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EXECUTIVE SUMARY

In few years Mutual Fund has emerged as a tool for ensuring ones financial

well being. Mutual Funds have not only contributed to the India growth story

but have also helped families tap into the success of Indian Industry. As

information and awareness is rising more and more people are enjoying the

benefits of investing in mutual funds.

The first part gives an insight about Mutual Fund industry and its various

aspects, the Company Profile, Objectives of the study, Research Methodology.

One can have a brief knowledge about Mutual Fund and its basics through the

Project.

The project report in its later part presents data analysis. More importance is

given to analyse why debt funds are better? To realize the better performance

of debt funds, comparison of two good Fund Houses namely HDFC Mutual

Fund SBI Mutual fund have been done in detailed keeping in mind some

important schemes. Schemes that have been analysed in this project are

many like Gilt Short, Medium & Long, Debt Short Term, FMPs (Fixed Maturity

Plan) etc. These schemes have been analysed taking into consideration main

pillars of Debt Funds, i.e. Credit Quality, Liquidity, Return, Average Maturity

etc.

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INTRODUCTION TO THE SUBJECT

CONCEPT:

What are Mutual Funds

A mutual fund is pool of money, which is collected from many investors and is

invested by an Asset Management Company to achieve some common

objective of the investors.

The investment manager invests the money collected into assets that are

defined by the stated objective of the scheme. For example, an Equity fund

would invest in Equity and Equity related instruments and a Debt fund would

invest in Bonds, Debentures, and Gilts etc. Further, a mutual fund is just the

connecting bridge or a financial intermediary that allows a group of investors

to pool their money together with a predetermined investment objective. The

mutual fund will have a fund manager who is responsible for investing the

gathered money into specific securities (stocks or bonds).

MUTUAL FUND OPERATION FLOW CHART

THE INDIAN MUTUAL FUND INDUSTRY HAS PASSED THROUGH SIX

PHASES:

PHASE YEAR PHASE KNOWN ASPhase 1 1964-1987 Growth of UTIPhase 2 1987-1993 Entry of Public Sector banksPhase 3 1993-1996 Emergence of Private FundsPhase 4 1996-1999 Growth and SEBI regulationsPhase 5 1999-2004 Emergence of a large and uniform

industry

Phase 6 2004 onwards Consolidation and growth

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The risk return trade-off indicates that if investor is willing to take higher risk

then correspondingly he can expect higher returns and vise versa if he

pertains to lower risk instruments, which would be satisfied by lower returns.

For example, if an investors opt for bank FD, which provide moderate return

with minimal risk.

Thus investors choose mutual funds as their primary means of investing, as

Mutual funds provide professional management, diversification, convenience

and liquidity. That doesnt mean mutual fund investments risk free. This is

because the money that is pooled in are not invested only in debts funds

which are less riskier but are also invested in the stock markets which involves

a higher risk but can expect higher returns. Hedge fund involves a very high

risk since it is mostly traded in the derivatives market which is considered

very volatile.

WHY INVEST IN MUTUAL FUNDS ADVANTAGES

1. Increases the purchasing power of investors

2. Risk reduction through diversification

3. Reduction of risk

4.Money would be managed by professionals at low costs

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5. Reduction of transaction costs due to economies of operation at a large

scale

6. Liquidity (Fast redemption)

7. Convenience of investing the money and tracking the performance of

money

8. Flexibility to change investment objectives

9. Safety of regulatory environment by SEBI made the industry very

transparent

10.Mutual funds offer a whole range of industries / sectors to choose from.

DISADVANTAGES OF INVESTING IN MUTUAL FUNDS:

1. No control over Cost in the Hands of an Investor

2. No tailor-made Portfolios

3. Managing a Portfolio Funds

4. Difficulty in selecting a Suitable Fund Scheme

TYPES OF RISKS

All investments involve some form of risk. Mentioned below are the common

types of risks. An investor would do well to evaluate them against potentialrewards while selecting an investment.

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". It

is also known as systematic risk and interest rate risk.

Inflation Risk: Sometimes referred to as "loss of purchasing power."

There would be no such risk if the interest of the bond is linked to the rate of

inflation.

Credit Risk: In short, how stable is the company or entity to which one lends

his/her money while investing? 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,

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is rarely successful. A diversified portfolio can help in offsetting these

changes.

Exchange risk: 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: In sartorial 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.

TYPES OF RETURNS

There are three ways, where the total returns provided by mutual funds can

be enjoyed by investors:

1. Income is earned from dividends on stocks and interest on bonds. A

fund pays out nearly all income it receives over the year to fund owners

in the form of a distribution.

2. If the fund sells securities that have increased in price, the fund has a

capital gain. Most funds also pass on these gains to investors in a

distribution.

3. If fund holdings increase in price but are not sold by the fund manager,

the fund's shares increase in price. You can then sell your mutual fund

shares for a profit. Funds will also usually give you a choice either to

receive a check for distributions or to reinvest the earnings and get

more shares.

WHAT ARE THE TYPES OF MUTUAL FUNDS

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MUTUAL FUNDS CLASSIFICATION BASED ON INVESTMENT OBJECTIVE:

1. Equity Oriented

a. General Purpose : The investment objectives of general-

purpose. Equity schemes does not restrict these funds from investing

only in specific industries or sectors. Hence these funds have a

diversified portfolio of companies spread across a vast spectrum of

industries.

b. Sector Specific: These schemes restrict their investing to one or

more pre-defined sectors, e.g. technology sector. More risky since it is

concentrated only one sector.

c. Special schemes:

i. Index schemes: The primary purpose of an Index is to serve as a

measure of the performance of the market as a whole, or a specific

sector of the market. An Index also serves as a relevant benchmark

to evaluate the performance of Mutual Funds.

ii. Tax saving schemes: Tax-saving schemes offer tax rebates to the

investors under tax laws prescribed from time to time. Under Sec.88of the Income Tax Act, contributions made to any Equity Linked

Savings Scheme (ELSS) are eligible for rebate.

2. Debt Based

The objective of these Funds is to invest in debt papers. Government

authorities, private companies, banks and financial institutions are some of

the major issuers of debt papers. By investing in debt instruments, these

funds ensure low risk and provide stable income to the investors.

a. Income Schemes: Income schemes invest in long- and medium-term

instruments like corporate bonds, debentures, fixed deposits

b. Liquid Income Schemes: Liquid Income Schemes are similar to the

Income schemes but have a shorter maturity period.

c. Money Market Schemes: These schemes invest in short term

instruments such as commercial paper ("CP"), certificates of deposit

("CD"), treasury bills ("T-Bill") and overnight money ("Call"). Since they

invest in short-term maturities they are least volatile.

