analysis of hdfc mutual fund

Analysis Of HDFC Mutual fund

“ANALYSIS OF HDFC MUTUAL FUND”

Masters of Commerce

(Accountancy)

Semester III

Submitted

In partial Fulfillment of the requirements

For the Award of Degree of

Masters of Commerce (Accountancy)

By

JIDNYASA B. BHOIR

__________________________________________________________________

VIVEK COLLEGE OF COMMERCE

VIVEK COLLEGE ROAD, SIDDHARTH NAGAR

GOREGAON – (W), MUMBAI-400 062.

Vivek College Of Commerce


VIVEK COLLEGE OF COMMERCE

VIVEK COLLEGE ROAD, SIDDHARTH NAGAR

GOREGAON – (W), MUMBAI-400 062.

CERTIFICATE

This is to certify that JIDNYASA B. BHOIR of

M.com-II Accountancy Semester III (2013-2014) have

Successfully completed the project on


Under the

Guidance of Prof: Bharat Pathadia

_________ __________

Internal Guide External Guide

_________ __________

Coordinator Principal



DECLARATION

I JIDNYASA B. BHOIR the student of M. Com.-II

Accountancy Semester III (2013-2014) hereby

Declare that I have completed the projects on


The information submitted is true and original to

the best of my Knowledge.

________________

JIDNYASA B. BHOIR Date:



Acknowledgement

To list who all have helped me in difficult because they are so numerous and the

department is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh

dimension in completion of this project.

I take this opportunity to thank the UNIVERSITY OF MUMBAI for giving me a

chance to do this project.

I would like to thank my principal Smt. Nandita Roy for providing the necessary

facilities for the completion of this project.

I take this opportunity to thank our coordinator as well as my project guide

Prof.Bharat Pathadia for his moral support and guidance.

I would like to thank my college library for having provided various reference

books and magazines related to my project.

Lastly I would like to thank each and every person who directly or indirectly

helped me with the completion of the project especially my parents and peers who

supported me throughout the project.

JIDNYASA BHOIR



INDEX

Sr. No. CHAPTER Page No.

1 Introduction 6

2 Analysis – II 24

3 Analysis – III 31

4 Summery, Conclusion and

Recommendation

36



CHAPTER 1

Introduction

Vision Statement:

“To be a dominant player in the Indian mutual fund space, recognized for its high level of

ethical and professional conduct and a commitment towards enhancing investor interests.”

HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act,

1956, on December 10, 1999, and was approved to act as an Asset Management Company for

the HDFC Mutual Fund by SEBI vide its letter dated July 3, 2000.

The registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg, 169,

Back bay Reclamation, Churchgate, Mumbai - 400 020.

In terms of the Investment Management Agreement, the Trustee has appointed the HDFC Asset

Management Company Limited to manage the Mutual Fund. The paid up capital of the AMC is

Rs. 25.161 crore.

Zurich Insurance Company (ZIC), the Sponsor of Zurich India Mutual Fund, following a review

of its overall strategy, had decided to divest its Asset Management business in India. The AMC

had entered into an agreement with ZIC to acquire the said business, subject to necessary

regulatory approvals.



Following the decision by Zurich Insurance Company (ZIC), the sponsor of Zurich India Mutual

Fund, to divest its Asset Management Business in India, HDFC AMC acquired the schemes of

Zurich India Mutual Fund effective from June 19, 2003.

HDFC AMC has a strong parentage – CO Sponsored by Housing Development Finance

Corporation Limited (HDFC Ltd.) and Standard Life Investment Limited, the investment arm of

The Standard Life Group, UK.

The present equity shareholding pattern of the AMC is as follows:

Housing Development Finance Corporation Limited was incorporated in 1977 as the first

specialized Mortgage Company in India, its activities include housing finance, and

property related services (property identification, valuation etc.), training and

consultancy. HDFC Ltd. contributes the 60% of the paid up equity capital of the AMC.

Standard Life Insurance Limited is a leading Asset management company with

approximately US$ 282 billion of asset under management as on June 30, 2007. The

company operates in UK, Canada, Hong Kong, China, Korea, Ireland and USA to ensure

it is able to form a truly global investment view. SLI Ltd. contributes the 40% of the paid

up equity capital of the AMC.

The AMC is managing 24 open-ended schemes of the Mutual Fund viz. HDFC Growth Fund

(HGF), HDFC Balanced Fund (HBF), HDFC Income Fund (HIF), HDFC Liquid Fund (HLF),

HDFC Long Term Advantage Fund (HLTAF), HDFC Children's Gift Fund (HDFC CGF),

HDFC Gilt Fund (HGILT), HDFC Short Term Plan (HSTP), HDFC Index Fund, HDFC Floating

Rate Income Fund (HFRIF), HDFC Equity Fund (HEF), HDFC Top 200 Fund (HT200), HDFC

Capital Builder Fund (HCBF), HDFC Tax Saver (HTS), HDFC Prudence Fund (HPF), HDFC

High Interest Fund (HHIF), HDFC Cash Management Fund (HCMF), HDFC MF Monthly

Income Plan (HMIP), HDFC Core & Satellite Fund (HCSF), HDFC Multiple Yield Fund

(HMYF), HDFC Premier Multi-Cap Fund (HPMCF), HDFC Multiple Yield Fund . Plan 2005

(HMYF-Plan 2005), HDFC Quarterly Interval Fund (HQIF) and HDFC Arbitrage Fund

(HAF).The AMC is also managing 11 closed ended Schemes of the HDFC Mutual Fund viz.

