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MANSUKH SECURITIES FINANCE LIMITED

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

OBJECTIVES OF THE STUDY The present study has been undertaken to meet the following specific objectives, 1. To evaluate investment performance of mutual funds in terms of risk and return. 2. To examine the funds sensitivity to the market fluctuations in terms of beta. 3. To appraise investment performance of mutual funds with risk adjustment the theoretical parameters as suggested by Sharpe and Treynor. .

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SCOPE OF THE STUDY


Mutual Funds provide the much needed fund requirements for the corporate sector. In the present day scenario, most of the corporate have been reportedly tapping the mutual fund route as a reliable source of finance. This decisive shift by the corporate towards the mutual fund route is due to the fact that there is a minimum or reasonable but assured rate of return which would be sufficient in the case of mutual funds to satisfy the investors. So, whether investing in mutual funds would be an ideal choice has to be probed from the viewpoint of the investor population. And if the answer is yes, which type of mutual fund will help investors to get regular return based on the NAV performance? In a nutshell, among other objectives, the present study aims at helping the investor to apply basic minimum criterion while making investments in mutual funds.

LIMITATIONS:
Not single work is an exception to the limitations every work has got its limitations. The data collection here in this project is strictly confined to the secondary sources. No primary data was associated with the project. Collecting historical NAV is very difficult. Selection of the schemes for the study is also a very difficult task because of the wide variety of schemes. The results of the study are subjected to inconsistencies arising out of the assumptions made to make the portfolios comparable viz., sample selection procedure, portfolio proportion assumption etc. The present study covers only equity scheme and balanced scheme. The study is related to three financial years only namely, 2007-2008, 2008-2009 and 2009-2010 spanning 36 months. Though care has been taken to collect data for the whole period of study, information was found missing for some days.

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MANSUKH SECURITIES FINANCE LIMITED

COMPANY PROFILE:
NAME: MANSUKH SECURITIES AND FINANCIAL LTD. YEAR OF STARTED: 1st January 2009 INVESTMENT: 3 lakh STARTED BY: Mr.A.B.Masur PLACE: Dharwad BRANCH MANAGER: Mr. Mahantesh.B. Shebannavar TYPE OF COMPANY: Sole Trader Mansukh securities and financial Ltd believes in giving services more and more satisfactorily and improving the quality of what they deliver along with wealth creation. It is the first stock and share broking firm to introduce the equity culture in the entire north Karnataka.

MANSUKH SECURITIES AND FINANCE LIMITED:


We are a leading Delhi based stockbroking company dealing in Equity/Commodity broking.Our mantra is "MAKE MORE".Client satisfaction is what we aim for. A sophisticated in house research department is our forte . Investment and Trading Solutions Provider. This has been our core business since more than two decades. Our group was founded in 1988 by Mr. J. U. Mansukhani an Ex.IES officer and U.N.O. advisor with decades of experience in capital markets. We are a Corporate Member of NSE, BSE, NCDEX & MCX and Depository Participant with NSDL and CDSL.Team Mansukh consists of qualified Professionals like M.B.As, C.As,Hardware and Software Engineers who tread the path of customer delight. Thus we are a Classic Mix of Youth and experience. -To the Investment and Trading needs of Retail Clients, HNI's, Corporates and Business Partners etc. You can choose your pick from the various Investment and Trading solutions customized to suit your needs. - Offices at more than 100 cities in India and a huge network of VSATs, Leased lines and modems. We use extended C-Band technology of HeCL, arguably one of the best providers of VSAT Technology.

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MANSUKH SECURITIES FINANCE LIMITED

Equity Trading Equity & Derivative Trading

You can trade in Equity and Derivative through our branches across India networked through VSATs and VPN. Commodities Trading

To cater to the needs of investors and traders in the booming commodity markets, we offer a reliable and user friendly trading platform to trade in commodities, listed in NCDEX and MCX. Depository Trading

We are having web based depository wherein you log on to www.moneysukh.com and check your holdings. We offer both NSDL (Speed-e) and CDSL (easiest) access to you. Internet Trading

We offer you both Browser as well as Exe. Based trading platforms which are exclusive packages from Asian Cerc and Financial Technologies. Logging in to www.moneysukh.com helps the investors immensely who gain access to a huge information and research resources.

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MANSUKH SECURITIES FINANCE LIMITED

Intraday SMS

Free SMS service* to clients enabling them to make informed buy/sell decisions in both equity and commodity markets Research & Advisory Services

We have our own inhouse R&D wing equipped with the most sophisticated research tools and software. Our research team is instrumental in analysing the market trends.

PMS

Portfolio Management Services to Residents, Non Residents and corporates with long term growth as main objective, making it more comprehensive and personalised service. The browser based online trading system Features: Easy installation and free access Multiple profiles can be configured. Single screen for commodity and capital markets. Integrated banking and BackOffice access. Odin Connect

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MANSUKH SECURITIES FINANCE LIMITED

Equity trading
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MANSUKH Trading Platform offers online equity trading facilities for investors who are looking for the ease and convenience and hassle free trading experience. We provide as well as Applications, which are high -end, integrated trading applications for fast, efficient and reliable execution of trades. These applications give you the privilege to trade at NSE and BSE simultaneously from any destination at your convenience. Moreover, both exe. Based as well as browser based trading platforms are available in both the above platforms. Our clients have access to a multitude of resources like live quotes, charts, research, advice; and online assistance, which help you to take informed decisions. Both trading systems offer integrated Asset Management system for executing delivery based trades, providing margins against shares and offer other products such as Buy Today, Sell Tomorrow without putting your position to risk. You can also trade through our Branch network on phone by calling our designated representatives in the Branches where you are registered as a client. Derivative Trading

Derivative products are structured in manner so as to curtail the risk exposure of an investor. Index futures and stock options are instruments that enable you to hedge your portfolio or open positions in the market. Option contracts allow you to run your profits while restricting your downside risk.Both Asiancerc and ODIN applications offer you delightful trading experience in derivatives. The exe. Version provides sophisticated analytical tools for charting and querying on the real time derivatives data.Powerful risk management features are in place for controlling customer exposures at the security level.To take care of the risk; Span Margining system manages the risks on derivative portfolios of the end customer.

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MANSUKH SECURITIES FINANCE LIMITED

Commodity Trading

To cater to the needs of investors and traders in the booming commodity markets we offer Trading Platforms in NCDEX and MCX using the ODIN technology. MANSUKH is a member of two major national level commodity exchanges, i.e National Commodity and Derivative Exchange and Multi Commodity Exchange and offers you trading platform of NCDEX and MCX. You can get Real-Time streaming quotes, place orders and watch the confirmation, all on a single screen. With the ever-increasing competition along with the ever-increasing volumes of business in the Commodities industry, automation is becoming the key to success. Management of diverse nature of commodities coupled with the diverse nature of risk profile of customers has become a challenging task. We provide a comprehensive solution to meet this challenge on a day-to-day basis. Depository

Evolution of the Indian capital market has seen several enhancements during the past few years and this has been a result of innovative use of newer technologies. In the reduced settlement cycle era, investors require updated demat account information at a much faster pace than ever before. In other words, the quest for account status information has risen manifold. We offer a quick, secure and hassle free alternative to holding the securities in physical form by providing both NSDL and CDSL depository. We provide web based access to your holding through our BackOffice software.

Speed-e an NSDL facility enables the Demat account holders who subscribe to this facility to
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MANSUKH SECURITIES FINANCE LIMITED

submit delivery instructions to us, instead of submitting delivery instruction slips (in paper form) .The users of SPEED-e can also check latest balances and transactions in their demat accounts through a facility called Internet-based Demat Account Statement (IDeAS) and monitor the status of execution of instructions. CDSL (Easiest) Internet-enabled services empowers a demat account holder in managing his securities anytime-anywhere in an efficient and convenient manner, all in a state-of-the-art secure environment. depository services.You can check your holdings online and transfer your shares using the link Depository. Backoffice

To provide robust back office support backed by excellent accounting standards and ensuring easy accessibility to back office accounting reports, to our clients, we have offered facilities to view various userfreindly, easily comprehendible back office reports using the link Backoffice below the heading My Mansukh Account.You can view reports and get them in print as well as digital contract notes. The reports include the Order and Trade information, final positions of clients and many more. Research & Advisory

Live calls on SMS during Market hours giving clear Buy/ Sell Recommendations with Entry Level, Volume, Target and Stop Loss Level are given to Traders for Intra-Day Movement.Intraday trend (IDT) of commodities and active stocks are sent as sms on the mobile. If you wish to receive intraday sms please mail us on services@moneysukh

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MANSUKH SECURITIES FINANCE LIMITED

Currency Derivatives We would like to introduce our new products Called 5 in 1, the Salient Features Equity cum Currency Trading A/c with Demat A/c Trade in NSE, BSE, F & O and Currency Derivative (NSE CDS & MCX Single A/c through which you can trade in equity and also Hedge your position with Currency trading Online Software available with Odin & Now (New Software) Online Back office Online DP Research Intraday Calls (SMS, Email

Operation Office Sri Balaji Complex, 2nd Floor, Opp. Mother Dairy, Patparganj Road, Pandav Nagar,Delhi-92. Mobile: 09350507924, 09999230889 Phone: 91-11-22484122, 91-11-32660796 Fax: 91-11-22485517 Email ID:services@moneysukh.com Corporate Office 306, 3rd Floor, Pratap Bhavan, 5, Bahadur Shah Zafar Marg, New Delhi 110002 Fax : 011-23739851 Email ID:contact@moneysukh.com

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ABSTRACT
Financial system in a country plays a dominant role in assets formation and intermediation, and contributes substantially in macroeconomic development. In this process of development mutual funds 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 play a crucial role in an economy by mobilizing savings and investing them in the capital market, thus establishing a link between savings and the capital market. The activities of mutual funds have both short-and long-term impact on the savings and capital markets, and the national economy. The Indian Mutual fund Industry has witnessed a structural transformation during the past few years. Therefore it becomes important to examine the performance of the mutual fund in the changed environment. This research report has evaluate the performance of Indian Mutual fund equity scheme by using monthly NAV returns of 10 equity Growth funds of 3 years past data from 1-1-2003 to 31-12-2005. BSE sensex has been used as a proxy for the market portfolio, while 364 day Treasury bills (T-bills) have been used as a surrogate for risk free rate of return. The performance of funds has been computed by using Sharpe.s ratio, Treynors ratio and Jensens ratio. To evaluate investment performance of mutual funds in terms of risk and return. to examine the funds sensitivity to the market fluctuations in terms of beta. To appraise investment performance of mutual funds with risk adjustment the theoretical parameters as suggested by Sharpe, Treynor and Jensen. To rank the funds according to Sharpes, Treynors and Jensens performance measure. There is no conclusive evidence which suggests that performance mutual funds superior to the market. However there is some evidence that some of the funds are performing better than the market

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FINANCIAL MARKETS
The Financial markets can be broadly classified into Organized and Unorganized markets. The Unorganized markets include Money lenders, Indigenous Bankers, etc. Where as, the organized market is classified as shown in the below chart.

