Project report

Comparison of Top Mutual Fund Houses With Kotak Mutual Fund

Submitted to: Submitted by:
Mr. Rajesh Sharma Niti Gupta

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Acknowledgement

I express my sincere gratitude to my industry guide Mr. Rajesh Sharma,
Manager Institutional Sales, Kotak Asset Management Co. Ltd. for his able
guidance, continuous support and cooperation through out my project,
without which present work would not be possible.

I would like to thank entire team of Kotak Mahindra Asset Management Co.
Ltd. for their constant support and help in successful completion of my
project.

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Executive Summary
If size is the measure of dominance, then the Indian mutual fund industry can now boast
on that. With the total Asset Under Management (AUM) increasing from Rs. 1,01,565
Crores in Jan 2000 to Rs.3,68,73.22 Crores by May 2010 , according to the Association
of Mutual Fund in India (AMFI), the industry’s growth has been nothing but
exceptional. It has indeed come a long way from being a single player, single scheme
(US-64) industry to having 34 players and more than 480 schemes.

What has driven the growth? Number of factors have contributed to the surge in the
industry’s growth. First and foremost, a buoyant domestic economy coupled with a
booming stock market has been one of the major divers of the growth in recent times
particularly in the last five year. Another significant factor facilitating this growth has
been a conducive regulatory regime, thanks to increased effort by SEBI to improve
market surveillance and protect investor’s interests. Further, incentives, such as making
dividend tax free in the hands of investors have also provided strong impetus to the
growth.

The intention of the research was to study the Mutual Fund Industry in India and
compare the top mutual fund houses with Kotak. This study begins with the general
introduction of the Mutual Fund Industry. After that under each type of Mutual Fund
Scheme, specific funds of the Mutual Funds are picked up and compared. At the end a
detailed portfolio has been designed for individuals in different age – groups and risk
class.

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Introduction

Purpose of the Project

This project provides better understanding to the reader by giving insights on Indian
Mutual fund Industry through comparative analysis of different Asset Management
Companies and their schemes in India . Comparative analysis of four major Mutual
Funds of India has been done, namely

• Kotak Mutual Fund
• Birla Sun Life Mutual
• Reliance Mutual Fund
• ICICI Prudential Mutual Fund

Objective of the Project

For every problem there is a research. As all the researches are based on some objectives
my study is also based upon some objectives and these are as follows:

• To give a holistic and a comprehensive view of mutual fund industry in India.
• Comparative study of returns given by various AMC Mutual funds on the basis
of parameters like Standard Deviation, Beta, Sharpe Ratio, Average Maturity,
etc.
• To understand the risk profile of the customer.
• To design a suitable portfolio for individual’s belonging to different risk class.

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Proposed Methodology:

In broader perspective the whole project can be divided into three sections. Under
SECTION I, on the basis of past and present the industry has been analyzed and based
on which future outlook has been projected. This section covers following things:

i. Concept of Mutual Funds, its Advantages and Disadvantages.
ii. Evolution of Mutual Funds in India.
iii. Types of Mutual Funds.
iv. Tools used to compare Performance.

SECTION II, focuses on the comparison between different Mutual Fund houses on
the basis of different categories of Mutual Funds. Funds are compared on the
parameters of risk and return.

SECTION III, comprises of the Portfolio’s designed for individuals in different age
and risk categories. A Portfolio comprising of different Funds has been designed
such that maximum returns are achieved with minimum risk.

Limitations:

• The analysis is completely based on the past performance and not confirms
the future performance.
• The research is based on secondary data collected from other sources like
magazines, newspapers, and websites, etc.
• Reliability of sources could also be limitation for the project.

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Mutual Funds Concept

Individuals or Institutions when have surplus money, i.e. savings, would like to invest
with the common and logical motive of growing money by getting returns on the
investments. There are various avenues to park money towards fulfillment of objective
of return on investment.

One can invest money either where u can get assured returns and hence the risk is low
but returns also are low compared to the high risk investments.

The other way is through investing in shares i.e. equity market. Generally the returns on
equity investments are higher than debt investment but risk also is higher. To get good
returns one really needs to understand the economy and performance of companies
where you are investing money. For a common man it may be cumbersome while
managing own profession, job or business.

Hence, the concept of mutual has evolved to manage the funds i.e. on behalf of the
investor; fund manager will be taking decisions to maximize the investor’s returns.

Mutual funds today represent perhaps the most appropriate opportunity for most small
investors. As financial markets become more sophisticated and complex, investors need
a financial intermediary who provides the required knowledge and professional
expertise on successful investing. In a mutual fund, many investors contribute to form a
common pool of money. This pool of money is invested in accordance with a stated
objective. The ownership of the fund is thus joint or “mutual” the fund belongs to all
investors. A single investor’s ownership of the fund is in the same proportion as the
amount of the contribution made by him bears to the total amount of the fund.

A mutual fund uses the money collected from investors to buy those assets which are
specifically permitted by its stated investment objective. Thus, a growth fund would buy
mainly equity assets – ordinary shares, preference shares, warrants, etc. An income fund
would buy debt instruments such as debentures and bonds. The fund’s assets are owned
by the investors in the same proportion as their contribution of all investors put together.
When an investor subscribes to the mutual fund, he becomes part owner of the funds
assets. In India, a mutual fund is constituted as a trust and investors subscribe to the
“units” of a scheme launched by the fund.

Investments in securities are spread across a wide cross-section of industries and sectors
and thus the risk is reduced. Diversification reduces the risk because all stocks may not
move in the same direction in the same proportion at the same time. The profits and
losses are shared by the investors in proportion to their investments. Mutual funds

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normally come out with a number of schemes with different investments objectives
which are launched from time to time. A mutual fund is required to be registered with
Securities and Exchange Board of India which regulates securities markets before it can
collect funds from public.

However, whether the investor gets funds shares or units is only a matter of legal
distinction. In any case, a mutual fund shareholder or unit holder is a part owner of the
fund’s assets. The term unit-holder includes the mutual fund account-holder or closed
end fund shareholder. A unit holder in Unit Trust of India US-64 scheme is the same as a
UTI Master Shareholder or an investor in an alliance.

Each share or unit that an investor holds needs to be assigned a value. Since the units
held by investor evidence the ownership of the assets, the value of the total assets of the
fund when divided by the total number of units issued by the mutual fund gives us the
value of one unit. This is generally called the Net Asset Value (NAV) of one unit or one
share. The value of an investor’s part ownership is the determined by the NAV of the
number of units held.

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Advantages of Mutual Funds:
The rising popularity of mutual funds can be attributed to the various advantages it has
over other forms of avenues of investing, particularly for the investor who has limited
resources available in terms of capital and ability to carry out detailed research and
market monitoring. The major advantages offered by mutual funds to all investors are:

• Portfolio Diversification: Mutual Funds normally invest in a well-diversified
portfolio of securities. Each investor in a fund is a part owner of all of the fund’s
assets. This enables him to hold a diversified investment portfolio even with a
small amount of investment, which would otherwise require big capital.

• Professional Management: Even if an investor has a big amount of capital
available to him, he benefits from professional management skills brought in by
the fund in the management of the investor’s portfolio. The investment
management skills, along with the needed research into available investment
options, ensure a much better return than what an investor can manage on his
own. Few investors have the skills and resources of their own to succeed in
today’s fast moving, global and sophisticated markets.

• Reduction/Diversification of Risk: An investor in a mutual fund acquires a
diversified portfolio, no matter how small his investment. Diversification reduced
the risk of loss, as compared to investing directly in one or two shares or
debentures or other instruments. When an investor invests directly, all the risk of
potential loss is his own. While investing in the pool of funds with other
investors, any loss on one or two securities is also shared with other investors.
This risk reduction is one of the most important benefits of a collective
investment like mutual fund.

• Reduction of transaction costs: What is true of risk is also true of the
transaction costs. A direct investor bears all the cost of investing such as
brokerage. or custody of securities. When going through a fund, he has the
benefit of economies of scale; the funds pay lesser costs because of large
volumes, a benefit passed on its investors.