HDFC Long Term Equity Fund, HDFC Mid-Cap Opportunities Fund, HDFC Infrastructure



Fund, HDFC Fixed Maturity Plans, HDFC Fixed Maturity Plans - Series II, HDFC Fixed

Maturity Plans - Series III, HDFC Fixed Maturity Plans - Series IV, HDFC Fixed Maturity Plans

- Series V, HDFC Fixed Maturity Plans - Series VI, HFDC Fixed Maturity Plans - Series VII and

HFDC Fixed Maturity Plans - Series VIII.

The AMC is also providing portfolio management / advisory services and such activities are not

in conflict with the activities of the Mutual Fund. The AMC has renewed its registration from

SEBI vide Registration No. - PM / INP000000506 dated December 8, 2006 to act as a Portfolio

Manager under the SEBI (Portfolio Managers) Regulations, 1993.

1. Industry Profile

I. Introduction

The Indian mutual fund industry has witnessed significant growth in the past few years driven by

several favourable economic and demographic factors such as rising income levels, and the

increasing reach of Asset Management Companies and distributors. However, after several years

of relentless growth ,the industry witnessed a fall of 8% in the assets under management in the

financial year 2008-2009 that has impacted revenues and profitability. Whereas in 2009-10 the

industry is on the road of recovery.

II. History of Mutual Funds

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.

First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the

Reserve Bank of India and functioned under the Regulatory and administrative control of the

Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development

Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The



first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700

Crores of assets under management.

Second Phase – 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and

Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).

SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by

Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank

Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC

established its mutual fund in June 1989 while GIC had set up its mutual fund in December

1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 Crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund

industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in

which the first Mutual Fund Regulations came into being, under which all mutual funds, except

UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with

Franklin Templeton) was the first private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and

revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual

Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds setting

up funds in India and also the industry has witnessed several mergers and acquisitions. As at the

end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 Crores. The

Unit Trust of India with Rs.44, 541 Crores of assets under management was way ahead of other

mutual funds



Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated

into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets

under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the

assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of

Unit Trust of India, functioning under an administrator and under the rules framed by

Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered

with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the

erstwhile UTI which had in March 2000 more than Rs.76,000 Crores of assets under

management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual

Fund.

Assets of the mutual fund industry touched an all-time high of Rs639,000 crore (approximately

$136 billion) in May, aided by the spike in the stock market by over 50 per cent in the last one

month and fresh inflows in liquid funds, data released by the Association of Mutual Funds in

India (AMFI) shows yesterday.

The country's burgeoning mutual fund industry is expected to see its assets growing by 29%

annually in the next five years. The total assets under management in the Indian mutual funds

industry are estimated to grow at a compounded annual growth rate (CAGR) of 29 per cent in

the next five years," the report by global consultancy Celent said. However, the profitability of

the industry is expected to remain at its present level mainly due to increasing cost incurred to

develop distribution channels and falling margins due to greater competition among fund houses,

it said.

III. Regulatory Framework

Securities and Exchange Board of India (SEBI)



The Government of India constituted Securities and Exchange Board of India, by an Act of

Parliament in 1992, the apex regulator of all entities that either raise funds in the capital markets

or invest in capital market securities such as shares and debentures listed on stock exchanges.

Mutual funds have emerged as an important institutional investor in capital market securities.

Hence they come under the purview of SEBI. SEBI requires all mutual funds to be registered

with them. It issues guidelines for all mutual fund operations including where they can invest,

what investment limits and restrictions must be complied with, how they should account for

income and expenses, how they should make disclosures of information to the investors and

generally act in the interest of investor protection. To protect the interest of the investors, SEBI

formulates policies and regulates the mutual funds. MF either promoted by public or by private

sector entities including one promoted by foreign entities are governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the funds by making investments

in various types of securities. Custodian, registered with SEBI, holds the securities of various

schemes of the fund in its custody. According to SEBI Regulations, two thirds of the directors of

Trustee Company or board of trustees must be independent.

Association of Mutual Funds in India (AMFI)

With the increase in mutual fund players in India, a need for mutual fund association in

India was generated to function as a non-profit organisation. Association of Mutual Funds in

India (AMFI) was incorporated on 22nd August, 1995.

AMFI is an apex body of all Asset Management Companies (AMC) which has been

registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its

member. It functions under the supervision and guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the Indian Mutual Fund Industry

to a professional and healthy market with ethical line enhancing and maintaining standards. It

follows the principle of both protecting and promoting the interests of mutual funds as well as

their unit holders.

The objectives of Association of Mutual Funds in India


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The Association of Mutual Funds of India works with 30 registered AMCs of the country.

