“
RISK RETURN ANALYSIS AND COMPARATIVE
STUDY OF MUTUAL FUNDS”
FOR
HDFC Asset Management Company Ltd.
A Report on Project work
In
MASTER OF BUSINESS ADMINISTRATION (MBA)
By
Somesh Behere
GUIDED BY: SUBMITTED
BY:
PROF.GARGI NAIDU SOMESH BEHERE
HOD ACADEMICS MBA IV Semester
VIM BHOPAL BHOPAL
VIDYASAGAR INSTITUTE OF MANAGEMENT
BARKATULLAH UNIVERSITY BHOPAL(M.P.)
BONOFIDE CERTIFICATE
This is to certify that the Report on Project Work titled “RISK RETURN ANALYSIS AND COMPARATIVE STUDY OF MUTUAL FUNDS” for HDFC Asset Management Company Ltd. is a bonafide record of the work done by
Somesh Behere
studying in Master of Business Administration in Vidhyasagar Institute of Management ,Bhopal during the year 2008-10.
Project Viva-Voce held on...
EXECUTIVE SUMMARY
The performance evaluation of mutual fund is a vital matter of concern to the fund managers, investors, and researchers alike. The core competence of the company is to meet objectives and the needs of the investors and to provide optimum return for their risk. This study tries to find out the risk and return allied with the mutual funds.
This project paper is segmented into three sections to explore the link between conventional subjective and statistical approach of Mutual Fund analysis. To start with, the first section deals with the introductory part of the paper by giving an overview of the Mutual fund industry and company profile.
This section also talks about the theory of portfolio analysis and the different measures of risk and return used for the comparison.
The second section details on the need, objective, and the limitations of the study. It also discusses about the sources and the period for the data collection. It also deals with the data interpretation and analysis part wherein all the key measures related to risk and return are done with the interpretation of the results.
In the third section, an attempt is made to analyse and compare the performance of the equity mutual fund. For this purpose β-value, standard deviation, and risk adjusted performance measures such as Sharpe ratio, Treynor measure, Jenson Alpha, and Fema measure have been used.
The portfolio analysis of the selected fund has been done by the measure return for the holding period.
At the end, it illustrates the suggestions and findings based on the analysis done in the previous sections and finally it deals with conclusion part.
ACKNOWLEDGEMENT
I take this opportunity to express my deep sense of gratitude to all those who have
contributed significantly by sharing their knowledge and experience in the completion of this project work. I am greatly obliged to, for providing me with the right kind of opportunity and facilities to complete this venture.
My first word of gratitude is due to Mr.Sidhartha Chattergee – Branch Manager,
HDFC AMC,Allhabad, my corporate guide, for his kind help and support and his
valuable guidance throughout my project. I am thankful to him for providing me with necessary insights and helping me out at every single step. I am also thankful to Prof Ashok Diwedi Executive Trainee, the former student of VIDHYASAGAR INSTITUTE OF MANAGEMENT, Bhopal for her constant valuable assistance and consultancy. I also thank Mr.Ankit Kumr, Unit Manager for his kind words of encouragement. Above all, I express my words of gratitude to HDFC AMC, Allahabad Branch for proving me with all the knowledge resources and enabling me to pass AMFI-MTUTUAL FUND (ADVISOR) MODULE; NSE’s CERTIFICATION IN FINANCIAL MARKETS (NCFM) with 74.5 percentages.
I am extremely thankful to Miss. Gargi Naidu – my internal faculty guide under whose able guidance this project work was carried out. I thank her for her continuous support and mentoring during the tenure of the project. Finally, I would also like to thank all my dear friends for their cooperation, advice and encouragement during the long and arduous task of carrying out the project and preparing this report.
PREFACE
This is the age of technical up gradation. Nothing remains same for a long period every thing change with a certain span of time. So it is must for every organization to put a birds eye view on it’s over all functioning.
This report was preparing during practical training of Master of business administration (M.B.A.) from Vidyasagar institute of management Bhopal (M.P.) .The student of M.B.A.essentially required a practical training of 4to6 weeks in any organization. It gives an opportunity to the student to test their acquired knowledge through practical experiences.
The objective of my study was Risk Return Analysis And Comparative Study Of Mutual
Funds “HDFC Asset Management Company Ltd.” I however present this report In all my
modesty to the readers with a faith that it shall serve the causes of subject. .
PLACE-……….. SOMESH BEHERE
TABLE OF CONTENTS Page No.
Part-I 1-37
Executive Summary Iii
A. Mutual Fund Overview 1-19
1.1 Mutual Fund an Investment Platform 1-2
1.2Advantages of Mutual Fund 3
1.3 Disadvantage of Investing Through Mutual Funds 4
1.4 Categories of Mutual Fund 4-8
1.5 Investment Strategies 8
1.6 Organisation of Mutual Fund 9-11
1.7 Distribution Channels 12
1.8 HDFC AMC Company Overview 12-19
B. Measuring and Evaluating Mutual Funds Performance 20-37
1.2.1 Purpose of Measuring and Evaluating 20-21
1.2.2 Financial Planning for Investors referring to Mutual Funds 22 1.2.3 Why Has It Become One Of The Largest Financial Instruments? 22-25
1.2.4 Evaluating Portfolio Performance 26
1.2.5 How to Reduce Risk While Investing 26-28
1.2.6 A Study of Portfolio Analysis from The Point Of Fund Manager 28-29
1.2.7 Measures of Risk and Return 29-37
Part-II 38-40
Research Methodology
2.1 Need For the Study 38-39
2.2 Objective of the Study 39
2.3 Limitations of the Study 40
2.4 Data Collection 40
Part-III 41-102
Case Analysis
3.2 Analysis of the observation 87-97 3.3 Findings 98 3.4 Recommendations 99-100 3.5 Conclusion 101 References 102 PART-I
MUTUAL FUND OVERVIEW
MUTUAL FUND AN INVESTMENT PLATFORM
Mutual fund is an investment company that pools money from small investors and invests in a variety of securities, such as stocks, bonds and money market instruments. Most open-end Mutual funds stand ready to buy back (redeem) its shares at their current net asset value, which depends on the total market value of the fund's investment portfolio at the time of redemption. Most open-end Mutual funds continuously offer new shares to
investors. It is also known as an open-end investment company, to differentiate it from a closed-end investment company.
