A critical view of undisclosed facts of disclosed fact sheets a case study of benchmarking of mutual funds

International Journal of Management (IJM) – 6502(Print), ISSN 0976 – 6510(Online)
International Journal of Management (IJM), ISSN 0976
Volume 1, Number 2, Aug - Sep (2010), © IAEME
ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online) IJM
Volume 1, Number 2, Aug - Sep (2010), pp. 44-52
© IAEME, http://www.iaeme.com/ijm.html ©IAEME

A CRITICAL VIEW OF UNDISCLOSED FACTS OF
DISCLOSED FACT SHEETS:
A CASE STUDY OF BENCHMARKING OF MUTUAL
FUNDS
Prof. Abdul Noor Basha
Chairman, Board of Studies Commerce (PG)
Acharya Nagarjuna Unviersity,
Nagarjuna Nagar, Guntur.

G.V.satya sekhar
Assistant Professor, Dept of Finance
GITAM Institute of Management
GITAM University, Visakhapatnam- 530 045
Email: gudimetlavss@yahoo.com

ABSTRACT:
Financial statements should focus on the true and fair view of state of affairs of
the corporate entity. It is the responsibility of audit committee to authenticate the true
and fair view of financial position. But, there are several undisclosed facts which are to
be unearthed by audit committee are ignored. This leads to financial turmoil and loss of
investor’s confidence as well as investment made by them
In this context, this paper is intended to examine the importance of disclosure
practices of financial statements with reference to benchmarking of a select mutual
funds’ fact sheets.
This paper focuses on the following objectives:
• To examine the prevailing disclosure norms of financial statements.
• To study on improving efficiency methods in timely reporting of financial statements
• To educate the readers about financial statement disclosures in UTI mutual funds
Key words: financial statements, disclosure practices, misstatements, benchmarking

44

International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)

Nature of Paper: empirical data based analytical paper
INTRODUCTION:
Disclosed Financial Statements (DFS) should be replica of financial position of
any corporate entity. But the variability in the quality of reporting is common as
companies try and take refuge under legal subtleties. DFS can also be called as financial
reporting which is the communication of accounting information of an entity to user or
group of users1.
There is a broader view of corporate governance, which views the subject as the
methods by which suppliers of finance control managers in order to ensure that their
capital cannot be expropriated and that they earn a return on their investment (Shleifer
and Vishny, 1997). Macey and O’Hara (2001) argue that a broader view of corporate
governance should be adopted in the case of banking institutions, arguing that because of
the peculiar contractual form of banking, corporate governance mechanisms for banks
should encapsulate depositors as well as shareholders.
Government-provided guarantees in the form of implicit and explicit deposit
insurance might encourage economic agents to deposit their wealth with a bank, as a
substantial part of the moral hazard cost is borne by the government. Nevertheless, even
if the government provides deposit insurance, bank managers still have an incentive to
opportunistically increase their risk taking, but now it is mainly at the government’s
expense.

1.1. BENCHMARK RETURNS

This will give you a standard by which to make the comparison. It basically
indicates what the fund has earned as against what it should have earned. A fund's
benchmark is an index that is chosen by a fund company to serve as a standard for its
returns. The market watchdog, the Securities and Exchange Board of India, has made it
mandatory for funds to declare a benchmark index. In effect, the fund is saying that the
benchmark's returns are its target and a fund should be deemed to have done well if it

1
Ramesh Venkatram (2008), ‘Good Governance can be as strong differentiator as good
strategy’, The Hindu-Business Line, April, 24, pp 9.

