A PROJECT REPORT ON PERFORMANCE
EVALUATION OF SECTORAL MUTUAL FUND.
AT
KOTAK MAHINDRA MUTUAL FUND.
Presented by Mohammed Abdi Ali.
Smart ICBM
Content
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Executive Summary
Company Profile
Introduction
The Study
Data Analysis
Observations and Inferences
Limitation of Study
Conclusion
Recommendations
Bibliography
Executive Summary
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The project titled “Comparative Analysis Of Sectoral Mutual
Funds” being carried out for KOTAK MAHINDRA GROUP. Today
an investor is interested in tracking the value of his investments,
whether he invests directly in the market or indirectly through Mutual
Funds. This dynamic change has taken place because of a number of
reasons. With globalization and the growing competition in the
investments opportunity available he would have to make guided and
rational decisions on whether he gets an acceptable return on his
investments in the funds selected by him, or if he needs to switch to
another fund.
In order to achieve such an end the investor has to understand the basis
of appropriate preference measurement for the fund, and acquire the
basic knowledge of the different measures of evaluating the
performance of the fund. Only then would he be in a position to judge
correctly whether his fund is performing well or not, and make the
right decision.
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This project t is undertaken to help the investors in tracking the
performance of their investments in Sectoral Mutual Funds and has
been carried out with the objective of giving performance analysis of
Sectoral Mutual Fund.
The methodology for carrying out the project was very simple that is
through secondary data obtained through various mediums like fact
sheet of the funds, the Internet, Business magazines, Newspaper, etc.
the analysis of Sectoral Funds has been done with respect to its
various parameters. Technology Sectors have performed well over the
years. FMCG and PHARMA sectors are catching up.
Though not much representation was there for banking sector, Reliance
Banking Fund Did not perform well. I hope KOTAK, hyderabad will
recognize this as well as take more references from this project report.
OBJECTIVE
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PURPOSE: To study and analyse the performance of open ended, sectoral mutual
funds (growth).
OBJECTIVES:To know various funds’ involved in various Sectoral Mutual
Funds.
To know the future of Sectoral Mutual Funds in India.
To evaluate the performance of mutual funds by calculating their
returns and risks
COMPANY PROFILE
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Kotak Mahindra Bank
At Kotak Mahindra Bank, we address the entire spectrum of financial needs
for individuals and corporates. We have the products, the experience, the
infrastructure and most importantly the commitment to deliver pragmatic, endto-end solutions that really work.
Kotak Mahindra Old Mutual Life Insurance Ltd.
Kotak Mahindra Old Mutual Life Insurance is a 76:24 joint venture between
Kotak Mahindra Bank Ltd. and Old Mutual plc. Kotak Mahindra Old Mutual
Life Insurance is one of the fastest growing insurance companies in India and
has shown remarkable growth since its inception in 2004.
Old Mutual, a company with 160 years experience in life insurance, is an
international financial services group listed on the London Stock Exchange
and included in the FTSE 100 list of companies, with assets under
management worth $ 400 Billion as on 30th June, 2006. For customers, this
joint venture translates into a company that combines international expertise
with the understanding of the local market.
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CORNERSTONES OF STRAREGY:Focus on retail segment.
Build a strong pan-India network managed by experienced
professionals; build presence across both metros and class A/B town.
Build a trusted brand; ensure high visibility
ACHIVEMENTS:Largest independent distributor for financial products
Amongst the top 5 stock brokers
Amongst top 10 investment Bankers
Ranking 4rd in retail procurement in equity IPOs.
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MISSION OF KOTAK:To be a leading, preferred service provider to our customer, and to
achieve this leadership position by building an innovative,
enterprising, and technology driven organization which will set the
highest standards of service and business ethics
Kotak offers trading on a vast platform; National Stock Exchange,
Bombay Stock Exchange and Hyderabad Stock Exchange. More
importantly, Kotak makes trading safe to the maximum possible extent,
by accounting for several risk factors and planning accordingly. Kotak
is assisted in this task by their in-depth research, constant feedback and
sound advisory facilities.
INTRODUCTION
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Mutual Funds: An overview
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 invested by the fund manager in different types of
securities depending upon the objective of the scheme. These
could range from shares to debentures to money market
instruments. The income earned through these investments and
the capital appreciations realized by the scheme are shared by
its unit holders in proportion to the number of units owned by
them (pro rata). 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 portfolio at a
relatively low cost. Anybody with an investible surplus of as little
as a few thousand rupees can invest in Mutual Funds. Each
Mutual Fund scheme has a defined investment objective and
strategy.
History of Mutual Fund in
India:
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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
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
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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.
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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.
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.
