HDFC Final reportCOMPARATIVE ANALYSIS OF MUTUAL FUND WITH OTHER INVESTMENT PRODUCTS AND THEIR...

8/4/2019 HDFC Final reportCOMPARATIVE ANALYSIS OF MUTUAL FUND WITH OTHER INVESTMENT PRODUCTS AND THEIR EVAL

1/77

SUMMER TRAINING PROJECT

A REPORT

ON

COMPARATIVE ANALYSIS OF MUTUALFUND WITH OTHER INVESTMENT

PRODUCTS AND THEIR EVALUATIONS

SUBMITTED TO SUBMITTED BY

Vikas singh

LECTURERmba SEMESTERSRCM, LUCKNOW SRCM, LUCKNOW


2/77

ACKNOWLEDGEMENT

The whole summer internship period with HDFC MUTUAL FUND

Kanpur has been full of learning and sense of contribution towards the

organization. I would like to thank HDFC MUTUAL FUND for giving us

an opportunity of learning and contributing through this project. I also

take this opportunity to thank all those people that made this

experience a memorable one.

A successful project can never be prepared by the single efforts

of the person to whom project is assigned, but it also demand the help

and guardianship of some conversant person who helped the

undersigned actively or passively in the completion of successful

project.

I would like to express my gratitude towards the following persons

who has helped me in making my summer internship full of learning

and interesting too.

Mr. Gaurav virmani (Branch Manager)

Mr. Qazi Asjad Ali

Miss. Shweta Agarwal

Miss. Neha Shukla

Mr. Prashant Sinha

I would also like to express my gratitude to Mr. Gaurav

Virmani (Branch Manager) for assigning me such a worthwhile Project

Comparative Analysis Of Mutual Fund With Other Investment

Options And Their Evaluation to work upon in HDFC Mutual Fund.

2


3/77

SHUBHAM ARORA

INDEX

CONTENT

PAGE NO.

1. INTRODUCTION

5

a) CHARACTERISTICS OF MUTUAL FUND 6

b) ORGANISATION OF A MUTUAL FUND 7

c) HISTORY OF INDIAN MUTUAL FUND

10

d) CLASSIFICATION I OF MUTUAL FUND

13

e) TAX STRUCTURE OF MUTUAL FUND

20

f) ADVANTAGES OF MUTUAL FUND

21

3


4/77

2. MUTUAL FUND INVESTMENT STYLES

28

3. PERFORMANCE MEASURES OF MUTUAL FUND

30

4. EVALUATING FUNDS

34

5. SAVING AND OTHER INVESTMENT OPTIONS

48

6. INFLATION AND MUTUAL FUNDS

53

7. SURVEY FINDINGS AND RECOMMENDATIONS

56

a) INTERNAL ANALYSIS OF HDFC AMC

67

b) RECOMMENDATIONS

71

8. BIBLIOGRAPHY

74

9. QUESTIONNAIRE

75

4


5/77

COMPARATIVE ANALYSIS OF MUTUAL FUNDSWITH OTHER INVESTMENT PRODUCTS.

INTRODUCTION

A Mutual fund is a collective investment that allows many investors, with acommon objective to pool individual investments and give to a professionalmanager who in turn would invest these monies in line with the commonobjective.

Since the mutual; fund is a common pool of money into which investors placetheir contributions that are to be invested in with a stated objective. Theownership of the fund is thus mutual; the fund belongs to all investors. A singleinvestors ownership in the fund is in the same proportion as the amount of thecontribution made by him/her bears to the total amount of the fund.The mutual fund uses the money collected from investors to buy those assetswhich are specifically permitted by its stated investment objective. Thus, anequity fund would buy mainly equity assets-ordinary shares, preference shares;warrants etc. A bond fund would mainly buy debt instruments such asdebentures, bonds; or government securities. It is these assets which are ownedby the investors in the same proportion as their contribution bears to the totalcontributions of all investors put together.

When an investor subscribes to a mutual fund, he or she buys a part of theassets or the pool of funds that are outstanding at that time. It is similar to buyingshares of a joint stock company, in which case the investment makes the

5


6/77

investor a part owner of the company and its assets. A mutual fund allowsinvestors to indirectly take a position in a basket of assets.

Mutual fund investments are not risk free. The major risk involved is the marketrisk. When the market is down most of the equity funds will also experience a

downturn. In fact, investing in mutual funds contains the same risk as investingin the markets, the only difference being the professional management of funds,which result in effective risk reduction.

In the USA a mutual fund is constituted as an investment company and aninvestor buys into the fund i.e. he buys the shares of the fund. In India themutual fund is constituted as a Trust, where the investor gets unit shares. In anycase, whether a share holder is a unit holder or a part owner of the funds assetsis only a matter of legal distinction. The term unit holder includes the mutual fundaccount holder.

The Operational Flow Chart shown below demonstrates the flow of funds incase of mutual funds.

Characteristics of Mutual Funds are as follows:

Investors own the mutual fund

Professional managers (Asset Management Company or AMC) manage

the fund for a small fee.

Fee charged is specified by SEBI (Securities and Exchange Board of India)

and is expressed as a percentage of assets managed.

The funds are invested in a portfolio of marketable securities in

accordance with the investment objective.

Value of the portfolio and the investors holdings, alters with change in the

market value of investments.

Investments in securities are spread among a wide cross section of industriesand sectors thus the risk is reduced. Diversification leads to risk reduction

6

Pool their

money

Invest in

Generates

Passed back to


7/77

because all stocks may not move in the same direction and in the sameproportion at the same time. Investors in mutual funds are known as unit holders.

The unit holders share the profits/losses in proportion with their respective

investments. The mutual fund providing companies come out with a variety ofschemes to achieve different investment objectives from time to time.

ORGANISATION OF A MUTUAL FUND

Mutual funds diversify their risk by holding a portfolio many companies instead ofonly one asset. This is because holding all the investors money in one asset willresult in absolute dependence of fortunes on that particular asset. On creating aportfolio with a variety of assets, this risk is substantially reduced. In India, amutual fund must be registered with the SEBIwhich regulates securities marketsbefore it can collect funds from the public.

Today, if mutual funds are emerging as a favoured investment option it is due toits advantages over other investment options it seems to be capitalising on. Indiais a developing economy recording an approx. 8% GDP growth, an indicator of

7

MarketingFundManagement

Operations

Broker

Market

Registrar Custodian

Bank

Sponsor

Trustee Company

Asset

ManagementCompany

Fiduciary

responsibility

to theInvestors

Distribution


8/77

the fact that the investor market is growing like never before. In the US 23% ofthe household financial assets are held in mutual funds and the country manages$11trillion of assets and 60% of the 500 US AMCs are independent advisors.

Every day, the fund manager counts up the value of the funds holdings, figures

out how many shares are purchased by shareholders, and then calculate the NetAsset Value (NAV) of the mutual fund, the price of a single share of the fund onthat day. If the fund manager is doing a good job, the NAV figure increases-theinvestors shares will be worth more. But exactly how does a mutual funds NAVincrease?

There are a few of ways that a mutual fund can make money in its portfolio. Amutual fund can earn dividends from the stocks that it owns.Dividends are shares of corporate profits paid to the stockholders of publiccompanies. The funds may have money in the bank that earns interest, or itmight receive interest payments from the bonds that it owns. These are all

sources of income for a fund. Mutual funds are required to hand out or distributethis income to shareholders. Usually, this is done twice a year, in a move that iscalled income distribution.

At the end of the year, a fund makes another kind of distribution, this time fromthe profits made by selling stocks or bonds that have risen in price. These profitsare known as capital gains and the act of passing them out is called capital gainsdistribution.

Income from Mutual Funds

Income earned on stocks and interest on bonds. A fund pays out nearly allthe income it receives over the year to fund owners in the form of a

distribution.

If a funds sells securities that have increases in price, the fund has a

capital gain most funds also pass on these gains to investors in

distribution.

If funds holdings rise in price but are not sold by the fund manager, the

funds shares increase in price. Investors can sell their mutual fund shares

for a profit.

The mutual funds can be classified under 3 heads as follows :

8


9/77

Equity Funds

Balanced Funds

Debt Funds

Equity Fund Schemes :

Equity schemes are those that invest predominantly in equity shares ofcompanies. An equity scheme seeks to provide returns by way of capitalappreciation.

