A Study on Management of Risk & Return Analysis on HDFC Mutual Funds HDFC Mutual Funds Ltd

7/31/2019 A Study on Management of Risk & Return Analysis on HDFC Mutual Funds HDFC Mutual Funds Ltd

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CHAPTER-1

INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the various economicunits, broadly classified into corporate sector, government and household sector. While

performing their activities these units will be placed in a surplus/deficit/balanced budgetary

situations.

There are areas or people with surplus funds and there are those with a deficit. A financial

system or financial sector functions as an intermediary and facilitates the flow of funds from the

areas of surplus to the areas of deficit. A Financial System is a composition of various

institutions, markets, regulations and laws, practices, money manager, analysts, transactions and

claims and liabilities.

Financial System;

The word "system", in the term "financial system", implies a set of complex and closely

connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities

in the economy. The financial system is concerned about money, credit and finance-the three

terms are intimately related yet are somewhat different from each other. Indian financial systemconsists of financial market, financial instruments and financial intermediation. These are briefly

discussed below;


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FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets are created ortransferred. As against a real transaction that involves exchange of money for real goods or

services, a financial transaction involves creation or transfer of a financial asset. Financial Assets

or Financial Instruments represents a claim to the payment of a sum of money sometime in the

future and /or periodic payment in the form of interest or dividend.

Money Market - The money market ifs a wholesale debt market for low-risk, highly-liquid,

short-term instrument. Funds are available in this market for periods ranging from a single day

up to a year. This market is dominated mostly by government, banks and financial institutions.

Capital Market - The capital market is designed to finance the long-term investments. The

transactions taking place in this market will be for periods over a year.

Forex Market - The Forex market deals with the multicurrency requirements, which are met by

the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of

funds takes place in this market. This is one of the most developed and integrated market across

the globe.

Credit Market - Credit market is a place where banks, FIs and NBFCs purvey short, medium

and long-term loans to corporate and individuals.

Financial system overview

A Financial Market can be defined as the market in which financial assets are created or

transferred. As against a real transaction that involves exchange of money for real goods orservices, a financial transaction involves creation or transfer of a financial asset. Financial Assets

or Financial Instruments represents a claim to the payment of a sum of money sometime in the

future and /or periodic payment in the form of interest or dividend.
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Money Market - The money market ifs a wholesale debt market for low-risk, highly-liquid, short-

term instrument. Funds are available in this market for periods ranging from a single day up to a

year. This market is dominated mostly by government, banks and financial institutions.

Capital Market - The capital market is designed to finance the long-term investments. The

transactions taking place in this market will be for periods over a year.

Forex Market - The Forex market deals with the multicurrency requirements, which are met by

the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of

funds takes place in this market. This is one of the most developed and integrated market across

theglobe.

Credit Market - Credit market is a place where banks, FIs and NBFCs purvey short, medium and

long-term loans to corporate and individuals.

FinancialIntermediaries

Having designed the instrument, the issuer should then ensure that these financial assets reach

the ultimate investor in order to garner the requisite amount. When the borrower of funds

approaches the financial market to raise funds, mere issue of securities will not suffice. Adequate

information of the issue, issuer and the security should be passed on to take place. There should

be a proper channel within the financial system to ensure such transfer. To serve this purpose,

financial intermediaries came into existence. Financial intermediation in the organized sector is

conducted by a widerange of institutions functioning under the overall surveillance of the

Reserve Bank of India. In the initial stages, the role of the intermediary was mostly related to

ensure transfer of funds from the lender to the borrower. This service was offered by banks, FIs,

brokers, and dealers. However, as the financial system widened along with the developmentstaking place in the financial markets, the scope of its operations also widened. Some of the

important intermediaries operating ink the financial markets include; investment bankers,

underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual

funds, financial advertisers financial consultants, primary dealers, satellite dealers, self

regulatory organizations, etc. Though the markets are different, there may be a few


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intermediaries offering their services in move than one market e.g. underwriter. However, the

services offered by them vary from one market to another.

Introduction to Indian Financial Sector and its Reforms

The Indian financial system of the pre-reform period, before 1991, essentially catered to the

needs of planned development in a mixed-economy framework, where the Government sector

had a predominant role in economic activity. Interest rates on Government securities were

artificially pegged at low levels, which were unrelated to the market conditions. The system of

administered interest rates was characterized by detailed prescriptions on the lending and the

deposit side, leading to multiplicity and complexity of interest rates.

Consequently, by the end of the eighties, directed and concessional availability of bank credit to

certain sectors adversely affected the viability and profitability of banks. Thus, the transactions

of the Government, the Reserve Bank and the commercial banks were governed by fiscal

priorities rather than sound principles of financial management and commercial viability. It was

then recognized that this approach, which, conceptually, sought to enhance efficiency through a

co-ordinate approach, actually led to loss of transparency, accountability and incentive to seek

efficiency.

Need and importance of financial sector

The New Economic Policy (NEP) of structural adjustments and stabilization programme was

given a big thrust in India in June 1991. The financial system reforms have received special

attention as a part of this policy because of the perceived interdependent relationship between the

real and financial sectors of the modern economy.

The need for financial reforms had arisen because the financial institution and markets were in a

bad shape. The banking sector suffered from lack of competition, low capital base, low

productivity, and high intermediation costs. The role of technology was minimal, and the quality

of service did not receive adequate attention. Proper risk management system was not followed,

and prudential norms were weak. All these resulted in poor assets quality. Development

financial institutions operated in an over protected environment with most of the funding


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coming from assured sources. There was little competition in insurance and mutual funds

industries. Financial markets were characterized by control over pricing of financial assets,

barriers to entry, and high transactions costs. The banks were running either at a loss or on very

low profits, and, consequently were unable to provide adequately for loan defaults, and build

their capital.

There had been organizational inadequacies, the weakening of management and control

functions, the growth of restrictive practices, the erosion of work culture, and flaws in credit

management. The strain on the performance of the banks had emanated partly from the

imposition of high Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and directed

credit programmes for the priority sectors all at below market or concessional or subsidized

interest rates. This, apart from affecting bank profitability adversely, had resulted in the low orrepressed or depressed interest rates on deposits and in higher interest rates on loans to the larger

borrowers from business and industry.

Further, the functioning of the financial system, and the credit delivery as well as recovery

process had become politicized, which damaged the quality of lending and the culture of

repaying loans. The widespread write-offs of the loans had seriously jeopardized the viability of

banks. As the closure of sick industrial units was discouraged by the government, banks had to

continue to finance non-viable sick units, which further compromised their own viability. The

legal system was not of much help in recovering loans. There was a lack of transparency in

preparing statements of accounts by banks.