It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The

objectives are as follows:

This mutual fund association of India maintains high professional and ethical standards

in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conduct

which is followed by members and related people engaged in the activities of mutual

fund and asset management. The agencies who are by any means connected or involved

in the field of capital markets and financial services also involved in this code of conduct

of the association.

AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund

industry.

Association of Mutual Fund of India do represent the Government of India, the Reserve

Bank of India and other related bodies on matters relating to the Mutual Fund Industry.

It develops a team of well qualified and trained Agent distributors. It implements a

program of training and certification for all intermediaries and other engaged in the

mutual fund industry.

AMFI undertakes all India awareness program for investors in order to promote proper

understanding of the concept and working of mutual funds.

At last but not the least association of mutual fund of India also disseminate information

on Mutual Fund Industry and undertakes studies and research either directly or in

association with other bodies.

IV. Concept of Mutual Fund

A Mutual Fund is a trust that pools the savings of a number of investors who share a common

financial goal. The money thus collected is then invested in capital market instruments such as

shares, debentures and other securities. The income earned through these investments and the

capital appreciations realized are shared by its unit holders in proportion to the number of units

owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it


http://finance.indiamart.com/india_business_information/amfi.html


offers an opportunity to invest in a diversified, professionally managed basket of securities at a

relatively low cost. The flow chart below describes the working of a mutual fund:

Mutual fund operation flow chart

Mutual funds are considered as one of the best available investments as compare to others. They

are very cost efficient and also easy to invest in, thus by pooling money together in a mutual

fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to

do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing

risk & maximizing returns.

Organization of a Mutual Fund

There are many entities involved and the diagram below illustrates the organizational set up of a

mutual fund



V. Types of Mutual Fund schemes in INDIA

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk

tolerance and return expectations.

Overview of existing schemes existed in mutual fund category: BY STRUCTURE

Open - Ended Schemes: An open-end fund is one that is available for subscription all through the

year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net

Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.



Close - Ended Schemes: A closed-end fund has a stipulated maturity period which generally

ranging from 3 to 15 years. The fund is open for subscription only during a specified period.

Investors can invest in the scheme at the time of the initial public issue and thereafter they can

buy or sell the units of the scheme on the stock exchanges where they are listed. In order to

provide an exit route to the investors, some close-ended funds give an option of selling back the

units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations

stipulate that at least one of the two exit routes is provided to the investor.

Interval Schemes: Interval Schemes are that scheme, which combines the features of open-ended

and close-ended schemes. The units may be traded on the stock exchange or may be open for

sale or redemption during pre-determined intervals at NAV related prices.

Overview of existing schemes existed in mutual fund category: BY NATURE

Equity fund: These funds invest a maximum part of their corpus into equities holdings. The

structure of the fund may vary different for different schemes and the fund manager’s outlook on

different stocks. The Equity Funds are sub-classified depending upon their investment objective,

as follows:

-Diversified Equity Funds

-Mid-Cap Funds

-Sector Specific Funds

-Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-

return matrix.

Debt funds: The objective of these Funds is to invest in debt papers. Government authorities,

private companies, banks and financial institutions are some of the major issuers of debt papers.



By investing in debt instruments, these funds ensure low risk and provide stable income to the

investors.

Gilt Funds : Invest their corpus in securities issued by Government, popularly known as

Government of India debt papers. These Funds carry zero Default risk but are associated with

Interest Rate risk. These schemes are safer as they invest in papers backed by Government.

Income Funds : Invest a major portion into various debt instruments such as bonds, corporate

debentures and Government securities.

Monthly income plans ( 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. These

scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds

primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers

(CPs). Some portion of the corpus is also invested in corporate debentures.

Liquid Funds : Also known as Money Market Schemes, These funds provides easy liquidity and

preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-

bank call money market, CPs and CDs. These funds are meant for short-term cash management

of corporate houses and are meant for an investment horizon of 1day to 3 months. These

schemes rank low on risk-return matrix and are considered to be the safest amongst all categories

of mutual funds.

Balanced funds : They invest in both equities and fixed income securities, which are in line with

pre-defined investment objective of the scheme. These schemes aim to provide investors with the

best of both the worlds. Equity part provides growth and the debt part provides stability in

returns.

Further the mutual funds can be broadly classified on the basis of investment parameter. It means

each category of funds is backed by an investment philosophy, which is pre-defined in the



objectives of the fund. The investor can align his own investment needs with the funds objective

and can invest accordingly

By investment objective:

Growth Schemes : Growth Schemes are also known as equity schemes. The aim of these schemes

is to provide capital appreciation over medium to long term. These schemes normally invest a

major part of their fund in equities and are willing to bear short-term decline in value for

possible future appreciation.

Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is

to provide regular and steady income to investors. These schemes generally invest in fixed

income securities such as bonds and corporate debentures. Capital appreciation in such schemes

may be limited.

Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically

distributing a part of the income and capital gains they earn. These schemes invest in both shares

and fixed income securities, in the proportion indicated in their offer documents.

Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of

capital and moderate income. These schemes generally invest in safer, short-term instruments,

such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

Other schemes

Tax Saving Schemes :

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to

time. Under Sec.80C of the Income Tax Act, contributions made to any Equity Linked Savings

Scheme (ELSS) are eligible for rebate.