Financial markets

Capital market

Money Market

Govt. Sec market

Industrial Securities Market

Long term loans market

Call money market

Comm. Bill market

T-bill market

Short term loan market

Primary Market

Secondary Market

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The financial markets can broadly be divided into Money and Capital market.

1.

Money market:
Money market is a market for debt securities that pay off in the short term usually less

than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt Instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. 2. Capital market: The Capital market is a market for financial assets which have a long or indefinite maturity. Generally it deals with long term securities which have a maturity period of above one year. Capital market may be further divided into three, namely;

Government securities market Industrial securities market Long term loans market

Government Securities market: The Government Securities market is otherwise called Gilt-Edged securities market. It is a market where Government securities are traded. Govt. securities are issued in denominations of Rs.100 and interest is payable half yearly. They carry tax exemptions also. Long term loans market: Development banks and commercial banks play a significant role in Long term loans market by supplying long term loans to corporate customers. Long term loans can be further classified as, (i) (ii) (iii) Term loans market Mortgages market Financial guarantees market.

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Industrial securities market: The Industrial securities market is a market for industrial securities namely, (a) Equity shares or ordinary shares (b) Preference shares, & (c) Debentures or bonds. It is the market where industrial concerns raise their capital or debt by issuing appropriate instruments The Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into; (i) Primary market or New issue market: This market deals with those securities which are issued to the public for the first time. This market facilitates capital formation. The most common method of raising capital by new companies is through issue of securities to the public. It is mainly done through IPO (Initial Public Offering).

Issues

Public

Rights

Preferential

Initial Public Offering

Further Public Offering

Fresh Issue

Offer for sale

Fresh Issue

Offer for sale

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Primarily issues can be classified as Public, Rights or Preferential issues (also known as Private
placements).While public & rights issues involve a detailed procedure, preferential issues are relatively simpler. The classification of issues is illustrated above.

Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves the way for listing and trading of the issuers securities. . A follow on public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations. Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements. A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in Chapter pertaining to preferential allotment in SEBI (DIP) guidelines which inter-alia include pricing, disclosures in notice etc. The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor protection) guidelines. SEBI framed its DIP guidelines in 1992. Many amendments have been carried out in the same in line with the market dynamics and requirements SEBI (Disclosure and investor protection) guidelines 2000 are in short called DIP guidelines. It provides a comprehensive framework for issuances by the companies.

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(ii) Secondary market: Secondary market is a market for secondary sale of securities. The securities which have already passed through new issue market are traded here. Generally such securities are quoted in the Stock Exchange and it provides a continuous and a regular market for buying and selling of securities. Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduitby facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions.

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INTRODUCTION MUTUAL FUNDS. AN OVERVIEW: An investment means employment of funds on assets (i.e. securities or mutual funds or any of the investment avenues) with the aim of earning income as well as capital appreciation. There are mainly two attributes while investing to any of the funds i.e. time and risk. There are mainly four objectives, which the investments activities will carry on. Those are: Return from the investment Risk involved Liquidity Hedge against inflation Safety Convenience There are many alternatives investment avenues which are open to the investors to suit their needs and nature .The selection of investment alternatives depends up on the required level of return and the risk tolerance level. These alternatives range from financial securities to traditional non-securities investment.

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Following are the various investment alternatives. Negotiable and fixed income securities Equity shares Preference share Debentures Bonds Indira vikas patra &Kisan Vikas patra Government securities Money market securities (i.e. treasury bill, commercial paper, certificate of Deposit etc)

Non-negotiable securities
Bank deposit Post office deposit NBFC deposit Tax saving schemes Public provident fund scheme National saving scheme Life insurance Mutual funds Real estate

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LITERATURE REVIEW
Introduction to Mutual Funds What is a Mutual Fund? Like most developed and developing countries the mutual fund cult has been catching on in India. There are various reasons for this. Mutual funds make it easy and less costly for investors to satisfy their need for capital growth, income and/or income preservation. And in addition to this a mutual fund brings the benefits of diversification and money management to the individual investor, providing an opportunity for financial success that was once available only to a select few. Understanding Mutual funds is easy as it's such a simple concept: a mutual fund is a company that pools the money of many investors -- its shareholders to invest in a variety of different securities. Investments may be in stocks, bonds, money market securities or some combination of these. Those securities are professionally managed on behalf of the shareholders, and each investor holds a pro rata share of the portfolio -- entitled to any profits when the securities are sold, but subject to any losses in value as well. For the individual investor, mutual funds provide the benefit of having someone else manage your investments and diversify your money over many different securities that may not be available or affordable to you otherwise. Today, minimum investment requirements on many funds are low enough that even the smallest investor can get started in mutual funds. A mutual fund, by its very nature, is diversified that is, its assets are invested in many different securities. Beyond that, there are many different types of mutual Funds with different objectives and levels of growth potential, furthering your chances to diversify.
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Evolution:
In most of the countries, mutual funds have emerged as strong rivals to banking industry in mobilizing savings funds. The reason that may attributed to same is that in the banking sector there are many restrictions for investment in the capital market, there as the mutual funds have been a free access to these markets which in other words have given then an upper hand in the matter of operations. Consequently, the returns from mutual funds investment are higher compared to the returns out of savings in banks in an ideal market condition. Thus, he mutual funds i8ndusty has witnessed a tremendous growth in countries like Mexico and South Africa. Mutual Funds can be broadly classified under 3 heads namely a) Investment Trust b) Holding companies c) Finance Companies Out of the above the investment trust got a boost because of good public response and today we have in India Unit Trust of India that was constituted on similar lines with the unit trust in the U.S.A. The unit trusts are open-ended schemes where the investor can buy and sell Unit at his only will and wish. The other advantage of unit Trust is that even a small investor can hold shares of many companies and enjoy the returns arising lot of the investment. The unit trust of India was constituted under the unit Trust of India act, 1963 and became operational in the year 1964 with the basic objectives of mobilizing savings through the sale of units and investing them in corporate securities with the idea of maximizing yield from them and capital appreciation with inbuilt liquidity. The unit trust of India still commands a good position among mutual fund in India and

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approximately 90% of the investments in mutual fund are in the schemes floated by unit trust of India. The unit trust of India has many highlights in its performance so far. The monopoly of unit trust of India was brought to an end with the entry of public sector mutual funds in the year 1987. Canara bank, State Bank of India, Punjab National Bank and Indian bank floated the premier mutual funds that came into being during 1987. Future growth prospects in mutual fund industry The major growth that drivers the Indian mutual fund industry is the huge demographic opportunity it offers on the platter. Apart from China, there is no other country in the world with such huge population and a large sum of investible money. India has a good 200-300 million people who fall in the lower-middle and middle-class bracket (also what you call the aspirers of mass affluence). The growth drivers of the industry would be demographic opportunity, global linkages, affluence opportunity and lifecycle opportunity. By 2015, there will be a working population of about 500 million people in India. As of now, Indian household savings is about Rs 10.5 lakh crore per annum. This savings pool is likely to grow at 38% annually at a GDP growth rate of 6% by 2015. India is already among the top five countries with the deepest savings pools. Market for niche Mutual Fund investment products are expected to hit in the coming years. The Innovative products are critically important for attracting investor interest. Fund houses will have to structure targeted value-added products for various classes of investors. There will be more beta offerings (as per risk), alpha instruments (activelymanaged funds) and blended alpha-beta products in the days to come. The funds/instruments we now have in the market will be wiped out or become Laggards. Real estate funds, infrastructure funds and gold ETF should do well in the years to come. This study is related to the Performance Evaluation of Mutual Fund Schemes. A comparative analysis of the returns of different mutual funds has been made with a definite purpose to identify a better performing fund. The study focuses on the NAV (Net Asset
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Value) of some selected AMCs (Asset Management Company) so as to serve as a guide to the investing public to help them find out as to which mutual fund has registered superior performance among the selected mutual fund schemes. This study will help Mansukh securities and finance Ltd to guide the clients to choose a scheme on the basis of performance evaluation of the schemes. The schemes selected for the study are Equity Schemes and balanced schemes. The study was made with the help of secondary data. The statistical tools like regression analysis and Standard deviations were used, and portfolio evaluation indices like Sharpes Index and Treynors Index were used for the performance evaluation. The calculations were made taking into account the daily NAVs of the mutual funds 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 held by them. Thus a mutual fund is the most suitable 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 invest able 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. A Mutual Fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for Equities, Bonds and other Fixed Income Instruments, real estate, derivatives and other assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and the time to keep track of events, understand their implications and act speedily. An Individual also finds it difficult to keep track of ownership of his assets, brokerage, dues and bank transactions etc. A Mutual Fund is the answer to all these situations. It appoints a professionally qualified and experienced staff that manages each of these functions on full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of Scale in all three areas- Research, Investments and Transaction Processing. While the concept of coming together to invest money collectively is not new, the mutual funds in their present form are a
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20th century Phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally there are thousands of mutual funds with different investment objectives. Today, mutual funds, collectively manage almost as much as or more money as compared to banks.

Characteristics of a Mutual Fund


A Mutual fund actually belongs to the investors who have pooled their funds. The ownership of the mutual funds is in the hands of the investors. In case of mutual fund the contributors and the beneficiaries of the funds are the same class of people namely the investors. Investment professionals manage a mutual fund and other service providers, who earn a fee for their services provided, from the fund. The pool of funds is invested in a portfolio of marketable investments. The value of the portfolio is updated every day. The investors share in the fund is denominated by UNITS. The value of the units changes with the change in the portfolios value, everyday. The value of one unit of investment is called as the net asset value or NAV

Mutual Fund Industry:


Unit Trust of India was the first mutual fund set up in India in the year 1963. I0n early 1990s, as a result of liberalization the Government allowed public sector banks and institutions to set up mutual funds. SEBI formulates policies and regulates the mutual funds to protect the interest of the 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. Thus, SEBI (Securities Exchange Board of India) regulates the security market.

