Mutual Fund A case study on HDFC Mutual Fund Asset Management Company
Gauarv singh.4
1. Project Report of the
Summer Internship Project
At
Topic- MUTUAL FUND COMPARISON AND ANALYSIS
SUBMITTED BY:
GAURAV SINGH
MBA( FINANCE)
ROLL NO:
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2. MUTUAL FUND COMPARISON AND ANALYSIS
By
GAURAV SINGH
Under the guidance of
Ms. Richa Kumar
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3. Certificate of Approval
The following Summer Project Report titled "Mutual Fund Comparison and Analysis " is hereby
approved as a certified study in management carried out and presented in a manner satisfactory to
warrant its acceptance as a prerequisite for the award of Management of Business Administration
for which it has been submitted. It is understood that by this approval the undersigned do not
necessarily endorse or approve any statement made, opinion expressed or conclusion drawn therein
but approve the Summer Project Report only for the purpose it is submitted.
Summer Project Report Examination Committee for evaluation of Summer Project Report
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4. Certificate from Summer Project Guides
This is to certify that Mr. Gaurav Singh, a student of the Master of Business Administration has
worked under our guidance and supervision. This Summer Project Report has the requisite standard
and to the best of our knowledge no part of it has been reproduced from any other summer project,
monograph, report or book.
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5. Declaration
I hereby declare that the following project report titled “Mutual Fund Comparison and Analysis” is
an authentic work done by me. This is to declare that all the work indulged in the completion of this
work such as research, data collection, analysis is a profound and honest work of mine.
Gaurav Singh
Date: MAIT
Place: New Delhi
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6. Acknowledgement
I take this opportunity to firstly thank my institute, for giving me this opportunity to undergo this
Project in one of the most reputed financial company. It has been a great learning experience in terms
of gaining exposure into the market and knowing how actually a business can be developed and run.
I thank my Faculty Guide, Prof. Girish Jain and Mr.Bhaskar Singh (Branch Manager) who put all
their efforts in making me understand the overall theme of the Project and thereby increasing my
knowledge. Their time and efforts have indeed been very fruitful.
I also thank all other employees at HDFC AMC particularly Mr. Saurabh Kumar and Mr.Amit
Girdhar with whom I have spent my training period. They have helped me in every possible manner
in my endeavor to complete this Project successfully. I acknowledge the support and knowledge they
have given
In this project the great emphasis is given to comparison of different mutual fund schemes,study of
Sip and Rebalancing .
I hope HDFC AMC; Noida will recognize this as well as take more references from this project
report.
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7. Table of Contents
S.no Topic Page No.
1 Executive Summary
2 Company Profile
3 Industry Profile
I. Introduction
II. History of Mutual funds
III. Regulatory framework
IV. Concept Of Mutual Fund
V. Types of Mutual Fund
VI. Advantages Of Mutual Fund
VII. Terms Used In Mutual Funds
VIII. Fund management
IX. Risk
X. Basis Of Comparisons
XI. How to pick right fund
4 Systematic Investment Plan and Lump Sum investment
5 Rebalancing and its effects.
6 Research Methodology
I. Problem statement
II. Research Objective
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8. III. Data source
IV. Data Anlysis
V. Scope of Study
VI. Limitations
7 Findings and Analysis
8 Rankings
9 Conclusion
1. Executive 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 parametrers. 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 analyse 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.
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10. 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.
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11. • 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
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12. Registration No. - PM / INP000000506 dated December 8, 2006 to act as a Portfolio Manager under
the SEBI (Portfolio Managers) Regulations, 1993.
3. 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.
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13. 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.
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14. 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.
The graph indicates the growth of assets over the years:
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15. 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
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16. 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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17. 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 offers an
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18. 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
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19. 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.
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20. 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.
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21. 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
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22. 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.
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23. 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 maybe 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.
Convenience- we can buy mutual fund shares by mail, phone, or over the Internet.
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24. 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
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25. 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
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26. - 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
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27. 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
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28. 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.
VIII. Fund Management
Actively managed funds:
Mutual Fund managers are professionals. They are considered professionals because of their
knowledge and experience. Managers are hired to actively manage mutual fund portfolios. Instead
of seeking to track market performance, active fund management tries to beat it. To do this, fund
managers "actively" buy and sell individual securities. For an actively managed fund, the
corresponding index can be used as a performance benchmark.