In other words, the reforms had become imperative on account of the facts that despite its

impressive quantitative growth and achievements, the financial health, integrity, autonomy,

flexibility, and vibrancy in the financial sector had deteriorated over the past many years. The

allocation of resources had become severely distorted, the portfolio quality had deteriorated, and

productivity, efficiency and profitability had been eroded in the system. Customer service was

poor, work technology remained outdated, and transaction costs were high.


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RESERVE BANK OF INDIA

The central bank of the country is the Reserve Bank of India (RBI). It was established in April

1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the HiltonYoung Commission. The share capital was divided into shares of Rs. 100 each fully paid which

was entirely owned by private shareholders in the begining. The Government held shares of

nominal value of Rs. 2,20,000.

Reserve Bank of India was nationalised in the year 1949. The general superintendence and

direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor

and four Deputy Governors, one Government official from the Ministry of Finance, ten

nominated Directors by the Government to give representation to important elements in the

economic life of the country, and four nominated Directors by the Central Government to

represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New

Delhi. Local Boards consist of five members each Central Government appointed for a term of

four years to represent territorial and economic interests and the interests of co-operative and

indigenousbanks.

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of

1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

To regulate the issue of banknotes

To maintain reserves with a view to securing monetary stability and

To operate the credit and currency system of the country to its advantage.


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Functions of Reserve Bank of India

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the

Reserve Bank of India.

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank

notes of all denominations. The distribution of one rupee notes and coins and small coins all over

the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank

has a separate Issue Department which is entrusted with the issue of currency notes. The assets

and liabilities of the Issue Department are kept separate from those of the Banking Department.

Originally, the assets of the Issue Department were to consist of not less than two-fifths of goldcoin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40

crores in value. The remaining three-fifths of the assets might be held in rupee coins,

Government of India rupee securities, eligible bills of exchange and promissory notes payable in

India. Due to the exigencies of the Second World War and the post-was period, these provisions

were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold

and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in

gold. The system as it exists today is known as the minimum reserve system.

Banker to Government

The second important function of the Reserve Bank of India is to act as Government banker,

agent and adviser. The Reserve Bank is agent of Central Government and of all State

Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the

obligation to transact Government business, via. to keep the cash balances as deposits free of

interest, to receive and to make payments on behalf of the Government and to carry out theirexchange remittances and other banking operations. The Reserve Bank of India helps the

Government - both the Union and the States to float new loans and to manage public debt. The

Bank makes ways and means advances to the Governments for 90 days. It makes loans and

advances to the States and local authorities. It acts as adviser to the Government on all monetary

and banking matters.


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Bankers' Bank and Lender of the Last Resort

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking

Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a

cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in

India. By an amendment of 1962, the distinction between demand and time liabilities was

abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate

deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of

India.

The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible

securities or get financial accommodation in times of need or stringency by rediscounting bills of

exchange. Since commercial banks can always expect the Reserve Bank of India to come to their

help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the

lender of the last resort.

Controller of Credit

The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume

of credit created by banks in India. It can do so through changing the Bank rate or through open

market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of Indiacan ask any particular bank or the whole banking system not to lend to particular groups or

persons on the basis of certain types of securities. Since 1956, selective controls of credit are

increasingly being used by the Reserve Bank.

The Reserve Bank of India is armed with many more powers to control the Indian money

market. Every bank has to get a licence from the Reserve Bank of India to do banking business

within India, the licence can be cancelled by the Reserve Bank of certain stipulated conditions

are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it canopen a new branch. Each scheduled bank must send a weekly return to the Reserve Bank

showing, in detail, its assets and liabilities. This power of the Bank to call for information is also

intended to give it effective control of the credit system. The Reserve Bank has also the power to

inspect the accounts of any commercial bank.


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As supreme banking authority in the country, the Reserve Bank of India, therefore, has the

following powers:

a) It holds the cash reserves of all the scheduled banks.

b) It controls the credit operations of banks through quantitative and qualitative controls.c) It controls the banking system through the system of licensing, inspection and calling for

information.

d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to maintain the official rate of exchange.According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at

fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed

was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d.

though there were periods of extreme pressure in favour of or against

the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve

Bank has the responsibility of maintaining fixed exchange rates with all other member countries

of the I.M.F.

Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the

custodian of India's reserve of international currencies. The vast sterling balances were acquired

and managed by the Bank. Further, the RBI has the responsibility of administering the exchange

controls of the country.


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Supervisory functions

In addition to its traditional central banking functions, the Reserve bank has certain non-

monetary functions of the nature of supervision of banks and promotion of sound banking in

India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI

wide powers of supervision and control over commercial and co-operative banks, relating to

licensing and establishments, branch expansion, liquidity of their assets, management and

methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorised to

carry out periodical inspections of the banks and to call for returns and necessary information

from them. The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed

new responsibilities on the RBI for directing the growth of banking and credit policies towards

more rapid development of the economy and realisation of certain desired social objectives. Thesupervisory functions of the RBI have helped a great deal in improving the standard of banking

in India to develop on sound lines and to improve the methods of their operation.

Promotional functions

With economic growth assuming a new urgency since Independence, the range of the Reserve

Bank's functions has steadily widened. The Bank now performs varietyof developmental and

promotional functions, which, at one time, were regarded as outside the normal scope of centralbanking. The Reserve Bank was asked to promote banking habit, extend banking facilities to

rural and semi-urban areas, and establish and promote new specialised financing agencies.

Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the

Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial

Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in

1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set

up directly or indirectly by the Reserve Bank to promote saving habit and to mobilise savings,and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve

Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only

since 1951 the Bank's role in this field has become extremely important. The Bank has

developed the co-operative credit movement to encourage saving, to eliminate moneylenders

from the villages and to route its short term credit to agriculture. The RBI has set up the


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Agricultural Refinance and Development Corporation to provide long-term finance to farmers.

Classification of RBIs functions

The monetary functions also known as the central banking functions of the RBI are related to

control and regulation of money and credit, i.e., issue of currency, control of bank credit, control

of foreign exchange operations, banker to the Government and to the money market. Monetary

functions of the RBI are significant as they control and regulate the volume of money and credit

in the country.

