CHAPTER-I RESEARCH STRUCTURE

Transcription

1 CHAPTER-I RESEARCH STRUCTURE 1.1 Introduction There are a lot of investment avenues available today in the financial market for an investor with an investable surplus. A person can invest in Bank Deposits, Corporate Debentures, and Bonds where there is low risk but low return. He may invest in Stock of companies where the risk is high and the returns are also proportionately high. The recent trends in the Stock Market have shown that an average retail investor lost with periodic bearish tends. People began opting for portfolio managers with expertise in stock markets who would invest on their behalf. Thus we had wealth management services provided by many institutions. However they proved too costly for a small investor. These investors have found a good shelter with the mutual funds. A mutual fund is the ideal investment vehicle for today s complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerages dues and bank transactions etc. A mutual fund is the answer to all these situations. The Mutual Funds is one type of an investment institution which mobilizes savings of individuals and institutions and channelizes these 1

2 savings into corporate securities to provide the investors a steady stream of returns and capital appreciation. It is worthwhile to note the terms of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 regarding Mutual Funds. It defines it as a fund established in the form of trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments. Mutual funds have already entered into a world of exciting innovative products. These products are now tailor made to suit specific needs of investors. Intensified competition and involvement of private players in the race of mutual funds have forced professional managers to bring innovation in mutual funds. Thus, mutual funds industry has moved from offering a handful of schemes like equity, debt or balanced funds to liquid, money market, sector specific funds, index funds and gilt edged funds. Beside this recently mutual funds have also introduced some special specific funds like children plans, education plans, insurance liked plans, and exchange traded funds. The result is that over the time Indian investors have started shifting towards mutual funds instead of traditional financial avenues. 1.2 Global Scenario The asset management industry globally has shown a steady growth trajectory. Developed countries economy is cooling down or at least slow-down, investors are moving out of saturated markets like US, UK and Europe, characterized by their increasing levels of debt and looking towards emerging markets such as India, China, Brazil, Turkey to give a new direction to growth. Mutual fund assets worldwide increased 2

3 5.2 percent to $28.87 trillion, an all-time high, at the end of the third quarter of Between 2002 and 2009, AUM grew annually by 25% in Asia (excluding Japan and Australia), 20% in Latin America, and 10% in the Middle East and South Africa. These rates compared with 6% in North America, 7% in Europe and 8% in Japan and Australia. 2 The trend of AUM growth rates in developing markets overshadowing those in developed markets shows no signs of slowing down. The differences in regional AUM growth were driven mainly by variations in net sales and exposure to equity markets. Emerging markets represent 37% of the world s gross domestic product, and Goldman Sachs is estimating that they will represent 49% by 2020, hence signifying steady growth in years to come. The steady stream of FII inflows are evidence to the high growth story of India, offering better returns as compared to advanced economies. An analysis by Goldman Sachs states that it is likely that the market value of emerging markets may increase to $80 trillion over the next 20 years from $14 trillion in Although most of the attention is centered towards the BRIC nations, there are the other emerging economies which also deserve attention like South Africa, Egypt, Turkey, Mexico, South Korea and Poland. These economies also boast of a high growth agenda with an investor friendly environment. With a huge population and steadily rising household incomes, the consumer goods BCG Report: Global Asset Management 2010, In Search of Stable Growth 3 PwC- ASSOCHEM Report: Mutual Fund Industry sustaining growth in emerging markets