Is an active fund a better investment because it is trying to outperform the market? Not necessarily.
While there is the potential for higher returns with active funds, they are more unpredictable and
more risky. From 1990 through 1999, on average, 76% of large cap actively managed stock funds
actually underperformed the S&P 500. (Source - Schwab Center for Investment Research)
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29. Actively managed fund styles:
Some active fund managers follow an investing "style" to try and maximize fund performance while
meeting the investment objectives of the fund. Fund styles usually fall within the following three
categories.
Fund Styles:
• Value: The manager invests in stocks believed to be currently undervalued by the market.
• Growth: The manager selects stocks they believe have a strong potential for beating the
market.
• Blend: The manager looks for a combination of both growth and value stocks.
To determine the style of a mutual fund, consult the prospectus as well as other sources that review
mutual funds. Don't be surprised if the information conflicts. Although a prospectus may state a
specific fund style, the style may change. Value stocks held in the portfolio over a period of time
may become growth stocks and vice versa. Other research may give a more current and accurate
account of the style of the fund.
Passively Managed Funds:
Passively managed mutual funds are an easily understood, relatively safe approach to investing in
broad segments of the market. They are used by less experienced investors as well as
sophisticated institutional investors with large portfolios. Indexing has been called investing on
autopilot. The metaphor is an appropriate one as managed funds can be viewed as having a pilot at
the controls. When it comes to flying an airplane, both approaches are widely used.
a high percentage of investment professionals, find index investing compelling for the
following reasons:
• Simplicity. Broad-based market index funds make asset allocation and diversification easy.
• Management quality. The passive nature of indexing eliminates any concerns about human
error or management tenure.
29
30. • Low portfolio turnover. Less buying and selling of securities means lower costs and fewer tax
consequences.
• Low operational expenses. Indexing is considerably less expensive than active fund
management.
• Asset bloat. Portfolio size is not a concern with index funds.
• Performance. It is a matter of record that index funds have outperformed the majority of
managed funds over a variety of time periods.
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
IX. 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
30
31. shorter your investment time horizon, the more concerned you should be with short-term volatility
and higher risk.
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.
Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is at
risk that its price will decline due to developments in its industry. A stock fund that invests across
many industries is more sheltered from this risk defined as industry risk.
Following is a glossary of some risks to consider when investing in mutual funds.
31
32. • 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.
X. 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
32
33. 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.
33
34. 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
34
35. 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.
35
36. 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.
XI. 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 investor has a longer term need, but is
36
37. 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
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
37
38. 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.
4. Systematic Investment Plan (SIP)
SIP is similar to a Recurring Deposit. Every month on a specified date an amount you choose is invested in a
mutual fund scheme of your choice. The dates currently available for SIPs are the 1st, 5th, 10th, 15th,
20th and the 25th of a month. There are many benefits of investing through SIP.
Benefit 1
Become A Disciplined Investor
38
39. Being disciplined - It’s the key to investing success. With the Systematic Investment Plan you commit an
amount of your choice (minimum of Rs. 500 and in multiples of Rs. 100 thereof*) to be invested every month in
one of our schemes.
Think of each SIP payment as laying a brick. One by one, you’ll see them transform into a building. You’ll see
your investments accrue month after month. It’s as simple as giving at least 6 postdated monthly cheques to us
for a fixed amount in a scheme of your choice. It’s the perfect solution for irregular investors.
Benefit 2
Reach Your Financial Goal
Imagine you want to buy a car a year from now, but you don’t know where the down-payment will come from.
SIP is a perfect tool for people who have a specific, future financial requirement. By investing an amount of
your choice every month, you can plan for and meet financial goals, like funds for a child’s education, a
marriage in the family or a comfortable postretirement life.
Benefit 3
Take Advantage of Rupee Cost Averaging
Most investors want to buy stocks when the prices are low and sell them when prices are high. But timing the
market is timeconsuming and risky. A more successful investment strategy is to adopt the method called Rupee
Cost Averaging. We can reap this benefit by investing the amounts through a SIP .
Benefit 4
Grow Your Investment With Compounded Benefits
It is far better to invest a small amount of money regularly, rather than save up to make one large investment.
This is because while you are saving the lump sum, your savings may not earn much interest.