Equally important, however, are the non-monetary functions of the RBI in the context of India's

economic backwardness. The supervisory function of the RBI may be regarded as a non-

monetary function (though many consider this a monetary function). The promotion of sound

banking in India is an important goal of the RBI, the RBI has been given wide and drastic

powers, under the Banking Regulation Act of 1949 - these powers relate to licencing of banks,

branch expansion, liquidity of their assets, management and methods of working, inspection,

amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the

working of banks has greatly improved. Commercial banks have developed into financially and

operationally sound and viable units. The RBI's powers of supervision have now been extended

to non-banking financial intermediaries. Since independence, particularly after its nationalisation1949, the RBI has followed the promotional functions vigorously and has been responsible for

strong financial support to industrial and agricultural development in the country.

RESERVE BANK OF INDIA ADDRESS

Reserve Bank of India,

Central Office,

Shaheed Bhagat Singh Road,

Mumbai - 400 001.


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FINANCIAL INSTRUMENTS IN INDIA

We took a look at the players in the financial markets earlier. Let us now look at the Financial

Instruments these players have. They van be braodly classified into Government securities andIndustrial securities.

Government Securities( G-Sec ) :

In India G- Secs are issued by the Central Government, State Governments and Semi Government

Authorities such as municipalities, port trusts, state electricity boards and public sector

corporations. The Central and State Governments raise money through these securities to finance

the creation of new infrastructure as well as to meet their current cash needs. Since these areissued by the government, the risk of default is minimal. Therefore, interest rates on these

securities often serve as a benchmark for the level of interest rates in the economy. Other issuers

may price their offerings by `marking up this benchmark rate to reflect the credit risk specific to

them.

These securities may have maturities ranging from five to twenty years. These are fixed income

securities, which pay interest every six months. The Reserve Bank of India manages the issues of

the securities. These securities are sold in the primary market mainly through the auction

mechanism. The RBI notifies issue of a new tranche of securities. Prospective buyers submit

their bids. The RBI decides to accept bids based on a cut off price.

The G -secs are primarily bought by the institutional investors. The biggest investors are

commercial banks who invest in G-secs to meet the regulatory requirement to maintain a certain

percentage of Statutory Liquidity Ratio (SLR) as well as an investment vehicle. Insurance

companies, provident funds, and mutual funds are the other large investors. The Primary Dealers

perform the function of market makers through buying and selling activities.


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The Government of India also borrows short term funds for up to one year. This is through the

issue of Treasury Bills which are sold at a discount to the face value and redeemed at the full face

value.

Industrial Securities :

These are securities issued by the corporate sector to finance their long term and working

capital requirements. The Major Instruments that fall under Industrial Securities are

Debentures, Preference Shares And Equity Shares.

Debentures

Debentures have a fixed maturity and pay a fixed or a floating rate of interest during their

lifetime. The company has an obligation to pay interest and the principal amount on the due dates

regardless of its profitability position. The debenture holders are not members of the company

and do not have any say in the management of the company. Since these carry a predefined rate

of return, there is no scope for any major capital appreciation. However, in case of fixed rate

debentures, their market price moves inversely with the direction of interest rates. The debenture

issues are rated by the professional credit rating agencies regarding the payment of interest and

the repayment of the capital amount. Apart from the `plain vanilla variety of debentures (periodic

payment of interest during their currency and repayment of capital on maturity), a number of

variations have been devised. For example, zero coupon bonds are issued at a discount to their

face value and redeemed at the full face value. The difference constitutes return for the investor.


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Preference Shares

Preference Shares carry a fixed rate of dividends. These carry a preferential right to dividends

over the equity shareholders. This means that equity share holders cannot be paid any dividends

unless the preference dividend has been paid in full. Similarly on the winding up of the company,

the preference share holders get back their capital before the equity share holders. In case of

cumulative preference shares, any dividend unpaid in past years accumulates and is paid later

when the company has sufficient profits. Now all preference shares in India are `redeemable, i.e.

they have a fixed maturity period. Thus, preference shares are sometimes called a `hybrid variety

incorporating features of debt as well as equity.

Equity Shares

Equity Shares are regarded as high return high risk instruments. These do not carry any fixed

rate of return and there is no maturity period. The company may or may not declare dividend on

equity shares. Equity shares of major companies are traded on the stock exchanges. The major

component of return to equity holders usually consists of market appreciation.

Call Money Market:

The loans made in this market are of a short term nature overnight to a fortnight . This is

mostly inter-bank market. Those banks which are facing a short term cash deficit, borrow funds

from the cash surplus banks. The rate of interest is market driven and depends on the liquidity

position in the banking system.

Commercial Paper (CP) and Certificate of Deposits (CD) :

CPs are issued by the corporates to finance their working capital needs. These are issued for short

term maturities. These are issued at a discount and redeemed at face value. These are unsecured

and therefore only those companies who have a good credit standing are able to access funds

through this instrument. The rate of interest is market driven and depends on the current liquidity

position and the creditworthiness of the issuing company.


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The characteristics of CDs are similar to those of CPs except that CDs are issued by the

commercial banks.

EXECUTIVE SUMMARY

Primary investment objective of any individual or organisation is to maximize the returns and

minimizing Market risk and Credit risk through diversification.

Mutual Funds (MF) have become one of the most attractive ways for the average person to invest

their money. It is said that Bank investment is the first priority of people to invest their savings

and the second place is for investment in Mutual Funds and other avenues. A Mutual Fund poolsresources from thousands of investors and then diversifies its investment into many different

holdings such as stocks, bonds, or Government securities in order to provide high relative safety

and returns.

The Project is a FINANCE PROJECT which tries to explain in laymans language about the

history, growth, & pros and cons of investing in Mutual Funds and the second part of it deals

with the analysis of risk and returns of Equity scheme, Tax saver fund scheme, Balanced fund,

Liquid fund, Capital builder fund, Gilt fund, Floating rate income fund, Prudence fund and shortterm plan fund provided by HDFC Mutual Fund in comparison with the benchmark of S&P

CNX indices.

The main objective of the project was to get an Overview of Mutual Fund Industry, its set up, its

working and to find out the risks and returns of selected HDFC Mutual Fund Schemes

comparison with the benchmark of S&P CNX indices.

The project includes a brief idea about the growth of MF industry (History), the broad idea about

the organization and concept of MF and SEBI Guidelines on Mutual Funds.

There are many improvements pending in the field and it has to happen as soon as possible so as

to call the MF industry as an Organized and well-developed sector.The past performance of MF


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is not necessarily indicative of future performance of the scheme and no AMC guarantees

Returns and or safety of Principal.