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Diagram depicting working mechanism of Mutual funds.

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. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an investable 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.

Mutual funds are financial intermediaries, which collect the savings of investors and invest them in a large and well-diversified portfolio of securities such as money market instruments, corporate and government bonds equity shares of joint stock companies. Mutual funds are conceived as institutions for providing small investors with avenues of investments in the capital market. Since small investors generally do not have adequate time, knowledge, experience and resources for directly accessing the capital market, they have to rely on an intermediary, which undertakes informed investment decisions and provides consequential benefits of professional expertise.

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Why choose Mutual Funds? Investing in Mutual Funds offers several benefits: Professional expertise: Fund managers are professionals who track the market on an on-going basis. With their mix of professional qualification and market knowledge, they are better placed than the average investor to understand the markets Diversification: Since a Mutual Fund scheme invests in number of stocks and/or debentures, the associated risks are greatly reduced. Relatively less expensive: When compared to direct investments in the capital market, Mutual Funds cost less. This is due to savings in brokerage costs, demat costs, depository costs etc. Liquidity: Investments in Mutual Funds are completely liquid and can be redeemed at their Net Assets Value-related price on any working day. Transparency: You will always have access to up-to-date information on the value of your investment in addition to the complete portfolio of investments, The proportion allocated to different assets and the fund manager investment strategy. Flexibility: Through features such as Systematic Investment Plans, Systematic Withdrawal Plans and Dividend Investment Plans, you can systematically invest or withdraw funds according to your needs and convenience. SEBI regulated market: All Mutual Funds are registered with SEBI and function within the provisions and regulations that protect the interests of investors. AMFI is the supervisory body of the Mutual Funds industry.

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HISTORY OF MUTUAL FUNDS IN INDIA The history of mutual funds in India can be broadly divided into 5 important phases. First Phase: 1963-87 Initial Development phase (Unit Trust of India) In 1963, UTI was established by an Act of Parliament and given a monopoly. UTI commenced its operations from July 1964 .The impetus for establishing a formal institution came from the desire to increase the propensity of the middle and lower groups to save and to invest. UTI came into existence during a period marked by great political and economic uncertainty in India. The first and still one of the largest schemes, launched by UTI was Unit Scheme 1964. UTI created a number of products such as monthly income plans, childrens plans, equity-oriented schemes and offshore funds during this period. The total asset under management for the year 1987-88 was 6,700 crores. Second Phase: 1987-93 (Entry of Public Sector Funds) Second phase witnessed the entry of mutual funds sponsored by state owned banks and financial institutions. With the opening up of the economy, many public sector and financial institutions were allowed to establish mutual funds. In November 1987 the State Bank of India established the first non-UTI mutual fund-SBI Mutual Fund. This was followed by Canbank Mutual Fund (launched in December, 1987), LIC Mutual Fund (1989), and Indian Bank Mutual Fund (1990) followed by Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. These mutual funds helped Enlarge the investor community and the invest able funds. During this period, investors were shifting away from bank deposits to mutual funds. Most funds were Growth-oriented closed-ended funds. From 1987 to 1992-93, the fund industry expanded nearly seven times in terms of Assets under Management. The total asset under management considering both UTI and Public Sector was 47,004

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Third Phase: 1993-96 (Emergence of Private Funds) A new era in the mutual fund industry began with the permission granted for the entry of private sector funds in 1993, both Indian and Foreign. Also Government launched a series of measures aimed at the financial sector as a part of the economic liberalization and reform process. This included the setting up of the Securities and Exchange Board of India (SEBI) as a regulatory body for the financial sector including Mutual Funds, which issued the SEBI Mutual Fund Regulations in January 1993. During the year 1993- 94, five private sector mutual funds launched their schemes followed by six others in 1994-95. Fourth Phase: 1996-1999 (SEBI Regulations for Mutual Funds) More investor friendly regulatory measures have been taken both by SEBI to protect the investor and by the Government to enhance investors. Returns. A comprehensive set of regulations for all mutual funds operating in India was introduced with SEBI (Mutual Fund), 1996. These regulations set uniform standards for all funds and will eventually be applied in full to Unit Trust of India as well, even though UTI is governed by its own UTI Act. In 1999 Union Government Budget took a big step in exempting all mutual funds dividends from income tax in the hands of investors. 1999 marks the beginning of a new phase in the history of the mutual fund industry in India, a phase of significant growth in terms of both amounts mobilized from investors and assets under management. Fifth Phase: 1999-2002 This phase was marked by very rapid growth in the industry, and significant increase in market shares of private sector players. Assets crossed Rs. 1, 00,000. The tax break offered to mutual funds in 1999 created arbitrage opportunities for a number of institutional players. Bond funds and liquid funds registered the highest growth in this PERFORMANCE EVALUATION OF MUTUAL FUNDS IN INDIA Accounting for nearly 60% of the assets. UTI.s share of the industry dropped to nearly 50%

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MEANING & DEFINITIONS OF MUTUAL FUND: Mutual Funds are financial intermediaries. They are companies set up to receive your money, and then having received it, make investments with the money Via an AMC. It is an ideal tool for people who want to invest but don't want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you invest, you own part of the overall fund. The beauty of mutual funds is that anyone with an invest able surplus of a few hundred rupees can invest and reap returns as high as those provided by the equity markets or have a steady and comparatively secure investment as offered by debt instruments. A Mutual Fund is an investment tool that allows small investors access to a well diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day. In simple words, a mutual fund is a trust, which collects the savings from small investors, invest them in government securities and earn through interest, dividends and capital gains. For instance, if one has Rs. 1000 to invest, it may not fetch much on its own. But, when it is pooled with Rs. 1000 each from a lot of other people, then, one Could create a .big fund. Large enough to invest in wide varieties of shares and debentures on a commanding scale and thus, to enjoy the economies of large scale operations. DEFINITIONS: The SEBI, 1993 defines a Mutual Fund as .a fund established in the form of a trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations.. According to Weston J. Fred and Brigham, Eugene, unit trusts are . Corporations which accept dollars from savers and then use these dollars to buy stocks, long term bonds and short term debt instruments issued by business or government units; these corporations pool funds and thus reduce the risk of diversification..

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OPERATION OF THE FUND: A mutual fund invites the prospective investors to join the fund by offering various schemes so as to suit to the requirements of categories of investors. The resources of individual investors are pooled together and the investors are issued units/shares for the money invested. The amount so collected is invested in capital market instruments like treasury bills, commercial papers, etc. For managing the fund, a mutual fund gets an annual fee of 1.25% of funds managed at the maximum as fixed by SEBI (MF) regulations, 1993 and if the funds exceed Rs. 100 cores , the fee is only 1%. The fee cannot exceed 1%. Off course, regular expenses like custodial fee, cost of dividend warrants, fee for registration, the asset management fee etc are debited to the respective schemes. These expenses cannot exceed 3% of the assets in the respective schemes each year. The remaining amount is given back to the investors in full.

ROLE OF MUTUAL FUNDS IN THE FINANCIAL MARKET


Indian financial institutions have played a dominant role in assets formation and intermediation, and contributed substantially in macroeconomic development. In this process of development Indian mutual funds 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 play a crucial role in an economy by mobilizing savings and investing them in the capital market, thus establishing a link between savings and the capital market. The activities of mutual funds have both short-and long-term impact on the savings and capital markets, and the national economy. Mutual funds, thus, assist the process of financial deepening and intermediation. They mobilize funds in the savings market and act as complementary to banking; at the same time they also compete with banks and other financial institutions. In the process stock market activities are also significantly influenced by mutual funds.

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There is thus hardly any segment of the financial market, which is not (directly or indirectly) influenced by the existence and operation of mutual funds. However, the scope and efficiency of mutual funds are influenced by overall economic fundamentals: the interrelationship between the financial and real sector, The nature of development of the savings and capital markets, market structure, institutional arrangements and overall policy regime. Regulatory Aspects of Mutual Fund Schemes of mutual fund: the asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the Board. Every mutual fund shall along with the offer document of each scheme pay filing fees. the offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision including the Disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor. No one shall issue any form of application for units of a mutual fund unless the form is accompanied by the memorandum containing such information as may be specified by the Board. Every close ended scheme shall be listed in a recognized stock exchange within six months from the closure of the subscription. The asset management company may at its option repurchase or reissue the repurchased units of a close-ended scheme. A close-ended scheme shall be fully redeemed at the end of the maturity period. "Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution". The mutual fund and asset management company shall be liable to refund the application money to the applicants,-

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(I) If the mutual fund fails to receive the minimum subscription amount Referred to in clause (a) of sub-regulation (ii) If the moneys received from the applicants for units are in excess of Subscription as referred to in clause (b) of sub-regulation (1). The asset management company shall issue to the applicant whose application has been accepted, unit certificates or a statement of accounts specifying the number of units allotted to the applicant as soon as possible but not later than six weeks from the date of closure of the initial subscription list and or from the date of receipt of the request from the unit holders in any open ended scheme.

The flow chart below describes broadly the working of a mutual fund :

Mutual Fund Operation Flow Chart

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ORGANISATION OF A MUTUAL FUND: The formation and operations of Mutual Funds in India is solely guided by SEBI (Mutual Funds) Regulations, 1993, which came into force on 20th January, 1996, through a notification on 9th December, 1996. these Regulations make it mandatory for Mutual Funds to have a three-tier structure of : 1. A Sponsor Institution to promote the Fund. 2. A team of Trustees to oversee the operations and to provide checks for the efficient, profitable and transparent operations of the fund and 3. An Asset Management Company (AMC) to actually deal with the funds.

Composition of Indian Mutual Fund Industry: Unit Trust of India Bank sponsored Bank of Baroda AMC Bank of India AMC Canbank Investment Management Services Ltd. Punjab National Bank AMC Ltd. SBI Funds Management Ltd. Indfund Management Ltd. Institutions: General Insurance Corporation AMC IDBI Principal Asset Management Co. Jeevan Bima Sahayog Asset Management Co. Ltd.