• Liquidity: Often, investors hold shares or bonds they cannot directly, easily and
quickly sell. Investment in a mutual fund, on the other hand is more liquid. An
investor can liquidate the investment by selling the units to the fund if it’s an
open-end fund, or by selling the units in stock market if the fund is a closed-end
fund, since closed end funds have to be listed on a stock exchange. In any case,

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the investor in a closed end fund receives the sale proceeds at the end of a period
specified by the mutual fund or the stock exchange.

• Convenience and Flexibility: Mutual fund management companies offer many
investor services that a direct market investor cannot get. Within the same fund
family, investors can easily transfer/switch their holdings from one scheme to
another. They can also invest or withdraw their money at regular investors in
most open end schemes. Mutual fund investment process has been made further
more convenient with the facility offered by funds for investors to buy or sell
their units through the internet on a e-mail or using other communication means.
The investors also get updated market information from the funds. The
information about the schemes is also shared by the fund managers in a
transparent manner, with all material facts required by regulators to be disclosed
to the investors.

• Safety: Mutual Fund industry is well regulated; all funds are registered with
SEBI which lays down rules to protect the investors. Thus, investors also benefit
from the safety of a regulated investment environment.

Disadvantages of Investing through Mutual Funds:

While the benefits of investing through mutual funds far outweigh the disadvantages, an
investor and his advisor will do well to be aware of a few shortcomings of using the
mutual fund as an investment vehicle.

• No tailor – made portfolios: Investors who invest on their own portfolios of
shares, bonds and other securities. Investing through funds means he delegates
this decision to the fund managers. High-net-worth individuals or large corporate
investors may find this to be a constraint in achieving their objectives. However,
most mutual funds help investors overcome this constraint by offering families of
schemes- a large number of different number of different schemes within the
same fund. In each scheme there are various plans and options. An investors can
choose from different investment schemes/ plans/ options and construct an
investment portfolio that meets his investment objectives.

• Managing a portfolio of funds: Availability of a large number of options from
mutual funds can actually mean too much choice for the investor. He may gain
need advice on how to select a fund to achieve his objectives, quite similar to the
situation when he has to select individual shares or bonds to invest in.
Fortunately, India now has a large number of AMFI registered and tested fund
distributors and financial planners who are capable of guiding the investors.

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Evolution of Mutual Funds in India

The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Reserve Bank and the Government of India. The objective
then was to attract the small investors and introduce them to market investments. Since
ten, the history of mutual funds in India can be broadly divided into six distinct phases.

• Phase 1- 1964-87: Growth of Unit Trust of India
In 1963, UTI was established by an act of Parliament. As it was the only entity
offering mutual funds in India, it was a monopoly. Operationally, UTI was set up
by the Reserve Bank of India, but was later de-linked from the RBI. The first
scheme, and for long one of the largest, launched by UTI was Unit Scheme 1964.
UTI started innovating and offering different schemes to suit the needs of
different classes investors. Unit Linked Insurance Plan (ULIP) was launched in
1971. Master share could be termed as the first diversified equity investment
scheme in India. The first Indian offshore fund was launched in August 1986.
During 1990s, UTI catered to the demand for income-oriented schemes by
launching Monthly Income Schemes, a somewhat unusual mutual fund product
offering “assured returns”.

• Phase 2- 1987-1993: Entry of Public Sector Funds
1987 marked the entry of other public sector mutual funds. With the opening up
of the economy, many public sector banks and financial institutions were allowed
to establish mutual funds. State Bank of India established the first non-UTI
mutual fund-SBI mutual fund – in November 1987. This was followed by
Canbank mutual fund, Indian Bank of Mutual Fund, GIC Mutual Fund and PNB
Mutual Fund. These funds helped in enlarging the investor community and the
investible funds. From 1987-88 to 1992-93, the assets under the management
increased from Rs.6700 cr. to Rs.47,004 cr., nearly seen times.

• Phase 3- 1993-1996: Emergence of Private Funds
A new era in the mutual fund industry began in 1993 with the permission granted
for the entry of private sector funds. This gave Indian investors a broader choice
of ‘fund families’ and increasing competition to the existing public sector funds.
Quite significantly, foreign fund management companies were also allowed to
operate mutual funds, most of them coming into India through joint ventures with
Indian promoters. These private funds have brought in with them the latest
product innovations, investment management techniques and investor-servicing
technology that make the Indian mutual fund industry today a vibrant and
growing financial intermediary.
During the year 1993-94, five private sector mutual funds launched their schemes
followed by six others in 1994-95. Initially, mobilization of funds by the private
mutual funds was slow. But, this segment of the fund industry began to witness
much greater investor confidence in due course. One influencing factor was the
development of SEBI’s regulatory framework for the Indian mutual fund

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industry. Yet another important factor has been the steadily improving
performance of several fund houses. Investors in India now clearly saw the
benefits of investing through mutual funds and became discerning and selective.

• Phase 4- 1996-99: Growth and SEBI regulation
Since 1996, the mutual fund industry in India saw tighter regulation and higher
growth. It scaled new heights in terms of mobilization of funds and number of
players. Deregulation and liberalization of the Indian economy had introduced
competition and provided impetus to the growth of the industry. Finally, most
investors – small or large – started showing interest in mutual funds. Measures
were taken both by SEBI to protect the investor and by the government to
enhance investors’ returns through tax benefits. A comprehensive set of
regulation for all mutual funds operating in India was introduced with SEBI
(Mutual Fund) Regulations, 1996. These regulations set uniform standards for
all funds. The erstwhile UTI voluntarily adopted SEBI guidelines for its new
schemes. Similarly, the budget of Union Government in 1999 took a big step in
exempting all mutual fund dividends from income tax in hands of investors. Both
the 1996 regulations and the 1999 Budget must be considered of historic
importance, given their far-reaching impact on the fund industry.

• Phase 5- 1999-2004: Emergence of a large and uniform industry
The other major development in the fund industry has been the creation of a level
playing field for all mutual funds operating in India. This happened in February
2003, when the UTI Act was repealed. Unit Trust of India no longer has a special
legal status as a trust established by an Act of Parliament. Instead, it has also
adopted the same structure as any other fund in India – a Trust and an Asset
Management Company. UTI Mutual Fund is the present name of the erstwhile
Unit Trust of India. While UTI functioned under a separate law of Indian
parliament earlier, UTI Mutual Fund is now under the SEBI’s (Mutual Funds)
Regulations, 1996 like all other mutual funds in India. UTI Mutual Fund is still
the largest player in the Indian fund industry. All SEBI complaint schemes of the
erstwhile UTI are under its charge. All new schemes offered by UTI Mutual
Fund are SEBI approved. Other schemes (US 64, Assured Return Schemes) of
erstwhile UTI have been placed with a special undertaking administered by the
Government of India. These schemes are being gradually wound up.

The emergence of a uniform industry with the same structure, operations and
regulations makes it easier for distributors and investors to deal with any fund
house in India.

• Phase 6- From 2004 onwards: Consolidation and Growth
The industry has lately witnessed a spate of mergers and acquisitions, most
recent ones being the acquisition of schemes of Alliance Mutual Fund by Birla
Sun Life, Sun F&C Mutual Fund by Principal and PNB Mutual Fund by
Principal. At the same time, more international players continue to enter India,
including Fidelity, one of the largest funds in the world. The stage is set now for

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growth through consolidation and entry of new international and private sector
players. As at the end of March 2006, there were 29 funds.

Classification of Mutual Funds

There are many types of schemes of mutual funds available to the Indian investor.
However, these different types of schemes can be grouped into three broad heads.
Firstly, schemes are usually classified in accordance with their structure as closed-end or
open-end. The distinction depends upon whether they give the investors the option to
redeem and buy units at any time from the fund itself (open end) or whether the
investors have to await a given maturity before they can redeem their units to the fund
(closed-end).

Schemes can also be grouped in terms of whether the fund collect from investors any
charges at the time of entry or exit or both, thus reducing the investible amount or the
redemption proceeds. Funds/schemes that make these charges are classified as load
funds, and funds schemes that do not make any of these charges are termed no-load
funds.

In the USA, schemes are also classified as being tax-exempt or non-tax exempt,
depending on whether they invest in securities that give tax-exempt returns or not. This
classification is not used in India.