Index Schemes :



Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex

or the Nifty 50. The portfolio of these schemes will consist of only those stocks that constitute

the index. The percentage of each stock to the total holding will be identical to the stocks index

weightage. And hence, the returns from such schemes would be more or less equivalent to those

of the Index.

Sector Specific Schemes:

These are the funds/schemes which invest in the securities of only those sectors or industries as

specified in the offer documents. Ex- Pharmaceuticals, Software, Fast Moving Consumer Goods

(FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of

the respective sectors/industries. While these funds may give higher returns, they are more risky

compared to diversified funds. Investors need to keep a watch on the performance of those

sectors/industries and must exit at an appropriate time.

VI. Advantages of Mutual Funds

Diversification – It can help an investor diversify their portfolio with a minimum investment.

Spreading investments across a range of securities can help to reduce risk. A stock mutual fund,

for example, invests in many stocks .This minimizes the risk attributed to a concentrated

position. If a few securities in the mutual fund lose value or become worthless, the loss may be

offset by other securities that appreciate in value. Further diversification can be achieved by

investing in multiple funds which invest in different sectors.

Professional Management- Mutual funds are managed and supervised by investment

professional. These managers decide what securities the fund will buy and sell. This eliminates

the investor of the difficult task of trying to time the market.

Well regulated- Mutual funds are subject to many government regulations that protect investors

from fraud.

Liquidity- It's easy to get money out of a mutual fund.


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Convenience- we can buy mutual fund shares by mail, phone, or over the Internet.

Low cost- Mutual fund expenses are often no more than 1.5 percent of our investment. Expenses

for Index Funds are less than that, because index funds are not actively managed. Instead, they

automatically buy stock in companies that are listed on a specific index

Transparency- The mutual fund offer document provides all the information about the fund and

the scheme. This document is also called as the prospectus or the fund offer document, and is

very detailed and contains most of the relevant information that an investor would need.

Choice of schemes – there are different schemes which an investor can choose from according to

his investment goals and risk appetite.

Tax benefits – An investor can get a tax benefit in schemes like ELSS (equity linked saving

scheme)

VII. Terms used in Mutual Fund

Asset Management Company (AMC)

An AMC is the legal entity formed by the sponsor to run a mutual fund. The AMC is usually a

private limited company in which the sponsors and their associates or joint venture partners are

the shareholders. The trustees sign an investment agreement with the AMC, which spells out the

functions of the AMC. It is the AMC that employs fund managers and analysts, and other

personnel. It is the AMC that handles all operational matters of a mutual fund – from launching

schemes to managing them to interacting with investors.

Fund Offer document

The mutual fund is required to file with SEBI a detailed information memorandum, in a

prescribed format that provides all the information about the fund and the scheme. This

document is also called as the prospectus or the fund offer document, and is very detailed and

contains most of the relevant information that an investor would need

Trust






The Mutual Fund is constituted as a Trust in accordance with the provisions of the Indian Trusts

Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.

The Trust appoints the Trustees who are responsible to the investors of the fund.

Trustees

Trustees are like internal regulators in a mutual fund, and their job is to protect the interests of

the unit holders. Trustees are appointed by the sponsors, and can be either individuals or

corporate bodies. In order to ensure they are impartial and fair, SEBI rules mandate that at least

two-thirds of the trustees be independent, i.e., not have any association with the sponsor.

Trustees appoint the AMC, which subsequently, seeks their approval for the work it does, and

reports periodically to them on how the business being run.

Custodian

A custodian handles the investment back office of a mutual fund. Its responsibilities include

receipt and delivery of securities, collection of income, distribution of dividends and segregation

of assets between the schemes. It also track corporate actions like bonus issues, right offers, offer

for sale, buy back and open offers for acquisition. The sponsor of a mutual fund cannot act as a

custodian to the fund. This condition, formulated in the interest of investors, ensures that the

assets of a mutual fund are not in the hands of its sponsor. For example, Deutsche Bank is a

custodian, but it cannot service Deutsche Mutual Fund, its mutual fund arm.

NAV

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit

NAV is the net asset value of the scheme divided by the number of units outstanding on the

Valuation Date.The NAV is usually calculated on a daily basis. In terms of corporate valuations,

the book values of assets less liability.

The NAV is usually below the market price because the current value of the fund’s assets is

higher than the historical financial statements used in the NAV calculation.

Market Value of the Assets in the Scheme + Receivables + Accrued Income

- Liabilities - Accrued Expenses

NAV = ------------------------------------------------------------------------------------------------

No. of units outstanding



Where,

Receivables: Whatever the Profit is earned out of sold stocks by the Mutual fund is called

Receivables.

Accrued Income: Income received from the investment made by the Mutual Fund.

Liabilities: Whatever they have to pay to other companies are called liabilities.

Accrued Expenses: Day to day expenses such as postal expenses, Printing, Advertisement

Expenses etc.

