Internship Report On

Internship Report on
Analysis of Risk & Returns in Mutual Funds

AT
BY
KAMLESH KUMAR SHAH
1RE13MBA15
Submitted to
VISVESVARAYA TECHNOLOGICAL UNIVERSITY, BELGAUM
In partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION
Under the guidance of
INTERNAL GUIDE
EXTERNAL GUIDE
Diwakar Naidu
Srikanthbabu Katragadda
Professor & Director
Executive Sales
Department of MBA
HDFC Asset Management Co.
Department of MBA
REVA INSTITUTE OF TECHNOLOGY & MANAGEMENT
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Reva Institute of Technology & Management, Bangalore

Batch (2013-2015)
\
CERTIFICATE
This is to certify that KAMLESH KUMAR SHAH bearing USN 1RE13MBA15, is a bonafide
student of Master of Business Administration course of the Institute 2012 batch, affiliated to
Visvesvaraya Technological university, Belgaum. Internship report on Analysis of Risk
&Returns in Mutual Funds is prepared by her under the guidance of Prof. DIWAKAR
NAIDU, in partial fulfillment of the requirements of the award of the degree of Master of
Business Administration of Visvesvaraya Technological University, Belgaum Karnataka.
Signature of Internal Guide
Signature of HOD
Signature of Principal
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DECLARATION
I, KAMLESH KUMAR SHAH, hereby declare that the internship report entitled Analysis of
Risk & Returns in Mutual Funds with reference to REVA Institute of Technology and
Management, Bangalore prepared by me under the guidance of Prof. Diwakar Naidu, faculty of
MBA Department, REVA Institute of Technology and Management and external assistance by
Mr. Srikanthbabu Katragadda, Executive Sales, HDFC Asset Management Company,
Malleshwaram-Bangalore.
I also declare that this Internship work is towards the partial fulfillment of the university
regulations for the award of degree of Master of Business Administration by Visvesvaraya
Technological University, Belgaum.
I have undergone a summer project for a period of ten weeks. I further declare that this project is
based on the original study undertaken by me and has not been submitted for the award of any
degree/diploma from any other University/Institution.
Place: Bangalore
Date:
KAMLESH KUMAR SHAH

1RE13MBA15
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ACKNOWLEDGEMENT
I take this opportunity to express my profound gratitude and deep regards to my guide Prof.
DIWAKAR NAIDU for his exemplary guidance, monitoring and constant encouragement
throughout the course of this internship. The blessing, help and guidance given by him time to
time shall carry me a long way in the journey of life on which I am about to embark.
I would like to thank Mr. SRIKANTHBABU KATRAGADDA, who gave me the opportunity to
complete my 10 weeks winter internship program in HDFC Asset Management Company and
also for his guidance from which I could learn various facilities offered at HDFC Asset
Management Co. as per requirement of my curriculum of Post Graduate Diploma in
Management. I am obliged to staff members of HDFC Asset Management Co., for the valuable
information provided by them in their respective fields. I am grateful for their cooperation during
the period of my internship.
Lastly, I thank almighty, my parents and friends for their constant encouragement without which
this internship would not be possible.
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INTRODUCTION
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CHAPTER 1
INTRODUCTION
1.1 OVERVIEW
Prudent investing requires information of key financial concepts and an understanding of your
investment profile and how these works together to affect investing decisions and results.
Saving and investing are often used interchangeably. However, there are differences between
the two. Saving refers to funds kept for making specific purchases in the relatively near future
(usually three years or less) and for emergencies. Preservation of the principal and liquidity of
the funds (ease of converting to cash) are essential aspects of savings. Consequently, savings
generally yield a low rate of return and do not maintain purchasing power. Investing, on the other
hand, focuses on increasing net worth and achieving long-term financial goals. Investing
involves risk (of loss of principal) and is to be considered only after you have adequate savings
and have done proper risk management. In short investing is more concerned on the return of
investment, while savings is on the return of capital. All investments involve some element of
risk because the future value of an investment is uncertain.
Risk, simply stated, is the possibility that the actual return on an investment will vary from the
anticipated return or that the initial principal will decline in value. Risk implies the possibility of
loss on your investment.
Mutual Fund is a fund, managed by an investment company with the financial objective of
generating high Rate of Returns. Or an investment vehicle managed by finance professionals
that raise capital by selling shares (called units) in a chosen and balanced set of securities to the
public.
A mutual fund is a type of investment fund. An investment fund is a collection of investments,
such as stocks, bonds or other funds. Unlike most other types of investment funds, mutual funds
are open-ended, which means as more people invest, the fund issues new units or shares. A
mutual fund typically focuses on specific types of investments. For example, a fund may invest
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mainly in government bonds, stocks from large companies or stocks from certain countries.
Some funds may invest in a mix of stocks and bonds, or other mutual funds. These asset
management or investment management companies collects money from the investors and
invests those money in different Stocks, Bonds and other financial securities in a diversified
manner. Before investing they carry out thorough research and detailed analysis on the market
conditions and market trends of stock and bond prices. These things help the fund managers to
speculate properly in the right direction.
The investors, who invest their money in the Mutual fund of any Investment Management
Company, receive an Equity Position in that particular Mutual fund. When after certain period of
time, whether long term or short term, the investors sell the shares of the Mutual Fund, they
receive the return according to the market conditions.
Fig1.1 Concept of Mutual Fund (Procedure)
A BRIEF OF MUTUAL FUNDS

Mutual fund is the pool of the money, based on the trust who invests the savings of a number
of investors who shares a common financial goal, like the capital appreciation and dividend
earning. The money thus collect is then invested in capital market instruments such as
shares, debenture, and foreign market. Investors invest money and get the units as per the
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unit value which we called as NAV (net assets value). Mutual fund is the most suitable
investment for the common man as it offers an opportunity to invest in diversified portfolio
management, good research team, professionally managed Indian stock as well as the
foreign market, the main aim of the fund manager is to taking the scrip that have under value
and future will rising, then fund manager sell out the stock. Fund manager concentration on
risk-return trade off, where minimize the risk and maximize the return through
diversification of the portfolio. The most common features of the Mutual fund unit are low
cost.
1.2 NEED FOR THE STUDY

In the finance field, it is a common knowledge that money or finance is
scarce and that
investors try to maximize their returns. But when the return is higher,
the risk is also higher.
Return and risk go together and they have a tradeoff. The art of
investment is to see that
return is maximized with minimum risk.
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In the above discussion we concentrated on the word investment and

to invest we need to
analyze securities. Combination of securities with different risk-return
characteristics will
constitute the portfolio of the investor.
The need of the study is to know the returns and the risk associated with
the Mutual funds
diversified scheme and to find out which best scheme to recommend.
1.3 OBJECTIVES OF THE STUDY

1. To study measures of Risk & Returns associated with Mutual Funds
investments;
2. To examine the different schemes & method to select a better scheme
of an AMC;
3. To analyze the risk appetite & investors preference while investing
between EQUITY & DEBT;
4. To study the factors influencing the investment decisions;
1.4 SCOPE OF THE STUDY

A big room has been witnessed in Mutual fund industry in recent times. A large number of
new players have entered the market ant trying to gain market share in this rapidly
improving market. The research has been carried on in Bangalore. I surveyed on my topic
Analysis of Risk & Returns in Mutual Funds on the visiting clients of the HDFC Asset
Management Company Limited, Malleshwaram-Bangalore.
Total area covered in this study is analysis on Risk and Return of the Mutual funds by
knowing the investment preference by the investors in various types of segments and also
covered data analysis like selection of different schemes which are best in terms of return
and to check the measures of Risk & Returns from the schemes.
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The study will help to know the preferences of the clients in selecting the Asset Management
Company, Portfolio, mode of investment, and option for getting return and so on they prefer.
This study will further help the company to make its further planning and strategy.
1.5 METHODOLOGY
This research was conducted during my Winter Internship Program; the location chosen was
branch office of HDFC Asset Management Company i.e. Malleshwaram-Bangalore.
For research, a sample size of 50 (Male__, and Female __) in the form of general & expert
opinion was taken by me under the guidance of my manager at the office.
General opinion was taken as investor on risk appetite of the mutual fund industry and there
analysis with the help of a brief questionnaire asking some of the details regarding the
Mutual funds. The research provided an interesting insight into awareness about the mutual
funds, difference in age groups, occupation, income levels, risk taking ability of individuals,
Investment options preferred etc.
Research Plan: To analyze investor preferences for mutual fund investments.
By knowing there:
Occupation
Age Group
Income
Investment Horizon
Investment Needs
Their Expected Returns
Risk Taking & Risk Coverage
Market Trends
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1.5.1 DATA SOURCES

The present study is totally based on the primary data. Secondary data only used for the
reference. The data has been collected by interacting with various people i.e. the sources
of information were collected from the investors of age group of 18-60 above (people
both with and without knowledge about mutual funds) and also collecting feedbacks
against a well-designed questionnaire.
1.5.2 SAMPLING
SAMPLING PROCEDURE:
The sample is selected in a random way, irrespective of them being investor or not or
availing the services or not. It was collected through personal visits to the known persons,
by formal and informal talks and through filling up the questionnaire prepared. The data
has been analyzed by using the CHI-SQUARE test and CAPM method. The group has
been selected and the analysis has been done on the basis statistical tools available.
SAMPLE SIZE:
The sample size of my report was limited to 50 respondents only. Out of which only __
respondents have invested in mutual fund. Other 10 have no inclinations towards mutual
fund.
SAMPLE DESIGN:
Data has been presented with the help of various graphs and table values required for
doing CHI-SQUARE Test.
1.6 LITERATURE REVIEW