Mutual funds invest pooled cash of many investors to meet the fund's stated investment objective. Mutual funds stand ready to sell and redeem their shares at any time at the fund’s current net asset value: total fund assets divided by shares outstanding.
Figure: 1.1
In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because not all stocks may move in the same direction in the same proportion at the same time. Mutual fund issues units t o the investors in accordance with quantum of money invested by them. Investors of Mutual fund are known as unit holders. The profits or losses are shared by the investors in proportion to their investments. The Mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. I N V E S T O R INVEST THEIR MONEY INVEST IN VARIETY OF STOCKS/BONDS M U T U A L FU N D S H E M E S M A R K E T ( FL U C T U A T IO N S ) PROFIT/LOSS FORM PORTFOLIO OF INVESTMENT PROFIT/LOSS FROM INDIVIDUAL
In India, A Mutual fund is required to be registered with Securities and Exchange Boa rd of India (SEBI) which regulates securities markets before it can collect funds from the public.
In Short , a Mutual fund is a common pool of money in to which investors with common investment objective place their contributions that are to be invested in accordance with the state d investment objective of the scheme. The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective of the scheme. For example, a n equity fund would invest equity and equity related instruments and a debt fund would invest in bonds, debentures, gilts etc. Mutual fund is a suitable investment for the common ma n a s it offers an Oporto unity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
1.2 ADVANTAGES OF MUTUAL FUND
Table:1.1 S. No. Advant age Particulars 1. Portfoli o Diversif ication
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).
2.
Professi onal Manage ment
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.
3. 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.
4.
Low Transac tion 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.
5. Liquidit y
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. 6. Choice of Scheme s
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
7. Transp arency
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.
8. Flexibili ty
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 vice-versa. Option of systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end schemes.
9. 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.
1.3 DISADVANTAGE OF INVESTING THROUGH MUTUAL FUNDS
Table:1.2 S. No. Disadva ntage Particulars 1. Costs Control Not in the Hands of an InvestorInvestor 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 Custom ized Portfoli os
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. 3. Difficult y in Selectin g 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.
1.4 CATEGORIES OF MUTUAL FUND
Figure:1.2
BASED ON THEIR
STURCTURE
OPEN ENDED FUNDS
CLOSE-ENDED FUNDS
2. BASED ON INVESTMENT OBJECTIVE
EQUITY FUNDS BALANCED
FUNDS
Mutual funds can be classified as follow: Based on their structure:
Open-ended funds: Investors can buy and sell the units from the fund, at any point of
time.
Close-ended funds: These funds raise money from investors only once. Therefore,
after the offer period, fresh investments cannot be made into the fund. If the fund is listed on a stocks exchange, the units can be traded like stocks (E.g., Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of close-ended funds provided liquidity window on a periodic basis such as monthly or weekly. Redemption of units can be made during specified intervals. Therefore, such funds have relatively low liquidity.
Based on their investment objective:
Equity funds : These funds invest in equities and equity related instruments. With
fluctuating share prices, such funds show volatile performance, even losses. However, short term fluctuations in the market, generally smoothens out in the long term, thereby offering higher returns at relatively lower volatility. At the same time, such funds can yield great capital appreciation as, historically, equities have outperformed
DEVIDEND YEILD EQUITY DIVERSIFIED THEMANTIC FUND SECTOR FUND EQUITY ORIENTED DEBT ORIENTED ARBITAGE FUNDS FLOATING RATE FMPS FUNDS INCOME FUNDS GUILT FUNDS LEQUID FUNDS ELSS INDEX FUNDS
all asset classes in the long term. Hence, investment in equity funds should be considered for a period of at least 3-5 years. It can be further classified as:
1. Index funds- In this case a key stock market index, like BSE Sensex or Nifty is tracked.
Their portfolio mirrors the benchmark index in terms of both composition and individual stock weightages.
2. Equity diversified funds- 100% of the capital is invested in equities spreading across
different sectors and stocks.
3. Dividend yield funds- it is similar to the equity-diversified funds except that they invest in
companies offering high dividend yields.
4. Thematic funds- Invest 100% of the assets in sectors which are related through some
theme.
e.g. -An infrastructure fund invests in power, construction, cements sectors etc.
5. Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking sector fund
will invest in banking stocks.
6. ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.
Balanced fund : Their investment portfolio includes both debt and equity. As a result,
on the risk-return ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments. Following are balanced funds classes:
2 Debt-oriented funds -Investment below 65% in equities.
3 Equity-oriented funds -Invest at least 65% in equities, remaining in debt.
Debt fund : They invest only in debt instruments, and are a good option for investors
averse to idea of taking risk associated with equities. Therefore, they invest exclusively in fixed-income instruments like bonds, debentures, Government of India securities; and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. Put your money into any of these debt funds depending on your investment horizon and needs.