Calculation of NAV

Scheme ABN

Scheme Size Rs. 5, 00, 00,000 (Five Crores)

Face Value of Units Rs.10/-

Scheme Size 5, 00, 00,000

--------------------------- = ------------------- = 50, 00,000

Face value of units 10

The fund will offer 50, 00,000 units to Public.

Investments: Equity shares of Various Companies.

Market Value of Shares is Rs.10, 00, 00,000 (Ten Crores)

Rs. 10, 00, 00,000

NAV = -------------------------- = Rs.20/-

50, 00,000 units

Thus each unit of Rs. 10/- is Worth Rs.20/-

It states that the value of the money has appreciated since it is more than the face value.

Sale price



Is the price we pay when we invest in a scheme. Also called Offer Price. It may include a sales

load.

Repurchase price

Is the price at which units under open-ended schemes are repurchased by the Mutual Fund. Such

prices are NAV related

Redemption Price

Is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV

related

Sales load

Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes

that do not charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’ Load

Is a charge collected by a scheme when it buys back the units from the unit holders

CAGR (compounded annual growth rate)

The year-over-year growth rate of an investment over a specified period of time. The compound

annual growth rate is calculated by taking the nth root of the total percentage growth rate, where

n is the number of years in the period being considered.



You make money from your mutual fund investment when:

The fund earns income on its investments, and distributes it to you in the form of

dividends.

The fund produces capital gains by selling securities at a profit, and distributes those

gains to you.

You sell your shares of the fund at a higher price than you paid for them

VIII. Risk

Every type of investment, including mutual funds, involves risk. Risk refers to the possibility

that you will lose money (both principal and any earnings) or fail to make money on an

investment. A fund's investment objective and its holdings are influential factors in determining

how risky a fund is. Reading the prospectus will help you to understand the risk associated with

that particular fund.

Generally speaking, risk and potential return are related. This is the risk/return trade-off. Higher

risks are usually taken with the expectation of higher returns at the cost of increased volatility.

While a fund with higher risk has the potential for higher return, it also has the greater potential

for losses or negative returns. The school of thought when investing in mutual funds suggests

that the longer your investment time horizon is the less affected you should be by short-term

volatility. Therefore, the shorter your investment time horizon, the more concerned you should

be with short-term volatility and higher risk.



CHAPTER 2

ANALYSIS I

Defining Mutual fund risk

Different mutual fund categories as previously defined have inherently different risk

characteristics and should not be compared side by side. A bond fund with below-average risk,

for example, should not be compared to a stock fund with below average risk. Even though both

funds have low risk for their respective categories, stock funds overall have a higher risk/return

potential than bond funds.



Of all the asset classes, cash investments (i.e. money markets) offer the greatest price stability

but have yielded the lowest long-term returns. Bonds typically experience more short-term price

swings, and in turn have generated higher long-term returns. However, stocks historically have

been subject to the greatest short-term price fluctuations—and have provided the highest long-

term returns. Investors looking for a fund which incorporates all asset classes may consider a

balanced or hybrid mutual fund. These funds can be very conservative or very aggressive. Asset

allocation portfolios are mutual funds that invest in other mutual funds with different asset

classes. At the discretion of the manager(s), securities are bought, sold, and shifted between

funds with different asset classes according to market conditions.

Mutual funds face risks based on the investments they hold. For example, a bond fund faces

interest rate risk and income risk. Bond values are inversely related to interest rates. If interest

rates go up, bond values will go down and vice versa. Bond income is also affected by the

change in interest rates. Bond yields are directly related to interest rates falling as interest rates

fall and rising as interest rise. Income risk is greater for a short-term bond fund than for a long-

term bond fund.

Following is a glossary of some risks to consider when investing in mutual funds.

Call Risk. The possibility that falling interest rates will cause a bond issuer to redeem—

or call—its high-yielding bond before the bond's maturity date

Country Risk. The possibility that political events (a war, national elections), financial

problems (rising inflation, government default), or natural disasters (an earthquake, a

poor harvest) will weaken a country's economy and cause investments in that country to

decline.

Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in

a timely manner. Also called default risk.

Currency Risk. The possibility that returns could be reduced for Americans investing in

foreign securities because of a rise in the value of the U.S. dollar against foreign

currencies. Also called exchange-rate risk.



Income Risk. The possibility that a fixed-income fund's dividends will decline as a result

of falling overall interest rates.

Industry Risk. The possibility that a group of stocks in a single industry will decline in

price due to developments in that industry.

1. Basis Of Comparison Of Various Schemes Of Mutual Funds

Beta

Beta measures the sensitivity of the stock to the market. For example if beta=1.5; it means the

stock price will change by 1.5% for every 1% change in Sensex. It is also used to measure the

systematic risk. Systematic risk means risks which are external to the organization like

competition, government policies. They are non-diversifiable risks.

Beta is calculated using regression analysis, Beta can also be defined as the tendency of a

security's returns to respond to swings in the market. A beta of 1 indicates that the security's

price will move with the market. A beta less than 1 means that the security will be less volatile

than the market. A beta greater than 1 indicates that the security's price will be more volatile than

the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the

market.