Open-end Vs. Closed-end Funds

An open-end fund is one that sells and repurchases units at all times. When the fund sells
units, the investor buys them from the fund. When the investor redeems the units, the
fund repurchases the units from the investor. An investor can buy units or redeem units
from the fund itself at a price based on the net asset value (NAV) per unit. The number
of units outstanding goes up or down every time the fund sells new units or repurchases
existing units. In other words, the ‘unit capital’ of an open-end mutual fund is not fixed
but variable. When sale of units exceed repurchase, the fund increases in size. When
repurchase exceed sale, the fund shrinks.

In practice, an open-end fund is not obliged to keep selling new units at all times, though
it has the obligation to repurchase units tendered by the investor. Many successful funds,
if they cannot mange a larger fund without adversely affecting profitability, stop
accepting further subscriptions from new investors after they reach a certain size. As
indicated earlier, an open-end fund rarely denies its investors the facility to redeem

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existing units. However, there are some situations when redemption is not possible. For
example, redemption is only possible after the investor’s cheque for initial subscription
has cleared (or only after the specified redemption period for collection of funds), or
until after any “lock-in period” specified by the fund is over.

Unlike an open-end fund, the ‘unit capital’ of a closed -end fund is fixed, as it makes a
one-time sale of a fixed number of units. After the offer closes, closed-end funds do not
allow investors to buy or redeem units directly from the funds. However, to provide the
much needed liquidity to investors, closed-end funds list on a stock exchange. Trading
through a stock exchange enables investors to buy or sell units of a closed-end mutual
fund from each other, through a stock broker, in the same fashion as buying or selling
shares of a company. The fund’s unit may be traded at a discount or premium to NAV
based on investor’s perception about the fund’s future performance and other market
factors affecting the demand for or supply of the fund’s units. The number of
outstanding units of a closed-end fund does not vary on account of trading in the fund’s
units at the stock exchange. Sometimes, closed-end funds do offer “buy-back of fund
shares/units”, thus offering another avenue for liquidity to closed-end fund investors. In
India, SEBI regulations ensure that the closed end scheme investors are given at least
one of the two exit avenues.

Load and No-load Funds

Marketing of a new mutual fund scheme involves initial expenses. These expenses may
be recovered from the investors in different ways at different times. Three usual ways in
which a fund’s marketing expenses may be recovered from the investors are:

1. At the time of investor’s entry into the fund/scheme, by deducting a specific
amount from his contribution.
2. By charging the fund/scheme with a fixed amount each year, during a specified
number of years.
3. At the time of investor’s exit from the fund/scheme, by deducting a specified
amount from the redemption proceeds payable to the investor.

These charges imposed on the investors to cover distribution/sales/marketing expenses
are often called ‘loads’. The load charged to the investor at the time of his entry into a
scheme is called a “front load or entry load”. This is the first case above. The load
amount charged to the scheme over a period of time is called a “deferred load”. This is
the second case above. The load that the investor pays at the time of his exit is called a
“back-end load or exit load”. This is the third case above. Some funds may also charge
different amounts of loads to the investors, depending upon how many years the investor
has stayed with the fund; the longer the investor stays with the fund less the amount of
“exit load” he is charged. This is called “contingent deferred sales charge”.

When an investor buys units from the fund, the front-end load amount is deducted from
the contribution/purchase amount paid by him to the distribution/sales/marketing
expenses, only the remaining par of his contribution is available at the disposable of the

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fund for making investments. Similarly, exit loads are subtracted from the redemption
proceeds before they are paid to the outgoing investor. If the sales charge is made on a
deferred bias directly to the scheme, the amount of the load may not be apparent to the
investor, as the scheme’s NAV would reflect the net amount after the deferred load.

Funds that charge front-end, back-end or deferred loads are called load funds. Funds that
make no such charges or loads for sales expenses are called no-load funds. In India,
SEBI has defined a “load” as the one-time fee payable by the investor to allow the fund
to meet initial issue expenses including brokers/agents/distributors commissions,
advertising and marketing expenses. Expenses such as SEBI filing fees, or printing of
offer documents and other forms or even bank charges related to new issue of scheme
would be considered initial issue expenses.

Tax-exempt Vs. Non-tax-exempt Funds

Generally, when a fund invests in tax-exempt securities, it is called a tax-exempt fund. In
USA for example, municipal bonds pay interest that is tax-free, while interest on
corporate and other bonds is taxable. In India, any income received by the mutual fund is
tax-free. After the 1999 Union Government Budget, all of dividend income received
from any of the mutual funds is tax-free in the hands of the investor. However, funds
other than open-end equity oriented funds have to pay a distribution tax, before
distributing income to investors. In other words, open-end equity oriented mutual fund
schemes are tax-exempt investment avenues, while other funds are taxable for
distributable income. For the Indian mutual fund investor, both the dividends and long
term gains from their mutual fund investments are currently tax-free. However, any short
term capital gains arising out of repurchase of fund units (held for a period of less than
12) are taxable. Further, after the 2005 Union Budget, repurchase transaction under
equity oriented schemes have been subjected to a Securities Transaction Tax (STT). All
these tax considerations are important in the investment decision. Hence, classification
of mutual from the taxability perspective has great significance for investors.

Mutual Fund Types

Funds are generally distinguished from each other by their investment objectives and
types of securities they invest in. Accordingly, we can divide these funds in three
different ways:

a) Broad Fund Types by Nature of Investments: Mutual funds may
invest in equities, bonds or other fixed income securities, or short term money
market securities. So we have Equity, Bond and Money Market or Liquid Funds.
All these invest in financial assets. But there are funds that invest in physical
assets. For example, there is Gold or other Precious Metal Funds and there are
Real Estate Funds.

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b) Broad Fund Types by Investment Objective: Investors and hence the
mutual funds pursue different objectives while investing. Thus, Growth Funds
invest for medium to long term capital appreciation. Income Funds invest to
generate regular income, and less for capital appreciation. Value Funds infest in
equities that are under-valued today, whose value will be unlocked in the future.

c) Broad Fund Types by Risk Profile: The nature of a fund’s portfolio and
its investment objective imply different levels of risk undertaken. Funds are,
therefore, often grouped in order of risk. Thus, Equity funds have a greater risk
of capita loss than a debt fund that seeks to protect the capital while looking for
they income. Liquid Funds are exposed to less risk than even the Bond Funds,
since they invest in short term fixed income securities, as compared to longer
term portfolios of Bond funds.

What is Money Market?

The money market is a subsection of the fixed income market. We generally think of the
term fixed income as being synonymous to bonds. In reality, a bond is just one type of
fixed income security. The difference between the money market and the bond market is
that the money market specializes in very short-term debt securities (debt that matures in
less than one year). Money market investments are also called cash investments because
of their short maturities. Money market securities are essentially IOUs issued by
governments, financial institutions and large corporations. These instruments are very
liquid and considered extra ordinary safe. Because they are extremely conservative,
money market securities offer significantly lower returns than most other securities. One
of the main differences between the money market and the stock market is that most
money market securities trade in very high denominations. This limits access for the
individual investor. Furthermore, the money market is a dealer market, which means that
firms buy and sell securities in their own accounts, at their own risk. Compare this to the
stock market where a broker receives commission to acts as an agent, while the investor
takes the risk of holding the stock. Another characteristic of a dealer market is the lack
of a central trading floor or exchange. Deals are transacted over the phone or through
electronic systems. The easiest way for us to gain access to the money market is with a
money market mutual find, or sometimes through a money market bank account. These
accounts and funds pool together the assets of thousands of investors in order to buy the
money market securities on their behalf. However, some money market instruments, like
Treasury bills, may be purchased directly. Failing that, they can be acquired through
other large financial institutions with direct access to these markets. There are several
different instruments in the money market, offering different returns and different risks.
Example: Treasury Bills, Certificate of Deposit, Commercial Paper etc.

Money Market/Liquid Funds

This is considered to be at the lowest rung in the order o risk level, liquid funds invest in
debt securities of a short term nature, which generally means securities of less than one-

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year maturity. The typical, short-term, interest bearing instruments these funds invest in
include Treasury Bills issued by governments, Certificates of Deposit issued by banks
and Commercial Paper issued by companies.

The major strength of money market or liquid funds is liquidity and safety of the
principal that the investors can normally expect from short-term investments. Through
interest rate risk is present; the impact is low as the investment instruments maturities
are short.