1. Liquid funds- These funds invest 100% in money market instruments, a large
portion being invested in call money market.
2. Gilt funds ST- They invest 100% of their portfolio in government securities of and
T-bills.
3. Floating rate funds - Invest in short-term debt papers. Floaters invest in debt
instruments, which have variable coupon rate.
4. Arbitrage fund- They generate income through arbitrage opportunities due to
miss-pricing between cash market and derivatives market. Funds are allocated to equities, derivatives and money markets. Higher proportion (around 75%) is put in money markets, in the absence of arbitrage opportunities.
5. Gilt funds LT- They invest 100% of their portfolio in long-term government
securities.
6. Income funds LT- Typically, such funds invest a major portion of the portfolio in
long-term debt papers.
7. MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an exposure
of 10%-30% to equities.
8. FMPs- fixed monthly plans invest in debt papers whose maturity is in line with that
of the fund.
How are funds different in terms of their risk profile:
Table:1.3
Equity Funds High level of return, but has a high level of risk too Debt funds Returns comparatively less risky than equity funds Liquid and Money
Market funds
INVESTMENT STRATEGIES
1. Systematic Investment Plan: Under this, a fixed sum is invested each month on a fixed
date of a month. Payment is made through post-dated cheques or direct debit facilities. The investor gets fewer units when the NAV is high and more units when the NAV is low. This is called as the benefit of Rupee Cost Averaging (RCA)
2. Systematic Transfer Plan: Under this, an investor invest in debt-oriented fund and give
instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund.
3. Systematic Withdrawal Plan: if someone wishes to withdraw from a mutual fund then he
can withdraw a fixed amount each month.
1.6. ORGANISATION OF MUTUAL FUND:
Figure:1.4
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 and the Offer Documents of the respective Schemes. At least 2/3rd 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 cores at all times.
The AMC if so authorized by the Trust Deed appoints the 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 handles communications with investors and updates investor records.
ASSET UNDER MANAGEMENT:
Table1.4
ASSET UNDER MANAGEMENT OF TOP AMC,S as on Jun 30, 2009
Mutual Fund Name No. of schemes
Corpus (Rs.Crores)
Reliance Mutual Fund 263 108,332.36 HDFC Mutual Fund 202 78,197.90 ICICI Prudential Mutual Fund 325 70,169.46 UTI Mutual Fund 207 67,978.19 Birla Sun Life Mutual Fund 283 56,282.87 SBI Mutual Fund 130 34,061.04 LIC Mutual Fund 70 32,414.92 Kotak Mahindra Mutual Fund 124 30,833.02 Franklin Templeton Mutual Fund 191 25,472.85 IDFC Mutual Fund 164 21,676.29 Tata Mutual Fund 175 21,222.81
Figure:1.5
1.7 DISTRIBUTION CHANNELS:
Mutual funds posses a very strong distribution channel so that the ultimate customers doesn’t face any difficulty in the final procurement. The various parties involved in distribution of mutual funds are:
1. Direct marketing by the AMCs: the forms could be obtained from the AMCs directly.
The investors can approach to the AMCs for the forms. some of the top AMCs of India are; Reliance ,Birla Sunlife, Tata, SBI magnum, Kotak Mahindra, HDFC, Sundaram, ICICI, Mirae Assets, Canara Robeco, Lotus India, LIC, UTI etc. whereas foreign AMCs include: Standard Chartered, Franklin Templeton, Fidelity, JP Morgan, HSBC, DSP Merill Lynch, etc.
2. Broker/ sub broker arrangements: the AMCs can simultaneously go for
broker/sub-broker to popularize their funds. AMCs can enjoy the advantage of large network of these brokers and sub brokers.
3. Individual agents, Banks, NBFC: investors can procure the funds through individual
agents, independent brokers, banks and several non- banking financial corporations too, whichever he finds convenient for him.
1.8 HDFC AMC COMPANY OVERVIEW
HDFC ASSET MANAGEMENT COMPANY LIMITED (AMC)AMC was incorporated under the Companies Act, 1956, on December 10, 1999, and was approved to act as an AMC for the Mutual Fund by SEBI on July 30, 2000.
The registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg, 169, Back bay Reclamation, Church gate, Mumbai - 400 020.
In terms of the Investment Management Agreement, the Trustee has appointed HDFC Asset Management Company Limited to manage the Mutual Fund
As per the terms of the Investment Management Agreement, the AMC will conduct the operations of the Mutual Fund and manage assets of the schemes, including the schemes launched from time to time.
The present share holding pattern of the AMC is as follows:
Table:1.5
Particulars % of the paid up capital
Housing Development Finance Corporation Limited 50.10
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 December 22, 2000 to act as a Portfolio Manager under the SEBI (Portfolio Managers) Regulations, 1993. The Certificate of Registration is valid from January 1, 2004 to December 31, 2006.
Board of Directors
The Board of Directors of the HDFC Asset Management Company Limited (AMC) consists of the following eminent persons.
Table:1.6
Mr. Deepak S. Parekh Chairman of the board
Mr. N. Keith Skeoch CEO of Standard Life Investments Ltd.
Mr. Keki M. Mistry Associate director
Mr. James Aird Investment director
Mr. P. M. Thampi Independent director
Mr. Humayun Dhanrajgir Independent director
Dr. Deepak B. Phatak Independent director
Mr. Hoshang S. Billimoria Independent director
Mr. Rajeshwar Raj Bajaaj Independent director
Mr. Vijay Merchant Independent director
Mr. Milind Barve Managing director
Mr. Deepak Parekh, the Chairman of the Board, is associated with HDFC Ltd. in his
capacity as its Executive Chairman.