Analysis is done by calculating standard deviation, beta calculation.

Findings: The HDFC Balanced Fund has not given stable returns to the investors. The beta of

the fund is 0.47546. The Standard Deviation of the fund is 0.85433. The HDFC Floating rate

Income Fund has given stable returns for the investors. The beta of the fund is 0.00187. The

Standard Deviation of the fund is 0.02186. The HDFC Equity Fund has not given stable returns

to the investors. The beta of the fund is 0.69971. The Standard Deviation of the fund is 1.1237.

The Liquid Fund has given below average returns for the investors in this period. It is moderate

riskier because the beta of the fund is 0.00148. The Standard Deviation of the fund is 0.01953.

Recommendations: HDFC Floating rate Income Fund has a beta of 0.00187 hence the scheme

is less volatile than the market. The scheme should generate reasonable returns while

maintaining safety and providing investor superior liquidity. The standard deviation of the

HDFC Liquid Fund Short Term Plan Funds is high, so the company should try to reduce the risk

involved by reducing the standard deviation of the fund. The HDFC Liquid Fund & Short Term

Plan Funds beta is 0.00148, 0.00383 so it means these schemes are less volatile. So the

companies should harness on it by excessively advertising its benefits and in turn invite investors

to invest whose risk appetite is less.

Conclusions: In the above selected schemes of HDFC Mutual Fund all nine Schemes are

defensive assets and the Gift Fund has negative beta. The scheme which contains beta is less

than one is called defensive asset.


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A. INTRODUCTION TO MUTUAL FUNDS

Mutual Funds - The Concept

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

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


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The following simple diagram clearly shows the working of a mutual fund :


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Funds Organization

There Mutual are many entities involved and the diagrams illustrate the organizational

set up of a mutual fund:

Advantages of Mutual Funds

1. Affordability:-

A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the

investment objective of the scheme. An investor can buy in to a portfolio of equities, which

would otherwise be extremely expensive. Each unit holder thus gets an exposure to such

portfolios with an investment as modest as Rs.500/-. Thus it would be affordable for an investor


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to build a portfolio of investments through a mutual fund rather than investing directly in the

stock market.

2. Diversification:-

It means that investor must spread his investment across different securities (money

market instruments, bonds, stocks, real estate, fixed deposits etc.) and different sectors (banking,

textile, IT, etc.). This kind of a diversification may add to the stability of inv estors returns, so as

to offset any underperformance by any one sector or instrument and help investor meet his

investment objective.

3. Variety:-

Mutual funds offer a whole variety of schemes. This variety is beneficial in two ways:first, it offers different types of schemes to investors with different needs and risk appetites;

secondly, it offers an opportunity to an investor to invest sums across a variety of schemes, both

debt and equity. For example, an investor can invest his money in a debt scheme and a equity

scheme depending on his risk appetite to create a balanced portfolio easily or simply just buy a

Balanced Scheme.

4. Professional Management:-

Qualified investment professionals seek to maximize returns and minimize risk monitor

investor's money. In a mutual fund, investors are handing their money with an investment

professional who has experience in making investment decisions. It is then the Fund Manager's

job to (a) find the best securities for the fund, given the fund's stated investment objectives; and

(b) keep track of investments and changes in market conditions and adjust the mix of the

portfolio, as and when required.

5. Liquidity:-


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Investors are free to take their money out of open -ended mutual funds whenever they

want, no questions asked. Most open-ended funds mail investor redemption proceeds, which are

linked to the fund's prevailing NAV (net asset value), within three to five working days of

investor putting their request.

6. Regulations:-

Securities and Exchange Board of India ("SEBI"), the Capital Markets regulator has

clearly defined rules, which govern mutual funds. These rules relate to the formation,

administration and management of mutual funds and also prescribe disclosure and accounting

requirements. Such a high level of regulation seeks to protect the interest of investors.

7. Other advantages:

Return Potential Low Costs Transparency Flexibility Tax benefits

Disadvantages of Mutual Funds

There are certainly some benefits to mutual fund investing, but investor should also be

aware of the drawbacks associated with mutual funds.

1. No Insurance:-

Mutual funds, although regulated by the government, are not insured against losses. The

Federal Deposit Insurance Corporation (FDIC) only insures against certain losses at banks, credit

unions, and savings and loans, not mutual funds. That means that despite the risk-reducing

diversification benefits provided by mutual funds, losses can occur, and it is possible (althoughextremely unlikely) that investors could even lose their entire investment.

2. Dilution:-
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Although diversification reduces the amount of risk involved in investing in mutual

funds, it can also be a disadvantage due to dilution. For example, if a single security held by a

mutual fund doubles in value, the mutual fund itself would not double in value because that

security is only one small part of the fund's holdings. By holding a large number of different

investments, mutual funds tend to do neither exceptionally well nor exceptionally poorly.

3. Fees and Expenses:-

Most mutual funds charge management and operating fees that pay for the fund's

management expenses (usually around 1.0% to 1.5% per year). In addition, some mutual funds

charge high sales commissions, 12b-1 fees, and redemption fees. And some funds buy and trade

shares so often that the transaction costs add up significantly. Some of these expenses are

charged on an ongoing basis, unlike stock investments, for which a commission is paid only

when you buy and sell.

4. Poor Performance:-

Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of

all mutual funds fail to beat the major market indexes, like the S&P 500, and a growing number

of critics now question whether or not professional money managers have better stock-picking

capabilities than the average investor.

5. Loss of Control:-

The managers of mutual funds make all of the decisions about which securities to buy and sell

and when to do so. This can make it difficult for investors when they trying to manage their

portfolio. For example, the tax consequences of a decision by the manager to buy or sell an asset

at a certain time might not be optimal for investors. Investors also should remember that

investors are trusting someone else with their money when they invest in a mutual fund.

6. Trading Limitations:-
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Although mutual funds are highly liquid in general, most mutual funds (called open-

ended funds) cannot be bought or sold in the middle of the trading day. Investors can only buy

and sell them at the end of the day, after they've calculated the current value of their holdings.

7. Size:-

Some mutual funds are too big to find enough good investments. This is especially true of funds

that focus on small companies, given that there are strict rules about how much of a single

company a fund may own. If a mutual fund has $5 billion to invest and is only able to invest an

average of $50 million in each, then it needs to find at least 100 such companies to invest in; as a

result, the fund might be forced to lower its standards when selecting companies to invest in.