Beta>11thenxaggressivexstocks

If1beta<1xthen1defensive1stocks

If beta=1 then neutral

So, it’s a measure of the volatility, or systematic risk, of a security or a portfolio in comparison

to the market as a whole.

Many utilities stocks have a beta of less than 1. Conversely, most hi-tech NASDAQ-based stocks

have a beta greater than 1, offering the possibility of a higher rate of return but also posing more

risk.

Alpha

Alpha takes the volatility in price of a mutual fund and compares its risk adjusted performance to

a benchmark index. The excess return of the fund relative to the returns of benchmark index is a

fundamental ALPHA. It is calculated as a return which is earned in excess of the return

generated by CAPM. 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 underperformanceof 1%. .

If a CAPM analysis estimates that a portfolio should earn 35% return based on the risk of the

portfolio but the portfolio actually earns 40%, the portfolio's alpha would be 5%. This 5% is the

excess return over what was predicted in the CAPM model. This 5% is ALPHA.

Sharpe Ratio

A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted performance. It is

calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the

result by the standard deviation of the portfolio returns.

The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment

decisions or a result of excess risk. This measurement is very useful because although one

portfolio or fund can reap higher returns than its peers, it is only a good investment if those

higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio,

the better its risk-adjusted performance has been.

Treynor Ratio

The treynor ratio, named after Jack Treynor, is similar to the Sharpe ratio, except that the risk

measure used is Beta instead of standard deviation. This ratio thus measures reward to volatility.

Treynor Ratio = (Return from the investment – Risk free return) / Beta of the

investment.

The scheme with the higher treynor Ratio offers a better risk-reward equation for the investor.

Since Treynor Ratio uses Beta as a risk measure, it evaluates excess returns only with respect to

systematic (or market) risk. It will therefore be more appropriate for diversified schemes, where

the non-systematic risks have been eliminated. Generally, large institutional investors have the

requisite funds to maintain such highly diversified portfolios.

Also since Beta is based on capital asset pricing model, which is empirically tested for equity,

Treynor Ratio would be inappropriate for debt schemes.



M- SQUARED

Modigliani and Modigliani recognized that average investors did not find the Sharpe ratio

intuitive and addressed this shortcoming by multiplying the Sharpe ratio by the standard

deviation of the excess returns on a broad market index, such as the S&P 500 or the Wilshire

5000, for the same time period. This yields the risk-adjusted excess return. This, too, is a

significant and useful statistic, as it measures the return in excess of the risk-free rate, which is

the basis from which all risky investments should be measured.

M–Squared= [ (Ri – Rf)/ Sd. Inv] * Sd. Mkt + Rf

OR

M–Squared= Sharpe Ratio* Sd. Mkt + Rf

Ri = Return from the investment

Rf = Risk free return

Sd. Inv= Standard Deviation Investment

Sd. Mkt= Standard Deviation Market

Leverage Factor:

It reports the comparison of the total risk in the fund with the total risk in the market portfolio

and can be used in making investment decisions. It is calculated by dividing market standard

deviation by the fund standard deviation.

Li = Standard deviation of the market

Standard deviation of the fund

for example a leverage factor greater than one implies that standard deviation of the fund is less

than standard deviation of the market index, and that the investor should consider levering the

fund by borrowing money and invest in that particular fund. while this would tend to increase the

risk of investment somewhat ,there would be an greater than proportional increase in returns. On

the other hand leverage factor less than one implies that the risk of fund is greater than risk of

market index and the investor should consider unlevering the fund by selling of the part of the



holding in the fund and investing the proceeds I a risk free security, such as treasury bill in this

way returns on the investment reduce somewhat, there would be an greater than proportional

reduction in risk.

Standard Deviation:

A measure of the dispersion of a set of data from its mean. The more spread apart the data is, the

higher the deviation. Standard deviation is applied to the annual rate of return of an investment

to measure the investment's volatility (risk).

A volatile stock would have a high standard deviation. The standard deviation tells us how much

the return on the fund is deviating from the expected normal returns.

Standard deviation can also be calculated as the square root of the variance.

2. How To Pick The Right Mutual Fund

Identifying Goals and Risk Tolerance

Before acquiring shares in any fund, an investor must first identify his or her goals and desires

for the money being invested. Are long-term capital gains desired, or is a current income

preferred? Will the money be used to pay for college expenses, or to supplement a retirement

that is decades away. One should consider the issue of risk tolerance. Is the investor able to

afford and mentally accept dramatic swings in portfolio value? Or, is a more conservative

investment warranted? Identifying risk tolerance is as important as identifying a goal. Finally,

the time horizon must be addressed. Investors must think about how long they can afford to tie

up their money, or if they anticipate any liquidity concerns in the near future. Ideally, mutual

fund holders should have an investment horizon with at least five years or more.

Style and Fund Type

If the investor intends to use the money in the fund for a longer term need and is willing to

assume a fair amount of risk and volatility, then the style/objective he or she may be suited for is

a fund. These types of funds typically hold a high percentage of their assets in common stocks,

and are therefore considered to be volatile in nature. Conversely, if the investor is in need of

current income, he or she should acquire shares in an income fund. Government and corporate

debt are the two of the more common holdings in an income fund. There are times when an


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investor has a longer term need, but is unwilling or unable to assume substantial risk. In this

case, a balanced fund, which invests in both stocks and bonds, may be the best alternative.