Mr. Parekh joined HDFC Ltd. in a senior management position in 1978. He was inducted as Wholetime Director of HDFC Ltd. in 1985 and was appointed as the Executive Chairman in 1993.
Mr. N. Keith Skeoch is associated with Standard Life Investments Limited as its Chief
Executive and is responsible for all company business and investment operations within Standard Life Investments Limited.
Mr. Keki M. Mistry is an associate director on the Board. He is the Vice-Chairman &
Managing Director of Housing Development Finance Corporation Limited (HDFC Ltd.) He is with HDFC Ltd. since 1981 and was appointed as the Executive Director of HDFC Ltd. in 1993. He was appointed as the Deputy Managing Director in 1999, Managing Director in 2000 and Vice Chairman & Managing Director in 2007.
SPONSORS
HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED (HDFC):
HDFC was incorporated in 1977 as the first specialised housing finance institution 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 currently has a client base of over 8, 00,000 borrowers, 12, 00,000 depositors, 92,000 shareholders and 50,000 deposit agents. HDFC raises funds from international agencies such as the World Bank, IFC (Washington), USAID, CDC, ADB and KFW, domestic term loans from banks and insurance companies, bonds and deposits. HDFC has received the highest rating for its bonds and deposits program for the ninth year in succession. HDFC Standard Life Insurance Company Limited, promoted by HDFC was the first life insurance company in
the private sector to be granted a Certificate of Registration (on October 23, 2000) by the Insurance Regulatory and Development Authority to transact life insurance business in India.
HDFC is India's premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities. With its experience in the financial markets, a strong market reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment.
STANDARD LIFE INVESTMENTS LIMITED
The Standard Life Assurance Company was established in 1825 and has considerable experience in global financial markets. In 1998, Standard Life Investments Limited became the dedicated investment management company of the Standard Life Group and is owned 100% by The Standard Life Assurance Company.
With global assets under management of approximately US$186.45 billion as at March 31, 2005, Standard Life Investments Limited is one of the world's major investment companies and is responsible for investing money on behalf of five million retail and institutional clients worldwide. With its headquarters in Edinburgh, Standard Life Investments Limited has an extensive and developing global presence with operations in the United Kingdom, Ireland, Canada, USA, China, Korea and Hong Kong. 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. The company's current holdings in UK equities account for approximately 2% of the market capitalization of the London Stock Exchange.
HDFC MUTUAL FUND PRODUCTS
Equity Funds
HDFC Growth Fund
HDFC Long Term Advantage Fund HDFC Index Fund
HDFC Equity Fund
HDFC Capital Builder Fund HDFC Tax saver
HDFC Top 200 Fund
HDFC Core & Satellite Fund HDFC Premier Multi-Cap Fund HDFC Long Term Equity Fund HDFC Mid-Cap Opportunity Fund
Balanced Funds
HDFC Children's Gift Fund Investment Plan HDFC Children's Gift Fund Savings Plan HDFC Balanced Fund
HDFC Prudence Fund Debt Funds
HDFC Income Fund HDFC Liquid Fund
HDFC Gilt Fund Short Term Plan HDFC Gilt Fund Long Term Plan HDFC Short Term Plan
HDFC Floating Rate Income Fund Short Term Plan HDFC Floating Rate Income Fund Long Term Plan HDFC Liquid Fund - PREMIUM PLAN
HDFC Short Term Plan - PREMIUM PLAN HDFC Short Term Plan - PREMIUM PLUS PLAN HDFC Income Fund Premium Plan
HDFC Income Fund Premium plus Plan HDFC High Interest Fund
HDFC High Interest Fund - Short Term Plan HDFC Sovereign Gilt Fund - Savings Plan HDFC Sovereign Gilt Fund - Investment Plan HDFC Sovereign Gilt Fund - Provident Plan HDFC Cash Management Fund - Savings Plan HDFC Cash Management Fund - Call Plan
HDFCMF Monthly Income Plan - Short Term Plan HDFCMF Monthly Income Plan - Long Term Plan HDFC Cash Management Fund - Savings Plus Plan HDFC Multiple Yield Fund
HDFC Multiple Yield Fund Plan 2005
ACHIEVEMENT AND AWARDS
CNBC - TV 18 - CRISIL Mutual Fund of the Year Awards 2008 :
HDFC Prudence Fund was the only scheme that won the CNBC - TV 18 - CRISIL Mutual
Fund of the Year Award 2008 in the Most Consistent Balanced Fund under CRISIL ~
CPR for the calendar year 2007 (from amongst 3 schemes).
HDFC Cash Management Fund - Savings Plan was the only scheme that won the CNBC -
TV 18 - CRISIL Mutual Fund of the Year Award 2008 in the Most Consistent Liquid Fund
under CRISIL ~ CPR for the calendar year 2007 (from amongst 5 schemes).
TV 18 - CRISIL Mutual Fund of the Year Award 2008 in the Liquid Scheme – Retail
Category for the calendar year 2007 (from amongst 19 schemes).
Lipper Fund Awards 2008:
HDFC Equity Fund - Growth has been awarded the 'Best Fund over Ten Years' in
the 'Equity India Category' at the Lipper Fund Awards 2008 (form amongst 23 schemes). It was awarded the Best Fund over ten years in 2006 and 2007 as well. 2008 makes it three in a row.
