A STUDY ON PARAMETERS AFFECTING THE INVESTMENT APPRAISAL TECHNIQUES FOR INVESTMENT APPRAISAL Dissertation submitted in partial fulfillment of the

requirements of the award of the degree of MASTER OF BUSINESS ADMINISTRATION ADMINISTRATION (MBA)
OF

BANGALORE UNIVERSITY
By

JINO THOMAS
Register Number: 05JJCM6022 Under the guidance of PROF.ALOYSIUS EDWARD M.COM, MBA, M.Phil

KRISTU JAYANTI COLLEGE

OF MANAGEMENT & TECHNOLOGY
(Affiliated to Bangalore University) Bangalore 2007

KRISTU JAYANTI COLLEGE

K.NARAYANAPURA, KOTHANUR POST BANGALORE 77

CERTIFICATE

This is to certify that this dissertation entitled Parameters affecting investment techniques and investment appraisal techniques Submitted in partial fulfillment for the award of MBA Degree of Bangalore University was carried out by Jino Thomas under the guidance of Prof. Aloysius Edward. This has not been submitted to any other University or institution for the award of any degree/diploma certificate.

Dean, management studies

Guide

Principal

Place: Bangalore Date:

DECLERATION
I hereby declare that this project titled Parameters affecting investment techniques and investment appraisal techniques submitted by me to Department of Management, Bangalore University in partial fulfillment of requirements of MBA programme is a bonafide work carried out by me under the guidance of Prof.Aloysious Edward .J. This has not been submitted earlier to any other University or Institution for the award of any degree diploma/ certificate or published any time before.

Place: Bangalore Date: JINO THOMAS

ACKNOWLEDGEMENTS

First and foremost, I praise and thank God Almighty from the depth of my heart, which has been the source of strength in the completion of this project work. It is my profound concern to thank the principal, Fr. Josekutty P.D, M. COM, Kristu Jayanti College who paved the path for offering me this opportunity and avenues of infinite possibilities of knowledge. I further express my deep sense of gratitude to Prof. A.M.Tatti MBA, coordinator of MBA department, Kristu Jayanti College for his constant encouragement and valuable help. I wish to extend my sincere and profound thanks to prof.Arun Kumar, MBA dean Kristu Jayanti college for the help extend towards me during the period of dissertation work. And I am deeply indebted to Prof. Aloysius Edward, Kristu Jayanti College, for his guidance, assistance and for giving all the formal support to conduct this study and for completing this project work. I am also thankful to the librarian, Kristu Jayanti College for their encouragement and valuable help. I take this opportunity to acknowledge indebt ness to Mr. Liju Varghese Thomas, Mathew Abraham, Abhilash P.J. and Tony Chacko for their earnest support and co-operation in the course of my study. I am also thankful to my parents and friends for their encouragement and support Finally I would like to express my sincere gratitude to all those who spend their valuable time for providing necessary data for this organizational study.

Jino Thomas

EXECUTIVE SUMMARY
Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions. With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.

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. The history of mutual funds in India can be broadly divided into four distinct phases

Determination of Minimum accessible Return (MAR)

MAR = Risk-free return + risk premium Risk-free return assumed = average daily returns

from liquid schemes (averaged over 1 month) Investors will be polled* each quarter to determine

risk premium required to invest in Equity Schemes Findings of the study is among the various mutual funds schemes FOF is giving more returns compared to others, especially equity schemes. So its very clear that FOF is a better scheme for investors.

CHAPTER - 1

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions. With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.

What Mutual Fund is all about?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.
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MUTUAL FUNDS IN INDIA AND THE REGULATORY AUTHORITY Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds. In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are to protect the interest of investors in securities and to promote the development of and to regulate the securities market. As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002).

1.2 MUTUAL FUND SET UP A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund. SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).

1.3 NET ASSET VALUE (NAV) OF A SCHEME The performance of a particular scheme of a mutual fund is determined by Net Asset Value (NAV). Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.

