JOURNAL OF INTERNATIONAL ACADEMIC RESEARCH FOR MULTIDISCIPLINARY Impact Factor 1.625, ISSN: , Volume 3, Issue 3, April 2015

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1 RISK-RETURN ANALYSIS OF AXIS BANK MUTUAL FUNDS G.SANTOSHI* *Head, Dept. of Business Administration, Indian Institute of Management and Commerce (IIMC) Hyderabad, Telangana State, India ABSTRACT A mutual fund is a financial intermediary that allows an investor to pool their money with a pre-determined objectives. The money is collected and invested in various investments by the fund manager and invested in various shares, bonds and other similar assets. This is beneficial to the investor as it is available at low cost, risk diversification, transparency. Mutual funds are an integral part of stock market which have become an investment avenue for large number of investors in recent years. There are a number of investment opportunities available to an investor. Each of the investment has its own risk and return features. The present study analyzed the risk and return of five mutual funds of Axis bank i.e. Debt-income ST (Short Term), Debt-income LT (Long-Term), Equity-mid-cap, Equity large-cap, Hybrid MIP S (Monthly Investment Plan). For this study the secondary data has been collected from daily mutual fund digest, journals, websites and books. To evaluate the performance of five funds, statistical tools like mean and standard deviation were used for the study. It has been found that after analyzing the risk and mean return of the five funds, Axis mid-cap fund is considered to be the best fund as it is having a risk-return ratio of KEYWORDS: Mutual funds, Schemes, KYC (know your customer) documentation, Risk- Return Ratio 1.0 OBJECTIVES 1. To understand the concept of mutual funds and its schemes. 2. To know the documentation required for customers to invest in mutual funds. 3. To find out the Mean return and Risk of five Mutual Funds of Axis Bank and to analyze the Risk-Return ratio. 2.0 RESEARCH METHODOLOGY The study is based on secondary data which has been collected from daily mutual fund digest of Axis bank, books, journals and websites. The study is analytical in nature and data was analyzed logically & meaningfully to arrive at meaningful conclusions. 399

2 3.0 SCOPE OF THE STUDY Scope of the study is confined to only 5 mutual funds of Axis bank but not all other funds. Only risk and return have been taken into consideration for the present study leaving other factors like (net assets, portfolio composition, income composition, gross income as a percentage of net assets and expenses ratio) 4.0 LIMITATIONS OF THE STUDY 1. The study is limited to returns only for 1month, 3months and 6 months but not for other periods 2. The present study concentrated only on historical returns. 5.0 INTRODUCTION The Indian Financial system based on four basic components like Financial Markets, Financial Institutions, Financial Services, Financial Instruments. The main aim of the Indian financial system is that providing the efficient services to the capital market. The Indian capital market has been increasing tremendously during the second generation reforms. The first generation started in 1991 with the concept of LPG (Liberalization, privatization, globalization) Then after 1997 second generation reforms was started, still they are going on, they include reforms of industrial investment, reforms of fiscal policy, reforms of ex- imp policy, reforms of public sector, reforms of financial sector, reforms of foreign investment through the institutional investors, reforms of banking sectors. The spread of the banking system has been a major factor in promoting financial intermediation in the economy and in the growth of financial savings with progressive liberalization of economic policies, there has been a rapid growth of capital market, money market and financial services industry including merchant banking, leasing and venture capital, hire purchasing. Consistent with the growth of financial sector and second generation reforms its need to fruition of the financial sector. It also need to provide the efficient service to the investor mostly if the investors supply small amount, in that point of view the mutual fund play vital for better service to the small investors. A mutual fund is an indirect way in which one can invest in capital markets. The objective is to collect from the investor and then invest in the securities permitted under the regulations i.e., a mutual fund acts as an intermediary between the investor and capital markets. Such kind of investment is ideal for small investors who want to invest in stock market but cannot 400

3 invest in most of market and by investing through a mutual fund it can make use of specialized people which the mutual fund employs. 5.1 Meaning of Mutual fund Mutual funds allow a group of investors to pool their money together and invest money. Fund manager invest the funds assets typically by buying stocks or bonds or combinations of them. Mutual funds provide many benefits to the investors. First of all it is very difficult for an investor to choose where to invest in diversified basket of market instruments. However any small investor can invest in any diversified portfolio. Second, unlike the underlying assets they have limited liability in the market. Furthermore by assembling them together, investors have access to professional management and reduce transactional cost. Fund manager concentrates on risk-return trade off, where he minimizes the risk and maximizes the returns through diversification of portfolio. 5.2 Organization Structure of mutual funds Mutual funds have organization structure as per the Security Exchange Board of India guidelines. SEBI specified authority and responsibility of Trustee and Asset Management Companies. The objective is to control, to promote, to regulate, to protect the investors right and efficient trading of units. Operation of mutual funds start with investors save their money on mutual fund, than Mutual fund manager handling the funds and strategic investment scrip s. Unit value will become high when fund manager investment policy generates the return on capital market. Unit return depends on fund return and efficient capital market. Mutual fund manager having high responsibility inside of return and how to minimize the risk. When the fund provides high return with high risk, investors attract to invest more funds for same scheme. 5.3 Operation process of mutual funds 401