45


manages to beat the benchmark. Let's say the fund is a diversified equity fund that has
benchmarked itself against the Sensex. So the returns of this fund will be compared vis-a-
viz the Sensex. Now if the markets are doing fabulously well and the Sensex keeps
climbing upwards steadily, then anything less than fabulous returns from the fund would
actually be a disappointment.
1.2. REVIEW OF LITERATURE:
Naser Abdelkarim et al (2009)2 carried out a study to investigate the perception
of users regarding the availability, adequacy, and usefulness of information disclosed in
the financial reports of companies listed on the Palestine Securities Exchange (PSE).
Results of the study demonstrated that users perceive reported information as neither
adequate nor relevant to investment decisions. In particular, reported information was
insufficient, as listed companies did not comply with the minimum disclosure
requirements of international standards. This unfavorable perception, along with poor
credibility and bad timeliness of the disclosures, has prevented information from being
impounded into stock prices. The study presented a number of recommendations that
may be helpful in improving the efficiency of the PSE, which in turn will contribute to
the Palestinian economy as a whole.
Vrajlal Sapovadia3 critically examined the relevant Accounting Standards and
such practices in India, to evaluate potency and fairness vis-à-vis Good Corporate
Governance. As per OECD principles of Corporate Governance, Accounting Information
should be prepared and disclosed in accordance with high quality standards of accounting
and financial and non-financial disclosure s. The application of high quality standards is
expected to significantly improve the ability of investors to monitor the company by
providing increased reliability and comparability of reporting, and improved insight into

2
Naser Abdelkarim , Yasser. A. Shahin & Bayan M. Arqawi, Investor Perception of
Information Disclosed in Financial Reports of Palestine Securities Exchange Listed
Companies, Accounting & Taxation, Volume 1, Number 1, 2009.

3
Vrajlal Sapovadia (2008), “Critical Analysis of Accounting Standards vis-à-vis
Corporate Governance Practice in India”, SSRN-ID-712461.

46


company performance. The quality of information substantially depends on the standards
under which it is compiled and disclosed.
Shiw Kumar Jiloka (2006)4 mentions that disclosure is regarded as a process
through which a business enterprise communicates to third parties. Government and
other regulating bodies like ICAI, SEBI propagate expanded disclosure in annual reports
on the hand, but at the time the Government through section 210 of the companies to
disclose the maximum possible information. It may be helpful to the Government in
making disclosure laws, to the ICAI and SEBI in considering the areas of disclosure
regarding which some standards or guidelines need to be issue. Dave (2000) conducted a
study on accounting standards during the period 1990-91 to 1993-94. This study covers
50 companies of which 25 from public sector and 25 from private sector. The companies
in both the sector complying with the accounting standards while preparing annual
reports differently, but not up to the satisfactory level.
Surendar and Manish Khanduri,5 explained that an absolute lack of disclosure
norms- from declaring the Net Asset Value of US-64 to inter-fund transfers- characterizes
UTI’s functioning. Unit Scheme, 1964 (US-64), is the Unit Trust of India’s largest and
best known mutual fund scheme. With this scheme there was a trouble of disclosure
policy. UTI discloses at the end of every quarter where it has invested about only 70% of
US-64’s corpus.
1.3. MEASURES FOR GOOD CORPORATE GOVERNANCE
In developed economies, protection of depositors in a deregulated environment is
typically provided by a system of prudential regulation, but in developing economies
such protection is undermined by the lack of well-trained supervisors, inadequate
disclosure requirements, the cost of raising capital and the presence of distributional
cartels. In order to deal with these problems, it was suggested that developing economies
need to adopt the following measures.

4
Shiw Kumar Jiloka (2006), ‘Corporate Financial Disclosure’, The Management
Accountant, November, 2006, pp 867-871.
5
T. Surender & Manish Khanduri, ‘US- 64: Pandora ’s Box opens’- Business world, 6th August,
2001.