4 and service markets in emerging economies will provide enormous opportunities for businesses. A potential threat for captive-asset managers is liberalized distribution, although currently this risk appears to be limited. Open architecture in Europe should remain on its precrisis trajectory of very slow growth. In addition, the increasing role of independent financial advisors (IFAs) should not significantly dent the domination of the bank channel in most continental European markets the possible exception being Italy. Overall, retail banks see limited value in pushing beyond the guided architecture structures that they have put in place, which can still rely heavily on captive funds. 1.3 Review of Literature The review of literature is to guide us in the methodologies to be used, estimation procedures and interpretation of results. This chapter, therefore, focuses on both theoretical and empirical literature to understand the need for regulation, the form of regulation, approaches to risk and performance assessment for funds and also estimating cost functions. Mutual funds play a crucial role in reducing risk and transaction cost while investing in the stock markets. They offer a more efficient route of investing. In the process of encouraging more investments they help in realizing true prices of securities. This in turn helps attract investments through the initial public offer route and unleash the savings of Indian households. We move from a controlled economy in India to one that is regulated. The line between control and regulation has to be distinct and, therefore, the basis, extent and mode of regulation have to be made clear. 4

5 Regulation essentially seeks to control price, sale and production decisions of firms such that private interests align with the larger 'public interest'. The public interest approach to regulation can be dated back to Arthur Pigou. He dealt with externalities as a source of market failure. The costs of negative externalities such as pollution are not internalized to reflect true costs. Markets prove inefficient and hence regulatory control is justified. The purpose of regulation is to improve public welfare (public interest) by correcting market failures; Government intervention improves welfare. Posner (1969) discusses exhaustively the regulating monopolies, although dealing with the issue of regulating 'natural monopolies' Dr. More specifically utilized reforms questions for the traditional basis and of regulating monopolies. The traditional 'deadweight loss' of monopoly profit maximizing price is questioned. He maintains that price need not be to maximize short term profits. He points out other managerial objectives which may lead to lower price. Preventing potential entrants from entering developing good reputation are two such reasons. Besides he questions the rationale for comparing monopoly pricing with competitive price when the general industrial tendency is oligopolistic whose prices themselves are uncertain. He points out that supra competitive profits are themselves an incentive for the monopolist to contain costs and innovate. Taxing monopoly profits is a far better alternative to direct regulatory controls for Posner. He dismisses other effects of monopoly such unresponsive behavior and inferior quality as likely to cause loss of profit and lower costs which attracts entry. His emphasis on the distortion effects of rate of return regulation which lead to inferior services besides, the problems of regulatory lags. He calls for a regulatory system based on a cost benefit analysis that includes both 5

6 direct and indirect costs of regulations. Stigler (1971) feels that the demand for regulation is not often for public benefit but rather for the benefit of the industry in question. The states coercive power allows it to tax, control entry, effect make policies which affect complements or substitutes or even fix prices. Such power can be bought by industries in return for campaign funds to restrict competition or ensure profits. Stigler points out that such regulations are actually welfare-reducing as the benefits inefficient policies are possible only because in a democracy voting on each policy is costly and hence not done and also because not all voters who vote might have an 'interest' the issue. Tullock (1975) downplays the need for regulation and believes that the costs of government failures or regulatory failures are larger than the cost of market failures. The other important reason for market failure and ground for regulation is that of information asymmetry and bounded rationality. Akerlof (1970) pioneered the study on information asymmetry and showed how imperfect information would lead to adverse selection and the ultimate collapse of the market through low quality sellers crowding out good quality sellers. Schwartz and Wilde (1979) deal with the necessity for government intervention in markets with imperfect information. Governments intervene in markets when the percent of uninformed consumers in the market is sufficient to do so. But this is expensive and besides one does not know what level of information is considered adequate for a 6

7 consumer, besides the focus should be on the market and not the individual. If there exist sufficient number of informed consumers the firm has every incentive to behave competitively. The guiding variable, they point out, is whether non-competitive behavior has occurred in the market. Even then they suggest providing information is a better method than price control. A mutual fund investor may be operating with imperfect informational. She is incapable of observing the fund manager and the effort levels to produce best returns. It could induce post contractual opportunistic behavior which opens the investor to greater risks and lower returns. There is also the possibility of the investor not comprehending the information related to the mutual fund. Both of these are grounds for regulatory intervention. Frank and Mayer (1989) point out those information asymmetries can lead to organizational failures which include fraud by employees, mis-utilization of funds, reckless investments and excessive churning of portfolio. Regulation of mutual funds normally cover mandatory disclosure of relevant information, fixing management fees and expense limits, guidelines for valuing the portfolio and conducting shareholder transactions, control of false and misleading information, investment norms and corporate governance structure. In India, one of the earliest attempts was made by NCAER in 1964 when a survey of households was undertaken to understand the attitude towards and motivation for saving of individuals. Another NCAER study 7