8. Inefficiency of Cash Reserves:-

Mutual funds usually maintain large cash reserves as protection against a large number of

simultaneous withdrawals. Although this provides investors with liquidity, it means that some of

the fund's money is invested in cash instead of assets, which tends to lower the investor's

potential return.
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Title Of The Project

A study on management of Risk & Return analysis on HDFC Mutual fundsHDFC Mutual Funds Ltd,

Introduction

. 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 opportunity to invest in a diversified, professionally managed basket of securities

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

Statement of the problem

Customers Perception with Mutual Funds option varies and differs to a great extent. So in order

to give a constructive study on various investment opportunities available in Mutual Funds

companies and to give a detail analysis of the different schemes available in the said company,

this study is initiated.

Objectives of the study: .

To study Mutual Fund Industry in India. To study the different Schemes provided by the origination. To study the performance of different schemes. To study the Risk involved in different Schemes. To study the Scheme returns with respect to Benchmark of S&P CNX Nifty index


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Methodology of Research Survey

Survey method has been used in this research. The methodology here refers to systematic

method. Which is been used to collect data for the purpose of research.

Sampling

Out of the large population available a sample size of 100 numbers will be chosen for the project.

This sample size will represent the population and the sample size is chosen on the basis of

convenience and randomness for the study

Sources of data collection

Primary data is collected by designing an appropriate questionnaire and data is also

collected by observation and panel discussions.

Secondary data has been collected through various books, journals, publication, magazines,

articles.

Limitations of the study

The study is not out of certain limitations as the study is need based and suitable for todays

context only and it is not standard one. Certain important factors like time limit and financial

constraints are also binding the study.

Plan Of Analysis

The collected data will be tabulated, correlated and analysed.The analyzed data will be separated

in form of graphs, diagrams. Further statistical tool like chi-square, t-test is proposed to be used

for the study.


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Chapter Scheme

I) GENERAL INTRODUCTION

INTRODUCTION

THEORETICAL BACKGROUND

II) RESEARCH DESIGN

TITLE OF THE STUDY

STATEMENT OF THE PROBLEM OBJECTIVES OF THE STUDY

SCOPE OF THE STUDY

METHODOLOGY

LIMITATION OF THE STUDY

III) COMPANY PROFILE

INDUSTRIAL BACKGROUND

PROFILE OF THE SAMPLE UNIT

ORGANISATION PROFILE

FUNCTIONAL DEPARTMENT OF THE ORGANISATION

IV) DATA ANALYSIS AND INTREPRETATION

V) SUMMARY OF FINDINGS

SUGGESTIONS AND CONCLUSION

BIBLIOGRAPHY AND ANNEXURES


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COMPANY PROFILE

History:HDFC was incorporated in 1977 with the primary objective of meeting a social need that of

promoting home ownership by providing long-term finance to households for their housing

needs. HDFC was promoted with an initial share capital of Rs.100 million. HDFC has AAA

rating by CRISIL and ICRA for seven consecutive years. These reflects the efficiency by which

HDFC manage their asset bases of Rs.21450 Cr. Billion. HDFCs 120 offices have serviced

customers in over 2400 cities/towns.

Subsidiaries and Associates

HDFC Bank

HDFC Mutual Fund HDFC Standard Life Insurance Company HDFC Realty HDFC Chubb General Insurance Company Ltd. Intelenet Global Services Ltd.

Credit Information Bureau (India) Limited Other Companies Co-Promoted by HDFC:

HDFC Trustee Company Ltd. GRUH Finance Ltd. HDFC Developers Ltd. HDFC Ventures Trustee Company Ltd. HDFC Investments Ltd. HDFC Holdings Ltd. Home Loan Services India Pvt. Ltd.
http://www.hdfcbank.com/http://www.hdfcfund.com/http://www.hdfcinsurance.com/http://www.hdfcrealty.com/http://www.hdfcchubbindia.com/http://www.intelenetglobal.com/http://www.cibil.com/http://www.cibil.com/http://www.intelenetglobal.com/http://www.hdfcchubbindia.com/http://www.hdfcrealty.com/http://www.hdfcinsurance.com/http://www.hdfcfund.com/http://www.hdfcbank.com/


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HDFC is known to its large customer and with its strong brand name. The service provided by

the company is better than any other finance corporation. The company is rated nine times

AAA by CRISIL & ICRA. The company is also rated the second best employer after

INFOSYS.

HDFC Asset Management Company Ltd (AMC) / HDFC Mutual Fund:

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 June 30, 2000.The registered office of the

AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg, 169, Backbay Reclamation,Churchgate, Mumbai - 400 020.As per the terms of the Investment Management Agreement, the

AMC will conduct the operations of the Mutual Fund and manage assets of the schemes,

including the schemes launched from time to time.

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

Particulars % of the paid up equity capital

Housing Development Finance Corporation Limited 60

Standard Life Investments Limited 40

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

regulatory approvals.


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On obtaining the regulatory approvals, the following Schemes of Zurich India Mutual Fund have

migrated to HDFC Mutual Fund on June 19, 2003. These Schemes have been renamed as

follows:

Former Name New Name

Zurich India Equity Fund HDFC Equity Fund

Zurich India Prudence Fund HDFC Prudence Fund

Zurich India Capital Builder Fund HDFC Capital Builder Fund

Zurich India TaxSaver Fund HDFC TaxSaver

Zurich India Top 200 Fund HDFC Top 200 Fund

Zurich India High Interest Fund HDFC High Interest Fund

Zurich India Liquidity Fund HDFC Cash Management Fund

Zurich India Sovereign Gilt Fund HDFC Sovereign Gilt Fund*

*HDFC Sovereign Gilt Fund has been wound up in March 2006

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 TaxSaver (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


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(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 8 closed ended Schemes of the HDFC Mutual Fund viz. HDFC LongTerm Equity Fund, HDFC Mid-Cap Opportunities 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 and HDFC Fixed Maturity Plans -

Series VI.

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. The Certificate of Registration

is valid from January 1, 2007 to December 31, 2009.

HDFC Mutual Fund is one of the largest mutual funds in India with an investor base of over 25

lakh which is serviced primarily by our vide network of distributors. We at HDFC Mutual Fund

recognize our distributors as the most important link between our investors and us. To help

distributors to advise and service their clients better, we, together with our registrar (CAMS)

offer a range of facilities to them.