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d. Gilt Funds: Investment is done in Government securities. Less credit

risky, since Government Debt is generally credit risk free. Choosing

between a between gilt and an income fund would depend upon the risk

appetite of any investor.

3. Hybrid Scheme

These schemes are commonly known as balanced schemes and invest in both

equities as well as debt. By investing in a mix of this nature, balanced

schemes seek to attain the objective of income and moderate capital

appreciation and are ideal for investors with a conservative, long-term

orientation.

(II) Mutual Fund Investment Based on Constitution:

Open-ended schemes: 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.

Close-ended schemes: Close-ended schemes have fixed maturity periods.

Investors can buy into these funds during the period when these funds are

open in the initial issue. After that, such schemes cannot issue new units

except in case of bonus or rights issue. However, after the initial issue, you

can buy or sell units of the scheme on the stock exchanges where they are

listed.

Interval schemes: These schemes combine the features of open-ended and

closed-ended schemes. They may be traded on the stock exchange or may be

open for sale or redemption during pre-determined intervals at NAV based

prices.

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INTRODUCTION TO THE INDUSTRY

MUTUAL FUND INDUSTRY

The Indian Mutual fund industry is likely to be one of the largest and most

dynamic parts of the Indian financial services sector in the years ahead.

Mutual Funds play a significant role in the development of the financial market

and this has been proved in the developed countries like United States, United

Kingdom and Japan. The mutual funds in India have emerged as strong

financial intermediaries and are playing a very important role in bringing

stability to the financial system and efficiency to resource allocation. Mutual

funds help corporate in raising funds for their financial needs and provide an

avenue of Investment to investors by parking their savings. This leads to over

all growth of the economy.

STRUCTURE OF THE INDIAN MUTUAL FUND INDUSTRY

There are many entities involved and the diagram below illustrates the

organizational set up of a mutual fund:

INDIAN MUTUAL FUND ON THE RIGHT PATH

Nevertheless, the Indian MF industry is evolved into a more matured industry,

as investors now have a wider variety of fund schemes and types to invest in,

like index funds, sectorial funds, money market funds, ETFs and so on,

depending on their risk appetite and return expectations. ETFs and

commodity-linked funds like Gold ETFs are also gaining popularity among

Indian investors. The industry is also looking forward to make more cross

border investments in international capital market instruments on account of

the current volatility in the domestic capital market. The Indian MF industryoverall is in a growth mode, which will not only help India in building a strong

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financial system but also in providing a financial stabilizing factor to the

economy by absorbing financial risk and extra liquidity from investors base.

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INDUSTRY PERFORMANCE

The mutual funds in India have emerged as strong financial intermediaries and

are playing a very important role in bringing stability to the financial system

and efficiency to resource allocation. Mutual funds help corporate in raising

funds for their financial

Needs and provide an avenue of investment to investors by parking their

savings. This leads to over all growth of the economy. The major chunk of

household saving in India, which earlier went to bank deposit are now being

taken by Mutual funds. At the end of June 2007, there were 32 funds, which

manage assets of approximately Rs. 4,00,000 crores under 756 schemes. In

the same period mutual fund assets went up by 188% from April 2001 to June

2007.

CONTRIBUTION OF MUTUAL FUND TO INDIAS GDP

INDIAS GROWTH RECENT GDP RATES

YEAR GDP RATES (%) YEAR GDP RATES (%)1999-00 6.1 2003-04 8.22000-01 4.4 2004-05 7.52001-02 5.8 2005-06 8.42002-03 4 20006-07 9.4

The Indian mutual fund industry is one of the fastest growing sectors in the

Indian capital and financial markets. The mutual fund industry in India has

seen dramatic improvements in quantity as well as quality of product and

service offerings in recent years. Mutual Funds assets under management

grew by 96% between the end of 1997 and June 2003 and as a result it rose

from 8% of GDP to 15%. The industry has grown in size and manages total

assets of more than $30351 million.

GLOBAL MUTUAL FUND INDUSTRY

Over the year, structural changes in the global economic environment have

led to the emergence of a strong market economy and facilitated the growth

of the mutual funds industry. A market economy depends more on growth led

by financial market than by bank-finance. Since the mutual funds industry is a

strong pillar of the financial markets, it got a boost with the emergence of a

strong market economy. Mutual funds found increasing acceptance also

because they have the capacity to absorb the instability and uncertainties that

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characterize the financial market system. The rise in inflation, reduction in real

interest rates and growing complexities in the market provided tremendous

opportunities to mutual funds. For these reasons, the mutual funds industry

began to thrive well in not only the developed countries but also the newly

industrialized and developing country, particularly during the 1990s. Mutual

fund assets worldwide rose to $ 13 trillion at the end of 2003 from $ 11.32

trillion in the previous year-end 2002. Asset growth was boosted by positive

stock market return in all major economies and the on going net flow of new

investments.

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OBJECTIVE OF THE STUDY

The mutual fund industry in India has come a full circle from being an open

competitive market to nationalization.

The objective behind taking this project was:

To gain knowledge about Mutual Fund Industry with special focus on

Debt Fund

Analyse the performance of Debt Funds by comparing with Critical

parameters.

To know how effective debt schemes funds and their performance is in

comparison with various benchmark indices To look at the debt fund as a separate sector and therefore know its

benefits and limitations

To analyse the Debt Fund trend

To get a holistic picture of the Mutual Fund Industry in India, analyse its

trends and market potential

Apart from having theoretical knowledge of Mutual Fund as a subject there

was a need to know more things beyond academics syllabus. The same was

possible only by taking live project like this.

Hence, the project for Debt Fund Analysis was selected under the guidance of

Core faculty guide.

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METHODOLOGY

Market research calls for developing the research plan for gathering the

required information. The aim of the research was to find out How Mutual

Funds work with a special focus on Debt Fund Schemes. Two different debt

fund house were analysed to get a clear picture out of this project. The

following method is adopted for carrying out the research:

SOURCES OF DATA

Secondary data is taken into consideration for this project. Primary data could

not be collected as people are not aware much about Debt Fund Schemes. As

compare to Equity funds debt funds are not popular.

Although the secondary data has been used to compare critical parameter like

return till date, NAV, Current Sharpe Ratio & Expense ratio etc, care has been

taken not to take outdated secondary data.

Secondary source is the data obtained from published / unpublished sources.

This constitutes the chief material on the basis of which research work is

carried out. The secondary data used, in this report has been obtained from

Valueresearchonline, Indiainfoline, Research Database, Google and other

search engine websites. Secondary data has also helped to get a complete

information about the two different fund house.

