CHAPTER 6

METHODOLOGY AND
PROCEDURE OF WORK

METHODOLOGY:
Data collection:

The data required for the study may be collected either from primary sources or from
secondary sources. A major portion of the data in this study has been collected through
secondary sources of data.

Secondary data sources include:

  Published material and annual reports of mutual fund companies
 Other published material of mutual funds.
 Research based online portals.
 Unpublished sources also.

Sample Profile:

The sample required for the study has been selected through random sampling method
from the available list of mutual fund schemes in the market. Broadly the sample of 12
mutual fund schemes includes equity funds, debt funds and balanced funds.

The study has taken three broad categories of funds

 Equity Funds
 Debt funds
 Balanced fund

Equity Funds:

1.Birla Advantage Fund – Growth

2.HDFC Equity Fund – Growth

3. ICICI Prudential Dynamic Plan – Growth

4.Sundaram BNP Paribas growth fund- Growth

Debt funds:

1. Birla Bond Index Fund – Growth

2. HDFC High Interest Fund – Growth

3. ICICI Prudential Blended Plan - Option B – Growth

4. Sundaram BNP Paribas fund- Growth

Balanced fund:
1. Birla Balance Fund – Growth

2. HDFC Balanced Fund – Growth

3. ICICI Prudential Balanced – Growth

4. Sundaram BNP Paribas balanced- Growth

For the purpose of estimating the performance of schemes in terms of returns, NAV of the
schemes are taken into consideration. As data relating to NAV is available more frequently
than any other data it is taken as the basis for estimation.

Period of the Study:

The study covered a period of 3 years from 2005 to 2008 to assess the performance of the
schemes in terms of returns.

Tools & Methods:

Beta:

It describes the relationship between the stock‘s return and the index returns. The beta
value may be interpreted in the following manner, ‗a 1% change in Nifty index would
cause a 1.042% (beta) change in the particular fund. It is the slope of characteristic
regression line.

It signifies that a fund with a beta of more than 1 will rise more than the market and also
fall more than market. Thus, if one likes to beat the market on the upside, it is best to invest
in a high-beta fund. But one must keep in mind that such a fund will also fall more than the
market on the way down. So, over an entire cycle, returns may not be much higher than the
market.

Similarly, a low-beta fund will rise less than the market on the way up and lose less on the
way down. When safety of investment is important, a fund with a beta of less than one is a
better option. Such a fund may not gain more than the market on the upside, but it will
protect returns better when market falls.

β = nΣxy – (Σx)( Σy)

nΣx2 – (Σx)2

Where,
n – Number of days

x – Returns of the index

y – Returns of the fund

Alpha:

It indicates that the stock return is independent of the market return. If the portfolio is well
diversified, the alpha value would turn out to be zero. The intercept of characteristic
regression line is alpha.

Alpha shows whether the particular fund has produced returns justifying the risks it is
taking by comparing its actual return to the one 'predicted' by the beta.

Alpha can be seen as a measure of a fund manager's performance. This is what the fund has
earned over and above (or under) what it was expected to earn. Thus, this is the value
added (or subtracted) by the fund manager's investment decisions. This can be clearly seen
from the fact that Index funds always have—or should have, if they track their index
perfectly—an alpha of zero.

Thus, a passive fund has an alpha of zero and an active fund's alpha is a measure of what
the fund manager's activity has contributed to the fund's returns. On the whole a positive
alpha implies that a fund has performed better than expected, given its level of risk. So
higher the alpha better are returns.

α = y - βx

Where,

y – Mean value of returns of the fund

x – Mean value of returns of the index

β – Beta value of the fund

Correlation Co-efficient:

It measures the nature and the extent of relationship between the stock market index
returns and a fund‘s return in a particular period.
 r= nΣxy – (Σx)( Σy) .