With HDFC MF SIP, each amount you invest grows through compounding benefits as well. That is, the interest
earned on your investment also earns interest. The following example illustrates this.
Imagine Neha is 20 years old when she starts working. Every month she saves and invests Rs. 5,000 till she is
25 years old. The total investment made by her over 5 years is Rs. 3 lakhs.Arjun also starts working when he is
20 years old. But he doesn’t invest monthly. He gets a large bonus of Rs. 3 lakhs at 25 and decides to invest the
39
40. entire amount.
Both of them decide not to withdraw these investments till they turn 50. At 50, Neha’s Investments have grown
to Rs. 46,68,273* whereas Arjun’s investments have grown to Rs. 36,17,084*. Neha’s small contributions to a
SIP and her decision to start investing earlier than Arjun have made her wealthier by over Rs. 10 lakhs.
*Figures based on 10% p.a. interest compounded monthly.
Benefit 5
Do All This Effortlessly
Investing with SIP is easy. Simply give us post-dated cheques or opt for an Auto Debit from your bank
account for an amount of your choice (minimum of Rs. 500 and in multiples of Rs. 100 thereof*) and we’ll
invest the money every month in a fund of your choice. The plans are completely flexible. You can invest for a
minimum of six months, or for as long as you want. You can also decide to invest quarterly and will need to
invest for a minimum of two quarters.
All you have to do after that is sit back and watch your investments accumulate
SIP and LUMPSUM Investment in HDFC EQUITY FUND
YEAR 2007-08
NAV SIP UNITS
Apr-07 151.6 1000 6.596306
May-07 159.28 1000 6.278173
Jun-07 165.31 1000 6.049131
Jul-07 166.8 1000 5.995175
Aug-07 168.83 1000 5.923223
Sep-07 182.84 1000 5.469323
Oct-07 210.1 1000 4.759638
Nov-07 206.18 1000 4.850225
Dec-07 223.32 1000 4.477819
40
43. 250
200
150
NAV
Series1
100
50
0
Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar-
09 09 09 09 09 09 09 09 09 10 10 10
PERIODS
SIP UNITS : 61.5747
AVERAGE UNIT PRICE=194.885
LUMPSUM: 12000/127.07= 94.4361
AVERAGE UNIT PRICE=127.07
In the year 2007-08 when the there is not much change in the opening and ending NAV there is not
much difference in the units earned through SIP investment and lump sum investment.
There is a constant decrease in the NAV of the fund and there is a noticeable change in the opening
and ending NAV for the year 2008-09. This fall in market helps the investors in earning more units as
the NAV is continuously going down. As the number of units earned increases as the average unit
price of the mutual fund scheme decreases.
In 2009-10 there continuous increase in the NAV and hence lump sum investment gives more units
compared to SIP investments. Due to low number of units earned the average unit price is more
compared to lump sum investment.
SIP investments are beneficial to investors in obtaining more units when the market is down. By
investing in small amounts but in continuous manner investors can reap benefits of market
volatility.SIP investment benefits the investor as small amount of money can be invested in a
systematic manner hence not burdening him/her with need to make large investment at one time
Hence along with convenience to the investors it also gives them advantage to reap the benefits of
having extra units when the markets are down.
43
44. 5. Portfolio Rebalancing
Rebalancing is defined as the periodic adjustment of a portfolio to restore the original asset allocation
mix of your mutual fund portfolio. If an investor's investment strategy or risk threshold has changed,
he can rebalance his investments so that asset classes in the portfolio align with his new asset
allocation plan. It is the process of selling assets that are performing well and buying assets that are
underperforming. Portfolio rebalancing is one of the very few ways to generate additional returns for
a portfolio without incurring any additional risk.
Ex-if there is a portfolio with a 50%stocks / 50% bonds policy asset mix.
If stocks return 25% return while bonds produce a 5% return, stocks become overweighed at the end
of the year (54% vs. 46%). Rebalancing involves selling 4% in stocks and buying 4% in bonds to
bring the asset mix back to the desired 50/50 asset mix.
44
45. One of a very important step before rebalancing is to assign a strategic asset allocation plan appropriate to risk
profile, investment goals and time horizon.
Rebalancing in volatile market
In rising stock markets, people often take on more risk than they're suited for ,as a result of which, they ended
up with a larger percentage of stocks in their portfolios than their risk levels warranted, Many even added to
their already over weighted positions by buying more and more, assuming the stellar performance trend would
continue indefinitely, but when the market began a sharp fall in 2000, their investments were pounded—more
than they likely expected and more than if had they rebalanced.