COMPANY SELECTED FOR ANALYSIS

The Mutual Fund house selected for analysis are HDFC and SBI Mutual Fund,

which are performing well in the market, and different concepts in this project

can be easily understood and explored.

RESEARCH INSTRUMENTS

Initially common research instrument such as different types of graphs, Ratios

etc are used to study the parameters affecting the debt schemes.

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LIMITATIONS OF THE REPORT:

Time Constraint

Study is based on historical and current data

Detailed information related for future of debt fund was not completely

available

No primary data could be collected by actually visiting the people due

to lack of knowledge of Debt Funds.

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DEBT

FUND

ANALYSIS

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Investments goals vary from person to person. While somebody wants

security, others might give more weight age to returns alone. Somebody

might want to plan for his childs education while somebody might be saving

for proverbial rainy days or even life after retirement. With objectives defying

any range, it is obvious that the products required will vary as well.

HOW DO DEBT FUNDS MAKE MONEY?

In three ways precisely

1. Through the interest they get on the bonds they hold,

2. Through gains made by marking the portfolio to market values(assuming

that bond values rise),

. Through trading gains, i.e., by actively churning the portfolio

RISKS OF A DEBT MUTAUL FUND

Broadly, there can be two risks in a debt fund:

1. Credit Risk: The money in debt funds is invested in interest-bearing

instruments of banks, companies and Govt. such as bonds, FDs, GSecs

etc. Therefore if a particular company or a bank defaults, then it will

affect the returns. However, considering the fact that a particular

scheme would invest in many companies/banks, a default by a few will

not impact the returns much. Moreover, MFs invest mainly in top-rated

instruments, where the risk of default is very low. So overall this is not a

very big risk, unless of course there is a mass default or a MF invests in

low-rated instruments.

2. Interest Rate Risk: The interest rate and the bond price have an

inverse relationship. If interest rates rise, bond prices will fall.

Accordingly the NAV, which is calculated from the bond prices, will alsofall. But if interest rates fall, bond prices and consequently the NAV will

rise. And the longer is the maturity of a particular bond, the more it

falls/rises.

WHY DEBT?

Ideally, investments in the equity markets are fraught with uncertainties and

volatility. And hence, these factors nullify a constant flow of returns, which

debt schemes, to a certain extent, guarantee. And this being true of thecurrent market scenario, there is a growing shift towards debt schemes.

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Hence, in order to secure the hard-earned money, the investment is protected

through proper asset allocation of 60:40 between debt and equity. And this

also depends upon the investors goals and risk-taking capacity.

However, to consolidate a portfolio, one has to focus on retaining the income

generated through equity, considering their high-risk nature. And this way,

one can reduce the equity component and increase the debt exposure

gradually. Investing in debt funds will give a steady income without destroying

the capital.

THE DEBT ROUTE

In an environment where investors seek to achieve an asset allocation

between debt and equity, that suits their requirements, investing in debt

mutual fund schemes as a part of their debt allocation would offer investors

many advantages.

1. For starters, debt funds offer a superior risk-adjusted proposition along with

tax benefits.

2. While fixed deposits might appeal to conservative investors, in a growing

economy like India, inflation is a fact of life, which eats into the returns earned

on investments. From an inflation-adjusted perspective, fixed income mutual

funds compare very favorably to fixed deposits.

3. The fact is that debt funds are viable alternatives to other debt oriented

products is not widely understood by the investing populace. Most investors

still concentrate on the mutual fund part of the asset and miss the

significance of the underlying fixed income nature of the product.

Added advantage

1. In the investment world, it is not an either/or scenario between debtand equity. Basic principle of sound investing postulates a diversified

portfolio. Though debt funds often may just be the difference between

being able to retain the profits and loosing it all in the next round of

volatility. The main advantage of debt funds is relatively lower risk and

steady income additional to liquidity of investments.

2. FDs generally have a lock-in-period wherein in a pre-mature withdrawal

by an investor would mean a monetary penalty that would be charged to

the investor. Moreover, debt funds could generate better yields during

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economic growth, dependent on the kind of scheme chosen by the

investor. A fund invests in range of securities leading to diversification of

risk, an important parameter for an investor. Also, certain funds offer

regular income schemes where the interest payment is given to investor

for his investment at regular intervals. This facility not available with FDs.

3. Debt funds also tend to perform better in periods of economic

slowdown. Analysis says that debt should be looked upon as an effective

hedge against equity market volatility, which lends stability in terms of

value and income to a portfolio.

THE OPTIONS

Debt funds have a fairly wide range of schemes offering something for all

types of investors. Liquid fund, Liquid plus funds, Short term income

funds, GILT funds, income funds and hybrid funds are some of the

more popular categories.

For long term investors, income funds provide the best opportunity to gain

from interest rate movements. Liquid funds can be used for very short term

surpluses. Fixed maturity plans have been gaining in popularity as they

minimize the interest rate risk and offer reasonable returns to debt investors.

TAX ARBITRAGE

A potent reason behind investing in debt funds is the tax benefit. Specifically,

this is termed as tax arbitrage. Investing in debt attracts tax but in a

different manner. Opting for dividend option in liquid/money market schemes

attracts net dividend distribution tax of 28.325% and the remaining debt

schemes (like gilt, income/bonds) attract 14.16% tax in the hands of mutual

funds. Any investment, be it in fixed deposit schemes of any bank or in debtfunds have to be looked beyond the rate offered on the investment. For the

purpose of determining the attractiveness of the investment, effective return,

that is, post-tax returns should be given more weight. Dividends from debt

mutual funds are taxed at a rate lower than highest marginal tax rate. The

long term capital gains can also be paid after indexation benefit.

INVESTMENT HORIZON

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As an investor one should invest taking a holistic view and have debt funds as

part of overall portfolio. Beauty is, debt is one category where there is some

option for every investment horizon. Investors can select a fund on the basis

of respective investment horizon. For example, an investor with an overnight

investment horizon may choose a liquid fund where one may choose a hybrid

fund for investment horizon of 18 months or higher. Generally speaking, there

is a linear relationship between investment horizon and returns other things

remaining the same.

THE BEST PERFORMER

The returns on the funds depend on the maturity profile. And hence, in order

to differentiate the best performers in debt schemes, one should divide their

performances according to their maturity profiles. For instance, non-

convertible debentures give higher interest than commercial paper as the

former is for the medium- and long-term and the latter is for short and

medium term instruments.

Now, looking at the rising interest rates in the past, for more than one year,

gilt funds have not performed up to the mark. It is noteworthy to specify this,

as the rules of the game have changed over the last 2-3 years. There was a

time when government securities (G-secs) with a 10-year benchmark yield to

maturity (YTM) was moving in the range of 5-6%.The returns on gilt funds

depend on the bond prices. If bond prices are decreasing, then the returns on

them will decline over a period of time. But there are gilt funds that have

reasonably performed well.

