Jeetu

MAHATNMA JYOTI RAO PHOOLE UNIVERSITY

Project Report on

“MUTUAL FUND-DIVERSIFIED INVESTMENTS”

At HDFC Asset Management Company Ltd. Jaipur

Submitted in partial fulfillment of the requirement for

Masters in Commerce- 2013-14

Submitted By: Submitted To:

Ms. Jeetu Sharma Mrs. Chetna Gupta

M.Com-III SEM(EAFM) (Department of Commerce)

Declaration 1

I hereby declare that this project report entitled “MUTUAL FUND-DIVERSIFIED

INVESTMENTS”At HDFC Asset Management Company Ltd. Jaipur “ is a bonafied

work done by me in partial fulfillment for the award of degree of Masters in commerce

(EAFM) of Mahatma Jyoti Rao Phoole University under the guidance of Mrs. Chetna

Gupta also confirm that the preparation of this project is the outcome of my personal

effort .

Ms. Jeetu Sharma

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Acknowledgement

I express my sincere thanks to my project guide, Mrs. Chetna Gupta for guiding me

right form the inception till the successful completion of the project. I sincerely

acknowledge him for extending their valuable guidance, support for literature, critical

reviews of project and the report and above all the moral support he had provided to me

with all stages of this project.

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Executive Summary

The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in the history of the country.

According to March 2013, the Indian mutual fund industry has 40 players. The number of public sector players has reduced from 11 to 5. The public sector has gradually receded into the background, passing on a large chunk of market share to private sector players.

HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act, 1956, on December 10, 1999, and was approved to act as an Asset Management Company for the HDFC Mutual Fund by SEBI vide its letter dated July 3, 2000.

Title of my project is Mutual Funds- Diversified Investments. Main Objective is to study in detail about Mutual Funds and its investment portfolio. Sub-Objectives are to understand the role of fund manager in achieving the investment objective by diversifying the portfolio. (Comparing performance of 3 selective funds).Comparison between growth and dividend option of 5 major funds. To study mutual fund investment valuation. To study the various types of Mutual Funds, investment pattern used by the fund managers for various fund, learn how to select a mutual fund and how mutual funds can be used for financial planning.

Main Findings are Diversification is the main tool used by the fund managers to dilute the risk factor. Diversification minimizes the concentration of investor’s money in single stock and thus minimizes the risk. There are mainly three patterns used by the fund managers during investment. They are: Aggressive plan, Moderate plan, and Conservative plan. Each plan is carefully designed by taking into account the asset allocation, risk and return and the investors view. The NAV of Growth option is greater than the dividend option of the fund. As the investor withdraws the dividend, that portion of the amount is not subject to growth. But in case of growth option the investor can enjoy the growth of the whole amount. In dividend option, if the investor is able to use the dividend amount of fund ‘X’ in some other investment and the money can have a growth more than growth option’s NAV of fund ‘X’. Then it is a good decision to opt for dividend option. Otherwise, growth option gives better growth of the investment. Fund managers diversify their portfolio across different industries and maximum weight age is given to those industries which have growth perspective in the future years.

Contents

Chapter Contents

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Chapter I

Introduction:

a. Need for studyb. Company profilec. Industry Profile

Chapter II

Objectives:

a. Conceptual aspect of mutual fund b. Objectives

Chapter III

Methodology:

a. Collection of datab. Statistical Toolsc. Limitation of study

Chapter IV

Analysis of the Study:

a. Comparison between growth and dividend option planb. Analysis of fund manager diversification & portfolio

management plan. HDFC Top 200 HDFC Balance Fund HDFC High Interest Fund

Chapter V Findings

Chapter VI Conclusion

Chapter VII References

Chapter I

IntroductionContents

Need for study

Company Profile

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Industry Profile

Need for the Study

The main purpose of doing this project was to know about mutual fund and its functioning. This helps to know in details about mutual fund industry right from its inception stage, growth and future prospects.

It also helps in understanding different schemes of mutual funds. Because my study depends upon prominent funds in India and their schemes like equity, income, balance as well as the returns associated with those schemes. And how the fund managers diversify risk and obtain maximum returns.

The project study was done to ascertain the asset allocation, entry load, exit load, associated with the mutual funds.

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Scope of the Study

In my project the scope is limited to some prominent mutual funds in the mutual fund industry. I analyzed the funds depending on their schemes like equity, income, balance.

My study is mainly concentrated on equity schemes, the returns, in income schemes the rating of CRISIL, ICRA and other credit rating agencies.

Company Profile

HDFC Asset Management Company Limited (AMC)

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HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act, 1956, on December 10, 1999, and was approved to act as an Asset Management Company for the HDFC Mutual Fund by SEBI vide its letter dated July 3, 2000.

The registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg, 169, Backbay Reclamation, Churchgate, Mumbai - 400 020.

In terms of the Investment Management Agreement, the Trustee has appointed the HDFC Asset Management Company Limited to manage the Mutual Fund. The paid up capital of the AMC is Rs. 25.161 crore.

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

Particulars

% of the paid up equity capital

Housing Development Finance Corporation Limited 60Standard Life Investments Limited 40

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 21, 2009 to act as a Portfolio Manager under the SEBI (Portfolio Managers) Regulations, 1993. The Certificate of Registration is valid from January 1, 2010 to December 31, 2013.

Sponsors

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HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED (HDFC)

HDFC was incorporated in 1977 as the first specialized Mortgage Company in India. HDFC provides financial assistance to individuals, corporates and developers for the purchase or construction of residential housing. It also provides property related services (e.g. property identification, sales services and valuation), training and consultancy. Of these activities, housing finance remains the dominant activity. HDFC has a client base of around 11 lac borrowers, 10 lac depositors, over 1.23 lac shareholders and 25,000 deposit agents, as at March 31, 2013.

HDFC had raised funds from international agencies such as the World Bank, IFC (Washington), USAID, DEG, ADB and KfW, international syndicated loans, domestic term loans from banks and insurance companies, bonds and deposits. HDFC has received the highest rating for its bonds and deposits program for the fifteenth year in succession.

STANDARD LIFE INVESTMENTS LIMITED

Standard Life Investments was launched as an investment management company in 1998. It is the dedicated investment management company of the Standard Life group and is a wholly owned subsidiary of Standard Life Investments (Holdings) Limited, which in turn is a wholly owned subsidiary of Standard Life plc.

With global assets under management of approximately US$224 billion (£138.7 billion) as at December 31, 2009 Standard Life Investments Limited is one of the world's major investment companies, operating in the UK, Canada, Hong Kong, China, Korea, Ireland and the USA, and is responsible for investing money on behalf of five million retail and institutional clients worldwide.

Trustees

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HDFC Trustee Company Limited, a company incorporated under the Companies Act, 1956 is the Trustee to HDFC Mutual Fund vides the Trust deed dated June 8, 2000, as amended from time to time. HDFC Trustee Company Ltd is wholly owned subsidiary of HDFC

The Board of Directors of HDFC Trustee Company Limited consists of the following eminent persons.