Rebalancing effects
Financial Research studied a portfolio of 60% stocks and 40% bonds to see what would happen if no
rebalancing took place. As the stock market performed well from 1994 to 1999, the portfolio's 60% stock
allocation grew to nearly 80%. This portfolio became over weighted in stocks just in time for the 2000 bear
market
Without rebalancing, a portfolio in the 1990s became too aggressive
45
46. but the same mix of 60% stocks and 40% bonds, starting in 2000. This time, the stock market was falling. By
2002, the portfolio's allocation had flipped, consisting of 40% stocks and 60% bonds.
Without rebalancing, a portfolio in the 2000s became too conservative
46
47. The value of regular rebalancing
A regular rebalancing plan helps instill discipline in investing process. In most cases, a rebalanced portfolio
had lower risk and similar to slightly higher returns. The chart below shows what happened when we
rebalanced a portfolio with a moderate risk profile annually from 1970 through 2006.
Rebalancing lowered risk and increased returns
47
48. Source: The Schwab Center for Financial Research with data from Ibbotson Associates, Inc.
Rebalancing has proven to be more efficient than a buy and hold strategy over a full market cycle and by
rebalancing periodically back to the original weighting of the portfolio, it has also been effective at risk
reduction. A buy and hold strategy can be more profitable over the short term as rebalancing sole driving force
is to sell off what is up and buy what is down. Because of this it is possible to reduce your position in an asset
class that is still on the rise thus reducing your potential for short-term gains. Overall, or more precisely, over a
full market cycle of (on average) 5-7 years, rebalancing does add value.
By rebalancing we can retain control of the overall risk of a portfolio. In a volatile market, rebalancing could
add to fees, but it would also keep the portfolio on target for our goals and in line with our desired level of risk
Advantages of rebalancing
1. It keeps portfolio’s risk within tolerable limit.
2. It generates stable return.
3. It will instill the discipline essential for investment success.
48
49. 4. By rebalancing the portfolio, the investor systematically takes profit in these expense asset classes and
reinvests the proceeds into the underperforming assets.
Analysis of investments in Equity and Debt and how rebalancing the portfolio will help in
-Risk Management
- Stability
- Maximize returns
Understanding debt and equity
Equity
Pros - High returns, Low risk in Long term, High Liquidity
Cons - Risky, not suitable for short term investment
Debt
Pros - Stable and assured returns, Good investment for short term goals
Cons - Low returns
Equity + Debt- When we combine Equity and Debt, returns are better than Debt but less than Equity, but at the
same time risk is also minimized, and when we apply technique of Portfolio Rebalancing, both risk and returns
are well managed.
Each person should concentrate on both returns and risk.
49
50. Case 1: Equity: Debt goes up.
Action: Decrease the Equity part and shift it to Debt so that Equity:Debt is same as earlier.
Reason: As our Equity has gone up, we could loose a lot of it if something bad happens; we shift the excess
part to Debt so that it is safe and grows at least.
Case 2: Equity: Debt Goes Down.
Action: Decrease the Debt part and shift it to Equity, so that Equity: Debt is same as earlier.
Reason: As out Equity part has decreased, we make sure that it is increased so that we don't loose out on any
opportunity. Limitations of this strategy is that, once our equity exposure has gone up, if we rebalance and
bring down your Equity Exposure, we will loose out on the profits if Equity provides great returns.
Case 3: Understanding the Game of Equity and Debt
As we know that the markets are unexpected and they can go in any direction, so its better to be safe. Many
people are confused that if there equity has done very well then shall they book profits and get out with money
and wait for markets to come down so that they can reinvest. Portfolio rebalancing is the same thing but a little
different name and methodology, so once you get good profit in something which was risky you transfer some
part to non-risk Debt.
The rebalancing analysis can be done with the help of an example.