4 Every mutual fund has a sponsor who establishes the fund and can be considered as similar to a promoter of a company. The sponsor forms the trust in accordance with SEBI regulations. The trust has a governing body which is also appointed by the sponsor. The governing body of the trust gives direction, control and also manages the overall affairs of mutual funds. The trustee has to be a person of high reputation and integrity. One of the governing body becomes a full time executive of the trust and heads a company floated by the trust called Asset Management Company (AMC). The AMC floats various schemes of fund and also manages them on day to day basis. AMC can be listed/non listed company and has a high standing professionals like MBA, CA, CFA, Engineers who are expert in job making investments. 5.4 Types of Mutual fund schemes The various schemes offered in mutual funds are as follows Open-ended scheme: The open ended scheme offers units on continuous basis and accepts fund from investors continuously. Repurchase is carried out on continuous basis, thus helping the investors to withdraw their money at any time. The open-ended scheme has no maturity period and not listed on stock exchanges. An investor can deal directly with the mutual funds for investment as well as redemption. Close-ended scheme: The close-ended schemes have a fixed maturity period. The first time investment is made when they are kept open for a limited period. Once they are listed on stock exchange the investors can buy and sell through stock exchange only. Interval scheme: Sometimes mutual funds with the features of close-ended and open-ended schemes are launched, and these are known as interval schemes. They can be listed on stock exchange or may be available for repurchase during specific periods at net asset value or related prices. 402

5 5.4 Why mutual funds The investors always look for good investment opportunity which gives better returns. They also look for safety and secure investment. The experts advice to invest in mutual funds as it gives a lot of benefits to the investor. Mutual Funds offer both 100% debt to 100% equity and also hybrid products with combination of equity and debt. Mutual Funds also came out with Gold ETFs and Gold Funds, which are much better option compared to physical gold. The past performance of the schemes is also available since inception of the fund. The past performance may not sustain in future but it tells the quality of the fund s performance in different cycles of the market, which can help investors before taking any investment decision. Mutual Fund schemes are market related and does not offer any guarantee of returns, which keeps away most of the investors from investing in mutual fund schemes. One has to understand how this schemes works & performs over a period of time and what are risks attached to it. Equity schemes always outperform the other asset class in the longer run and beat inflation with a big margin. 5.5 Where to invest in mutual fund The selection of mutual fund depends upon the investment plan, the category of fund such as (equity, debt or hybrid). Within a category the right scheme can be selected on the basis of past performance, risk attached, scheme size, expenses ratio, fund manager performance. The information should be selected and the right decision should be taken. (A)Equity Funds The aim of these funds is to provide capital appreciation over a long term period by investing maximum part of the corpus into equities. 1. Diversified Equity Fund: These funds aim at investing the investment in various diversified sectors and companies. 2. Small and Mid-Cap funds: These funds are aggressive in their investment nature with an aim to generate long term appreciation from a portfolio that is substantially constituted of equity and equity related securities, which are not part of top 100 stocks. 3. Large-cap funds: A term used by the investment community to refer to companies with a market capitalization value of more than $10 billion. Large cap is an abbreviation of the term "large market capitalization". Market capitalization is calculated by multiplying the number of a company's shares outstanding by its stock price per share. 403