Mr. Anil Kumar Hirjee Mr. Vincent Joseph O’Brien Mr. Shishir K. Diwanji Mr. Ranjan Sanghi Mr. V. Srinivasa Rangan

Awards

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ICRA Mutual Fund Awards 2010ICRA Gold Award for 'Best Performance' - Seven Star Fund Ranking

HDFC Prudence Fund in the category of Open Ended Balanced HDFC MF Monthly Income Plan - Long Term Plan in the category of Open Ended

Marginal Equity HDFC High Interest Fund - Short Term Plan in the category of Open Ended Debt - Short

Term for three year period

ICRA Five Star Fund Ranking

HDFC Multiple Yield Fund - Plan 2005 HDFC MF Monthly Income Plan - Long Term Plan HDFC Cash Management Fund - Savings Plan

Lipper Fund Awards 2010

HDFC Equity Fund - Growth Option was Category (from amongst 53 schemes) HDFC Prudence Fund – Growth Option category (from amongst 24 schemes) HDFC MF Monthly Income Plan – Long Term Plan - Growth Option category (from

amongst 58 schemes)

CNBC TV18 - CRISIL Mutual Fund Awards 2010

HDFC Top 200 Fund was among the only two schemes that won the “Best Performing Mutual Fund of the Year” Award # in the Large Cap Oriented Funds category at CNBC TV18 - CRISIL Mutual Fund Awards 2010 for the calendar year 2009 (from amongst 24 schemes)

HDFC Cash Management Fund - Treasury Advantage Plan was among the only two schemes that won the “Best Performing Mutual Fund of the Year” Award # in the Ultra Short Term Debt Funds category at CNBC TV18 - CRISIL Mutual Fund Awards 2010 for the calendar year 2009 (from amongst 28 schemes)

Mutual fund industry and structure

Some facts for the growth of mutual funds in India

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Mutual funds have seen 100% growth in the last 6 years.

Number of foreign AMC's are in the queue to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.

We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.

Mutual fund can penetrate rural like the Indian insurance industry with simple and limited products.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.

According to March 2010, the Indian mutual fund industry has 40 players. The number of public sector players has reduced from 11 to 5. The public sector has gradually receded into the background, passing on a large chunk of market share to private sector players.

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The Association of Mutual Funds in India (AMFI) is the industry body set up to facilitate the growth of the Indian mutual fund industry. It plays a pro-active role in identifying steps that need to be taken to protect investors and promote the mutual fund sector. It is noteworthy that AMFI is not a Self-Regulatory Organisation (SRO) and its recommendations are not binding on the industry participants. By its very nature, AMFI has an advisor’s or a counsellor’s role in the mutual fund industry. Its recommendations become mandatory if and only if the Securities and Exchange Board of India (SEBI) incorporates them into the regulatory framework it stipulates for mutual funds.

The Indian mutual fund industry follows a 3-tier structure as shown below:

Let’s understand what each of these terms means and their roles in the mutual fund industry.

1. SponsorsThey are the individuals who think of starting a mutual fund. The Sponsor approaches SEBI, themarket regulator and also the regulator for mutual funds. Not everyone can start a mutual fund.SEBI will grant a permission to start a mutual fund only to a person of integrity, with significantexperience in the financial sector and a certain minimum net worth. These are just some of thefactors that come into play.

2. TrustOnce SEBI is satisfied with the credentials and eligibility of the proposed Sponsors, the Sponsorsthen establish a Trust under the Indian Trust Act 1882. Trusts have no legal identity in India andthus cannot enter into contracts.

3. Asset Management Company (AMC)The Trustees appoint the AMC, which is established as a legal entity, to manage the investor’s(unit holder’s) money. In return for this money management on behalf of the mutual fund, theAMC is paid a fee for the services provided. This fee is to be borne by the investors and isdeducted from the money collected from them.

The AMC has to be approved by SEBI and it functions under the supervision of its Board of Directors, and also under the direction of the Trustees and the regulatory framework established by SEBI. It is the

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Sponsors

Trust

Asset Management Company

AMC, which in the name of the Trust, that floats new schemes and manages these schemes by buying and selling securities.

Apart from these parties, we also have the following:

1. CustodianThe Custodian maintains the custody of the securities in which the scheme invests. It also keeps a tab on corporate actions such as rights, bonus and dividends declared by the companies in which the fund has invested. The Custodian is appointed by the Board of Trustees. The Custodian also participates in a clearing and settlement system through approved depository companies on behalf of mutual funds, in case of dematerialized securities.

2. Transfer AgentsRegistrar and Transfer Agents (RTAs) maintain the investor’s (unit holder’s) records, reducing the burden on the AMCs.

A comprehensive structure of a mutual fund appears as depicted in the chart below:

Shareholding Trust deed

I M agreement

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Mutual Fund

SEBI Regulations

Sponsors

Trustees

Transfer Agent Custodian

Unit Holders

AMC

Chapter II

Objectives

Contents:

Conceptual aspect of mutual Fund

Objectives

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Conceptual aspect of mutual Fund

Mutual Fund

A mutual fund is an investment vehicle which pools investors’ money and invests the same for and on behalf of investors, into stocks, bonds, money market instruments and other assets. The money is received by the AMC with a promise that it will be invested in a particular manner by a professional manager (commonly known as fund managers). The fund managers are expected to honor this promise. The SEBI and the Board of Trustees ensure that this actually happens.

The organization that manages the investments is the Asset Management Company (AMC). The AMC employs various employees in different roles who are responsible for servicing and managing investments. The AMC offers various products (schemes/funds), which are structured in a manner to benefit and suit the requirement of investors’. Every scheme has a portfolio statement, revenue account and balance sheet. Some less known facts about Mutual Funds:

Mutual Funds perform well even during market downfall. This is because of the investment decisions taken by the AMC. The SENSEX considers the trading in only 30 indices and decides the market volatility. But MF’s on the other hand invest in the top 300 indices and not just the 30 which BSE considers. Therefore even when the SENSEX falls, the MF’s outperform i.e. they give good returns because not all 300 companies register a fall at a time.

The returns given by Mutual Funds Equity related funds the tax on long term growth is tax free. While Income schemes/FMPs bear a tax rate of 22.115% for short term(less than a year) and for a long term (more than a year) it is 11.22% and if dividend is distributed, it is 14.16% at TDS and in the hands of investor it is TAX FREE, whereas the amount deposited in fixed deposits of the Banks on maturity have to pay a tax rate of 33.3%(depending on the depositors IT slab). Thus the investors who invest in MF’s earn a tax benefit over the investors in bank.

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Typical classification of mutual fund schemes on various bases:

Tenor

Tenor refers to the ‘time’. Mutual funds can be classified on the basis of time as under;

1. Open ended fundsThese funds are available for subscription throughout the year. These funds do not have a fixed maturity. Investors have the flexibility to buy or sell any part of their investment at any time, at the prevailing price (Net Asset Value - NAV) at that time.We can buy and sell at any point of time. But if we do so before maturity we must bear the exit load.