Eight sensex levels have been selected starting from 1 st January 2007 till 1st June 2010 semiannually. The
sensex levels on the below mentioned dates were:
Dates Sensex
1st January 07 13942.24
1st July 07 14664.26
st
1 January 08 20300.71
1st July 08 12961.68
1st January 09 9903.46
1st July 09 14645.47
st
1 January 10 17558.73
1st June 10 16572.03
50
52. equity + debt
Returns without equity+debt
Time period (%) Equity debt@9% rebalancing with rebalancing
Jan 07- July 07 5.18 105178.7 109000 107090 107089.4
July 07- Jan 08 38.44 145605.8 118810 132210.5 132490.9
Jan 08- July 08 -36.15 92966.98 129503 111237.8 114504.2
July 08 - Jan 10 -23.59 71032.96 141158 106099.3 106148.7
Jan 09- July 09 47.88 105043.9 153862 129459 136377.4
July 09- Jan 10 19.89 125939.1 167709 146830 156031.3
Jan 10 - Jun 10 -5.62 118873.6 182802 150837.8 158668.7
Analysis:
As we can see clearly from the above table that,Hence if we consistently rebalance our portfolio we
get more returns while reducing risk in our portfolio.
Working note:
(Assumption: tax has been ignored for calculation purposes)
For equity: 1 lack is the amount of investment, we are getting 5.18% returns in the first quarter. So it
will be 105178.7. Now in the next quarter return is 38.44 %,so the amount will be
105178.7*1.3844=145605.8
Similarly the rest calculations will be;
145605.8*0.6385=92966.98
92966.98*0.7641=71032.96
71032.96*1.4788=105043.9
52
53. 105043.9*1.1989=125939.1
125939.1*0.9438= 118873.6
So at the end the amount becomes 118873.6
For debt @ 9%
For 1st quarter: 9%*100000=109000
For 2nd quarter: 9%*109000=118810
For 3rd quarter: 9% 118810=129503
For 4th quarter: 9% 129503=141158
For 5th quarter: 9% 141158=153862
For 6th quarter: 9% 153862=167709
For 7th quarter: 9% 167709=182802
For equity + debt (50:50) of amount 100000 without rebalancing:
(118873.6+182802)/2 = 150837.8
For equity + debt (50:50) of amount 100000 with rebalancing:
1st quarter: 50*105178.70= 52589.35
50*109000=54500
So total capital now is =107089.40 .we can see that our 50,000 in equity becomes 52589.35 and
50,000 in debt becomes 54500 .so in order to bring it to our original 50:50 ratio we will now
rebalance.
53
54. 2nd quarter: 50*107089.40 =53544.68 and
50*107089.40=53544.68
Now this 54175 amount becomes the opening balance for quarter 2.
Calculating the returns now,
53544.68 *1.3844= 74127.25
53544.68 *1.09 =58363.7
So the total capital now becomes=132490.9 .Now again 53544.68 amount becomes 74127.25and
53544.68 becomes 58363.7disrupting our 50:50 ratio. so we will again rebalance it
For 3rd quarter:
50%*132490.9=66245.47
50%*132490.9=66245.47
Calculating return in these two figures. in equity the return is -36.15% and in debt it is 9%.
66245.47*.6385=42296.68
66245.47*1.09 =72207.56
The total amount now is 114504.2.
For 4th quarter
50%* 114504.2=57252.12 and
50% 114504.2= 57252.
54
55. 57252.12 *1.3843= 43743.87
57252.12*1.09 = 62404.81
The final amount will be 106148.7
For 5th quarter
50%*106148.7 =53074.34
50% * 106148.7 =53074.34
53074.34*1.4788= 78486.34
53074.34*1.09= 57851.03
So the total is 136337.4
For 6th quarter
50% * 136337.4= 68168.69
50% * 136337.4= 68168.69
68168.69*1.1989 = 81727.44
68168.69*1.09 = 74303.87
So the total is 156031.3
For 7th quarter
50% 156031.3= 78015.65
50% 156031.3= 78015.65
78015.65*.9438 = 73631.62
55
56. 78015.65*1.09 = 85037.06
So the final total is 158668.7
Analysis
Comparing the debt+ equity with and without rebalancing.
Calculating CAGR without rebalancing: (150837.8/100000) 0.2857 - 1 = 12.46% p.a
Calculating CAGR with rebalancing: (158668.7/100000) 0.2857 - 1 = 14.09 % p.a
So it can be concluded that with the help of rebalancing we are getting 2.26% higher CAGR while
reducing the risk and maintaining our desired portfolio allocation.
56
57. 6. Research Methodology
I. Problem Statement
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.