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Study of the mutual funds industry in India

HISTORY OF MUTUAL FUNDS:

When three Boston securities executives pooled their money together in 1924 to create the first

mutual fund, they had no idea how popular mutual funds would become. The idea of pooling

money together for investing purposes started in Europe in the mid-1800s. The first

pooled fund in the U.S. was created in 1893 for the faculty and staff of Harvard

University. On March 21st, 1924 the first official mutual fund was born. It was called

the Massachusetts Investors Trust.

After one year, the Massachusetts Investors Trust grew from $50,000 in assets in 1924

to $392,000 in assets (with around 200 shareholders). In contrast, there are over

10,000 mutual funds in the U.S. today totaling around $7 trillion (with approximately

83 million individual investors) according to the Investment Company Institute.

The stock market crash of 1929 slowed the growth of mutual funds. In response to thestock market crash, Congress passed the Securities Act of 1933 and the Securities

Exchange Act of 1934. These laws require that a fund be registered with the SEC and

provide prospective investors with a prospectus. The SEC (U.S. Securities and

Exchange Commission) helped create the Investment Company Act of 1940, which

provides the guidelines that all funds must comply with today. With renewed

confidence in the stock market, mutual funds began to blossom. By the end of the

1960s there were around 270 funds with $48 billion in assets.

In 1976, John C. Bogle opened the first retail index fund called the First Index

Investment Trust. It is now called the Vanguard 500 Index fund. In November of 2000

it became the largest mutual fund ever with $100 billion in assets.


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HDFC PROFILE

The history of Mutual Funds in India can be broadly divided into 4 Phases:

1. First phase (1964-1987) The Unit Trust of India (UTI) was established in the year 1963 by passing an Act in the

Parliament. The UTI was setup by the Reserve Bank of India (RBI) and functioned under the

Regulatory and Administrative control of the RBI. The First scheme in the history of mutual funds was UNIT SCHEME-64, which is

popularly known as US-64. In 1978, UTI was de-linked from RBI. The Industrial Development Bank of India (IDBI)

took over the Regulatory and Administrative control. At the end of the year 1988, UTI had Rs.6700/- Crores of Assets Under Management.

2. Second phase (1987-1993) Entry of Public Sector Funds. In the year 1987, public sector Mutual Funds setup by public sector banks, Life Insurance

Corporation of India (LIC) and General Insurance Corporation of India (GIC) are came in

to existence. State Bank of India Mutual Fund was the first non-UTI Mutual Fund. The following are the non-UTI Mutual Funds at initial stages. SBI Mutual Fund in June 1987. Can Bank Mutual Fund in December 1987. LIC Mutual Fund in June 1989. Punjab National Bank Mutual Fund in August 1989.

Indian Bank Mutual Fund in November 1989. Bank of India Mutual Fund in June 1990. GIC Mutual Fund in December 1990. Bank of Baroda Mutual Fund in October 1992.


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At the end of 1993, the entire Mutual Fund Industry had Assets Under Management of Rs.47,

004/- Crores.

3. Third phase (1993-2003) Entry of Private Sector Funds - a wide choice to Indian Mutual Fund investors. In 1993, the first Mutual Fund Regulations came into existence, 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. In 1996, the 1993 Securities Exchange Board of India (SEBI) Mutual Funds Regulations

were substituted by a more comprehensive and revised Mutual Fund Regulations.

The number of Mutual Fund houses went on increasing, with many foreign mutual fundssetting up funds in India.

In this time, the Mutual Fund industry has witnessed several Mergers &Acquisitions. The UTI with Rs.44, 541/- Crores. Of Assets Under management was way ahead of all

other Mutual Funds.

The following was the status at end of February 2003:

(Source AMFI website)

Number of schemes Amount (in Crores)

Open-ended schemes 321 82,693

Close-ended schemes 51 4497

TOTAL 372 87,190


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The diagram below shows the three segments and some players in each segment:

4. Fourth phase (since 2003 February) Following the repeal of the UTI Act in February 2003, it was (UTI) bifurcated into 2

separate entities. One is the specified undertaking of the UTI with asset under management of Rs.29, 835/-

Crores as at the end of January 2003. The second is the UTI Mutual Funds Limited, sponsored by State Bank of India, Punjab

National Bank, Bank of Baroda and Life Insurance Corporation of India. UTI is functioning under an Administrator and under the Rules framed by the

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

The UTI Mutual Funds Limited is registered with SEBI and functions under the Mutual

Funds Regulations.


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With the bifurcation of the Erstwhile UTI, with the setting up of a UTI Mutual Fund,

confirming to the SEBI Mutual Fund Regulations and with recent mergers taking place

among different private sector funds, the Mutual Fund Industry has entered its current

phases of consolidation and growth. At the end of September 2004, there were 29 funds, which manage assets of Rs.153108/-

Crores under 421 different schemes. At the end of July 2005, the status of Mutual fund Industry was:

No. of schemes Amount (in crores)

Open-ended schemes 414 1,64,998

Close-ended schemes 46 10,920

TOTAL 460 1,75,918


At the end of March 2006, the status of Mutual fund Industry was:

No. of schemes Amount (in crores)

Open-ended schemes 414 1,85,999

Close-ended schemes 46 71,500

TOTAL 460 2,57,499



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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 organization. Association of Mutual Funds in India

(AMFI) was incorporated on 22 nd August 1995.

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

with Securities Exchange Board of India (SEBI). Till date all the AMCs are that have launched

mutual fund schemes are its members. 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 lines enhancing and maintaining

standards. It follows the principal of both protecting and promoting the interest of mutual funds

as well as their unit holders.

The objectives of Association of Mutual Funds in India

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:


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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. Associations 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 aprogramme of training and certification for all intermediaries and other engaged in the

mutual fund industry. AMFI undertakes all India awareness programme 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.The sponsors of Association of Mutual Funds in India

Bank Sponsored SBI Fund Management Ltd. BOB Asset Management Co. Ltd. Canbank Investment Management Services Ltd. UTI Asset Management Company Pvt. Ltd.

Institutions

GIC Asset Management Co. Ltd. Jeevan Bima Sahayog Asset Management Co. Ltd.

PrivateSector

Indian:-


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Benchmark Asset Management Co. Pvt. Ltd. Cholamandalam Asset Management Co. Ltd. Credit Capital Asset Management Co. Ltd. Escorts Asset Management Ltd. JM Financial Mutual Fund Kotak Mahindra Asset Management Co. Ltd. Reliance Capital Asset Management Ltd. Sahara Asset Management Co. Pvt. Ltd Sundaram Asset Management Company Ltd. Tata Asset Management Private Ltd.