2. Close Ended fundsThese funds begin with a fixed corpus and operate for a fixed duration. These funds are open for subscription only during a specified period. When the period terminates, investors can redeem their units at the prevailing NAV. Some closed ended funds are converted into open ended fund after certain lock-in period. (egg: HDFC Tax saver)

Asset classes

1. Equity fundsThese funds invest in shares. These funds may invest money in growth stocks, momentum stocks, value stocks or income stocks depending on the investment objective of the fund. These funds are volatile in nature and gives higher returns.(eg: HDFC Equity fund and HDFC Growth fund)

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Performance of Top Equity FundsEquity Diversified

Asset Size (in cr.)

NAV (Rs./unit) 1wk 1mth 3mth 6mth 1yr 2yr 3yr

ICICI Pru Discovery Fund (G)

1,083.5845.57 0.7 8.2 7.8 14 68.8 83 61.3

IDFC Small&Midcap Eqty -G

686.8917.33 2 8.8 8.2 15.2 54.3 93 --

IDFC Premier Equity - A (G)

1,376.3029.92 2.2 11.7 9.1 14.9 54.7 59 77.5

Birla SL Dividend Yield (G)

384.8378.82 1.7 8.5 11.7 14.5 53.1 86 68

DSP-BR Small & Mid Cap -RP (G)

847.6716.65 2.3 9.2 10 14.3 64.6 69 45.7

Equity Tax Saver

Asset Size (in cr.)

NAV (Rs./unit) 1wk 1mth 3mth 6mth 1yr 2yr 3yr

Can Robeco Eqty TaxSaver (G)

174.1424.37 1 6.8 5.7 12.3 43.3 72 63.8

ICICI Pru Tax Plan (G) 1,159.48

131.7 1.6 8.6 4.4 9.4 55 50 43.8

HDFC Tax Saver (G) 2,465.31

216.1 1.6 8.9 5.3 10.1 48.9 64 39.4

Religare Tax Plan (G) 97.58

16.58 0.9 9.3 6.1 10.4 46 60 57.6

Fidelity Tax Advantage (G) 1,155.62

20.41 1.5 10.4 8.3 12.5 46.4 54 45

2. Debt funds or Income fundsThese funds invest money in bonds and money market instruments. These funds may invest into/long-term and/or short-term maturity bonds. They give lower returns, these returns are the interest on

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debentures. Debt funds are suggestible to retired individuals and companies who want to make short term investments.( eg: HDFC High Interest Fund)

Top Funds in Debt Category

Debt Short -Term

Asset Size(in cr.)

NAV (Rs./unit) 1wk 1mth

3mth 6mth 1yr

2yr 3yr

IDFC SSIF -MTP - RP A (G) 58.92 16.07 0.2 0.4 2.9 4.9 9.6 2432.6

Kotak Bond (Deposit) (G) 40.8 25.26 0.1 -0.9 3.5 4.4 6.5 2634.3

Can Robeco Income (G) 215.44 19.93 -- 0.1 2.6 2.9 5.3 3647.4

Fortis Flexi Debt Fund-RP (G) 322.72 16.15 0.1 0.1 1.5 2.9 5.1 2636.9

HDFC High Interest - STP (G) 3,891.48 18.7 0.2 0.3 1.7 3.3 7.2 22 34

Debt Long -Term

Asset Size(in cr.)

NAV (Rs./unit) 1wk 1mth

3mth 6mth 1yr

2yr 3yr

Birla Sun Life GSec - LTF (G) 86.42 27.45 0.1 0.3 5.7 711.9 37

36.6

ICICI Pru Gilt Inv Plan - PF 79.17 18.49 -- 0.2 1.4 1.9 2.5 4455.2

Templeton (I) ST Income (G) 4,991.56 1,876.90 0.1 0.4 1.7 3.4 8.7 2333.8

DSP-BR Govt. Sec. (G) 68.75 32.72 0.2 0.1 3.2 3.9 4.5 3340.5

Birla SL Dynamic Bond -RP (G) 8,611.67 15.72 0.2 0.4 1.5 3.3 7 21 34

3. Hybrid funds

These funds invest in a mix of both equity and debt. In order to retain their equity status for tax purposes, they generally invest at least 65% of their assets in equities and roughly 35% in debt instruments, failing which they will be classified as debt oriented schemes and be taxed accordingly. Monthly Income Plans (MIPs) fall within the category of hybrid funds. MIPs invest up to 25% into equities and the balance into debt.

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4. Real asset fundsThese funds invest in physical assets such as gold, platinum, silver, oil, commodities and real estate. Gold Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs) fall within the category of real asset funds.(eg: HDFC Infrastructure Fund)

Investment Philosophy

1. Diversified Equity FundsThese funds diversify the equity component of their Asset Under Management (AUM), across various sectors. Such funds avoid taking sectoral bets i.e. investing more of their assets towards a particular sector such as oil & gas, construction, metals etc. Thus, they use the diversification strategy to reduce their overall portfolio risk.

2. Sector FundsThese funds are expected to invest predominantly in a specific sector. For instance, a banking fund will invest only in banking stocks. Generally, such funds invest 65% of their total assets in a respective sector.

3. Index FundsThese funds seek to have a position which replicates the index, say BSE Sensex or NSE Nifty. They maintain an investment portfolio that replicates the composition of the chosen index, thus following a passive style of investing.

4. Exchange Traded Funds (ETFs)These funds are open-ended funds which are traded on the exchange (BSE / NSE). These funds are benchmarked against the stock exchange index. For example, funds traded on the NSE are benchmarked against the Nifty. The Benchmark Nifty BeES is an example of an ETF which links to the stocks in the Nifty. Unlike an index fund where the units are traded at the day’s NAV, in ETFs (since they are traded on the exchange) the price keeps on changing during the trading hours of the exchange. If you as an investor want to buy or sell ETF units, you can do so by placing orders with your broker, who will in-turn offer a two-way real time quote at all times. The AMC does not offer sale and re-purchase for the units. Today, ETFs are available for pre-specified indices. (eg: HDFC Gold ETF)

5. Fund of Funds (FOF)These funds invest their money in other funds of the same mutual fund house or other mutual fund houses. They are not allowed to invest in any other FOF and they are not entitled to invest their assets other than in mutual fund schemes/funds, except to such an extent where the fund requires liquidity to meet its redemption requirements, as disclosed in the offer document of the FOF scheme.

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6. Fixed Maturity Plan (FMP)These funds are basically income/debt schemes like Bonds, Debentures and Money market instruments. They give a fixed return over a period of time. FMPs are similar to close ended schemes which are open only for a fixed period of time during the initial offer. However, unlike closed ended schemes where your money is locked for a particular period, FMPs give you an option to exit. Remember though, that this is subject to an exit load as per the funds regulations. FMPs, if listed on the exchange, provide you with an opportunity to liquidate by selling your units at the prevailing price on the exchange. FMPs are launched in the form of series, having different maturity profiles. The maturity period varies from 3 months to one year.

Geographic Regions

1. Country or Region FundsThese funds invest in securities (equity and/or debt) of a specific country or region with an underlying belief that the chosen country or region is expected to deliver superior performance, which in turn will be favourable for the securities of that country. The returns on country fund are affected not only by the performance of the market where they are invested, but also by changes in the currency exchange rates.

2. Offshore FundsThese funds mobilize money from investors for the purpose of investment within as well as outside their home country. So we have seen that funds can be categorized based on tenor, investment philosophy, asset class, or geographic region. Now, let’s get down to simplifying some jargon with the help of a few definitions, before getting into understanding the nitty-gritty of investing in mutual funds.