II. 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.
II. 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.
57
58. IV. Data analysis
The data that has been collected for this study has been analysed by widely used performance
parameters as:
• Treynor Ratio
• Sharpe Ratio
• Jensen’s Alpha
• M Squared
• Leverage Factor
Other analysis are done by using graphs, calculations, tables etc.
V Scope Of The Study
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.
VI Limitations Of The Study
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.
58
59. 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-
59
60. 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.
Fund Category Equity diversified
Scheme Plan Growth
Scheme Type Open Ended
Launch Date August 16,2004
Benchmark S&P CNX Nifty
60
61. Fund Manager Mr. Sankaren Naren
Assets (RS crore) 1088.9
• UTI OPPORTUNITIES FUND
AMC UTI Asset Management Co. Ltd.
Fund Category Equity diversified
Scheme Plan Growth
Scheme Type Open Ended
Launch Date July 16,2005
Benchmark BSE 100
Fund Manager Mr. Harsh Upadhyaya
Assets (RS crore) 1432.78
• IDFC PREMIER EQUITY PLAN A
AMC IDFC Asset Management Company Ltd.
Fund Category Equity diversified
Scheme Plan Growth
Scheme Type Open Ended
Launch Date September 28, 2005
Benchmark BSE 500
Fund Manager Mr. Kenneth Andrade
Assets (RS crore) 1443.25
61
62. • RELIANCE RSF FUND
AMC RELAINCE Asset Management Co. Ltd.
Fund Category Equity diversified
Scheme Plan Growth
Scheme Type Open Ended
Launch Date June 8,2005
Benchmark BSE 100
Fund Manager Mr. Arpit Malaviya
Assets (RS crore) 2722.39
• SUNDARAM BNP PARIBAS S.M.I.L.E REG-G
AMC ICICI Prudential Asset Management Co. Ltd.
Fund Category Equity diversified
Scheme Plan Growth
Scheme Type Open Ended
Launch Date February 15,2005
Benchmark CNX midcap
Fund Manager Mr. S Krishna Kumar
Assets (RS crore) 695.139
For all the above schemes returns of the past three years i.e. 2007-10 , have been considered. Similarly
returns are taken for the benchmarks of the respective schemes. Calculation of different parameters like
average return , beta, standard deviation, sharpe ratio, treynor ratio have been done for all the schemes for
all years separately.
62
63. AVERAGE MONTHLY RETURN
SCHEMES 2007-08 2008-09 2009-10
HDFC EQUITY FUND 1.72 (2.56) 5.95
ICICI PRUDENTIAL DISCOVERY
FUND 1.11 (2.86) 7.50
UTI OPPORTUNITIES FUND 3.27 (1.83) 4.14
IDFC PREMIER EQUITY PLAN A 3.79 (3.31) 5.46
RELIANCE RSF FUND 4.38 (2.9) 5.77
SUNDARAM BNP PARIBAS
S.M.I.L.E REG-G 2.65 (3.86) 6.30
The table above average monthly returns of the mutual fund schemes for 2007-08, 2008-09 and 2009-10.
During the period of analysis, it was in the year 2009- 10, that the funds have yielded the maximum return.
Among them, the top return was provided by ICICI Prudential Discovery Fund with a value of 7.5%. The
lowest return giving fund for the year was UTI Opportunities Fund and the value was 4.14%.
Performance in the year 2008-09 was the least in all the three years. Least returns this year was from
Sundaram BNP Paribas SMILE REG-G fund with the returns being -3.86% and highest were of UTI
Opportunities Fund with returns of -1.83%. Low returns in this year were because of recession that hit the
market.
In the year 2007-08 highest returns were given by Reliance RSF Fund with returns being 4.38% and lowest
returns were 1.11% of ICICI Prudential Discovery Fund.
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64. STANDARD DEVIATION
SCHEMES 2007-08 2008-09 2009-10
HDFC EQUITY FUND 0.08 0.12 0.10
ICICI PRUDENTIAL DISCOVERY
FUND 0.09 0.12 0.09
UTI OPPUTTUNITIES FUND 0.09 0.10 0.08
IDFC PREMIER EQUITY PLANA 0.09 0.11 0.07
RELAINCE RSF FUND 0.10 0.12 0.12
SUNDARAN BNP PARIBAS
S.M.I.L.E REG-G 0.10 0.13 0 .11
Standard Deviation of a fund depicts, that how much the returns of the fund have deviated from the
mean level. The higher the value of standard deviation, the greater will be the volatility in the fund's
returns. In 2007-08 ,standard deviation of 10% was highest among all for Reliance RSF Fund and
Sundaram BNP Paribas SMILE REG-G meaning that the fund's return fluctuated in either direction
(up or down) by 10% from its average return ,whereas HDFC Equity fund showed minimum
deviation of 8%.