After looking at the performances, it is seen that in the last one year, short-

term or liquid funds have been the best performers among all the categories,

considering returns generated by the majority of the schemes in this category.In order to expand, it is necessary for business owners to tap financial

resources. Business owners can utilize a variety of financing resources,

initially broken into two categories, debt and equity. "Debt" involves borrowing

money to be repaid, plus interest. "Equity" involves raising money by selling

interests in the company.

Investing in debt funds still makes sense. Here's why:

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1. Debt funds offer benefits, which pure debt investments (like bonds and

deposits) don't. If there were to be a further decline in interest rates, and

one has directly invested in debt instruments, it would not mean much.

One would hardly trade the securities that they hold since all one would

want to collect is the promised interest at the end of the term. But a debt

fund can post a better return by marking the bonds in its portfolio to their

rising market value, and by actively trading them.

2. The era of tax concessions is ending. With lower interest rates already

acting as a dampener, small saving schemes appear to be at a

disadvantage compared to debt funds.

3. Unlike the case of direct investments in bonds, higher returns in debt

funds need not necessarily mean higher risks. Several debt funds have

achieved great returns from a steady income stream and aggressive

duration management (that is managing bonds' tenure in the portfolio),

without their risk going up. In short, exceptional returns in debt funds need

not mean higher risks. In pure debt instruments, higher return is certainly

the result of the issuer taking higher risks.

4. Unlike retail investors, debt fund managers do not rely only on the

rating of credit rating agencies while evaluating bonds. The market has away of downgrading a bond even before the bond is actually downgraded

by a rating agency.

5. Debt fund managers can factor in a possible industrial recovery in their

strategies.

6. A debt fund manager can move a substantial chunk of the corpus into

corporate bonds and reap higher returns because of spread contraction. As

an individual investors, simply don't have the means to make such moves.

CURRENT SITUATION

While not too long ago, liquid and liquid plus funds faced a major crisis due to

the sudden redemption pressure, things have improved now. The debt market

is smooth and offers investors a safe place to keep money, provided no more

panic situations arise. After the Reserve Bank of India (RBI) cut cash reserve

ratios and opened a separate window for mutual funds to borrow against

certificates of deposit, the debt market overload eased up considerably.

Investors have burnt their fingers before in the equity market and are now

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focusing solely on wealth preservation. The debt market is looking the most

attractive currently and investors are still keen on keeping a sizeable portion

of their portfolio invested in debt.

In India, unlike abroad, one cannot invest in debt instruments as a retail

investor and that means the mutual fund route is what investors must use.

This has in such times been a blessing in disguise for investors as the risks

they could face have been considerably reduced. As such, amongst all the

risks mentioned the two most prominent ones that one should take care

against are interest rate risks and credit risks.

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REGULATORY AUTHORITY

SEBI (SECURITIES EXCHANGE BOARD OF INDIA)

Securities exchange board of India (SEBI) is the primary regulator of mutual

funds in India. It is mandatory for all mutual funds to get registered with SEBI.

SEBI regulations provide for the : The structure and formation of mutual

funds, the appointment of key functionaries, operation of the mutual fund,

accounting & disclosure norms, rights & obligations of functionaries and

investors, investment restrictions, compliance and penalties.

RBI

RBI acts as regulator of sponsors of bank-sponsored mutual funds, especially

in case of funds offering guaranteed / assured returns. No mutual fund can

bring out a guaranteed returns scheme without taking approval from RBI

COMPANIES ACT, 1956:

Asset Management Company and Trustees Company will be subject to the

provisions of the Companies Act, 1956. Under this act Company law board

(CLB) is the regulator and they can be approached for filling the complaints

against directors of AMC and Trustee Company. Registrar of Companies (RoC)

is responsible for compliances.

INDIAN TRUSTS ACT, 1882:

Since mutual fund is formed and registered as a public trust under the Indian

Trust Act, 1882, they have to follow the provision of this act.

MINISTRY OF FINANCE

The Finance Ministry is the supervisor of both the RBI & SEBI. The MoF s alsothe appellate authority under SEBI regulations. Aggrieved parties can make

appeals to the MoF on the SEBI rulings relating to mutual funds.

STOCK EXCHANGE

Stock Exchange is self regulatory organizations supervised by SEBI. Many

closed end schemes listed on exchanges are subject to regulations through a

listing agreement between the fund and the exchange on matters such as

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trading, clearing, transfer settlement of buying and selling of mutual fund

units in the market.

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IMPACT OF UNION BUDGET ON MUTUAL FUND INDUSTRY:

1. Easing in Income Tax Slabs

Measures

Threshold limit of Income Tax exemption for individuals raised as follows

Up to Rs.150,000 - NIL Rs.300,001 to Rs.500,000 - 20%

Rs.150,001 to Rs.300,000 - 10% Rs.500,001 and above - 30%Impact

This is expected to increase the disposable income in the hands of the

individuals to some extent which could translate into increased retail

investments in mutual funds.

Increase in Short Term Capital Gains Tax

Measures

Short Term Capital Gains Tax raised from 10% to 15%

Impact

Since long term capit

al gains tax has been left unchanged, this hike in short-term capital gains tax

could encourage long-term investments which augur well to the development

of the concept of long terms in the Indian Mutual Fund industry, which is

conspicuous by its absence but which is coveted by the fund industry given

the greater flexibility that this provides in fund management.

At the same time since the short term capital gains tax is still lower than the

income tax slabs of typical capital market investors, it is not expected to

cause too many investors to turn away from mutual funds.

2. Service Taxes Realigned for ULIPs

Measures

Asset management services provided under Unit Linked Insurance Plans

(ULIPs) would be brought on par with asset management services provided

under mutual funds as regards chargeability to service tax.

Services provided by stock/commodity exchanges and clearing houses would

also be brought under the service tax net.

Impact

The competitiveness of mutual funds vis--vis ULIPs in the investment basket

of investors is expected to increase somewhat.

Transactional expense levels of mutual funds are expected to go up

marginally on account of their exposure to stock and commodity exchangeswhich are expected to pass on the service tax. But clarity on what would

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define services here and on what amount the service tax would be levied is

awaited.

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COMPARATIVE ANALYSIS OF FUND HOUSE (DEBT SCHEMES)

WHY HDFC MUTUAL FUND?

HDFC Mutual Fund is one of the largest mutual funds and well-established

fund house in the country with consistent and above average fund

performance across categories since its incorporation on December 10, 1999.