Advantages of investing in mutual funds

While everyone fantasizes about investing in the stock markets and is passionate about investing in stocks, what’s more important is; how smartly are these investments done.

One can invest in the stock markets either through the direct route i.e. stocks or through the indirect route i.e. mutual funds.

Both have their own pros and cons, and so it’s important for us to understand both routes before embarking on an investment spree.

If an investor has a profound insight into stocks and investments with the requisite time and skill to analyze companies, then he can surely begin independent stock-picking. However, if an investor lacks any one or all these pre-requisites, then he’s better off investing in stocks through the indirect route i.e. through mutual funds. Mutual funds offer several important advantages over direct stock picking.

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1. Diversification Investing in stocks directly has one serious drawback - lack of diversification. By putting your

money into just a few stocks, you can subject yourself to considerable risk. Decline in a single stock can have an adverse impact on your investments, damaging the returns

of your portfolio. A mutual fund, by investing in several stocks, tries to overcome the risk of investing in just 3-4 stocks.

By holding say, 15 stocks, the fund avoids the danger of one rotten apple spoiling the whole portfolio.

A diversified portfolio may thus fall to a lesser extent, even if a few stocks fall dramatically. Also, a mutual fund’s NAV may certainly drop, but mutual funds tend to not fall as freely or as easily as stocks.

The legal structure and stringent regulations that bind a mutual fund do a very good job of safeguarding investor interest.

2. Professional management Active portfolio management requires not only sound investment sense, but also considerable

time and skill. Track of the prospects and potential of the companies in the mutual fund portfolio are maintained

by skilled research professionals appointed by the mutual fund houses, professionals whose job it is to continuously research and monitor these companies.

3. Lower entry levelThere are very few quality stocks today that investors can buy with Rs. 5,000 in hand. This is especially true when valuations are expensive. Sometimes, with as much as Rs 5,000 you can buy just a single stock. In the case of mutual funds, the minimum investment amount requirement is as low as Rs. 500. This is especially encouraging for investors who start small and at the same time take exposure to the fund’s portfolio of 20-30 stocks.Minimum investments:

5000/- lumpsum 1000/- through SIP 500/- Tax free scheme

4. Economies of scaleBy buying a handful of stocks, the stock investors lose out on economies of scale. This directly impacts the profitability of portfolio. If investors buy or sell actively, the impact on profitability would be that much higher. On the other hand, in case of mutual funds, frequent voluminous purchases/sales results in proportionately lower trading costs than individuals thus translating into significantly better investment performance.

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5. Innovative plans/services for investors By investing in the stock market directly, investors deprive themselves of various innovative

plans offered by fund houses. For example, mutual funds offer automatic re-investment plans, systematic investment plans

(SIPs), systematic withdrawal plans (SWPs), asset allocation plans, and triggers etc., tools that enable you to efficiently manage your portfolio from a financial planning perspective too.

These features allow you to enter/exit funds, or switch from one fund to another, seamlessly -something that will probably never be possible in case of stocks.

6. Liquidity A stock investor may not always find the liquidity in a stock to the extent they may want. There could be days when the stock is hitting an upper/lower circuit, thus curtailing

buying/selling. Further, if an investor is invested in a penny stock, he may find it difficult to get out of it.

On the other hand, mutual funds offer some much required liquidity while investing. In case of an open-ended fund, you can buy/sell at that day's NAV by simply approaching the fund house directly, or by approaching your mutual fund distributor or even by transacting online.

As highlighted above, investing in mutual funds has some unique benefits that may not be available to stock investors. However by no means are we insinuating that mutual fund investing is the only way of clocking growth. This can also be done even by investing directly into the right stocks. However, mutual funds offer the investor a relatively safer and surer way of picking growth minus the hassle and stress that has become synonymous with stocks over the years.

On account of the aforementioned advantages which mutual funds offer, they (mutual funds) have emerged as immensely popular asset class, especially for retail investor, and for the investor looking for growth with lower risks.

Disadvantages of investing in Mutual Funds:

Some funds charge hefty fees, leading to lower overall returns. Over time, statistics have shown that most actively managed funds tend to underperform their

benchmark averages Mutual Funds cannot be bought or sold during regular trading hours, but instead are priced just

once per day.

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How mutual funds can be used for financial Planning

“This time, like all other times, is a very good time, if we but know what to do with it."- Ralph Waldo EmersonFinancial Planning couldn’t have been summed up better; to put it simply it allows an investor to know today what is required for achieving financial goals tomorrow.

A financial plan helps an investor in the following ways:

1. Enabling investors to identify his goals and investment needs2. Understand the various financial products with respect to their risk, return, liquidity andmaturity profile3. Combine the features of financial products with the investor’s financial needs and determineappropriate mix of investments, technically referred to as asset allocation4. Suggest suitable instruments as part of asset allocation Mutual fund allows a financial planner to enhance the effectiveness of his financial plan in the following fashion:

1. Diversification

Diversification as practiced in financial planning can be done at three levels by assets,investment style and management style.

a. Diversification of assets – Assets can be diversified on many levels for example holding a mix of stocks, bonds and cash. Possibly then by geographic sector taking advantage of global opportunities and the fact that if one economy is weak, another is strong. And then by economic sector, to include a variety of industries, because when one industry is slowing down, another is picking up. Each of these diversifications will serve to increase returns and reduce risk.

b. Diversification of styles - Each asset class is then diversified into multiple investment styles – such as growth, value, and opportunities.

c. Diversification of managers - Portfolio returns can be enhanced by using multiple managers with complementary investment styles who react in their own ways to varying market conditions. However, we opine investors not to provide primacy to the fund managers in the diversification criteria.

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Asset Allocation

Except for the most conservative portfolios which do not hold equities, every portfolio should bediversified to hold all major assets classes:

a. Cash for security and liquidity, so that one can take advantage of opportunities as they ariseb. Bonds, to help preserve capital and provide a steady incomec. Stocks, for growth to help you beat inflation and counter the impact of taxesd. Real estate, because of their low correlation with stocks and bondse. Gold, for its ability to be a hedge against uncertaintiesAn important inference could be, that one should spend considerable amount of time and energy in choosing a tailor made or customized asset allocation strategy. Once the strategy is in place, then the next important action point would be the instruments to fulfill the role of respective asset classes.

2. Portfolio Strategy

Most portfolios are structured with 5 financial objectives in mind:a. Growthb. Incomec. Inflation protectiond. Peace of mind and preservation of capitale. Minimize taxesA financial planner has to balance the importance of each of these, and keep them in mind as hegoes about structuring a portfolio. There is no such thing as an optimal balance that’s right foreveryone. The balance is a personal choice depending on the relative importance of these factorsfor a given investor. While doing financial planning through mutual funds, one must try to answer the following questions.

a. Towards what objective/goal is the investor allocating his money

Knowing the objective of investing enables the investor to select the right options offered by amutual fund house. For example, if an individual has a long term objective, then he may go in fora long term equity fund and for investors with short term objectives or needing intermediatereturns, a liquid fund is the right option.

b. What is the time horizon?