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Private Sector: 1. India Benchmark AMC Ltd. Cholamandalam AMC Ltd. Escorts AMC Ltd. J.M. Capital Management Co. Ltd. Kotak Mahindra AMC Ltd. Shriram AMC Ltd. 2. Joint Venture .Predominantly Indian Birla Sun Life AMC Pvt. Co. Ltd. DSP Merrill Lynch Investment Mangers (India) ltd. HDFC AMC Ltd. Sundaram Newton AMC Tata TD Waterhouse Asset Management Private Ltd. 3. Joint Ventures .Predominantly Foreign Alliance Capital Asset Management (India) Pvt. Ltd. Standard Chartered Asset Management Co. Pvt. Ltd. ING Investment Management (India) Pvt. Ltd. JM Asset Management (India) Pvt. Ltd. Morgan Stanley Investment Management Pvt. Ltd. Prudential ICICI Management Co. Ltd. Templeton Asset Management (I) Pvt. Ltd. Sponsoring Institution: The Company, which sets up the mutual fund, is called the Sponsor. SEBI has laid down certain criteria to be met by the sponsor. The criterion mainly deals with adequate experience, good past track record, net worth etc. Sponsor appoints the Trustees, Custodian and the AMC with the prior Approval of SEBI, and in accordance with SEBI Regulations. Sponsor must have at least 5-year track record of business interest in the Financial Markets.
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Trustees: Trustees are the people with long experience and good integrity in the respective Fields carry the crucial responsibility in safeguarding the interests of the investors. For this purpose, they monitor the operations of the different schemes. They have Wide ranging powers and they can even dismiss AMC with the approval of SEBI. The Indian Trust Act governs them. Rules regarding appointment of the Trustees are: Appointment of Trustees has to be done with the prior approval of SEBI. There must be at least 4 members in the Board of Trustees and at least 2/3rd of the members of the Board of Trustees must be independent. Trustees of one Mutual Fund cannot be a Trustee of another Mutual Fund, Unless he is an independent trustee in both cases, and has the approval of Both the Boards. Rights of Trustees: Trustees appoint the AMC, in consultation with the sponsor and according to SEBI Regulations. All mutual Fund Schemes floated by the AMC have to be approved by the Trustees. Trustees can seek information from the AMC on the operations and Compliance of the Mutual Fund, with the provisions of the trust Deed, Investment management agreement and the SEBI Regulations. Trustees can review and ensure that Net worth of the AMC is according to Stipulated norms and regulations.

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INVESTMENT OBJECTIVES AND VALUATION POLICIES: The money collected under any scheme of a mutual fund shall be invested only in transferable securities in the money market or in the capital market or in privately placed debentures or securitised debts. Provided that moneys collected under any money market scheme of a mutual fund shall be invested only in money market instruments in accordance with directions issued by the Reserve Bank of India. The mutual fund shall not borrow except to meet temporary liquidity needs of the mutual funds for the purpose of repurchase redemption of units or payment of interest or dividend to the unit holders. The mutual fund shall not advance any loans for any purpose. The Net Asset Value of the scheme shall be calculated and published at least in two daily newspapers at intervals of not exceeding one week. The price at which the units may be subscribed or sold and the price at which such units may at any time be repurchased by the mutual fund shall be made available to the investors.

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SEBI REGULATIONS ON MUTUAL FUNDS The Government brought Mutual Funds in the Securities market under the regulatory framework of the Securities and Exchange board of India (SEBI) in the year 1993. SEBI issued guidelines in the year 1991 and comprehensive set of regulations relating to the organization and management of Mutual Funds in 1993. SEBI REGULATIONS 1993 (20.1.1993) The regulations bar Mutual Funds from options trading, short selling and carrying forward transactions in securities. The Mutual Funds have been permitted to invest only in transferable securities in the money and capital markets or any privately placed debentures or securities debt. Restrictions have also been placed on them to ensure that investments under an individual scheme, do not exceed five per cent and investment in all the schemes put together does not exceed 10 per cent of the corpus. Investments under all the schemes cannot exceed 15 per cent of the funds in the shares and debentures of a single company. SEBI grants registration to only those mutual funds that can prove an efficient and orderly conduct of business. The track record of sponsors, a minimum experience of five years in the relevant field of Investment, financial services, integrity in business transactions and financial soundness are taken into account. The regulations also prescribe the advertisement code for the marketing schemes of Mutual Funds, the contents of the trust deed, the investment management agreement and the scheme-wise balance sheet. Mutual Funds are required to be formed as trusts and managed by separately formed as trusts and managed by separately formed Asset Management Companies (AMC). The minimum net worth of such AMC is stipulated at Rs.5 crores of which, the Mutual Fund should have a custodian who is not associated in any way with the AMC and registered with the SEBI. The minimum amount raised in closed-ended scheme should be Rs.20 Crores and for the open-ended scheme, Rs.50 Crores. In case, the amount collected falls short of the minimum prescribed, the entire amount should be refunded not later than six weeks from the date of closure of the scheme. If this is not done, the fund is required to pay an interest at the rate of 15 per cent per annum from the date of expiry of six weeks. In addition to these, the

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Mutual Funds are obliged to maintain books of accounts and provision for depreciation and bad debts. Further, the Mutual Funds are now under the obligation to publish scheme-wise annual reports, furnish six month un-audited accounts, quarterly statements of the movements of the net asset value and quarterly portfolio statements to the SEBI. There is also a stipulation that the Mutual Funds should ensure adequate disclosures to the investors. SEBI has agreed to let the Mutual Funds buy back the units of their schemes. However, the funds cannot advertise this facility in their prospectus. SEBI is also empowered to appoint an auditor to investigate into the books of accounts or the affairs of the Mutual Funds. SEBI can suspend the registration of Mutual Funds in the case of deliberate manipulation, price rigging or deterioration of the financial position of Mutual Funds. SEBI REGULATIONS, 1996 SEBI announced the amended Mutual Fund Regulations on December 9, 1996 covering Registration of Mutual Funds, Constitution and Management of Mutual funds and Operation of Trustees, Constitution and Management of Asset Management Companies (AMCs) and custodian schemes of MFs, investment objectives and valuation policies, general obligations, inspection and audit. The revision has been carried out with the objective of improving Investor protection, imparting a greater degree of flexibility and promoting innovation The increase in the number of MFs and the types of schemes offered by them necessitated uniform norms for valuation of investments and accounting practices in order to enable the investors to judge their performance on a comparable basis. The Mutual Fund Regulations is sued in December 1996 provide for a scheme-wise report and justification of performance, disclosure of large investments which constitute a significant portion of the portfolio and disclosure of the movements in the unit capital. The existing Asset Management Companies are required to increase their net worth from Rs.10 crores within one year from the date of notification of the amended guidelines. AMCs are also allowed to do other fund-based businesses such as providing investment management services to offshore funds, other Mutual Funds, Venture Capital Funds and Insurance Companies. The amended guidelines retained the former fee structure
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of the AMCs of 1.25% of weekly average Net Asset Value (NAV) up to Rs.100 crores and 1% of NAV for net assets in excess of Rs.100 crores. The consent of the investors has to be obtained for bringing about any change in the fundamental attributes of the scheme on the basis of which the unit holders had made initial investments. The regulation empowers the investor. The amended guidelines require portfolio disclosure, standardization of accounting policies, valuation norms for NAV and pricing. The regulations also sought to address the areas of misuse of funds by introducing prohibitions and restrictions on affiliate transactions and investment exposures to companies belonging to the group of sponsors of mutual funds. The payment of early bird incentive for various schemes has been allowed provided they are viewed as interest payment of early bird incentive for early investment with full disclosure. The various Mutual Funds are allowed to mention an indicative return for schemes for fixed income securities. In 1998-99 the Mutual Funds Regulation were amended to permit Mutual Funds to trade in derivatives for the purpose of hedging and portfolio balancing. SEBI registered Mutual Funds and Fund managers are permitted to invest in overseas markets, initially within an overall limit of US $500 million and a ceiling for an individual fund at US$ 50 million. SEBI made (October 8, 1999) investment guidelines for MFs more stringent. The new guidelines restrict MFs to invest no more than 10% of NAV of a scheme in share or share related instruments of a single company. MFs in rated debt instruments of a single issuer is restricted to 15% of NAV of the scheme (up to 20% with prior approval of Board of Trustees or AMC). Restrictions in un- rated debt instruments and in shares of unlisted companies. The new norms also specify a maximum limit of 25% of NAV for any scheme for investment in listed group companies as against an umbrella limit of 25% of NAV of all schemes taken together earlier. SEBI increased (June 7, 2000) the maximum investment limit for MFs in listed companies from 5% to 10% of NAV in respect of open-ended funds. Changes in fundamental attributes of a scheme was also allowed without the consent of three fourths of unit holders provided the unit holders are given the exit option at NAV without any exit load. MFs are also not to make assurance or claim that is likely to mislead investors. They are also banned from making claims in advertisement based on past performance.

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TYPES OF MUTUAL FUND

MUTUAL FUNDS

Based on the structure Open-ended

Based on investment objective Growth/Equity funds Income/Debt funds

Other schemes

Tax Saving schemes

Close-ended Interval Schemes

Balanced funds

Special schemes Sector funds Index funds

Money market funds

Gilt funds

General purpose funds

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On the basis of investments objective, there are five different types of Schemes: Growth/Equity Scheme: Majority of the corpus of such a scheme is invested in equities and equity related instruments. This kind of scheme is for those investors who are not risk averse and are willing to hold on to their investment for a long period of time, caring little for volatility. In such schemes, dividend may or may not be declared. Income /Debt Scheme: The Fund Manager of such schemes invests a substantial portion of their fund in fixed income securities like debentures, bonds and money market instruments. This kind of scheme is ideal for risk adverse investors who are interested in steady income. Balanced Schemes: Fund Manager of such funds invests in both equity as well as debt markets in the proportion as that highlighted in the prospectus. The objective of such a scheme is to provide both growth and income by distributing a part of the income and capital gains they earn. Such a scheme is suitable for investors who want long-term returns without taking the entire risk of the equity market.