Gilt Funds

Gilt is government securities with medium to long term maturities, typically of over one
year. In India, we have Government Securities or Gilt Funds that invest in government
paper called dated securities. Since the issuer is the Government of India/States, these
funds have little risk of default and hence offer better protection of principal. However,
Gilt Securities, like all debt securities, face interest rate risk. Debt securities prices fall
when interest rate levels increase.

Debt Funds (or Income Funds)

Debt instruments invest in debt instruments issued not only by governments, but also by
private companies, banks and financial institutions and other entities such as
infrastructure companies/utilities. By investing in debt these funds target low risk and
stable income for the investor as their key objectives. However, as compared to the
money market/ liquid funds, they do have a higher price fluctuation risk, since they
invest in longer-term securities.

Debt funds are largely considered as Income funds as they invest primarily in fixed
income generating debt instruments. They do not target capital appreciation but look for
current income, and therefore distribute a substantial part of their surplus to investors.
Income funds that target high returns can face more risks. Even within the broad
category of debt investment, different investment objectives can be set.

a) Diversified Debt Funds: A debt fund invests in all available types of debt
securities, issued by entities across all industries and sectors is a properly
diversified debt fund. While debt fund offer high income and less risk than
equity funds, investors need to recognize that debt securities are subject to risk
of default by the issuer on payment of interest or principal. A diversified debt
fund has the benefit of risk reduction through diversification. Hence a diversified
debt is less risky than a narrow-focus fund that invests in debt securities of a
particular sector or industry. In addition, all debt mutual funds lead to risk
reduction for the individual investor as any losses by a debt issuer are shared by
a large number of investors in the fund.

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b) Focused Debt Funds: Some debt funds have a narrow focus, with less
diversification in its investments. Examples include, sector, specialized and
offshore debt funds. They have a substantial part of their portfolio invested in
debt instruments and are therefore more income oriented and inherently less
risky than equity funds. However, debt funds should not be automatically
considered to be less risky than equity funds, as there have been relatively large
defaults by issuers of debt and many funds have non-performing assets in their
debt portfolios. Also the market value of debt securities will fluctuate more as
Indian debt market witness more trading and interest rate volatility in the future.
The central point to note is that these narrow focus funds have greater risk than
diversified debt funds. Other examples of focused funds include those that invest
only in Corporate Debentures and Bonds or only in Tax Free Infrastructure or
Municipal Bonds.

c) High Yield Debt Funds: Usually, Debt Funds control the default risk by
investing in securities issued by borrowers who are rated by credit rating
agencies and are considered to be of “investment grade”. There are, High Yield
Debt Funds that seek to obtain higher interest returns by investing in debt
instruments that are considered to be “below investment grade”. Clearly, these
funds are exposed to higher default risk.

d) Assured Return Funds- an Indian Variant: Fundamentally, mutual funds hold
assets in trust for investors. All returns and risks are assumed by the investor.
The role of the fund manager is to provide professional management service and
to ensure the most favorable risk-return profile consistent with the investment
objective of the fund. The fund manager, the trustees or the sponsors do not
guarantee minimum return to the investors.

However, in India, historically, UTI and other funds had offered “assured
return” schemes to investors. The most popular variant of such schemes was the
Monthly Income Plans of UTI. Returns were indicated in advance for all of
future years of these closed-end schemes. In assured return schemes the
shortfall, if any, is borne by the sponsors/AMCs. Assured Return or Guaranteed
Monthly Income Plans are essentially Debt/Income Funds. Assured return debt
funds certainly reduce the risk to the investor as compared to all other debt or
equity funds, but only to the extent that the guarantor has the require financial
strength. Hence, the market regulator SEBI permits only those funds whose
sponsors have adequate net-worth to offer assurance of returns.

Assured return schemes are no longer offered by AMCs, though possible.

e) Fixed Term Plan Series-Another Indian Variant: Fixed Term Plan Series
offer a combination of both open-end and closed-end schemes to its investors, as
a series of plans are offered and units are issued at frequent intervals for short
plan durations. Fixed Term Plans are essentially closed-end in nature; in that

17


mutual fund AMC issues a fixed number of units for each series only once and
closes the issue after an initial offering period, like a closed-end scheme
offering. However, a closed end scheme would normally make a one time initial
offering of units, for a fixed duration generally exceeding one year. Investors
have to hold the units until the end of the stated duration, or sell them on a stock
exchange if listed. Fixed Term Plans are closed-end, but usually for shorter
term-less than a year. Being of short duration, they are not listed on a stock
exchange.

The scheme under which Fixed Term Plan Series are offered is likely to be an
Income Scheme, since the objective is clearly for the AMC to attempt to reward
investors with an expected return within a short period. Mutual Fund AMCs in
India usually offering such plans do not guarantee any returns, but the product
has clearly been designed to attract the short term investor who would otherwise
place the money as fixed term bank deposits or inter-corporate deposits.

Equity Funds

Equity funds invest a major portion of their corpus in equity shares issued by companies,
acquired directly in initial public offerings or through the secondary market. Equity
funds would be exposed to the equity price fluctuation risk at the market level, at the
industry or sector level and at the company-specific level. Equity funds Net Asset
Values fluctuate with all these price movements. These price movements are caused by
several external factors-political, social as well as economic. The issuers of equity shares
offer no guaranteed repayment as in case of debt instruments. Hence, Equity Funds are
generally considered at the higher end of the risk spectrum among all funds available in
the market. On the other hand, unlike debt instruments that offer fixed amount of
repayment, equities can appreciate in value in line with issuer’s earnings potential, and
so offer greatest potential for growth in capital.

Equity funds adopt different investment strategies resulting in different levels of risk.
Hence, they are generally separated into different types in terms of their investment
styles.

a) Aggressive Growth Funds: There are many types of stocks available in the
market-market leaders, less researched stocks that are considered to have
future growth potential, and even some speculative stocks of somewhat
unknown or unproven issuers. Fund managers seek out and invest in
different types of stocks in line with their own perception of potential returns
and appetite for risk.

b) Growth Funds: Growth funds invest in companies whose earnings are
expected to rise at an above average rate. These companies may be operating
in sectors like technology considered having a growth potential, but not
entirely unproven and speculative. The primary objective of Growth Funds is

18


capital appreciation over a three to five years span. Growth funds are
therefore less volatile than funds that target aggressive growth.

c) Specialty Funds: These funds have a narrow portfolio orientation and invest
in only companies that meet pre-defined criteria. Within the Specialty Funds
category, some funds may be broad based in terms of types of investments in
the portfolio. However, most specialty funds tend to be concentrated funds,
since diversification is limited to one type of investment. Clearly,
concentrated specialty funds tend to be more volatile than diversified funds.

• Sector Funds: Their portfolio consists of investments in only
one industry or sector of the market such as Information
Technology, Pharmaceuticals or Fast Moving Consumer
Goods. Since sector funds do not diversify into multiple
sectors, they carry a high level of sector and company specific
risk than diversified equity funds.

• Foreign Securities Funds: These funds invest in equities in
one or more foreign countries thereby achieving
diversification across the country’s borders. However, they
also have additional risks such as the foreign exchange rate
risk and their performance depends on the economic
conditions of the countries they invest in. foreign securities
Equity Funds may invest in a single country or many
countries.

• Mid-Cap or Small-Cap Equity Funds: These funds invest in
shares of companies with relatively lower market
capitalization than that of big, blue chip companies. They may
be thus more volatile than other funds, as mid size or smaller
companies shares are not very liquid in the markets. In terms
of risk characteristics small company funds may be
aggressive-growth or just growth type.

• Option Income Funds: These funds do not exist in India, but
Option Income Funds write options on a significant part of
their portfolio. While options are viewed as risky instruments,
they may actually help to control volatility, if properly used.
Conservative option funds invest in large, dividend paying
companies, and sell options against their stock positions. This
ensures a stable income stream in the form of premium
income through selling options and dividends.

d) Diversified Equity Funds: A fund that seeks to invest only in equities,
except for a very small portion in liquid money market securities, but is not

19


focused on any one or a few sectors or shares, may be termed a diversified
equity fund. While exposed to all equity price risks, diversified equity fund
seeks to reduce the sector or stock specific risks through diversification.
They have exposure to equity market risk. Such general purpose diversified
funds are at a lower risk level than growth funds.