Time horizon refers to, when does the investor want to enjoy the fruit of investment? Thisascertainment is critical because both, the risk and the reward of investments can vary accordingto the time horizon. Generally, a longer horizon allows for more aggression in investment.

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c. What is the risk tolerance of the investor?

There is a risk-reward continuum running from cash to bonds to stocks. Returns arecommensurate with the risk someone is willing to tolerate. Risk has other dimensions investor toreplace capital. If not earning any income, replacing lost capital will be difficult, which means amore conservative approach. Other considerations could be the present financial situation,estate planning and level of taxation. One other important factor is age. As a general rule, theyounger one is, the more aggressive someone can afford to be with their investment portfolio.This is because the investor has more time to recover from any possible setbacks in the value ofthe portfolio.

3. Rebalancing

Rebalancing is the action of bringing a portfolio of investments that has deviated away fromtarget asset allocation. The goal of rebalancing is to move the current asset allocation back inline to the originally planned asset allocation. Rebalancing is primarily warranted underconditions where the returns have significantly deviated than expected or to stay in line withmarket conditions. For example, an equity heavy portfolio needs to be restructured incontraction phases where company profits are hit harder and interest rates move up. It could bedone by moving a portion of equity holdings to debt instruments. Mutual funds probably allowthe easiest window to rebalancing due to their diversity of offerings.

A case would help to understand better on rebalancing.

Mr. X has planned for his son’s marriage in 2020, for which the estimated cost in 2020 would beRs 1.7 crores. In 2010 he is advised to invest Rs 70,000 in equity and Rs 30,000 in Debt assuming an average return of 12% for equity and 5% for debt the expected value of investments at year end would be 78,400 for equity and 31,500 for debt. At year end, at 8%, the equity markets performed worse than expected and at 14% the debt markets performed better than expected. Hence, the portfolio value, instead of the planned Rs 109,900 ended up as Rs 109,800.Consequently, the ratio of debt to equity changed from the original 70:30 to 69:31. To rebalancethe portfolio, Mr. X has to liquidate his debt holdings by Rs 2,700 and invest in equity and alsoadd Rs 100 cash from his own personal reserves.

4. Tax efficiency

Where mutual funds score head and shoulder over other instruments in a financial planner’s eyes is when it comes to tax efficiency and reduction in transaction charges. Imagine a scenario where a person holds the individual stocks BSE-Sensex in the same proportion as it is meant to be andanother person holds a unit of an index fund. The chances are that the Mutual Fund unit holderwould be a happier person for the fact that:

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a. The mutual fund unit holder is safe from transaction fees the stockholder might have to pay forusing his DEMAT account for equity trading

b. The incidence of capital gains tax would be zero for a mutual fund holder as it is the fund which is involved in equity trading and that equity trading is considered primary business and hence is exempt

c. Dividends declared by equity-oriented funds (i.e. mutual funds with more than 65% of assets in equities) are tax-free in the hands of investor. There is also no dividend distribution taxapplicable on these funds under section 115R. Diversified equity funds, sector funds, balancedfunds are examples of equity-oriented funds.Thus, mutual funds allow the financial planner to align the investment goals on the mantra ofDIVERSIFICATION + PATIENCE = SUCCESSTo invest prudently in a mutual fund, one can taking into the account the following 10 pointers for the concluding quick read.

How to select a mutual fund

The increased number of New Fund Offerings (NFOs) lately has led also to an increased dilemma in the mind of investors. Investors often get confused when it comes to selecting the right fund from the plethora of funds available. Many investors also feel that 'any' mutual fund can help them achieve their desired goals. But the fact is, not all mutual funds are same. There are various aspects within a fund that an investor must carefully consider before short-listing it for making investments. These aspects which were briefly covered in the Path to Knowledge section are given in a little more detail below:

PerformanceThe past performance of a fund is important in analyzing a mutual fund. But, as learnt earlier past performance is not everything. It just indicates the fund’s ability to clock returns across market conditions. And, if the fund has a well-established track record, the likelihood of it performing well in the future is higher than a fund which has not performed well.

Under the performance criteria, we must make a note of the following:

1. Comparisons:

A fund’s performance in isolation does not indicate anything. Hence, it becomes crucial to compare the fund with its benchmark index and its peers, so as to deduce a meaningful inference. Again, one must be careful while selecting the peers for comparison. For instance, it doesn’t make sense comparing the performance of a mid-cap fund to that of a largecap.

2. Time period:

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It’s very important that investors have a long term (atleast 3-5 years) horizon if they wish to invest in equity oriented funds. So, it becomes important for them to evaluate the long term performance of the funds. However this does not imply that the short term performance should be ignored. Besides, it is equally important to evaluate how a fund has performed over different market cycles (especially during the downturn). During a rally it is easy for a fund to deliver above-average returns; but the true measure of its performance is when it posts higher returns than its benchmark and peers during the downturn. Remember.

3. Returns:

Returns are obviously one of the important parameters that one must look at while evaluating a fund. But remember, although it is one of the most important, it is not the only parameter. Many investors simply invest in a fund because it has given higher returns. In our opinion, such an approach for making investments is incomplete. In addition to the returns, investors must also look at the risk parameters, which explain how much risk the fund has taken to clock higher returns.

4. Risk:

We have seen in our Definitions section and on our Path to Knowledge, that risk is normally measured by Standard Deviation (SD). SD signifies the degree of risk the fund has exposed its investors to. From an investor’s perspective, evaluating a fund on risk parameters is important because it will help to check whether the fund’s risk profile is in line with their risk profile or not.

For example, if two funds have delivered similar returns, then a prudent investor will invest in the fund which has taken less risk i.e. the fund that has a lower SD.

5. Risk-adjusted return:

This is normally measured by Sharpe Ratio. It signifies how much return afund has delivered vis-à-vis the risk taken. Higher the Sharpe Ratio better is the fund’s performance. From an investor’s perspective, it is important because they should choose a fund which has delivered higher risk-adjusted returns. In fact, this ratio tells us whether the high returns of a fund are attributed to good investment decisions, or to higher risk.

6. Portfolio Concentration:

Funds that have a high concentration in particular stocks or sectors tend to be very risky and volatile. Hence, investors should invest in these funds only if they have a high risk appetite. Ideally, a well diversified fund should hold no more than 40% of its assets in its top 10 stock holdings. Remember: Make sure your fund does not put all its eggs in one basket.

7. Portfolio Turnover:

The portfolio turnover rate measures the frequency with which stocks are

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bought and sold. Higher the turnover rate, higher the volatility. The fund might not be able to compensate the investors adequately for the higher risk taken. Remember: Invest in funds with a low turnover rate if you want lower volatility.

Fund Management

The performance of a mutual fund scheme is largely linked to the fund manager and his team. Hence, it’s important that the team managing the fund should have considerable experience in dealing with market ups and downs. As mentioned earlier, investors should avoid fund’s that owe their performance to a ‘star’ fund manager. Simply because if the fund manager is present today, he might quit tomorrow, and hence the fund will be unable to deliver its ‘star’ performance without its ‘star’ fund manager. Therefore, the focus should be on the fund houses that are strong in their systems and processes. Remember: Fund houses should be process-driven and not 'star' fund manager driven.

