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University School of Management Studies,Guru Gobind Singh Indraprastha University Sector- 16C, Dwarka, Delhi 110075
CERTIFICATE
This is to certify that Ms. Nidhi Srivastava a student of Master of Business Administration at University School of Management Studies, GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY has worked under my guidance and supervision. This Project report has the requisite standard for the partial fulfillment the Post Graduate Degree in Management. To the best of my knowledge no part of this report has been reproduced from any other report and the contents are based on original research.
DECLARATION
I, Nidhi Srivastava, Enrollment No. 04516603910, MBA 4th Semester hereby declare that, the project report titled Effect of Fund Size on Mutual Fund Performance is an original work done by me under the guidance of Dr. Vijita Aggarwal and has not been submitted to any other university or institute for the award of any degree or diploma or fellowship.
Date :
Acknowledgement
No task is a single person effort, same is with this project. Thus I would like to extend my sincere thanks to all those people who helped me in accomplishing my project. I owe my project success to all faculty members and to my mentor Dr. Vijita Aggarwal for their help in this project. This project provided me a platform to increase my knowledge and empowered me with a better understanding of concepts in the real world scenario.
Executive Summary
The main objective of the project is to analyze the effect of fund size on mutual fund performance. Mutual funds have become one of the major investment option in India. This report aims to find out their behavior i.e. how they perform when their fund size increases or decreases. The report contains all the details about the mutual fund their history, terms, rights of investor. It includes researches one earlier n their methodologies. The research design is descriptive and prospective (correlational). The sample size is ten and target population includes all the mutual funds in India. All the data that was collected is analyzed in excel sheets to find out the correlation coefficient and regression coefficient (). In the end it is concluded that increase in fund size leads to decrease in return.
Table of Contents
Chapter 1: Introduction 1.1 Problem Statement 1.2 Objective of the project 1.3 Hypothesis of the research 1.4 Chapter wise details Chapter 2: Mutual Funds 2.1 Definition Mutual Funds: 2.2 History 2.2.1 A Retrospect 2.2.2 AMFI and its role 2.3 Types of Mutual Fund 2.4 Advantages and Disadvantages of mutual funds 2.5 TERMS OF MUTUAL FUNDS 2.6 THE RIGHTS OF INVESTORS 2.7Different plans that Mutual Funds offer 2.8 Current Scenario Chapter 3 Literature Review Chapter 4 Research Methodology 4.1 Research Problem 4.2 Research Design 4.2.1 Justification for using research design 4.3 Data Collection
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4.4 Sample Size 4.4.1 Target population 4.4.2 Techniques of Sampling 4.4.2.1 Justification for using non probability sampling technique
5.1 HDFC top 200 fund 5.2 Reliance Growth Fund - Institutional Plan (G) 5.3 ICICI Prudential Dynamic Plan (G) 5.4 Birla Sun Life Equity Fund (G) 5.5 AIG India Equity Fund - Regular Plan (G) 5.6 UTI Opportunities Fund (G) 5.7 LIC Nomura Equity Fund(G) 5.8 SBI Magnum Equity Fund (G) 5.9 JPMorgan India Equity Fund (G) 5.10 Morgan Stanley Growth Fund (G) Chapter 6 Conclusion 6.1 Summary table 6.2 Conclusion Reference list
Chapter 1: Introduction
1.3 Problem Statement:
To study the effect of fund size on mutual fund performance.