6 4. Sector specific funds: These funds invest into sectors which are mentioned in their objective or offer documents, such as banking, FMCG, information technology etc. 5. Tax Saving fund: It offers tax rebates to investor u/s (under section) 80C of I.T. Act. Any contributions made in ELSS are eligible for 100% rebate. (B) Debt Funds The objectives of these funds are to invest in debt papers. Government authorities, private companies, banks & financial institutions are some of the major issuer of debt papers. 1.Gilt funds : Invest their corpus in securities issued by government. These funds carry zero default risk but are associated with Interest rate risk. 2. Income funds: Income fund is a type of mutual fund that emphasizes on current income either on monthly or quarterly basis as opposed to capital appreciation. Such funds hold a variety of government, municipal and corporate debt obligations, preferred stock, money market instruments, and dividend-paying stocks. 3. Monthly income plan (MIPs): MIPs invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. 4. Short term plans: These investments are meant for a horizon of three to six months. These funds primarily invest in short term papers like Certificate of Deposits and Commercial Papers. (C) Hybrid Fund A category of mutual fund that is characterized by portfolio that is made up of a mix of stocks and bonds, which can vary proportionally over time or remain fixed. 6.0 MUTUAL FUNDS PROCESS FLOW WITH RESPECT TO INVESTMENTS The first requirement for a customer to invest in mutual funds is know your customer (KYC). It is compulsory for all the investments of Rs 50,000 and above according to the regulatory requirements under Anti-Money Laundering Act 1992 and SEBI. The following documents are required by the mutual fund investors Identity proof Address proof PAN card Photograph 404

7 Mutual funds have made an arrangement with CDSL Ventures Ltd (CVL), a wholly owned subsidiary of Central Depository Services (India) Ltd. (CDSL), to make it convenient for mutual fund investors to comply with the documentation requirements There are few offices of mutual fund registrars and large distributers as a point of service for the KYC documentation. Investors need to provide the originals to any of the PoS (points of service) and will be returned after the verification. Alternatively the investors can provide a true copy attested by a notary public, Gazetted officer or manager of scheduled commercial bank. CVL provides a facility where the PoS from their own office can access CVL s system, enter the requisite data and generate an acknowledgement with a Mutual Fund Identification Number (MIN). Based on this acknowledgement, the mutual fund investor can invest in any mutual fund. Thus, the KYC documentation has to be done only once, with CVL acting through the PoS (points of service). If there is any change in the address or any other information of the investor they have to fill up a standard form and follow the prescribed process only once, with any PoS. Based on that the PoS will update all the mutual funds where the investors have invested. If the investor is minor the KYC have to be compiled with the guardian. In case of investments by a Power of Attorney holder on behalf of an investor, KYC requirements have to be complied with, by both the investor and PoA holder. 6.1 PAN (Permanent account number) card requirements PAN card is required for all the mutual fund investments except for the Micro-SIPs (systematic investment plan) i.e. where the annual investment does not exceed Rs.50,000. Micro-SIP investment by individuals, minors and sole-proprietary firms are exempted from the requirement of PAN card. Instead, the investors (including joint holders) can submit any one of the following Photo Identification documents along with Micro-SIP applications 1. Voter Identity Card 2. Driving License 3. Government / Defence identification card 4. Passport 5. Photo Ration Card 405

8 6. Photo Debit Card (Credit card not included because it may not be backed up by a bank account). 7. Employee ID cards issued by companies registered with Registrar of Companies) 8. Photo Identification issued by Bank Managers of Scheduled Commercial Banks / Gazetted Officer / Elected Representatives to the Legislative Assembly / Parliament ID card issued to employees of Scheduled Commercial / State /District Co-operative Banks. 9. Senior Citizen / Freedom Fighter ID card issued by Government. 10. Cards issued by Universities / deemed Universities or institutes under statutes like ICAI, ICWA, ICSI. 11. Permanent Retirement Account No (PRAN) card issued to New Pension System (NPS) subscribers by CRA (NSDL). 12. Any other photo ID card issued by Central Government / State Governments /Municipal authorities / Government organizations like ESIC / EPFO The documents submitted by the investors should be current and valid. Document copy shall be self attested by the investor. The investors have to give a declaration that he or she does not have any Micro SIPs which together the current application will result in an aggregate exceeding Rs. 50,000 in a year. 6.2Additional document requirements applicable for institutional investors There is an additional documentation requirement for the institutional investors as they are not the natural investors and they invest through the institution. 1. Eligibility for the investing institution to invest. 2. Authorisation for the investing institution to invest. This is typically in the form of Board Resolution 3. Authorisation for the official to sign the documents on behalf of the investing institution. This again is provided for in the Board Resolution. Demat account: Dematerialisation is the process where the investors holding investments in physical form (paper) convert into digital form. The benefit demat accounts for the mutual funds has increased with National stock exchange and Bombay stock exchange has provided a screenbased platform for the purchase and sale of mutual funds 406