 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 erstwhile UTI
which had in March 2000 more than Rs.76,000 crores of assets under
management and with the setting up of a UTI Mutual Fund,
conforming to the SEBI Mutual Fund Regulations, and with recent
mergers taking place among different private sector funds, the mutual
fund industry has entered its current phase of consolidation and
growth. As at the end of March, 2006, there were 29 funds.
Growth in asset under management
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Future Scenario
The asset base will continue to grow at an annual rate of about 30 to 35
% over the next few years as investor’s shift their assets from banks
and other traditional avenues. Some of the older public and private
sector players will either close shop or be taken over
SEBI is working out the norms for enabling the existing mutual
fund schemes to trade in derivatives. Importantly, many market
players have called on the Regulator to initiate the process
immediately, so that the mutual funds can implement the
changes that are required to trade in Derivatives.
Types of Mutual Funds
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Mutual fund schemes may be classified on the basis of its structure and
its investment objective.
By Structure:
Open-ended Funds
An open-end fund is one that is available for subscription all through
the year. These do not have a fixed maturity. Investors can
conveniently buy and sell units at Net Asset Value ("NAV") related
prices. The key feature of open-end schemes is liquidity.
Closed-ended Funds
A closed-end fund has a stipulated maturity period which
generally ranging from 3 to 15 years. The fund is open for
subscription only during a specified period.
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Interval Funds
Interval funds combine the features of open-ended and close-ended schemes.
They are open for sale or redemption during pre-determined intervals at NAV
related prices.
By Investment Objective:Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to
long- term. Such schemes normally invest a majority of their corpus in equities
Income Funds
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 and
Government securities. Income Funds are ideal for capital
stability and regular income.
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Balanced Funds
The aim of balanced funds is to provide both growth and regular income. Such
schemes periodically distribute a part of their earning and invest both in
equities and fixed income securities in the proportion indicated in their offer
documents. In a rising stock market,
Money Market Funds
The aim of money market funds is to provide easy liquidity, preservation of
capital and moderate income. These schemes generally invest in safer shortterm instruments such as treasury bills, certificates of deposit, commercial
paper and inter-bank call money
Load Funds
A Load Fund is one that charges a commission for entry or exit. That
is, each time you buy or sell units in the fund, a commission will be
payable. Typically entry and exit loads range from 1% to 2%. It could
be worth paying the load, if the fund has a good performance history
Special Schemes
Industry Specific Schemes
 Industry Specific Schemes invest only in the industries specified in the
offer document. The investment of these funds is limited to specific
industries like InfoTech, FMCG, and Pharmaceuticals etc
Index Schemes
 Index Funds attempt to replicate the performance of a particular index
such as the BSE Sensex or the NSE 50
Sectoral Schemes
 Sectoral Funds are those, which invest exclusively in a specified
industry or a group of industries or various segments such as 'A' Group
shares or initial public offerings.
RISK HIERARCHY OF MUTUAL FUNDS
Money
Market
Funds
Gilt
Funds
Debt
Funds
Equity
Funds
Hybrid
Funds
Flexible Asset
allocation
Funds
Aggressive
Growth
Funds
Growth Funds
High Yield
Debt Funds
Risk
Level
Diversified
Equity Funds
Index Funds
Value Funds
Focused
Debt Funds
Money
Market Funds
Gilt Funds
Diversified
Debt Funds
Type of Fund
Growth and
Income
funds
Balanced
Funds
Equity Income
Funds
Benefits of Mutual Fund investment
Professional Management:
 Mutual Funds provide the services of experienced and skilled professionals,
backed by a dedicated investment research team that analyses the performance
and prospects of companies and selects suitable investments to achieve the
objectives of the scheme.
Convenient Administration:
 Investing in a Mutual Fund reduces paperwork and helps you avoid many
problems such as bad deliveries, delayed payments and follow up with brokers
and companies. Mutual Funds save your time and make investing easy and
convenient
Return Potential:
 Over a medium to long-term, Mutual Funds have the potential to provide a
higher return as they invest in a diversified basket of selected securities.
Low Costs:
 Mutual Funds are a relatively less expensive way to invest compared
to directly investing in the capital markets because the benefits of scale
in brokerage, custodial and other fees translate into lower costs for
investors.
Liquidity:
 In open-end schemes, the investor gets the money back promptly at
net asset value related prices from the Mutual Fund
Flexibility:
 Through features such as regular investment plans, regular withdrawal
plans and dividend reinvestment plans, one can systematically invest
or withdraw funds according to your needs and convenience.
Limitations of mutual fund investment
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No Control Over Cost:
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An Investor in mutual fund has no control over the overall costs of
investing. He pays an investment management fee (which is a
percentage of his investments) as long as he remains invested in
fund, whether the fund value is rising or declining. He also has to
pay fund distribution costs, which he would not incur in direct
investing.