In the year 2008-09 Sundaram BNP Paribas SMILE REG-G showed the maximum volatility by having
standard deviation of 13%. UTI Opportunities Fund had the minimum standard deviation of 10%
For the year 2009-10 Reliance RSF Fund was the most volatile fund with standard deviation of 12%.
IDFC Premier Equity Plan A had the least value of 7%
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65. BETA
SCHEMES 2007-08 2008-09 2009-10
HDFC EQUITY FUND 0.87 0.91 0.86
ICICI PRUDENTIAL DISCOVERY
FUND 0.84 0.98 0.87
UTI OPPORTUNITIES FUND 0.95 0.82 0.80
IDFC PREMIER EQUITY PLAN
A 0.87 0.87 0.71
RELAINCE RSF FUND 0.99 1.00 1.02
SUNDARAM BNP PARIBAS
S.M.I.L.E REG-G 0.95 0.97 1.10
Beta measures the non- diversifiable risk of a portfolio. Normally, the value of beta lies somewhere between
0.4 and 1.9. In this case, the sample involves only equity diversified schemes. Therefore, the beta lies at a
range from 0.71 to 1.10. During the financial year 2007- 08, Reliance RSF Fund was considered as the highest
risky fund as it was having highest beta value of 0.99. The lowest risky fund was ICICI Prudential Discovery
Fund with a beta of 0.84.
In the year 2008- 09, high risky fund was Reliance RSF Fund and the value was 1. The low risky fund for this
financial year was UTI Opportunities Fund and the value was 0.82.
The high risky fund for the financial year 2009- 10 was Sundaram BNP Paribas SMILE REG-G Fund with the
Beta value of 1.1 next was Relaince RSF Fund with beta of 1.02.Low risk fund for this year was IDFC Equity
Plan A with beta value of 0.71.
65
66. SHARPE RATIO
SCHEMES 2007-08 2008-09 2009-10
HDFC EQUITY FUND 2.06 (3.40) 11.44
ICICI PRUDENTIAL DISCOVERY
FUND 0.63 (3.47) 13.97
UTI OPPUTTUNITIES FUND 4.11 (3.23) 9.94
IDFC PREMIER EQUITY PLAN
A 6.11 (3.63) 14.63
RELIANCE RSF FUND 5.24 (3.64) 10.48
SUNDARAM BNP PARIBAS
S.M.I.L.E REG-G 3.59 (3.54) 10.87
The above table shows the Sharpe ratio of various schemes for the financial years 2007-08, 2008-09 and 2009-
10. Sharpe ratio is a measure of the excess return per unit of risk in an investment asset of a trading strategy.
The Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk
taken. The selected mutual fund schemes showed the best risk adjusted performance during the financial year
2009- 10. Among them, IDFC Equity Plan A was considered as the best one with a ratio of 14.63. The least
performance was shown by UTI Opportunities Fund which has a ratio of 9.94.
The performance of all selected mutual fund schemes was really low during the financial year 2008- 09. Funds
were even having negative Sharpe ratio. The lowest risk adjusted performance was shown by Reliance RSF
Fund and the value was -3.64. UTI Opportunities Fund which showed the risk adjusted performance with a
Sharpe ratio of -3.23 which was best among all.
In the year 2007-08, IDFC Premier Equity Plan A is the fund which has shown the maximum Sharpe ratio of
6.11. It means that the fund has provided the maximum risk adjusted return as compared to other funds. The
fund having the least Sharpe value is ICICI Prudential Discovery Fund with a value of 0.63.