8 in 1996 analyzed the structure of the capital market and presented the views and attitudes of individual shareholders. SEBI NCAER Survey (2000) was carried out to estimate the number of households and the population of individual investors, their economic and demographic profile, portfolio size, and investment preference for equity as well as other savings instruments. This is a unique and comprehensive study of Indian Investors, for; data was collected from 3,00,0000 geographically dispersed rural and urban households. Some of the relevant findings of the study are: Households preferences for instruments match their risk perception. Bank Deposit has an appeal across all income class; 43% of the non-investor households equivalent to around 60 million households (estimated) apparently lack awareness about stock markets; and, compared with low income groups, the higher income groups have higher share of investments in Mutual Funds (MFs) signifying that MFs have still not become truly the investment vehicle for small investors. Nevertheless, the study predicts that in the next two years (i.e., 2000 hence) the investment of households in MFs is likely to increase. We have to wait and watch the investors reaction to the July 2nd 2001, great fall of the Big Brother, UTI. (Note: Behavior is a reaction to a situation. So as situation changes, behavior gets modified. Hence, findings and predictions of behavior studies should be viewed accordingly). Gupta (1994) made a household investor survey with the objective to provide data on the investor preferences on MFs and other financial assets. The findings of the study were more appropriate, at that time, to the policy makers and mutual funds to design the financial products for 8

9 the future. Kulshreshta (1994) offers certain guidelines to the investors in selecting the mutual fund schemes. Shanmugham (2000) conducted a survey of 201 individual investors to study the information sourcing by investors, their perceptions of various investment strategy dimensions and the factors motivating share investment decisions, and reports that among the various factors, psychological and sociological factors dominated the economic factors in share investment decisions. Madhusudhan V Jambodekar (1996) conducted a study to assess the awareness of MFs among investors, to identify the information sources influencing the buying decision and the factors influencing the choice of a particular fund. The study reveals among other things that Income Schemes and Open Ended Schemes are more preferred than Growth Schemes and Close Ended Schemes during the then prevalent market conditions. Investors look for safety of Principal, Liquidity and Capital appreciation in the order of importance. Newspapers and Magazines are the first source of information through which investors get to know about MFs/Schemes and investor service is a major differentiating factor in the selection of Mutual Fund Schemes. Sujit Sikidar and Amrit Pal S ingh (1996) carried out a survey with an objective to understand the behavioral aspects of the investors of the North Eastern region towards equity and mutual funds investment portfolio. The survey revealed that the salaried and self-employed formed the major investors in mutual fund primarily due to tax 9

10 concessions. UTI and SBI schemes were popular in that part of the country then and other funds had not proved to be a big hit during the time when survey was done. Syama Sunder (1998) conducted a survey to get an insight into the mutual fund operations of private institutions with special reference to Kothari Pioneer. The survey revealed that awareness about Mutual Fund concept was poor during that time in small cities like Visakapatnam. Agents play a vital role in spreading the Mutual Fund culture; open-end schemes were much preferred then; age and income are the two important determinants in the selection of the fund/scheme; brand image and return are the prime considerations while investing in any Mutual Fund. Anjan Chakarabarti and Harsh Rungta (2000) stressed the importance of brand effect in determining the competitive position of the AMCs. Their study reveals that brand image factor, though cannot be easily captured by computable performance measures, influences the investor s perception and hence his fund/scheme selection. Shankar (1996) points out that the Indian investors do view Mutual Funds as commodity products and AMCs, to capture the market should follow the consumer product distribution model. Since 1986, a number of articles and brief essays have been published in financial dailies, periodicals, professional and research journals, explaining the basic concept of Mutual Funds and highlight their importance in the Indian capital market environment. They touch upon varied aspects like Regulation of Mutual Funds, Investor expectations, 10