Lipper Fund Awards 2009 :
HDFC Equity Fund - Growth has been awarded the 'Best Fund over Ten Years' in the 'Equity India Category' (form amongst 34 schemes) and HDFC Prudence Fund – Growth Plan in the ‘Mixed Asset INR Aggressive Category’ (from amongst 6 schemes), have been awarded the ‘Best Fund over 10 Years’ by Lipper Fund Awards India 2009.
ICRA Mutual Fund Awards – 2008 :
HDFC MF Monthly Income Plan - Long Term Plan - Ranked a Seven Star Fund and has
been awarded the Gold Award for "Best Performance" in the category of "Open Ended
Marginal Equity" for the three year period ending December 31, 2007 (from amongst 27
schemes)
HDFC High Interest Fund - Short Term Plan - Ranked a Five Star Fund indicating
performance among the top 10% in the category of "Open Ended Debt - Short Term" for one year period ending December 31, 2007 (from amongst 20 schemes).
HDFC Prudence Fund - Ranked a Five Star Fund indicating performance among the top
10% in the category of "Open Ended Balanced" for the three year period ending December 31, 2007 (from amongst 16 schemes)
B. MEASURING AND EVALUATING MUTUAL FUNDS
PERFORMANCE:
1.2.1 PURPOSE OF MEASURING AND EVALUATING
Every investor investing in the mutual funds is driven by the motto of either wealth creation or wealth increment or both. Therefore it’s very necessary to continuously evaluate the funds’ performance with the help of factsheets and newsletters, websites, newspapers and professional advisors like HDFC AMC. If the investors ignore the evaluation of funds’ performance then he can lose hold of it any time. In this ever-changing industry, he can face any of the following problems:
1. Variation in the funds’ performance due to change in its management/ objective. 2. The funds’ performance can slip in comparison to similar funds.
3. There may be an increase in the various costs associated with the fund. 4 .Beta, a technical measure of the risk associated may also surge.
5. The funds’ ratings may go down in the various lists published by independent rating
agencies.
6. It can merge into another fund or could be acquired by another fund house.
Performance measures:
Equity funds: the performance of equity funds can be measured on the basis of: NAV
Growth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns and Distributions, Computing Total Return (Per Share Income and Expenses, Per Share Capital Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio Turnover Rate, Fund Size, Transaction Costs, Cash Flow, Leverage.
Debt fund: Likewise, the performance of debt funds can be measured on the basis of: Peer
Group Comparisons, The Income Ratio, Industry Exposures and Concentrations, NPAs, besides NAV Growth, Total Return and Expense Ratio.
Liquid funds: the performance of the highly volatile liquid funds can be measured on the
basis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio.
Concept of benchmarking for performance evaluation:
Every fund sets its benchmark according to its investment objective. The funds performance is measured in comparison with the benchmark. If the fund generates a greater return than the benchmark then it is said that the fund has outperformed benchmark , if it is equal to benchmark then the correlation between them is exactly 1. And if in case the return is lower than the benchmark then the fund is said to be underperformed.
Some of the benchmarks are:
1. Equity funds: market indices such as S&P CNX nifty, BSE100, BSE200, BSE-PSU, BSE
500 index, BSE bankex, and other sectoral indices.
2. Debt funds: Interest Rates on Alternative Investments as Benchmarks, I-Bex Total Return
Index, JPM T-Bill Index Post-Tax Returns on Bank Deposits versus Debt Funds.
3. Liquid funds: Short Term Government Instruments’ Interest Rates as Benchmarks, JPM
T- Bill Index.
To measure the fund’s performance, the comparisons are usually done with:
I) with a market index.
ii) Funds from the same peer group.
iii) Other similar products in which investors invest their funds.
1.2.2 FINANCIAL PLANNING FOR INVESTORS REFERRING TO
MUTUAL FUNDS:
Investors are required to go for financial planning before making investments in any mutual fund. The objective of financial planning is to ensure that the right amount of money is available at the right time to the investor to be able to meet his financial goals. It is more than mere tax planning. Steps in financial planning are:
Asset allocation.
Selection of fund.
Studying the features of a scheme.
In case of mutual funds, financial planning is concerned only with broad asset allocation, leaving the actual allocation of securities and their management to fund managers. A fund
manager has to closely follow the objectives stated in the offer document, because financial plans of users are chosen using these objectives.
1.2.3 WHY HAS IT BECOME ONE OF THE LARGEST FINANCIAL INSTRUMENTS?
If we take a look at the recent scenario in the Indian financial market then we can find the market flooded with a variety of investment options which includes mutual funds, equities, fixed income bonds, corporate debentures, company fixed deposits, bank deposits, PPF, life insurance, gold, real estate etc. all these investment options could be judged on the basis of various parameters such as- return, safety convenience, volatility and liquidity. Measuring these investment options on the basis of the mentioned parameters, we get this in a tabular form
Table:1.7
Return Safety Volatility Liquidity Convenienc
e
Equity High Low High High Moderate
Bonds Moderate High Moderate Moderate High
Co. Debent ures
Moderate Moderate Moderate Low Low
Co. FDs
Moderate Low Low Low Moderate
Bank Deposi ts
PPF Moderate High Low Moderate High
Life Insura nce
Low High Low Low Moderate
Gold Moderate High Moderate Moderate Gold
Real
Estate High Moderate High Low Low
Mutual Funds
High High Moderate High High
We can very well see that mutual funds outperform every other investment option. On three parameters, it scores high whereas it’s moderate at one. comparing it with the other options, we find that equities gives us high returns with high liquidity but its volatility too is high with low safety which doesn’t makes it favourite among persons who have low risk- appetite. Even the convenience involved with investing in equities is just moderate.