1.4 Objective of the project: To analyze the effect of fund size on mutual fund performance To understand the various terms related to mutual funds. 1.3 Hypothesis of the research
HI: Increase in fund Size reduces returns from mutual funds
2.2 History
The first mutual funds were established in Europe. One researcher credits a Dutch merchant with creating the first mutual fund in 1774. The first mutual fund outside the Netherlands was the Foreign & Colonial Government Trust, which was established in London in 1868. It is now the Foreign & Colonial Investment Trust and trades on the London stock exchange. The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most glamorous in that it is a young industry where there are changes in the rules of the game everyday, and there are constant shifts and upheavals. The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in the history of the country. The mutual fund industry started in India in a small way with the UTI Act creating what was effectively a small savings division within the RBI. Over a period of 25 years this grew fairly successfully and gave investors a good return, and therefore in 1989, as the next logical step, public sector banks and financial institutions were allowed to float mutual funds and their success emboldened the government to allow the private sector to foray into this area. The initial years of the industry also saw the emerging years of the Indian equity market, when a number of mistakes were made and hence the mutual fund schemes, which invested in lesser-known stocks and at very high levels, became loss leaders for retail investors. From those days to today the retail investor, for whom the mutual fund is actually intended, has not yet returned to the industry in a big way. But to be fair, the industry too has focused on brining in the large investor, so that it can create a significant base corpus, which can make the retail investor feel more secure. [http://en.wikipedia.org/wiki/Mutual_fund] (wikipedia, 2012)
2.2.1 A Retrospect:
The last year was extremely eventful for mutual funds. The aggressive competition in the business took its toll and two more mutual funds bit the dust. Alliance decided to remain in the ring after a highly public bidding war did not yield an acceptable price, while Zurich has been sold to HDFC Mutual. The growth of the industry continued to be corporate focused barring a
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few initiatives by mutual funds to expand the retail base. Large money brought with it the problems of low retention and consequently low profitability, which is one of the problems plaguing the business. But at the same time, the industry did see spectacular growth in assets, particularly among the private sector players, on the back of the continuing debt bull run. Equity did not find favor with investors since the market was lack-luster and performances of funds, barring a few, were quite disappointing for investors. The other aspect of this issue is that institutional investors do not usually favor equity. It is largely a retail segment product and without retail depth, most mutual funds have been unable to tap this market. The tables given below are a snapshot of the AUM story, for the industry as a whole and for debt and equity separately. The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases
(AMFI, 2012)
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By Structure o Open - Ended Schemes o Close - Ended Schemes o Interval Schemes (mutual fund resource, 2012) By Investment Objective o Growth Schemes o Income Schemes o Balanced Schemes o Money Market Schemes
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Other Schemes o Tax Saving Schemes o Special Schemes Index Schemes Sector Specfic Schemes (mutual fund resource, 2012)
On the basis of their structure and objective, mutual funds can be classified into following major types: Closed-end funds A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. Open-end funds Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets Large cap funds Large cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies Mid-cap funds Mid cap funds are those mutual funds, which invest in small / medium sized companies. As there is no standard definition classifying companies Equity funds Equity mutual funds are also known as stock mutual funds. Equity mutual funds invest pooled amounts of money in the stocks of public companies. Balanced funds Balanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds Growth funds Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. No load funds
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Mutual funds can be classified into two types - Load mutual funds and No-Load mutual funds. Exchange traded funds Exchange Traded Funds (ETFs) represent a basket of securities that is traded on an exchange, similar to a stock. Hence, unlike conventional mutual funds Value funds Value funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation. Money market funds A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. International mutual funds International mutual funds are those funds that invest in non-domestic securities markets throughout the world. Regional mutual funds Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified geographical area, usually, the fund's local region. Sector funds Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. Index funds An index fund is a a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market. Fund of funds A fund of funds (FoF) is an investment fund that holds a portfolio of other investment funds rather than investing directly in shares, bonds or other securities. (mutual fund resource, 2012)
Increased diversification Daily liquidity Professional investment management Ability to participate in investments that may be available only to larger investors Service and convenience Government oversight Ease of comparison (wikipedia, 2012)
Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize (wikipedia, 2012)
