2010

INTERNATIONAL SCHOOL OF
BUSINESS & MEDIA.
Abhijit Samanta

[FUND OF FUND &

CORPORATE FIXED DEPOSIT.]
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Q: Compare any Fund of Fund with any corporate fixed deposit.

Objective:

We all want to invest our money to get return on it. Now in market there are various
options of investment that are available. So it is very important to understand in which
scheme or fund we should invest and in which we should not.

In this project we have two options either to invest in a Fund of Fund or to invest in any
corporate / company fixed deposit. Basically here we take an investor’s point of view and
tries to analyze which option is a better one for what kind of investors.

Methodology:

In this project we have taken Kotak Equity Fund of Fund which is a growth fund and Tata
Motors fixed deposit as a company fixed deposit for comparison. The relevant data and
information is collected from various resources. Details about the source of information are
given in the relevant areas.

Information of the Schemes:

Kotak Equity Fund of Fund basic information: -

Objective of the fund:-

To generate long term capital appreciation from a portfolio created by investing

predominantly in open ended diversified equity schemes of MFs registered with SEBI. 1

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www.mutualfundsindia.com

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Fund Features:

Type of Scheme Open Ended

Nature Fund Of Funds
Option Growth
Inception Date Aug 9, 2004
Face Value (Rs/Unit) 10
Fund Size in Rs. Cr. 50.68 as on Feb 28, 2010
Minimum Investment (Rs) 5000
Purchase Redemptions Daily
NAV Calculation Daily
Entry Load Entry Load is 0%.
Exit Load If redeemed bet. 0 Year to 1 Year; Exit
load is 1%.
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Risk and Return:

Scheme Performance (%) as on Mar 5, 2010

1 Month 3 Months 6 Months 1 Year 3 Years 5 Years Since
Inception
5.60 0.84 13.74 10.76 14.40 19.84 24.70

Risk:

Mean -0.45 Treynor -0.70

Standard 4.92 Sortino -0.19
Deviation Correlation 0.78
Sharpe -0.11 Fama 0.05
Beta 0.79
Source: www.mutualfundsindia.com

Information on Tata Motors Fixed Deposit Schemes:

Tata Motors fixed deposit has two schemes for deposit

1. Quarterly Income Plan:

Period Minimum Amount (Rs) Rate of Interest (p.a)

1 year 20,000 10.00 %
2 years 20,000 10.50 %
3 years 20,000 11.00 %

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 2. Cumulative Deposit Plan:

Period Minimum Rate of Maturity Yield (p.a)

Amount (Rs) Interest (p.a) Value (Rs)
1 year 20,000 10.00 % 22,076 10.38 %
2 years 20,000 10.50 % 24,607 11.52 %
3 years 20,000 11.00 % 27,696 12.83 %

Source: http://www.thinkplaninvest.com/2009/03/tata-motors-fixed-depositfd-scheme/

The Analysis:

The comparison of these two schemes can be done by discussing various points. Below the
various relevant points are discussed to compare these two investment options.

1. Risk:
Here Tata Motors fixed deposit is subject to credit risk. i.e. : the risk that the
company could default on paying the principal and interest amount. But Tata Motors
being a very reputed company this risk is low. As investors already have a good
perception about the company and the possibility of bankruptcy is very low.

The Kotak Equity FOF is also subject to risk but the amount of this risk is very low
because being a mutual fund (Fund of Fund) the investment is in various diversified
options however there is another issue. The risk is in the form of variability of return.
Because the NAV is strictly market dominated parameter. So there the return over it
uncertain.

The Standard Deviation is 4.92 which is quite high it shows the variability in the
returns over various periods.

The Sharpe index shows risk premium (return in excess of risk free rate) earned in
excess of risk free rate of return. Here it is -0.11 means it has no premium over risk
free rate till date.

The Treynor Index shows risk premium earned per unit of non diversifiable risk. Here
it is -0.70 which is – ve. Means it has no risk premium over the non diversifiable risk.

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 Fama’s net selectivity represents the return in excess of the return required for its
level of total risk. If the Fama’s measure is positive, the fund has outperformed the
benchmark index. Here it is 0.05 means it has an excess over the required return for
its level of risk.

2. Return:

The return parameter for Tata Motors fixed avail form the above mentioned table. In
the quarterly income plan for last three years the return is about 11.00 % and in the
cumulative deposit plan it is 12.83 % so there is difference of 1.83 %. In both the
schemes the minimum amount of investment is Rs 20,000.

Now the return parameter for the Kotak FOF is different. There the return over the
last three years period is 14.40 % which again is higher that of the fixed deposit
scheme. Here the minimum investment is of Rs 5000.

Now we do a comparison with Rs 20,000 investment in both the options:

Tata Motors:
Principle: 20,000.00
Interest @ 12.83 %: 7,696.00 (for three years)
Total: 27,696.00 (without tax calculation)

Kotak Equity FOF:

Investment: 20,000.00
Interest @ 14.40 %: 8,640.00 (for three years)
Total: 28,640.00 (As it is growth fund dividend payment is 0.00 )

So the difference is = (28,640.00 – 27696.00) = Rs. 944.00

Means investing on FOF is a better option without considering the risk factor.

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The NAV history of Kotak Equity FOF:

Latest NAV 34.22 as on Mar 5, 2010

Benchmark Index - S&P Nifty 5,088.70 as on Mar 5, 2010
52 - Week High 35.51 as on Jan 18, 2010
52 - Week Low 16.36 as on Mar 9, 2009

NAV GRAPH

Over the last month the NAV graph is also showing a good return. However a more
time graph will actually helps us in evaluating the actual picture of NAV.

S&P Nifty
NAV GRAPH
Kotak Equity FOF

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Over last three years the NAV growth of Kotak Eqity FOF is quiet good. Almost 40 % NAV
growth it is showing.

3. Safety:

The safety parameter can be found out by the credit rating of various agencies like
CRISIL and ICRA etc. However sometimes some non financial instates also publish
rating where the reliability is not of that much. It is actually entirely dependent on
the investor itself which he will consider and which not.

4. Liquidity:

This is an area where the FOF scores more than the fixed deposit. It is an open ended
fund the exit load is 1 % if it redeemable within one year of joining the fund. The
fixed deposit charges a penalty rate at the exit if it violets the terms and condition.

5. Tax efficiency:

The dividends form FOF is tax free. But the interest that is earned form FD is
taxable. In this particular investment the principle amount for Tata Motors is more
than Rs 5000. So as per the lax law 10 % tax will be applicable over the interest.

Conclusion:
Here very obviously we can say that investing in the Kotak Equity FOF will give us a good
return of investment. Now again the entire decision is a risk driven decision. Because
Mutual Fund or FOF investment is a subject to market risk. The NAV graph history also
shows that the return is very highly correlated with the nifty index value.

The issue we will consider that here the fixed deposit is not a government fixed deposit. Its a
private one so there is also always a risk of non payment of interest as well the principle.

Now if the investor is not at all a risk taker he can opt for the fixed deposit. But in that case
he should opt for a bank deposit. Now is the person a bit of risk taker then he can opt for

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either one but it is also subject to kind of return he or she is look for. If he wants a very
good capital appreciation then the

FOF is the best option. But there is no guarantee at all that the return will be also same in
the future. It is only expected that it will provide a good return depending on the past
performance of the fund.