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Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989 and
contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was
constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882.
The settler is not responsible for the management of the Trust. The settler is also not
responsible or liable for any loss or shortfall resulting in any of the schemes of LIC
Mutual Fund.
The Trustees of the LIC Mutual Fund have exclusive ownership of Trust Fund and are
vested with general power of superintendence, discretion and management of the
affairs of the Trust. LIC Mutual Fund Asset Management Company Ltd. was formed
on 20th April 1994 in compliance with the Securities and Exchange Board of India
(Mutual Funds) Regulations, 1993. The Company commenced business on 29th April
1994. The Trustees of LIC Mutual Fund have appointed LIC Mutual Fund Asset
Management Company Ltd. as the Investment Managers for LIC Mutual Fund. The
Trustees are responsible for appointing a Custodian. The Trustees should also ensure
that the activities of the Trust and the Asset Management Company are in accordance
with the Trust Deed and the SEBI Mutual Fund Regulations as amended from time to
time. The Trustees have also to report periodically to SEBI on the functioning of the
Fund.
The investors under the schemes can obtain a copy of the Trust Deed, the text of the
concerned Scheme and also a copy of the Annual Report, on a written request made to
the LIC Mutual Fund Asset Management Company Ltd. at a nominal price of Rs. 10/-
Review of literature
History of Mutual Funds
History of Mutual Funds has evolved over the years and it is sure to appear as
something very interesting for all the investors of the world. In present world, mutual
funds have become a main form of investment because of its diversified and liquid
features. Not only in the developed world, but in the developing countries also
different types of mutual funds are gaining popularity very fast in a tremendous way.
But, there was a time when the concept of Mutual Funds was not present in the
economy.
There is an ambiguity about the fact that when and where the Mutual Fund Concept
was introduced for the first time. According to some historians, the mutual funds were
first introduced in Netherlands in 1822. But according to some other belief, the idea
of Mutual Fund first came from a Dutch Merchant ling back in 1774. In 1822, that
idea was further developed. In 1822, the concept of Investment Diversification was
properly incorporated in the mutual funds. In fact, the Investment Diversification is
the main attraction of mutual funds as the small investors are also able to allocate
their little Funds in a diversified way to lower Risks.
After 1822 in Netherlands, the Mutual Funds Concept came in Switzerland in 1849
and thereafter in Scotland in the 1880s. After being popular in Great Britain and
France, Mutual fund concept travelled to U.S.A in the 1890s. In 1920s and 1930s, the
Mutual Fund popularity reached a new high. There was record investment done in
mutual funds. But, before 1920s, the mutual funds were not like the modern day
mutual funds.
The modern day mutual funds came into existence in 1924, in Boston. Massachusetts
Investors Trust introduced the Modern Mutual Funds and the funds were available
from 1928. At present this Massachusetts Investors Trust is known as MFS
Investment Management Company. After the glorious year of 1928, Mutual fund
ideas expanded to different levels and different regulations came for well functioning
of the funds.
Still today, the funds are evolving and improving in order to offer people much wider
choices and better advantages for fulfilment of their various investment needs and
financial objectives.
Growth of Mutual Funds
Growth of Mutual Funds has been gradual and it took really long years to evolve the
modern day mutual funds. Mutual Funds emerged for the first time in Netherlands in
the 18th century. Then it got introduced to Switzerland, then Scotland and then to
United States in the 19th century.
The very idea of mutual funds came from the urge to deliver a form of Diversified
Investment Solution. Over the years the idea developed and people received more and
more choices of Diversified Investment Portfolio through the mutual funds.
When in 1924, Massachusetts Investors Trust first introduced mutual funds in U.S,
they found it difficult to gain the trust of the investors. It was very natural that the
people took time to adapt to a new investment idea. There emerged some confusion
regarding the Taxation of Investment Income from mutual funds as there was no
Regulation or legislation.
Laws started to came in existence from 1940s. The result was not immediate. The
Mutual Fund Concept achieved warm reception only in the middle of 1950s. By the
end of fifties and in first half of 1960s mutual fund investment triggered up
tremendously.