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What is redemption price? Redemption price is the price received on selling units of open-ended scheme. If the fund does not levy an exit load, the redemption price will be same as the NAV. The redemption price will be lower than the NAV in case the fund levies an exit load. (SEBI, 2012) What is repurchasing price? Repurchase price is the price at which a close-ended scheme repurchases its units. Repurchase can either be at NAV or can have an exit load. (SEBI, 2012) What is a Switch? Some Mutual Funds provide the investor with an option to shift his investment from one scheme to another within that fund. For this option the fund may levy a switching fee. Switching allows the Investor to alter the allocation of their investment among the schemes in order to meet their changed investment needs, risk profiles or changing circumstances during their lifetime. (SEBI, 2012) What is Shut-Out Period? After the closure of the Initial Offer Period, on an ongoing basis, the Trustee reserves a right to declare Shut-Out period not exceeding 5 days at the end of each month/quarter/half-year, as the case may be, for the investors opting for payment of dividend under the respective Dividends Plans. The declaration of the Shut-Out period is envisaged to facilitate the AMC/the Registrar to determine the Units of the unit holders eligible for receipt of dividend under the various Dividend Options. Further, the Shut-Out period will also help in expeditious processing and dispatch of dividend warrants. During the Shut-Out period investors may make purchases into the Scheme but the Purchase Price for subscription of units will be calculated using the NAV as at the end of the first Business Day in the following month/quarter/half-year as the case may be, depending on the Dividend Plan chosen by the investor. Therefore, if investments are made during the Shut -Out period, Units to the credit of the Unit holder's account will be created only on the first Business Day of the following month/ quarter/half year, as the case may be, depending on the dividend plan chosen by the investor. The Shut-Out period applies to new investors in the Scheme as well as to Unit holders making additional purchases of Units into an existing folio. The Trustee reserves the right to change the Shut-Out period and prescribe new Shut- Out period, from time to time. (SEBI, 2012) Minimum lock-in period for investment There is no lock-in period in the case of open-ended funds. However in the case of tax saving funds a minimum lock-in period is applicable. The lock-in period for different tax saving schemes are as follows: section minimum lock-in period U/s 88 3 yrs. U/s 54EA 3 yrs. U/s 54EB 7 yrs. (SEBI, 2012)
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Who are the issuers of Mutual funds in India? Unit Trust of India was the first mutual fund which began operations in 1964. Other issuers of Mutual funds are Public sector banks like SBI, Canara Bank, Bank of India, Institutions like IDBI, ICICI, GIC, LIC, and Foreign Institutions like Alliance, Morgan Stanley, Templeton and Private financial companies like Kothari Pioneer, DSP Merrill Lynch, Sundaram, Kotak Mahindra, and Cholamandalam etc. there are many new upcoming fund houses like Edelweiss, J.P. Morgan, Axis, (SEBI, 2012) SYSTEMATIC INVESTMENT PLAN SIP is an investment option that is presently available only with mutual funds. The other investment option comparable to SIPs is the recurring deposit schemes from Post office and banks. Basically, under an SIP option an investor commits making a regular (monthly/quarterly) investment in a particular mutual fund/deposit. Investor can now use auto debit (ECS) facility from Banks to automatically debit SIP amount from your account. There is no need to give bulk of cheques for SIP. For that you should have account in nationalized banks. For SIP through ECS, you have to provide bank details like account no., branch name, MICR no. etc. (SEBI, 2012)
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Dividend Reinvestment Plan Dividend plans of schemes carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested on behalf of the investor, thus increasing the number of units held by the investors. (SEBI, 2012) Automatic Investment Plan Under the Automatic Investment Plan (AIP) also called Systematic Investment Plan (SIP), the investor is given the option for investing in a specified frequency of months in a specified scheme of the Mutual Fund for a constant sum of investment. AIP allows the investors to plan their savings through a structured regular monthly savings program. (SEBI, 2012) Automatic Withdrawal Plan Under the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal Plan (SWP), a facility is provided to the investor to withdraw a pre-determined amount from his fund at a predetermined interval. (mutual fund resource, 2012) (SEBI, 2012)
perceived high risk and a lack of information on how mutual funds work. This report is based on a survey of approximately 10,000 respondents in 15 Indian cities and towns as of March 2010. There are 43 Mutual Funds recently. The primary reason for not investing appears to be correlated with city size. Among respondents with a high savings rate, close to 40% of those who live in metros and Tier I cities considered such investments to be very risky, whereas 33% of those in Tier II cities said they did not how or where to invest in such assets (wikipedia, 2012).
(wikipedia, 2012)
Reasons for not investing in mutual funds in India On the other hand, among those who invested, close to nine out of ten respondents did so because they felt these assets were more professionally managed than other asset classes. Exhibit 2 lists some of the influencing factors for investing in mutual funds. Interestingly, while noninvestors cite risk as one of the primary reasons they do not invest in mutual funds, those who do invest consider that they are professionally managed and more diverse most often as their a reasons to invest in mutual funds versus other investments.
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(wikipedia, 2012)
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investigated the effect of scale on performance in the active money management industry. They were the first to find strong evidence that fund size erodes performance. We then move on to consider various explanations for why this might be the case. We find that this relationship is not driven by heterogeneity in fund styles, fund size being correlated with other observable fund characteristics, or any type of survivorship bias. Instead, we find that the effect of fund size on fund returns is most pronounced for funds that play small cap stocks. This suggests that liquidity is an important reason behind why size erodes performance
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Load Details: Entry Load:N.A. Exit Load:1.00% Load Comments:Exit Load 1% if units are redeemed / switched-out within 1 year from the date of allotment. (Moneycontrol)
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Scheme details Fund Type: Open-Ended Investment Plan: Growth Launch date: Oct 18, 2002 Benchmark: S&P CNX NIFTY Asset Size (Rs cr): 4,092.30 (Mar-31-2012) Minimum Investment: Rs.5000 Last Dividend: N.A. Bonus: N.A. Fund Manager: Sankaran Naren / Mittul Kalawadia
Load Details Entry Load: N.A. Exit Load: 1.00% Load Comments: Exit Load 1% if units are redeemed / switched-out for a period of up to 1 year from the date of allotment.