11 Investor protection, Trend in growth of Mutual Funds and some are critical views on the performance and functioning of Mutual Funds. A few among them are Vidyashankar (1990), Sarkar (1991), Agarwal (1992), Sadhak (1991), Sharma C. Lall (1991), Samir K. Barua et al., (1991), Sandeep Bamzai (2001), Atmaramani (1995), Atmaramani (1996), Subramanyam (1999), Krishnan (1999), Ajay Srinivsasn (1999). Segmentation of investors on the basis of their characteristics was highlighted by Raja Rajan (1997). Investor s characteristics on the basis of their investment size Raja Rajan (1997), and the relationship between stage in life cycle of the investors and their investment pattern was studied Raja Rajan (1998). While empirical studies of mutual funds in India are not comparable to sheer volume of studies conducted in the US it is picking up with the growth of the industry and more importantly with the availability of more frequent data. Sahadevan and Thiripalraju (1997) attempted to compare the performance of funds using total return, consistency and volatility. They did not attempt to use any CAPM single or multifactor models. Their study covered private and public sector mutual funds for the period The benchmark used was the SSE National Index terms of absolute returns. Out of 32 public sector funds, 11 outperformed the index. In the case of private sector mutual funds time out of the ten studied outperformed the index. The study of course did not intend to go into 11

12 deeper risk return analysis and compared a host of different types of funds to a Single index. Panigrahi (1996) in his study of Indian Mutual funds selected a sample of four growth funds for the time period October 93 to December 95 and divided them into two periods to capture their performance in boom and bear phases separately. The general conclusion reached was that funds had lesser risk than the market index, BSE 200 or the RBI ordinary share price index and they delivered near market returns under normal conditions. He uses a log-log model regressing the log of (monthly average) of NAV on the log of the market index (monthly tune rates of growth) to arrive at the R 2 or diversification and risk compared to the market. The study of course, has a very limited objective, sample and time period. Roy and Deb (2003), use the conditional performance evaluation technique to study fund timing and performance. They pointed out that the tradition models of Treynor-Mazuy had shortcomings as they based their assessment on historical average returns without considering the role of new information and the time varying element of returns. Taking a sample of 89 funds (consisting of equity diversified and balanced funds) they test for alpha over the time period January, 1999 to July, Using lagged information variables they find that the alpha deteriorates. But their study is weak with poor statistical significance. Indian empirical studies tend to focus on the application of evolving methods to the study of mutual fund performance. However, to the best of our knowledge, there have been no studies that tried to deal 12

13 with the interplay between regulations and fund behavior. Issue such as the influence of regulations on performance and its ability to act as a genuine constraint on expenses are left untouched. This study makes an attempt to fill this gap. 1.4 Rationale The rationale behind my research lied in the tendencies that are related with tremendous growth of mutual fund industry in recent years in India that has given a new dimension to Indian economy with the globalization of Indian financial market. There was a possibility to conduct research to identify the trends of India s mutual fund industry and analyze the growth of different mutual fund companies. Many of the studies related to different securities were available but there was scarcity of research work on mutual fund industry. Some of the following facts also encouraged in conducting research on mutual fund industry of India they are: 1. It has been noticed that for last ten years mutual fund industry has shown a specific growth vis-à-vis other securities. 2. Mutual fund industry has grown with the contribution of different companies like SBI and Reliance mutual funds which have grown substantially during last ten years. 3. Presently mutual fund players are slowly realizing the potential of middle class cities of India. Increased penetration is helping the industry improve its assets under management. B and C class cities are growing rapidly. Today most of the mutual funds are 13