Monetary Fund’s benefited a lot from the mutual funds. Earlier investors was used to
invest directly in the stock market and many times suffered from loss due to wrong
Speculation. But, with the mutual funds which were handled by efficient Fund
Managers, Investment Risks was lowered by a great extent. The diversified
investment structure of mutual funds also diversified risk and this contributed
tremendously in the Growth of Mutual Funds.
Over the years not only the new types of mutual funds emerged, the way, in which
mutual funds were sold also changed. But, the Growth of Mutual Funds has not
stopped. It is continuing to evolve to a better future, where investors will get newer
opportunities.
GROWTH OF MUTUAL FUNDS IN INDIA
The Indian Mutual Fund has passed through three phases. The first phase was
between 1964 and 1987 and the only player was the Unit Trust of India, which had a
total asset of Rs. 6,700 crores at the end of 1988. The second phase is between 1987
and 1993 during which period 8 Funds were established (6 by banks and one each by
LIC and GIC). The total assets under management had grown to 61,028 crores at the
end of 1994 and the number of schemes was 167.
The third phase began with the entry of private and foreign sectors in the Mutual Fund
industry in 1993. Kothari Pioneer Mutual Fund was the first Fund to be established by
the private sector in association with a foreign Fund.
As at the end of financial year 2000(31st march) 32 Funds were functioning with Rs.
1, 13,005 crores as total assets under management. As on august end 2000, there were
33 Funds with 391 schemes and assets under management with Rs 1, 02,849 crores.
The securities and Exchange Board of India (SEBI) came out with comprehensive
regulation in 1993 which defined the structure of Mutual Fund and Asset
Management Companies for the first time.
Several private sectors Mutual Funds were launched in 1993 and 1994. The share of
the private players has risen rapidly since then.
Currently there are 34 Mutual Fund organizations in India managing 1, 02,000 crores.
By By Other
Structure Investment Schemes
Objective
Open
Ended Tax
Schemes Growth Saving
Schemes Schemes
Close (ELSS)
Ended
Schemes Income Special
Schemes Schemes
Interval
Schemes Balanced Index
Schemes Scheme
s
Sector
Money Specific
Market Scheme
Schemes s
(Amfiindia.com)
EXPLAINATION
Interval Schemes
It is a fund that combines the features of open-ended and closed-ended schemes, making the
fund open for sale or redemption during pre-determined intervals. In other words, this is a
mutual fund with redemption features in between those of closed-end and open-end funds.
Growth Schemes
It is a diversified portfolio of stocks that has capital appreciation as its primary goal, and it
thereby invests in companies that reinvest their earnings into expansion, acquisitions, and/or
research and development. Most growth funds offer higher potential growth but usually at a
higher risk.
Income Schemes
This scheme seeks to provide stable current income by investing in securities that pay interest.
Income funds typically invest in utility stocks and blue chips.
Balanced Scheme
It is a type of mutual fund that invests its assets into the money market, bonds, preferred
stock, and common stock with the intention to provide both growth and income. A balanced
fund is geared towards investors looking for a mixture of safety, income, and capital
appreciation. The amount the mutual fund invests into each asset class usually must remain
within a set minimum and maximum. It is also known as “Asset Allocation Fund”.
Index Schemes
It is a portfolio of investments that is weighted the same as a stock-exchange index in order to
mirror its performance. This process is also referred to as "indexing". Investing in an index
fund is a form of passive investing. The primary advantage to such a strategy is the lower
management expense ratio on an index fund. Also, a majority of mutual funds fail to beat
broad indexes such as the S&P 500.
(Amfiindia.com)
OBJECTIVE
To analyze performance of selected mutual funds on the basis of risk & return
• To guide the investor
Scope
The study is limited for selected equity diversified fund and sector fund
Secondary Data:
The Secondary data is the one which have been already collected by someone else &
which have already been passed through the statistical process. Internet, magazines,
books & company referrals were the sources of secondary data. Data which is not
originally collected, but rather obtained from published or unpublished sources are
known as secondary data. Secondary data is a means to reprocess and reuse collected
information as an indication for betterments of the service or product. In secondary
data, information relates to a past period. Secondary data is obtained from some other
organization than the one instantaneously interested with current research project.