It is bound to adapt the rich books, journals, periodicals, reports, etc. to measure with
quantity of collections. Lots of books, national and international level magazines, websites
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are referred for the study. The previous research studies are also be used as a guideline in
preparing and designing the research work.
Dr. N.K. Sathya Pal Sharma in his Research Article titled ANALYSIS OF THE RISK
AND RETURN RELATIONSHIP OF EQUITY BASED MUTUAL FUND IN INDIA
published in the International Journal of Advancements in Research & Technology,
Volume 2, Issue 8, and august-2013. Using CAPM one can calculate the expected rate of
return for a portfolio, given its risk. The objective of the study is to bring out a comparison
between the performance of equity based mutual funds of public and private sectors in
India. So, in this paper the first task is to calculate the risk associated with a mutual fund.
This is denoted by beta in CAPM. The research article found few things like; the overall
analysis finds that Reliance and UTI have been the best performers, Kotak an average
performer and SBI the worst performer which gave below-expected returns on the riskreturn relationship. It is concluded with the point that, though the stock market is subjected
to high risk, by using derivatives the loss can be minimized to an extent.
1.7 LIMITATIONS
The research is confined to a certain part of Bangalore.
Sample size is limited to 50 investors of HDFC Mutual Fund, MalleshwaramBangalore, out of these only __ had invested in Mutual Fund.
Some respondents were reluctant to divulge personal information which can affect the
validity of all responses .
The sample size may not adequately represent the whole market.
Possibility of error in data collection because many of investors may have not given
actual answers of my questionnaire.
Some of the persons were not so responsive.
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INDUSTRY PROFILE
COMPANY PROFILE
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CHAPTER 2
2.1 INDUSTRY PROFILE
2.1.1 HISTORICAL EVOLUTION
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the
initiative of the Government of India and Reserve Bank of India. The history of mutual funds in
India can be broadly divided into four distinct phases
First Phase - 1964-1987
Unit Trust of India (UTI) was established in 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development
Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The
first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700
crores of assets under management.
Second Phase - 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non-UTI, public sector mutual funds set up by public sector banks and
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).
SBI Mutual Fund was the first non-UTI Mutual Fund established in June 1987 followed by
Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
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established its mutual fund in June 1989 while GIC had set up its mutual fund in December
1990.
At the end of 1993, the mutual fund industry had assets under management of Rs. 47,004 crores.
Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in
which the first Mutual Fund Regulations came into being, under which all mutual funds, except
UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds setting
up funds in India and also the industry has witnessed several mergers and acquisitions. As at the
end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The
Unit Trust of India with Rs. 44,541 crores of assets under management was way ahead of other
mutual funds.
Fourth Phase - since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated
into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets
under management of Rs. 29,835 crores as at the end of January 2003, representing broadly, the
assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of
Unit Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund Regulations.
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The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with
SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile
UTI which had in March 2000 more than Rs. 76,000 crores of assets under management and with
the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and
with recent mergers taking place among different private sector funds, the mutual fund industry
has entered its current phase of consolidation and growth.
The graph indicates the growth of assets over the years.
Note:
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Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit
Trust of India effective from February 2003. The Assets under management of the Specified
Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the
industry as a whole from February 2003 onwards.
2.1.2 TRENDS IN MUTUAL FUND INDUSTRY

A. NUMBER OF SCHEMES UNDER MUTUAL FUND
TABLE 1
Year
Debt
Income
Balanced
ETFs
Overseas
Total
2010-11
679
376
32
28
16
1131
2011-12
872
352
30
35
20
1309
2012-13
857
347
32
37
21
1294
2013-14
1178
363
30
40
27
1638
Source: SEBI
The total numbers of schemes under MFs have increased during the period 2010-14 and it
increased very steeply between 2012-13 to 2013-14. The growth rate of number of schemes in
debt is greater than income, balanced, ETFs and overseas.
B. FUND MOBILIZATION UNDER MUTUAL FUNDS

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TABLE 2
Year
Debt
2010-11
Income
Balanced
ETFs
Overseas
Total
8777034.17 66592.30
7409.28
7709.25
969.39
8859515.38
2011-12
6754113.22 50618.80
5027.29
8563.39
1355.81
6819678.51
2012-13
7213578.19 43364.31
5204.88
5052.35
685.53
7267885.26
2013-14
9709762.04 46092.99
Source: SEBI
3434.89
6869.63
1941
9768100.54
The total Fund mobilized by the mutual fund have declined in the year 2011-12 from Rs
8859515.38 crores to 6819679.51 crores but again the industry gained momentum and it
increased to 9768100.54 in 2013-14. The major chunk of mutual fund industry is invested in debt
securities where as the share of investment in balanced and ETFs is more or less same. Thus we
can conclude from above that the mutual fund industry is one of the major investor in the debt
securities of the capital market
C. NET ASSETS UNDER MUTUAL FUNDS
TABLE 3
Year
Debt
Income
Balanced
ETFs
Overseas
Total
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2010-11
369049.22
95322.39
18445.09
6916.67
2516.17
592249.53
2011-12
374856.70
182075.86
16261.10
11492.58
2530.31
587216.56
2012-13
497451.17
172507.78
16307.21
13124.33
2052.87
701443.37
2013-14
600944.82 191107.08 16792.61
13204.83
3190.80
825240.14
Source: SEBI
The Net Assets under mutual funds have remained almost stagnant during 2010-11 to 2011-12
and it increased very steeply between 201S2-13 to 2013-14.
2.2 COMPANY PROFILE

HDFC Mutual Fund is one of the largest mutual funds and well-established fund house in the
country with focus on delivering consistent fund performance across categories since the launch
of the first scheme(s) in July 2000. While the past experience makes HDFC Mutual Fund, a
veteran, but when it comes to investments, they have never believed that the experience is
enough.
Vision Statement
To be a dominant player in the Indian mutual fund space, recognized for its high levels of
ethical and professional conduct and a commitment towards enhancing investor interests.
2.2.1 COMPANY OVERVIEW
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 Securities and Exchange
Board of India (SEBI) vide its letter dated
REVA
OF TECHNOLOGY & MANAGEMENT
July 3,INSTITUTE
2000.
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The registered office of the AMC is situated at HUL House, 2nd Floor, H. T. Parekh Marg,
165-166, Backbay Reclamation, Churchgate, Mumbai - 400 020. The Company Identification
Number (CIN) is U65991MH1999PLC123027.
In terms of the Investment Management Agreement, the HDFC Trustee Company Ltd. has
appointed the HDFC Asset Management Company Limited (AMC) to manage schemes of the
Mutual Fund. The paid up capital of the AMC is Rs. 25.241 crore as on September 30, 2013.
Zurich Insurance Company (ZIC), the sponsor of Zurich India Mutual Fund, following a review
of its overall strategy, had decided to divest its Asset Management business in India. The AMC
had entered into an agreement with ZIC to acquire the said business, subject to necessary
regulatory approvals.
On obtaining the regulatory approvals, the Schemes of Zurich India Mutual Fund has now
migrated to HDFC Mutual Fund on June 19, 2003.
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 February 12, 2013 to act as a Portfolio
Manager under the SEBI (Portfolio Managers) Regulations, 1993. The Certificate of Registration
is valid from January 1, 2013 to December 31, 2015.
CONSTITUTION OF HDFC MUTUAL FUND

Mutual Fund Trust
Sponsors
Trustee
AMC
Custodians
HDFC Mutual Fund

Housing Development Finance Corporation Limited (HDFC)
Standard Life Investment Limited
HDFC Trustee Company Limited
HDFC Asset Management Company Limited
HDFC Bank Limited
CITI Bank N.A.
Deutsche Bank A.G.
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MUTUAL FUND TRUST:

HDFC Mutual Fund has been constituted as a trust in accordance with the provisions of the
Indian Trusts Act, 1882, as per the terms of the trust deed dated June 8, 2000 with Housing
Development Finance Corporation Limited (HDFC) and Standard Life Investments Limited as
the Sponsors / Settlers and HDFC Trustee Company Limited, as the Trustee. The Trust Deed has
been registered under the Indian Registration Act, 1908. The Mutual Fund has been registered
with SEBI, under registration code MF/044/00/6 on June 30, 2000.
SPONSORS:
HOUSING DEVELOPMENT FINANCING CORPORATION LIMITED (HDFC):
HDFC Ltd. was incorporated in 1977 as the first specialized Mortgage Company in India. HDFC
provides financial assistance to individuals, corporate 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 13.25 lac
borrowers, over 17.5 lac depositors, over 1.82 lac shareholders and over 25,000 deposit agents,
as at March 31, 2014.
As at March 31, 2014, HDFC had mortgage loan assets of Rs. 1971.00 billion. Since inception,
HDFC has financed over 4.6 million housing units. 74% of shareholders in HDFC are foreign
investors. HDFCs market capitalization as at March 31, 2014 stood at approximately Rs 1379.35
billion.
HDFC's borrowings consist of domestic term loans from banks and insurance companies, bonds
and retail deposits. HDFC has received the highest rating for its bonds and deposits program for
the Nineteenth year in succession.
As part of HDFCs developmental initiatives, the company has set up institutions in various
fields including Banking, Insurance; Life and General, Asset Management, Credit Rating,
Consumer finance, IT- enabled services, Real Estate and Education finance.
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Over the years, the HDFC group has emerged as a strong financial conglomerate in the Indian
capital markets with a presence in banking, life and general insurance, asset management and
venture capital. HDFCs key associate and subsidiary companies include HDFC Bank Limited,
HDFC Standard Life Insurance Company Limited, HDFC Ergo General Insurance Company
Limited, HDFC Asset Management Company Limited, GRUH Finance Limited, HDFC Venture
Capital Limited and Credila Financial Services Limited.
STANDARD LIFE INVESTMENTS LIMITED