66
67. TREYNOR RATIO
SCHEMES 2007-08 2008-09 2009-10
HDFC EQUITY FUND 0.19 (0.43) 1.26
ICICI PRUDENTIAL DISCOVERY
FUND 0.07 (0.32) 1.73
UTI OPPORTUNITIES FUND 0.37 (0.38) 0.99
IDFC PREMIER EQUITY PLAN
A 0.60 (0.46) 1.46
RELAINCE RSF FUND 0.53 (0.43) 1.01
SUNDARAM BNP PARIBAS
S.M.I.L.E REG-G 0.37 (0.47) 1.11
Treynor’s ratio measures the fund’s performance in relation to the market’s performance. The table shows the
Treynor’s ratio of selected mutual fund schemes for three financial years 2007-08,2008-09 and 2009-10. .It
was during the financial year 2009- 10, that the funds showed the highest performance among the three years
of analysis. All the funds were having its highest Treynor ratio during this financial year. Among them, the
top performing fund was ICICI Prudential Discovery Fund. The value was 1.73. The lowest performance was
shown by UTI Opportunities Fund. The value was 0.99.
The financial year 2008- 09 was a low performance year for almost all mutual fund schemes. The returns
reduced significantly as compared to previous financial year. Some schemes showed even a negative
Treynor’s ratio. ICICI Prudential Discovery Fund is the fund which showed the maximum Treynor’s ratio
during this financial year. The value was -0.32 and the least performing fund was SUNDARAM BNP Paribas
SMILE REG- G Fund. Its value was -0.47.
In the year 2007-08, IDFC Equity Plan A Fund is having the maximum Treynor’s ratio of 0.60. It means that
the scheme has a better risk adjustedperformance as compared to other schemes. The scheme having the
lowest Treynor ratio is ICICI Prudential Discovery Fund. The ratio is 0.07. This shows that the fund is having
a low risk adjusted performance.
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68. JENSEN ALPHA
SCHEMES 2007-08 2008-09 2009-10
HDFC EQUITY FUND (0.0109) (0.0026) 0.0110
ICICI PRUDENTIAL DISCOVERY
FUND (0.0207) (0.0050) 0.0377
UTI OPPORTUNITIES FUND (0.0013) 0.0052 (0.0111)
IDFC PREMIER EQUITY PLAN
A 0.0693 0.0097 (0.0005)
RELAINCE RSF FUND 0.0235 (0.0342) 0.0045
SUNDARAM BNP PARIBAS
S.M.I.L.E REG-G (0.0026) (0.0024) (0.0018)
Jensen’s performance index is used as a measure of absolute performance of the portfolio. The above table
shows the Jensen’s alpha measure for the financial years2007-08, 2008-09 and 2009- 10. In the year 2007-08,
the highest risk- adjusted performance is shown by IDFC Premier Equity Plan A with a value of 0.0693. The
lowest risk- adjusted performance was shown by ICICI Prudential Discovery Fund and the value was -0.0207.
During the financial year 2008- 09, the least value was shown by Relaince RSF Fund and the value was
-0.0342. The highest risk adjusted performance for this financial year was shown by IDFC Premier Equity
Plan A and the value was 0.0097.
For the year 2009-10, the highest Jensen’s measure is for ICICI Prudential Discovery Fund and the value is
0.0377. The lowest value is for UTI Opportunities Fund and it is -0.0111.
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69. M^2(M SQUARE)
SCHEMES 2007-08 2008-09 2009-10
HDFC EQUITY FUND 0.2340 (0.3512) 1.1423
ICICI PRUDENTIAL DISCOVERY
FUND 0.1033 (0.3309) 1.5213
UTI OPPORTUNITIES FUND 0.4711 (0.3225) 0.9809
IDFC PREMIER EQUITY PLAN
A 0.5952 (0.4399) 1.5624
RELIANCE RSF FUND 0.5056 (0.3698) 1.0319
SUNDARAM BNP PARIBAS
S.M.I.L.E REG-G 0.4012 (0.4211) 1.124
The M-squared is a performance measurement using return per unit of total risk as measured by the standard
deviation. The table above shows that in the year 2007-08 IDFC Premier Equity Plan A fund scored high on it
with a value of 0.5952 and ICICI Prudential Discovery Fund showed least value with 0.10.
In 2008-09 all the funds showed negative performance as the markets were down too. Among all UTI
Opportunities Fund showed best performance with value of -0.3225 and IDFC Equity Plan A gave the
minimum value of -0.4399.
For the year 2009-10 IFDC Premier Equity Plan A Fund showed highest values of 1.5624 among all the funds.
And UTI Opportunities Fund had the minimum values of 0.98.
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