Tools of study
Risk
The chance is that an investment's actual return will be different than expected. This
includes the possibility of losing some or all of the original investment. Risk is
usually measured by calculating the standard deviation of the historical returns or
average returns of a specific investment.
Risk is defined as the chance that an investment's actual return will be different than
expected. This includes the possibility of losing some or all of the original investment.
Those of us who work hard for every penny we earn have a harder time parting with
money. Therefore, people with less disposable income tend to be, by necessity, more
risk averse. On the other end of the spectrum, day traders feel if they aren't making
dozens of trades a day there is a problem. These people are risk lovers.
When investing in stocks, bonds, or any investment instrument, there is a lot more
risk than you'd think. In the next section, we'll take a look at the different kind of risk
that often threatens investors' returns.
Different Types of Risk
Systematic Risk
Systematic risk influences a large number of assets. A significant political event, for
example, could affect several of the assets in your portfolio. It is virtually impossible
to protect yourself against this type of risk.
Unsystematic Risk
Unsystematic risk is sometimes referred to as "specific risk". This kind of risk affects
a very small number of assets. An example is news that affects a specific stock such
as a sudden strike by employees. Diversification is the only way to protect yourself
from unsystematic risk. (We will discuss diversification later in this tutorial).
Now that we've determined the fundamental types of risk, let's look at more specific
types of risk, particularly when we talk about stocks and bonds.
Country Risk
Country risk refers to the risk that a country won't be able to honour its financial
commitments. When a country defaults on its obligations, this can harm the
performance of all other financial instruments in that country as well as other
countries it has relations with. Country risk applies to stocks, bonds, mutual funds,
options and futures that are issued within a particular country. This type of risk is
most often seen in emerging markets or countries that have a severe deficit. (For
related reading, see What Is An Emerging Market Economy?)
Foreign-Exchange Risk
When investing in foreign countries you must consider the fact that currency
exchange rates can change the price of the asset as well. Foreign-exchange risk
applies to all financial instruments that are in a currency other than your domestic
currency. As an example, if you are a resident of America and invest in some
Canadian stock in Canadian dollars, even if the share value appreciates, you may lose
money if the Canadian dollar depreciates in relation to the American dollar.
Political Risk
Political risk represents the financial risk that a country's government will suddenly
change its policies. This is a major reason why developing countries lack foreign
investment.
Market Risk
This is the most familiar of all risks. Also referred to as volatility, market risk is
the the day-to-day fluctuations in a stock's price. Market risk applies mainly to stocks
and options. As a whole, stocks tend to perform well during a bull market and poorly
during a bear market - volatility is not so much a cause but an effect of certain market
forces. Volatility is a measure of risk because it refers to the behavior, or
"temperament", of your investment rather than the reason for this behaviour. Because
market movement is the reason why people can make money from stocks, volatility is
essential for returns, and the more unstable the investment the more chance there is
that it will experience a dramatic change in either direction.
The Risk-Return Trade-off
The risk-return trade-off is the balance an investor must decide on between the desires
for the lowest possible risk for the highest possible returns. Remember to keep in
mind that low levels of uncertainty (low risk) are associated with low potential returns
and high levels of uncertainty (high risk) are associated with high potential returns.
The risk-free rate of return is usually signified by the quoted yield of "U.S.
Government Securities" because the government very rarely defaults on loans. Let's
suppose that the risk-free rate is currently 6%. Therefore, for virtually no risk, an
investor can earn 6% per year on his or her money. But who wants 6% when index
funds are averaging 12-14.5% per year? Remember that index funds don't return
14.5% every year, instead they return -5% one year and 25% the next and so on. In
other words, in order to receive this higher return, investors much also take on
considerably more risk.
The following chart shows an example of the risk/return trade-off for investing. A
higher standard deviation means a higher risk:
A measure of the dispersion of a set of data from its mean. The more spread apart the
data, the higher the deviation. Standard deviation is calculated as the square root of
variance.