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Money Market/Liquid Schemes: These are schemes with very low risks. They invest in Zero risk or safer, short term instruments like treasury bills, certificates of deposit, Commercial Paper and inter-bank call money. The objective of these schemes is to provide liquidity and moderate income and also preserve the capital. Tax saving Schemes: The objective of such a scheme is to provide tax benefits to the investors. Two types of schemes fall under this head. 1. ELSS (Equity Linked Savings Schemes): A Fund Manager of such a scheme invests primarily in stocks. An Important feature of this scheme is that there is a lock-in period of three years from the date of investment. During this period unit holders are prohibited from trading, pledging and transferring the units. Repurchase is permitted only after three years. 2. Pension Schemes: A unit holder in a Pension Scheme can avail of a tax rebate of 20 per cent for investments up to Rs 60,000 (tax saving of Rs 12,000).

Other schemes:

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.

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

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Fund of Funds (FoF) scheme:

A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. A FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.

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. A 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. Sales Practices in the Indian Mutual Fund Market Agent commissions Agents are compensated by the funds through commissions, commission rates. In India there are no rules prescribed for governing the minimum r maximum commissions payable by a fund to its agents. Each fund has discretion to decide the commission structure for its agents. Thus sundaram pays commission to its agents as a basic rates plus an incentive that depends on the volume of business. In recent times

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Funds have been paying commissions in the range of 1.5-2 % on equity oriented funds and 0.4-0.8 % on debt based funds. Higher commissions are generally paid in case of investments that are made with the purpose of taking tax benefits, since investors are required to lock in their funds for a longer period.

SEBI Regulations Although SEBI does not prescribe the minimum or maximum amount of commission payable by a fund to agents under SEBI (MF) Regulations, 1996, all initial expenses including Brokerage paid to agents are limited to 6 % of resources raised under the schemes. In additions, SEBI regulated open-end funds are authorized to charge the investors are entry & exit loads to cover the fund distribution expenses. These loads should not exceed the percentage specified in the schemes offer document. In case the agents commissions paid by the fund result in over all distribution expenses are to be borne by AMC i.e. the excess cannot be passed on to the unit holders. A no load, charging no entry or exit loads is authorized to charge the schemes with the commissions paid to agents as part of the regular management & marketing expenses allowed by SEBI. SEBI puts a cap on the total expenses (including commissions) that can be charged to a scheme each year. Any excess over allowable expenses is required to be borne by the AMC.

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Marker Practice Some funds pay the entire commission up- fronts to the agents (i.e. at the time of sale of units), while others pay apart of it up-front and the balance in phases. The latter practice is known as trail commission. Some funds follow the practice of non-paying the balance to the agent if the investor exits the scheme before a specified period or stop paying the commission after the investor exits whenever he does. On the issue of commissions, is that of rebating by the agent to the investor of a part of the commission received from the fund on the sale to that investor. Although agent commissions in the in the mutual industry are not at the same levels as in insurance, investors have come to expect such rebates from agents of all financial products. It is possible in future such rebates might reduce in future & may even disappear. He distributors themselves will tend to realize that they provide useful processing and advisory services to investors, & have to incur costs in the process that need to be covered from their well deserve commissions received from the funds Agents Obligation Commission/other arrangements are between the fund and agent/broker. Sub-brokers serve as agents of the principle agent and the fund is not answerable for their activities. Clearly, given the need for and widespread existence of a sub-broker network in India their role cannot be washed away. But the distributors need to make the investors aware of whom they are dealing with, whom the commission rebate is received from, & whom should they contact in case of any problems. Agents are well advised to practice honesty & transparency in explaining the commission structure & the timing of any rebate payment to the investors, whose trust will build a long-term relationship.

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Top ten Mutual fund terms:


1. Expense ratio: The ratio of total expenses to net assets of the fund. Expenses include management fees, the cost of shareholder mailings and other administrative expenses. The ratio is listed in a fund's prospectus. Expense ratios may be a function of a fund's size rather than of its success in controlling expenses. The cost of operating the fund is called expense ratio. It is revealed as percentage of the funds average net assets. E.g.: Vanguard Capital. 12b-1 fee: 12b-1 fees pay funds marketing, promotion and distribution expenses. Alpha(): It is measure of the difference between a funds expected return and its real return. Alpha must be evaluated in context of beta () i.e. volatility and R-squared (benchmark index).A high alpha (more than 1) is a good thing and inversely a negative alpha means the fund has under performed. 2. Beta (): It is the funds volatility measured against the S&P 500 index which has a set beta of 1. Therefore, if the fund has Beta greater than 1, it means the fund is moving up and down more than the rest of the market. E.g.: a fund with beta 2 will move up 20% when the S&P rises 10%. 3. R-squared: This measures funds movements against its particular benchmark index on a scale ranging from 1 to 100. A S&P 500 index fund will have R-squared very close to 100 because the fund mirrors the index. A fund with a low R-squared number is moving out of sync with its index. A high R-squared means beta is useful. A low R-squared means ignore the beta
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4. Redemption fee: A redemption fee is charged when you withdraw money from a fund. It is different from back-end load. A redemption fee goes back into the fund while a back-end load profits the fund company. A redemption fee is charged only if the money is withdrawn before a set period. Some fund families charge it as exchange fee. 5. Volatility: In investing, volatility refers to the ups and downs of the price of an investment. The greater the ups and downs, the more volatile the investment 6. Net Asset Value: Also known as NAV, this is the unit price (or rupee value) of one unit of a mutual fund. NAV is calculated at the end of every business day. It is calculated by adding up the value of all the securities and cash in the mutual fund's portfolio (its assets), subtracting the fund's liabilities, and dividing that number by the number of units that the fund has issued. It does not include a sales charge. The NAV increases (or decreases) when the value of the mutual fund's holdings increase (or decrease). NAV = Current Assets - Current Liabilities & provisions No. of outstanding units

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7. Load: Load is the factor that is applies to the NAV of a scheme to arrive at the price .if a commission is paid to agents, to bring in new business; this represents a cost incurred by the mutual fund, for the additional sales. The fund may therefore decide that investors, who are already in the scheme, need not bear this cost. Therefore it may decide to impose this cost on the new investors, by increasing the price at which they can buy units. This is called ENTRY LOAD if an investor stays in a fund for a short while, and decides to repurchase his units, the fund may incur some costs in liquidating the portfolio and paying off this investor. The fund may want to impose the cost of this operation on the exiting investor, in the form of a load. This is called as EXIT LOAD 10. Asked or Offering Price:

It is the price at which a mutual fund's shares can be purchased. The asked or offering price means the current net asset value (NAV) per share plus sales charge, if any. For a no-load fund, the asked price is the same as the NAV. OPERATIONAL DEFINITIONS OF THE CONCEPT RISK: The dictionary meaning of risk is the possibility of loss or injury. Any rational investor, before investing his/her investible wealth in the security, analyzes the risk associated with a particular security. The actual return he receives from a security may vary from his expected return and the risk is expressed in term of variability of return. The down side of risk may be caused by several factors, either common to all securities or specific to a particular security. Investor in general would like to analyze the risk factors and a through knowledge of a risk helps him to plan his portfolio in such a manner so as to minimize risk associated with the investment.

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Risk consists of two components: The systematic risk. The unsystematic risk. The systematic risk is caused by the factors external to a particular company and ```uncontrollable by the company. The systematic risk affects the market as a whole. In case of unsystematic risk the factors are specific, unique and related to a particular industry or company. Systematic Risk: The systematic risk affects the entire market. The economic conditions, political situations and the sociological changes affect the security market. These factors are beyond the control of the corporate and the investor. The investor cannot avoid them. This is subdivided into: i. ii. iii. Market Risk terest Rate Risk Purchasing Power Risk.

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Systematic Investment Plan


Many mutual funds offer investment programs whereby unit holders can invest. The Unit holders of the scheme can benefit by investing specific Rupee amounts periodically, for a continuous period. The SIP allows the investors to invest a fixed amount of Rupees every month or quarter for purchasing additional units of the scheme at NAV based prices. It helps investors to tide over the volatility by averaging out the cost as shown in the example. Month NAV Lump sum Invest(Rs.) units June July August September October November December January February March April May Total 20 22 23 21 20 19 18 16 18 19 21 22 24000 24000 1200 1200 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 24000 120.00 90.91 86.96 95.23 100.00 105.26 111.11 125.00 111.11 105.26 95.23 90.91 1236.98 No. of SIP Invest(Rs.) No. of units

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Effectiveness of SIP by averaging of costs: Lump sum Total investment Total number of units Average price per unit Value after 1 year Returns Rs.24, 000 1200 Rs.20 Rs.26, 400 10 % SIP______ Rs.24000 1236.98 Rs.19.40 Rs.27213 13.39 %_____

Thus, SIP yields the best results only if the person continues to invest during downturns. Often investors get so disturbed by bearish market that they stop investing. This is a mistake because market dips are the best time to buy cheap and average your purchase price Importance of Offer Document: 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, sponsor's 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. Statement of account: Mutual funds are required to despatch 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 demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended 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.

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Transfer of Units: According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgement of certificates with the mutual fund Dividends: 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 dispatch 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). Information on Mutual Funds: 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. Complaint redressing: Investors would find the name of contact person in the offer document of the mutual fund scheme that 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.

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Mutual fund IPO:


Investors often tend to think of fund IPOs in the same vein as they do of stock IPOs. However, there are some fundamental differences that they need to take into consideration. The price of a stock is based on its supply and the demand for it. IPOs often get listed at a premium because when a stock opens, its demand is sometimes much larger than its supply. This is not true of mutual funds. In case of mutual funds, a separate unit is created at the time of investment and it is destroyed at the time of redemption. Thus, the supply of mutual fund units is unlimited and so any appreciation in the value of a fund's NAV can never be due to an increase in the demand for a fund's units. Moreover, in the case of funds, your gains depend on how well the fund manager invests All things considered, it is generally a good idea to stay out of fund IPOs. A new fund is an untested entity without any track record. Your investment call will have to be made purely by looking at the fund manager and the AMC. Another issue is that of a possible opportunity loss. Your investments may be locked in for up to a month. This money could instead be kept in a liquid fund for a month and then invested once the fund opens for daily sale and repurchase post its IPO. There are some exceptions to this. An obvious one is closed-end funds. Even though these are no longer in vogue, there are special funds called fixed maturity plans, which are similarly structured. If an investor wants to invest in one of these, then the IPO may be the only option available to him because these funds are not open for daily sale and repurchase. Investors need to understand that fund IPOs are purely a marketing device that creates some excitement. AMCs always communicate strongly during an IPO. A discerning investor should absorb this information carefully and invest later when the fund opens for sale and repurchase on an ongoing basis.