The single most important factor that drives HDFC Mutual Fund is its belief to

give the investor the chance to profitably invest in the financial market,

without constantly worrying about the market swings. To realize this belief,

HDFC Mutual Fund has set up the infrastructure required to conduct all the

fundamental research and back it up with effective analysis.

HDFC GILT FUND - LONG TERM PLAN

INVESTMENT OBJECTIVE: Is to generate credit risk free returns through

investments in sovereign securities issued by the Central Government and/or

a State Government. The scheme is a dedicated gilt scheme which seeks togenerate reasonable returns with investments in government securities,

securities guaranteed by GoI with medium to long term residual maturities.

Entry Load: Nil, Exit Load: NIL

SNAPSHOTS

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PERFORMANCE

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ANALYSIS OF HDFC GILT FUND - LONG TERM PLAN

This fund has been rated 3 Star, this indicates Average performance of

this fund in the same category.

Average maturity of this fund is 11.73 years. Fund style of this fund is

also marked as high for Interest rate sensitivity.

Its benchmarking is done with the index which comprises securities

maturing late than seven years. So it can be said that benchmarking is

done correctly.

Credit quality is high for this fund, it can be determined that there will

be less possibility in its default risk. Default risk is less since the

investment of this fund is done AAA rated schemes.

Sharpe ratio is 0.47, that means the fund have generated 0.47

percentage point of return above the risk free return for each point of

standard deviation.

Expense ratio is 0.65

Beta of this fund is 0.66, it is less than 1 and it signifies that this fund is

conservative fund, means it is moving slowly than the market.

HDFC INCOME FUND - G

INVESTMENT OBJECTIVE

The primary objective of the Scheme is to optimise returns while maintaining

a balance of safety, yield and liquidity from a portfolio of debt and money

market instruments.

Entry Load: Nil, Exit Load: 2 % for redemption between 0 - 180 days and

investment below Rs. 1 Cr. 0.5 % for redemption between 0 - 90 days and

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investment of Rs. 1 Cr. and above 0.25 % for redemption between 91 - 180

days and investment of Rs. 1 Cr. and above 1 % for redemption between 181 -

365 days and investment below Rs. 1 Cr.

SNAPSHOTS

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ANALYSIS OF HDFC INCOME FUND

This fund has been rated 2 Star, this indicates below average

performance of this fund in the same category.

Average maturity of this fund is 9.27 years that can be considered as

shorter. Fund style is rated as high for Interest rate sensitivity.

Its benchmarking is done with the index which track the return on a

composite portfolio that includes call instrument, commercial paper,

government securities as also the AAA and AA related instruments. So it

can be said that benchmarking is done correctly. Credit quality is high for this fund, that means it can be determined that

there will be less possibility in its default risk. Default risk is less since the


Sharpe ratio is 0.75, that means the fund have generated 0.75


standard deviation.


Standard Deviation is 7.76.

Beta of this Fund is 0.94, it is less than 1, it signifies that this fund is


HDFC MF MONTHLY INCOME PLAN - SHORT TERM PLAN


The primary objective of Scheme is to generate regular returns through

investment primarily in Debt and Money Market Instruments. The secondaryobjective of the Scheme is to generate long-term capital appreciation by

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investing a portion of the Scheme's assets in equity and equity related

instruments. However, there can be no assurance that the investment

objective of the Scheme will be achieved.

This aims to generate regular returns through investment primarily in debt

and money market instruments. It will also invest inequity and equity related

securities to generate long-term capital appreciation.

Entry Load : NIL , Exit Load: 1 % for redemption between 0 - 365 days and

investment below Rs. 1 Cr. 0.25 % for redemption between 0 - 90 days and

investment of Rs. 1 Cr. and above

SNAPSHOT

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ANALYSIS OF HDFC MONTHLY INCOME PLAN SHORT TERM



Average maturity of this fund is 2.29 years that can be considered as

very short period, so this scheme is sensitive to market interest rate

change. Fund style for this is also rated as medium for Interest rate

sensitivity.


MIP portfolio that includes both equity held in various companies as well as

debt market instruments. Since benchmarking is in line with this schemes

objective it can be said that benchmarking is done correctly.

Credit quality is high for this fund, that means it can be determined that

there will be less possibility in its default risk. Default risk is less since theinvestment of this fund is done AAA & AA rated schemes.

Sharpe ratio is -0.73 that means the fund have generated -0.73


standard deviation.


Standard Deviation is 5. 68

Beta of this fund is 0.52 which is less than 1. This signifies that this fund

is conservative fund, means it is moving slowly than the market.

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HDFC MF MONTHLY INCOME PLAN - LONG TERM PLAN


The primary objective of Scheme is to generate regular returns through

investment primarily in Debt and Money Market Instruments. The secondary

objective of the Scheme is to generate long-term capital appreciation by

investing a portion of the Scheme`s assets in equity and equity related

instruments. However, there can be no assurance that the investment

objective of the Scheme will be achieved.

Entry Load: NIL, Exit Load : 1 % for redemption between 0 - 365 days and

investment below Rs. 5 Cr.

SNAPSHOTS

PERFORMANCE

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ANALYSIS OF HDFC MF MONTHLY INCOME PLAN - LONG TERM PLAN

This fund has been rated 3 Star, this indicates average performance of

this fund in the same category.

Average maturity of this fund is 5.95 years, Fund style for this fund is

also rated as high for Interest rate sensitivity.




objective it can be said that benchmarking is done correctly. Credit quality is high for this fund, that means it can be determined that





standard deviation.


Standard Deviation is 9.54

Beta of this fund is 0.89, which is less than 1. That signifies that this

fund is conservative fund, means it is moving slowly than the market.

HDFC Q INTERVAL PLAN C RETAIL-G

Entry Load: NIL, Exit Load: 1%

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ANALYSIS OF Q INTERVAL PLAN C RETAIL-G

Its benchmarking is done with the index which track the returns on a

portfolio that includes call instruments and commercial paper instruments.

Since benchmarking is in line with this schemes objective it can be said

that benchmarking is done correctly.

Sharpe ratio is 5.82 that means the fund have generated 5.82


standard deviation.



Beta of this fund is -0.02, which is less than 0, that means there is

inverse relationship between fund and market.

HDFC FMP 36M Jun 2007 Retail-G

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ANALYSIS HDFC FMP 36M Jun 2007 Retail-G


short term portfolio that include call instruments, commercial papers,

government securities as also the AAA and AA rated instruments. it can be

said that benchmarking is done correctly.

Sharpe ratio is 0.72 that means the fund have generated 0.72


standard deviation.



