BHARATHIDASAN U NIVERSITY TIRUCHIRAPPALLI A PROJECT REPORT ON DETAIL STUDY OF HDFC MUTUAL FUND SUBMITTED FOR THE PARTIAL FULFILLMRNT OF THE REQUIREMENT FOR THE DEGREE OF MBA SUBMITTED BY: HARISH SINGH NEGI REGISTRATION NO.-13295294 MBA-IV SEMESTER SESSION (2013-2015) INTERNAL GUIDE GAURAV GILL
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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
HARISH SINGH NEGI
Studying in Master of Business Administration in Bharathidasan University Tiruchirappalli
2013-15.
Project Viva-Voce held on.....................
Internal examiner External examiner
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, Barakhambha Road, 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
Gaurav Gill Executive Trainee, the former student of Bharathidasan University
Tiruchirappali, 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 Mr–Gaurav Gill 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 Bharathidasan University .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-……….. Harish Singh Negi
DATE…………..
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
1.2 Advantages 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
3.1 Data Interpretation 41-87
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
1.MUTUAL FUND OVERVIEW
1.1 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.
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.
INVE
STO
R
INVEST THEIR MONEY
INVEST IN VARIETY OF STOCKS/BONDS
MU
TUA
L FU
ND
SH
EMES
M
ARK
ET (F
LUCT
UA
TIO
NS)
PROFIT/LOSS FORM PORTFOLIO OF INVESTMENT
PROFIT/LOSS FROM INDIVIDUAL
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.
Advantage
Particulars
1.
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).
2.
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.
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 Transaction
Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction costs. These benefits are passed on to the investors.
Costs
5.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.
6.
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
7.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.
8.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 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.
Disadvantage
Particulars
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.
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.
1.4 CATEGORIES OF MUTUAL FUND
Figure:1.2
BASED ON THEIR STURCTURE
OPEN ENDED FUNDSCLOSE-ENDED FUNDS
2. BASED ON INVESTMENT OBJECTIVE
EQUITY FUNDS BALANCED FUNDS
DEBT FUNDS
DEBT ORIENTED
LEQUID FUNDSINDEX 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
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:
DEVIDEND YEILD
EQUITY DIVERSIFIED
THEMANTIC FUND
SECTOR FUND
EQUITY ORIENTED
ARBITAGE FUNDS
FLOATING RATE
FMPS FUNDS
INCOME FUNDS
GUILT FUNDS
ELSS
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
Provide stable but low level of return
1.5 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
THE STRUCTURE CONSISTS OF:
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.
REGISTRAR AND TRANSFER AGENT
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
The graph indicates the growth of assets over the years.
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
Standard Life Investments Limited 49.90
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 boardMr. N. Keith Skeoch CEO of Standard Life Investments Ltd.Mr. Keki M. Mistry Associate directorMr. James Aird Investment directorMr. P. M. Thampi Independent directorMr. Humayun Dhanrajgir Independent directorDr. Deepak B. Phatak Independent directorMr. Hoshang S. Billimoria Independent directorMr. Rajeshwar Raj Bajaaj Independent directorMr. Vijay Merchant Independent directorMs. Renu S. Karnad Joint 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
Other Cash,Cash Equivalents and Net Current Assets 8,679.32 7.45
Net Assets 116,299.99 100.00
Table:3.24
Sectoral Allocation of Assets(%)
Banks 16.37
Pharmaceuticals 10.39
Media & Entertainment 8.48
Consumer Non Durables 7.94
Petroleum Products 7.72
Industrial Capital Goods 6.60
Telecom - Services 5.30
Auto Ancillaries 5.30
Finance 3.42
Software 3.31
Chemicals 2.41
Fertilisers 2.24
Ferrous Metals 1.92
Construction 1.48
Transportation 1.24
Oil 1.12
Construction Project 0.85
Paper Products 0.85
Industrial Products 0.21
Engineering 0.18
Cash,Cash Equivalents and Net Current Assets
12.67
TOTAL 100
Figure:3.8
Table:3.25
HDFC Growth Fund
(NAV as at evaluation date 30-June-09, Rs. 57.219 Per unit)
Date Period NAV Per Unit (Rs.)
Returns (%) ^
Benchmark Returns (%) Sensex
December 30, 2008
Last Six months (182 days)
41.697 37.23 49.17
June 30, 2008 Last 1 Year (365 days) 53.472 7.01 7.67
June 30, 2006 Last 3 Years (1096 days)
36.034 16.65 10.95
June 30, 2004 Last 5 Years (1826 days)
16.439 28.31 24.74
June 30, 1999 Last 10 Years (3653 days)
N.A N.A. 13.34
September 11, 2000
Since Inception (3214 days)
10 21.91 13.65
Figrure:3.9
HDFC Growth Fund - Analysis
It requires a lot of research and constant watch on the capital market for a fund manager to analyze the portfolio of the particular fund. I took the secondary data from the fund review of the article corner from The Business Line web site. I comprehended the analysis and concluded my view as stated below.
HDFC Growth Fund invests in stocks across market capitalisations. Despite a large-cap bias, mid and small cap stocks account for 28 per cent of the portfolio. The fund has managed to consistently beat its benchmark Sensex over one-, three- and five-year periods.
In the latest portfolio, the fund has invested in as many as 52 stocks across 18 different sectors making it a fairly diversified portfolio. This may indicate net inflows into the fund.
Sector Moves: There is a fair bit of stability in terms of top sector holdings in the portfolio. Banks (16.39 per cent) and pharmaceuticals (10.37 per cent) sectors continue to be the top two sector holdings, although exposures have been a bit reduced.
Banks and consumer non-durables also figure among top holdings in the fund, and have seen increased exposures over the September-February period. While capital goods and banks have done well in the past year, they have been among the worst hit in the recent meltdown.
The respective sector indices were beaten down by over 25 per cent in the last couple of months. Construction and predictably, software exposures have been pared in the six-month period.
Interestingly, media and entertainment (8.48 per cent), which were not part of the portfolio six months ago is now in the top ten sector holdings for the fund. The power sector has been exited, while telecom services and auto ancillaries exposures have been increased substantially.
Stock Moves: Most stocks are those whose prices have fallen during September-February, include stocks such as Zee Entertainment, HT Media and Dr Reddy's Labs.
The fund has also taken profit booking opportunities, with several stocks whose prices rose between 60-105 per cent have been exited. These include, Axis Bank, Hanung Toys and Tata Power. Other high-profile exits include DLF, HPCL, Ranbaxy Labs, and Punj Lloyd.
Reliance Industries, SBI, ONGC and BHEL are the stocks retained by the fund during the period and are among the fund's top holdings.
3.4 FINDINGS
As far as analysis is concerned, we found out that the HDFC Growth Fund was among
the best performers fund. Although all the funds are affected by the global meltdown,
(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.
3.5 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 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 to reduce the
risk if the same return is given to the investor 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 bench
mark 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 and are able to use leverage or invest in the risk-free asset. When the
investor is investing in the different funds, the fund’s marginal contribution to the
portfolio’s risk and 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 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.
3.6 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 management’s 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 fund’s 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.
REFERENCES
Books:
1. Security Analysis and Portfolio Management (sixth Edition 1995) by Donald E. Fisher and Ronald J. Jordan. Publication: Pearson education.
2. The Indian Financial System (second edition) by Bharati V. Pathak. Published by Dorling Kindersley (India) Pvt. Ltd., licensees of Pearson Education in South Asia.
3. Security Analysis and Portfolio Management by Khan and Jain.