Balanced Fund Schemes :

Balanced schemes invest both in equity shares and in income-bearing

instruments. They aim to reduce the risks of investing in stocks by having a stakein both the equity and the debt markets. These schemes adopt some flexibility inchanging the asset composition between equity and debt. The fund managersexploit market conditions to buy the best class of assets at each point in time. Bymixing stocks and bonds (and sometimes other types of assets as well, like callmoney or commercial paper), a balanced scheme is likely to give a returnsomewhere in between those of stocks and bonds. Bonds add stability duringmarket downturns and volatile periods, while stocks provide growth.

Debt Fund Schemes :

These schemes invest mainly in income-bearing instruments like bonds,debentures, government securities, commercial paper, etc. These instrumentsare much less volatile than equity schemes. Their volatility depends essentiallyon the health of the economy e.g., rupee depreciation, fiscal deficit, inflationarypressure. Performance of such schemes also depends on bond ratings. Theseschemes provide returns generally between 7 to 12% per annum.

9


10/77

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trustof India, at the initiative of the government of India and the Reserve Bank. Thehistory of mutual funds in India can be broadly divided into four distinct phases.

First Phase (1964-87):

Unit trust of India was established in 1963 by an Act of Parliament by the

Reserve Bank of India. In 1978 UTI was delinked from the RBI and the IndustrialDevelopment Bank of India (IDBI) took over its regulatory and administrativecontrol. The first scheme launched by UTI was Unit Scheme 1964. By the end of1988 UTI had Rs.6, 700 crores of assets under management.

Second Phase-Entry of public sector funds (1987-93):

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

public sector banks, Life Insurance Corporation of India (LIC) and the

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 (December 87), Punjab National

Bank (August 89), Indian Bank Mutual Fund (November 89), Bank of

India (June 90), Bank of Baroda Mutual Fund (Oct 92), LIC establishes its

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

December 1990. At the end of 1993, the mutual funds industry had assets

under management of Rs 47,004 crores.

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

The entry of private sector funds in 1993 marked the beginning of a new era forthe Indian mutual fund industry, giving the investors a wider choice of fundfamilies. This was also the year in which First Mutual Fund Regulations came

10


11/77

into being. Under this, all mutual funds except the UTI were to be registered andgoverned. The erstwhile Kothari Pioneer (now merged with Franklin Templeton)was the first private mutual fund company to be registered in July 1996.The 1993 SEBI (Mutual fund) Regulations were substituted by morecomprehensive and revised mutual fund regulations in 1996. Today, the industry

functions under the SEBI (Mutual Fund) Regulations, 1996.The number of mutualfund houses increased, with many foreign mutual funds setting up funds in Indiaand the industry witnessed several mergers and acquisitions. As in January

2003, there were 33 mutual funds with total assets of Rs44, 541 crores. The UnitTrust of India with Rs. 44,541 crores of assets under management was wayahead of other mutual funds.

Fourth phase (February 2003 onwards):

In February 2003, following the repeal of the United Trust of India Act of 1963,

UTI bifurcated into two separate families. One is the specified undertaking of theUnited Trust of India with the assets under management of Rs. 29,835 crores asthe end of January 2003, representing broadly, the assets of US 64 scheme,assured return and certain other schemes. The specified undertaking if the UnitTrust of India, functioning under the administrator and under the rulings of theGovernment of India does not come under the Mutual fund Regulations. Thesecond is the UTI Mutual Fund Ltd., sponsored by SBI, PNB, DOB and LIC.

With the bifurcation of the erstwhile UTI which had, in March 2000 more than Rs.7,600 crores of assets under management and with the setting up of the UTIMutual Fund, conforming to the SEBI Mutual Funds Regulations and with therecent mergers talking place in the private sector funds, the mutual fund industryhad entered its current phase of growth. As at the end of(research for presentday figures). Rs.323602.79 January 2006

11


12/77

Classification of Mutual Funds

Money market funds

Aiming for protection, money market funds are considered the safest place to

invest money in mutual funds. They do not provide much potential for income or

growth. However, they do seek to generate a small amount of return by loaning

money on a short-term basis, anywhere from one day to up to a year. These

loans are considered low-risk because they are such short-term. On the other

hand, they are also typically the class of fund that earns the least for investors.Money market funds charge low interest rates for the loans, thus earning you

small amounts on your investment. Money market funds try to maintain a

consistent share price of $1 by paying out all of the earnings to shareholders and

by avoiding securities that can rise and fall in price (so there are no capital gains

to distribute).

12


13/77

You have a choice of varieties of money market funds:

Taxable: These are simply called "money market funds" if offered by a

mutual fund company; or "money market accounts" if offered by a bank.

Both make short-term loans, but those offered by a bank are FDIC

insured. Those offered by mutual funds are insured by the private insurer,

SIPC (Securities Investors Protection Corporation).

Government: These funds only make loans to national governments or

agencies of those governments. Earnings are free from federal taxation.

Municipal: These funds only make loans to various state and local

governments and their agencies. The income from these funds is free

from federal taxation, and any portion of the income that comes from the

state in which you live is also free from state taxation. You can also find

money market funds that make loans only within a particular state, so youcan find a money market fund for your own state and generally be free

from all taxation.

Fund of Funds

A fund of funds, as the name suggests, is a mutual fund that holds shares ofother mutual funds (stock funds, bond funds, maybe both). This is one way ofachieving a high level of diversification. However, the expense ratio tends to behigh since the fund must pay for itself as well as the expenses charged by theholdings. Further, because many mutual funds have similar holdings, buyingshares in many different funds doesn't always result in diversification of holdings.

Bond FundsAiming for income, bond funds loan money to corporations and/or government

agencies. So, in general, if you invest in a bond fund, you are loaning money in

order to receive regular interest payments until the borrower has repaid the

balance of the loan (or you've sold your shares). Bond funds, therefore, are

typically for earning a somewhat predictable amount of income. In times of falling

interest rates, however, a bond fund could increase in value, growing your money

13


14/77

through capital appreciation, as stock funds are meant to do. The opposite is also

true; in times of rising interest rates, the bonds in your fund may lose value and

cause you to lose money, even while you're earning income from interest.

Types of bond funds

Bond funds tend to be grouped according to the kinds of bonds in the fund. You

can buy a fund that invests in:

Corporate bonds: a corporation is the borrower

Government bonds: the national government or its agency is the

borrower

Municipal bonds: a state or local government or its agency is the

borrower

Bond funds can also be grouped according to the average length of the life of the

bonds (their "average maturity") in the fund:

Short-term bond funds: bonds typically maturing in less than five years

Intermediate bond funds: bonds typically maturing in five to ten years

Long-term bond funds: bonds typically maturing in ten to thirty years

Share prices, interest rates and yield

Share prices of bond funds reflect the value of the fund's underlying bonds. If

interest rates drop, the fund's share price (net asset value) will tend to rise

because the bonds in the fund will appreciate in value. If rates rise, the share

prices will usually fall.

Yield is the percentage you're earning on your investment. It will differ depending

on when you invest. For example, if the bond fund is earning $1 a share

annually, and you paid $10 a share, you would have a yield of 10%. But if youwaited until the NAV dropped and then paid $9 a share, you would have a yield

of 11%.

A fund's yield, or earnings, will differ from your total return. If the NAV drops, the

loss in value of your investment will reduce your overall return (called total

14


15/77

return). If you sell your fund shares while the NAV is down, you could actually

lose money even if you have earned some income.

Average maturity and credit rating

This is the average number of years until the bonds in the fund expire (mature).

Generally, the longer the average maturity of a fund, the higher the fund's yield,

because loans for longer periods tend to be made at higher interest rates.

However, credit rating can also affect the price of a bond fund. Generally, the

better the overall credit rating of the bonds held in the fund, the lower the fund's

overall yield - but the higher the stability of the fund's NAV.

Stock Funds

Stock funds generally aim for growth, income or a combination of both. Stock

funds are probably the most common of all mutual funds, even though they come

in many shapes and sizes. A stock fund invests mainly in stocks and may focus

on a particular type of stock or segment of the stock market, depending on its

goal and strategy.

Types of stock funds

The fund's strategy focuses on the types of securities the managers will target as

potential investments. For example, it might be stocks of well-established

companies, or stocks of small companies with high growth potential.

Aggressive growth. These are the start-up, or relatively new companies

who have not yet established themselves in their product or service

market. They may also be companies in high risk businesses, such as the

Internet, biotechnology, and a number of other highly competitive and

money-intensive industries.

Growth. These are companies that have moved beyond the phase of

uncertainty but still have a lot of room to grow. The more and faster they

grow, the more stock price movement investors can expect to see.