Beta of this fund is -0.11 which is less than 0, this signifies that there is

inverse relation between fund and market.

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SNAPSHOT OF HDFC DEBT FUND SCHEMES

ANALYSIS OF VARIOUS FUND SCHEMES OF HDFC MUTUAL FUND:

Credit Quality for most of the funds has been rated as High. That

indicates that there will be less possibility of default risk. Less default

risk will be there since the schemes into which they are investing are

AAA or AA rated.

Sharpe Ratio, as the rule says higher the Sharpe ratio better is the fund.

Above all the funds only HDFC Q Interval plan (Retail G) has got theoutstanding ratio. This particular fund has been able to generate

returns by taking less risk compare to other funds. It can also be said

that this fund has performed well considering its riskiness. Rest all can

be categorized as Good. Further to analysis, negative Sharpe ratio

cannot be compared with others.

Expense Ratio, as the rule says lower the Expense ratio better is the

fund. Above all the funds lowest Expense ratio is observed in HDFC Q

Interval plan (Retail G) has got the lowest ratio. Rest all can be

categorized as Pretty Ok, except HDFC MF Monthly plan Short term

plan which is more than 2%.

Shorter the average maturity more sensitive is the fund to market rate

changes. HDFC MF Monthly Income Plan Short term plan is more

sensitive to market rate changes compared to other schemes.

Considering funds 5 years return every fund is in line with the

performance of the return of its respective category. Except HDFC MF

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Monthly Income Plan Long term which has outperformed than its

respective category.

Four funds have been observed as Conservative Funds and for

remaining two there is an inverse relationship between market and

fund.

Proven Skills in Wealth Generation.

SBI Mutual Fund is Indias largest bank sponsored mutual fund and has anenviable track record in judicious investments and consistent wealth creation.

The fund traces its lineage to SBI - Indias largest banking enterprise. The

institution has grown immensely since its inception and today it is India's

largest bank, patronised by over 80% of the top corporate houses of the

country.

SBI Mutual Fund is a joint venture between the State Bank of India and Socit

Gnrale Asset Management, one of the worlds leading fund

management companies that manages over US$ 500 Billion worldwide.

Exploiting expertise, compounding growth

In twenty years of operation, the fund has launched 38 schemes and

successfully redeemed fifteen of them. In the process it has rewarded its

investors handsomely with consistent returns.

A total of over 5.4 million investors have reposed their faith in the wealth

generation expertise of the Mutual Fund.

Schemes of the Mutual fund have consistently outperformed benchmark

indices and have emerged as the preferred investment for millions of

investors and HNIs.

Today, the fund manages over Rs. 27,076.63 crores of assets and has a

diverse profile of investors actively parking their investments across 36 active

schemes.

The fund serves this vast family of investors by reaching out to them through

network of over 130 points of acceptance, 28 investor service centers, 46

investor service desks and 56 district organisers.

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SBI Mutual is the first bank-sponsored fund to launch an offshore fund

Resurgent India Opportunities Fund.

Growth through innovation and stable investment policies is the SBI MF credo.

MAGNUM GILT LONG-TERM-G


To provide the investors with returns generated through investments in

government securities issued by the Central Government and / or a State

Government. It will normally maintain an average maturity of more than three

years. Entry Load: NIL, Exit Load: 0.25 % for redemption within 90 days.

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ANALYSIS OF MAGNUM GILT LONG-TERM-G

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Average maturity of this fund is 8.09 years. Fund style of this is also

rated as high for Interest rate sensitivity.

Its benchmarking is done with the index which comprises securities

maturing later than seven years. Since benchmarking is in line with this

schemes objective it can be said that benchmarking is done correctly.



investment of this fund is done GoI schemes.

Sharpe ratio is 0.11 that means the fund have generated 0.11percentage point of return above the risk free return for each point of

standard deviation.

Expense ratio is 1.38.


Beta of this fund is 0.60, which is less than 1. This signifies that this


MAGNUM INCOME-G


The objective of the scheme is to provide the investors an opportunity to earn,

in accordance with their requirements, through capital gains or through

regular dividends, returns that would be higher than the returns offered by

comparable investment avenues through investment in debt & money market

securities.

Entry Load: Nil, Exit Load: 1 % for redemption between 0 - 180 days andinvestment upto Rs. 1 Cr. 0.5 % for redemption between 181 - 365 days and

investment upto Rs. 1 Cr.

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ANALYSIS OF MAGNUM INCOME-G

This fund has been rated 1 Star, this indicates poor performance, of this

fund in the same category.

Average maturity of this fund is 8.02 years. Fund style of this is also

marked as high for Interest rate sensitivity, that means they are sensitive

to market interest rate change.


composite portfolio that includes call instruments, commercial paper,

government securities as also the AAA and AA rated instruments. Since

benchmarking is in line with this schemes objective it can be said that

benchmarking is done correctly.






standard deviation.



Beta of this is 0.96, which is less than 1. That means this fund is


MAGNUM INCOME PLUS FUND (INVESTMENT PLAN)


The investment objective of the scheme will be to provide attractive returns tothe Magnum holders / Unit holders either through periodic dividends or

through capital appreciation through an actively managed portfolio of debt,

equity and money market instruments. Income may be generated through the

receipt of coupon payments, the amortization of the discount on the debt

instruments, receipt of dividends or purchase and sale of securities in the

underlying portfolio. The scheme aims to invest at least 80 per cent of its

corpus in investment grade debt instruments and money market instruments

and the balance in equity and equity related instruments. The stocks would be

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selected from the BSE 100 index only. Entry Load: NIL, Exit Load: 1 % for

redemption within 180 days 0.5 % for redemption between 181 - 365 days

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ANALYSIS OF MAGNUM INCOME PLUS FUND (INVESTMENT PLAN)

Average maturity is 1.27 years. Fund style of this is rated as medium for

Interest rate sensitivity.




objective it can be said that benchmarking is done correctly.


there will be less possibility in its default risk. Less default risk since the




standard deviation.

Expense ratio is 1. 30


Beta of this fund is 0.70, which is less than 1. This signifies that this


MAGNUM NRI INVESTMENT FUND


The investment objective of the scheme will be to provide attractive returns to

the Magnum holders either through periodic dividends or through capital

appreciation through an actively managed portfolio of debt, equity and money

market instruments. Income may be generated through the receipt of couponpayments, the amortization of the discount on the debt instruments, receipt of

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dividends or purchase and sale of securities in the underlying portfolio. The

scheme would invest only in investment grade debt instruments like

government securities, corporate bonds and debentures and money market

instruments. The average maturity of the scheme would normally not exceed

3 years. This would be ideal for investors with an investment horizon of more

than one year.