14 concentrating on the A class cities. Soon they will find scope in the growing cities. 4. After liberalization by Government of India in year 1991 the service industry has shown the tremendous change and vibration during last ten years. We have 52 mutual fund companies which are much less than US, having more than 800. There is big scope for expansion. 5. Our savings rate is over 23% highest in the world. During last ten years the trend of investment has shifted from fixed deposits, shares and insurance towards mutual funds. 1.5 Hypotheses The following hypotheses have been set to achieve the objectives of the study:- H 01 : The three main security options Fixed Deposits, Shares and Insurance plan will not affect the mutual fund investment. H 02 : The three main mutual fund schemes (Equity, Balanced and Income) will not affect each other. H 03 : There is no significant difference in the growth of SBI and Reliance mutual funds. H 04 : There is no risk and threats related to mutual fund investments. 14

15 1.6 Objective Without any particular objective there is no meaning of any study. We know the importance of objectives, it is a heart of the study and without it the study is useless. The main objective of the study was to examine the growth of mutual funds with special reference to SBI and Reliance mutual funds. The present study has been undertaken with the following objectives.- 1. To analyze the trend of mutual funds demand. 2. To know the regulations required for mutual funds. 3. To analyze the role of distribution channels like AMCs (Asset Management Company) on the growth of mutual funds. 4. To make comparative analysis of mutual funds with three important security options Fixed Deposits, Shares and Insurances. 5. To make comparative analysis of three mutual fund schemes Equity, Balance and Income schemes. 6. To analyze the various investment risks related to mutual funds. 7. To analyze the growth of SBI mutual fund and Reliance mutual fund. 8. To make the comparative analysis of SBI mutual fund and Reliance mutual fund. 15

16 9. To find out suggestions that would help in the development of mutual fund companies. 1.7 Research Methodology Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In research methodology, researcher pursues various steps that are generally adopted by a researcher in studying its research problem along with the logic behind them. It is necessary to know not only the research methods and techniques but also the methodology. The research design is the conceptual framework within which researcher study is conducted and it construct the blue print for collection of data, measurement of data, statistical tools for analysis and analysis of variance. Research design included an outline of what the researcher will do from writing the hypothesis and its operational implication to the final analysis of data. Good researcher design is often features like flexible, appropriate, efficient, and economical. Researcher ensures the minimization of bias and maximization reliability of the evidence collected. Several parametric and non-parametric mathematical and statistical tools were used for the analysis of the study. Simple ratios, percentage methods, index number, regression analysis and trend analysis have been adapted to identify the trends and patterns of various indicators of financial development. Apart from it regression analysis and Karl 16

17 Pearson s correlations have also been used to test hypotheses and for better interpretation p-values have been chosen. Regression analysis is a quantitative research method which is used when the study involves modeling and analyzing several variables, where the relationship includes a dependent variable and one or more independent variables. One of the main occasions where such analysis is used is to understand the relationship between independent variables and a dependent variable. Without an extremely large sample size, regression analysis is only ever able to approximately estimate to what extent specified input variables affect an output variable. In reality, the true scale of this effect may be bigger or smaller. It is therefore useful to know what the likely maximum and minimum scale of the effect might be (i.e. the largest and smallest values the regression coefficients are likely to have). To do this, regression analysis can provide a confidence interval, expressed as a maximum value and a minimum value, which, in 95% of cases, will contain the true value of the coefficient. This might look as follows, assessing the impact of satisfaction with product and service on overall satisfaction. The linear correlation coefficient is a test that can be used to see if there is a linear relationship between two variables. For example, it is useful if a linear equation is compared to experimental points. The range of r is from -1 to 1. If the r value is close to -1 then the relationship is considered anti-correlated, or has a negative slope. If the value is close to 1 then the relationship is considered correlated, or to 17