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Unsystematic Risk: The unsystematic risk is unique and peculiar to a firm or an industry. Unsystematic Risk stems from managerial inefficiency, technological change in the production process, availability of raw material, changes in the customer preference, and labour problems. The nature and magnitude of the above-mentioned factors differ from industry to industry, and company to company. They have to be analyzed separately for each industry and firm. Broadly, unsystematic risk can be classified into: i. ii. Business Risk Financial Risk

Risk Measurement: Understanding the nature of risk is not adequate unless the investor or analyst is capable of expressing it in some quantitative terms. Measurements cannot be assured of cent percent accuracy because risk is caused by Numerous factors such as social, political, economic and managerial efficiency. The statistical tools used to quantify risk are:

i.

Standard Deviation: a. A measure of the dispersion of a set of data from its mean. The more spread apart the data is, the higher the deviation. b. In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility (risk).

A volatile stock would have a high standard deviation. In mutual funds, the standard deviation tells us how much the return on the fund is deviating from the expected normal returns. Standard deviation can also be calculated as the square root of the variance.

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ADVANTAGES AND DISADVANTAGES


Advantages: 1. Professional management: Mutual funds are backed by experienced and skilled professionals, a dedicated investment research team that analyses the performance and prospects of companies and selects investments. 2. Diversification: Mutual funds always have an investment mix. The diversity in this mix spreads out the probability of profits and losses, reducing the risk of a substantial fall in the money you have invested.

3. Return potential: Over a medium to long term, mutual funds have the potential to provide a higher net return as they invest in a diversified basket of selected securities. 4. Efficiency: By pooling investors' monies together, mutual fund companies can take advantage of economies of scale. With large sums of money to invest, they often trade commission-free and have personal contacts at the brokerage firms.

5. Liquidity: In open end schemes, the investor gets the money back promptly at net NAV pegged prices. In closed end schemes, the units can be sold on a stock exchange at the prevailing market price. The fund also repurchases from the investors at NAV pegged prices.

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6. Flexibility: Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. 7. Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class or assets and the fund managers investment strategy and outlook. 8. Affordability: Mutual funds are excellent for the new investors because you can invest small amounts of money and you can invest at regular intervals with no trading costs. 9. Investors safety: All mutual funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of mutual funds are regularly monitored by SEBI.

Disadvantages: No Control over Costs: Since investors do not directly monitor the funds operations they cannot control the costs effectively. Regulators therefore usually limit the expenses of mutual funds. No tailor made portfolio: Mutual fund portfolios are created by AMCs into which investors invest. They cannot create tailor made portfolios.

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TOOLS AND TECHNIQUES USED FOR THE STUDY i. Beta:

= Beta of the fund; N = Number of Observations; X = Quarterly return of Index; Y = Quarterly return of the NAV.

ii. returns.

Beta: Beta describes the relationship between the securities return and the index

Beta = + 1.0 One percent change in market index returns causes exactly one percent change in the security return. It indicates that the security moves in tandem with the market.

Beta = + 0.5 One percent change in the market index return causes 0.5 percent change in the security

return. The security is less volatile compared to the market.

Beta = + 2.0

One percent change in the market index return causes 2 percent change in the security return. The security return is more volatile. When there is a decline of 10% in the market return, the security with beta of 2 would give a negative return of 20%. The security with more than 1 beta value is considered to be risky.

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Negative Beta

Negative beta value indicates that the security return moves in the opposite direction to the market return. A security with a negative beta of -1 would provide a return of 10%, if the market return declines by 10% and vice-versa. RATE OF RETURN: The compounded annual return on a mutual fund scheme represents the return to investors from a scheme since the date of issue. It is calculated on NAV basis or price basis. On NAV basis it reflects the return generated by the fund manager on NAV. On price basis it reflects the return to investors by way of market or repurchase price Net Asset Value (NAV): The net asset value of the fund is the cumulative market value of the assets fund of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the per unit. We also abide by the same convention. Computation of Net Asset Value The Net Asset Value (NAV) of the units will be determined as of every working day and for such other days as may be required for the purpose of transaction of units. The NAV shall be calculated in accordance with the following formula, or such other formula as may be prescribed by SEBI from time to time. Market /Fair value of schemes investments + Receivables + Accrued Income + Other Assets Accrued Expenses Payables-Other liabilities NAV= _____________________________________________________ Number of Units Outstanding
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Standard Deviation

S. D =

(x X)2
N

( x X)2 N =

=It is the square of deviation

Total of the Frequency = It is the square root of variance.

Standard Deviation: a) A measure of the dispersion of a set of data from its mean. The more spread apart the data is, the higher the deviation. b) In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility (risk). c) A volatile stock would have a high standard deviation. In mutual funds, the standard deviation tells us how much the return on the fund is deviating from the expected normal returns. Standard deviation can also be calculated as the square root of the variance.

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VARIABLE DEFINITION:
Sharpe Ratio
A ratio developed by Bill Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment decisions or a result of excess risk. Higher the ratio better is the investment.

St =
S t = Sharpe index

rt - r*

r t = average return on portfolio t r* =risk less rate of interest t = standard deviation (risk) of the returns of portfolio t Note: Higher the Sharpe index better is the performance of the fund.

Treynor ratio The Treynor ratio is a measurement of the returns earned in excess of that which could have been earned on a risk less investment (i.e. Treasury Bill) (per each unit of market risk assumed). The Treynor ratio (sometimes called reward-to-volatility ratio) relates excess return over the risk-free rate to the additional risk taken; however systematic risk instead of total risk is used. The higher the Treynor ratio, the better the performance under analysis. Where

Tn =

rn - r*
n

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T n = Treynor ratio, rn = portfolio return, r* = risk free rate n = portfolio beta

Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of active portfolio management. It is a ranking criterion only. A ranking of portfolios based on the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic risk, but different total risk, will be rated the same. But the portfolio with a higher total risk is less diversified and therefore has a higher unsystematic risk which is not priced in the market.

The Financial Planning Process. Financial Planning involves advising clients on how to manage their finances and investments so as to achieve their financial goals. A financial planner assimilates the aspirations of his clients and draws a road map to make them a reality. Before we review the process of financial planning, it is useful to understand some basic terms used by financial planners. Financial Planning: Financial Planning is the overall process of advising clients on how to achieve their financial goals. Financial Goals and Objectives: Clients should be made to define their financial goals in terms of how much money they need and when they will need it. These include

Income for a comfortable retirement. Funding for a child's wedding or education Money to buy a home, a car or other material acquisition Where with al to lead a better life and indulge in pursuits such as charity, hobbies, travel, etc.

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Asset Allocation: The allocation of a client's investments at a broad level across various asset classes, which include hard assets and financial assets. The latter can be categorized into equities or growth assets, bonds or income assets and money market or liquid assets. There are also further subdivision of equities into different sectors and bonds into government and corporate bonds of different ratings and maturities. Risk Tolerance: The extent of loss in value that clients can tolerate. Psychologically and financially and for how long they can with stand such declines in value. In dealing with Mutual Funds it is necessary to understand the value of their units. The NAV of the units is an important relevant concept in this context it is basis For unit pricing. In case of Open Ended Funds and Closed End funds the NAV per unit is basically arrived at by calculating the total market value of investments or Assets of the Mutual Funds subtracting liabilities and dividing by the number of unit are currently outstanding.

Total market value of assets or securities in the portfolio of the fund - Liabilities NAV = ______________________________________________________ Number of funds units outstanding. In case of units of Open Ended Funds the NAV is calculated daily and the sales and repurchases on each day are made at the on the most recently circulated NAV. The approximate formulae used to calculate sale and repurchase prices of units are as follows:

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(Market value of assets liabilities excluding contingent liabilities, initial share capital reserve and unit capita)+brokerage charges, commission, tax, stamp duties, other management & administrative expenses Sale price=___________________________________________________ Number of units outstanding.

(Market value of assets- liabilities excluding contingent liabilities, initial share capital, reserve and unit capital)-brokerage charges, commission etc. Repurchase Price=____________________________________________________ Number of units outstanding.

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Risk appetite of investors For investors with low risk appetite Money market funds Government securities funds. For investors with moderate risk appetite Income funds Balanced funds Growth and income funds Short -term bond funds Intermediate bond funds Index funds. For investors with high risk appetite Aggressive growth funds International funds Sector funds Specialized funds Precious metal funds High-yield bond funds Commodity funds

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PORTFOLIO A portfolio is a collection of investments held by an institution or a private individual. Holding a portfolio is part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value. Management Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions. Selection involves deciding what assets to purchase, how many to purchase, when to purchase them, and what assets to divest. These decisions always involve some sort of performance measurement, most typically expected return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return). Typically the expected return from portfolios comprised of different asset bundles are compared. Mutual funds have developed particular techniques to optimize their portfolio holdings. Models Some of the financial models used in the process of Valuation, stock selection, and management of portfolios include:

Maximizing return, given an acceptable level of risk. Modern portfolio theory - a model proposed by Harry Markowitz among others. Capital asset pricing model. Arbitrage pricing theory. The Jensen Index. The Treynor Index. The Sharpe Diagonal (or Index) model. Value at risk model.

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Index fund An index fund or tracker can be defined as a mutual fund or exchange-traded fund (ETF) that tracks the result of a target market index. Good tracking can be achieved simply by holding all of the investments in the index, in the same proportions as the index; alternatively, statistical sampling may be used. This constant adherence to the securities held by the index is why these funds are referred to as passive investments. The market index used is Nifty for balanced funds and the CNX Mid Cap for Mid cap funds.