√nΣx2 – (Σx)2 √nΣy2 – (Σy)2

Co-efficient of Determination:

The square of correlation of co-efficient is the co-efficient of determination. It gives the

percentage variation in the stock‘s return explained by the variation in the market return.

r2

Treynor‘s Ratio:

The Treynor Ratio, named after Jack L. Treynor, one of the fathers of modern portfolio
theory, helps analyze returns in relation to the market risk of the fund. The Ratio, also
known as the reward-to-volatility ratio, provides a measure of performance adjusted for
market risk. Higher the Treynor Ratio, the better the performance under analysis.

It is a ratio that helps the portfolio managers to determine the excess return generated as
the difference between the fund‘s return and the risk free return. The excess return to beta
ratio measures the additional return on a fund per unit of systematic risk. Ranking of the
funds is done based on this ratio.

T = R – RFR

Where,

R – Return on investment.

RFR – Risk Free Return

Sharpe‘s Ratio:

Sharpe‘s ratio is similar to treynor‘s ratio the difference being, instead of beta here we take
standard deviation. As standard deviation represents the total risk experienced by the fund,
it reflects the returns generated by undertaking all possible risks. A higher Sharpe‘s ratio is
better as it represents a higher return generated per unit of risk.
 S = R – RFR

Return

A return is a measurement of how much an investment has increased or decreased in value

over any given time period. In particular, an annual return is the percentage by which it
increased or decreased over any twelve-month period.

Formula:

(P1-p0)
P0

Mean:

The mean average is a quick mathematical measure of a number of data points as a unit. It
will tell you important information about a group of data in your business. It is almost a
summary of all the data in your dataset.

Mean: Mean = Sum of X values / N (Number of values).

Standard Deviation:

The degree that a single value in a group of values varies from the mean (average) of the
distribution. Standard deviation is a statistical measure that uses past performance of an
investment or portfolio to determine the potential range of future performance and assess
the probability of that performance. Standard deviations can be calculated for an individual
security or for the entire portfolio
Variance:

Variance: Variance = s2

Jensen Ratio (JR):

A risk-adjusted performance measure that represents the average return on a portfolio over
and above that predicted by the capital asset pricing model (CAPM), given the portfolio's
beta and the average market return. This is the portfolio's alpha. In fact, the concept is
sometimes referred to as "Jensen's alpha."

Jensen Ratio (JR) = α /β

Data Processing and Analysis:

Data is processed with the help of Microsoft Excel and SPSS (Statistical Package for
Social Sciences). The NAVs for six months of all the funds and their benchmarks were
entered into the spreadsheet and the above mentioned tools were used to get the final
values for the comparative analysis and interpretations.

Limitations of the Study:

The present study has the following limitations

 The study has been restricted to only a few schemes.

 The data is analyzed for a limited period of 3 years.
 CHAPTER 7
ANALYSIS /
INTERPRETATION OF
DATA
 Data Analysis and Interpretation
Introduction:

Asset allocation strategies of various select mutual fund schemes are presented in the
following tables.

Equity Funds:

Sundaram BNP Paribas Growth Fund (G):

Investment Information

Fund type Open-Ended

Investment Plan Growth

Asset Size (Rs cr) 26.05 (Jul-31-2008)

Min .Investment Rs 5,000

Last Dividend N.A.

Bonus N.A.

Asset Allocation Percentage held

Equity 0.00

Debt 73.87

Mutual Funds N.A

Money Market 0.00

Cash / Call 26.13

 Asset Allocation(% ) Sundaram BNP
Paribas Growth fund

0%
26%
Equity
Debt
0% Mutual Funds
Money Market
Cash / Call
74%

SCHEME PERFORMANCE:
1month 3month 6month 1year

-0.05635 0.06 0.362075 -0.16089

Birla Advantage Fund – Growth

Investment information

Fund Type Open- Ended

Investment Plan Growth

Asset Size (RS cr) 433.61(May-30-2008)