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1.4 MUTUAL FUND SCHEMES

Schemes based on Maturity Period: A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period. Open-ended Fund/ Scheme 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. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. 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. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

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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 investors must indicate the option in the application form. 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.

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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. 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. 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.

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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. 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. 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

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oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

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. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. 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. 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.

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THE LEVEL OF LOADS Can a mutual fund impose fresh load or increase the load beyond the level mentioned in the offer documents is one of the greatest concerning issues ? Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments.

SALES OR REPURCHASE / REDEMPTION PRICE The price or NAV a unit holder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable. Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unit holders. It may include exit load, if applicable.

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ASSURED RETURN SCHEME The schemes assure a specific return to the unit holders irrespective of performance of the scheme is known as Assured return scheme.. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document. Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

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THE ASSET ALLOCATION IS ANY CHANGE POSSIBLE ? Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unit holders and giving them option to exit the scheme at prevailing NAV without any load.
1.5 INVESTMENT INITIATION

Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. These days post offices and banks also distribute the units of mutual funds. However, the investors should note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors.

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Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.
STRIKING THE BALANCE BETWEEN DEBT AND EQUITY

An investor should take into account his risk taking capacity, age factor, financial position, etc As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns at various risk rates. Investors may also consult financial experts before taking decisions. Agents and distributors also play a vital role in this regard.

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THE FIRST STEP An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsors track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.

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1.6 INVESTORS INFORMATION Mutual funds are required to dispatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a D mat account statement or unit certificates as these are traded in the stock exchanges. In case of openended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document. According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund. A mutual fund is required to dispatch to the unit holders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unit holder In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present). There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unitholders. Apart from it, many mutual funds send quarterly newsletters to their investors.

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At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted. The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders. The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc. Some of the mutual funds send newsletters to the unitholders on quarterly basis which also contain portfolios of the schemes.

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IS CHANGE IN THE SCHEME POSSIBLE .? Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g. structure, investment pattern, etc. can be carried out unless a written communication is sent to each unit holder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unit holders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor.

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1.7 THE PERFORMANCE EVALUATION The performance of a scheme is reflected in its Net Asset Value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) http://www.amfiindia.com/ and thus the investors can access NAVs of all mutual funds at one place The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format. The mutual funds are also required to send annual report or abridged annual report to the unit holders at the end of the year. Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.

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Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme. IS THERE ANY DIFFERENCE BETWEEN INVESTING IN A MUTUAL FUND AND IN AN INITIAL PUBLIC OFFERING (IPO) OF A COMPANY Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed. 1.8 DIFFERENCE IN IPO AND MUTUAL FUND The. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.

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SCHEMES HAVING LOWER NAV. Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc This is explained in an example given below. Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes.

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On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently. HOW TO ARRIVE AT THE RIGHT DECISION As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.

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THE SPONSORS REQUIREMENT In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls. 1.9 INFORMATION SOURCES FOR INVESTOR Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors. Investors can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given. There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.

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AT THE WINDING OF FUNDS In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unitholders are entitled to receive a report on winding up from the mutual funds which gives all necessary details. INVESTORS GREIVECES Investors would find the name of contact person in the offer document of the mutual fund scheme whom they may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents. Investors can also approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved. Investors may send their complaints too.

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CHAPTER 2

RESEARCH DESIGN

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2.1 STATEMENT OF PROBLEM Despite the major role paid by the fund mangers in the process of investment. The investors have a very little knowledge on the parameters of investment which determines the pattern of investment. The researcher has made an attempt to study the various methods and techniques of investment analysis and investment appraisal techniques. 2.2 OBJECTIVES To study the various parameters which determines investment patterns To study techniques involves in investment appraisal

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2.3 THE METHODOLOGY Assessment of future earning is also crucial as many companies command a high premium in the share market not because their book profits are high but the investors feel the future earning to be more than the current earning.