No Tailor-Made Portfolios:
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Investing through mutual funds means delegation of the decision of
portfolio composition to the fund managers. The very high net worth
individuals or large corporate investors may find this to be a
constraint in achieving their objectives.
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Managing A Portfolio Of Funds:
Availability of large no. of funds can actually mean too much choice for
the investors. He may again need advice on how to select a fund to achieve
his objectives.
Taxes:
During a typical year, most actively managed mutual funds sell anywhere
from 20 to 70 percent of the securities in their portfolios. If your fund
makes a profit on its sales, you will pay taxes on the income you receive,
even if you reinvest the money you made.
Cost of Churn
The portfolio of fund does not remain constant. The extent to which the
portfolio changes is a function of the style of the individual fund manager
i.e. whether he is a buy and hold type of manager or one who aggressively
churns the fund
The study
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Conceptual background of the study: 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
 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. For evaluating the performance of
selected Sectoral Mutual Fund schemes risk-return relation
models have been used like:
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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,
 Treynor's Index (Ti) = (Ri - Rf)/Bi.
 The Sharpe Measure
 In this model, performance of a fund is evaluated on the
basis of Sharpe Ratio
 Sharpe Index (Si) = (Ri - Rf)/Si
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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.
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.
Ri = Rf + Bi (Rm - Rf)
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Fama Model
 The 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.
 Ri = Rf + Si/Sm*(Rm - Rf)
DATA ANALYSIS
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Data Collection
Following is a description of the sources &
methodology followed to collect the data required
NAV
For the study NAVs of the funds have been taken
at every weekend i.e. the NAVs on Friday during
the period of the study have been considered.
NAV data have been taken from the website
www.myris.com and in some cases the websites of
the respective funds.
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Benchmark Index
The data is sourced from the website of National Stock
Exchange.
www.nse-india.com
Selection of the Schemes
Details pertaining to the type of the scheme, Assets under
management and Launch date were sourced from the
websites www.valueresearchonline.com
OBSERVATIONS AND
INFERENCES
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Total Risk (Standard Deviation)
All 14 funds are having high standard deviation as
compared to market. It is between 6 to 8 for all sectoral
funds qualified. Franklin FMCG and UTI Software are the
best among all with standard deviation of 6.19 and 6.41
Reliance banking and Magnum Pharma are
bad
performers among all with standard deviation of 7.90 and
7.87.
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Systematic
Risk(Beta)
Determination()
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None of the schemes have beta greater than 1(i.e. market beta)
suggesting that all these funds were holding a portfolio which was less
risky as compared with the market portfolio
Avg. beta for the group works out to .82214 and 9 schemes have beta
value greater than this.
FMCG sector has performed worst in this parameter. Magnum FMCG,
Franklin FMCG, Prudential ICICI FMCG have performed badly. Their
() is .52,.77,.57 respectively.
This shows that apart from these schemes having higher risk as
inferred previously by the high values of standard deviation of their
returns,
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and
Coefficient
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Limitation of study
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The analysis is based on historical data and thus indicates the past
performance which may not always be indicative of the future
performance.
Weekly NAVs have been considered for the study. Daily NAVs would
have given more precise result for the study
The time period considered by the study is only three years; a larger
period could have ensured coverage of a full market cycle, thus giving
a more real picture of the performance of the schemes.
Sharpe ratio (in its simplest forms) that the relationship between risk
and return is linear and remain linear throughout its entire range.
CONCLUTION
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Good Performers
Following 6 schemes have scored well on all parameters
Franklin Info tech
UTI Software
Birla Sun life
Franklin FMCG
DSPML Technology
Karvy Tech
Technology sector is the best performer among all the compared
sectors.
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Non-Performers
Our schemes which can be identified as non performing on the basis of
the parameters considered in the study are
Prudential ICICI Tech
Reliance Banking
Magnum FMCG
Prudential ICICI-FMCG
Franklin Pharma\
UTI Pharma.
RECOMMENDATIONS
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Technology sectoral funds have performed well on all parameters,
hence it is good bet for investments
FMCG and Pharma are avg. performers. Still they can be good for long
run
In Banking Sector Reliance was only fund which qualified but it was
worst performer in all parameters
Kotak should keep Mutual Fund Awareness Programmer’s on regular
basis for investors and clients as future belongs to mutual fund in India
specially Sectoral Mutual Funds
BIBLIOGRAPHY
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FINANCIAL MANAGEMENT … I M PANDY
MUTUAL FUND PRODUCT AND SERVICES TAXMAN
AMFI COURSE BOOK
Investment analysis and portfolio management
www.njindiainvest.com
www.moneycontrol.com
www.amfiindia.com
www.kotak.com
www.valueresearch.com
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Thank you all for your patinas
 The end
By:- Mohammed Abdi Ali