Costs

If two funds are similar in most contexts, it might not be worth buying the high cost fund if it is only marginally better than the other. Simply put, there is no reason for an AMC to incur higher costs, other than its desire to have higher margins.

The two main costs incurred are:

1. Expense Ratio: Annual expenses involved in running the mutual fund include administrativecosts, management salary, overheads etc. Expense Ratio is the percentage of assets that go towards these expenses. Every time the fund manager churns his portfolio, he pays a brokerage fee, which is ultimately borne by investors in the form of an Expense Ratio. Remember: Higher churning not only leads to higher risk, but also higher cost to the investor.

2. Exit Load: Due to SEBI’s recent ban on entry loads, investors now have only exit loads to worry about. An exit load is charged to investors when they sell units of a mutual fund within a particular tenure; most funds charge if the units are sold within a year from date of purchase. As exit load is a fraction of the NAV, it eats into your investment value. Remember: Invest in a fund with a low expense ratio and stay invested in it for a longer duration. Among the factors listed above, while few can be easily gauged by investors, there are others on which information is not widely available in public domain. This makes analysis of a fund difficult for investors and this is where the importance of a mutual fund advisor comes into play.

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Investment Pattern used by the fund managers

Aggressive Plan:

This plan has 60-70% of growth schemes that is purely equities which helps the investor’s money to grow over years.

10-20% of the fund is in balanced schemes which have both debt and equities in certain proportions.

10-15% is in income schemes which give timely interest on debt funds.

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Moderate Plan:

This plan has 30-40% of growth schemes that is equities, because here the investor is not ready to take higher risk.

40-50% of the fund is in balanced schemes which have both debt and equities in certain proportions. Here the fund manager balances the fund such that he gets maximum returns and manages the risk.

20% are in income schemes which give timely interest on debt funds.

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Conservative Plan:

This plan has 10% of growth schemes that is equities, because here the investor wants very low amount of risk.

Balanced fund is 20-30% because even balanced fund has some amount of risk, so to reduce risk it is taken in small portion.

50-60% is in income schemes which give timely interest on debt funds, which the retired investors expect.

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Investment Valuation of Mutual Funds

1. Net Asset Value (NAV)

NAV is the sum total of all the assets of the mutual fund (at market price) less the liabilities (fund manager fees, audit fees, registration fees among others); divide this by the number of units and you arrive at the NAV per unit of the mutual fund.

NAV (per unit) =Net Assets of the scheme / No. of units of the scheme

Eg: Total Assets = 20, 00,000 No. of units= 20,000

NAV= 20, 00,000/20,000= 100

2. Standard Deviation (SD)

SD is the measure of risk taken by, or volatility borne by, the mutual fund. Mathematically speaking, SD tells us how much the values have deviated from the mean (average) of the values. SD measures by how much the investor could diverge from the average return either upwards or downwards. It highlights the element of risk associated with the fund. The SD is calculated by using returns of the scheme i.e. Net Asset Value (NAV).

A fund that has consistent 4 year return of 3% would have a mean of 3%. The S.D for this fund would then be zero because the fund’s return in any given year does not differ from its four year mean of 3%. On the other hand the fund that returned in each of last four years -4%, 17%, 2%, and 30% will have a mean return of 11% the fund will also exhibit a high S.D because each the return differs from the mean return, this fund is therefore more risky because it fluctuates.

3. Sharpe Ratio (SR)

SR is a measure developed to calculate risk-adjusted returns. It measures how much return you can expect over and above a certain risk-free rate (for example, the bank deposit rate), for every unit of risk (i.e. Standard Deviation) of the scheme. Statistically, the Sharpe Ratio is the difference between the annualized return (Rib) and the risk-free return (Rf) divided by the Standard Deviation (SD) during the specified period.

Sharpe Ratio = (Rib-Rf)/SD.

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Higher the magnitude of the Sharpe Ratio, higher is the performance rating of the scheme.

4. Compounded Annual Growth Rate (CAGR)

It means the year-over-year growth rate of an investment over a specified period of time.Mathematically it is calculated as under:

CAGR= Ending Value 1

Beginning Value # of years -1

Eg: 1 Jan 2004 NAV of a fund is 10 and 31 Dec 2004 NAV is 14. What is the compounded return per annum

CAGR = [(14/10)1/2]-1=.1832=18.32%

5. Absolute ReturnsThese are the simple returns, i.e. the returns that an asset achieves, from the day of its purchase to the day of its sale, regardless of how much time has elapsed in between. This measure looks at the appreciation or depreciation that an asset - usually a stock or a mutual fund – achieves over the given period of time. Mathematically it is calculated as under:

Ending Value – Beginning Value x 100Beginning Value

According to above example:

=[(14-10)/14]*100=28.57%

6. Beta

Beta determines the volatility or risk of a fund in comparison to that of its index or benchmark. Fund with a beta very close to 1 means the fund’s performance closely matches the index or benchmark. A beta greater than 1 indicates greater volatility than the overall market. A beta less than 1 indicates less volatility.

If a fund has a beta of 1.1 in relation to the Sensex the fund has been moving 10% more than the index. Therefore if the Sensex increased 20% the fund would be expected to increase 22% on the other hand a

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fund with a beta of 2.4 would be expected to move 2.4 times more than its corresponding index. So, if the Sensex moved 20% the fund would be expected to rise 48% and if the Sensex declined 10% the fund would be expected to lose 24%

Title of the Project: Mutual Funds- Diversified Investments.

Objectives:

Main Objective: To study in detail about Mutual Funds and its investment portfolio.

Sub-Objectives:

1. To understand the role of fund manager in achieving the investment objective by diversifying the portfolio. (comparing performance of 3 selective funds)

2. Comparison between growth and dividend option of 5 major funds.3. To study mutual fund investment valuation.4. To study the various types of Mutual Funds, investment pattern used by the fund managers

for various fund, learn how to select a mutual fund and how mutual funds can be used for financial planning.

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Chapter III

Methodology

Contents:

a. Collection of dataa. Primary Data b. Secondary Data

b. Statistical Toolsa. Graphsb. Charts

c. Limitation of study

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Collection of Data

Primary:

Discussion with the branch manager and the employees of HDFC AMC Ltd Hubli Branch. The discussion was based on basics of mutual funds, working of mutual funds, financial planning, and some calculation based on NAV, Sharpe Ratio, and Beta etc.

Secondary:

Information regarding Mutual Fund industry and working of mutual funds was referred from Personal FN magazine

Performance of funds, their industry allocation, and other facts of funds were captured from Fact Sheets

Information regarding company profile, products, NAV and Returns was taken from the website www.hdfcfund.com

Performance of some were observed from www.moneycontrol.com Growth and Dividend option of some top funds were compared and the information was got

from www.mutualfundindia.com

Statistical Tools

Graphs

Graphs are used to analyze the difference between growth option and dividend option.

Charts

Charts depicting the pattern used by fund managers are used.

Pie chart depicting the different debt and money market instruments used in HDFC High interest fund is used.

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Limitation of the Study

1. This study is limited to some prominent funds and all the funds of HDFC AMC are not taken into account.

2. Due to unavailability of investor’s information regarding the growth and dividend option comparison of the funds, I have compared the NAV’s of the both option.