The Standard Life Assurance Company was established in 1825 and has considerable experience
in global financial markets. The company was present in the Indian life insurance market from
1847 to 1938 when agencies were set up in Kolkata and Mumbai. The company re-entered the
Indian market in 1995, when an agreement was signed with HDFC to launch an insurance joint
venture.
In April 2006, the Board of The Standard Life Assurance Company recommended that it should
demutualise and Standard Life plc float on the London Stock Exchange. At a Special General
Meeting held in May 2006, voting members overwhelmingly voted in favor of this. The court of
session in Scotland approved this in June 2006 and Standard Life plc floated on the London
Stock Exchange on 10th July 2006.
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$319.5 billion (191.7 billion) as at
March 31, 2014, Standard Life Investments Limited is a leading asset manager with an
expanding global reach operating in the UK, Canada, Hong Kong, China, Korea, Ireland, France,
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Australia and the USA, and is responsible for investing money on behalf of six million retail and
institutional clients worldwide.
In order to meet the different needs and risk profiles of its clients, Standard Life Investments
Limited manages a diverse portfolio covering all of the major markets world-wide, which
includes a range of private and public equities, government and company bonds, property
investments and various derivative instruments.
TRUSTEE:
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 registered office of the Trustee company is situated at HUL House, 2nd Floor, H. T. Parekh Marg,
165-166, Backbay Reclamation, Churchgate, Mumbai - 400 020. The Company Identification Number
(CIN) is U65991MH1999PLC123026.
The Board of Directors of HDFC Trustee Company Limited consists of the following eminent persons.
MR. ANIL KUMAR HIRJEE

MR. VINCENT JOSEPH OBRIEN
MR. SHISHIR K. DIWANJI
MR. RANJAN SANGHI
MR. V. SRINIVASAN RANGAN
Chairman
Director
Director
Director
Director
HDFC MUTUAL FUND PRODUCTS;
HDFC Growth Fund

HDFC Equity Fund
HDFC Top 200 Fund
HDFC Capital Builder Fund
HDFC Core & Satellite Fund
HDFC Premier Multi-Cap Fund
HDFC Large Cap Fund
HDFC Mid-Cap Opportunities Fund
HDFC Small and Mid-Cap Fund
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HDFC Infrastructure Fund

HDFC Long Term Advantage Fund
HDFC TaxSaver
HDFC Index Fund - Sensex Plan & Nifty Plan
HDFC Index Fund Sensex Plus Plan
HDFC Balanced Fund
HDFC Prudence Fund
HDFC Childrens Gift Fund Investment Plan
HDFC Childrens Gift Fund Savings Plan
HDFC MF MIP Short Term Plan
HDFC MF MIP Long Term Plan
HDFC Multiple Yield Fund
HDFC Multiple Yield Fund Plan 2005
HDFC Income Fund
HDFC High Interest Fund Dynamic Plan
HDFC High Interest Fund Short Term Plan
HDFC Short Term Plan
HDFC Short Term Opportunities Fund
HDFC Medium Term Opportunities Plan
HDFC Gilt Fund Long Term Plan
HDFC Floating Rate Income Fund Short Term Plan & Long Term Plan
HDFC Liquid Fund
HDFC Cash Management Fund Savings Plan
HDFC Cash Management Fund Treasury Advantage Plan
HDFC Corporate Debt Opportunities Fund
ACHIEVEMENTS AND AWARDS:

LIPPER FUND AWARDS 2011
HDFC was awarded the Best Group over 3 Years# in the Overall Group Category (from
amongst 14 fund groups) for the 3 year period ending December 31, 2010 at Lipper Fund
Awards- India 2011. The said award has been given to HDFC as one of the Sponsor Companies.
Housing Development Finance Corporation Limited (HDFC) was awarded the Best Group
over 3 Years# in the Mixed Assets Group Category (from amongst 15 fund groups) for the 3
year period ending December 31, 2010 at Lipper Fund Awards- India 2011. The said award has
been given to HDFC as one of the Sponsor Companies.
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ICRA MUTUAL FUND AWARDS 2011- STAR FUND HOUSE OF THE YEAR :
Star Fund House of the Year is determined in the Equity and Debt categories separately. Star
Fund house of the Year Award indicates top overall performance within the eligible fund houses.
To qualify for the award a fund house needs to have at least one scheme ranked 3 star or above in
at least three of the equity and debt categories respectively defined by ICRA. The scoring aims at
assessing the number of superior performing schemes managed by the fund house over the
current one-year period. The result also takes into account qualitative factors of an AMC's
structure based on their responses to a due diligence questionnaire.
MORNINGSTAR INDIA FUND AWARDS 2011
Best Equity Fund House: The award recognizes sustained outperformance over three years,
based on the Morningstar Risk-Adjusted Return across its equity fund line-ups for the period
ending December 31, 2010.
Best Multi-Asset Fund House: The award recognizes sustained outperformance over three years,
based on the Morningstar Risk-Adjusted Return across its equity, debt and allocation fund lineups for the period ending December 31, 2010.
CNBC TV18 - CRISIL MUTUAL FUND AWARDS 2011:
Debt Mutual Fund House of the Year
Eligibility Criteria: Gilt, Income, Income - Short, Liquid - Retail, Liquid - Institutional, Liquid Super Institutional, MIP - Aggressive, MIP - Conservative, Ultra Short term debt - Retail, Ultra
Short term debt-Institutional , Ultra Short term - Super Institutional, Consistent Debt and
Consistent Liquid categories are considered.
Methodology: Quarterly CRISIL Fund Ranks during the year for the above categories, for ranked
schemes from eligible fund houses, are multiplied with appropriate factors to arrive at the
weighted scores. The mutual fund house with the highest weighted score is awarded the Debt
Mutual Fund House of the Year.
Equity Mutual Fund House of the Year Award
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Eligibility Criteria: Large cap, Diversified, Small & Mid cap, ELSS, Index, Thematic Infrastructure, Balanced, Consistent Equity and Consistent Balanced categories are considered.
Methodology: Quarterly CRISIL Fund Ranks during the year for the above categories, for ranked
weighted scores. The mutual fund house with the highest weighted score is awarded the Equity
Mutual Fund House of the Year.
Mutual Fund House of the Year Award
Eligibility Criteria: The mutual fund house should have won at least one scheme level award.
Methodology: Quarterly CRISIL Fund Ranks during the year across all categories, for ranked
weighted scores. The mutual fund house with the highest weighted score is the Mutual Fund
House of The Year.
BUSINESS WORLD -VALUE RESEARCH SURVEY
Best Asset Management Company: AMCs were ranked based on funds rated either 4-star or 5star by Value Research as a percentage of the total number of rated funds. AMCs with less than
Rs 3,000 crores of average assets under management as of December 2010 were not included.
BLOOMBERG UTV FINANCIAL LEADERSHIP AWARDS 2011
Best Mutual Fund - Equity of the Year : All Mutual Funds operating in the
country were evaluated and of them 6 fund houses were shortlisted to make
presentations to the jury based on the performance of their schemes. The
final winners were selected by a Jury panel which considered weighted
average Sharpe Ratio achieved by the fund houses in each of their schemes
subject to minimum average assets under management during FY10 for the
debt and equity segments and the submissions made by the fund house on
its
risk
management
processes,
investor
education
and
category
enhancement initiatives, leadership initiatives undertaken by the fund house

to expand mutual fund operations.
Page 26
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3. CONCEPTUAL ANALYSIS OF MUTUAL FUNDS

3.1 UNDERSTANDING MUTUAL FUND
Mutual Fund is a trust that pools money from a group of investors (sharing common financial
goals and invest the money thus collected into assets classes that match the stated investment
objectives of the scheme. Since the stated investment objectives of a mutual fund scheme
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generally form the basis for an investors decision to contribute money to the pool, a mutual fund
can not deviate from its stated objectives at any point of time.
Every Mutual Fund is managed by a fund manager, who using his investment management skills
and necessary research works ensures much better return than what an investor can manage on
his own. The capital appreciation and other incomes earned from these investments are passed on
to the investors (also known as unit holders) in proportion of the number of units they own.
When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets
of the fund in the same proportion as his contribution amount put up with the corpus (the total
amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit
holder.
Any change in the value of the investments made into capital market instruments (such as shares,
debentures etc.) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the
market value of the Mutual Fund schemes assets net of its liabilities. NAV of a scheme is
calculated by dividing the market value of schemes assets by the total liabilities. NAV of a
scheme is calculated by dividing the market value of schemes assets by the total number of units
issued to the investors.
For example:
1.
2.
3.
4.
5.
If the market value of the assets of a fund is Rs. 100,000.