15


16/77

Value. These are well-established companies with histories of consistent

earnings and growth, whose stock prices are viewed by the portfolio

manager as being an attractive value.

Industry and sector. Some industries will do well while others will do

poorly. The companies in the software business are in the same industry;while others in the high tech hardware business are in a different industry.

All of these companies, however, would be grouped into the high tech

sector.

Country or region. The economies of different countries act differently at

different times. So there are mutual funds, for instance, that invest in

specific countries or regions. If you hear the term, "emerging growth fund,"

it may be a fund that invests in countries that have small but growing

economies.

OTHER FUNDSBalanced funds

Balanced funds aim for the best of both stocks and bonds. These funds mix

stocks and bonds to give you a mixture of growth potential and income potential,

as well as a little more protection during periods of dropping prices. The stocks

are typically meant to provide price appreciation potential, while the bonds are

meant to provide income and a measure of price stability.

Balanced funds may either keep their ratio of stocks to bonds fairly constant or

switch the ratio of stocks to bonds depending on market conditions. Because of

the mix, balanced funds tend to offer a return on investment over the long-term

somewhere between a growth stock fund and a traditional bond fund.

Asset Allocation F unds

Asset allocation funds can invest in a mixture of stocks, bonds and cash

equivalents. The ratio of each asset class is typically based on investor risk

profiles, such as conservative, moderate and aggressive.

Index funds

16


17/77

Index funds are low-cost mutual funds that seek to mirror the performance of the

broader markets they represent. Years of investment research show that mutual

fund managers who try to buy and sell individual companies based on their own

research have a hard time outperforming the broader markets over time. That's

why index funds are so attractive.

Lifestyle Funds

These funds aim to provide all the diversification that you need in a single fund.

They have gained in popularity along with the growth in 401(k) plans. They are

designed for consumers who dont have much time or knowledge to make

investment decisions. They can go by a number of different names, such as

retirement, target date (e.g., target date 2040), life-cycle or asset allocation

funds.

Some lifestyle funds are geared to a certain risk level. So, for example, there

may be funds designed for conservative, moderate and aggressive investors.

With these funds, it is up to the consumer to switch into a different fund if their

goals change.

With lifestyle funds that are designed for a specific age group or retirement target

date, the asset mix shifts as time goes on. As the group ages or moves closer to

retirement, the asset mix automatically becomes more conservative.

Exchange traded funds (ETFs): An alternative

Exchange Traded Funds are baskets of stocks, somewhat like mutual funds, that

are traded on the stock market. The fees may be even lower than mutual funds,

and the tax consequences more favorable.

But you pay a commission to buy them, just like when you buy stocks. So, if you

want to invest on a regular basis, ETFs can get very expensive because you pay

a commission every time you buy more shares. For example, if you automatically

invest $100 out of your checking account each month into an ETF, you would

pay a commission every month. So, for automatic investing, you would likely be

better off investing in mutual funds.

Open Ended funds V/s Closed Ended Funds:

17


18/77

An open ended fundis one that has units available for sale and repurchase at alltimes. An investor can buy or redeem units from the fund itself based on the NetAsset Value (NAV) per share.

The NAV per unitis obtained by dividing the amount of market value of the funds

assets (adding accrued income and subtracting the funds liabilities) by thenumber of units outstanding. The number of units outstanding goes up/ downevery time the fund purchases new/repurchases existing units. In other words,the unit capitalof an open ended mutual fund is variable. The fund size and itstotal investment go up if more new subscriptions come in from new investorsthan redemptions by existing investors; the fund shrinks when redemptions ofunits exceed fresh subscriptions.

In the case of a close ended fund, the unit capital is fixed, as it makes a one-timesale of a fixed number of units. Unlike open ended funds, closed ended funds donot allow investors to buy or redeem units directly from the fund. Investors are

provided the much needed liquidity by many close ended funds getting listed inthe Stock Exchange(s).Trading through a stock exchange enables investors tobuy/sell units of a close ended mutual fund from each other, through a stockbroker, in the same fashion as buying and selling stocks of a company. The

funds units may be traded at a discount or premium to NAV based on theinvestors perception about the funds future performance and other marketfactors affecting the demand for a funds unit.

Note, that the number of outstanding units of a close ended fund do not vary onaccount of trading in the funds units in a stock exchange. On the other hand,funds often do

buy back of fund shares/units, thus offering another avenue of

liquidity for close ended funds. In this case, the number the mutual fund actuallyreduces the number of units outstanding with investors.

Load v/s No Load Funds:

Marketing of a new mutual fund scheme involves initial expenses. Theseexpenses may be recovered from the investors in different ways at differenttimes. Three usual ways in which a funds sales expenses may be recoveredfrom the investors are:

1. At the time of investors entry into the fund/scheme by deducting a specific

amount from his initial contribution, or

2. By charging the fund/scheme with a fixed amount each year, during the

stated number of years, or

3. At the time of the investors exit from the fund/scheme, by deducting a

specified amount from the redemption proceeds payable to the investor.

18


19/77

These charges are made by the fund managers to the investors to coverdistribution/sales/marketing expenses are called loads. The load charged on theentry of the investor into the scheme is called a front end loadoranentry load.

This is the Case 1 above. The load amount charged to the scheme over a periodof time is called a deferred load. This is the Case 2. The load that the investorpays at the time of his exit is called a back endorexit load. This is the Case 3.Some funds may also charge different amounts of loads to the investors,depending on the number of years the investor has stayed with the fund; thelonger the time period for which the investor has stayed with the fund the lesserthe exit loadcharged. This is called the contingent deferred sales charge.

Note that the front end load amount is deducted from the initialcontribution/purchase amount paid by the incoming investor, thus reducing hisinitial investment amount. Similarly exit loads would reduce the redemptionproceeds paid out to the outgoing investor. If the sales charge is made on adeferred basis directly on the scheme, the amount of the load may not beapparent to the investor, as the schemes NAV would reflect the net amount afterthe deferred load.

Funds that change front end, back end or deferred loads are called load funds.Funds that make no such charges or loads for sales expenses are called no loadfunds.

Tax Exempt V/s Non Tax Funds:

When a fund invests in tax exempt securities, it is called a tax exempt fund. Forexample, in the US municipal bonds pay interest that is tax free, while interest oncorporate and other bonds is taxable. In India, after the 1999 Union GovernmentBudget, all of the dividend income received from any of the mutual funds is taxfree in the hands of the investor. However, other than equity funds have to pay adistribution tax, before distributing income to investors. Equity mutual funds aretax exempt investment avenues.

Tax rules for mutual fund investors as per Finance Bill 2008: Equity Orientedschemes.

19


20/77

TAX STRUCTURE OF MUTUAL FUNDS

FOREQUITY

Short TermCapital GainsTax

Long Term CapitalGains Tax

DividendIncome

DividendDistribution tax TDS

2007-08

2008-09

2007-08 2008-09 2007-08

2008-09

2007-08

2008-09

2007-08

2008-09

Residentindividual / HUF

10% !5% Nil Nil Taxfree

Taxfree

Nil Nil Nil Nil

Partnershipfirms/AOP/BOI

!0% 15% Nil Nil Taxfree

Taxfree

Nil Nil Nil Nil

DomesticCompanies

10% 15% Nil Nil Taxfree

Taxfree

Nil Nil Nil Nil

NRIs 10% 15% Nil Nil Taxfree

Taxfree

Nil Nil STCG-10%LTCG Nil

FOR DEBT

Short TermCapital Gains

Tax

Long Term Capital Gains

Tax

Dividend

Income

DividendDistribution tax-

Other thanliquid/moneymarket Schemes

DividendDistribution tax-

Liquidity/MoneyMarket Schemes TDS

2007-08

2008-09

2007-08 2007-08 2008-09

2008-09

2007-08 2008-09

2007-08

2008-09

2007-08

2008-09

Resident individual /HUF

Asperslab

Asperslab

10%(20%indexation)

10% (20%indexation)

TaxFree

TaxFree

14.025% 14.1% 14.025% 28.3% Nil Nil

Partnershipfirms/AOP/BOI

Asperslab

Asperslab

10% (20%indexation)

10%( 20%indexation)

TaxFree

TaxFree

22.44% 22.6% 22.4% 28.3% Nil Nil

Domestic Companies Asperslab

Asperslab

10%( 20%indexation)

10%( 20%indexation)

TaxFree

TaxFree

22.44% 22.6% 28.3% 28.3% Nil Nil

NRIs Asperslab

Asperslab

10% (20%indexation)

10% (20%indexation)

TaxFree

TaxFree

14.025% 14.2% 14.025% 28.3% STCG-30%LTCG-20%

ADVANTAGES OF MUTUAL FUNDS:

20


21/77

Mutual funds offer a number of advantages, including diversification, professional

management, cost efficiency and liquidity.