• Equity Linked Savings Schemes: In India, investors have
been given tax concessions to encourage them to invest in
equity markets through these special schemes. Investment in
these schemes entitles the investor to claim an income tax
rebate., but usually has a lock-in period. There are no
restrictions on the investment objectives for fund managers.
Investors should clearly look for where the Fund Management
Company proposes to invest and accordingly judge the level
of risk involved.

e) Equity Index Fund: An index fund tracks the performance of a specific
stock market index. The objective is to match the performance of the stock
market by tracking an index that represents the overall market. The fund
invests in shares that constitute the index and in the same proportion as the
index. These funds take only the overall market risk, while reducing the
sector and stock specific risks through diversification. However, there are
index funds that track a narrow sect oral index, such as Parma Index or Bank
Index. These will be less diversified and more risky, although they will be
less risky compared to individual stocks in that industry/sector.

f) Value Funds: Value funds try to seek out fundamentally sound companies
whose shares are currently under priced in the market. Value funds will add
only those shares to their portfolio that are selling at low price-earning ratios,
low market to book value ratios and are believed to be undervalued
compared to their true potential. Value Funds take equity market risks, but
stand often at a lower end of the risk spectrum in comparison with the
Growth funds. Value Stocks may be from a large number of sectors and
therefore diversified. However, value stocks often come from cyclical
industries. Example Templeton Fund which has in its portfolio shares of
Cement/Aluminum and other cyclical industries. Prices of such shares may
fluctuate more than the overall marketing both bull and bear markets,
making such value funds more risky than diversified funds in the short-term.
However, proponents of the value investing recommend it as a long term
approach. In the long term, value Funds ought to be less risky than Growth
Funds or even Equity diversified funds.

g) Equity Income or Dividend Yield Funds: There are some equity funds that
can be designed to give the investor a high level of current income along
with steady capital appreciation, investing mainly in shares of companies
with high dividend yields. As an example, an Equity Income Fund would

20


invest largely in Power/Utility companies, shares of established companies
that pay higher dividends and whose prices do not fluctuate as much as other
shares. These equity funds should therefore be less volatile and less risky
than nearly all other equity funds.

Hybrid Funds – Quasi Equity/Quasi Debt

In terms of the nature of financial securities held, there are three major mutual fund
types: money market, debt and equity. Many mutual funds mix these different types of
securities in their portfolios. Thus, most funds, equity or debt, always have some money
market securities in their portfolios as these securities offer the much needed liquidity.
However, money market holdings will constitute a lower proportion in the overall
portfolios of debt or equity funds. These are funds that, however, seek to have a
relatively balanced holding of debt and equity securities in their portfolios. Such funds
are termed “hybrid funds” as they have a dual equity – bond focus. Some of the funds in
this category are:

a) Balanced Funds: A balanced fund is one that has a portfolio comprising debt
instruments, convertible securities, and preference and equity shares. Their
assets are generally held in more or less equal proportions between debt/money
market securities and equities. By investing in a mix of this nature, balanced
funds seek to attain the objectives of income, moderate capital appreciation and
preservation of capital, and are ideal for investors with a conservative ad long-
term orientation.

b) Growth and Income Funds: Unlike income-focused r growth-focused funds,
these funds seek to strike a balance between capital appreciation and income
for the investor. Their portfolios are a mix between companies with good
dividend paying records and those with potential for capital appreciation.
These funds would be less risky than pure growth funds, though more risky
than income funds.

c) Asset Allocation Funds: These are the funds that follow variable asset
allocation policies and move in and out of an asset class (equity, debt, money
market etc.) Depending upon their outlook for specific markets. The fund
manager is given the flexibility to shift towards equity when equity market is
expected to do well and to shift towards debt when the debt market is expected
to do well. The success of such strategy would depend on the skill of the f und
manager in anticipating market trends.

Commodity Funds

Commodity funds specialize in investing in different commodities directly or through
shares of commodity companies or through commodity futures contract. Specialized
funds may invest in a single commodity or a commodity group such as edible oils or

21


grains, while diversified commodity funds will spread their assets over many
commodities.

A most common example of commodity funds is the so called Precious Metals Funds.
Gold Funds invest in gold, gold futures or shares of gold mines. Other precious metal
funds such as Platinum or Silver are also available. They may take exposure to more
than one metal to get some benefit of diversification.

Real Estate Funds

Real Estate Funds would invest in real estate directly, or many fund real estate
developers, or lend to them, or buy shares of housing finance companies or may even
buy their securitized assets. The fund may have a growth orientation or may seek to
give investors regular income.

Exchange Traded Fund (ETF)

An ETF is a mutual fund scheme, which combines the best features of open end and
closed end structures. It tracks a market index and trades like a single stock on the Stock
Exchange. Its pricing is linked to the index and units can be bought/sold on the Stock
Exchange. ETF offers investor the benefit of flexibility of holding a single share as well
as the diversification and cost efficiency of an index. ETFs trade on the stock exchanges
and thus its unit price is determined in the market place and will keep changing from
time to time. ETFs are bought and sold through intermediaries who are generally market
makers-buying and selling units with two way price quotes. These market makers allow
investors to exchange ETF units for underlying shares.

Funds of Funds

A fund of funds invests in other mutual funds. As a normal mutual fund invests in a
portfolio of securities such as debt or equity, a fund of funds invests in a portfolio of the
units of other mutual fund schemes. Availability of a fund of funds to an investor helps
the investor diversify his risk not only in terms of the types of securities held in the
portfolio, but also in terms of schemes of different fund managers and investment styles.
A fund of funds can invest in top performing equity funds of different AMCs and offer
the most widely diversified portfolio to the investor. It can also invest in equity and
income schemes of other AMCs simultaneously offering the investor balanced or
diversified portfolio across asset classes. A fund of funds could, however, result in
higher expenses of the AMC that manages the fund of funds get added to the expenses of
the other schemes it invests in.

Fund Structure and Constituents

In India, open-end and closed-end funds are constituted along one unique structure as
unit trusts. A mutual fund in India is allowed to issue open-end and closed-end schemes

22


under a common legal structure. Therefore, a mutual fund may have several different
schemes under it i.e., under one unit trust, at any point of time. However, like the USA
all the funds and their open end and closed end schemes are governed by the same
regulations and the regulatory body, the SEBI. The structure that is required to be
followed by mutual funds in India is laid down under SEBI Regulations, 1996. The
structure of the various fund constituents is:

Fund Sponsor: Sponsor is defined under SEBI regulations as any person who, acting
alone or in combination with another body corporate, establishes a mutual fund. The
sponsor of a fund is akin to the promoter of a company as he gets the fund registered
with SEBI. The sponsor will form a trust and appoint a board of Trustees. The sponsor
will also generally appoint an Asset Management Company as fund managers. The
sponsor, either directly or acting through the trustees will also appoint a Custodian to
hold the fund assets. All these appointments are made in accordance with SEBI
Regulations. As per the existing SEBI regulations, for a person to qualify as a sponsor,
he must contribute at least 40% of the net worth of the AMC and possess a sound
financial track record over five years prior to registration.

Mutual Fund as Trusts

A mutual fund in India is constituted in the form of a Public Trust created under the
Indian Trusts Act, 1882. The Fund Sponsor acts as the Settler of the Trust, contributing
to its initial capital, and appoints a Trustee to hold the assets of the Trust for the benefit
of the unit-holders, who are the beneficiaries of the Trust. The fund then invites
investors to contribute their money in the common pool, by subscribing to “units” issued
by various schemes established by the trust, units being the evidence of their beneficial
interest in the fund.

Under the Indian Trusts Act, the Trust or the Fund has no legal capacity itself, rather it is
the Trustee or Trustees who have legal capacity and therefore all acts in relation to the
trust are taken on its behalf by the Trustees. The Trustees hold the unit-holders money in
a fiduciary capacity i.e. the money belongs to the unit-holders and is entrusted to the
fund for the purpose of investment. In legal parlance, the investors or the unit-holders
are the “beneficial owners” of the investment held by the Trust, even as these
investments are held in the name of the trustees on a day-to-day basis. Being Public
Trusts, mutual funds can invite any number of investors as beneficial owners in their
investment schemes.