The total number of units issued to the investors is equal to 10,000.
Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000
Now if an investor X owns 5 units of this scheme
Then his total contribution to the fund is Rs. 50 (i.e. Number of units held multiplied by the
NAV of the scheme).
KEY CONSTITUENTS OF A MUTUAL FUND:
Page 29
SPONSOR:
Sponsor is the person who acting alone or in combination with another body corporate
establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the
investment managed and meet the eligibility criteria prescribed under the Securities and
Exchange Board of India (Mutual Fund) Regulations, 1996. The sponsor is not responsible or
liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial
contribution made by it towards setting up of the Mutual Fund.
TRUST:
The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts
Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.
TRUSTEE:
Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The
main responsibility of the Trustee is to safeguard the interest of the unit holders and ensure that
the AMC functions in the interest of investors and in accordance with the Securities and
Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed
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and the Offer Documents of the respective Schemes. At least 2/3 rd directors of the Trustee are
independent directors who are not associated with the Sponsor in any manner.
ASSET MANAGEMENT COMPANY (AMC):
The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC
is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an
Asset Management Company of the Mutual Fund. At least 50% of the directors of the AMC are
independent directors who are not associated with the Sponsor in any manner. The AMC must
have a net worth of at least 10 crores at all times.
REGISTRAR AND TRANSFER AGENTS (RTA):
The AMC if so authorized by the Trust Deed appoints Registrar and Transfer Agent to the Mutual
Fund. The Registrar processes the application form, redemption requests and dispatches account
statements to the unit holders. The Registrar and Transfer Agent also handle communications
with investors and updates investor records.
CUSTODIAN:
The custodian has custody of the assets of the fund. As part of this role, the custodian needs to
accept and give delivery of securities for the purchase and sale transactions of the various
schemes of the fund. Thus, the custodian settles all the transactions on behalf of the mutual fund
schemes. All custodians need to register with SEBI. The Custodian is appointed by the trustees.
CLASSIFICATION OF MUTUAL FUNDS:

MUTUAL
FUNDS
OPEN ENDED
SCHEMES
CLOSEENDED
SCHEMES
INTERVAL
SCHEMES
1. Open-Ended Fund:
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Funds that can sell and purchase units at any point in time are classified as Open-ended funds.
The fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous
selling (to investors) and repurchases (from the investors) by the fund. An open-end fund is not
required to keep selling new units to the investors at all times but is required to re-purchase,
when an investor wants to sell his units. The NAV of an open-end fund is calculated every day.
2. Close-Ended Fund:
Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period are
known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all times.
After the closure of the offer, buying and redemption of units by the investors directly from the
Funds is not allowed. However, to protect the interests of the investors, SEBI provides investors
with two avenues to liquidate their positions:
Closed-end Funds are listed on the stock exchanges where investors can buy/sell units
from/to each other. The trading is generally done at a discount to the NAV of the scheme.
The NAV of a closed-end fund is computed on a weekly basis.

Closed-end Funds may also offer buy-back of units to the unit holders. In this case, the
corpus of the Fund and its outstanding units do get changed.
3. INTERVAL FUND:
Interval funds combine features of both open-ended and close-ended schemes. They are
largely close-ended, but become open-ended at pre-specified intervals. The periods when an
interval scheme becomes open-ended, are called transaction periods; the period between the
close of a transaction period, and the opening of the next transaction period is called interval
period. Minimum duration of transaction period is 2 days, and minimum duration of
transaction period is 15 days. No redemption/repurchase of units is allowed except during the
specified transaction period (during which both subscription and redemption may be made to
and from the scheme).
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MUTUAL
FUNDS
EQUITY
DEBT
GOLD
DIVERSIFI
ED
GILT
GOLD
ETF
SECTOR
DIVERSIFI
ED
GOLD
SECTO
R
THEMATIC
JUNK
BONDS
TAX
SAVING
FIXED
MATURITY
PLAN
ARBITRAG
E
HYBRID
COMMODI
TY
INTERNATIO
NAL
MONTHL
Y
INCOME
PLAN
CAPITAL
PROTECT
ED
SCHEMES
LIQUID
EQUITY:
A Scheme might have an investment objective to invest largely in equity shares and equity
related investments like convertible debentures. The investment objective of such funds is to
seek capital appreciation through investment in this growth asset. Such schemes are called
Equity Schemes.
Diversified equity Fund is a category of funds that invest in a diverse mix of securities
that cut across sectors.
Sector funds however invest in only a specific sector. For example, a banking sector
fund will invest in only shares of banking companies. Gold sector fund will invest in only
shares of gold related companies.
Thematic funds invest in line with an investment theme. For example, an infrastructure
thematic fund might invest in shares of companies that are into infrastructure
construction, infrastructure toll-collection, cement, steel, telecom, power etc. The
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investment is thus more broad-based than a sector fund; but narrower than a diversified
equity fund.
Tax Saving Schemes have got two types of schemes:
(i)
Equity Linked Savings Schemes (ELSS), offer investors the benefit of
deduction of the amount subscribed (upto Rs. 150,000 in a financial year), from
their income that is liable to tax. This reduces their taxable income, and therefore
the tax liability. However, the investment is subject to lock-in for a period of 3
(ii)
years.
Rajiv Gandhi Equity Savings Schemes (RGESS), offers a rebate to first time
retail investors (in equity or mutual funds) with annual income up to Rs.12 lakhs.
The RGESS benefit is linked to amount invested (excluding brokerage, securities
transaction tax, service tax, stamp duty and all taxes appearing in the contract
note). Rebate of 50% of the amount invested up to Rs. 50,000, can be claimed as a
deduction from taxable income. The investment limit of Rs. 50,000 is applicable
for a block of three financial years, starting with the year of first investment.
Arbitrage Funds take opposite positions in different markets / securities, such that the risk is
neutralized, but a return is earned. For instance, by buying a share in BSE, and
simultaneously selling the same share in the NSE at a higher price.
DEBT:
Schemes with an investment objective that limits them to investments in debt securities like
treasury Bills, Government Securities, Bonds and Debentures are called Debt Funds.
Gilt Funds invest in only treasury bills and government securities, which do not have a
credit risk (i.e. the risk that the issuer of the security defaults).
Diversified debt funds on the other hand, invest in a mix of government and nongovernment debt securities such as corporate bonds, debentures and commercial paper. These
schemes are also known as Income funds.
Junk bond Schemes or high yield bond schemes invest in companies that are of poor credit
quality. Such schemes operate on the premise that the attractive returns offered by the
investee companies makes up for the losses arising out of a few companies defaulting.
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Fixed Maturity Plans are a kind of debt fund where the investment portfolio is closely
aligned to the maturity of the scheme. AMCs tend to structure the scheme around preidentified investments. Further, being close-ended schemes, they do not accept moneys postNFO.
Liquid Schemes or money market schemes are a variant of debt schemes that invest only in
short term debt securities. They can invest in debt securities of up to 91 days maturity.
However, securities in the portfolio having maturity more than 60 days need to be valued at
market prices [marked to market (MTM)].
Gold Funds:
These funds invest in gold and gold related securities. They can be structured in either of the
following formats:
Gold Exchange Traded Fund, which is like an index fund that invests in gold, gold
related securities or gold deposit schemes of banks. The structure of exchange traded
funds is discussed later in this chapter. The NAV of such funds moves in line with
gold prices in the market.
Gold Sector Fund i.e. the fund will invest in shares of companies engaged in gold
mining and processing. Though gold prices influence these shares, the prices of these
shares are more closely linked to the profitability and gold reserves of the companies.
Therefore, NAV of these funds do not closely mirror gold prices.
HYBRID FUNDS:
Monthly Income Plan seeks to declare a dividend every month. It therefore invests
largely in debt securities. However, a small percentage is invested in equity shares to
improve the schemes yield.
Capital Protected Schemes are close-ended schemes, which are structured to ensure that
investors get their principal back, irrespective of what happens to the market. This is
ideally done by investing in Zero Coupon Government Securities whose maturity is
aligned to the schemes maturity.
Page 35
Another very popular category among the hybrid funds is the Balanced Fund category. These
schemes were historically launched for the purpose of giving an investor exposure to both equity
and debt simultaneously in one portfolio. The objective of these schemes was to provide growth
and stability (or regular income), where equity had the potential to meet the former objective and
debt the latter. The balanced funds can have fixed or flexible allocation between equity and debt.
COMMODITY FUNDS:
Commodities, as an asset class, include:
Food crops like wheat and gram
Spices like pepper & turmeric
Fiber like cotton
Industrial metals like copper & aluminium
Energy products like oil and natural gas
Precious metals (bullion) like gold and silver
The investment objective of commodity funds would specify which of these commodities it
proposes to invest in.
INTERNATIONAL FUNDS
These are funds that invest outside the country. For instance, a mutual fund may offer a scheme
to investors in India, with an investment objective to invest abroad.
ADVANTAGES OF MUTUAL FUNDS:

