changes.

Effect of loss of key professionals and inability to adapt business to the rapid technological
change
An industries' key asset is often the personnel who run the business i.e. intellectual properties of
the key employees of the respective companies. Given the ever-changing complexion of few
industries and the high obsolescence levels, availability of qualified, trained and motivated
personnel is very critical for the success of industries in few sectors. It is, therefore, necessary to
attract key personnel and also to retain them to meet the changing environment and challenges
the sector offers. Failure or inability to attract/retain such qualified key personnel may impact the
prospects of the companies in the particular sector in which the fund invests.

Exchange Risks
A number of companies generate revenues in foreign currencies and may have investments or
expenses also denominated in foreign currencies. Changes in exchange rates may, therefore,
have a positive or negative impact on companies which in turn would have an effect on the
investment of the fund.
Investment Risks
The sectoral fund schemes, investments will be predominantly in equities of select companies in
the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance
of such companies and may be more volatile than a more diversified portfolio of equities.
Changes in the Government Policy
Changes in Government policy especially in regard to the tax benefits may impact the business
prospects of the companies leading to an impact on the investments made by the fund.

MEASURING RISKS

RISK MEASURE IMPLICATION IMPACT ON INVESTOR

High average maturity and More sensitive to interest rate Higher volatility in returns
modified duration changes
Low average maturity and Less sensitive to interest rate Lower volatility in returns
modified duration changes
Greater allocation to high Low risk default Lower yield with lower risk
credit rated instruments
Greater allocation to low Higher risk of default Higher yield but with greater
rated instruments risk
 Wealth Management

Wealth Management is a type of financial planning that provides high net worth individuals
and families with private banking, estate planning, legal resources, and investment management,
with the goal of sustaining and growing long-term wealth. Whereas financial planning can be
helpful for individuals who have accumulated wealth or are just starting to accumulate wealth,
you must already have accumulated a significant amount of wealth for the wealth management
process to be effective.

Services typically include:

 • Portfolio Management and Portfolio Rebalancing
• Investment Management and Strategies
• Trust and Estate Management
• Private Banking and Financing
• Tax Advice
• Family Office Structures

PORTFOLIO MANAGEMENT

 PORTFOLIO

A Portfolio is a diversified professionally managed basket of securities. A healthy investment

portfolio has the following features:
• The right mix of assets and liabilities
• Regular monitoring
• Rebalancing portfolio when the asset mix gets skewed
• Optimum returns in a reasonable time period
As per definition of SEBI Portfolio means "a collection of securities owned by an investor”. It
represents the total holdings of securities belonging to any person". Obviously Portfolio
Management refers to the management or administration of a portfolio of securities to protect
and enhance the value of the underlying investment. SEBI has directed that portfolio
management as a service by a financial intermediary is to be carried out only by corporate
entities. Portfolio management by a corporate body can be either for management of its own pool
of securities created out funds collected from diverse sources or it can be offered as a financial
service to other investors, who choose to avail the expertise and skill of this company to carry
out portfolio investment/management on their behalf. Insurance companies, mutual funds,
pension and provident funds etc. carry out operations of portfolio management for investing their
own funds in remunerative channels. These companies are also referred as investment companies
or institutional investors. In fact they are portfolio managers in respect of the back-end of their
business activities. After initially pooling these funds from smaller investors, they choose to
invest them in a portfolio of securities intended as a lucrative deployment option.

 PORTFOLIO MANAGEMENT

The goal of Portfolio Management is to assemble various securities and other assets into
portfolios that address investor needs and then to manage these portfolios so as to achieve
investment objectives. The investor’s needs are defined in terms of risk, and the portfolio
manager maximizes return for investment risk undertaken.
Portfolio Management consists of three major activities:

1) Asset Allocation,
2) Shifts in weighting across major assets classes, and
3) Security selection within asset classes.
 Asset allocation can best be characterized as the blending together of major asset classes to
obtain the highest long-run return at the lowest risk. Managers can make opportunistic shifts in
asset class weightings in order to improve return prospects over the longest-term objective.

 RISK RETURN TRADE OFF

In selecting asset classes for portfolio allocation, investors need to consider both the return
potential and the riskiness of the asset class. It is clear from empirical estimates that there is a
high correlation between risk and return measured over longer periods of time. Furthermore
capital market theory, posits that there should be a systematic relationship between risk and
return. This theory indicates that securities are priced in the market so that high risk can be
rewarded with high return, and conversely, low risk should be accompanied by correspondingly
lower return.