18 have a positive slope, as the r value deviates from either of these values and approaches zero, the points are considered to become less correlated and eventually are uncorrelated. There are also probability tables that can be used to show the significant of linearity based on the number of measurements. If the probability is less than 5% the correlation is considered significant. A p-value is a statistical value that details how much evidence there is to reject the most common explanation for the data set. It can be considered to be the probability of obtaining a result at least as extreme as the one observed, given that the null hypothesis is true. In chemical engineering, the p-value is often used to analyze marginal conditions of a system, in which case the p-value is the probability that the null hypothesis is true. The null hypothesis is considered to be the most plausible scenario that can explain a set of data. The most common null hypothesis is that the data is completely random, that there is no relationship between two system results. The null hypothesis is always assumed to be true unless proven otherwise. An alternative hypothesis predicts the opposite of the null hypothesis and is said to be true if the null hypothesis is proven to be false. The p-value proves or disproves the null hypothesis based on its significance. A p-value is said to be significant if it is less than the level of significance, which is commonly 5%, 1% or.1%, depending on how accurate the data must be or stringent the standards are. For example, a health care company may have a lower level of significance because they have strict standards. If the p-value is considered significant (is less than 18

19 the specified level of significance), the null hypothesis is false and more tests must be done to prove the alternative hypothesis, in the present study 5% level of significant has been taken. Indicator of average percentage change in a series of figures where one figure (called the base) is assigned an arbitrary value of 100, and other figures are adjusted in proportion to the base. Index numbers characterize the magnitude of economic changes over time. Because they work in a similar way to percentages they make such changes easier to compare. Briefly, this works in the following way. Suppose that a cup of coffee in a particular café cost 75p in In 2002, an identical cup of coffee cost 99p. How has the price changed between 1995 and 2002? The particular time period of 1995 which we've chosen to compare against, is called the base period. The variable for that period, in this case the 75p, is then given a value of 100, corresponding to 100%. The index can then be calculated for the later period of 2002 as a proportionate change as follows: The index number/100 = 99/75, so the index number = 99/75x100 =132 The index number shows us that there has been a price increase of 32% since the base period. An index number for a single price change like this is called a price relative. In present study we have consider P o be the price in the base period and P 1 be the price in the later period, then the price relative for the price change between these periods is given by (P 1 /P o ) x 100. They can describe trends in a change of any economic data such as retail prices, an employment rate, a company revenue or Gross Domestic Product. Index numbers are always calculated with respect to a base period; a year, a month or a quarter. 19

20 Where there is a time series data which is increasing or decreasing over a period of time, it can be suitably fitted in semi-long trend, y= abx or linear trend y = ax + b whichever is appropriate. The usual method of least square is used to fit the trend. Risk The risk is calculated on the basis of year-end NAV. The following measures of risks associated with mutual funds have been considered for the study: i. Beta (β): i.e., fund s volatility as regard market index measuring the extent of co-movement of fund with that of the benchmark index. ii. Standard Deviation (Ϭ): i.e., fund s volatility or variation from the average expected return over a certain period. iii. Co-efficient of Determination (R2): i.e., the extent to which the movement in the fund can be explained by corresponding benchmark index. The R2 measures the extent of the correlation between the fund and its benchmark, and hence gives an indication of the reliability of Beta. An R2 above 0.9 indicates a high degree of correlation whilst a figure below 0.75 would suggest that no reliance should be placed on Beta. In Sharpe Model, performance of a fund is evaluated on the basis of Sharpe ratio, which is the ratio of returns generated by the fund over the risk free rate of return and the total risk associated with it. According to Sharpe, it is the total risk of the fund that investors are more concerned about. So, the model evaluates funds on the basis of reward per unit of total risk. While high and positive ratios show a superior risk adjusted 20

21 performance of a fund, a low and negative ratio is an indication of unfavorable performance. In Alpha, a measure of performance on a risk-adjusted basis, Alpha takes the volatility (price risk) of a mutual fund and compares its riskadjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha. Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. If a CAPM analysis estimates that a portfolio should earn 10% based on the risk of the portfolio but the portfolio actually earns 15%, the portfolio's alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model. Absolute risk is split into two component parts: systematic and unsystematic risk. Systematic risk embodies market, interest rate, and inflation risks. Unsystematic risk is the risk unique to an asset class or security, including industry, country, currency and the financial position of individual companies, which can be reduced through diversification. Beta is the measure of systematic risk. 21