1. Professional Management: Fund Manager undergoes through various research works and
has better investment management skills which ensure higher returns to the investor than
what he can manage on his own.
2. Less Risk: Investors acquire a diversified portfolio of securities even with a small
investment in a Mutual Fund. The risk in a diversified portfolio is lesser than investing in
merely 2 or 3 securities.
Page 36
3. Low Transaction Costs: Due to the economies of scale (benefits of larger volumes), mutual
funds pay lesser transaction costs. These benefits are passed on to the investors.
4. Liquidity: An investor may not be able to sell some of the shares held by him very easily
and quickly, whereas units of a mutual fund are far more liquid.
5. Choice of Schemes: Mutual funds provide investors with various schemes with different
investment objectives. Investors have the option of investing in a scheme having a correlation
between its investment objectives and their own financial goals. These schemes further have
different plans/options.
6. Transparency: Funds provide investors with updated information pertaining to the markets
and the schemes. All material facts are disclosed to investors as required by the regulator.
7. Flexibility: Investors also benefit from the convenience and flexibility offered by Mutual
Funds. Investors can switch their holdings from a debt scheme to an equity scheme and viceversa. Option of Systematic (at regular intervals) investment and withdrawal is also offered
to the investors in most open-ended schemes.
8. Safety: Mutual Fund industry is part of a well-regulated investment environment where the
interests of the investors are protected by the regulator. All funds are registered with SEBI
and complete transparency is forced.
9. Portfolio Diversification: Mutual Funds invest in a well-diversified portfolio of securities
which enables investor to hold a diversified investment portfolio (whether the amount of
investment is big or small). There a lot of schemes in the mutual fund market INDIA i.e. 44
Asset Management companies each may holding almost more than 50 schemes.
DISADVANTAGES:
1. Costs Control Not in the hands of an Investor: Investor has to pay investment
management fees and fund distribution costs as a percentage of the value of his investments
(as long as he holds the units), irrespective of the performance of the fund.
2. No customized Portfolios: The portfolio of securities in which a fund invests is a decision
taken by the fund manager. Investors have no right to interfere in the decision making
process of a fund manager, which some investors find as a constraint in achieving their
financial objectives.
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3. Difficulty in Selecting a Suitable Fund Scheme: Many investors find it difficult to select
one option from the plethora of funds/schemes/plans available. For this, they may have to
take advice from financial planners in order to invest in the right fund to achieve their
objectives.
Load Funds
Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio churning,
fund managers salary etc. Many funds recover these expenses from the investors in the form of
load. These funds are known as Load Funds. A load fund may impose following types of loads
on the investors:
Entry Load: - Also known as Front-end load, it refers to the load charged to an investor at
the time of his entry into a scheme. Entry load is deducted from the investors contribution
amount to the fund.
Exit Load: - Also known as Back-end load, these charges are imposed on an investor when
he redeems his units (exits from the scheme). Exit load is deducted from the redemption
proceeds to an outgoing investor.
Deferred Load: - Deferred load is charged to the scheme over a period of time.
Contingent Deferred Sales Charge (CDSS): - In some schemes, the percentage of exit load
reduces as the investor stays longer with the fund. This type of load is known as Contingent
Deferred Sales Charge.
UNDERSTANDING MUTUAL FUND RISK
Understanding of risk and return is the first and basic step towards investing. Every investment
involves certain degree of risk, so the mutual funds. They are not free from risk. Although they
are the useful tool to generate good returns on investments as compared to others options
available in the market with hassle free investments, it definitely involves some degrees of risk
as well. Before investing in mutual funds, rational investors must decide in their risk tolerance
and financial condition and then choose the right category of mutual fund. It is better to take
advice from any financial advisor which the mutual fund company offers to its clients.
Page 38
Balancing risk and return is a dilemma that every investor faces. But armed with the appropriate
knowledge, quantitative tools and data, investors can maximize their portfolios return at the
level of risk that is appropriate for them. The first and broadly accepted concept of mitigating
risk is diversification. Diversification means not to put all eggs in one basket. All rational
investors must hold fully diversified portfolios to mitigate their aggregate risk associated. They
more you diversify, the less risky your portfolio will be.
RISK CATEGORIES
Risk can be categorized as Specific and Systematic.
Specific Risk or Unsystematic Risk is diversifiable risk also referred to as company-specific
risk or non-systematic risk. It is the aggregate risk that is specific to each company, arising from
such things as managerial expertise, R&D, patents, pending law suits, labor relations, supplier
relations, customer relations, etc. Specific risk also includes micro economic factors specific to
each industry that affect all firms in an industry, such as seasonal fluctuations in demand and the
prices of input commodities.
Systematic Risk, non diversifiable risk, also known as market risk, consisting of macroeconomic factors such as inflation, war, fluctuating exchange rates, etc., cannot be diversified
away and therefore is the residual risk that all investors are faced with and must be factored into
their balance between risk and return. Investing in mutual funds involves following types of
risks:
Call Risk. The possibility that falling interest rates will cause a bond issuer to redeem or call its
high yielding bond before the bonds maturity date.
Country Risk. The possibility that political events (a war, national elections), financial problems
(rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will
weaken a countrys economy and cause investments in that country to decline.
Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in a timely
manner. Also called default risk.
Page 39
Currency Risk. The possibility that returns could be reduced for Americans investing in foreign
securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called
exchange rate risk.
Income Risk. The possibility that a fixed income funds dividends will decline as a result of
falling overall interest rates.
Industry Risk. The possibility that a group of stocks in a single industry will decline in price
due to developments in that industry.
Inflation Risk. The possibility that increases in the cost of living will reduce or eliminate a
funds real inflation-adjusted returns.
Interest Rate Risk. The possibility that a bond fund will decline in value because of an increase
in interest rates.
Manager Risk. The possibility that an actively managed mutual funds investment adviser will
fail to execute the funds investment strategy effectively resulting in the failure of stated
objectives.
Market Risk. The possibility that stock fund or bond fund prices overall will decline over short
or even extended periods. Stock and bond markets tend to move in cycles, with periods when
prices rise and other periods when prices fall.
Principal Risk. The possibility that an investment will go down in value, or lose money, from
the original or invested amount.
KEY STATISTICS FOR SCREENING MUTUAL FUNDS

When it comes to mutual fund investing, it requires proper screening and comparison of mutual
funds to figure out which one is worthy to be included in the portfolio keeping in mind the risk
tolerance. To screen out any mutual fund, following key statistics should be followed:
A. Mutual Fund Returns
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Simple Returns
Annualized Returns
Compounded Returns
Compounded Annual Growth Rate (CAGR) Returns
B. Mutual Funds Risk

Standard Deviation
Active Return or Alpha
Beta
R-Squared
C. Mutual Funds Performance
Sharpe Ratio
Treynor Ratio
Jensens Alpha
Information Ratio
A. Mutual Fund Returns:

When we come to mutual funds comparison, mutual funds historic returns are the first thing most
of us look at, and it is what we are looking for. Mutual funds historic returns are generally total
returns which include all payouts and distributions subtracting expense and charges such as load,
management fee, regulator fee, commissions and other expenses.
1. Simple Returns:
Whatever the nature of a mutual fund scheme, its value is reflected in the NAV.
Suppose you invested in a scheme, when its NAV was Rs. 12. Later, you found that the NAV has
grown to Rs. 15. How much is your return?
The Simple Return can be calculated with the following formula:
( Later Value Initial Value) 100
Initial Value
(Rs .15 Rs . 12)100
Rs .12
i.e. 25%
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Thus, simple return is simply the change in the value of an investment over a period of time.
2. Annualized Returns:
Two investment options have indicated their returns since inception as 5% and 3% respectively.
If the first investment was in existence for 6 months, and the second for 4 months, then the two
returns are obviously not comparable. Annualization helps us compare the returns of two
different time periods.
The annualized return can be calculated as:
Simple Return 12
Period of Simple Return ( months)
Investment 1
Investment 2
5 12
3 12
i.e. 10%
i.e. 9%
3. Compounded Return:
Compounded return can be calculated using a formula:
LV 1 /n
IV
Where, LV is the Later Value; IV is the Initial Value; and n is the period in years.
Thus, if Rs 1000 grew to Rs 4000 in 2 years, LV = Rs 4000; IV = Rs 1000; n = 2 years, then the
compounded return is given by the formula:
Rs 4000
Rs 1000
i.e. 100%
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4. Compounded Annual Growth Rate (CAGR):

Whenever a dividend is paid and compounding is to be considered the CAGR technique
prescribed by SEBI is used. This calculation is based on an assumption that the dividend would
be re-invested in the same scheme at the ex-dividend NAV. The following example will clarify
the calculation.
Example: You invested Rs. 10,000 in a scheme at Rs. 10 per unit on June 30, 2008. On January
1, 2009, the scheme paid out a dividend of Rs. 1 per unit. The ex-dividend NAV was Rs. 12.50.
On January 1, 2010, the scheme paid out another dividend of Rs. 1 per unit. The ex-dividend
NAV was Rs. 15.00.
Let us calculate the CAGR, which we know captures the impact of both dividend payments and
compounding.
We know that IV, the initial value of investment is Rs. 10,000.
If Rs. 10,000 was invested at Rs. 10 per unit, then you would have 1,000 units.
The first dividend of Rs. 1 per unit on 1,000 units would amount to Rs. 1,000. If this amount
were re-invested in the same scheme at the ex-dividend NAV, then you would have Rs. 1,000
Rs. 12.50 i.e. 80 additional units.
Thus, your unit-holding would have gone up from 1,000 to 1,080 units.
The second dividend of Rs. 1 per unit, on the revised unit-holding of 1,080 units would amount
to Rs. 1080. If this amount were re-invested in the same scheme at the ex-dividend NAV, then
you would have Rs. 1,080 Rs. 15.00 i.e. 72 additional units.
Thus, your unit-holding would have gone up from 1,080 to 1,152 units. At Rs. 15 per unit, this
would be valued at Rs. 17,280.
LV the later value of units is thus Rs. 17,280.
The impact of dividend has been captured in the form of increase in the number of units.
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You now need the time period in years, to compute the compounded returns. The period of June
30, 2008 to January 1, 2010 has 550 days. Dividing by 365, it translates to 1.51 years.
Now the compound interest formula can be applied.
LV 1 /n
IV
Where, LV is the Later Value; IV is the Initial Value; and n is the period in years.
Here, Rs. 10,000 grew to Rs.17,280 in 1.51 years, LV = Rs. 17,280; IV = Rs. 10,000; n =1.51
years. CAGR is calculated by the formula:
Rs. 17,280 1/1.51 1 = 43. 65%
Rs. 10,000
Measure of risk
Investors are interested not only in funds return but also in risk taken to achieve those returns.
So risk can be thought as the uncertainty of the expected return, and uncertainty is generally
equated with variability. Variability and the risk are correlated; hence high returns will tend to
high variability.
Standard Deviation:
In simple terms standard deviation is one of the commonly used statistical parameter to measure
risk, which determines the volatility of a fund. Deviation is defined as any variation from a mean
value (upward & downward). Since the markets are volatile, the returns fluctuate every day.
High standard deviation of a fund implies high volatility and a low standard deviation implies
low volatility.
S.D. =
1 (Rt AR)
T
Where,
S.D. is the periodic standard deviation,
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AR is the average periodic return,