9 The demat facility is typically initiated by the mutual fund, which would tie up with a Depository (like National Securities Depository Ltd or Central Ltd Depository Securities). On the basis of this tie up, investors can go to a Depository Participant (which is generally a bank or a broking house) and demat their investment holding i.e. convert their physical units into demat units. In order to avail this facility, the Depository Participant will insist on the investor opening a demat account. Usual KYC documentation will be opening a demat account. On dematerialisation, the investor s unit-holding will be added to his / her demat account. As and when the investor sells the unit holding, the relevant units will be reduced investor s demat account. 6.3Transactions of mutual funds Fresh purchase: The application will be available for the investor in the AMC (Asset Management Company) or they can download it from the concerned AMC. The application with the KIM (key information memorandum) is available for fresh purchase i.e. insistence where the investor does not hold any investment account (technically known as folio ) with specific mutual fund. The mutual fund would require the prescribed documentation and requisite investment amount, to allot the investment folio in the name of the investor. Additional purchase: The investor with an existing folio for an additional purchase in the same mutual fund does not need an application and documentation.they just need to fill up a transaction slip and submitted with requisite amount Most mutual funds send a transaction slip (with the investor s folio number pre-printed) along with the Statement of Account. Alternatively, blank transaction slip (without preprinted folio number), which is available with branches of the AMC, distributors or downloadable from the net, can be used The investor needs to confirm that the investment amount is above the minimum investment limit set by the mutual fund for additional purchase in the scheme. 407

10 Online transaction: The facility is given to the existing investor in mutual fund. The investor has to fill all the details in the application form. Based on this, the registrar will allot a user name and password (Personal Identification Number PIN).This can be used by the investor for the future purchase of units in the mutual fund, or to request re-purchase of the units held in mutual fund. Transaction of mutual funds through stock exchange: Both National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have extended their trading platform to help the Stock exchange brokers become a channel for investors to transact in Mutual Fund Units. NSE s platform is called NEATMFSS. BSE s platform is BSE Star Mutual Funds Platform. Both the platforms are available from 9.a.m to 3.p.m on every working day. Fresh subscription in mutual fund and additional purchases are possible. Similarly redemption is also possible, this can happen through physical form and also through demat account. The transaction slip generated by the broking system, also includes the time stamp. This serves the purpose of an acknowledgment to the investor. 7.0 DATA ANALYSIS AND INFERENCES 7.1Return It is the primary motivating force that drives the investments. It represents the reward for undertaking investment.since the gain of investing is about return (after allowing for risk) measurement of returns is necessary to know how well the investment manager has done. Formula for measurement of Return R = ( R i /n) Where R i - returns R -mean return n- no. of months 7.2 Risk A person making an investment expects to get some return from investment in future. But as future is uncertain, so is the future expected return. It is the uncertainty associated with the 408

11 returns from an investment that introduces risk into an investment. Thus, risk can be defined as the variability of returns. Risk is the potential for the variability in returns. An investment whose returns are fairly stable is considered to be low-risk investment, whereas whose returns fluctuate significantly are considered to be high risk investments. Equity shares whose returns are likely to fluctuate widely are considered to be risky investments. Government securities whose returns are stable are considered to possess low risk. 7.3 Measurement of risk through standard deviation Standard Deviation: It is the square root of squared deviations from the mean divided by number of observations. Different versions of risk are usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. A high standard deviation indicates a high degree of risk. Formula for Standard deviation = ( d 2 /n) Where d- deviation d 2 - square of deviations d - (R i -R ) R i - returns R -mean return n- no. of months 7.4 Types of Axis Bank Mutual Funds Debt-Income Fund (Axis fixed income opportunities scheme) Months Absolute returns (%) Calculation of cumulative risk Months Returns d = (R i -R ) d 2 = (R i -R ) Mean return 3.22 d 2 =14.48 Standard deviation = d 2 /n = 14.48/3 = 4.82 =

12 Inference: From the above fund i.e. axis fixed income opportunities fund, it is clear that the returns (deviations) are increasing from 1 to 6 months.i.e to 2.89 with a cumulative risk of Equity-Mid-Cap (Axis mid-cap fund) Months Absolute returns (%) Calculation of cumulative risk Months Returns d = (R i -R ) d 2 = (R i -R ) Mean return d 2 = Standard deviation = d 2 /n = /3 = 137 = 12 Inference: From the above table, it is clear that the returns (deviations) i.e to are increasing from 1 to 6 months with a cumulative risk of Hybrid-MIPs (Axis Income Saver Fund) Months Absolute returns (%) Calculation of cumulative risk Months Returns d = (R i -R ) d 2 = (R i -R ) Mean return 5 d 2 =45 Standard deviation = d 2 /n = 45/3 = 15 = 4 Inference: From the axis income saver fund, it is clear that returns (deviations) are increasing from 1 to 6 months i.e. - 4 to 5 with a cumulative risk of 4 410