Now looking at bank deposits, it scores better than equities at all fronts but lags badly in the parameter of utmost important ie; it scores low on return , so it’s not an happening option for person who can afford to take risks for higher return. The other option offering high return is real estate but that even comes with high volatility and moderate safety level, even the liquidity and convenience involved are too low. Gold have always been a favourite among Indians but when we look at it as an investment option then it definitely doesn’t gives a very bright picture. Although it ensures high safety but the returns generated and liquidity are moderate. Similarly, the other investment options are not at par with mutual funds and serve the needs of only a specific customer group. Straightforward, we can say that mutual fund emerges as a clear winner among all the options available.
I)Mutual funds combine the advantage of each of the investment products: mutual fund
is one such option which can invest in all other investment options. Its principle of diversification allows the investors to taste all the fruits in one plate. just by investing in it, the investor can enjoy the best investment option as per the investment objective.
II) Dispense the shortcomings of the other options: every other investment option has
more or less some shortcomings. Such as if some are good at return then they are not safe, if some are safe then either they have low liquidity or low safety or both….likewise, there exists no single option which can fit to the need of everybody. But mutual funds have definitely sorted out this problem. Now everybody can choose their fund according to their investment objectives.
III) Returns get adjusted for the market movements: as the mutual funds are managed by
experts so they are ready to switch to the profitable option along with the market movement. Suppose they predict that market is going to fall then they can sell some of their shares and book profit and can reinvest the amount again in money market instruments.
IV) Flexibility of invested amount: Other then the above mentioned reasons, there exists
one more reason which has established mutual funds as one of the largest financial intermediary and that is the flexibility that mutual funds offer regarding the investment amount. One can start investing in mutual funds with amount as low as Rs. 500 through SIPs and even Rs. 100 in some cases.
Not all award-winning funds may be suitable for everyone
Many investors feel that a simple way to invest in Mutual funds is to just keep investing in award winning funds. First of all, it is important to understand that more than the awards; it is the methodology to choose winners t at is more relevant.
A rating firm generally elaborates on the criteria for deciding the winner’s i.e. consistent performance, risk adjusted returns, total returns and protection of capital. Each
of these factors is very important and ha s its significance for different categories of funds.
Besides, each of these factors has varying degree of significance for different kinds of investors. For example, consistent return re ally focuses on risk. If someone is afraid of negative returns, consistency will be a more import ant measure than tot al ret urn i.e. Growth in NAV as well as dividend received.
A fund can have very impressive total ret urns overtime, but can be very volatile and tough for a risk adverse investor. Therefore, all the ward winning funds in different categories may not be suitable for everyone. Typically, when one has to select funds, the first step should be to consider personal goals and objectives. Invest ors need to decide which element they value the most and the n prioritize the other criteria
Once one knows what one is looking for, one should go about selecting the funds according to the asset allocation. Most investors need just a few funds, carefully picked, watched and managed over period of time.
1.2.4 EVALUATING PORTFOLIO PERFORMANCE
It is important to evaluate the performance of the portfolio on an on-going basis. The following factors are important in this process:
Consider long-term record of accomplishment rather than short -term performance. It is important because long-term track record moderates the effects which unusually good or bad short -term performance can have on a fund's track record. Besides, longer-term track record compensates for the effects of a fund manager's particular investment style.
Evaluate the record of accomplishment against similar funds. Success in managing a small or in a fund focusing on a particular segment of the market cannot be re lied upon as an evidence of anticipated performance in managing a large or a broad based fund.
Discipline in investment approach is an important factor as the pressure to perform can make a fund manager susceptible to have a n urge to change tracks in terms of stock selection as well a s investment strategy.
The objective should be to differentiate investment skill of the fund manager from luck and to identify those funds with the greatest potential of future success.
1.2.5 HOW TO REDUCE RISK WHILE INVESTING:
Any kind of investment we make is subject to risk. In fact we get return on our investment purely and solely because at the very beginning we take the risk of parting with our funds, for getting higher value back at a later date. Partition it self is a risk. Well known economist and Nobel Prize recipient William Sharpe tried to segregate the total risk faced in any kind of investment into two parts - systematic (Systemic) risk and
unsystematic (Unsystematic) risk.
Systematic risk is that risk which exists in the system. Some of the biggest examples of
systematic risk are inflation, recession, war, political situation etc.
Inflation erodes returns generated from all investments e .g. If return from fixed deposit is 8 percent and if inflation is 6 per cent then real rate of return from fixed deposit is reduced by 6 percent. Similarly if returns generated from equity market is 18 percent and inflation is still 6 per cent then equity returns will be lesser by the rate of inflation. Since inflation exists in the system there is no way one can stay away from the risk of inflation.
Economic cycles, war and political situations have effects on all forms of investments. Also these exist in the system and there is no way to stay away from them. It is like learning to walk. Anyone who wants to learn to walk has to first fall; you cannot learn to walk without falling. Similarly, anyone who wants to invest has to first face systematic risk. Therefore, one can never make any kind of investment without systematic risk.
Another form of risk is unsystematic risk. This risk does not exist in the system and hence is not applicable to all forms of investment.
Unsystematic risk is associated with particular form of investment. Suppose we invest in stock market and the market falls, then only our investment in equity gets affected OR if we have placed a fixed deposit in particular bank and bank goes bankrupt, than we only lose money placed in that bank. While there is no way to keep away from risk, we can always reduce the impact of risk. Diversification helps in reducing the impact of
unsystematic risk. If our investment is distributed across various asset classes, the impact of unsystematic risk is reduced.