T is the number of observations in
the period for which the standard deviation is being
calculated.
Rt is the return in month t.
Active Return or Alpha:
Return relative to a benchmark, it is the difference of portfolios return and its benchmark. A
benchmark is the standard against which the performance of mutual fund or any security can be
measured. It is the return in excess of the compensation for the risk borne.
The benchmark of the stock funds is CNX Nifty Index & S&P BSE SENSEX. A fund
generating positive alpha is considering as well as managed and negative alpha as poorly
managed. Zero alpha means that the fund is performing with its benchmark. Negative alpha
denotes that the fund manager failed to beat even its benchmark. This ratio translates that the
investors must choose among the funds having high positive alpha.
Active Return or Alpha = Portfolio Return Benchmark Return
Beta Analysis ( - Co-efficient):

Systematic risk is measured 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 Fund with
the returns in the market. While unsystematic risk can be diversified through investments in a
number of instruments, systematic risk cannot. By using the risk return relationship, we try to
assess the competitive strength of the Mutual Funds vis--vis one another in a better way.
= [N (XY) XY] / [N (X2) (X) 2]
Beta is used to measure the risk. It basically indicates the level of volatility associated with the
fund as compared to the market. In case of funds, as compared to the market. In case of funds,
beta would indicate the volatility against the benchmark index. It is used as a short REVA INSTITUTE OF TECHNOLOGY & MANAGEMENT
Page 45
term decision making tool. A beta that is greater than 1 means that the fund is more volatile than
the benchmark index, while a beta of less than 1 means that the fund is more
volatile than the benchmark index. A fund with a beta very close to 1 means the funds
performance closely matches the index or benchmark. The success of beta is heavily dependent
on the correlation between a fund and its benchmark. Thus, if the funds portfolio doesnt have a
relevant benchmark index then a beta would be grossly inappropriate. For example if we are
considering a banking fund, we should look at the beta against a bank index.
R Squared (R2):
R squared is the square of R (i.e. coefficient of correlation). It describes the level of association
between the funs market volatility and market risk. The value of R squared ranges from 0 to 1.
A high R squared (more than 0.80) indicates that beta can be used as a reliable measure to
analyze the performance of a fund. Beta should be ignored when the R-squared is low as it
indicates that the fund performance is affected by factors other than the markets.
For example:
R2
Case 1
0.65
1.2
Case 2
0.88
0.9
In the above table R2 is less than 0.80 in case 1, implies that it would be wrong to mention that
the fund is aggressive on account of high beta. In case 2, the R2 is more than 0.85 and value is
0.9, it means that this fund is less aggressive than the market.
Portfolio Turnover Ratio:
Portfolio turnover is a measure of a funds trading activity and is calculated by dividing the lesser
of purchases or sales (excluding securities with maturities of less than one year) by the average
monthly net assets of the fund. Turnover is simply a measure of the % of portfolio value that has
been transacted, not an indication of the % of a funds holdings that have been changed. Portfolio
turnover is the purchase and sale of securities in a funds portfolio. A ratio of 100%, then means
the fund has bought and sold all its position within the last year. Turnover is important when
Page 46
investing in any mutual fund, since the amount of turnover affects the fees and costs within the
mutual fund.
Total Expenses Ratio:
A measure of the total costs associated with managing and operating an investment fund such as
a mutual fund. These costs consist primarily of management fees and additional expenses such as
trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is
divided by the funds total assets to arrive at a percentage amount, which represents the TER:
Total Expense Ratio = (Total fund Costs / Total fund Assets)
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 of return and the total risk associated
with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about.
So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be
written as:
Sharpe Ratio (Si) = (Ri Rf)/Si
Where,
Si is the standard deviation of the fund,
Ri represents return on fund, and
Rf is risk free rate of return.
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a
low and negative Sharpe Ratio is an indication of unfavorable performance.
The Treynor Measure:

Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynors
index. This index is a ratio of return generated by the fund over and above risk free rate of return
(generally taken to be the return on securities backed by the government, as there is no credit risk
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associated), during a given period and systematic risk associated with it (Beta). Symbolically, it
can be represented as:
Treynors Index (Ti) = (Ri Rf)/i
Where,
Ri represents return on fund,
Rf is risk free rate of return, and
i is beta of the fund.
All risk-averse investors would like to maximize this value. While a high and positive Treynors
Index shows a superior risk-adjusted performance of a fund, a low and negative Treynors Index
is an unfavorable performance.
Comparison of Sharpe and Treynor
Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a
numerical risk measure. The total risk is appropriate when we are evaluating the risk return
relationship for well diversified portfolios. On the other hand, the systematic risk is the relevant
measure of risk when we are evaluating less than fully diversified portfolios or individual stocks.
For a well diversified portfolio the total risk is equal to systematic risk. Rankings based in total
risk (Sharpe measure) and systematic risk (Treynor measure) should be identical for a well
diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly diversified
fund that ranks higher on Treynor measure, compared with another fund that is highly
diversified, will rank lower on Sharpe Measure.
Jenson Model:
Jensons model proposes another risk adjusted performance measure. This measure was
developed by Michael Jenson and is sometimes referred to as the different Return Method. This
measure involves evaluation of the returns that the fund has generated vs. the returns actually
expected out of the fund 1 given the level of its systematic risk. The surplus between the two
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returns is called Alpha, which measures the performance of a fund compared with the actual
returns over the period. Required return of a fund at a given level of risk (i) can be calculated
as:
E (Ri) = Rf + i (Rm Rf)
Where,
E (Ri) represents expected return on fund
Rm is a average market return during the given period,
Rf is risk free rate of return, and
i is Beta deviation of the fund.
After calculating it, Alpha can be obtained by subtracting required return from the actual return
of the fund.
p = Ri [Rf + i (Rm Rf)]
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 risk associated with the fund and an
ordinary investor cannot mitigate unsystematic risk, as his knowledge of market is primitive.
Fama Model:
The Eugene Fama Model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return commensurate with
the total risk associated with it. The difference between these two is taken as a measure of the
performance of the fund and is called Net Selectivity.
The Net Selectivity represents the stock selection skill of the fund manager, as it is the excess
returns over and above the return required to compensate for the total risk taken by the fund
manager. Higher value of which indicates that fund manager. Higher value of which indicates
that fund manager has earned returns well above the return commensurate with the level of risk
taken by him.
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Selectivity: measures the ability of the portfolio manager to earn a return that is consistent with
the portfolios market (systematic) risk. The selectivity measure is:
Ri [Rf + i (Rm Rf)]
Diversification: measures the extent to which the portfolio may not have been completely
diversified. Diversification is measured as:
[Rf + (Rm Rf)(i/m)] [Rf + i (Rm Rf)]
If the portfolio is completely diversified, contains no unsystematic risk, then diversification
measure would be zero. A positive diversification measure indicates that the portfolio is not
completely diversified; it would contain unsystematic risk and it represents the extra return that
the portfolio should earn for not being completely diversified. The performance of the portfolio
can be measured as:
Net Selectivity = Selectivity - Diversification
Net selectivity measures, how well the portfolio managers did at earning a fair return for the
portfolios systematic risk and diversifying away unsystematic risk. Positive net selectivity
indicates that the fund earned a better return. The comparison, done based on Sharpe Ratio,
Treynor Measure, Jensen Alpha, and Fema Measure notifies that the portfolio performance can
be evaluated on the following basis:
Sharpe Ratio: measures the reward to total risk trade off.
Treynor: measures the reward to systematic risk trade off
Jensens Alpha: measures the average return over and above that predicted.
Fema Measure: measures return of portfolio for its systematic risk and diversifying away
unsystematic risk.
Among the above performance measures, two models namely, Treynor Measure and Jenson
Model use Systematic risk is based on the premise that the Unsystematic risk is diversifiable.
These models are suitable for large investors like institutional investors with high risk taking
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capacities as they do not face paucity of funds and can invest in a number of options to dilute
some risks. For them, a portfolio can be spread across a number of stocks and sectors.
However, Sharpe measure and Fama model that consider the entire risk associated with fund are
suitable for small investors, as the ordinary investor lacks the necessary skill and resources to
diversify. Moreover,, the selection of the fund on the basis of superior stock selection ability of
the fund manager will also help in safeguarding the money invested to a great extent. The
investment in funds that have generated big returns at higher levels of risk leaves the money all
the more prone to risks of all kinds that may exceed the individual investors risk appetite.
ACCOUNTING AND VALUATION (PORTFOLIO ANALYSIS TOOLS)

Net Asset Value (NAV)
The net asset value of the fund is the cumulative market of the assets fund net of its liabilities. In
other words, if the fund is dissolved or liquidated by selling off all the assets in the fund, this is
the amount that the shareholders would collectively own. This gives rise to the concept of Net
Asset value per unit, which is the value represented by the ownership of one unit in the fund.
It is calculated simply by dividing the net asset value of the fund by the number of units.
However, most people refer loosely to the NAV per unit as NAV, ignoring the per unit. We also
abide by the same convention.
Calculation of Net Asset Value
The most important part of the calculation is the valuation of the assets owned by the fund. Once
it is calculated, the NAV is simply the net value of assets divided by the number of the units
outstanding. The detailed methodology for the calculation of the net asset value is given below:
NAV= Market value of investments + Current assets and other assets + Accrued Income
Current liabilities and other liabilities Accrued expense
DRIVERS OF RETURNS IN A SCHEME