Trustees

The trust-the mutual fund may be managed by a Board of Trustees-a body of individuals,
or a Trust Company- a corporate body. Most of the funds in India are managed by board
of Trustees. While the Board of Trustees is governed by the provisions of Indian Trusts
Act, where the trustees is a corporate body, it would be required to comply with the
provisions of the, Companies Act, 1956. The board or the Trustee Company, acts as an
independent body and as a protector of the unit holders interests. The Trustees do not

23


directly manage the portfolio of securities. For this specialist function, they appoint an
Asset Management Company. They ensure that the fund is managed by the AMC as per
the defined objectives and in accordance with the Trust Deed and SEBI regulations.

The Trust is created through a document called the Trust Deed that is executed by the
Fund Sponsor in favor of the Trustees. The Trust Deed is required to be stamped as
registered under the provisions of the Indian Registration Act and registered with SEBI.
The trustees being the primary guardians of the unit-holder’s funds and assets, a Trustee
has to be a person of high repute and integrity. SEBI has laid down a set of conditions to
be fulfilled by the individuals being proposed as trustees of mutual funds- both
independent and non-independent. Besides specifying the “disqualifications”, SEBI has
also set down the Rights and Obligations pf the Trustees. Broadly, the Trustees must
ensure that investor’s interests are safeguarded and that AMCs operations are along
professional lines. They must also ensure that the management of the fund is in
accordance with SEBI Regulations. To ensure the independence of the Trustee
Company, SEBI mandates a minimum of two-third independent directors on the board of
Trustee Company.

The Asset Management Company-Appointment and Functions

The role of an AMC is to act as the Investment Manager of the Trust. The sponsors, or
the trustees, if so authorized by the Trust Deed, appoint the Acute AMC so appointed is
required to be approved by SEBI. Once approved, the AMC functions under the
supervision of its own Board of Directors, and also under the direction of the Trustees
and SEBI. The Trustees are empowered to terminate the appointment of the AMC and
appoint a new AMC with the prior approval of SEBI and unit –holders. The AMC
would, in the name of the Trust, float and then manage the different investment
“schemes” as per SEBI Regulations and as per the Investment Management Agreement
it signs with the Trustees.

The AMC of the mutual fund must have a net worth of at least Rs.10 Crores at all times.
Directors of the AMC, both independent and non-independent, should have adequate
professional experience in financial services and should be individuals of high moral
standing, a condition also applicable to other key personnel of the AMC. The AMC
cannot act as a trustee of any other mutual fund. Besides its role as the fund manager, it
may undertake specified activities such as advisory services and financial consulting,
provided these activities are run independently of one another and the AMCs resources
are properly segregated by activity. The AMC used always act in interest of the unit-
holders and report to the trustees with respect to its activities. To ensure the
independence of the asset management company, SEBI mandates that a minimum of
50% of the directors of the board of the asset management company should be
independent directors.

Custodian and Depositories

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Mutual funds are in the business of buying and selling of securities in large volumes.
Handling these securities in terms of physical delivery and eventual safekeeping is
therefore a specialized activity. The custodian is appointed by the Board of Trustees for
safekeeping of physical securities or participating in any clearing system through
approved depository companies on behalf of the mutual fund in case of dematerialized
securities. A custodian must fulfill its responsibilities in accordance with its agreement
with the mutual fund. The custodian should be an entity independent of the sponsors and
is required to be registered with SEBI.

Bankers

A fund’s activities involve dealing with money on a continuous basis primarily with
respect to buying and selling units, paying for investment made, receiving the proceeds
on sale of investments and discharging its obligations towards operating expenses. A
fund’s bankers, therefore, play a crucial role with respect to its financial dealings by
holding its bank accounts and providing it with remittance services.

Registrars and Transfer Agents

Registrars and transfer Agents are responsible for issuing and redeeming units of the
mutual fund and providing other related services such as preparation of transfer
documents and updating investor records. A fund may choose to carry out this activity
in-house and charge the scheme for the service at a competitive market rate. Where an
outside Transfer Agent is used, the fund investor will find the transfer agent to be an
important interface to deal with, since all of the investor services that a fund provides are
going to be dependent on the transfer agent. Such services include buying/repurchase of
units, switching from one scheme to another, systematic investment/ withdrawals,
recording of nomination & bank detail.

Distributors

Mutual funds operate as collective investment vehicles, on the principles of
accumulating funds from a large number of investor and then investing on a big scale.
For a fund to sell units across a wide retail base of individuals’ investors, an established
network of distribution is essential. In terms of numbers, individuals constitute the
largest segment in the category of mutual fund distributors. Other distributors such as
banks, non banking finance.

Companies account for bulk of the volume of business. Banks are now emerging as a
significant distribution vehicle for mutual funds.

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Tools

1. Standard Deviation: In probability theory and statistics, standard deviation
is a measure of the variability or dispersion of a population, a data set, or a
probability distribution. A low standard deviation indicates that the data points
tend to be very close to the same value (the mean), while high standard deviation
indicates that the data are spread out over a large range of values.

In finance, standard deviation is a representation of the risk associated with a
given security (stocks, bonds, property, etc.), or the risk of a portfolio of
securities (actively managed mutual funds, index mutual funds, or ETFs). Risk is
an important factor in determining how to efficiently manage a portfolio of
investments because it determines the variation in returns on the assets and/or
portfolio and gives investors a mathematical basis for investment decisions
(known as mean-variance optimization).

The overall concept of risk is that as it increases, the expected return on the asset
will increase as a result of the premium earned-in other words, investors should
expect a higher return on an investment when said investment carries a higher
level of risk, or uncertainty of that return. When evaluating investments,
investors should estimate both the expected return and the uncertainty of future
returns. Standard deviation provides a quantified estimate of the uncertainty of
future returns

2. Sharpe Ratio: A ratio developed by Nobel Laureate Bill Sharpe to measure
risk-adjusted performance. Sharpe ratio is a bit of a blunt instrument for
measuring risk adjusted returns. Past returns don’t predict future returns. And
although relative risks among funds have a good deal of consistency overtime,
standard deviation only a rough proxy for a concept as elusive as risk. Further,
weighting risk as equal to return in importance in the formula is completely

26


arbitrary. Since Sharpe Ratio uses standard deviation as a measure of risk, it
evaluates returns with respect to total risk, not just the market (systematic) risk.
Therefore, it can be used even for non diversified portfolios (which would have
both systematic risks as well as non systematic risk). 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 due to smart
investment decisions or a result of excess risk. This measurement is very useful
because although one portfolio or fund can reap higher returns than its peers, it is
only a good investment if those higher returns do not come with too much
additional risk. The greater a portfolio’s Sharpe ratio, the better its risk-adjusted
performance has been.

A variation of the Sharpe ratio is the Sorption ratio, which removes the effects of
upward price movements on standard deviation to instead measure only returns
against downward price volatility.

Let Rf represent the return on fund F in the forthcoming period and RB the return
on a benchmark portfolio or security. In the equations, the tildes over the
variables indicate that the exact values may not be known in advance.

3. Beta: Beta is a measure of a stock’s volatility in relation to the market. By
definition, the market has a beta of 1.0, and individual stocks are ranked
according to how much they deviate from the market. A stock that swings more
than the market over time has a beta above 1.0. if a stock moves less than the
market, the stock’s beta is less than 1.0. High-beta stocks are supposed to be
riskier but provide a potential for higher returns; low-beta stocks pose less risk
but also lower returns.

Beta is a key component for the capital asset pricing model (CAPM), which is
used to calculate cost of equity. The cost of capital represents the discount rate
used to arrive at the present value of a company’s future cash flows. All things
being equal, the higher a company’s beta is, the higher its cost of capital discount
rate. The higher the discount rate, the lower the present value placed on the
company’s future cash flows. In short, beta can impact a company’s share
valuation.

4. Portfolio Turnover Ratio: Portfolio Turnover Ratio is the percentage of a
mutual fund or other investment vehicle’s holdings that have been “turned over”
or replaced with other holdings in a given year. The type of mutual fund, its
investment objective and/or the portfolio manager’s investing style will play an
important role in determining its turnover ratio.