Predominantly India Joint Ventures:-

Birla Sun Life Asset Management Co. Ltd. DSP Merrill Lynch Fund Managers Limited HDFC Asset Management Company Ltd.

Predominantly Foreign Joint Ventures:-

ABN AMRO Asset Management (I) Ltd. Alliance Capital Asset Management (India) Pvt. Ltd.

Deutsche Asset Management (India) Pvt. Ltd. Fidelity Fund Management Private Limited Franklin Templeton Asset Mgmt. (India) Pvt. Ltd. HSBC Asset Management (India) Private Ltd. ING Investment Management (India) Pvt. Ltd. Morgan Stanley Investment Management Pvt. Ltd. Principal Asset Management Co. Pvt. Ltd.

Association of Mutual Funds in India Publications : AMFI publishes mainly two

types of bulletin. One is on the monthly basis and the other is quarterly. These publications are of

great support for the investors to get intimation of the know how of their parked money.


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SEBI REGULATIONS ON MUTUAL FUNDS

The Government brought Mutual Funds in the Securities market under the regulatory framework

of the Securities and Exchange board of India (SEBI) in the year 1993. SEBI issued guidelines in

the year 1991 and comprehensive set of regulations relating to the organization and management

of Mutual Funds in 1993.

SEBI REGULATIONS 1993 (20.1.1993)

The regulations bar Mutual Funds from options trading, short selling and carrying forward

transactions in securities. The Mutual Funds have been permitted to invest only in transferable

securities in the money and capital markets or any privately placed debentures or securities debt.

Restrictions have also been placed on them to ensure that investments under an individual

scheme, do not exceed five per cent and investment in all the schemes put together does not

exceed 10 per cent of the corpus. Investments under all the schemes cannot exceed 15 per cent

of the funds in the shares and debentures of a single company.

SEBI REGULATIONS, 1996

SEBI announced the amended Mutual Fund Regulations on December 9, 1996 covering

Registration of Mutual Funds, Constitution and Management of Mutual funds and Operation of Trustees, Constitution and Management of Asset Management Companies (AMCs) and

custodian schemes of MFs, investment objectives and valuation policies, general

obligations,inspection and audit. The revision has been carried out with the objective of

improving investor protection, imparting a greater degree of flexibility and promoting

innovation.

TYPES OF MUTUAL FUND SCHEMES

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

tolerance and return expectations etc. The table below gives an overview into the existing types

of schemes in the Industry.


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By Structure

Open - Ended Schemes Close - Ended Schemes

Interval Schemes

By Investment Objective

Growth/Equity Schemes General Purpose Income/Debt Funds Money Market Guilt Funds Balanced Schemes

Other Schemes

Tax Saving Schemes Special Schemes Sector Specific Schemes Index Schemes

.Open Ended Schemes

The units offered by these schemes are available for sale and repurchase on any business day at

NAV based prices. Hence, the unit capital of the schemes keeps changing each day. Such

schemes thus offer very high liquidity to investors and are becoming increasingly popular in

India. Please note that an open-ended fund is NOT obliged to keep selling/issuing new units at

all times, and may stop issuing further subscription to new investors. On the other hand, an open-

ended fund rarely denies to its investor the facility to redeem existing units.

Close Ended Schemes

The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of

units. These schemes are launched with New Fund Offer (NFO) with a stated maturity period

after which the units are fully redeemed at NAV linked prices. In the interim, investors can buy


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or sell units on the stock exchanges where they are generally listed. Unlike open-ended schemes,

the unit capital in Close-ended schemes usually remains unchanged. After an initial closed

period, the scheme may offer direct repurchase facility to the investors. Close-ended schemes are

usually more illiquid as compared to open-ended schemes and hence trade at a discount to the

NAV. This discount tends towards the NAV closer to the maturity date of the scheme.

Interval Schemes

These schemes combine the features of open-ended and Close-ended schemes. They may be

traded on the stock exchange or may be open for sale or redemption during pre-determined

intervals at NAV based prices.

Growth/Equity Schemes

These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds

in equities and a small portion in money market instruments. Such schemes have the potential to

deliver superior returns over the long term. However, because they invest in equities, these

schemes are exposed to fluctuations in value especially in the short term.

Equity schemes are hence not suitable for investors seeking regular income or needing to use

their investments in the short-term. They are ideal for investors who have a long-term investmenthorizon. The NAV prices of equity fund fluctuates with market value of the underlying stock

which are influenced by external factors such as social, political as well as economic.


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General Purpose Equity Schemes

The investment objectives of general-purpose equity schemes do not restrict them to invest in

specific industries or sectors. They thus have a diversified portfolio of companies across a large

spectrum of industries. While they are exposed to equity price risks, diversified general-purposeequity funds seek to reduce the sector or stock specific risks through diversification. They mainly

have market risk exposure.

Income /Debt Schemes

These schemes, also commonly known as Income Schemes, invest in debt securities such as

corporate bonds, debentures and government securities. The prices of these schemes tend to be

more stable compared with equity schemes and most of the returns to the investors are generated

through dividends or steady capital appreciation. These schemes are ideal for conservative

investors or those who are not in a position to take higher equity risks. However, as compared to

the money market schemes they do have a higher price fluctuation risk and compared to a Gilt

fund they have a higher credit risk.

These schemes invest in money markets, bonds and debentures of corporate companies with

medium and long-term maturities. These schemes primarily target current income instead of

capital appreciation. Hence, a substantial part of the distributable surplus is given back to the

investor by way of dividend distribution. These schemes usually declare quarterly dividends andare suitable for conservative investors who have medium to long-term investment horizon and

are looking for regular income through dividend or steady capital appreciation.


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Money Market Schemes

These schemes invest in short term instruments such as commercial paper ("CP"), certificates of

deposit ("CD"), treasury bills ("T-Bill") and overnight money ("Call"). The schemes are the least

volatile of all the types of schemes because of their investments in money market instrument

with short-term maturities. These schemes have become popular with institutional investors and

high net-worth individuals having short-term surplus funds

Gilt Funds

These primarily invest in Government Debt. Hence, the investor usually does not have to worry

about credit risk since Government Debt is generally credit risk free. The investor is open to

Interest risk, where the value of the securities changes in relation to the market scenario.

Balanced Schemes

These schemes are also commonly called balanced schemes. These invest in both equities as well

as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of

income and moderate capital appreciation. Such schemes are ideal for investors with a

conservative, long-term orientation.