The portfolio is the main driver of returns in a mutual fund scheme. The underlying factors are
different for each asset class.
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EQUITY SCHEMES
Securities Analysis Disciplines Fundamental Analysis and Technical Analysis, these are
quantitative approaches to securities analysis. As will be appreciated, a passive fund maintains a
portfolio that is in line with the index it mirrors. Therefore, a passive fund manager does not need
to go through this process of securities analysis.
Fundamental Analysis entails review of the companys fundamentals viz. financial statements,
quality of management, competitive position in its product/service market etc. The analyst sets
price targets, based on financial parameters like
Earnings per Share (EPS): Net profit after tax No. of equity shares, this tells investors how
much profit the company earned for each equity shares that they own.
Price to Earnings Ratio (P/E): Market Price EPS. When investors buy shares of a company;
they are essentially buying into its future earnings. P/E ratio indicates how much investors in the
share market are prepared to pay (to become owners of the company), in relation to the
companys earnings. This ratio is normally calculated based on a projected EPS for a future
period (also called forward EPS). A simplistic (but faulty) view is that low P/E means that a
share is cheap, and therefore should be bought; the corollary being that high P/E means that a
share is expensive, and therefore should be sold. In reality, the P/E may be high because the
companys prospects are indeed good, while another companys P/E may be low because it is
unlikely to replicate its past performance.
Book Value per Share: Net Worth No. of equity shares this is an indicator of how much each
share is worth, as per the companys own books of accounts. The accounts represent a historical
perspective, and are a function of various accounting policies adopted by the company.
Price to Book Value: Market Price Book Value per Share. An indicator of how much the share
market is prepared to pay for each share of the company, as compared to its book value.
Such financial parameters are compared across companies, normally within a sector.
Accordingly, recommendations are made to buy/hold/sell the shares of the company. As in the
case of P/E ratio, most financial indicators cannot be viewed as stand-alone numbers. They need
to be viewed in the context of unique factors underlying each company.
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The fundamental analyst keeps track of various companies in a sector, and the uniqueness of
each company, to ensure that various financial indicators are understood in the right perspective.
The discipline of Technical Analysis has a completely different approach. Technical Analysts
believe that price behavior of a share, and the volumes traded are a reflection of investor
sentiment, which in turn will influence future price of the share. Both types of analysts swear by
their discipline. It is generally agreed that longer term investment decisions are best taken
through a fundamental analysis approach, while technical analysis comes in handy for shorter
term speculative decisions, including intra-day trading. Even where a fundamental analysisbased decision has been taken on a stock, technical analysis might help decide when to
implement the decision i.e. the timing. Investment Styles- Growth and Value Growth investment
style entails investing in high growth stocks i.e. stocks of companies that are likely to grow much
faster than the economy. Many market players are interested in accumulating such growth stocks.
Therefore, valuation of these stocks tends to be on the higher side. Value investment style is an
approach of picking up stocks which are valued lower, based n fundamental analysis. The belief
is that the market has not appreciated some aspect of the value in a companys share and hence
it is cheap. When the market recognizes the intrinsic value, then the price would shoot up. Such
stocks are also called Value stocks. Since no time frame can be set for the market to recognize
the value, value stocks tend to be longer term investments, at times beyond two years. Even then,
the market may not recognize it, in which case the investment fails. It is important to note that
high valuations is not the equivalent of high share price, just as low valuation is not the
same as low share price. For example, how much is the share price as compared to its earnings
per share (Price to Earnings Ratio); or how much is the share price as compared to its book value
(Price to Book Value Ratio). Thus, a companys share price may be high, say Rs 100, but still
reasonably valued given its earnings; similarly, a company may be seen as over-valued, even
when its share price is Rs 5, if it is not matched by a reasonably level of earnings. Investments of
a scheme can thus be based on growth, value or a blend of the two styles. In the initial phases of
a bull run, growth stocks deliver good returns. Subsequently, when the market heats up, value
picks end up being safer. Portfolio building approach Top down and Bottom up.
In a top down approach, the portfolio manager decides how to distribute the investible corpus
between countries (if it invests in multiple geographies) and sectors. Thereafter, the good stocks
within the identified sectors are selected for investment. Thus sector allocation is a key decision.
A bottom-up approach on the other hand does not assign too much importance to the countryallocation and sector-allocation. If a stock is good, it is picked for investment. The approach is
therefore also called stock licking. Stock selection is the key decision in this approach; sector
allocation is a result of the stock selection decisions. Both approaches have their merit. What is
important is that the approach selected should be implemented professionally. Therefore, it can
be said that equity returns are a function of sector and stock selection.
Page 53
Page 54
CHAPTER 4
ANALYSIS & INTERPRETATION
Risk returns Analysis and Comparative study of funds

In this section, a sample of HDFC equity related funds have been studied, evaluated and
analyzed. This study could facilitate to get a fair comparison. The expectations of the study are to
give value to the funds by keeping the risk in the view. Here equity funds are taken as they bear
high return with risk.
Following are the products of HDFC Mutual Fund, which have been taken the evaluation
purpose.
HDFC Equity Fund Growth option
HDFC Capital Builder
HDFC Growth Fund
HDFC Tax Saver Fund
HDFC Top 200 Fund
HDFC EQUITY FUND:
Investment Objective
The investment objective of the Scheme is to achieve capital appreciation.
Basic Scheme Information
Nature of Scheme
Inception Date
Option/Plan
Entry Load
(purchase/additional purchase/switch-in)
Exit Load
(as a % of the Application NAV)
Minimum Application Amount
Lock in Period
Net Asset Value Periodicity
Redemption Proceeds
Open-Ended Growth Scheme

January 1, 1995
Dividend Option, Growth Option
NIL
(with effect from August 1, 2009
NIL
Purchase: Rs. 5,000 and any amount thereafter.
Additional Purchase: Rs 1,000 and any amount
thereafter.
NIL
Every Business Day
Normally dispatched within 3-4 Business Days
Page 55
Investment Pattern:
The asset allocation under scheme will be as follows:
S. No.
1
2
TYPES OF INSTRUMENTS
Equities & Equities related
instruments.
Debt Securities, Money Market
instrument & Cash
NORMAL
ALLOCATION
80-100
RISK PROFILE
0-100
Low to Medium
Medium to High
Investment in Securitized debt, if undertaken, would not exceed 20% of the net assets of the
scheme. The Scheme may also invest up to 25% of net assets of the scheme in derivative such as
Futures & Options and such other derivative instruments as may be introduced from time to time
for the purpose of hedging and portfolio balancing and other uses as may be permitted under the
Regulations.
Investment Strategy & Risk Control:
In order to provide long term capital appreciation, the Scheme will invest predominantly in
growth companies. Companies selected under this portfolio would as far as practicable consist of
medium to large sized companies which: are likely achieved above average growth than the
industry; enjoy distinct competitive advantages, and have superior financial strengths. The aim
will be to build a portfolio, which represents a cross-section of the strong growth companies in
the prevailing market. In order to reduce the risk of volatility, the Scheme will diversify across
major industries and economic sectors.
Benchmark Index: S&P CNX 500. HDFC Equity, which is benchmarked to S&P CNX 500
Index is not sponsored, endorsed, sold or promoted by Indian Index Service & Products Limited
(IISL).
Fund Manager: Mr. Prashant Jain
Page 56
HDFC CAPITAL BUILDER FUND

Investment Objective
The investment objective of the Scheme is to achieve capital appreciation in Long Term.
Nature of Scheme
Inception Date
Option/Plan

February 1, 1994
Dividend Option, Growth
Option.
The
Dividend Option offers Dividend Payout and

Entry Load
(purchase/additional purchase/switch-in
Exit Load
Reinvestment Facility.
NIL
In respect of each purchase/switch-in of

Units, an Exit Load of 1.00% is payable if
Units are redeemed/switched-out within 18
months from the date of allotment.

No Exit Load is payable if units are
redeemed/switched-out after 18 months
Lock in Period
Net Assets Value Periodicity
Redemption Proceeds
from the date of allotment.

thereafter.
NIL
Every Business Day
Investment Pattern:
The asset allocation under Scheme will be as follows:
S. No.
1
2
Types Of Instruments
instruments.
Debt & Money Market instrument.
% of Portfolio
Upto 100%
Risk Profile
Medium to High
Not more than 20%
Low to Medium
Page 57
scheme.
Investment Strategy
This Scheme aims to achieve its objectives by investing in strong companies at prices which are
below fair value in the opinion of the fund managers.
The Scheme defines a strong company as one that has the following characteristics:
strong management, characterized by competence and integrity

strong position in its business (preferably market leadership)
efficiency of operations, as evidenced by profit margins and asset turnover, compared to
its peers in the industry

working capital efficiency
consistent surplus cash generation
high profitability indicators (returns on funds employed)
In common parlance, such companies are also called Blue Chips.

