SUMMER TRAINING PROJECT A REPORT ON COMPARATIVE ANALYSIS OF MUTUAL FUND WITH OTHER INVESTMENT PRODUCTS AND THEIR EVALUATIONS

SUBMITTED TO LECTURER mba SEMESTER SRCM, LUCKNOW

SUBMITTED BY Vikas singh SRCM, LUCKNOW

ACKNOWLEDGEMENT
The whole summer internship period with HDFC MUTUAL FUND Kanpur has been full of learning and sense of contribution towards the organization. I would like to thank HDFC MUTUAL FUND for giving us an opportunity of learning and contributing through this project. I also take this opportunity to thank all those people that made this experience a memorable one. A successful project can never be prepared by the single efforts of the person to whom project is assigned, but it also demand the help and guardianship of some conversant person who helped the undersigned actively or passively in the completion of successful project. I would like to express my gratitude towards the following persons who has helped me in making my summer internship full of learning and interesting too. Mr. Gaurav virmani (Branch Manager) Mr. Qazi Asjad Ali Miss. Shweta Agarwal Miss. Neha Shukla Mr. Prashant Sinha I would also like to express my gratitude to Mr. Gaurav Virmani (Branch Manager) for assigning me such a worthwhile Project Comparative Analysis Of Mutual Fund With Other Investment Options And Their Evaluation to work upon in HDFC Mutual Fund.

SHUBHAM ARORA

INDEX
CONTENT PAGE NO.
1. INTRODUCTION

5 a) CHARACTERISTICS OF MUTUAL FUND b) ORGANISATION OF A MUTUAL FUND c) HISTORY OF INDIAN MUTUAL FUND 10 d) CLASSIFICATION I OF MUTUAL FUND 13 e) TAX STRUCTURE OF MUTUAL FUND 20 f) ADVANTAGES OF MUTUAL FUND 21 6 7

2. MUTUAL FUND INVESTMENT STYLES 28 3. PERFORMANCE MEASURES OF MUTUAL FUND 30 4. EVALUATING FUNDS 34 5. SAVING AND OTHER INVESTMENT OPTIONS 48 6. INFLATION AND MUTUAL FUNDS 53 7. SURVEY FINDINGS AND RECOMMENDATIONS 56 a) INTERNAL ANALYSIS OF HDFC AMC 67 b) RECOMMENDATIONS 71 8. BIBLIOGRAPHY 74 9. QUESTIONNAIRE 75

COMPARATIVE ANALYSIS OF MUTUAL FUNDS WITH OTHER INVESTMENT PRODUCTS.

INTRODUCTION
A Mutual fund is a collective investment that allows many investors, with a common objective to pool individual investments and give to a professional manager who in turn would invest these monies in line with the common objective. Since the mutual; fund is a common pool of money into which investors place their contributions that are to be invested in with a stated objective. The ownership of the fund is thus mutual; the fund belongs to all investors. A single investors ownership in the fund is in the same proportion as the amount of the contribution made by him/her bears to the total amount of the fund . The mutual fund uses the money collected from investors to buy those assets which are specifically permitted by its stated investment objective. Thus, an equity fund would buy mainly equity assets-ordinary shares, preference shares; warrants etc. A bond fund would mainly buy debt instruments such as debentures, bonds; or government securities. It is these assets which are owned by the investors in the same proportion as their contribution bears to the total contributions of all investors put together. When an investor subscribes to a mutual fund, he or she buys a part of the assets or the pool of funds that are outstanding at that time. It is similar to buying shares of a joint stock company, in which case the investment makes the

investor a part owner of the company and its assets. A mutual fund allows investors to indirectly take a position in a basket of assets. Mutual fund investments are not risk free. The major risk involved is the market risk. When the market is down most of the equity funds will also experience a downturn. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being the professional management of funds, which result in effective risk reduction. In the USA a mutual fund is constituted as an investment company and an investor buys into the fund i.e. he buys the shares of the fund. In India the mutual fund is constituted as a Trust, where the investor gets unit shares. In any case, whether a share holder is a unit holder or a part owner of the funds assets is only a matter of legal distinction. The term unit holder includes the mutual fund account holder.

The Operational Flow Chart shown below demonstrates the flow of funds in case of mutual funds. Pool their money

Characteristics of Mutual Funds are as follows:

Investors own the mutual fund Invest in Passed back to Professional managers (Asset Management Company or AMC) manage the fund for a small fee.
Fee charged is specified by SEBI (Securities and Exchange Board of India) and is expressed as a percentage of assets managed.

The funds are invested in a portfolio of marketable securities in accordance with the investment objective. Value of the portfolio and the investors holdings, alters with change in the Generates market value of investments. Investments in securities are spread among a wide cross section of industries and sectors thus the risk is reduced. Diversification leads to risk reduction

because all stocks may not move in the same direction and in the same proportion at the same time. Investors in mutual funds are known as unit holders. The unit holders share the profits/losses in proportion with their respective investments. The mutual fund providing companies come out with a variety of schemes to achieve different investment objectives from time to time.