47


Firstly, Liberalizations policies need to be gradual, and should be dependent upon
improvements in prudential regulation. Secondly, developing economies need to expend
resources enhancing the quality of their financial reporting systems. Thirdly, given that
capital plays such an important role in prudential regulatory systems, it may be necessary
to improve investor protection laws, increase financial disclosure and impose fiduciary
duties upon directors so that firms can raise the equity capital required for regulatory
purposes.
A further reason as to why this policy needs implemented is the growing
recognition that the corporate governance has an important role to play in assisting
supervisory institutions to perform their tasks, allowing supervisors to have a working
relationship with bank management, rather than adversarial one. It was suggested that
the corporate governance in developing economies is severely affected by political
considerations. Firstly, given the trend towards privatization of government-owned firms
in developing economies, there is a need for the managers of such firms to be granted
autonomy and be gradually introduced to the corporate governance practices of the
private sector prior to divestment. Secondly, where there has only been partial divestment
and governments have not relinquished any control to other shareholders, it may prove
very difficult to divest further ownership stakes unless corporate governance is
strengthened. Finally, given that limited entry of foreign firm may lead to increased
competition, which in turn encourages domestic banks to emulate the corporate
governance practices of their foreign competitors.
1.4. RELEVANCE OF BENCHMARK IN MUTUAL FUNDS:

The idea behind investing in a specialized fund, be in diversified or sectoral fund,
is to outperform the market benchmark. If he is not able to beat the benchmark, there is
something wanting in investment skills of fund manager. For example if any investor
want to invest in an index fund, where the costs are lower. Also, there is no risk of a great
downslide. This is because an index fund invests only in stocks in proportion to their
weightage in the index. It is a passive investment strategy. The returns would be in
tandem with the movement of index, save for a small tracking error. Since these funds do
not have to churn their portfolio heavily, the transaction costs are also lower. In addition,

48


investor do not have worry about the performance record of the fund manager, as
investing in an index is not rocket science.

1.5. ANALYSIS OF SELECT FACT SHEETS OF MUTUAL FUNDS:
The following note is made by this organization is a caution to investors:
IISL is not responsible for any errors or omissions or the results obtained from the use of
such index and in no event shall IISL have any liability to any party for any damages of
whatsoever nature (including loss of profit) resulted to such party due to purchase or sale
or otherwise of such product benchmarked to such index. For instance, HDFC Equity
Fund and Capital Builder Fund are benchmarked to S&P CNX 500 Index are not
sponsored, endorsed, sold or promoted by India Index & Service Products Ltd (IISL).
The following tables 1 to 3 gives a reflection of the performance of HDFC growth fund,
equity fund and capital builder fund against its benchmark.
Table 1 HDFC GROWTH FUND (As on 28th Feb, 2007)
Details NAV per unit Growth Fund Bench Mark: ENSEX
% returns % returns
Since Inception 10.00 26.20** 16.96**
(sept.11.2000)
March31,2006 41.236 9.24* 14.70*
36.490 23.45* 24.76*
* Absolute Returns
** Compounded Annualized return
Table 2 HDFC EQUITY FUND As on 28th Feb, 2007)
Details NAV per unit Growth Fund Bench Mark-
% returns S &P CNX 500
% returns
Since Inception 10.00 24.31** 10.01**
(1ST JAN1995)
March31,2006 127.169 11.06* 6.78*
Last 1year (2007) 116.84 20.87* 16.88
Last year(as at 2003) 22.790 126.30 98.14
* Absolute Returns

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Table 3 HDFC Capital Builder Fund
Details NAV per unit Growth Fund Bench Mark-
% returns S &P CNX 500
% returns
Since Inception 10.00 14.86** 8.55*
Feb 1st, 1994
March31,2006 60.169 1.81* 6.78*
Last 1year (2007) 55.290 10.80* 16.88*
Last year(as at 2003) 0.740 121.91 98.14(due to share
rise in stockprise)
* Absolute Returns
Table-4: JM Financial Mutual fund
Scheme Bench Mark
JM Equity Fund BSE SENSEX
JM Balanced Fund CRISIL Balanced Fund Index
JM Basic Fund BSE Basic Industries Index
JM Auto Sector fund BSE Auto Sector Index
JM Health care Sector Fund BSE Health Care Index
JM Emerging Leaders Fund BSE 200 Index
JM Hi fi Fund S&P CNX Nifty Index
The above table gives information about JM Financial Mutual Fund. The fund
manager selects BSE Basic Industries Index as a bench mark for JM Basic fund. BSE
cautions the investors by the following note: “All rights in the BSE Basic Industries
Index vest in BSE. It shall not liable in any manner whatsoever (including in negligence)
for any loss arising to any person whosever out of use of a reliance on this fund by any
person.
Table-5 Tata Mutual Fund
Scheme Bench Mark Rate of return Bench mark
of the scheme return since
since inception
inception
Tata Equity Opportunities Fund SENSEX 13.37% 11.95%
Tata Pure Equity Fund SENSEX 33.83% 14.62%
Tata Select Equity Fund SENSEX 22.26% 12.81%
Tata Life Sciences and Technology SENSEX 24.44% 16.71%
Fund
Tata Tax Saving Fund SENSEX 27.13% 13.62%
Tata Growth Fund SENSEX 11.02% 9.92%