If we have placed fixed deposit in several banks, then even if one of the banks goes bankrupt our entire fixed de posit investment is not lost. Similarly if our equity investment is in Tata Motors, HLL, Infosys, adverse news about Infosys will only impact investment in Infosys, all other stocks will not have any impact . To reduce the impact of systematic risk, we should invest regularly. By investing regularly, we average out the impact of risk. Mutual fund, as an investment vehicle gives us benefit of both
diversification and averaging. Portfolio of mutual funds consists of multiple securities
and hence adverse news about single security will have nominal impact on overall portfolio.
By systematically investing in mutual fund, we get benefit of rupee cost averaging. Mutual fund as an investment vehicle helps reduce, both, systematic as well a s unsystematic risk
1.2.6 A STUDY OF PORTFOLIO ANALYSIS FROM THE POINT OF
FUND MANAGER:
Effective use of portfolio management disciplines improves customer satisfaction, reduces the number of risks problems, and increases success. The goal of portfolio analysis is to realize these same benefits at the portfolio level by applying a consistent structured management approach.
The considerations underlying the portfolio analysis is a matter of concern to the fund managers, investors, and researchers alike. This study attempts to answer two questions relating to the portfolio analysis:
• Make an average (or fair) return for the level of risk in the portfolio • To find out the portfolio which best meets the purpose of the investor.
At a minimum, any comprehensive mutual fund selection and analysis approach should include the following generalized processes:
• Fund selection
• Fund prioritize/ reprioritize
• Selection of the acceptable and required fund
• Fund analysing and monitoring
• Corrective action management
The fund portfolio analysis gives the ability to select funds that are aligned with the investor’s strategies and objectives. It helps the fund manager to make the best use of available opportunities by applying to the highest priority of the investor. A fund manager can regularly assess how securities and stocks are contributing to portfolio health and can make the corrective action to keep the portfolio in compliance with the investor’s interest and objectives.
Mutual funds do not determine risk preference. However, once investor determines his/her return preferences, he/she can choose a mutual fund a large and growing variety of alternative funds designed to meet almost any investment goal. Studies have showed that the funds generally were consistent in meeting investors stated goals for investment strategies, risk, and return. The major benefit of the mutual fund is to diversify the portfolio to eliminate unsystematic risk. The instant diversification of the funds is especially beneficial to the small investors who do not have the resources to acquire 100 shares of 12 or 15 different issues required to reduce unsystematic risk.
Mutual funds have generally maintained the stability of their correlation with the market because of reasonably well diversified portfolios. There are some measures for the analysis and each of them provides unique perspectives. These measures evaluate the different components of performance.
Risk is variability in future cash flows. It is also known as uncertainty in the distribution of possible outcomes. A risky situation is one, which has some probability of loss or unexpected results. The higher the probability of loss or unexpected results is, the greater the risk.
It is the uncertainty that an investment will earn its expected rate of return. For an investor, evaluating a future investment alternative expects or anticipates a certain rate of return is very important.
Portfolio risk management includes processes that identify, analyse, respond to, track, and control any risk that would prevent the portfolio from achieving its business objectives. These processes should include reviews of project level risks with negative implications for the portfolio, ensuring that the project manager has a responsible risk mitigation plan.
Additionally, it is important to do a consolidated risk assessment for the portfolio overall to determine whether it is within the already specified limits. Since portfolio and their environments are dynamic, managers should review and update their portfolio risk management plans on a regular basis through the fund life cycle.
Simple measure of returns:
The return on mutual fund investment includes both income (in the form of dividends or investment payments) and capital gains or losses (increase or decrease in the value of a security). The return is calculated by taking the change in a fund’s Net Asset Value, which is the market value of securities the fund holds divided by the number of the fund’s shares during a given time period, assuming the reinvestment all income and capital gains distributions, and dividing it by the original net asset value. The return is calculated net of management fees and other expenses charged to the fund. Thus, a fund’s monthly return can be expressed as follows:
Rt= (NAVt- NAVt-1)/NAVt-1
Where,Rt is the return in month t
NAVt is the closing net asset value of the fund on the last trading day of the month NAVt-1 is the closing net asset value of the fund on the last day of the previous month
Measure of risk
Investors are interested not only in fund’s 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/T× (Rt-AR) ²
Where,S.D. is the periodic standard deviation, 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
Beta analysis: ) β (Beta) Co-efficient:
Systematic risk is measured in terms of Beta, which represents fluctuations in the NAV of the fund vis-à-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-à-vis one another in a better way.
β
(Beta) is calculated as = [N (
Σ
XY) –
Σ
X
Σ
Y]/ [N (
Σ
X
2) – (
Σ
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 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 fund’s 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 fund’s portfolio doesn’t 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 fun’s market volatility and market risk. The value of R- squared ranges from0 to1. 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:
Case 1 Case 2
R2 0.65 0.88
In the above tableR2 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 r- squared is more than 0.85 and beta 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 fund's 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 percentage of portfolio value that has been transacted, not an indication of the percentage of a fund's holdings that have been changed. Portfolio turnover is the purchase and sale of securities in a fund's portfolio. A ratio of 100%, then, means the fund has bought and sold all its positions within the last year. Turnover is important when 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 fund's total assets to arrive at a percentage amount, which represents the TER:
Total expense ratio = (Total fund Costs/ Total fund Assets)
The most important and widely used measures of performance are:
The Sharpe Measure
The Treynor’Measure
Jenson Model
Fama Model
:-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 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 unfavourable performance.