22 By definition, the market/benchmark has a Beta = A fund with a Beta = 1.00 is equally as aggressive as the benchmark. Funds with a Beta > 1 are more aggressive, and more sensitive than average to systematic or market conditions. Funds with a Beta < 1 are more defensive and less sensitive than average to systematic or market risk. Beta is a risk measure of a portfolio s sensitivity to the market (or benchmark). As a risk measure it is driven by a manager s style bias a high Beta indicating a more aggressive stance whereas a low Beta indicates a more cautious stance. One drawback with Beta is that it is retrospective, based on the historical position of a fund. It does not tell the investor anything about what the fund manager may do in the future. The portfolio return calculated on the basis of NAV does not consider any change in the market price but considers the change in the net asset value of mutual funds units during the period. The return from a Mutual fund scheme (R st ) at time t, is as follows: R st = NAV t NAV t-1 NAV t-1 Where NAV t and NAV t-1 are net assets values for time period t and t-1, respectively, It was difficult to select mutual funds schemes among all the mutual fund companies that s why year-wise returns have been calculated for selected random mutual funds of SBI and Reliance mutual funds (equity only) that are completed 10 years since their commencement of the study period i.e. from March 2003 to March For the present study only secondary data has been used. Secondary data has been collected for the period from various 22

23 governments (SEBI, RBI), associations (AMFI, CII) and mutual funds websites (SBI, Reliance, Value Research), various publication (companies monthly/quarterly/annual reports, research reports), journals, books, research papers, magazines, articles, fact-sheets published and unpublished documents of the mutual funds have been consider in the research. 1.8 Scope and Limitations of Study The study deals with the examination of activities involved in an economic analysis of growth of mutual funds with special reference to SBI and Reliance mutual funds only. It explains about the importance of mutual funds in Indian economy and the growth of Indian economy because of mutual funds. It deals with the comparative studies of mutual fund schemes and comparative study with other securities in different chapters of thesis. The study also discusses the barriers in the development of mutual funds in India. In addition the study justifies about the Future of mutual funds in India and steps which must be taken. The following are the limitations of the present study- 1) The study has covered data available of mutual fund companies with SEBI, AMFI and RBI only. 2) As the study is based on secondary data, it is beset with certain limitations which are bound to arise while dealing exclusively with secondary data. 3) The study period is restricted to the period of eleven years from 2003 to ) The study fully depends on financial data collected from the published financial statements of companies. This study 23

24 incorporates all the limitations that are inherent in the financial statements. 1.9 Significance of the Study Mutual funds play a crucial role in the economic development of the respective countries. The active involvement of mutual funds in the economic development can be seen by their dominant presence in the money and capital markets world over. Their presence is, however, comparatively stronger in the economically advanced countries. The role of the mutual funds in the form of financial intermediation, by way of resource mobilization, allocation of resources, and development of capital markets and growth of corporate sector is very conspicuous. Mutual funds also play an important role in the stock market by way of ensuring stability as supplier of large resources and through steady absorption of floating stocks. Mutual funds are well known for their benefits in the following forms to its investors: Professional expertise in buying and selling of units; Professional management of securities transactions; Opportunity to hold wide spectrum of securities; Long-term planning by fund managers; Safety of funds; Spreading of risk; Freedom from stress and emotional involvement; Automatic reinvestment of dividends and capital gains; Dissemination of information on the performance of the mutual funds, schemes, fund managers and, Investor Protection. 24

25 Emergence of mutual funds in the Indian scenario is a product of constraints on the banking sector to tap the fruits of the capital market and the reluctance of the investors to take a direct plunge in complex and erratic capital market operations. Mutual fund entered the arena of this service sector in an admirable manner. The Indian Mutual Fund Industry is one among the top 15 nations in terms of assets under management, which has crossed USD 100 billion. As a globally significant player the Indian Mutual Fund Industry is attracting a bigger chunk of household investments and is expected to witness five to six times growth in the next seven to eight years. The present study analyzes the performance of various schemes of SBI and Reliance mutual funds and growth of Indian Mutual Fund Industry