Diversification. A mutual fund spreads your investment dollars around

better than you could do by yourself. This diversification tends to lower the

risk of losing money. Diversification usually results in lower volatility,

because when some investments are doing poorly, others may be doing

well.

Professional management. Many people don't have the time or expertise

to make investment decisions. A mutual fund's investment managers,

however, are trained to search out the best possible returns, consistent

with the fund's strategies and goals. In essence, your mutual fund

investment brings you the services of a professional money manager.

Cost efficiency. Putting your money together with other investors creates

collective buying power that may help you achieve more than you could on

your own. As a group, mutual fund investors can buy a large variety and

number of specific investments. They can also afford to pay for

Mutual Funds:A Packaged Product

Diversification

21

ProfessionalManagement

Convenience Tax Benefits

Liquidity


22/77

professional money managers and fund operating expenses, where they

wouldn't be able to afford it on their own.

Liquidity. With most funds, you can easily sell your fund shares for cash.

Some mutual fund shares are traded only once a day at a fixed price,

while stocks and bonds can be bought or sold any time the markets areopen at whatever price is then available.

Convenient Administration Investing in a Mutual Fund reduces

paperwork and helps you avoid many problems such as bad deliveries,

delayed payments and follow up with brokers and companies. Mutual

Funds save your time and make investing easy and convenient.

Return Potential Over a medium to long-term, Mutual Funds have the

potential to provide a higher return as they invest in a diversified basket of

selected securities.

Transparency You get regular information on the value of your

investment in addition to disclosure on the specific investments made by

your scheme, the proportion invested in each class of assets and the fund

manager's investment strategy and outlook.

Flexibility Through features such as regular investment plans, regular

withdrawal plans and dividend reinvestment plans, you can systematically

invest or withdraw funds according to your needs and convenience.

Affordability Investors individually may lack sufficient funds to invest in

high-grade stocks. A mutual fund because of its large corpus allows even

a small investor to take the benefit of its investment strategy.

Funds typically give you two ways in which to invest:

22


23/77

Lump sum. You can invest any amount you want at one time, as long as

you meet the minimum requirements of that fund. Some funds have no

minimum for opening an account or no minimum for additional share

purchases, while others do.

Automatic investment. Most funds offer plans that allow you to transferset amounts on a regular basis automatically from your bank account or

paycheck. This is a great way to save money on a routine basis.

With automatic investing, you get the benefits of dollar cost averaging.

That is, when you make regular investments in a mutual fund, such as

investing $100 every month, you can take advantage of both the ups and

downs of the market. When the market is down, your monthly investment

typically buys you more shares of the fund, helping to increase your

ownership in the fund. When the market is up, your monthly investmenttypically buys you fewer shares of the fund, helping you avoid buying too

many shares at higher prices. Over a long period of time, the end result is

that the average costof your fund shares is lower than the average price

of the fund shares during the same period.

Exchanging and selling shares

Many funds allow you to make free exchanges of your shares for shares ofanother fund owned by the same fund company. Typically, there is a limit to the

number of free exchanges you can make. Be aware that even though an

exchange may be free, there may be tax consequences associated with it.

To sell shares, you either call the fund directly if you have a no-load fund, or have

your broker or bank officer do it if you have a load fund. Typically, you are given

the option to have the proceeds deposited into your account or sent directly to

you by check or wire. Some funds will charge you a fee if you don't keep the fund

shares for a minimum amount of time (e.g., 90 or 180 days).

23


24/77

Share price

The value of a mutual fund share is calculated based on the value of the assets

owned by the fund at the end of every trading day. Here is how it works:

The fund calculates the value: A share's value is called the Net Asset

Value (NAV). The fund calculates the NAV by adding up the total value of

all of the securities it owns, subtracting the expenses of the fund, and then

dividing by the number of shares owned by shareholders like you.

Value changes daily: Since the value of the stocks or bonds owned by

the fund can change daily, the value of the fund can also change daily.

Therefore, a fund is required by law to adjust its price once every trading

day to provide investors with the most current NAV.

How many shares you own: To see the value of your investment, you

take the value of one share and multiply it by the number of shares you

have in the fund. Or, if you are considering investing say $1,000 in the

fund, you would divide that money by the value of one share to see how

many shares that $1,000 would give you. While you cannot buy a fraction

of a share of stock, you can own a fraction of a mutual fund share, if the

amount you invest does not divide evenly by the NAV.

Earning money

Once your money is in a fund, it can provide you with earnings in three ways.

Appreciation: The value of a fund share can appreciate or go up in value.

(Of course, it can also go down in value.) When the total value of the

securities owned by the fund rises, the value of your fund shares rises with

it. Again, the reverse is also true.

Dividends: If the fund receives dividends from stocks, interest from

bonds, or other investment income, it distributes those earnings to

shareholders as a dividend according to the terms outlined in its

prospectus. Depending on the fund, these distributions can be monthly,

quarterly, or annually.

Capital gain distributions: Every time the fund manager sells securities

at a profit, the fund earns capital gains. Funds are required to distribute

these gains to the shareholders at regular intervals, typically once or twice

24


25/77

a year. You can choose to have the fund automatically reinvest the money

in more fund shares, keep it as cash in your account, or send the money

to you.

Choosing a Mutual FundChoosing the right fundsand trusting your decisions enough to back them withyour moneyis challenging. To keep from getting overwhelmed, be sure you

understand what you want for your money (protection, income, growth), then look

only at the funds that aim for the same thing. But where can you look for

information?

Look at the fund prospectus

The prospectus is essentially the user's manual for a mutual fund. It has the

reputation of being dense and complicated to read, but recent changes in

regulations have required funds to make every prospectus much simpler,

especially in the key areas of understanding performance and expenses. Simply

looking at the charts and tables in the first few pages will tell you a lot you need

to know.

What's in a prospectus?

The SEC requires every fund to publish a prospectus and update it annually. It

covers all of the important elements, such as the history, management, financial

condition, performance, expenses, goals, strategies, types of allowable

investments, and policies.

Performance. Each fund must tell you how much it has increased or

decreased in value in each of the past 10 years (or for every year of its

existence, if shorter). This is labeled in the prospectus as "performance" or

as "annual total return." Fund performance is required to be shown against a

relevant industry benchmark, a performance measure used by the industry of

how the market segment has performed as a whole compared to the

investments in that segment held by the fund. Typically, the benchmark will

be an "index" for that category.

Average annual return. While every fund has to show its annual

performance, every fund also must to tell you its average return on a

yearly basis. Average annual return is important because it keeps funds

25


26/77

from promoting their best years and ignoring their worst years. It takes the

total returns for each year and averages them across the number of years

the fund has been in existence.

Fees and expenses. The prospectus will tell you if a fund charges a sales

charge or is a "no-load" fund, meaning that there is no up-front salescharge. All funds charge management fees and expenses, which will be

described in the prospectus.

Risks

Because mutual funds typically hold a large number of securities, their level of

diversification provides them with a lower level of risk than investing in a single

stock or bond.

However, investing in mutual funds still contains a number of risks that youshould consider before investing, including:

You could lose money

Your money may lose buying power

You may not achieve your goal

Your investment may rise and fall in value

Other risks

You could lose money

Every mutual fund prospectus will highlight this point. It's the most obvious and

feared risk of investing. There are, however, many strategies for managing this

risk, particularly over the long term.

Your money may lose buying power

This risk is also known as inflation risk: as prices increase, your investments

must increase in value at least at the same pace, or you'll lose purchasing power.

You may not achieve your goal

Probably the biggest, yet most overlooked risk of investing, is the risk of not

achieving your goal. It's probably overlooked so often because so few investors

actually set goals, and many others set unrealistic goals. Furthermore, many

investors don't buy the right investments to help them achieve their goals. This

type of risk is often called shortfall risk (falling short of your goal). For example, if

26


27/77

you are investing to pay for a future college education, a money market fund

might feel safe. But it's highly unlikely that you'll reach your goal

Your investment may rise and fall in value

Almost all investments have the potential to gain and lose value. This is known

as market risk. In other words, the price of any investment, whether it's stocks,

bonds, mutual funds, or any other, is likely to rise and fall over time. Seasoned

investors tend to ignore the relatively small price movements in their investments,

preferring to try and capture the more significant fluctuations they can better

anticipate. If you invest for longer periods of time, market risk may become less

dangerous to you. That's because, over the long-term, most investments tend to

rise in price. Market risk, however, can place investors at a significant

disadvantage if they are forced to sell at a time when prices happen to be down.