To make good investment decision fund managers rely on financial statement analysis and key fund manager fundamental variables namely book to market ratio (B/M) and price earning (P/E) For the analysis purpose the fund managers generally use Balance sheet, Income Statement, Profit After Tax. Further, fund managers regarded financial risk, quality of disclosure in the annual report by the management predictability of earnings and and corporate growth prospects as the primary determinant when a taking an investment decision. Another aspect to evaluate the performance is to analyse the Quality of Earning (QE) it is the ratio between the profit after taxes and the cash flow from the operations, Many companies have high book profits, but the cash profits are low and so this ratio plays a vital role in decision making process.

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2.4 Calculation of Sharpe return to the measure the performance of portfolio

Either the Sharpes measure or the Treynors measure can be used to evaluate the performance of a portfolio. since it is not possible to compute beta of each portfolio, Treynors measure is not used to measure the performance of the portfolio.

Sharpe return is used to compute the return from the portfolio.

S=

Rt-R*

t
St= Sharpe Index Rt= Average return on portfolio t R*= Risk Free rate

= standard Deviation of the return

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2.5Review of literature The literature review focuses on various fundamental measures, which can help in constructing a better portfolio there by maximizing return to sock holders and justification of choosing a measure rather than intuition and by their popularity among practitioners.

The process of using fundamental variables to make stock trading decisions begins with Benjamin Graham as early aas1928. His first book security analysis published in the year 1934, which gives distilled investment wisdom including the intelligent investor which published in 1949. He urged investors to pay attention to three fundamental variables namely size of firm, capitalization, and price earning ratio. The price earning ratio is a key fundamental variable which can be used as key fundamental variable which can be used to select the securities that would yield high returns. The lowest p/e ratio stocks dramatically out performed the higher p/e ratio stocks. The results of the study shows that better investment performance can be obtained from the portfolio comprised of low price earning ratio stocks as contrasted to portfolio made up of high price earning ratio stocks. For individual securities the good performance may be found among stocks selling at almost at any selling ratio.

This is also generally true when bias on the performance measures resulting from the effect of risk taken into account. There are reports which confirmed that P/E ratio information was not fully reflected in security prices in as rapid manner as postulated by the semi strong form of the efficient market hypothesis.

De Bondt and Thayler study the price in relation to book value in a universe of all NYSE and American Stock Exchange equity issue. It has explained the relation between the market price and book value, with stock being assigned in quintiles from lowest price to book ratios. The earning yields effect on stock return is significantly positive only in January for the sub period.

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Piotroski investigates whether fundamental analysis can be used to provide abnormal returns, and right shift the returns spectrum earned by a value investor. He focused on high book to market securities, and show that the mean return earned by a high book to market investor can be shifted to the right by at least 7.5% annually. The authors developed portfolio based on four fundamental conditions namely: Single Value P/E, Market Price <Book Value, established track recode on the shareholders return. Barely and Myers supported Quality of earning as a key performance measure. It is based on the following argument the problem is that the earnings that firms report are book, or accounting figures, and as such reflect a series of more or less arbitrary choices of accounting methods. A switch in the depreciation method used for reporting purposes directly affects earning per share. Other accounting choices which affect reported earning are the valuation of inventory, the procedures by which the account for two merging companies are combined the choice between expensing and capitalizing. The total value of the companies existing stock is equal to the discounted value of that portion of the total dividend stream which will be paid to the stock outstanding today. The net cash flow to share holders after paying for future investment is sometime s knows as companys cash flow. This analysis is done at portfolio return on the excess returns for the market factors using CAPM.

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2.6 Interpretation of data obtained One of the primary aims of this study is to obtain a clearer understanding of the financial statement analysis process and the information that is utilized in conducting such analysis. It was an attempt to indicate the extent to which they use various sources of accounting information in their corporate evaluation.

Cash flows may be regarded as being informative to the extend that they are less likely to be manipulated or dressed up

It is clear that the quality of earning is primarylu regarded as beign a function of growth, risk, and the persistence of earnings. Thus analysis regarded earnings that exhibit high growth low risk and a high degree of persisitance of being of a high quality reltife to earnings characterized by low growth high risk and lack of persistence.