27


For example, a stock index fund will have a low turnover rate, but a bond fund,
whether passively or actively managed, will have high turnover because active
trading is an inherent quality of bond investments. An aggressive small-cap
growth stock fund will generally experience higher turnover than a large-cap
value stock fund. All things being equal, investors should favor low turnover
funds. High turnover equates to higher brokerage transaction fees, which reduce
fund returns. Also, the more portfolio turnover in a fund, the more likely it will
generate short-term capital gains, which are taxable at an investor’s ordinary
income rate. Turnover ratios for a mutual fund will vary from year to year, but
the general range can be assessed by looking at the figure over a few consecutive
years.

Comparative Analysis

1. Large Cap Funds

• Reliance Vision Fund:

Investment Objective

This fund was launched in October 1995, with an objective to achieve long-term
capital growth. It focuses on companies with large size capitalization with a small
exposure to companies with mid size capitalization. The primary investment
objective of the scheme is to achieve long term growth of capital by investment in
equity and equity related securities through a research based investment approach. Its
benchmark index is S&P CNX Nifty.

Reliance Vision Fund had a corpus of Rs 3591.84 Crores as on May 31, 2010.

Fund Performance as on May 31, 2010

Period % change in NAV % change in Index
Last 6 months 1.0% -3.0%
1 Year 22.4% 9.7%
3 Years 6.9% 5.0%
5 Years 21.7% 18.9%
Since Inception 24.4% -

Comparing the performance of the fund with its benchmark BSE 100, we find
that

28


the past six months while Reliance Vision fund grew by 1.0% its benchmark
index declined by 2.5%. Thus, in the past six months this fund outperformed as
compared to the benchmark index.

• Kotak 30


It is an open-ended equity growth scheme with an objective to generate capital
appreciation from a portfolio of predominantly equity related securities. The portfolio
will generally comprise of equity and equity related instruments of around thirty
companies which may go up to thirty nine companies. This scheme was launched on
December 29; 1988. Its benchmark index is S&P CNX Nifty. The fund’s total corpus as
on May 31, 2010 was Rs. 1023.24 Crores.

Analyzing the fund’s portfolio as on May 31, 2010, we gather that majority of its corpus
is allocated in the Banking Sector (16.73%), Software (10.89%), Pharmaceuticals
(9.06%), Petroleum Products (7.97%), Consumer Non Durables (6.60%), CBLO & Term
Deposits & Rev. Repo (5.96%), Finance (5.71%), Construction Project (5.33%),
Industrial Products (4.07%), Media & Entertainment (3.71%), Others (23.97%).


Period %change in NAV %change in Index
Last 6 months -1.8% -3.0%
1 Year 18.3% 9.7%
3 Years 7.8% 5.0%
5 Years 22.9% 18.9%

• Birla Sun Life Frontline Equity Fund

Investment Objective:

It is an open-ended growth scheme with the objective of long term growth of capital,
through a portfolio with a target allocation of 100% equity by aiming at being as
diversified across various industries and or sectors. The scheme was launched on August
30, 2002. Its benchmark index is S&P CNX Nifty.



29


Last 6 Months -0.2% -3.0%
1 Year 22.4% 9.7%
3 Years 11.8% 5.0%
5 Years 25.8% 18.9%

• ICICI Prudential Focused Bluechip Equity Fund


The scheme was launched on August 19, 1999. Its benchmark index is S&P CNX Nifty.


Last 6 Months 2.2% -3.0%
1 Year 27.4% 9.7%
3 Years - 5.0%
5 Years - 18.9%

Comparing Performance

Fund/Period 6 Months 1 Year 3 Years 5 Years Since
Inception
Reliance 1.0% 22.4% 6.9% 21.7% 24.4%
Vision
ICICI 2.2% 27.4% - - 17.2%
Prudential
Focused
Bluechip
Equity Fund
Kotak 30 -1.8% 18.3% 7.8% 22.9% 22.0%
Birla Sun -0.2% 22.4% 11.8% 25.8% 30.3%

30


Life
Frontline
Equity

Benchmark Returns

Fund/Performance 6 Months 1 Year 3 Years 5 Years Since
Inception
Reliance Vision (-)0.4% 1.59% 1.21% 1.10% -
ICICI Prudential (-)0.73% 2.82% - - -
Focused Bluechip
Equity Fund
Kotak 30 0.6% 1.89% 1.56% 1.21% -
Birla Sun Life 0.06% 1.34% 1.98% 1.37% -
Frontline Equity
Comparing Risk

Fund/Risk Beta Standard Sharpe Ratio Portfolio Expense
Measure Deviation Turnover Ratio
Ratio
Reliance 0.8529 4.2749 0.0376 1.71 1.8
Vision
ICICI 0.82 29.66 0.69 0.62 2.0
Prudential
Focused
Bluechip
Equity Fund
Kotak 30 0.89 32.04 0.97 243.68% 2.0
Birla Sun 0.85 33.42% 0.24% - 1.9
Life
Frontline
Equity

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2. Balanced Fund

• Reliance Regular Savings Fund Balanced Option


The primary investment objective of this option is to generate consistent returns and
appreciation of capital by investing in a mix of securities comprising of equity, equity
related instruments and fixed income instruments. The inception date of this scheme is
January 13; 2007. It had a total corpus of Rs 2994.33 crores as on May 31,2010. Its
benchmark index is Crisil Balanced Fund Index.


Last 6 Months 7.3% 0.6%
1 Year 28.1% 10.2%
3 Years 18.4% 7.9%
5 Years - 15.1%

• ICICI Prudential Balanced Fund

32



It is an open-ended balanced fund. Its objective is to generate long term capital
appreciation and current income. This fund was launched on November 3, 1999. Its
benchmark index is Crisil Balanced Fund Index.


1 Year 20.9% 10.2%
3 Years 3.6% 7.9%
5 Years 14.7% 15.1%

• Kotak Balance


To achieve growth by investing in equity and equity related instruments, balanced with
income generation by investing in debt and money market instruments. This fund was
launched on November 25; 1999. Its benchmark index is Crisil Balanced Fund Index, As
on May 31, 2010 it had a total corpus of Rs.63.35 crores

As on May 31, 2010 the fund had invested majority of its portfolio in CBLO & Term
deposits & Revenue Repot (13.37%), Debentures & Bonds (10.81), Banks (8.66%),
Government Dated Securities (8.02%), Pharmaceuticals (7.54%), Software (5.91%),
Consumer Non Durables (5.86%), Auto Ancillaries (4.61%), Petroleum Products
(3.65%), Construction Project (2.68%), Others (28.89%).


6 Months 0.8% 0.6%
1 Year 15.8% 10.2%
3 Years 7.0% 7.9%
5 Years 15.6% 15.1%

• Birla Sun Life ’95 Fund

33



It is an open-ended balanced scheme with the objective of long term growth of capital
and current income, through a portfolio of equity and fixed income securities. This fund
was launched on February 10, 1995. Its benchmark index is Crisil Balanced Fund Index.


1 Year 22.9% 10.2%
3 Years 11.3% 7.9%
5 Years 20.7% 15.1%


Inception
ICICI 3.0% 20.9% 3.6% 14.7% 14.1%
Prudential
Balanced
Kotak 0.8% 15.8% 7.0% 15.6% 14.4%
Balance
Reliance- 7.3% 28.1% 18.4% - 15.1%
RSF
Balanced
Birla Sun 3.7% 22.9% 11.3% 20.7% 24.2%
Life ’95
Fund

Benchmark Returns

Fund/Period 6 Months 1 Year 3 Years 5 Years Since Inception
ICICI 5% 2.05% 0.46% 0.97% -
Prudential
Balanced
Kotak 1.33% 1.55% 0.89% 1.033 -
Balance %
Reliance- 12.17% 2.75% 2.32% - -
RSF

34


Balanced
Birla Sun 6.167% 2.25% 1.43% 1.37% -
Life ’95
Fund

Comparing Risk

Fund/Risk Beta Standard Sharpe Ratio Portfolio Expense
Ratio
Birla Sun - 27.65% 0.26 - 2.4
Life ’95
Fund
ICICI - 23.62% - 0.72 2.3
Prudential
Balanced
Kotak 0.96 25.54% 0.94 251.85% 2.4
Balance
Reliance- 0.6784 3.4720 0.0891 4.15 2.3
RSF
Balanced

3. Mid Cap Funds

• Reliance Growth Fund


35


The primary investment objective of the scheme is to achieve long-term growth of
capital by investing in equity and equity related securities through a research based
investment approach. This fund was launched on October 8, 1995. Its benchmark index
is BSE 100.
It had a total corpus of Rs. 7428.96 as on May 31. 2010.