Fund Type: Open Ended. Entry Load: NIL, Exit Load: 0.5 % for redemption

within 180 days

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ANALYSIS OF MAGNUM NRI INVESTMENT FUND

Average maturity of this fund is 0.01 years. Fund style of this fund is

marked as low for Interest rate sensitivity.




can be said that benchmarking is done correctly.






standard deviation.


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Beta of this fund is 0.05, which is less than 1. That means this fund is

hughly conservative fund, means it is moving very slowly than the market.

SBI DEBT FUND SERIES 24 MONTHS 1-G


The objective of the scheme will be to provide regular income, liquidity and

returns to the investors through investments in a portfolio comprising of debt

instruments such as Government Securities, AAA/AA+ Bonds and Money

Market instruments. Income may be generated through the receipt of coupon

payments, the amortization of the discount on the debt payments, or

purchase and sale of securities in the underlying portfolio.

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ANALYSIS OF SBI DEBT FUND SERIES 24 MONTHS 1-G

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Average maturity of this fund is 0.63 which can be considered as very

short. Therefore, fund style of this fund is also marked as low for Interest

rate sensitivity.




can be said that benchmarking is done correctly.



investment of this fund is done AA rated schemes.


SNAPSHOT OF SBI HDFC DEBT FUND SCHEMES

ANALYSIS OF VARIOUS FUND SCHEMES OF SBI MUTUAL FUND:

Credit Quality for all the funds has been rated as High. That indicates

that there will be less possibility of default risk. Less default risk will be

there since the schemes into which they are investing are AAA or AA

rated.

Sharpe Ratio, as the rule says higher the Sharpe ratio better is the fund.

Above all the funds none of the funds Sharpe ratio is outstanding or

pretty good. It can also be interpreted that none of the fund have been

able to generate returns by taking less risk compare to other funds.

Considering the risk attached to the funds have not performed well.

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Further to analysis, negative Sharpe ratio cannot be compared with

others.

Expense Ratio, as the rule says lower the Expense ratio better is the

fund. Above all the funds lowest Expense ratio is observed in SBI Debt

Fund series 24 months has got the lowest ratio.

Shorter the average maturity more sensitive is the fund to market rate

changes. NRI Investment fund has got the shortest average maturity.

Compare to SBI Debt Fund series rest schemes are less sensitive to

market rate.

Considering funds 5 years return not every fund of SBI is in line with

the performance of the return given by its respective category. Returnsgiven by NRI investment plan and return given by its category is having

maximum difference.

Three funds have been observed as Conservative Funds and only one

fund is having an inverse relationship with.

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RECOMMENDATIONS

There is great scope for the growth of the mutual funds in India. Mutual funds

have to compete with bank deposits and government securities for a share of

consumer savings. This requires the regulator and the AMC to increase the

creditability of mutual funds and develop a trust among the average retail

investors.

Mutual Fund can penetrate rural India like the Indian Insurance Industry with

simple and limited products.

SEBI should allow the mutual fund to launch commodity mutual funds

Emphasis on better corporate governance

Trying to curb the late trading practices Introduction of financial planners who can provide need based advice

The following steps should be taken by SEBI and AMC

STEPS TO BE TAKEN BY SEBI

Increase accountability among different players

Give the board of trustees the right to choose the fund manager of their own

choice. This will make them more accountable and aware as to what the

AMC is doing.

Benchmark the performance of funds with peers as well as with specific

indices.

Restriction on who can be appointed as a sub brokers

Implementation of international accounting principles across the mutual fund

industry will help promote fairness and stability of the sector,

Steps to be taken by AMCs Make mutual offer documents more comprehensible by making disclosures

more simple and relevant, and fund structure more distinctive to the

common people

Make disclosure regarding the MF expense more transparent especially

distributor expenses which form a major chunk of entry loads.

Make Fund managers accountable to unit holders. This can be done by

organizing Annual General Meetings of Unit holders where performance of

the fund would be reviewed.

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CONCLUSION

Savings form an important part of the economy of any nation. With savings

invested in various options available to the people, the money acts as the

driver for growth of the country. Indians have predominantly favoured

assured and guaranteed returns from their investments. Hence the

tendency to save in Bank FDs, NSCs, PPFs, Post Office schemes and such other

products!

Indian financial scene too presents multiple avenues to the investors. Though

certainly not the best or deepest of markets in the world, it has ignited the

growth rate in mutual fund industry to provide reasonable options for an

ordinary man to invest his savings. And because MFs are not allowed to offer

assured/guaranteed returns - which means there is some uncertainty of

returns - debt mutual funds have not enjoyed the kind of popularity they could

have.

Though still at a nascent stage, Indian MF industry offers plethora of schemes

and serves broadly all type of investors. The range of products includes Equity

, Debt, Liquid, Gilt and Balanced Funds.

Coming to the mutual fund space, if debt schemes are to attract the investors

then they can act favorable in softening interest rate scenario.

There is no doubt that debt funds will continue to be frontrunners of growth in

the mutual fund industry but investors should not underestimate the risks

involved there.

There was a time when fixed maturity plans (FMPs) were corporate Indias

favourite debt investment. But new regulations have taken liquidity out of the

picture, putting their future in doubt. Two major regulatory changes have

affected FMPs. First, market regulator Securities and Exchange Board of India

(Sebi) has forbidden redemptions at net asset value (NAV) by new closed-end

funds, instead mandating that these funds be listed on a stock exchange as a

way of providing exit. The practice of announcing indicative yields and

portfolios has also been disallowed. While the indicative yield rule isnt a major

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dampener, the lack of NAV-based liquidation is a big issue. It wont be

surprising if FMPs die out eventually. The old ones will be redeemed and no

new ones will be launched. That would be a pity. Except for the liquidity

problem, FMPs have many desirable characteristics. Its also possible that as

the economic situation settles down, liquidity shortcomings will seem to

matter less and shorter-duration FMPs will make a comeback as a viable

investment.

With equity markets in the doldrums, mutual funds are increasingly turning to

debt instruments. Several mutual funds have diverted a large portion of their

portfolios into debt schemes.

LOOKING AHEAD

Though the last credit policy announced by the RBI did not make any changes

in key interest rates, there is a buzz regarding a further hike in cash reserve

ratio (CRR), which can put further pressure on banks. There are mixed

reactions by fund managers over the trend of interest rates. In this situation,

where interest rates could remain stable or can decline a little, selecting a

lucrative debt fund is difficult. Investors with a time period of one to threeyears can go for FMPs. They can stay away from investing in gilts for some

time, looking at the uncertainty in interest rates in the near future.