The quality of company management and disclosure level also ranked as beign important determinants of earning quality. There are certiani regulations that prevent analysts from holding exclusive meeting with company management for the purpose of obtiaining private guidance. Finally analysts indicated that the accountin method and level of disclosure employed by the company also influence tthir perception of earnings quality. It seems that analysts favour earnigna th are results of prudently applied accounting.

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2.7 Methods of measuring risk and return in the portfolio

Evaluation of portfolio performance, the bottom line of the investing process, is an important aspect of interest to all investors and money managers. The framework for evaluating portfolio performance consists of measuring both realized return and the differential risk of the portfolio to compare a portfolios performance, and recognizing any constraints that the portfolio manager may face.

The two factors i.e. risk and return are the different faces of the same coin and both must be evaluated if intelligent decision is to be made. Therefore if the risk in an investment is not known, then it is difficult to give judgement about its performance.

To evaluate portfolio performance properly, it is essential to determine whether the return are large enough given the risk involved. Three such evaluative measures that asses performance of the portfolio on a risk adjusted basis are developed by Jensen, sharpe and Treynor.

The standard deviation measures the excess return per unit of total risk. Sharpe and Treynor sought to relate the return on a portfolio to its risk. Treynor however distinguished between total risk and systematic risk, Implicitly assuming that portfolios are well diversified.

The sharpe and Treynor measures can be used to rank portfolio performance and indicate the relative positions of the portfolios being evaluated.

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CHAPTER 3
PROFILES

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3.1 INDUSTRY PROFILE

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. The history of mutual funds in India can be broadly divided into four distinct phases

Phase One 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.

Phase Two 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.

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Phase Three 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 does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the
40

erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting mutual fund industry has entered its current phase of consolidation and growth. As at the end of October 31, 2003, there were 31 funds, which manage assets of Rs.126726 crores under 386 schemes.

41

3.2 CORPORATE PROFILE

ICICI Prudential Asset Management Company enjoys the strong parentage of Prudential plc, one of UK's largest players in the insurance & fund management sectors and ICICI Bank, a well-known and trusted name in financial services in India. ICICI Prudential Asset Management Company, in a span of just over eight years, has forged a position of pre-eminence in the Indian Mutual Fund industry as one of the largest asset management companies in the country with assets under management of Rs. 37,906.24 crores (as of March 31, 2007). The Company manages a comprehensive range of schemes to meet the varying investment needs of its investors spread across 68 cities in the country.

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Key Indicators At inception - May 1998 As on March 31, 2007 Assets Under Management Number of Funds Managed Rs. 160 crores 2 Rs. 37,906.24 crores 30

PRUDENTIAL

Established in London in 1848, Prudential plc, through its businesses in the UK, US and Asia, provides retail financial services products and services to more than 21 million customers, policyholders and unit holders worldwide with over US$400 (as of 31st December, 2005) billion in funds under management. Prudential employs some 23,000 staff worldwide.

In Asia, Prudential has life insurance and funds management operations across twelve countries - China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam. Prudential has championed customer-centric products and services for over 80 years, supported by an extensive network of over 145,000 staff and agents across the region.

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ICICI BANK ICICI Bank is India's second-largest bank with total assets of about Rs. 2,513.89 bn (US$ 56.3 bn) at March 31, 2006 and profit after tax of Rs. 25.40 bn (US$ 569 mn) for the year ended March 31, 2006 (Rs. 20.05 bn (US$ 449 mn) for the year ended March 31, 2005). ICICI Bank has a network of about 614 branches and extension counters and over 2,200 ATMs. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross border needs of clients and leverage on its domestic banking strengths to offer products internationally. ICICI Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre and representative offices in the United States, United Arab Emirates, China, South Africa and Bangladesh. Our UK subsidiary has established a branch in Belgium. ICICI Bank is the most valuable bank in India in terms of market capitalisation. (Source: Overview at www.icicibank.com