Expected
Return

Capital Market Line

In the above figure a capital market line showing an expected relationship between risk and
return for representative asset classes arrayed over a range of risk. Note that the line is upward-
Corporate
sloping, indicating that higher risk should be accompanied by higher return. Conversely, the
Bonds
capital market relationship can be considered as showing that higher return can be generated

Government
Bonds
only at the “expense” of higher risk. When measured over longer periods of time, the realized
return and risk of the asset classes conform to this sort of relationship.
Note that treasury bills are positioned at the low end of the risk range, consistent with these
securities’ generally being considered as representative of risk-free investing, at least for short
holding periods. Correspondingly, the return offered by T-bills is usually considered as a basic
risk-return. On the other hand, equities as a class show the highest risk and return, with venture
capital at the very highest position on the line, as would be expected. International equities, in
turn, are shown as higher risk than domestic equities. Bonds and real estate are at an intermediate
position on the capital market line, with real estate showing higher risk relative to both corporate
and government bonds.

 TYPES OF PORTFOLIO BASED ON RISK AND RETURN

Whenever the money is invested a risk of not getting the money back is borne by the investor.
An investor wants a compensation for bearing such a risk also known as returns. In theory “the
higher is the risk the greater are the returns” and vice versa. The chart below can explain the
different types of securities and their associated risk.

Located towards the right of the diagram are investments that offer investors a higher potential
for above-average returns, but this potential comes with a higher risk. Towards the left are much
safer investments, but these investments having a lower potential for high returns.
 • Conservative Portfolio
This model is ideal for those who wish to take least amount of risk and want a steady income
over a period of time from his investments. Conservative portfolio is designed by investing
greater proportion in the lower risk securities. Such a portfolio always tends to generate income
for the investor. Such a model aims at protecting the principal value of the portfolio. Hence the
investment is generally done in fixed income and money market securities. Very less amount of
the capital is invested in the equities. The model is often known as the ‘capital preservation
portfolio’.

• Moderately Conservative Portfolio

A moderately conservative portfolio is ideal for those who want a fixed and steady income as
well as capital appreciation. This model not only offers a fixed income but also grows the
money of the investor. Although maximum amount of allocation is done in lower risk securities,
investment is also made in equities to some extent so that the capital grow

Source: Investopedia.com

• Moderately Aggressive Portfolio

Source: Investopedia.com
A moderately aggressive portfolio is ideal for those who want a balance of growth and income.
The asset composition is divided among equity and fixed income securities. Maximum amount
of investment is made in the equities. Assets allocated to the fixed income securities is also no
less. Such a model is often referred to as “balance portfolio”

• Aggressive Portfolio

Source: Investopedia.com
 Aggressive portfolios mainly consist of equities. So the value tends to fluctuate. Such a portfolio
provides long term appreciation to the capital. But to have some liquidity fixed income securities
are also added to the portfolio. It is always better to invest in such a portfolio for a longer period
of time so that the money gets sufficient time to grow. Such a portfolio is risky.

• Very Aggressive Portfolio

A very aggressive portfolio is one which consist mostly of equities. The portfolio is suitable for
those who have risk taking ability. Since the investment is done in equities hence it provides a
growth to the capital. The portfolio is designed for those who can invest for a longer time period.

Source: Investopedia.com

• Investment Risk Pyramid

Once the risk acceptable in the portfolio has been decided by acknowledging the time horizon
and bankroll one can use the risk pyramid approach for balancing the assets.

Source: Investopedia.com

Source: Investopedia.com
This pyramid can be
Thought of as an asset allocation tool that investors can use to diversify their portfolio
investments according to the risk profile of each security.
The pyramid, representing the investor's portfolio, has three distinct tiers:

• Base of the pyramid: this area is comprised of investments that are low in risk and have good
returns.
• Middle portion: this area is made of medium risk investments that not only offers stable
returns but also allows capital appreciation.
• Summit (top): the summit is for high risk investments. This is the area of the pyramid and
should be made up of money one can afford to lose.

Process of Portfolio Management

 Following is the process of portfolio management:

1. Understanding the present market conditions

2. Framing of an Investment Policy
This involves mainly the following two parts:
a. Investment Objectives of an investor
b. Investment Constraints of an investor
3. Portfolio Policies and Strategies
4. Asset Allocation Process
5. Security Selection
6. Portfolio Construction
7. Portfolio Implementation and Execution
8. Portfolio Analysis
9. Portfolio Rebalancing and Revision

After you've built your portfolio of mutual funds, you need to know how to maintain it. Four
common strategies can be followed for the same:

• The "Wing-It" Strategy

This is the most common mutual-fund strategy. Basically, if your portfolio does not have a plan
or a structure, then it is likely that you are employing a wing-it strategy. If you are adding money
to your portfolio today, how do you decide what to invest in? Are you one that searches for a
new investment because you do not like the ones you already have? A little of this and a little of
that? If you already have a plan or structure, then adding money to the portfolio should be really
easy. Most experts would agree that this strategy will have the least success because there is little
to no consistency.