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Chapter IV

Analysis of the Study

Contents:

a. Comparison between growth and dividend option planb. Analysis of fund manager diversification & portfolio management plan.

i. HDFC Top 200ii. HDFC Balance Fund

iii. HDFC High Interest Fund

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Comparison between Dividend option and Growth option of HDFC Top 200 Fund.

Time period- 5yrs (from July, 2005 to July, 2010)

Name Key

HDFC Top 200 – Dividend

HDFC Top 200 – Growth

Inference:

The NAV of Growth option is greater than the dividend option of the fund. As the investor withdraws the dividend, that portion of the amount is not subject to growth. But in case of growth option the investor can enjoy the growth of the whole amount.

As HDFC Top 200 fund is equity oriented fund it yields high returns, but during the year 2008-09 the dividend option of this fund observed negative NAV but the growth option observed only positive values.

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Comparison between Dividend option and Growth option of HDFC Growth Fund.


Name Key

HDFC Growth Fund - Dividend

HDFC Growth Fund - Growth

Inference:


As HDFC Growth fund is equity oriented fund it yields high returns, but during the year 2008-09 the dividend option of this fund observed negative NAV but the growth option observed only positive values.

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Comparison between Dividend option and Growth option of HDFC Tax Saver.


Name Key

HDFC TaxSaver – Dividend

HDFC TaxSaver – Growth

Inference:


In case of HDFC Tax Saver fund the dividend option and the growth option NAV’s are close and there is and by 2010 there is much difference between the two because of the hike in Sensex

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Comparison between Dividend option and Growth option of HDFC Balanced Fund.


Inference:


Compared to all other funds balanced fund has less fluctuations in its NAV this is because it is balanced with the debt and equity funds and balanced funds are preferred by investors who wants to take lesser risk.

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Name Key

HDFC Balanced Fund - Dividend

HDFC Balanced Fund - Growth

Comparison between Dividend option and Growth option of HDFC Balanced Fund.


Name Key

HDFC Income Fund - Dividend

HDFC Income Fund - Growth

Inference:


HDFC Income Fund is a debt and money market oriented fund and its returns are in the form of interest earned by the instruments. There is a huge difference between the growth and dividend option’s NAV.

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HDFC TOP 200

Investment Objective

To generate long term capital appreciation from a portfolio of equity and equity-linked instruments primarily drawn from the companies in BSE 200 index.

Fund Manager Details

Mr. Prashant Jain (since Jun19, 03)Mr. Anand Laddha - Dedicated Fund Manager - Foreign SecuritiesInvestment Scheme and Risk Exposure

Sr.no. Asset Type (% of Portfolio) Risk Profile

1

Equities and Equity Related Instruments

Upto 100% (including use of derivatives for hedging and other uses as permitted by prevailing SEBI Regulations) High

Portfolio Holdings(as on May 31, 2010)

Company Industry+ % to NAV EQUITY & EQUITY RELATED State Bank of India Banks 6.97Infosys Technologies Ltd. Software 5.34ICICI Bank Ltd. Banks 4.43Oil & Natural Gas Corporation Ltd. Oil 4.34Bank of Baroda Banks 4.04

Larsen & Toubro Ltd.Construction Project 3.79

ITC Ltd.Consumer Non Durables 3.56

Reliance Industries Ltd.Petroleum Products 3.49

GAIL (India) Ltd. Gas 3.03LIC Housing Finance Ltd. Finance 2.81Total of Top Ten Equity Holdings 41.8Total Equity & Equity Related Holdings 96.81Total Money Market Instrument & Other Credit Exposures (aggregated holdings in a single issuer) 0Cash margin / Earmarked cash for Futures & Options 0.09Other Cash, Cash Equivalents and Net Current Assets 3.1Grand Total 100Net Assets (Rs. In Lakhs) 749021.2

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Industry Allocation

Industry% of allocation Industry

% of allocation

Banks 20.99 Power 3.68Consumer Non Durables 8.73 Telecom-Services 2.3Pharmaceuticals 8.29 Transportation 1.87Software 7.81 Media and Entertainment 1.85Oil 6.55 Ferrous Metals 1.67Construction Project 5.97 Non- Ferrous Metals 1.14Auto 5.59 Diversified 1.07Petroleum Products 5.37 Hardware 0.44Finance 4.96 Auto Ancillaries 0.25Industrial Capital Goods 4.44 Cement 0.12Gas 3.72

Relative Performance

HDFC Top 200 Fund (NAV as at evaluation date 31-May-2010, Rs. 184.857 Per unit)

Date PeriodNAV Per Unit (Rs.)

Returns (%) $$ ^

Benchmark Returns (%) #

30-Mar-07 Last 1158 days 104.504 19.69** 10.75**

30-Nov-09Last Six months (182 days) 176.161 4.94* 2.22*

29-May-09

Last 1 Year (367 days) 139.341 32.46** 21.27**

31-May-07

Last 3 Years (1096 days) 119.096 15.77** 6.81**

31-May-05

Last 5 Years (1826 days) 54.931 27.45** 19.32**

31-May-00

Last 10 Years (3652 days) 15.83 27.84** 16.5**

11-Oct-96Since Inception (4980 days) 10 25.65** 15.16**

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HDFC Balanced Fund


The primary objective of the Scheme is to generate capital appreciation along with current income from a combined portfolio of equity and equity related and debt and money market instruments.


Mr. Chirag Setalvad (since April 2, 07)

Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities

Investment Scheme and Risk Profile

Sr. No. Type of Instruments

Normal Allocation

Normal Deviation

Risk Profile of the instrument

(% of Net Assets)

(% of Normal Allocation)

1Equity and Equity Related Instruments 60 20

Medium to High

2

Debt Securities (including securitized debt) and Money Market instruments 40 30

Low to Medium

Portfolio - Holdings (as on June 30, 2010)

Company / Issuer Industry+ / Rating% to NAV

EQUITY & EQUITY RELATED Coromandel International Ltd. Fertilizers 3.91Tata Consultancy Services Ltd. Software 3.6Ipca Laboratories Ltd. Pharmaceuticals 3.5Infosys Technologies Ltd. Software 3.34Balkrishna Industries Ltd. Auto Ancillaries 3.34Sun Pharmaceutical Industries Ltd. Pharmaceuticals 3.21

Dabur India Ltd.Consumer Non Durables 3.15

Biocon Ltd. Pharmaceuticals 3.12Motherson Sumi Systems Ltd. Auto Ancillaries 2.95Bank of Baroda Banks 2.94Total of Top Ten Equity Holdings 33.06Total Equity & Equity Related Holdings 66.87Total Credit Exposures (aggregated holdings in a 20.95

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single issuer)Cash, Cash Equivalents and Net Current Assets 12.18Grand Total 100Net Assets (Rs. In Lakhs) 16702.24

Industry Allocation

Industry% of allocation Industry

% of allocation

Pharmaceuticals 12.19 Construction Project 2.7Banks 8.5 Construction 2.17Software 7.23 Telecom-Services 2.03Fertilizers 6.98 Power 1.86Auto Ancillaries 6.37 Consumer Durables 1.69Industrial Capital Goods 5.26 Chemicals 1.29Consumer Non Durables 4.68 Industrial Products 1.03Petroleum Products 4.07

Relative Performance

HDFC Balanced Fund

(NAV as at evaluation date 30-June-2010, Rs. 50.713 Per unit)

Date PeriodNAV Per Unit (Rs.)