The Treynor Measure:
Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's 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 associated), during a given period and systematic risk associated with it (beta). Symbolically, it can be represented as:
Treynor's Index (Ti) = (Ri - Rf)/Bi.
Where,Ri represents return on fund, Rf is risk free rate of return, and Bi is beta of the fund.
All risk-averse investors would like to maximize this value. While a high and positive Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index is an indication of 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 on 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:
Jenson's model proposes another risk adjusted performance measure. This measure was developed by Michael Jenson and is sometimes referred to as the differential Return Method. This measure involves evaluation of the returns that the fund has generated vs. the returns actually expected out of the fund1 given the level of its systematic risk. The surplus between the two returns is called Alpha, which measures the performance of a fund compared with the actual returns over the period. Required return of a fund at a given level of risk (Bi) can be calculated as:
E(Ri) = Rf + Bi (Rm - Rf)
Where,E(Ri) represents expected return on fund, and
Rm is average market return during the given period,
Rf is risk free rate of return, and Bi is Beta deviation of the fund.
After calculating it, Alpha can be obtained by subtracting required return from the actual return of the fund.
αp= Ri –[ Rf + Bi (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 has earned returns well above the return commensurate with the level of risk taken by him.
Selectivity: measures the ability of the portfolio manager to earn a return that is consistent
with the portfolio’s market (systematic) risk. The selectivity measure is:
Ri –[ Rf + Bi (Rm - Rf) ]
Diversification: measures the extent to which the portfolio may not have been completely
diversified. Diversification is measured as:
[Rf +(Rm - Rf)(αi/ αm)]-[Rf + Bi (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 mangers did manager did at earning a fair return for the portfolio’ 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:
Sahrpe ratio: measures the reward to total risk trade off Treynor: measures the reward to systematic risk trade off
Jensen’s 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 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 risks leaves the money all the more prone to risks of all kinds that may exceed the individual investors' risk appetite.
PART-II
RESEARCH METHODOLOGY
2.1 NEED FOR THE STUDY
The Mutual Fund Companies periodically build up a study, which can prioritize and analyse the portfolio of the mutual funds. This study is helpful in having a comparison among the mutual funds based on the risk bearing capacity and expected return of the investor and will also carry out an analysis of the portfolio of the selected mutual fund.
The mutual fund industry is growing globally and new products are emerging in the market with all captivating promises of providing high return. It has become difficult for the investors to choose the best fund for their needs or in other words to find out a fund which will give maximum return for minimum risk. Therefore, they turn to their financial adviser to get precise direct investment. Hence, the company asked me to prepare a model, which will facilitate them to analyse the fund and to have reasonable estimation for the fund performance.
The driving force of Mutual Funds is the ‘safety of the principal’ guaranteed, plus the added advantage of capital appreciation together with the income earned in the form of interest or dividend. The various schemes of Mutual Funds provide the investor with a wide range of investment options according to his risk bearing capacities and interest besides; they also give
handy return to the investor. Mutual Funds offers an investor to invest even a small amount of money, each Mutual Fund has a defined investment objective and strategy. Mutual Funds schemes are managed by respective asset managed companies, sponsored by financial institutions, banks, private companies or international firms. A Mutual Fund is the ideal investment vehicle for today’s complex and modern financial scenario.
The study is basically made to analyze the various open-ended equity schemes of HDFC Asset Management Company to highlight the diversity of investment that Mutual Fund offer. Thus, through the study one would understand how a common person could fruitfully convert a meagre amount into great penny by wisely investing into the right scheme according to his risk taking abilities.
Sharpe ratio is a performance measure, which reflects the excess return earned on a portfolio per unit of its total risk (standard deviation). Treynor measure indicates the risk premium return per unit risk of the portfolio. While Jensen alpha talks about the deviation of the actual return from its expected one. Fema measure decomposes the portfolio total return into two main components: systematic return and the unsystematic return. It determines whether the portfolio is perfectly diversified or not. Hence, it is a significant measure to evaluate the performance of the fund manager.
The analysis of the fund portfolio has been done to find out the influence of the top holdings on the performance of the fund. All these measures give fair implication and results about the portfolio performance and can show the ground reality to a rational investor.
2.2 OBJECTIVE OF THE STUDY
Whether the growth oriented Mutual Fund are earning higher returns than the benchmark returns (or market Portfolio/Index returns) in terms of risk.
Whether the growth oriented mutual funds are offering the advantages of Diversification, Market timing and Selectivity of Securities to their investors
This study provides a proper investigation for logical and reasonable comparison and selection of the funds.
It also assists in analysing the portfolio of the selected funds.
2.3 LIMITATIONS OF THE STUDY
The study is limited only to the analysis of different schemes and its suitability to different investors according to their risk-taking ability.
The study is based on secondary data available from monthly fact sheets, websites and other books, as primary data was not accessible.
The study is limited by the detailed study of six schemes of HDFFC.
Many investors are all price takers.
The assumption that all investors have the same information and beliefs about the distribution of returns.
Banks are free to accept deposits at any interest rate within the ceilings fixed by the
Reserve Bank of India and interest rate can vary from client to client. Hence, there can be inaccuracy in the risk free rates.
The study excludes the entry and the exit loads of the mutual funds.
2.4 DATA COLLECTION
The Methodology involves the selected Open-Ended equity schemes of HDFC mutual fund for the purpose of risk return and comparative analysis the competitive funds. The data collected for this project is basically from secondary sources, they are;