1 Year 31.3% 11.7%
3 Years 13.6% 4.4%
5 Years 26.7% 19.7%

• ICICI Discovery Fund


The objective is to generate returns through a combination of dividend income and
capital appreciation by investing primarily in a well-diversified portfolio of value stocks.
This fund was launched on August 16, 2004. Its benchmark index is BSE 100.


1 Year 61.3% 11.7%
3 Years 15.5% 4.4%
5 Years 23.9% 19.7%

• Birla Mid Cap Fund


36


An open-ended growth scheme with the objective to achieve long-term growth of capital
at controlled level of risk by primarily investing in mid cap stocks. This fund was
launched on October 03, 2002. Its benchmark index is BSE 100.


1 Year 35.2% 11.7%
3 Years 12.6% 4.4%
5 Years 24.3% 19.7%

• Kotak Mid Cap Fund


It is an Open-Ended Equity Growth Scheme with the objective to generate capital
appreciation from a diversified portfolio of equity and equity related securities. This
fund was launched on February 24, 2005.


1 Year 38.7% 11.7%
3 Years 0.9% 4.4%
5 Years 15.6% 19.7%


Inception
ICICI 12.8% 61.3% 15.5% 23.9% 28.8%
Prudential
Discovery
Fund
Birla sun 1.0% 35.2% 12.6% 24.3% 35.5%
Life Mid

37


Cap Fund
Reliance 5.8% 31.3% 13.6% 26.7% 29.4%
Growth
Kotak Mid 8.7% 38.7% 0.9% 15.6% 16.5%
Cap Fund

Benchmark Returns

Fund/ Period 6 Months 1 Year 3 Years 5 Years Since
Inception
ICICI -3.56 5.24 3.52 1.21 -
Prudential
Discovery
Fund
Birla Sun -0.28 3.01 2.86 1.23 -
Life Mid
Cap Fund
Reliance -1.61 2.68 3.09 1.36 -
Growth
Kotak Mid -2.41 3.31 0.20 0.79
Cap Fund

Comparing Risk

Fund/ Risk Beta Standard Sharpe Ratio Portfolio Expense
Ratio
ICICI - 38.03% 0.57 - 2.0
Prudential
Discovery
Fund
Birla Sun 0.94 41.67% 0.21 - 2.00
Life Mid
Cap Fund
Reliance 0.8531 4.3902 0.0637 0.44 1.8
Growth
Kotak Mid 1.03 39.04 0.88 383.00% 2.4
Cap Fund

4. Liquid Funds

38


• Reliance Liquidity Fund


The investment objective of the scheme is to generate optimal returns consistent with
moderate level of risk and high liquidity. Accordingly, investments shall predominantly
be made in Debt and Money Market Instruments. This fund was launched on June 16,
2005.


1 Year 4.5% 3.1%
3 Years 7.0% 6.2%
5 Years - 6.19%

• Birla Sun Life Cash Manager


It is an open-ended liquid scheme with the objective to provide current income which is
consistent with a portfolio that offers investors superior liquidity by investing 100% in a
diversified portfolio debt (Fixed Income) and money market securities. This fund was
launched on May 14, 1998.


1 Year 4.6% 3.1%
3 Years 6.9% 6.2%
5 Years - 6.19%

39


• Kotak Liquid Institutional Premium Plan


Its objective is to provide reasonable returns and high level of liquidity by investing in
debt and money market instruments of different maturities so as to spread risk across
different kinds of issuers in the debt markets. This fund was launched on November 4,
2003.


1 Year 4.5% 3.1%
3 Years 7.0% 6.2%
5 Years 6.91% 6.19%

• ICICI Prudential Liquid Plan


An open-ended Liquid Income Fund. Its objective is to generate reasonable returns while
providing high levels of liquidity. This fund was launched on September 28, 2003.


1 Year 4.5% 3.1%
3 Years 7.0% 6.2%
5 Years 6.76% 6.19%


40


Inception
ICICI 4.3% 4.5% 7.0% 6.76% 7.3%
Prudential
Liquid Plan
Kotak 4.3% 4.5% 7.0% 6.91% 6.4%
Liquid
Institutional
Premium
Plan
Birla Sun 4.4% 4.6% 6.9% - 6.4%
Life Cash
Manager
Reliance 4.3% 4.5% 7.0% - 7.0%
Liquidity
Fund

Benchmark Returns

Inception
ICICI 1.23% 1.45% 1.13% 1.09% -
Prudential
Liquid Plan
Kotak 1.23% 1.45% 1.13% - 1.11%
Liquid
Institutional
Premium
Plan
Reliance 1.23% 1.45% 1.13% - -
Liquidity
Fund
Birla Sun 1.26% 1.48% 1.11% - -
Life Cash
Manager

41


Comparing Risk

Fund/ Risk Beta Standard Sharpe Portfolio Expense Average
Measure Deviation Ratio Turnover Ratio Maturity
Ratio (Years)
ICICI - 0.18% - - 0.4 -
Prudential
Liquid Plan
Kotak 0.01 0.20 0.02 - 0.6 -
Liquid
Institutional
premium
Plan
Reliance - - - - 0.2 -
Liquidity
Fund
Birla Sun - 0.15% - - 0.3 0.03
Life Cash
Manager

5. Income Funds
• Reliance Income Fund


This is an open-ended income scheme. The primary investment objective of the scheme
is to generate optimal returns consistent with moderate levels of risk. This income may
be complemented by capital appreciation of the portfolio. Accordingly, investments shall
predominantly be made in Debt & Money market Instruments. This Scheme was
launched on January 1, 1998. Its total corpus as on May 31, 2010 was Rs 330.55 crores.
Its Benchmark Index is Crisil Composite Bond Fund Index.



42


6 Months 5.0% 5.4%
1 Year 4.5% 4.7%
3Years 10.2% 7.1%
5 Years 8.0% 5.7%

• ICICI Prudential Income Plan


This is an open-ended debt fund. Its objective is to generate income through investment
in debt securities. This fund was launched on July 09; 1998. Its benchmark index is
Crisil Composite Bond Fund Index.

Funds Performance as on May 31, 2010

6 Months 2.5% 5.4%
1 Year 4.3% 4.7%
3 Years 12.4% 7.1%
5 Years 9.3% 5.7%

• Kotak Bond Deposit Fund


It is an open-ended debt scheme. Its objective is to create a portfolio of debt and money
market instruments of different maturities so as to spread the risk across a wide maturity
horizon & different kinds of issuers in debt market. This fund was launched on
November 25, 1999. Its total corpus as on May 31, 2010 was Rs.39.49 crores. Its
benchmark Index is Crisil Composite Bond Fund Index.

As on May 31, 2010 its portfolio comprised of Debentures and Bonds (19.77%),
Government Dated Securities (48.84%), CBLO & Team Deposits & Revenue Repot
(7.38%), Net Current Assets (24.01%).

If we look at the fund’s portfolio by rating class we find the contributions are:
AAA, CARE AAA, SOV (62.01%), Net Current Assets (24.01%), CBLO & Term
Deposits & Revenue Repo (7.38%), AA+ (6.6%).

43



6 Months 9.9% 5.4%
1 Year 7.3% 4.7%
3 Years 10.6% 7.1%
5 Years 8.1% 5.7%

• Birla Sun Life Dynamic Bond Fund


It is an open-ended income scheme with the objective to generate optimal returns with
high liquidity through active management of the portfolio by investing in high quality
debt and money market instruments. This fund was launched on September 27, 2004. its
benchmark index is CRISIL Composite Bond Fund.


1 Year 7.2% 4.7%
3 Years 10.4% 7.1%
5 Years 8.6% 5.7%


Inception
Birla Sun 6.4% 7.2% 10.4% 8.6% 8.2%
Life

44

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