Returns (%) ^

Benchmark Returns (%) #

30-Mar-07 Last 1188 days 29.183 18.5** 10.95** 30-Dec-09 Last 182 days 44.624 13.65* 3.05*

30-Jun-09Last 1 Year (365 days) 36.003 40.86* 17.34*

29-Jun-07Last 3 Years (1097 days) 32.314 16.18** 8.73**

30-Jun-05Last 5 Years (1826 days) 20.698 19.62** 14.89**

30-Jun-00Last 10 Years (3652 days) N.A N.A. N.A.

11-Sep-00Since Inception (3579 days) 10 18.01** N.A.

HDFC High Interest Fund


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The investment objective of HDFC High Interest Fund is to generate income by investing in a range of debt and money market instruments of various maturity dates with a view to maximizing income while maintaining the optimum balance of yield, safety and liquidity.


Mr. Anil Bamboli (since Feb 16, 04),Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities

Investment Scheme and Risk Profile

Sr.no. Asset Type(% Of Portfolio) Risk Profile

1 Debt & Money Market Instruments * 100%Low to Medium

Portfolio Holdings as at May 31st 2010Issuer Rating % to NAVGovernment Securities,Money Market Instruments and other Credit ExposureGovernment Securities Soverign 43.81Power Finance Corporation Ltd AAA 7.89National Housing Bank AAA 7.49Rural Eleectrification Corporation Ltd AAA 5.5National Aviation Company of India Ltd AAA(SO) 5.5Indian Railways Finance Corporation AAA 5.35Corporation Bank P1+ 5.06National Bank for Agricuture and Rural Development AAA 3.5Power Grid Corporation of India Ltd AAA 2.68State Bank of India AAA 2.67Total of 10 Government Secutities, Money market instruments and other credit exposure(aggregated holdings in a single issuer) 89.45Others 2.63Total of Government Secutities, Money market instruments and other credit exposure(aggregated holdings in a single issuer) 92.08Cash, Cash Equalents and net Current Assets 7.92Grand Total 100Net Assets(in lakhs) 19,123.17

Portfolio Classification by Asset Class (%)

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Relative Performance (Growth option)

Date Period NAVReturns (%)

Benchmark Returns (%)

Nov 30 2009Last six months(182 days) 30.8888 2.72 2.55

May 29 2009Last 1 Year (367 days) 30.1072 5.36 4.72

May 31 2007Last 3 Years (1096 days) 24.5138 8.97 7.06

May 31 2005Last 5 years (1826 days) 23.2925 6.37 5.71

May 31 2000Last 10 years (3652 days) 14.7 7.99 N.A

April 28 1997Since inception (4781 days) 10 9.22 N.A

Analysis:

Fund Name Fund Category Risk ProfileReturns(Since inception)

Role of fund manager

HDFC Top 200 Pure Equity High 25.65Highly active

HDFC Balanced Fund

Equity and Debt Instruments Medium 18.01

Moderate


Debt and Money market instruments Low 9.22

Comparatively passive

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Risk Vs Return Pattern

Chapter V: Findings

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1. Mutual funds are classified across asset classes, time period and investment philosophy.

2. There are different types of plans designed for different types of investors depending on their risk taking ability and return expectation.

3. Diversification is the main tool used by the fund managers to dilute the risk factor. Diversification minimizes the concentration of investor’s money in single stock and thus minimizes the risk.

4. There are mainly three patterns used by the fund managers during investment. They are: Aggressive plan, Moderate plan, and Conservative plan. Each plan is carefully designed by taking into account the asset allocation, risk and return and the investors view.

5. The NAV of Growth option is greater than the dividend option of the fund. As the investor withdraws the dividend, that portion of the amount is not subject to growth. But in case of growth option the investor can enjoy the growth of the whole amount.

6. In dividend option, if the investor is able to use the dividend amount of fund ‘X’ in some other investment and the money can have a growth more than growth option’s NAV of fund ‘X’. Then it is a good decision to opt for dividend option. Otherwise, growth option gives better growth of the investment.

7. Equity funds have better NAV than balanced and income funds because they have greater risk involved.

8. In case of HDFC Tax Saver fund the dividend option and the growth option NAV’s are close and there is and by 2013 there is much difference between the two because of the hike in Sensex

9. Compared to all other funds balanced fund has less fluctuations in its NAV this is because it is balanced with the debt and equity funds and balanced funds are preferred by investors who wants to take lesser risk.

10. HDFC Income Fund is a debt and money market oriented fund and its returns are in the form of interest earned by the instruments. There is a huge difference between the growth and dividend option’s NAV.

11.

Fund Name Fund Category Risk Profile Returns(Since Role of fund

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inception) manager

HDFC Top 200 Pure Equity High 25.65Highly active

HDFC Balanced Fund

Equity and Debt Instruments Medium 18.01

Moderate


Debt and Money market instruments Low 9.22

Comparatively passive

12. Fund managers diversify their portfolio across different industries and maximum weightage is given to those industries which have growth perspective in the future years.

13. Now, it is banking, software, and consumer non durables industries that are given more weightage. But, in future fund managers have predicted that the infrastructure industry will have better prospects.

14. In case of HDFC High Interest fund the fund managers have allocated the assets in Government securities, Certificate of Deposits, Credit Exposure and Cash equalents and Net current assets which are safe and give high interest

Chapter VI: Conclusion

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Mutual Fund market provides vast investment avenues for the prospective investors ranging from bonds to bank deposits and corporate debentures, which are low on risk and high on returns. The latest mutual fund market has indicated bearish trend which means that investors who are seeking for profitable investments should opt for highly skilled fund managers who invests on their behalf.

My experience in HDFC AMC Ltd was a very fruitful one. My external guide Mr.Yashwant.Ponkshse guided me how to go about financial planning, how much it is important for an individual to invest his money in proper avenues. I learnt about mutual funds their investment portfolio and how fund managers diversify their portfolio and overcome the risk factor.

There are many kinds of mutual funds to suit the requirements of the investor and each of them are managed by qualified and experienced fund managers who will smartly invest in proper avenues.

Working procedure at HDFC AMC Ltd. Hubli is very open. When a New Fund Offer is introduced all the employees of the branch sit together and share their views that how this fund will work in future and how to sell the fund.

Finally, I conclude that my project work on the given topic was interesting and I personally felt of investing in mutual funds. As they are handled by fund managers who are experienced and manage the funds by diversifying risk in different avenues.

Chapter VII: References

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Books

Personal FN magazine(mutual fund guide 2013)/ financial planning, Mutual Fund selection criteria, Mutual Fund Structure

Fact Sheets (issue of May 2013)/ asset allocation, latest NAV etc. AMFI Study material/ calculations regarding NAV, Sharpe ratio etc.

Websites

www.hdfcfund.com www.moneycontrol.com www.mutualfundindia.com

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Jeetu

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