Load Details Entry Load: N.A. Exit Load: 1.00% Load Comments: Exit Load of 1% if redeemed within 365 Days from the date of allotment. (Moneycontrol)
Load Details
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Entry Load: N.A. Exit Load: 1.00% Load Comments:Exit load of 1% if redeemed within 1 year from the date of allotment. (Moneycontrol)
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Load Comments: Exit Load - An early exit charge equivalent to the unamortized new fund offer expenses will be recovered from the investors incase of redemption before expiry of 5 years from the date of allotment (Moneycontrol)
Load Details Entry Load: N.A. Exit Load: 1.00% Load Comments: Exit Load 1% if units are redeemed on or before the expiry of 1 year from the date of allotment. (Moneycontrol)
Overview Investment Objective To provide the investor long-term capital appreciation by investing in high growth companies along with the liquidity of an open-ended scheme through investments primarily in equities and the balance in debt and money market instruments. Scheme details Fund Type: Open-Ended Investment Plan: Growth Launch date: Jan 01, 1991 Benchmark: S&P CNX NIFTY Asset Size (Rs cr): 491.40 (Mar-31-2012) Minimum Investment: Rs.1000 Last Dividend: N.A. Bonus: N.A. Fund Manager: R. Srinivasan
Load Details Entry Load: N.A. Exit Load: 1.00% Load Comments: Exit Load 1% if units are redeemed / switched-out within 1 year from the date of allotment. (Moneycontrol)
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Scheme details Fund Type: Open-Ended Investment Plan: Growth Launch date :Apr 19, 2007 Benchmark: BSE-200 Asset Size (Rs cr): 311.20 (Mar-31-2012) Minimum Investment: Rs.5000 Last Dividend: N.A Bonus: N.A. Fund Manager: Harshad Patwardhan / Amit Gadgil . Load Details Entry Load: N.A. Exit Load: 2.00% Load Comments: Exit load 2% if redeemed within 6 months from the date of allotment, exit load 1.5% if redeemed after 6 months upto 12 months from the date of allotment and exit load of 1% if redeemed after 12 months upto 18 months from the date of allotment. (Moneycontrol)
5.10 Morgan Stanley Growth Fund (G) Overview Investment Objective The investment objective of the scheme is to achieve long-term capital appreciation by investing primarily in equity and equity related securities of companies having large market capitalization. Scheme details Fund Type: open-Ended Investment Plan: Growth Launch date: Jan 19, 1994
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Benchmark: BSE-100 Asset Size (Rs cr): 1,248.50 (Mar-31-2012) Minimum Investment: Rs.5000 Last Dividend: Rs.2.00 (Oct-27-2006) Bonus: N.A. Fund Manager: Sridhar Sivaram / Amay Hattangadi
Load Details Entry Load: N.A. Exit Load: 1.00% Load Comments: Exit Load 1% if units are redeemed on or before the expiry of 1 year from the date of allotment. (Moneycontrol)
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-0.325397573 HDFC top 200 fund -0.33476209 Reliance Growth fundInstitutional plan(G) ICICI Prudential Dynamic plan(G) -0.02738
Birla sunlife equity fund(G) AIG India Equity Fund-Regular plan(G) UTI Opportunities Fund Growth LIC nomura Equity Fund (G) SBI Magnum Equity fund (G) JP Morgun India Equity Fund(G) Morgun Stanley Growth Fund(G)
6.2 Conclusion
From the above table it can be seen that 6 out of 10 mutual funds have negative correlation with the return from the mutual fund. Moreover it can be said that when fund size increases, it affects performance in the negative way. Rather than economies of scale, diseconomies of scale come into function. It is often believed that huge fund size will help in diversifying the portfolio but it can be concluded from the above data that it is not always true. All the funds listed above has positive beta ( ) which means that the return from the mutual fund is related to returns from market and if market has given better returns then mutual fund has also given positive returns. To conclude I can say that increase in fund size leads reduced returns from the mutual fund. Despite the fact that more fund is available for diversification and lower cost of transactions.
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Reference list
www.wikipedia.com http://www.amfiindia.com/ www.moneycontrol.com www.mutualfundresource.com
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