Foreign exchange or currency risk

If you invest overseas, the exchange rate between your home currency and the

foreign currency adds an extra layer of risk to your investment. The stock or bond

you buy may go up, but the exchange rate may go down so far that it wipes out

your gain.

The halo effect

When something wonderful happens to one stock in an industry, many of theothers in that industry may also enjoy a rise. This is known as the Halo Effect.

But it also occurs in reverse, taking value out of perfectly good investments just

because they are linked in the minds of investors to another investment that is

experiencing a problem.

27


28/77

Mutual Fund Investment Styles

The growth in the number of mutual funds is due, in part, to the variety ofinvestment styles employed by money managers. Studies have shown thatinvestment style can play an important role in fund returns; as a result, there isconsiderable debate within the investment community about the effectiveness ofthe various styles. The following is an overview of the dominant styles employedby todays money managers.

Active vs. Passive

Active investors believe in their ability to outperform the overall market by pickingstocks they believe may perform well. Passive investors, on the other hand, feelthat simply investing in a market index fund may produce potentially higher long-term results. The majority of mutual funds underperform market indexes.*Passive investors believe this is due to market efficiency. In other words, allinformation available about a company is reflected in that companys currentstock price, and its impossible to forecast and profit on future stock prices.Rather than trying to second-guess the market, passive investors can buy theentire market via index funds.

Growth vs. Value

Active investors can be divided into growth and value seekers. Proponents ofgrowth seek companies they expect (on average) to increase earnings by 15% to25%. Of course, there is no assurance that this objective will be obtained. Stocksin these companies tend to have high price to earnings ratios (P/E) sinceinvestors pay a premium for higher returns. They usually pay little or nodividends. The result is that growth stocks tend to be more volatile, and thereforemore risky.

Value investors look for bargains cheap stocks that are often out of favor,such as cyclical stocks that are at the low end of their business cycle. A valueinvestor is primarily attracted by asset-oriented stocks with low prices comparedto underlying book, replacement, or liquidation values. Value stocks also tend tohave lower P/E ratios and potentially higher dividend yields. These potentiallyhigher yields tend to cushion value stocks in down markets while certain cyclicalstocks will lead the market following a recession.

Small Cap vs. Large Cap

28


29/77

Some investors use the size of a company as the basis for investing. Studies ofstock returns going back to 1925 have suggested that "smaller is better." Onaverage, the highest returns have come from stocks with the lowest marketcapitalization (common shares outstanding times share price). But since thesereturns tend to run in cycles, there have been long periods when large-cap

stocks have outperformed smaller stocks.

Small-cap stocks also have higher price volatility, which translates into higherrisk. Some investors choose the middle ground and invest in mid-cap stocks withmarket capitalizations between $500 million and $8 billion seeking a tradeoffbetween volatility and return. In so doing, they give up the potential return ofsmall-cap stocks.

Bottom-Up vs. Top-Down

A top-down investor looks first at economic factors and then selects industries

accordingly. For example, during periods of low inflation, consumer spendingincreases, which might be a good time to buy automobile stocks or retail stocks.The top-down investor would then search for the best values in these industries.A bottom-up investor is more concerned with individual companiesfundamentals. They reason that even if its industry is doing poorly, a strongcompany will still outperform the market. Both of these styles emphasizefundamentals, but place different emphasis on the economic environment.

Technical vs. Fundamental Analysis

Another difference is that some equity investors look at the fundamentals of

individual stocks, while others invest based on technical analysis.Fundamentalists, who represent the majority, spend time poring over annualreports and visiting companies attempting to uncover investment opportunitiesand seek greater return potential over the long run. Technical analysts pore overcharts of stock prices and economic data in an attempt to divine patterns thatcould be indicative of future trends, and are more concerned with short-termmarket timing than individual stock picking.

Although technical analysts fell out of favor as studies questioned theirforecasting powers, increased access to information and the growing power ofcomputers have led to a resurgent interest.

29


30/77

Performance Measures of Mutual Funds

Mutual Fund industry today, with about 34 players and more than five hundredschemes, is one of the most preferred investment avenues in India. However,with a plethora of schemes to choose from, the retail investor faces problems inselecting funds. Factors such as investment strategy and management style arequalitative, but the funds record is an important indicator too. Though pastperformance alone can not be indicative of future performance, it is, frankly, theonly quantitative way to judge how good a fund is at present. Therefore, there isa need to correctly assess the past performance of different mutual funds.

Worldwide, good mutual fund companies over are known by their AMCs and thisfame is directly linked to their superior stock selection skills. For mutual funds togrow, AMCs must be held accountable for their selection of stocks. In otherwords, there must be some performance indicator that will reveal the quality ofstock selection of various AMCs.

Return alone should not be considered as the basis of measurement of theperformance of a mutual fund scheme, it should also include the risk taken by thefund manager because different funds will have different levels of risk attached tothem. Risk associated with a fund, in a general, can be defined as variability or

fluctuations in the returns generated by it. The higher the fluctuations in thereturns of a fund during a given period, higher will be the risk associated with it.

These fluctuations in the returns generated by a fund are resultant of two guidingforces. First, general market fluctuations, which affect all the securities present inthe market, called market risk or systematic risk and second, fluctuations due tospecific securities present in the portfolio of the fund, called unsystematic risk.

The Total Risk of a given fund is sum of these two and is measured in terms ofstandard deviation of returns of the fund. Systematic risk, on the other hand, ismeasured in terms of Beta, which represents fluctuations in the NAV of the fund

vis--vis market.

The more responsive the NAV of a mutual fund is to the changes in the market;higher will be its beta. Beta is calculated by relating the returns on a mutual fundwith the returns in the market. While unsystematic risk can be diversified throughinvestments in a number of instruments, systematic risk can not. By using therisk return relationship, we try to assess the competitive strength of the mutualfunds vis--vis one another in a better way.

30


31/77

In order to determine the risk-adjusted returns of investment portfolios, severaleminent authors have worked since 1960s to develop composite performance

indices to evaluate a portfolio by comparing alternative portfolios within aparticular risk class. The most important and widely used measures ofperformance are:

The Treynor Measure

The Sharpe Measure

Jenson Model

Coefficient of Variation

The Treynor Measure

Developed by Jack Treynor, this performance measure evaluates funds on thebasis of Treynor's Index. This Index is a ratio of return generated by the fundover and above risk free rate of return (generally taken to be the return onsecurities backed by the government, as there is no credit risk associated),during a given period and systematic risk associated with it (beta). Symbolically,it can be represented as:

Treynor's Index

(Ti) = (Ri - Rf)/Bi.

Where, Ri represents return on fund, Rfis risk free rate of return and Bi is betaof the fund.

All risk-averse investors would like to maximize this value. While a high andpositive Treynor's Index shows a superior risk-adjusted performance of a fund, alow and negative Treynor's Index is an indication of unfavorable performance.

The Sharpe Measure

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio,

which is a ratio of returns generated by the fund over and above risk free rate ofreturn and the total risk associated with it. According to Sharpe, it is the total riskof the fund that the investors are concerned about. So, the model evaluatesfunds on the basis of reward per unit of total risk. Symbolically, it can be writtenas:

Sharpe Index (Si) = (Ri - Rf)/Si

31


32/77

Where, Si is standard deviation of the fund.While a high and positive Sharpe Ratio shows a superior risk-adjustedperformance of a fund, a low and negative Sharpe Ratio is an indication ofunfavorable performance.

Comparison of Sharpe and Treynor

Sharpe and Treynor measures are similar in a way, since they both divide therisk premium by a numerical risk measure. The total risk is appropriate when weare evaluating the risk return relationship for well-diversified portfolios. On theother hand, the systematic risk is the relevant measure of risk when we areevaluating less than fully diversified portfolios or individual stocks. For a well-diversified portfolio the total risk is equal to systematic risk. Rankings based on

total risk (Sharpe measure) and systematic risk (Treynor measure) should beidentical for a well-diversified portfolio, as the total risk is reduced to systematicrisk. Therefore, a poorly diversified fund that ranks higher on Treynor measure,compared with another fund that is highly diversified, will rank lower on SharpeMeasure.