The Scheme defines reasonable prices as:
a market price quote that is around 30% lower than its value, as determined by the
discounted value of its estimated future cash flows

a P/E multiple that is lower than the company's sustainable Return on funds employed
a P/E to growth ratio that is lower than those of the company's competitors
in case of companies in cyclical businesses, a market price quote that is around 50%lower
than its estimated replacement cost
Fund Manager: Chirag Setalvad (since April 2, 2007) & Miten Lathia (since May 10, 2012).
HDFC GROWTH FUND:
Investment Objective:
The primary investment objective of the Scheme is to achieve Long Term Capital Appreciation
from a portfolio that is invested predominantly in equity and equity related instruments.
Page 58
Nature of Scheme
Inception Date
Option/Plan
Entry Load
Exit Load
Lock in Period
Redemption Proceeds

September 11, 2000
Dividend Option, Growth Option.
NIL
NIL
thereafter.
NIL
Every Business Day
Investment pattern
The corpus of the Scheme will be invested primarily in equity and equity related instruments.
The Scheme may invest a part of its corpus in debt and money market instruments, in order to
manage its liquidity requirements from time to time, and under certain circumstances, to protect
the interests of the Unit holders. The asset allocation under the Scheme will be as follows:
S. No.
1
2

instruments.
instrument & Cash
NORMAL
ALLOCATION
(% of Net Asset)
80-100
RISK PROFILE
0-100
Low to Medium
Medium to High
Investment Strategy & Risk Control

The investment approach will be based on a set of well established but flexible principles that
emphasize the concept of sustainable economic earnings and cash return on investment as the
means of valuation of companies. In summary, the Investment Strategy is expected to be a
function of extensive research and based on data and reasoning, rather than current fashion and
Page 59
emotion. The objective will be to identify "businesses with superior growth prospects and good
management, at a reasonable price. Benchmark Index : SENSEX
Fund Manager: Mr. Shrinivas Rao
HDFC TOP 200 FUND
Investment Objective:
The investment objective is to generate long term capital appreciation from a portfolio of equity
and equity linked instruments. The investment portfolio for equity and equity-linked instruments
will be primarily drawn from the companies in the BSE 200 Index. Further, the Scheme may also
invest in listed companies that would qualify to be in the top 200 by market capitalization on the
BSE even though they may not be listed on the BSE. This includes participation in large IPOs
where in the market capitalization of the company based on issue price would make the company
a part of the Top 200 companies listed on the BSE based on market capitalization.
Basis Scheme Information:

Nature of Scheme
Inception Date
Option/Plan
Entry Load
Exit Load
Lock in Period
Redemption Proceeds

October 11, 1996
Dividend Option, Growth Option.
NIL
NIL
thereafter.
NIL
Every Business Day
Investment Pattern:
The asset allocation under Scheme will be as follows:
Page 60
S. No.

instruments.

instrument & Cash
NORMAL ALLOCATION
(% of Net Asset)
Up to 100% (Including use
of derivative for hedging
and other uses as permitted
by prevailing SEBI
regulations)
Balance in Debt and
Money Market Instruments
RISK PROFILE
Medium to High
Low to Medium
Scheme. The Scheme may also invest up to 25% of net assets of the Scheme in derivatives such
as Futures & Options and such other derivative instruments as may be introduced from time to
time for the purpose of hedging and portfolio balancing and other uses as may be permitted
under the regulations and guidelines.
Investment Strategy & Risk Control:
The investment strategy of primarily restricting the equity portfolio to the BSE 200 Index scrip is
intended to reduce risks while maintaining steady growth. Stock specific risk be minimized by
investing only in those companies/industries that have been thoroughly researched by the
investment managers research team. Risk will also be reduced through a diversification of the
portfolio.
Benchmark Index : BSE 200
Fund Manager : Mr. Prashant Jain
Page 61
CHAPTER- 5
FINDINGS:
As far as analysis is concerned, we found that th HDFC Growth Fund was among the best
performers fund. Although all the funds are affected by the global melt down (recession), still
HDFC Growth Fund has better performed comparing to other funds for its systematic and
unsystematic risk. It offers advantages of diversification, market timing, and selectivity. In
the comparison of sample of funds, HDFC Growth Fund is found highly diversified fund and
because of high diversification, it has reduced the total risk of portfolio.
Further, other funds were found very poor in diversification, market timing, and selectivity.
Although HDFC Top 200 Fund and Equity Fund performed better in terms of returns but
these suffered by the systematic risk (market volatility) and lack of diversification. For the
further clarification, we too studied the portfolio of HDFC Growth Fund.
One of the findings that I came across is that generally, a good model of asset classes is the
one that can explain a large portion of the variance of returns on the assets and there were
some stocks in the fund portfolio, which were not aligned with strategy of the fund portfolio.
The optimal situation involves the selection that proceeds from sensible assumptions, is
carefully and logically constructed, and is broadly consistent with the data while collecting
the stocks for the portfolio. The portfolio was showing constructive outcome in long time
horizon and the results can be improved by making the minor changes in fund portfolio.
Hence, the portfolio theory teaches us that investment choices are made on the basis of
expected risk and returns and these expectations can be satisfied by having right mix of
assets.
RECOMMENDATIONS:
Considering the above analysis, it can be noted that the three growth oriented mutual funds
(HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200 Fund) have performed better than
Page 62
their benchmark indicators. Other funds such as HDFC Capital Builder Fund, HDFC Long term
Advantage Fund did not perform well even some performed negatively. Though HDFC Equity
Fund, HDFC Growth Fund and HDFC Top 200 Fund have performed better than the benchmark
of their systematic risk (volatility) but with respect to total risk the fund have not outperformed
the Market Index.
Growth oriented mutual funds are expected to offer the advantages of Diversification, Market
Timing and Selectivity. In the sample, HDFC Equity Fund, HDFC Growth Fund and HDFC Top
200 Fund is found to be diversified fund and because of high diversification, it has reduced total
risk of the portfolio. Whereas, others are low diversified and because of low diversification their
total risk is found to be very high. Further, the fund managers of these under performing funds
are found to be poor in terms of their ability of market timing and selectivity.
The fund manager of HDFC Equity Fund. HDFC Growth Fund and HDFC Top 200 Fund can
improve the returns to the investors by increasing the systematic risk of the portfolio, which
in turn can be done by identifying highly volatile shares. Alternatively, these can take
advantage by diversification, which goes at a reduced risk level; the compensation for risk
might seem adequate. The fund manager of HDFC Capital Builder Fund, HDFC Long Term
Advantage Fund can earn better returns by adopting the marketing timing strategy and
selecting the under priced securities.
The fund manager can divide all securities into several asset classes and tries to construct an
efficient portfolio based on expected returns, risk, and correlations of indexes representing
these asset classes. The investment should be done in the benchmark indexes to get an
efficient portfolio in such a way that no other combination of these indexes would result in
a portfolio with a higher return for a given level of risk. It should be emphasized, however,
that this is not a fully efficient portfolio because information about correlations among
individual securities within an index and across the indexes is lost in the transition from
individual securities to the benchmarks that represent them.
These measures are more useful to investors who are putting their money into one diversified
fund are able to use leverage or invest in the risk-free asset. When the investor is investing in
the different funds, the funds marginal contribution to the portfolios risk & return is more
important than its individual security characteristics. To construct an efficient portfolio, an
investor must take account of the correlations among the being considered. It is not advisable
Page 63
to apply just procedure or approach for all situations at least when it comes to investments
though the used measures are highly reliable in the studies done on similar veins. Even at this
juncture it would still be recommended that instead of going ahead only on the basis of risk
and return, other indicators like new projects, sector impact, individual sentiments about
companies etc. besides common sense and intuition may also be looked into.
CONCLUSIONS:
Mutual fund has become one of the important sources for investing. It is quite likely that a more
efficient portfolio can be constructed directly from funds. Thus, the two-step process of choosing
an asset allocation based on the information about benchmark indexes and then choosing funds
in each category may be one of the best realistically attainable approaches. To use this approach,
to portfolio selection effectively, investors would benefit from estimates of future asset returns,
risks and correlations, as well as from fund managements disclosure of future asset exposures
and appropriate benchmarks. It has been a great opportunity for me to get a first experience of
Mutual Funds. My study is to get the feel of how the work is carried out in relation to funds
portfolio aspect. I got an opportunity in relation to the documentation and also the portfolio
analysis that have been carrying out in facilitating the investor and the fund manager.
Page 64

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Analysis of Risk & Returns in Mutual Funds

In partial fulfillment of the requirements for the award of the degree of

Reva Institute of Technology & Management, Bangalore

Signature of Internal Guide

REVA INSTITUTE OF TECHNOLOGY & MANAGEMENT

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KAMLESH KUMAR SHAH

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Fig1.1 Concept of Mutual Fund (Procedure)

A BRIEF OF MUTUAL FUNDS

1.2 NEED FOR THE STUDY

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In the above discussion we concentrated on the word investment and

1.3 OBJECTIVES OF THE STUDY

1.4 SCOPE OF THE STUDY

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1.5.1 DATA SOURCES

1.6 LITERATURE REVIEW

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

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2.1.2 TRENDS IN MUTUAL FUND INDUSTRY

B. FUND MOBILIZATION UNDER MUTUAL FUNDS

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2.2 COMPANY PROFILE

2.2.1 COMPANY OVERVIEW

HDFC Asset Management Company Ltd

Companies Act, 1956, on December 10,

CONSTITUTION OF HDFC MUTUAL FUND

HDFC Mutual Fund

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MUTUAL FUND TRUST:

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STANDARD LIFE INVESTMENTS LIMITED

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MR. ANIL KUMAR HIRJEE

HDFC MUTUAL FUND PRODUCTS;

HDFC Growth Fund

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HDFC Infrastructure Fund

ACHIEVEMENTS AND AWARDS:

enhancement initiatives, leadership initiatives undertaken by the fund house

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3. CONCEPTUAL ANALYSIS OF MUTUAL FUNDS

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If the market value of the assets of a fund is Rs. 100,000.

KEY CONSTITUENTS OF A MUTUAL FUND:

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CLASSIFICATION OF MUTUAL FUNDS:

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The NAV of a closed-end fund is computed on a weekly basis.

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ADVANTAGES OF MUTUAL FUNDS:

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