Sharpe Ratio
The Sharpe ratio tells us whether a portfolio's returns 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
negative Sharpe ratio indicates that a risk-less asset would perform better than the
security being analyzed.
Beta
PORTFOLIO
SECTOR ALLOCATION
ASSET ALLOCATION
SCHEME RETURN
RISK
Beta [%] SD [%] Sharpe Ratio [%]
INTERPRETATION
LIC Equity fund is having good allocation in various funds. The fund have 0.8499 %
of Beta means it is low risky. The standard deviation of fund is 11.33 means the
returns of the fund are volatile. The sharp ratio is 0.0441 means fund is having low
excess income.
PORTFOLIO
Percentage
of Net
Stock Assets
SECTOR ALLOCATION
ASSET ALLOCATION
Scheme Return
RISK
INTERPRETATION
Reliance Diversified Power Fund is good in allocation with the beta of 0.75 means the
fund is low risky. The standard deviation is 4.66 means less volatile with index. The
sharpe ratio is -0.14 means the excess returns are also high.
UTI THERMATIC BANKING SECTOR FUND
PORTFOLIO
Percentage of
Stock Net Assets
SECTOR ALLOCATION
ASSET ALLOCATION
Scheme Return
RISK
INTERPRETATION
UTI Thermatic Banking Fund is having the Beta of 1.08 which means the fund is
highly risky negatively correlated with index.
The standard deviation of the fund is 6.92 which show the return is less volatile with
the stock. The sharpe ratio is -0.03 means the fund is have high excess income.
RELIANCE BANKING FUND
PORTFOLIO
ASSET ALLOCATION
Scheme Return
RISK
INTERPRETATION
Reliance banking fund having good allocation in banking sector and financial
institutions. The beta of fund is 0.99 which shows the risk of the fund. The standard
deviation of the fund is 6.37 means the fund is less volatile with stock. the sharpe ratio
of the fund is -0.03 means the fund is have high excess income.
FINDINGS
Following are the important findings of my study based on the analysis and
interpretation of the data collected.
1) The equity diversified funds are low risky but, they also have low returns as
compare to sectoral funds.
2) The sectoral funds are having high and high returns as compare to equity
diversified funds
SUGGESTIONS
The most vital problem spotted is of ignorance. Investors should be made aware of the
benefits. Nobody will invest until and unless he is fully convinced. Investors should
be made to realize that ignorance is no longer bliss and what they are losing by not
investing.
Mutual funds offer a lot of benefit which no other single option could offer. But most
of the people are not even aware of what actually a mutual fund is? They only see it as
just another investment option. So the advisors should try to change their mindsets.
The advisors should target for more and more young investors. Young investors as
well as persons at the height of their career would like to go for advisors due to lack
of expertise and time.
CONCLUSION
With the globalize economy and immense competition among countries for faster
development of their respective economies, the significance of Mutual Funds and
Foreign investment has taken manifold. With a buoyant vibrant and experienced stock
market, India today is looking ahead to surpass China in terms of foreign Investment
and growth prospects. Stock exchange being the barometer of the economy plays a
vital role in showcasing growth of an economy and luring investment. While studying
the role of Mutual fund and FIIs in Stock Market, I discussed with a few persons who
are into stock broking business. And the information they have provided shows that
though the investment and participation of domestic investors are rising, still, they
have not been able to prove themselves to be as influential as mutual funds and FIIs.
Importance and the role of Mutual funds and FIIs play in the Indian stock market can
be seen from the fact that the recent surge in Sensex and NIFTY is attributed to the
active participation of FIIs in the Stock Market. Despite being aware of the Asian
economic crisis where FIIs role was of a major concern, the importance of foreign
capital in the development of economy cannot be undermined in anyway so the
people more emphasis on mutual fund to earn more return increasing our benefit .
BIBLIOGRAPHY
www.licmutual.com
www.moneycontrol.com
www.mutualfundsindia.com
www.valueresearchonline.com