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3.3 FUND FACT An investor could be very cautious or very aggressive or someone who would like to maintain a balance. ICICI Prudential Mutual Fund Has provided the investors a range of solutions that enable them to create a portfolio of the tenor, return and risk that they desire On the debt market side, from simple parking solutions for efficient utilization of each rupee for each day, to long term interest rate view-based products, our range spans varying time horizons and incomes. Our debt products are managed to minimize liquidity & credit risks and also manage interest rate risks. They come with periodic dividend and growth options to enable you to choose your income streams in a manner most efficient for your needs.On the equity market side, our equity funds offer a choice of size, sectors, themes and styles to enable participation in the broad market and its segments. The chart below plots schemes offered by ICICI Prudential Mutual Fund on a risk-return scale that helps you zero-in on the relevant schemes that match your risk taking ability and the returns you desire.

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46

3.4 PERFORMANCE ANALYSER This tool allows you to track NAV movements of various ICICI Prudential Mutual Fund Schemes since their inception. We can also compare the scheme performance with relevant benchmarks.

How to use the performance analyser? Just select the date range, the scheme you wish to analyse and the type of analysis required. We can analyse the scheme based on its NAV / Dividend History over any period of your choice. Or, we could choose to simulate the return on Rs. 1000 invested over any period of your choice under any scheme. In schemes where the Systematic Investment Plan (SIP) option is available, you can also simulate the returns from following this approach. Alternatively we could compare scheme performance vs relevant benchmark over standard horizons (1 year, 3 years, 5 years and since inception as applicable). By default the From Date is taken as inception date of the scheme and To Date is taken as the current date. You can change this as per requirement.

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3.5 COMPARE SCHEME This section lets you compare the investment objectives, horizons and other critical factors like minimum investment amounts, entry / exit loads etc of different ICICI Prudential Mutual Fund Schemes, thus helping you make a more informed choice.

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3.6 SYSTEMATIC INVESTMENT One of the simplest and most sensible ways of investing, especially when you are just starting off on your Investment journey is to use the Systematic Investing Option. ICICI Prudential Mutual Fund invest systematically through the following 3 different systematic investing options which allow you to make your transactions - whether purchasing a new fund, transferring between funds or redeeming from a fund - in a systematic and disciplined manner. 1)ICICI Prudential systematic investment plan ICICI Prudential SIP allows you to make your investments in periodic installments instead of a lump sum amount.

ADVANTAGES 1. 2. 3. It helps you start small, with as low as Rs. 1000 per month. It helps you reduce the risk of mistiming the market. It helps you buy more units when the market is down and fewer units when the market is up. Thus reducing the cost of entry.

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2. ICICI Prudential systematic transfer plan ICICI Prudential STP allows you to make a lump sum investment in a money-market or a debt oriented ICICI Prudential Scheme and subsequently transfer partial amounts to any equity oriented ICICI Prudential Scheme at regular intervals. This way the investment money continues to earn while it waits to be fully deployed in the equity scheme of your choice. You can choose from three frequencies(weekly, monthly and quarterly) if someone wish to transfer the investment from one scheme to another. 3 ICICI Prudential systematic withdrawal plan ICICI Prudential SWP operates like the reverse of ICICI Prudential SIP. It allows you to systematically withdraw your existing investment in a ICICI Prudential Mutual Fund scheme by redeeming your units in periodic installments instead of all at one go. As in the case of the SIP, this helps to reduce risk of mistiming your exit from a particular scheme.