Beta coefficient The Beta coefficient, or financial elasticity (sensitivity of the asset returns to market returns, relative volatility), is a key parameter in the Capital asset pricing model (CAPM). Beta can also be defined as the risk of the stock to a diversified portfolio. Therefore the beta of a stock will be much lower than its (the stock's) standard deviation. The coefficient measures the asset's non-diversifiable risk, also called systematic risk or market risk, rm measures the rate of return of the market and ra measures the rate of return of the asset. On an individual asset level, measuring beta can give clues to volatility and liquidity in the marketplace. On a portfolio level, measuring beta is thought to separate a manager's skill from his willingness to take risk. The beta movement should be distinguished from the actual returns of the stocks. For example a sector may be performing well and may have good prospects but the fact that its movement does not correlate well with the broader market index may decrease its beta. It however should not be taken as a reflection on the overall attractiveness or the loss of it for the sector or stock as the case may be. Beta is a measure of risk and not be confused with the attractiveness of investment. The beta coefficient was actually borne out of regression analysis. It is linked to a regression analysis of the return of the stock index (x-axis) in a specific year Versus the return of the market (y-axis) in a specific year. The regression line is then called the Security Characteristic Line (SCL).

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For example, in a year where the broad market or benchmark index returns 25%, suppose two managers gain 50%. Since this is theoretically possible merely by choosing a portfolio whose beta is exactly 2.0, we would expect a skilled portfolio Manager to have built the portfolio with a beta somewhat less than 2, such that the excess return not explained by the beta is positive. If one of the managers has an average beta of 3.0 in his portfolio, and the other's is only 1.5, then the CAPM simply states that we are not being adequately compensated for the first manager's risk, whereas the second manager has done more than expected of him and appears capable of generating superior returns. Calculation of Beta To calculate Beta, one needs a list of (e.g., daily closing) prices for the asset and prices for the index, hopefully corrected for dividends. The first step is to calculate ri, the return for each period, for the asset and for the index. Next, a plot should be made, with the index returns on the x-axis and the asset returns on the y-axis, in order to check that there are no serious violations of the linear regression model assumptions. The fitted slope from the linear least-squares system is Beta. The y-intercept is "Alpha", a less commonly used term. The Sharpe Performance Index

The Sharpe Index is a measure with which you may measure the performance of your portfolio over a given period of time. The important aspect of the Sharpe Index is that this performance indicator takes into consideration the risk of the portfolio. In order to use the Sharpe Index, you must know three things; the portfolio return, the risk-free rate of return, and the Standard Deviation of the portfolio. For the risk-free rate of return, you may use the average return (over the period of time) of some government bond or note. The Standard Deviation of the portfolio is a measure of the systematic risk of the portfolio. Using the Standard Deviation, rather than the Beta (as in the Treynor Index), you are assuming that the portfolio is NOT a diversified portfolio. If you are looking at the return of a mutual fund, this figure is typically available from the fund company itself (this and other measures are also available from the American Association of Individual Investors' Guide to Mutual Funds).

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Formula for the index; Sharpe = (Portfolio Return - Risk-Free Return) / Standard Deviation Let's use the same example information. A portfolio manager achieved a return of 15.0%, his portfolio had a standard deviation of 0.3 and the market achieved a return of 14.6% vs. a risk free rate of return of 7%. To calculate the Sharpe Index: Index = (.15 - .07) / .3 = 0.267 To compare, another portfolio manager achieved a return of 13.5% with a standard deviation of .25. The Sharpe index for this portfolio manager is: Index = (.135 - .07) / .25 = 0.26 This means that the 1st portfolio manager out performed the second portfolio manager on a risk-adjusted basis. Sharpe index Is one of the indices used by analysts to measure investment performance relative to the risks associated with the performance. It measures the ratio of the portfolio excess return above the risk-free rate to the standard deviation of portfolio returns. A Sharpe index number greater than 1 indicates a good performance in relation to the level of risk taken while a number below 0.1 indicates the opposite. Treynor Index A measure of a portfolio's excess return per unit of risk, equal to the portfolio's rate of return minus the risk-free rate of return, divided by the portfolio's beta. This is a similar ratio to the Sharpe ratio, except that the portfolio's beta is considered the measure of risk as opposed to the variance of portfolio returns. This is useful for assessing the excess return from each unit of systematic risk, enabling investors to evaluate how structuring the portfolio to different levels of systematic risk will affect returns.

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Expected return = (Beta * Market Risk Premium) + Risk-Free Rate The "Beta" of a stock is determined by figuring out how much the stock's return has varied in relation to the market over a specified time. The risk-free rate is what we could get by buying a risk-free government bond of the same investment time horizon as our proposed stock investment. So if we're looking at a three-year holding period, we would look at the returns on Government Bonds which is currently about 8%. The market risk premium is what we as investors can reasonably expect to get by investing in the market. A related concept is called the Treynor Index, which measures the riskadjusted return of a stock: Treynor Index = (Expected Return - Risk-Free Rate) Beta

A high Treynor Index indicates that we're getting a good deal in terms of the return-to-risk ratio.

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MUTUAL FUNDS
- Budget Impact Analysis 2011-12

Mutual fund industry assets touch all-time high, but growth trajectory to be under pressure The Indian mutual fund industrys average assets under management (AAUM), which touched a record high of Rs 8.09 trillion (including fund of funds) in November 2011, fell marginally to Rs 7.63 trillion in January 2012. AAUM grew by 65 per cent till January 2012 compared with the same month last year, largely on the back of inflows into debt funds as well as mark-to-market gains in equity funds following the close to 80 per cent rise in the benchmark indices. High systemic liquidity too helped fund houses increase their corpus. The industry recorded net inflows of Rs 1,742 billion, out of which Rs 1,727 billion were in debtoriented funds (mainly ultra short term debt schemes). Going forward, systemic liquidity is expected to be lower than the levels seen in the last several months on account of factors such as bank credit growth picking up and the inflation control measures of the government. Consequently, increasing the assets under management (AUM) would be a challenge for the mutual fund industry. Banks were key contributors to mutual fund assets, occupying around a fifth of the AUM till December 2011. However, the sectors contribution dropped in the last 2 months (December 2012 and January 2012) after the RBI expressed concerns on the rising mutual fund investments of banks. Banks investments in mutual funds stood at Rs 1.07 trillion on January 29, 2010 compared to Rs 1.69 trillion in early December 2009. Debt-oriented funds continued to garner a major share of the mutual fund assets (70 per cent share as of January 2012). This was, however, marginally lower than the 72 per cent share in the corresponding period of the previous year. Equity-oriented funds accounted for the remaining share.

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Source: Association of Mutual Funds in India (AMFI) The industry continued to be top heavy, with the top five mutual funds accounting for a 56 per cent share while the top 10 funds had an 80 per cent share of the January 2012assets. The bottom 10 fund houses continued to have around 1 per cent of the industry assets. Reliance Mutual Fund dominated the assets chart throughout the year, and became the first fund house to cross the Rs 1 trillion AAUM mark in May 2011 (Rs 1.17 trillion as of January 2012). HDFC Mutual Fund was the second fund house to cross the Rs 1 trillion-mark in November 2011. The year 2011 saw a key regulatory change for the benefit of retail investors with SEBIs decision to waive-off entry loads for investing in mutual fund schemes from August 1, 2011. SEBI further proposed that distributors must move to an advisory model, whereby they can charge fees for investment advice as against the distribution commissions that they received earlier. The immediate impact of this regulation was the reduction in the equity schemes monthly sales from over Rs 90 billion in July 2011 to Rs 40-50 billion levels from August 2011 till December 2011 on account of lower distributor interest in selling schemes following the SEBI ban on entry loads. The launch of new fund offers (NFOs) too dropped as a result. SEBI also targeted improving retail investor penetration by allowing investors to buy and sell mutual fund schemes on stock exchanges. Both the BSE and NSE have subsequently launched mutual fund trading platforms though volumes have yet to pick up. CRISIL FundServices is of the view that investor education is key to improving penetration, as investors must inculcate the habit of regular investing through options like systematic investing via mutual funds. CRISIL FundServices also expects pressure on mutual fund assets growth going forward, as the withdrawal of the fiscal stimulus (liquidity) is likely to gain momentum. Banks too are likely to reduce their mutual fund exposure post the full implementation of the 0.75 per cent cash reserve ratio (CRR) hike announced in the latest monetary policy review as well as due to the pick up in credit demand.
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Budgetary measures and their impact 1. Financial inclusion and financial literacy Government proposes to set up an apex-level Financial Stability and Development

Council, which would monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues. It will also focus on financial literacy and financial inclusion. The government proposes to provide appropriate banking facilities to regions having a population in excess of 2,000 by March 2012. The government has also proposed to extend insurance and other services to these targeted beneficiaries. To encourage financial inclusion, the government proposes to augment NABARDs Financial Inclusion Fund and Financial Inclusion Technology Fund by Rs 1 billion. These funds enable to expand the reach of banking services to unbanked areas. Impact Increase in financial inclusion and financial literacy would benefit mutual fund penetration, which is currently at less than 5 per cent of the total population. 2. Infrastructure spending The government has provided Rs 1,735 billion (over 46 per cent of the total plan allocations) for infrastructure development. The government has provided Rs 661 billion for rural development in 2010-11. The allocation for Bharat Nirman (upgradation of rural infrastructure through various programmes) would be Rs 480 billion. There would be an allowance for the deduction of an additional amount of Rs 20,000 for investment in long-term infrastructure bonds as notified by the Central Government, above the existing limit of Rs 0.1 million on tax savings under Section 80C. its

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Impact The continued thrust on infrastructure funding is expected to result in an increasing appetite for infrastructure-oriented funds. The focus on infrastructure projects is likely to result in an increasing number of corporate bond and equity issuances for fund raising by infrastructure companies and institutions. This would provide an expanding avenue for mutual funds to invest in. 3. Governments contribution to NPS (New Pension System) Government will contribute Rs 1,000 per year to each NPS account opened in 2010-11. An allocation of Rs 1 billion has been made for the year, which will million NPS subscribers of the unorganised sector. Impact This incentive is likely to improve subscriptions towards NPS as well as add to the assets of pension fund managers under the NPS. benefit up to 1

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4. Broadening of tax slabs Income Tax rate Nil 10% 2010-11 (Existing) 2011-12 (Proposed) Up to Rs.1.60 lakhs Up to Rs.1.60 lakhs Above Rs.1.60 lakhs up to Rs.3 Above Rs.1.60 lakhs up to Rs.5 lakhs lakhs Above Rs.3 lakhs up to Rs.5 Above Rs.5 lakhs up to Rs.8 lakhs Above Rs.8 lakhs

20% lakhs 30% Above Rs.5 lakhs (10 lakhs = 1 million) Impact

This will result in higher disposable incomes, which could see additional inflows towards mutual fund schemes, amongst other investment avenues. 5. Concessions for clean energy technology The government has announced various concessions for clean energy technology such as solar energy and other renewal energy sources. Impact Mutual funds may look at clean energy as a theme going forward, taking into account the evolving consensus on global warming.