Jenson Model

Jenson's model proposes another risk adjusted performance measure. Thismeasure was developed by Michael Jenson and is sometimes referred to as theDifferential Return Method. This measure involves evaluation of the returns thatthe fund has generated vs. the returns actually expected out of the fund given thelevel of its systematic risk. The surplus between the two returns is called Alpha,which measures the performance of a fund compared with the actual returns overthe period. Required return of a fund at a given level of risk (Bi) can becalculated as:

Er = Rf + Bi (Rm - Rf)

Where, Rm is average market return during the given period. After calculating it,alpha can be obtained by subtracting required return from the actual return of thefund.

Higher alpha represents superior performance of the fund and vice versa.Limitation of this model is that it considers only systematic risk not the entire riskassociated with the fund and an ordinary investor can not mitigate unsystematicrisk, as his knowledge of market is primitive.

Among the above performance measures, two models namely, Treynor measureand Jenson model use systematic risk based on the premise that the

32


33/77

unsystematic risk is diversifiable. These models are suitable for large investorslike institutional investors with high risk taking capacities as they do not facepaucity of funds and can invest in a number of options to dilute some risks. Forthem, a portfolio can be spread across a number of stocks and sectors. However,Sharpe measure considers the entire risk associated with fund are suitable for

small investors, as the ordinary investor lacks the necessary skill and resourcesto diversified. Moreover, the selection of the fund on the basis of superior stockselection ability of the fund manager will also help in safeguarding the money

invested to a great extent. The investment in funds that have generated bigreturns at higher levels of risks leaves the money all the more prone to risks of allkinds that may exceed the individual investors' risk appetite.


Coefficient of Variation is the measure of dispersion which gives us a feel aboutdispersion, ie. total risk associated with the fund, relative to its mean return. It isexpresses as standard deviation of the fund as a percentage of the mean return.It can be calculated as

Coefficient of Variation = (Si/ Ri) * 100

Where Si stands for standard deviation of the fund & Ri stands for mean return ofthe fund. A lower coefficient of variation describes a better total risk adjustedperformance of the fund & vice versa.

Evaluating funds on basis of Risk and Return

Under my Dissertation study I have decided to evaluate open ended equitydiversified fund schemes of H.D.F.C Mutual Fund. I have selected the top fiveequity diversified schemes of H.D.F.C Mutual Fund on the basis of the past 12months performance.

Now, for evaluating these schemes, the performancemeasures I have selected are as under:

% Return over 12 month period

Treynors Measure

Sharpes Measure

Jenson Model


33


34/77

Funds Returns

H.D.F.C EQUITY ORIENTED FUNDS

1. H.D.F.C GROWTH FUND 36.48%2. H.D.F.C EQUITY FUND 16.16%3. H.D.F.C TOP 200 FUND 25.72%4. H.D.F.C CAPITAL BUILDER FUND 25.82%5. H.D.F.C CORE & SATELLITE FUND 14.26%

For the evaluation of the funds, the following parameters are considered:

Risk free rate has been taken as the 91 day T Bill rate as on March,

2008= 5% Benchmark Market return over 12 month period.

1. H.D.F.C GROWTH FUND

Objective:To generate long term capital appreciation from a

portfolio that is invested predominantly in equity and equityrelated instruments.

Investment Information

Type of Scheme Open EndedNature of Scheme Equity

Launch 11-09-2000Face Value(Rs./unit) 10Fund size(Rs. In lakhs) 87867.92 march 31, 2008

Plans Growth

Returns and Risk Aggregates

Annual Returns (Ri) 36.48 %

34


35/77

Beta (Bi) 0.9230Standard Deviation (Si) 7.20%Benchmark Market Return (Rm) 19.56%Risk Free Rate (Rf) 5%

PERFORMANCE ANALYSIS :

- 12 month return = 36.48% = 0.3648

- Treynors Ratio = (Ti) = (Ri - Rf)/Bi

= (0.3648 0.05)/ 0.9230 = 0.3410

- Sharpes Ratio = (Si) = (Ri - Rf)/Si

=(0.3648 0.05)/ 0.072 = 4.37

- Jensons Model = Ri (Er)


Er= 0.05 + 0.9230(0.1956-0.05) = 0.1844

Alpha = 0.3648 0.1844 = 0.1804

- Coefficient of Variation = (Si/ Ri) * 100

= (0.072/ 0.3648) * 100 = 19.74 %

35


36/77

2. H.D.F.C EQUITY FUND

Objective: To achieve capital appreciation.


Type of Scheme Open EndedNature of Scheme EquityLaunch 01-01-1995Face Value(Rs./unit) 10Fund size(Rs. In lakhs) 394439.11 march 31, 2008Plans Growth


Annual Returns (Ri) 16.16%Beta (Bi) 0.8890Standard Deviation (Si) 7.30%Benchmark Market Return (Rm) 21.51%Risk Free Rate (Rf) 5%


- 12 month return = 16.16% = 0.1616

36


37/77


= (0.1616 0.05)/ 0.8890 = 0.1255


=(0.1616 0.05)/ 0.073 = 1.53



Er= 0.05 + 0.8890(0.2151-0.05) = 0.1968

Alpha = 0.1616 0.1968 = 0.0352


= (0.073/ 0.1616) * 100 = 45.17 %

37


38/77

3. H.D.F.C TOP 200 FUND

Objective : To generate long term capital appreciation from aportfolio of equity and equity linked instruments primarily drawnfrom companies in BSE 200 index.


Type of Scheme Open EndedNature of Scheme EquityLaunch 11-10-1996

Face Value(Rs./unit) 10Fund size(Rs. In lakhs) 210243.97 march 31, 2008Plans Growth


Annual Returns (Ri) 25.72%Beta (Bi) 0.8730

Standard Deviation (Si) 7.00%Benchmark Market Return (Rm) 23.99%Risk Free Rate (Rf) 5%


38


39/77

- 12 month return = 25.72% = 0.2572


= (0.2572 0.05)/ 0.8730 = 0.2373


=(0.2572 0.05)/ 0.07 = 2.96



Er= 0.05 + 0.8730(0.2399-0.05) = 0.2157

Alpha = 0.2572 0.2156 =0.0416


= (0.07/ 0.2572) * 100 = 27.21 %

39


40/77

4. H.D.F.C CAPITAL BUILDER FUND

Objective:To achieve capital appreciation in the long term.


Type of Scheme Open EndedNature of Scheme EquityLaunch 01-02-1994

Face Value(Rs./unit) 10Fund size(Rs. In lakhs) 64571.81 march 31, 2008Plans Growth


Annual Returns (Ri) 25.82%Beta (Bi) 0.9470Standard Deviation (Si) 8.10%Benchmark Market Return (Rm) 21.51%Risk Free Rate (Rf) 5%


40


41/77

- 12 month return = 25.82% = 0.2582


= (0.2582 0.05)/ 0.9470 = 0.2199


=(0.2582 0.05)/ 0.081= 2.57



Er= 0.05 + 0.9470(0.2151-0.05) = 0.2063

Alpha = 0.2582 0.2063 =0.0519


= (0.081/ 0.2582)*100 =31.37%S

41


42/77

5. H.D.F.C CORE & SATELLITE FUND

Objective: To generate capital appreciation through equityinvestment in companies whose shares are quoting at pricesbelow their true value.


Type of Scheme Open EndedNature of Scheme EquityLaunch 17-09-2004Face Value(Rs./unit) 10Fund size(Rs. In lakhs) 42974.98 march 31 2008Plans Growth


Annual Returns (Ri) 14.26%Beta (Bi) 0.9430Standard Deviation (Si) 8.00%Benchmark Market Return (Rm) 23.99Risk Free Rate (Rf) 5%

42


43/77

PERFORMANCE ANALYSIS:

- 12 month return = 14.26 = 0.1426


= (0.1426 0.05)/ 0.9430 = 0.0981


=(0.1426 0.05)/ 0.08= 1.16



Er= 0.05 + 0.9430(0.2399-0.05) = 0.2290

Alpha = 0.1426 0.2290 = 0.0864


= (0.08/ 0.1426)*100 =56.10%

43


44/77

RANKING OF FUNDS BASED ON 12 MONTHS RETURN AS ON31st MARCH, 2008

RANK NAME OF FUND 12 MONTH RETURN%

1.

2.

3.4.5.