Tax Saving Schemes

Investors (individuals and Hindu Undivided Families (HUFs)) are being encouraged to investin equity markets through Equity Linked Savings Scheme ("ELSS") by offering them a tax

rebate. Units purchased cannot be assigned / transferred/ pledged / redeemed / switched - out

until completion of 3 years from the date of allotment of the respective Units. The Scheme is

subject to Securities & Exchange Board of India (Mutual Funds) Regulations, 1996 and the

notifications issued by the Ministry of Finance (Department of Economic Affairs), Government

of India regarding ELSS. Subject to such conditions and limitations, as prescribed under Section

80 C of the Income-tax Act, 1961, subscriptions to the Units not exceeding Rs.1, 00, 000 would

be fully tax exempt from income tax. The exemption under section 80 C of IT act is also

applicable to other eligible schemes.


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Special Schemes

Sector Specific Equity Schemes:

These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector.

They depend upon the performance of these select sectors only and are hence inherently more

risky than general-purpose equity schemes. Ideally suited for informed investors who wish to

take a view and risk on the concerned sector.

Index schemes:

An Index is used as a measure of performance of the market as a whole, or a specific sector of

the market. It also serves as a relevant benchmark to evaluate the performance of mutual funds.

Some investors are interested in investing in the market in general rather than investing in any

specific fund. Such investors are happy to receive the returns posted by the markets. As it is not

practical to invest in each and every stock in the market in proportion to its size, these investors

are comfortable investing in a fund that they believe is a good representative of the entire market.

Index Funds are launched and managed for such investors.

Comparison Of Mutual Funds With Other Products/ Investment Opportunities:

The mutual fund sector operates under stricter regulations as compared to most other investmentavenues. Apart from the tax efficiency and legal comfort how do mutual funds compare with

other products? Here the investment in Mutual Funds is compared with:

1. Company Fixed Deposits.

2. Bank Fixed Deposits.

3. Bonds and Debentures.

4. Equity.

5. Life Insurance

1. Company Fixed Deposits versus Mutual Funds

Fixed deposits are unsecured borrowings by the company accepting the deposits? Credit rating

of the fixed deposit program is an indication of the inherent default risk in the investment. The

moneys of investors in a mutual fund scheme are invested by the AMC in specific investments


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under that scheme. These investments are held and managed in-trust for the benefit of schemes

investors. On the other hand, the re is no such direct correlation between a companys fixed

deposit mobilization, and the avenues where these resources are deployed.

A corollary of such linkage between mobilization and investment is that the gains and losses

from the mutual fund scheme entirely flow through to the investors. Therefore, there can be no

certainty of yield, unless a named guarantor assures a return or, to a lesser extent, if the

investment is in a serial gilt scheme. On the other hand, the return under a fixed deposit is

certain, subject only to the default risk of the borrower.

Both fixed deposits and mutual funds offer liquidity, but subject to some differences: The provider of liquidity in the case of fixed deposits is the borrowing company. In

mutual funds, the liquidity provider is the scheme itself (for open-end schemes) or the

market (in the case of closed-end schemes). The basic value at which fixed deposits are encashed is not subject to market risk.

However, the value at which units of a scheme are redeemed entirely depends on the

market. If securities have gained in value during the period, then the investor can even

earn a return that is higher than what she anticipated when she invested. Conversely, she

could also end up with a loss. Early encashment of fixed deposits is always subject to a penalty charged by the

company that accepted the fixed deposit. Mutual fund schemes also have the option of charging a penalty on early redemption of units (by way of an exit load). If the NAV

has appreciated adequately, then despite the exit load, the investor could earn a capital

gain on her investment.

2. Bank Fixed Deposits versus Mutual Funds

Bank fixed deposits are similar to company fixed deposits. The major difference is that banks

are more stringently regulated than are companies. They even operate under stricter

requirements regarding Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR).While

the above are causes for comfort, bank deposits too are subject to default risk. However, given

the political and economic impact of bank defaults, the Government as well as Reserve Bank of

India (RBI) tries to ensure that banks do not fail.


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Further, bank deposits up to Rs 1, 00, 000 are protected by the Deposit Insurance and Credit

Guarantee Corporation (DICGC), so long as the bank has paid the required insurance premium

of 5 paise per annum for every Rs 100 of deposits. The monetary ceiling of Rs 100,000 is for all

the deposits in all the branches of a bank, held by the depositor in the same capacity and right.

3. Bonds and Debentures versus Mutual Funds

As in the case of fixed deposits, credit rating of the bond / debenture is an indication of the

inherent default risk in the investment. However, unlike fixed deposits, bonds and debentures

are transferable securities. While an investor may have an early encashment option from the

issuer (for instance through a put option), generally liquidity is through a listing in the market.

Implications of this are:

If the security does not get traded in the market, then the liquidity remains on paper. Inthis respect, an open-end scheme offering continuous sale / re-purchase option is

superior. The value that the investor would realize in an early exit is subject to market risk. The

investor could have a capital gain or a capital loss. This aspect is similar to a MF

scheme.

It is possible for an astute investor to earn attractive returns by directly investing in the debt

market, and actively managing the positions. Given the market realities in India, it is difficult formost investors to actively manage their debt portfolio. Further, at times, it is difficult to execute

trades in the debt market even when the transaction size is as high as Rs 1 crore. In this respect,

investment in a debt scheme would be beneficial.

Debt securities could be backed by a hypothecation or mortgage of identified fixed and / or

current assets (secured bonds / debentures). In such a case, if there is a default, the identified

assets become available for meeting redemption requirements. An unsecured bond / debenture

are for all practical purposes like a fixed deposit, as far as access to assets is concerned. The

investment in mutual fund scheme is held by a Custodian for the benefit of all investors in that

scheme. Thus, the securities that relate to a scheme are ring-fenced for the benefit of its

investors.


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4. Equity versus Mutual Funds

Investment in both equity and mutual funds are subject to market risk. An investor holding an

equity security that is not traded in the market place has a problem in realizing value from it. But

investment in an open-end mutual fund eliminates this direct risk of not being able to sell theinvestment in the market. An indirect risk remains, because the scheme has to realize its

investments to pay investors. The AMC is however in a better position to handle the situation.

Another benefit of equity mutual fund schemes is that they give investors the benefit of portfolio

diversification through a small investment. For instance, an investor can take an exposure to the

index by investing a mere Rs 5,000 in an index fund.

5. Life Insurance versus Mutual Funds

Life insurance is a hedge against risk and not really an investment option. So,

A Study on Management of Risk & Return Analysis on HDFC Mutual Funds HDFC Mutual Funds Ltd

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