Charges and Fees

Mutual funds make their money by charging fees to the investor. It is important to gain an

understanding of the different types of fees that you may face when purchasing an investment.

Some funds charge a sales fee known as a load fee, which will either be charged upon initial

investment or upon sale of the investment. A front-end load/fee is paid out of the initial

investment made by the investor while a back-end load/fee is charged when an investor sells his

or her investment, usually prior to a set time period. To avoid these sales fees, look for no-load

funds , which don't charge a front- or back-end load/fee. However, one should be aware of the

other fees in a no-load fund, such as the management expense ratio and other administration

fees, as they may be very high.

The investor should look for the management expense ratio. The ratio is simply the total

percentage of fund assets that are being charged to cover fund expenses. The higher the ratio, the

lower the investor's return will be at the end of the year.

Evaluating Managers/Past Results

Investors should research a fund's past results. The following is a list of questions that

perspective investors should ask themselves when reviewing the historical record:

Did the fund manager deliver results that were consistent with general market returns?

Was the fund more volatile than the big indexes (it means did its returns vary

dramatically throughout the year)?

This information is important because it will give the investor insight into how the portfolio

manager performs under certain conditions, as well as what historically has been the trend in

terms of turnover and return. Prior to buying into a fund, one must review the investment

company's literature to look for information about anticipated trends in the market in the years

ahead.

Size of the Fund


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Although, the size of a fund does not hinder its ability to meet its investment objectives.

However, there are times when a fund can get too big. For example - Fidelity's Magellan Fund.

Back in 1999 the fund topped $100 billion in assets, and for the first time, it was forced to

change its investment process to accommodate the large daily (money) inflows. Instead of being

nimble and buying small and mid cap stocks, it shifted its focus primarily toward larger

capitalization growth stocks. As a result, its performance has suffered.

Fund Transactional Activity

Portfolio Turnover

Measure of how frequently assets within a fund are bought and sold by the managers. Portfolio

turnover is calculated by taking either the total amount of new securities purchased or the

amount of securities sold -whichever is less - over a particular period, divided by the total net

asset value (NAV) of the fund. The measurement is usually reported for a 12-month time period

Fund Performance Metrics

Historical Performance

The investor should see the past returns of the fund and should compare it with the peer group

fund.

Whatever the objective, the mutual fund is an excellent medium to accumulate financial assets

and grow them over time to achieve any of these goals.

CHAPTER 3

Analysis II

RESERCH METHODOLOGY

1. Problem Statement


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Aim of the project is to analyze the performance flagship equity diversified schemes of six fund

houses by calculating different performance measures for the data of past three years. Through

this we aim to evaluate the performance in terms of risk and the returns of the schemes.

2. Research Objective

1. To compare the performance of various 5 star rated equity diversified mutual fund

schemes over a period of three years.

2. To compare the schemes with the returns of benchmark for the past three years.

3. To identify the level of risk involved in investing in various equity diversified mutual

fund schemes.

3. Data Sources

Primary data

Most of the data about the schemes of HDFC has been provided by the HDFC Asset

Management Company. My industry mentor helped me obtain monthly portfolios and returns

data of schemes which were available to him and also helped me acquire data from company’s

intranet.

Secondary data

Data collection: Secondary data is collected from various published journals, company fact

sheets, books and from Internet.

4. Data analysis

The data that has been collected for this study has been analyzed by widely used performance

parameters as:

Turnover Ratio

Sharpe Ratio



Jensen’s Alpha

M Squared

Leverage Factor

Other analysis are done by using graphs, calculations, tables etc.

5.Scope

This study calculates different measures to compare equity diversified schemes of different fund

houses . For this study past three years data of the schemes and their benchmarks have been

taken into consideration. It helps us see how the funds stand in comparison with each other.

6. Limitations

1. Time constraints: Due to shortage or less availability of time it may be possible that all the

related and concerned aspects may not be covered in the project.

2. Only past three year data has been taken in this project which might not give complete scheme

performance.

3. Analysis done is limited to the availability of data.

7. Findings And Analysis

Here six funds of different companies are taken which are rated 5 star by Value Research

Ratings. Value research Funds ratings are a composite measure of historical risk adjusted

returns. In the case of equity and hybrid funds this rating is based on the weighted average

monthly returns for the last 3 and 5 – year period. In the case of debt fund this rating is based on

the weighted average weekly returns for the last 18 months and 3 years period and in case of



short term debt funds –weekly returns for the last 18 months. Each category must have a

minimum of 10 funds to be rated. Effective since July 2008,additional qualifying criteria,

whereby a fund with less than Rs. 5 crore of average AUM in the past six months will not be

eligible for rating.

Five star indicate that a fund is in the 10% of its category in terms of historical risk adjusted

returns Four star indicate that fund is in the next 22.5% ,middle 35% receive 3 star, the next

22.5%are assigned 2 star bottom 10% receive 1 star.