H.D.F.C GROWTH FUND

H.D.F.C CAPITAL BUILDERFUNDH.D.F.C TOP 200 FUNDH.D.F.C EQUITY FUNDH.D.F.C CORE & SATELLITEFUND

36.48%

25.82%

25.72%16.16%14.26%

RANKING OF FUNDS BASED ON TREYNORS RATIO

RANK NAME OF FUND TREYNORS RATIO

44


45/77

1.2.3.

4.5.

H.D.F.C GROWTH FUNDH.D.F.C TOP 200 FUNDH.D.F.C CAPITAL BUILDERFUND

H.D.F.C EQUITY FUNDH.D.F.C CORE & SATELLITEFUND

.3410 .2373

.2199

.1255.0981

RANKING OF FUNDS BASED ON SHARPES RATIO

RANK NAME OF FUND SHARPES RATIO

1.2.

3.

4.5.

H.D.F.C GROWTH FUNDH.D.F.C TOP 200 FUND

H.D.F.C CAPITAL BUILDERFUNDH.D.F.C EQUITY FUNDH.D.F.C CORE & SATELLITEFUND

4.372.96

2.571.531.16

RANKING OF FUNDS BASED ON JENSONS MODEL - ALPHA

RANK NAME OF FUND ALPHA

45


46/77

1.2.

3.

4.5.

H.D.F.C GROWTH FUNDH.D.F.C CORE & SATELLITEFUNDH.D.F.C CAPITAL BUILDER

FUNDH.D.F.C TOP 200 FUNDH.D.F.C EQUITY FUND

.1804

.0864

.0519.0416

.0352

RANKING OF FUNDS BASED ON COEFFICIENT OF VARIATION

RANK NAME OF FUND COEFFICIENT OFVARIATION %

1.

2.3.

4.5.

H.D.F.C CORE & SATELLITEFUNDH.D.F.C EQUITY FUNDH.D.F.C CAPITAL BUILDERFUNDH.D.F.C TOP 200 FUNDH.D.F.C GROWTH FUND

56.10%45.17%

31.37%27.21%19.74%

46


47/77

Saving and other Investment Options: In India

There are many savings and investment options available in India. Although allthese are not provided necessarily provided in an organised fashion, they can,nonetheless, be made available..Bank Fixed Deposits (FD)

Fixed Deposit or FD is the most preferred investment option today. It yields up to8.5% annual return depends on the Bank and period. Minimum period is 15 daysand maximum is 5 years and above. Senior citizens get special interest rates forFixed Deposits. This is considered to be a safe investment because all banksoperated under the guidelines of Reserve Bank of India.

National Saving Certificate (NSC)

NSC is backed by Govt. of India so it is a safe investment method. Lock in periodis 6 years. Minimum amount is Rs100 and no upper limit. You get 8% interestcalculated twice a year. NSC comes under Section 80C so you will get anincome tax deduction up to Rs 1, 00,000. From FY 2005-'06 onwards interestaccrued on NSC is taxable.

Public Provident Fund (PPF)

PPF is another form of investment backed by Govt. of India. Minimum amount isRs500 and maximum is Rs70,000 in a financial year. A PPF account can beopened in a head post office, GPO and selected branches of nationalized banks.PPF also comes under Section 80C so individuals could avail income taxdeduction up to Rs 1, 00,000. Lock in period for PPF is 15 years and interest rateis 8%. Unlike NSC, PPF interest rate is calculated annually. Both PPF and NSCconsidered to be best investment option as it is backed by Government of India.

Stock Market

Investing in share market is another investment option to get more returns. But

share market investment is volatile to market conditions. Before investing youshould have a thorough knowledge about its operation. Direct investment in thestock market is generally a high risk high returns ventures because markettrends are affected factors that vary from weather change to political change to achange in the economic climate of another trading economy at any point in time.Fund diversification and management is far more efficient and has lesser riskunder skilled fund managers.

47


48/77

Gold

Gold is a unique risk-return matrix, a safe-haven asset, an efficient diversifieragainst inflation against falls in the equity market and badly performing fixedsecurities. In India, gold is highly liquid. It is a reserve asset a defense against

domestic currency fluctuations, providing the means to tackle a debt crisis,preserving confidence in the economy, and providing a private investmentportfolio, which among the Indian public is now estimated at 10,000 to 15,000tones. Finally, gold can act as a stabilizing factor to manage Indias externalcrises.

It is crucial for those living in rural and semi-urban parts of India to have accessto gold as an investment option since a majority of people living in these areaslack complete knowledge of the financial markets. Studies conducted by SEBI(Security Exchange Board of India) reveal that gold, either in primary or in

jewellery form, still remains the second most preferred option among the Indian

public after deposits in the banks.

Gold is chiefly held for its safety and liquidity though very little gold is purchasedfor investment purposes. This is mainly due to its liquidity and the fact that thereare not many players involved in either the sales or purchases of gold as aninvestment product. Although India is still the among largest consumer ofphysical gold, there is no benchmark price at any given point of time or on anygiven date.

For instance, we would not know exactly how much 100gms of gold, 12gms ofgold or 10gms of gold would cost in Delhi, or how much it would be worth if one

wanted to sell the same amount of gold in Mumbai or in Agra or in Jaipur.

Therefore, a benchmark price needs to be established.

A Comparison of mutual fund with other Investment options:

48


49/77

Investment in Real estate

In general, property is considered a fairly low-risk investment, and can be less

volatile than shares (although, this is not always the case). Some of the

advantages of investing in property include:

Tax benefits a number of deductions can be claimed on your tax return,

such as interest paid on the loan, repairs and maintenance, rates and taxes,

insurance, agent's fees, travel to and from the property to facilitate repairs,

and buildings depreciation.

Negative gearing tax deductions can also be claimed as a result of

negative gearing, where the costs of keeping the investment property exceed

the income gained from it.

Long-term investment many people like the idea of an investment that can

fund them in their retirement. Rental housing is one sector that rarely

decreases in price, making it a good potential option for long-terminvestments .

Positive asset base there are many benefits from having an investment

property when deciding to take out another loan or invest in something else.

Showing your potential lender that you have the ability to maintain a loan

without defaulting will be highly regarded. The property can also be useful as

security when taking out another home, car or personal loan.

Safety aspect Low-risk investments are always popular with untrained

"mum and dad" investors. Property fits this criteria with returns in some

country areas reaching 10% per year. Housing in metropolitan areas is

constantly in demand with the high purchase price being offset by substantialrental income and a yearly return of between 6% and 9%.

High leverage possibilities investment properties can be purchased at

80% LVR (loan to valuation ratio), or up to 90% LVR with mortgage

insurance. The LVR is calculated by taking the amount of the loan and

dividing it by the value of the property, as determined by the lender. This high

leverage capacity results in a higher return for the investor at a lower risk due

to having less personal finances ties up in the property (80% of the purchase

price was provided by the mortgagee).

49


50/77

Disadvantages of Investment in Real estate:

Liquidity This can take many months unless you're willing to accept a price

less than the property is worth. Unlike the stock market, you will have to wait for

any financial rewards. Vacancies Mortgage payments need to be covered from the investors

pocket due to the property being untenanted. This could just be a result of

a gap between tenants or because of maintenance issues.

Bad tenants Tenants significantly damage your property, refuse to pay

rent and refuse to leave. Disputes can sometimes take months to resolve.

Property oversupply Inner-city builders have created a glut of high-rise

apartment blocks, resulting in fierce competition and many units being

increasingly difficult to rent out.

Ongoing costs In addition to the standard costs associated with a

property, ongoing maintenance costs, especially with an older building,can be substantial.

Capital Gains Tax Imposed by the Federal Government on the

appreciation of investments and payable on disposal.

Other costs Negative gearing may offer tax deductions each financial

year, however ongoing payments to cover the shortfall need to be

budgeted for every month. Also, costs involved in purchasing and

disposing of the property can be substantial.

ON COMPARISION of the advantages & disadvantages of investment in real

estate and investment in mutual funds, it is clear that mutual funds offer a safer,

legal & hassle free investment option. Mutual funds are not only managed by

professional fund managers with minimal fees but they are also diversified. This

reduces the risk involved to a large degree.

Mutual fund transactions in AMCs like the HDFC Mutual Funds are transparent

and there are no hidden costs that the investors are unaware of. Also, another

major advantage that the mutual fund investments have over real estateinvestment is that in case of the latter the money loses liquidity. In case of mutual

funds whether it be open & close ended the exit window option is always

available to the investor.