Debt funds offer tremendous scope for most investors. One can get liquidity,

and most importantly, a regular flow of income. However, it has a risk

attached as compared to fixed deposits. But considering the benefit of tax

arbitrage and the imposition of penalty on withdrawal before maturity in fixed

deposits, liquid funds are a better option, though returns in both fixed depositsand liquid funds are more or less the same. On the other hand, FMPs are

relatively less risky than income funds as they have fixed maturity, which

gives fixed returns according to the time period selected.

With FMPs dying and liquid funds set to be commoditized, it looks as if things

are going to be difficult for debt funds. However, there are many positives on

the horizon.

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Fundamentally, debt funds are simple products, or at least they ought to be.

Unlike the complex world of equity analysis, all debt instruments can be

reduced to five simple characteristics. Five pillars are credit quality, returns,

maturity, liquidity and tax.. Moreover, it is also easy for investors to map their

own expectations and requirements on the basis of these five parameters.. As

long as an investor can define his own needs, it should be a simple matter to

choose the debt fund that is the best fit for his needs.

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BIBLOGRAPHY

www.nse.com

www.unittrustofindia.com

www.indiainfoline.com

www.amfiindia.com

www.debtonline.com

www.mutualfundsindia.com

www.google.com

www.finmin.nic.in

www.valueresearchonline.com

www.itfsl.co.in

www.investopedia.com

www.myiris.comwww.moneycontrol.com

AMFI Book

Mutual Fund by Akhilesh (Based On AMFI (Advisorys Module)

Mutual Fund Industry Prodcuts & Services by Indian Institute of Banking &

Finance

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http://www.nse.com/http://www.unittrustofindia.com/http://www.indiainfoline.com/http://www.amfiindia.com/http://www.debtonline.com/http://www.mutualfundsindia.com/http://www.google.com/http://www.finmin.nic.in/http://www.valueresearchonline.com/http://www.itfsl.co.in/http://www.investopedia.com/http://www.myiris.comwww.moneycontrol.com/http://www.nse.com/http://www.unittrustofindia.com/http://www.indiainfoline.com/http://www.amfiindia.com/http://www.debtonline.com/http://www.mutualfundsindia.com/http://www.google.com/http://www.finmin.nic.in/http://www.valueresearchonline.com/http://www.itfsl.co.in/http://www.investopedia.com/http://www.myiris.comwww.moneycontrol.com/


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ANNEXURE

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GLOSSARY:

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 can not 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. 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. The most important and widely used measures of

performance are:

THE TREYNOR MEASURE: The Treynor ratio sometimes called Reward to

Variability Ratio also realtes return to risk; but systematic risk instead of total

risk is used. The higher the ratio the better the performance under analysis.

Treynors Index (Ti) = (Ri-Rf) / Bi

Where T= Treynor ratio, r = Portfolio return, rf= Riskfree rate, b= Portfolio

beta

THE SHARPE MEASURE: The Sharpe also known as Reward to Volatility

Ratio indicates the excess return per unit of risk associated with the excess

return. The higher the ratio the better performance.

Sharpe Index (Si) = (Ri-Rf)/SiWhere S=Sharpe ratio, r=Portfolio return, rf= Risk free rate, v=Portfolio

volatility

JENSON MODEL:Jensons model proposes another risk adjusted performance

measure. 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.

Ri = Rf + Bi (Rm-Rf)

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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.

Required return can be calculated as : Ri = Rf + Si/Sm*(Rm-Rf)

Wehre, Sm = standard deviation of market returns.

Fama Model that consider the entire risks associated with fund are suitable for

small investors, as the ordinary investor lacks the necessary skill and

resources to diversify..

EXPENSE RATIO : Expense ratio is the ratio of total expenses of the fund to

the average net assets of the fund. Expense ratio states how much you pay a

fund in percentage term every year to manage your money. Since this is

charged regularly (every year), a high expense ratio over the long-term may

eat into our returns massively through power of compounding.

Expenses ratio = Total expenses / Avg net assets * 100

PORTFOLIO TURNOVER : Every mutual fund has a portfolio turnover rate.

The turnover rate is basically the percentage of the portfolio that is bought

and sold to exchange for other stocks. This number helps one determine how

much you will have to pay in taxes for that mutual fund. For example, if the

mutual fund has a low turnover rate, you will probably pay less in taxes. If it

has a high turnover rate, you will probably pay more in taxes. Higher portfolio

turnover generally results in higher costs such as brokerage costs, stamp duty

and custodian charges. In case of higher portfolio turnover, the scheme will try

to endeavour to cover these costs by way of higher gain from the increased

turnover.

PORTFOLIO P/E RATIO : Importance of portfolio P/E ratio in case of mutualfunds is rather less as portfolio consists of a number of stocks in different

sectors. Every sector has different P/E and every individual security has a

different P/E ratio and it calculates the weighted average with respect to

weight of the security in the portfolio.

Otherwise also a portfolio composition changes almost every day. As portfolio

turnover rate increases it becomes more and more immaterial to find out the

importance of P/E with respect to mutual funds.

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P/E (price-to-earnings) ratio of a stock tells us how much the investors will pay

for one rupee of a companys earnings. High P/E indicates higher expectations

of investors from a particular stock. But the P/E ratio of a fund is the weighted

average of the P/E of all stocks in its portfolio.

PORTFOLIO P/B RATIO

Portfolio P/B ratio indicates at what price market is wiling to pay for a portfolio

with respect to its book value and again it is the average of P/B ratio of

different individual securities which are present in the portfolio.

A higher P/B ratio indicates that market values a particular security higher

than its book value and that may be for a variety of reasons but the other side

of it indicates that a security is not trading at correct valuation level and it is

deliberately increased by speculators.

P/B (price-to-book value) ratio compares the market value of a stock to its

book value. A high P/B value indicates an overvalued stock and a low P/B

indicates an undervalued stock. A low P/B of a stock could also mean that

something is fundamentally wrong with the company. For a fund, the P/B ratio

is calculated like the P/E ratio, by taking the weighted average P/B of all stocks

in a funds portfolio.

A funds P/E and P/B ratios do not take the cash component into account. So,

they are not as relevant for funds as they are for stocks. Yet they can be used

to understand the broad nature of a funds portfolio within a category. The

growth funds in a category will have a relatively higher P/E and P/B than the

value funds.

BETA

Beta = Covariance (Index, Stock) / Variance (Index)

If Beta =1, than fund will move precisely in line with the market.

Beta < 1, than it means that it is an conservative fund, i.e it is moving slowlythan the market.

Beta > 1, it means that fund is moving aggressively in the market.

debt funds.doc

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Transcript of debt funds.doc