Market-Timing Strategy

The market timing strategy implies the ability to get into and out of sectors or assets or markets
at the right time. The ability to market time means that you will forever buy low and sell high.
 Unfortunately few investors buy low and sell high because investor behavior is usually driven by
emotions instead of logic. The reality is most investors tend to do exactly the opposite – buy high
and sell low. This leads many to believe that market timing does not work in practice. No one
can accurately predict the future with any consistency.

• Buy-and-Hold Strategy

This is by far the most commonly preached investment strategy. The reason for this is that
statistical probabilities are on your side. Markets generally go up 75% of the time and down
25% of the time. If you employ a buy-and-hold strategy and weather through the ups and downs
of the market, you will make money 75% of the time. If you are to be more successful with
other strategies to manage your portfolio, you must be right more than 75% of the time to be
ahead. The other issue that makes this strategy most popular is it is easy to employ. This does
not make it better or worse. It is just easy to buy and hold.

Performance-Weighting Strategy

This is somewhat of a middle ground between market timing and buy and hold. With this
strategy, you will revisit your portfolio mix from time to time and make some adjustments. Let's
walk through an oversimplified example using real performance figures.

Let's say that at the end of 2007, you started with an equity portfolio of four mutual funds and
split the portfolio into equal weightings of 25% each.

Fund Allocation(Rs) Allocation (%)

Fund A 25000 25

Fund B 25000 25

Fund C 25000 25

Fund D 25000 25

100000 100

After the first year of investing, the portfolio is no longer an equal 25% weighting because some
funds performed better than others.

• Fund • 1-yr return • End balance(Rs) • Allocation (%)

• Fund A • 13.60% • 28000 • 26.28

• Fund B • 6.80% • 26700 • 24.71

• Fund C • 8.50% • 27125 • 25.10

• Fund D • 3.40% • 25850 • 23.92

• • • 108075 • 100

The reality is that after the first year, most investors are inclined to dump the loser (Fund D) for
more of the winner (Fund A). However, the right strategy is to do the opposite to practice sell
high, buy low. Performance weighting simply means that you sell some of the funds that did the
best to buy some of the funds that did the worst. Your heart will go against this logic but it is the
right thing to do because the one constant in investing is that everything goes in cycles.

In year four, Fund A has become the loser and Fund D has become the winner.

• Fund • 1-yr return

• Fund A • -16.00%

• Fund B • 22.30%
 • Fund C • 9.60%

• Fund D • 15.20%

Performance weighting this portfolio year after year means that you would have taken the profit
when Fund A was doing well to buy Fund D when it was down. In fact, if you had re-balanced
this portfolio at the end of every year for five years, you would be further ahead as a result of
performance weighting.

The key to portfolio management is to have a discipline that you adhere to. The most successful
money managers in the world are successful because they have a discipline to manage money
and they have a plan. Warren Buffet said it best: "To invest successfully over a lifetime does
not require a stratospheric I.Q., unusual business insight or inside information. What is
needed is a sound intellectual framework for making decisions and the ability to keep
emotions from corroding that framework."

WHAT DRIVES PORTFOLIO PERFORMANCE

According to Pramerica Finance team of wealth management, the most important step in wealth
management is asset allocation. But the least time is spent on this investment decision. This step
affects almost 92% of the returns expected from any portfolio.
Fig.(g) : Portfolio Performance
 DUMMY PORTFOLIO

Complex Copounds
The crisil complexity classification denotes how easy it is for an investor to understand the risks
associated with different products.
PRODUCT SIMPLE COMPLEX HIGHLY COMPLEX
Debt Funds Gilt, Liquid, Debt
funds,Fixed Maturity
Plans, Interval Funds,
Monthly Income Funds
Mutual Capital protected funds- Capital protected funds-
Funds- static hedge, arbitrage Leveraged,
Structured funds constant,proportion portfolio
insurance,dynamic portfolio
insurance
Mutual Plain equity,sector Derivative funds,fund of Art funds
Funds-Eqity based funds,international,special
and Others balanced,gold,etf’s,index situation funds
linked funds
Equity Shares Exchange-traded equity
shares
Equity Buying index/stock options Selling index/stock options(short
Derivatives (long options),index/stock positions)
futures(buying and selling)
Commodity Commodity futures
Derivatives
Others PPF,NSC/Kisan Vikas Unit-linked insurance Real estate investment trusts
Patra,Recuring deposit plans
Source: CRISIL