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CHAPTER- 4

DATA ANALYSISI AND INTERPRETATION

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YEAR

2005-06

Portfolio constructed on the basis of P/E Range

Standard Deviation 1.5801 20492-3.436 0.5489 3.463-4.454 0.5426 4.454-5.348 0.4583 5.348-6.611 0.49996 6.611-8.117 0.49996 8.117-10.388 0.5887 10.388-14.696 0.498 14.696-23.529 0.5247 23.5290.6399 0.3205 0.3756 0.5021 0.4978 0.3264 0.5407 0.5559 0.8474 0.2409 0.3679 0.3729 0.6321 0.3226 0.5794 0.5209 0.8548 0.4621 0.7377

P/E Range .160-2.492

Mean 1.0013

Sharpes return 0.5976

Sources : Secondary source

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Portfolio constructed on the basis of QE Rang

Port folio formed on the basis of QE (quality of earnings) QE Range 0.004-.122 .122-.216 0.6173 .216-.304 0.5075 .304-.394 0.6377 .394-.531 0.9086 .531-.696 1.1467 .696-.977 0.5743 .977-1.362 0.5912 1.362-2.795 0.5843 2.795-379 0.9565 0.3568 0.3134 0.3678 0.5317 0.453 0.6697 0.3807 0.5634 0.5433 0.424 0.5965 0.7043 0.5062 0.5301 0.3261 0.5937 0.1866 0.2098 Standard Deviation 0.6665 Mean 0.4556 Sharpe Return 0.5979

Sources: Secondary source

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Portfolio constructed on B/M Range B/M Range .011-.558 .558-.860 0.6645 .860-1.132 0.4603 1.132-1.403 0.5322 1.403-1.752 0.5861 1.752-2.120 0.6153 2.120-2.800 0.6394 2.800-3.654 0.5049 3.654-5.532 0.6471 5.532-148.222 1.4739 0.6171 0.3799 0.4622 0.6259 0.2893 0.4599 0.3642 0.4804 0.4265 0.6003 0.3766 0.5452 0.3735 0.5945 0.2775 0.4789 0.3802 0.4861 Standard deviation 0.4765 Mean 0.3004 Sharpe Return 0.5105

Sources: Secondary source

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2004-05
Standard Deviation 1.2194 2.124-3.253 1.25 3.253-4.221 0.3236 4.221-5.045 0.3677 5.045-6.693 0.696 6.693-8.816 0.3683 8.816-10.526 0.3904 10.526-14.870 0.3247 14.870-31.896 0.3079 31.896-285 0.733 0.0516 -0.0298 0.0626 -0.0351 0.0447 -0.0883 0.1067 0.0852 0.1215 0.1308 0.3136 0.345 0.1763 0.2797 0.1585 0.2631 0.33 0.2059

P/E Range .212-2.124

Mean 0.544

Sharpe return 0.3892

Sources: Secondary source

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Port folio formed on the basis of QE (quality of earnings)

QE Range .006-.101 .101-.175 1.1932 .175-.249 0.3459 .249-.375 0.811 .375-.489 0.9257 .489-.666 0.3243 .666-.868 0.5636 .868-1.174 0.3619 1.174-1.921 0.8828 1.921-265 0.416 0.0311 -0.1017 0.2681 0.2206 0.064 -0.0258 0.1648 0.1622 0.1857 0.3463 0.4064 0.3565 0.321 0.3064 0.1414 0.1966 0.262 0.1582 Standard Deviation 0.6901 Mean 0.2398 Sharpe Return 0.2413

Sources: Secondary source

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Portfolio constructed on B/M Range

B/M Range .010-.571 .571-.908 0.5419 .908-1.203 0.3322 1.203-1.476 3428 1.476-1.790 0.399 1.790-2.149 0.7478 2.149-2.632 0.446 2.632-3.523 0.7957 3.523-5.144 0.6299 5.144-72.230 1.3065 0.4396 0.2803 0.07 -0.0055 0.1099 0.0459 0.0858 0.0277 0.2829 0.2802 0.1299 0.1416 0.1385 0.1898 0.07 -0.0102 0.1838 0.2038 Standard deviation 0.4024 Mean 0.5091 Sharpe Return -0.0356

Sources: Secondary source

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GRAPHICAL ANALYSIS ON THE PEERFORMANCE OF FUNDS LAUNCHED BY PRU ICICI