Data Collection Method


The required data for the re-search study were collected from secondary sources. The data relating to NAV of the schemes were collected from the web site www.amfiindia.com, www.indiainfoline.com, www.nseindia.com & www.investorsmartindia.com. This study adopts convenience-sampling method with a stipulation that complete data were available for the three-year period for the schemes.

ANALYSIS AND INTERPRETATION


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Equity fund 1. Absolute Return

ABSOLUTE RETURN NIFTY

1ST YEAR 71.520 114.5041 84.00211

2ND YEAR 10.869 42.51454 21.23823 -4.71869

3RD YEAR 5673.996 72.78039 50.43325 2.239533

HDFC Kotak Mahindra Prudential ICICI

-1.22295

In dex R etu rn
100% 80% 60% 40% 20% 0% -20% -40% -60% -80% NIFTY HDFC K otak M ahindra P rudential ICICI 3RD Y E A R 2ND Y E A R 1S T Y E A R

FUND

HDFC

ICICI Pru mutual fund

Kotak Mahindra

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BETA(slope) 1 YEAR 2ND YEAR 3RD YEAR


ST

0.73145 78.99955 -29.3025 10.77939

-0.02429 0.728926 0.187608 0.243871 -0.0195 56.49329 -29.602 85.70762

RISK PREMIUM

Fund name HDFC KOTAK ICICI Pru

SD(fund) 1.89103 1.8422 0.3703

SLOPE(Beta) Correlation 0.7314 0.7289 0.02429 0.8573 0.877006 0.1454

HDFC Mutual Fund has performed better in short term of 1yr by giving returns upto

114.5041. And also HDFC Mutual Fund has performed better in long run with result of 72.78039 when compared with nifty .and other one Kotak Mahindra Mutual Fund short term
of 1yr by giving returns up to 84.00211. This fund performed with result of 50.43325. The beta of HDFC Mutual Fund is also low. Since the beta measures funds sensitivity to market movements, therefore if the future resembles the past, this means that on average when the market rises an extra 1 %, Kotak Mahindra Mutual Fund NAV will rise by an 0.72% and HDFC by 0.73%

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Sharpe Index
SHARP RATIO

HDFC
1.110668 -0.36998 0.177998 0.306228667

Kotak Mahindra
0.804739 -0.37639 1.205525 0.544624667

Prudential ICICI
-0.18775 -0.20109 -0.1025 -0.16378

1ST YEAR 2 3
ND RD

YEAR YEAR

Average Sharp Ratio

S harpe ind ex
2 .5 2 1 .5 1 0 .5 0 -0 .5 -1 -1 .5 1 ST YEAR 2 ND YEAR 3RD YEAR Ave rage Sharp Ratio Pru den tial ICICI Kotak Ma hin dra HDF C

Interpretation: The Sharpe Index is a measure to measure the performance of portfolio over a given period of time. It takes into consideration of Standard Deviation of the fund. SD is used to measure the desperation of the fund. It enables us to determine how far individual items in a distribution deviated form its mean. If SD differs by 1% Kotak Mahindra NAV may go up or comes down by 0.5446%. SD of Kotak Mahindra is 1.8422, even though SD is high but the beta(0.728926) is low. This may be because the portfolio return may differ from period to period AMC have moved/managed there fund very well.

Trey nor Index Ranking


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Treynor Ratio
1 YEAR 2ND YEAR 3RD YEAR Average Trenyor Ratio
ST

HDFC
108.0041 -40.0609 14.73703 27.560

Kotak Mahindra
77.50211 -40.6104 117.5807 51.491

Prudential ICICI
-7.72295 -10.039 0.802824 -5.653

Treynor Index 200 150 100 50 0 -50 -100 -150 1S T YE A R 2ND YE A R 3RD YE A R A verage Trenyor Ratio Prudential IC IC I Kotak Mahindra HD FC

Interpretation:

A measure of a portfolio's excess return per unit of risk, equal to the portfolio's rate of return minus the risk-free rate of return, divided by the portfolio's beta. Kotak Mahindra Mutual Fund is having a higher Treynor ratio of 51.491

Balanced Fund
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ABSOLUTE RETURN NIFTY

1ST YEAR 71.520 80.43428 38.12437 56.35609

2ND YEAR 10.869 37.42321 0.940222 11.18562

3RD YEAR 5673.996 65.76988 -1.24008 27.30344

HDFC Kotak Mahindra Prudential ICICI

Index Return
7000.000 6000.000 5000.000 4000.000 3000.000 2000.000 1000.000 0.000 -1000.000 NIFTY HDFC Kotak Mahindra Prudential ICICI 3RD YEAR 2ND YEAR 1ST YEAR

FUND

HDFC
0.47324

Kotak Mahindra
0.510046 16.12989 -17.0462 -4.41695

Prudential ICICI
0.567074 28.27211 -20.0685 4.168762

BETA 1ST YEAR 2ND YEAR 3RD YEAR

34.98864 -14.3569 6.68559

RISK PREMIUM

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Fund name HDFC KOTAK ICICI Prudential

SD(fund) 1.2817 2.8035 3.9567

SLOPE(Beta) Correlation 0.4732 0.51004 0.56704 0.8183 0.4032 0.3176

Interpretation:

HDFC Mutual Fund has performed better in short term of 1yr by giving returns up to 80.43428%. And also HDFC Mutual fund has performed better in long run with result of 65.76988% when compared with nifty. The beta of HDFC Mutual Fund is also LOW compare to Kotak Mutual Fund. Since the beta measures funds sensitivity to market movements, therefore if the future resembles the past, this means that on average when the market rises an extra 1 %, HDFC Mutual Fund NAV will rise by an 34.98 and ICICI by 28.27

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Sharpe Index Ranking

SHARP RATIO 1ST YEAR 2ND YEAR 3


RD

HDFC
0.753631 -0.28909 0.155561

Kotak Mahindra
0.358059 -0.29239 -0.004478 0.020

Prudential ICICI
0.399283 -0.45317 0.132014 0.026

YEAR Sharp

Average Ratio

0.207

S harpe Ind ex 2 1.5 1 0.5 0 -0.5 -1 -1.5 1S T YE AR 2ND YE AR 3RD YEA R A verage S harp Ratio C P rudential IC IC I K otak Mahindra HD FC

Interpretation:

The Sharpe Index is a measure to measure the performance of portfolio over a given period of time. The important aspect of the Sharpe Index is that this performance indicator takes into consideration the risk of the portfolio. The fund performing well according to this index is HDFC Mutual Fund with the average ratio of 0.207 %

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Trey nor Index Ranking

Treynor Ratio
1ST YEAR 2ND YEAR 3
RD

HDFC
73.93428 -30.3375 14.12728

Kotak Mahindra
31.62437 -33.4208 -8.6599 -3.485

Prudential ICICI
49.85609 -35.3895 7.35135 7.273

YEAR Trenyor

Average Ratio

19.241

Treynor Index
200 150 100 50 0 -50 -100 -150 1ST YEAR 2ND YEAR 3RD YEAR Average Trenyor Ratio Prudential ICICI Kotak Mahindra HDFC

Interpretation:

A measure of a portfolio's excess return per unit of risk, equal to the portfolio's rate of return minus the risk-free rate of return, divided by the portfolio's beta. HDFC Mutual Fund is having a higher Treynor ratio of 19.241 %

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FINDINGS
1. HDFC Mutual Fund has been out performed the nifty returns. 2. In the Balance Scheme HDFC Mutual Fund has performed better in terms of absolute returns in 3yr. 3. According to Sharpes index in Equity Scheme, Kotak Mahindra Mutual Fund is having the highest ratio of 0.5446% in Equity scheme. 4. According to Treynor index Equity Scheme, Kotak Mutual Fund is having the average highest ratio of 51.491% in Equity scheme 5. And other AMC in Equity scheme that is HDFC Mutual Fund (0.3062) has been also performing well. According to Sharpes index and Treynor index. The funds Sharpe ratio is 0.3062% and Treynor index is 27.560% 6. According to Sharpes index in Balance Scheme, HDFC Mutual Fund is having the highest ratio of 0.298%. 7. According to Treynor index Balance Scheme, HDFC Mutual Fund is having the average highest ratio of 19.241% in Balance scheme 8. And other AMC in balanced scheme ICICI Pru Mutual Fund has been performing well according to Sharpes index and Treynor index. The funds Sharpe ratio is 0.026 and Treynor index is 7.273

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RECOMMENDATION
Since all commercial college students are the potential employees as well as the potential investors of the company hence the Mansukh securities and finance Ltd should target the postgraduate colleges in order to educate the potential investors. Mansukh securities and finance Ltd has to advertise about its service through billboards and other outdoor ads.. The AMC should publish the Beta, Standard deviation, Sharpe Ratio Treynor Ratio so that it helps the investor in analyzing to with fund they can go for/invest. Mansukh securities, is more of trading in equity market but commodity market also in boom so company can start commodity trading.

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CONCLUSION
In this study, I have done a Performance evaluation of two schemes namely Equity and Balanced. The evaluation was done on the basis of the absolute returns from the funds and using indices like Sharpe index and Treynor index. Based on the study following conclusions can be drawn. Data of equity scheme shows that most of mutual funds have performed well with the Nifty returns but at the end of the 2011 and 2012 market is complete breakdown because of financial crisis. HDFC Mutual Fund has got good Sharpes index and Treynor index. And also Kotak Mahindra mutual fund performed well. And in balance scheme HDFC Mutual fund performed better with 65.76988% returns. And also the ICICI Pru mutual fund performed well with returns of 27.30344

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BIBLIOGRAPHY
Books Security Analysis And Portfolio Management By Punithavanithy Pandian

Web Sites
http://www.nseindia.com http://www.amfiindia.com http://www.investsmartindia.com http://www.wikipedia.com http://www.indiainfoline.com

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