Here I have taken two portfolios- 1) only scripts 2) scripts and mutual funds
This dummy portfolio will enable us to understand how the portfolio is managed through mutual
funds. In the first portfolio I have taken a total amount of approx Rs 100000 invested in 5
securities covering 5 different sectors so as to taste the flavor of diversification. The portfolio has
 taken the exposure of 100% equity with a blend of growth and large as its style. The companies
taken into the portfolio contains topmost companies in its sector like ITC, Bharti Airtel, ONGC,
Parsvnath and ICICI bank.
The time duration of 1 year has been taken so as to taste the long term results. But the overall results
as of 1st july, 2008 stands negative. The portfolio gives a loss of Rs 1643.70.The detailed analysis of
the portfolio can be well understood with the tables mentioned below.
 The second portfolio contains a blend of securities and mutual funds so as to manage the
portfolio in an efficient manner. Here to get a feel of diversification I have taken 5 scripts which
are common as in the first portfolio but this time with a little changes in the amount. This time I
have taken a total amount of Rs 100000 with Rs 50000 in scripts and Rs 50000 in mutual funds
which are again not concentrated. In the mutual funds I have taken gold ETFs , balanced fund,
index fund and opportunities fund. The reason being as the portfolio has already taken the
exposure of 100% equity in the scripts. Therefore to bang upon the diversification I have taken
different mutual fund schemes. The result has been astonishing with approx 1 year as the time
duration and a net profit on the whole portfolio standing at Rs 14513. The analysis can be
observed with the charts provided below. This portfolio explores the experience of portfolio
diversification with an asset allocation in equity and a little in debts and others. It also gets an
exposure of mid cap and small cap.
Finally to summarise and come to a conclusion we can for sure observe and deduce that portfilo
can really be managed through mutual funds. A number of permutation and combination can be
applied to design a model portfolio containing mutual funds. I have just arrived at one portfolio
which if present has really done wonders.
DIFFERENT AMC’s IN INDIA
FUND ANALYSIS PARAMETERS

Top Quartile
(Among top 25%in the

Second quartile
(Among top 50-75%in th

Third Quartile
(Among bottom 25-50%

Bottom Quartile
(Among bottom 25%in

The left-most bar in a serie

fund’s performance in the f
calendar year. Similarly,
representthefund’sperforma
third and last quarter of the
dataas on March31, 2008. Re
areabsoluteandabove1 year
 Valuation
Growth Blend value

00 00 00

l
m
S
id
M
e
rg
a
L

n
o
itlz
p
a
C
00 00 00

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CONCLUSION
A nine-box matrix that di
fund’s investment approach
The performance of mutual funds in India in the initial phase com
was notpanies
even closer in which it inves
to satisfactory
level. People rarely understood, and of course investing was out of question. But yes, some 24
million shareholders were accustomed with guaranteed high threereturnssquares indicate
by the beginning of size or
– became
liberalization of the industry in 1992. This good record of UTI frommarketing
the toolbottom
for new, small-c
entrants. The expectations of investors touched the sky in profitability factor. However, people
large cap. Horizontally, th
were miles away from the preparedness of risks factor after the liberalization.
indicate, from left to right,
the value-to-growth spectrum
The annual composite rate of growth is expected 13.4% during the rest of the decades. In the last
5 years we have seen annual growth rate of 9%. According to the current growth rate, by year
2010, mutual fund assets will be double. boxed represent percentage
the respective matrix.
The government is also helping in boosting mutual fund industry. Government is emphasizing a
lot on infrastructure development and social spending and yet targeting a lower fiscal deficit.
FIIs continued to be positive on emerging markets in general and the Indian markets in
particular. FIIs buying have considerable portion in mutual funds buying.
Key Points:

• Almost 100% growth in the last 6 years.(excepting 2008)

• Our saving rate is over 30%, highest in the world. Only channel zing these savings in
mutual funds sector is required.
• We have some 70 mutual funds which are much less than US having more than 800.
There is a big scope for expansion.
• 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are
concentrating on the 'A' class cities. Soon they will find scope in the growing cities.
• SEBI allowing the MFs to launch commodity mutual funds.
• This year budget has increased the limit of investment in overseas market by mutual
funds to 33-35%.
• During last financial year investment habit of India has increased by 25 % and it is
expected to grow by 30 % this year.

WEBOGRAPHY
• http://en.wikipedia.org/wiki/Mutual_fund
• http://finance.indiamart.com/markets/mutual_funds/
• http://www.moneycontrol.com/mutualfundindia
• http://www.mutualfundsindia.com/icra_m_power_institutional.asp#q3
• http://www.amfiindi.com/navhistoryreport.asp
• www.nseindia.com
• www.bseindia.com
• www.investopedia.com
• www.morningstar.in
• www.mutualfundsindia.com
• www.sebigov.in
• www.valueresearchonline.com
• www.waytowealth.com
• www.myrisis.com
• www.capitalmarket.com

BIBLIOGRAPHY

• Book on “Portfolio Management” by ICFAI Press

• Business Week Magazine

• Business Today

• Outlook

• Fact Sheets of Different AMC’s