58

Growth since Inception Dynamic Plan

80000 70000 60000 50000 40000 30000 20000 10000 0
ap r ap r ap r ap r oc t oc t oc t oc t 20 03 20 04 20 05 20 05 20 06 20 06 20 03 20 04 20 02 oc t

S&P CNX Nifty Pru ICICI Dynamic

Year

59

Growth since Inception Emerging star

35000 30000 25000 20000 15000 10000 5000 0 S&P CNX Nifty Pru ICICI Emerging star

fe b

oc t

fe b

ju n

oc t

20 05

20 05

20 05

20 06

Year

60

20 06

20 06

20 04

oc t

jly

Growth since Inception Infrastructure firm

25000 20000 15000 10000 5000 0 S&P CNX Nifty Pru ICICI Infrastructure

20 05

20 05

20 06 fe b 20 06 ap r 20 06 ju n 20 06 no v 20 07 ja n
Year

au g

20 05 oc

de c

61

300000 250000 200000 Year 150000 100000 50000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 S&P CNX Nifty Pru ICICI FMCG Fund

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CHAPTER-5

FINDINGS, SUGESSTIONS AND CONCLUSION

63

5.1 Findings

Suppose A invested in mutual fund scheme & B in Equity scheme. Both are investing Rs.75 lakhs in 1st july 2003. after a quarter they again invest Rs.25 lakhs. Total investment will become 1crore now. Every quarter both are changing the portfolios similarly.

In an FOF scheme there is no need to pay capital gain tax and also the entry load in between. But in equity scheme in changing the portfolios the person is suppose to pay capital gain tax as well as the entry load if he is selling and going for a new scheme.

If the taxation is not TDS he can reinvest the entire amount which he is getting through sales. From the analysis its very clear that if a person is reinvesting the amount which he calculated as capital gain, it will earn more returns.

IT companies shares are promising one they are more bound to international risk since most of the IT companies largely depends on the US market any downward trend in the US economy may have a negative impact on these companies shares but for the long term investment this shares are promising one hence the company has allocated a considerably good amount in the IT.

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5.2 SUGGESTIONS

When an investor opts to make investment he should first gather sufficient information about the type of investment options available to him

The investor should be in a position to decide where and how much of funds are he ready to invest in particular security.

He should diversify his investment portfolio so that he is exposed to minimum risk.

Investor should not depend entirely on the past returns as the future is uncertain and the stock market is highly volatile.

The investor must be in a position to determine the degree of risk involved and then invest in any security.

He should not follow the foot of others while investing because usually people tend to go by the trend.

An investor must be in a position to judge which is the right time to enter into the market and quit the market.

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5.3 CONCLUSION

As different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.

The investor should analyze the market on a continuous basis which will help them to pick the right companies to invest their funds. the beta value, standard deviation and variance helps the investors in arriving at decision .the investors should be in a position to interpret the data in the right manner to arrive at important conclusions and investment decision From the analysis mutual funds are giving a return which is

higher than the SENSEX hence it gives the investor to have a safe return at minimum level of risk .
I hope this dissertation will help the investors as a guiding record in future and help them to make appropriate investment decisions.

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5.4
.

BIBLIOGRAPHY

BOOKS Investment management Preeti Singh-tenth edition Himalaya publication 2002 Investment analysis and portfolio management Prasanna Chandra-second edition Tata McGraw hill publishing company -2005 Security analysis and portfolio management Donald E Fischer, Ronald j Jordan sixth edition prentice hall of India private ltd 2000 Modern portfolio theory and investment analysis Edwin J Elton, Martin J Gruber fifth edition john Wiley & sons -2002 Investment management V A Avandi-fifth Edition Himalaya publication house 2003 JOURNALS The ICFAI journal of financial risk management vol 12 issue 7-June 2006 Business week vol 26 issue 41 February 2007 The ICFAI journal of applied finance vol 8 issue 8 august 2005

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