50


All the schemes mentioned above listed by Tata Mutual Fund selected ‘Sensex’ as
their bench mark as per their ‘portfolio statement’ released on 30th April, 2007.
However, the rate of return for these schemes with reference to benchmark is same for
one year duration (15.19%), three year duration (34.87%) and five year duration
(32.94%). It varies with respect to rate of return of the bench mark, since inception for
each scheme. It shows that index of bench mark may be different for each scheme. In
practice, the indices selected as bench mark should be varied according to nature of
scheme.
1.6. CONCLUSION:
Benchmark Mutual Fund, which specializes in managing exchange traded funds
(ETFs), has lined up a scheme that will try to generate returns through investment in
securities represented by a host of sectoral indices. The indices - the offer document sent
to SEBI mentions nine of them - are owned by India Index Services & Products Ltd, the
joint venture formed by NSE and CRISIL to provide a variety of indices and index-
related services for the capital market. These indices cover the following sectors:
Automobiles/four-wheeler, cement, electrical equipment, pharmaceutical, power, steel,
telecom, services and information technology. Their names are S&P CNX
Pharmaceutical Index, S&P CNX Cement and Cement Product Index, S&P CNX Power
Index and the like.
Thus, investors should have awareness of benchmarking of mutual funds as they
may not reveal real risk factors which are undisclosed in disclosed fact sheets.
REFERENCES:
• Agarwal G.D (1992), ‘Mutual Funds and Investors Interest’, Chartered Secretary,
Jan.
• Bhatt, Narayana M (1990)., ‘Mutual Funds; Some Regulatory Issues’, The
Economic Times, January 7th.
• Dave S.A (1994), ‘An Open Ended fund may be more prudent’, The Economic
Times, December 20th.
• Goyal Madan (1990), ‘Off-shore country funds: The Indian Experience’, State
Bank of India Monthly Review, May.

51


• Gupta, L.C (1993), ‘Mutual Funds and Assets Preference’, Society for Capital
Market Research and Development, New Delhi.
• Naser Abdelkarim, Yasser. A. Shahin & Bayan M. Arqawi (2009), Investor
Perception of Information Disclosed in Financial Reports of Palestine Securities
Exchange Listed Companies, Accounting & Taxation, Volume 1, Number 1, 2.
• Ramesh Venkatram (2008), ‘Good Governance can be as strong differentiator as
good strategy’, The Hindu-Business Line, April, 24, pp 9.
• Shiw Kumar Jiloka (2006), ‘Corporate Financial Disclosure’, The Management
Accountant, November, 2006, pp 867-871
• T. Surender & Manish Khanduri (2001), ‘US- 64: Pandora’s Box Opens’-
Business world, 6th August.
• Vrajlal Sapovadia (2008), “Critical Analysis of Accounting Standards vis-à-vis
Corporate Governance Practice in India”, SSRN-ID-712461.

52

A critical view of undisclosed facts of disclosed fact sheets a case study of benchmarking of mutual funds

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A critical view of undisclosed facts of disclosed fact sheets a case study of benchmarking of mutual funds