For our study here six schemes have been selected:

HDFC EQUITY FUND

ICICI PRUDENTIAL DISCOVERY FUND

UTI OPPUTTUNITIES FUND

IDFC PREMIER EQUITY PLAN A

RELIANCE RSF FUND

SUNDARAN BNP PARIBAS S.M.I.L.E REG-

SCHEME PROFILE:

HDFC EQUITY FUND

AMC HDFC Asset Management Company Ltd.

Fund Category Equity diversified

Scheme Plan Growth

Scheme Type Open Ended

Launch Date January 01, 1995



Fund Manager Mr. Prashant Jain

Benchmark S&P CNX 500

Assets (RS crore) 6355.7

ICICI PRUDENTIAL DISCOVERY FUND

AMC ICICI Prudential Asset Management Co. Ltd.


Scheme Plan Growth


Launch Date August 16,2004

Benchmark S&P CNX Nifty

Fund Manager Mr. Sankaren Naren


UTI OPPORTUNITIES FUND

AMC UTI Asset Management Co. Ltd.


Scheme Plan Growth


Launch Date July 16,2005

Benchmark BSE 100

Fund Manager Mr. Harsh Upadhyaya


IDFC PREMIER EQUITY PLAN A

AMC IDFC Asset Management Company Ltd.


Scheme Plan Growth


Launch Date September 28, 2005

Benchmark BSE 500



Fund Manager Mr. Kenneth Andrade


RELIANCE RSF FUND

AMC RELAINCE Asset Management Co. Ltd.


Scheme Plan Growth


Launch Date June 8,2005

Benchmark BSE 100

Fund Manager Mr. Arpit Malaviya


SUNDARAM BNP PARIBAS S.M.I.L.E REG-G

AMC ICICI Prudential Asset Management Co. Ltd.


Scheme Plan Growth


Launch Date February 15,2005

Benchmark CNX midcap

Fund Manager Mr. S Krishna Kumar


CHAPTER 4

Summery, Conclusion and Recommendation

Summary: -



The topic of this project is Mutual Fund Comparison and Analysis. The mutual fund industry in

India has seen dramatic improvements in quantity as well as quality of product and service

offerings in recent years and hence here focus is on comparing schemes of different mutual fund

companies on different performance parameters. Along with this project also touches on the

aspect of Systematic Investment Plan and Rebalancing.

Project analysis past three years data of different mutual fund schemes. Different measures like

beta, Sharpe, Treynor, Jensen etc. have been taken to analyses the performance.

An effort has been made to work on the concepts that have been taught in class along with other

useful parameters so that better study can be done.

Conclusion: -

In this study the performance of various mutual fund schemes in the equity diversified segment

was considered. Analysis was based on the risk and returns of various schemes. On analysis, it

was revealed that there is a certain amount of risk involved, while investing in equity diversified

schemes, as the beta values of schemes falls within a range of 0.71 and 1.10. The study also

revealed the fact that almost all the equity diversified schemes were affected in the year 2008-09

when recession had hit the market. Values for average returns, Sharpe and Treynor were lowest.

Whereas in the year 2009-10 when the market were recovering and investors were again

showing faith in the market schemes showed good risk adjusted performance, as most of the

schemes were having positive values in case of the performance measures. Schemes like IDFC

Equity Plan A and HDFC Equity Fund were the top performing schemes in different parameters

for 2007-08. In 2008-09 UTI Opportunities Fund, IDFC Equity Plan A and ICICI Prudential

Discovery Fund were the best of all and in 2009-10 IDFC Equity Plan A and ICICI Prudential

Discovery Fund performed the best.

The study is highly beneficial to the investors as it gives them chance to compare and analyze

different scheme. Thus, the it helps the investors of all classes, in seeing how the different five

star rated funds stand in comparison with each other.



Along with this we are also able to see that in the difference between Systematic and Lump sum

investment. We found out that if markets are down then SIP helps us in securing more units. In

todays time when market movements cannot be predicted investors tend to go for SIP as it does

help them take advantage of the low market rates. Also it removes the burden of investing large

amount of money at one time.

Further the effects of rebalancing showed that the returns that were earned when rebalancing was

done was higher compared to the returns that were earned without rebalancing. Hence setting

rules for rebalancing your mutual fund portfolio and adhering to those rules will ensure that you

sell high and buy low in the process of maintaining the desired composition. One need to decide

up front how often he/she will rebalance their portfolio. One should plan on doing it at least once

a year and possibly quarterly. Also, one should set target ranges and rebalance any funds as soon

as they blow through the upper or lower end of their ranges.

Bibliography

1. Naresh Malhotra, Research Methodology



2. Reilly/Brown, Investment Analysis and Portfolio Management.

3. www.valueresearchonline.com

4. www.moneycontrol.com

5. www.nseindia.com

6. www.bseindia.com

7. www.hdfcfund.com.


http://www.bseindia.com/

http://www.nseindia.com/

http://www.moneycontrol.com/

http://www.valueresearchonline.com/

analysis of hdfc mutual fund

Documents

bhoir of

indian mutual fund space

project guide prof

asset management business

jidnyasa bhoir indexsr

analysis iii31

analysis ii24

college library