Min .Investment Rs. 5,000

Last Dividend N.A

Bonus N.A

Asset Allocation (%) Percentage held

Equity 84.89

Debt 0.00
Money Market 0.00

Cash / Call 15.10

Asset Allocation (% ) of Birla Advantage Fund (G)

15%

Equity
Cash / Call

85%

SCHEME PERFORMANCE
1 month 3 months 6 months 1 yrs*

-0.00779 0.352075 -0.02593 -0.15439

HDFC Equity Fund – Growth

Investment Information

Fund Type Open- Ended

Investment Plan Growth

Asset Size(Rs cr) 4,030.92(May-30-2008)

Min. Investment Rs.5,000

Last Dividend N.A

Bonus N.A

Asset Allocation (%) Percentage held

Equity 98.51

Debt 0.00

Mutual fund N.A

Mutual Market 1.85

Cash / Call -0.36

 Asset Allocation (% ) of HDFC Equity Fund (G)

2% 0%

Equity
Money Market
Cash / Call

98%

SCHEME PERFORMANCE

1 month 3 months 6 months 1 yrs*

0.080941 0.151203 0.136557 -0.08444

ICICI Prudential Dynamic Plan – Growth

Investment Information

Fund Type Open-Ended

Investment Type Growth

Investment Plan 1,783.12(May-30-2008)

Asset Size (Rs cr) Rs. 5,000

Last Dividend N.A

Bonus N.A
Asset Allocation(%) Percentage held

Equity 85.24

Debt 3.78

Mutual Fund N.A

Money Market 0.00

Cash / Call 11.01

Asset Allocation (% ) of ICICI Pru Dynamic Plan (G)

11%
4%

Equity
Debt
Cash / Call

85%

SCHEME PERFORMANCE
1 month 3 months 6 months 1 yrs*

0.091597 0.119449 0.082544 -0.06898

(EQUITY FUND ONE MONTH COMPARISON OF RETURN)

Company Name Absolute Mean return Standard Variance
and Fund return Deviation

HDFC Equity 0.080941 0.00285 (0.28%) 0.011736 0.000137733

Fund - Growth

Birla Advantage -0.00779 -0.31817 1.102299 1.215063085

Fund - Growth (-31.81%)

ICICI Prudential 0.091597 0.003216 (0.32%) 0.012989 0.000168714

Dynamic Plan –
Growth

Sundaram BNP -0.05635 -0.00249(0.25%) 0.018029 0.000325

Paribas Growth

ONE MONTH OF EQUITY FUND

0.15

0.1 Sundaram BNP

paribas-growth
0.05
ICICI Purdential
VALUE

0 Dynamic plan-growth
-0.05 1 4 7 10 13 16 19 22 25 28 Birla Advantage fund
-growth
-0.1
HDFC Equity Fund -
-0.15 Growth
-0.2
TIME PERIOD OF NAV

FINDINGS:

From the above table we can see that ICICI Prudential Dynamic Plan - Growth fund is
giving the highest absolute return over 1 months (0.091597) while it is highest in term of
fluctuation of returns (variance=0.000168714). HDFC Equity Fund - Growth is having the
minimum fluctuation in return generated (variance=0. 0.000137733).

SUGGESTIONS:

a) For investor with high risk appetite go for: Sundaram BNP Paribas - Growth

b) For investor with moderate risk appetite: Go for ICICI Prudential Dynamic Plan -
Growth

c) For investor with low risk appetite: HDFC Equity Fund - Growth

(EQUITY FUND SIX MONTHS COMPARISON OF RETURN)

Company Name Absolute Mean return Standard Variance

and Fund return Deviation

HDFC Equity 0.136557 0.000897 0.018978 0.0003601

Fund - Growth

Birla Advantage -0.02593 0.01695 1.020131 1.0406672

Fund - Growth

ICICI Prudential 0.082544 0.000628 0.019227 0.0003696

Dynamic Plan -
Growth IC

Sundaram BNP 0.362075 0.001909 0.024218 0.000586

Paribas Growth