Investment in Gold

50


51/77

Types of Gold

The investor can invest in physical gold or through paper documents like sharesand certificates. Some of the popular modes of investing gold are gold coin

investing, gold stock investing, online gold investing, and gold bullion investing.Before you decide to invest in the metal you must decide which form suits you interms of convenience convertibility and preference. Some of the popular forms ofinvestment are as follows

Raw Gold

This is the most common form of gold. However it is not regarded to be safe andmaintenance becomes difficult. This is generally stored in commercial banklockers.

Jewellery

This form of investment is also equally famous. The advantage of raw gold and jewellery is that they facilitate liquidity in no time. However, maintenance ofjewellery and gold is high.

Gold Coin

This form of investment is advantageous when compared with the earlier twoforms because it is easily portable. However there are lots of gold coins specificto national boundaries and the investor must have a clear idea of their valuesbefore trading. Gold coins are very liquid.

Investment in gold has its own limitations for example, many investors blindlytake decisions on the basis of the ups and downs in the stock markets and this

creates havoc especially when the gold market is demonstrating a differentbehaviour. Gold investment is very important as it contributes to the national andinternational economy. These investments are also very high on maintenance.

Fixed Deposits:

With FDs one deposits a lump sum of money for a fixed period ranging from afew weeks to a few years and earns a pre-determined rate of interest. FDs areoffered by both banks and companies though putting your money with the latteris generally considered riskier.

Advantages and disadvantages of Fixed Deposits:

51


52/77

The main advantage is that FDs from reputed banks are a very safe investmentbecause such banks are carefully regulated by the Reserve Bank of India.

An advantage of FDs is that you have the option of receiving regular incomethrough the interest payments that are made every month or quarter. This option

is especially useful for retirees. On the other hand, a fixed deposit will not give aninvestor the same returns that he may get in the stock markets. For instance astock-portfolio may rise 20-30 per cent in a good year whereas a fixed deposittypically earns only 7-10 per cent.

Mutual funds and stocks can offer higher returns but the main issue is whetherthere are low risk investment products which offer a better return than FDs. Manyfinancial experts believe that fixed maturity plans (FMP) offer exactly such asuperior alternative.

Fixed Maturity Plans are similar to FDs in that they have a pre-determined

tenure (say 3 years like the maturity of an FD) ranging from a few weeks to a fewyears. The investors money is invested in fixed-income assets like governmentsbonds and money-market instruments which carry a low risk.

The main advantage of FMP's is that you can take into account inflation whilecalculating your taxes which means that your after-tax return may be superior toFDs, especially if you lie in the top income tax bracket.

Investment options and Inflation; Mutual Funds BeatInflation

Inflation is a persistent increase in price within an economy. It denotes anincreased money supply in the economy along with a fall in the value of money.Inflation and its effect on the value of money affects the investments to a majordegree.

The nominal interest rate is the growth rate of your money, while the real interestrate is the growth of your purchasing power. In other words, the real rate ofinterest is the nominal rate reduced by the rate of inflation.

Fixed deposits do not offer protection against inflation. If inflation rises steeplyduring the maturity of the Fixed Deposit then the inflation adjusted return will fall.

Say, for example, the inflation when the money was deposited was at a fixedreturn of 8 per cent per annum is 3 per cent. Now when the FD matures say after2 years, the inflation increases to 5 per cent.

In this case, the inflation adjusted returns is only 3 per cent (8-5). Had inflationremained at 3 per cent by the time your deposit matured, the real rate of returnwould be 5 per cent (8-3).

52


53/77

On the 10th of May 2008, Prabhakar Sinha, TNN reported in the article titledThanks to inflation, you are losing money on FDs reported Inflation is no longer

just eating into your pocket by way of higher grocery bills. It's also eroding themoney you've safely put away in a fixed deposit in your bank or post office.

That's because at 7.61%, it is more than enough to offset your interest earnings,giving you negative real returns. Most banks offer interest in the range of 8% to8.75% on fixed deposits of tenures ranging from one year to 10 years.

The country's largest bank, SBI, for instance, offers 8.5% on deposits of twoyears or more, while for shorter duration deposits, it gives 8.75%.That may seem like it still gives you some positive real return after accounting forinflation, but that's an illusion for most. This is because the interest income istaxable, even if your deposit is covered by Section 80C of the Income Tax Act.Real estate and gold, which typically appreciate fast in inflationary periods, are

possible options that are relatively risk-free. Equity could be another option.

When it comes to inflation, it is an especially important issue for people living ona fixed income. The impact of inflation on an investors portfolio depends on thetype of securities you hold. If the investment is only in stocks, the investor has anadvantage. Over the long run, a companys revenue and earnings shouldincrease at the same pace as inflation with the exception of stagflation. Thecompany is in the same situation as a normal consumer - the more cash itcarries, the more its purchasing power decreases with increases in inflation.The main problem with stocks and inflation is that a companys returns tend to beoverstated. Fixed-income investors are the hardest hit by inflation.

Inflation and Mutual Funds:

The Business Line e paper on 11th October read, The stock market, on anaverage, provides a return of 20-25 per cent annually. When the returns are 20

per cent, the maturity value at the end of 20 years would be doubled to Rs 24lakhs. Investment of Rs 500 every month could get a return of Rs 30- Rs 35lakhs after 20 years whereas the actual investment is only for 6 or 7 years. Noother savings could match the return provided by Mutual Funds.

As far as mutual fund investment was concerned, the investors would be able toearn more money only if they increase their understanding and knowledge of thevarious funds by reading news articles about them.

This is evident from the following chart:

53

Year WPI* Value of Re Value of FD** Value 0f Net of Inf BSE YOY Value of Net

Rs 1 Lac Rs. 1 Lac return 1 Lac In

1.0000 100000 100000 100 100000

1979-80 9.50% 0.9132 91324 8.50% 108500 99087 129 29.00% 129000 1

1980-81 9.10% 0.8371 83707 9.50% 118808 99450 173 34.11% 173000 1

1981-82 12.70% 0.7427 74274 10.00% 130688 97067 218 26.01% 218000 1

1982-83 8.00% 0.6877 68772 9.00% 142450 97966 212 -2.75% 212000 14

1983-84 12.50% 0.6113 61131 10.00% 156695 95789 245 15.57% 245000 1

1984-85 5.20% 0.5811 58109 10.00% 172365 100160 354 44.49% 354000 2

1985-86 7.10% 0.5426 54257 10.00% 189601 102872 574 62.15% 574000 3

1986-87 9.20% 0.4969 49686 10.00% 208561 103626 510 -11.15% 510000 25

1987-88 9.30% 0.4546 45458 10.00% 229417 104289 398 -21.96% 398000 18

1988-89 9.70% 0.4144 41439 10.00% 252359 104574 714 79.40% 714000 2

1989-90 5.40% 0.3932 39316 10.00% 277595 109138 781 9.38% 781000 31990-91 13.70% 0.3458 34578 11.00% 308131 106547 1168 49.55% 1168000 4

1991-92 13.10% 0.3057 30573 12.00% 345106 105510 4285 266.87% 4285000 13

1992-93 8.00% 0.2831 28309 10.00% 379617 107464 2281 -46.77% 2281000 64

1993-94 8.60% 0.2607 26067 10.00% 417579 108850 3779 65.67% 3779000 9

1994-95 9.50% 0.2381 23805 10.00% 459336 109347 3261 -13.71% 3261000 77

1995-96 9.70% 0.2170 21700 11.00% 509863 110643 3367 3.25% 3367000 73

1996-97 10.40% 0.1966 19656 11.00% 565948 111244 3361 -0.18% 3361000 66

1997-98 6.30% 0.1849 18491 11.00% 628203 116162 3893 15.83% 3893000 7

1998-99 15.30% 0.1604 16037 11.00% 697305 111830 3740 -3.93% 3740000 59

1999-00 0.50% 0.1596 15958 10.25% 768779 122679 5001 33.72% 5001000 7

2000-01 3.50% 0.1542 15418 9.75% 843735 130088 3604 -27.93% 3604000 55

2001-02 5.20% 0.1466 14656 8.25% 913343 133859 3469 -3.75% 3469000 50

2002-03 4.30% 0.1405 14052 7.25% 979560 137645 3049 -12.11% 3049000 42


54/77

54

8/4/2019 HDFC Final reportCOMPARATIVE ANALYSIS

HDFC Final reportCOMPARATIVE ANALYSIS OF MUTUAL FUND WITH OTHER INVESTMENT PRODUCTS AND THEIR...

Documents

Transcript of HDFC Final reportCOMPARATIVE ANALYSIS OF MUTUAL FUND WITH OTHER INVESTMENT PRODUCTS AND THEIR...