13 Debt income Lt (long term) (Axis income fund) Months Absolute returns (%) Calculation of cumulative risk Months Returns d = (R i -R ) d 2 = (R i -R ) Mean return 5.5 d 2 =39.11 Standard deviation = d 2 /n = 39.11/3 = = 4 Inference: From the above table, it is found that returns are increasing from 1 to 6 months with a cumulative risk of Equity large cap (Axis focused 25 fund) Months Absolute returns (%) Calculation of cumulative risk Months Return d = (R i -R ) d 2 = (R i -R ) Mean return 14 d 2 =155 Standard deviation = d 2 /n = 155/3 = 52 = 7.2 Inference: From the above table, we can see that returns (deviations) are increasing from 1 to 6 months with a cumulative risk of

14 Risk Name of the fund Axis fixed income opportunities fund Axis midcap fund Axis income saver fund Axis income fund Risk Axis focused 25 fund 15 risk 10 5 risk 0 Inference: From the graph it is clear that Axis mid-cap fund is having more risk.i.e.12 followed by Axis focused 25 fund i.e.7.2 whereas the risk for Axis income fund and Axis income saver fund is the same i.e.4 and then Axis fixed income fund is having low risk i.e Risk-Return Ratio Name of the Scheme Risk Return Risk-Return Ratio Axis fixed income opportunities fund Axis mid-cap fund Axis income saver fund Axis income fund Axis 25 focused fund Risk-return ratio = Risk/return Inference: From the above graph we can see that Axis mid-cap fund is having high risk return ratio i.e.0.96 followed by Axis income saver fund, Axis income fund,axis fixed income oppurtunites fund and Axis focused 25 fund is having low risk return ratio.i.e

15 8.0 FINDINGS 1. It has been observed that Axis Fixed Income Opportunities fund has a mean return of 3.22% with a low risk of 2.19 compared to other four funds 2. It has been found that Axis Mid-Cap Fund has a mean return of 12.49% with a risk of 12% 3. It has been found that Axis Income Saver fund has a mean return of 5% with a risk of 4 4. As per Axis Income Fund, it has been found that it has a mean return of 5.5% with a risk of 4 5. It has been observed that Axis focused 25 fund has high return of 14% with a risk of 7.2 compared to other four funds. 9.0 SUGGESTIONS 1. It has been suggested that as per mean return is considered, Axis Focused 25 Fund is having highest return compared to other four funds. So the investor can invest in this fund if he/she wants high returns. 2. It has been suggested that when risk is considered, Axis Fixed Income Opportunities Fund is having low risk compared to other four funds. So the investor can invest in this fund if he/she wants to take less risk. 3. Though all the returns of five funds are increasing, Axis mid-cap fund is increasing more compared to others. So it has been suggested that in all the five funds, Axis Mid-Cap is having a risk return ratio of 0.96 which is given as the first preference by investor to invest in it with relevant to both risk as well as return is considered, then followed by Axis Income Saver Fund, Axis Income Fund, Axis Fixed Income Opportunities Fund, Axis Focused 25 Fund CONCLUDING REMARKS The present study helps in creating awareness among the investor community in choosing the best mutual fund scheme as it calculated risk, return & risk-return ratio of five mutual funds of Axis Bank. Investors vary depending upon their risk bearing ability & can be categorized as high risk bearing, moderate risk bearing & low risk bearing investors. After analyzing the risk and risk return ratio of all the five mutual funds, if an investor opts for low risk, he/ she will invest in Axis fixed income opportunities fund and if an investor will consider return, he/she will invest in Axis focused 25fund. On comparing all the funds we can conclude that Axis Mid-Cap is the best fund to invest in it, as the deviations of this fund is increasing and risk-return ratio is also highest among all other four funds. 413

16 REFERENCES 1. Prasanna Chandra (2002), Investment Analysis and Portfolio Management, Tata McGraw- Hill publishing company Ltd, New Delhi 2. PunithavathyPandian (2001), SecurityAnalysis and PortfolioManagement, Vikas Publishers Pvt Ltd, New Delhi. 3. Rakesh Shahani (2002), Financial Markets and Services, Galgotia Publishing Company, New Delhi. 4. S. Kevin (2006), Security Analysis and Portfolio Management, PH learning PVT Limited, New Delhi. 5. V.K.Bhalla (2014), Investment Management Security Analysis and Portfolio Management, (16 th edition) S.Chand and Company, New Delhi. 6. C.Sunder (October 2014), Quantitative analysis of mutual fund Indian Journal Of Finance Volume-8, Number-10, 7. Shivani Gupta (April 2011), Indian Mutual Fund Industry: Current State And Future Outlook Indian Journal Of Finance Volume-5, Number