ORGANISATION OF A MUTUAL FUND

Sponsor

Trustee Company

Asset Management Company

Fiduciary responsibility to the Investors

Fund Management Broker s Market

Operations

Marketing Distribution

Registrar rr Bank

Custodian

Mutual funds diversify their risk by holding a portfolio many companies instead of only one asset. This is because holding all the investors money in one asset will result in absolute dependence of fortunes on that particular asset. On creating a portfolio with a variety of assets, this risk is substantially reduced. In India, a mutual fund must be registered with the SEBI which regulates securities markets before it can collect funds from the public. Today, if mutual funds are emerging as a favoured investment option it is due to its advantages over other investment options it seems to be capitalising on. India is a developing economy recording an approx. 8% GDP growth, an indicator of

the fact that the investor market is growing like never before. In the US 23% of the household financial assets are held in mutual funds and the country manages $11trillion of assets and 60% of the 500 US AMCs are independent advisors. Every day, the fund manager counts up the value of the funds holdings, figures out how many shares are purchased by shareholders, and then calculate the Net Asset Value (NAV) of the mutual fund, the price of a single share of the fund on that day. If the fund manager is doing a good job, the NAV figure increases-the investors shares will be worth more. But exactly how does a mutual funds NAV increase? There are a few of ways that a mutual fund can make money in its portfolio. A mutual fund can earn dividends from the stocks that it owns. Dividends are shares of corporate profits paid to the stockholders of public companies. The funds may have money in the bank that earns interest, or it might receive interest payments from the bonds that it owns. These are all sources of income for a fund. Mutual funds are required to hand out or distribute this income to shareholders. Usually, this is done twice a year, in a move that is called income distribution. At the end of the year, a fund makes another kind of distribution, this time from the profits made by selling stocks or bonds that have risen in price. These profits are known as capital gains and the act of passing them out is called capital gains distribution. Income from Mutual Funds Income earned on stocks and interest on bonds. A fund pays out nearly all the income it receives over the year to fund owners in the form of a distribution.

If a funds sells securities that have increases in price, the fund has a capital gain most funds also pass on these gains to investors in distribution.

If funds holdings rise in price but are not sold by the fund manager, the funds shares increase in price. Investors can sell their mutual fund shares for a profit. The mutual funds can be classified under 3 heads as follows :

Equity Funds Balanced Funds Debt Funds

Equity Fund Schemes : Equity schemes are those that invest predominantly in equity shares of companies. An equity scheme seeks to provide returns by way of capital appreciation. Balanced Fund Schemes : Balanced schemes invest both in equity shares and in income-bearing instruments. They aim to reduce the risks of investing in stocks by having a stake in both the equity and the debt markets. These schemes adopt some flexibility in changing the asset composition between equity and debt. The fund managers exploit market conditions to buy the best class of assets at each point in time. By mixing stocks and bonds (and sometimes other types of assets as well, like call money or commercial paper), a balanced scheme is likely to give a return somewhere in between those of stocks and bonds. Bonds add stability during market downturns and volatile periods, while stocks provide growth. Debt Fund Schemes : These schemes invest mainly in income-bearing instruments like bonds, debentures, government securities, commercial paper, etc. These instruments are much less volatile than equity schemes. Their volatility depends essentially on the health of the economy e.g., rupee depreciation, fiscal deficit, inflationary pressure. Performance of such schemes also depends on bond ratings. These schemes provide returns generally between 7 to 12% per annum.

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the government of India and the Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases. First Phase (1964-87): Unit trust of India was established in 1963 by an Act of Parliament by the Reserve Bank of India. In 1978 UTI was delinked from the RBI and the Industrial Development Bank of India (IDBI) took over its regulatory and administrative control. The first scheme launched by UTI was Unit Scheme 1964. By the end of 1988 UTI had Rs.6, 700 crores of assets under management. Second Phase-Entry of public sector funds (1987-93): 1987 marked the entry of non UTI, public sector mutual funds set up by public sector banks, Life Insurance Corporation of India (LIC) and the General Insurance Corporation of India (GIC).

SBI mutual fund was the first non UTI mutual fund established in June 1987 followed by Canbank Mutual Fund (December 87), Punjab National Bank (August 89), Indian Bank Mutual Fund (November 89), Bank of India (June 90), Bank of Baroda Mutual Fund (Oct 92), LIC establishes its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual funds industry had assets under management of Rs 47,004 crores.

Third Phase-Entry of Private Sector Funds (1993-2003): The entry of private sector funds in 1993 marked the beginning of a new era for the Indian mutual fund industry, giving the investors a wider choice of fund families. This was also the year in which First Mutual Fund Regulations came

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into being. Under this, all mutual funds except the UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private mutual fund company to be registered in July 1996. The 1993 SEBI (Mutual fund) Regulations were substituted by more comprehensive and revised mutual fund regulations in 1996. Today, the industry functions under the SEBI (Mutual Fund) Regulations, 1996.The number of mutual fund houses increased, with many foreign mutual funds setting up funds in India and the industry witnessed several mergers and acquisitions. As in January 2003, there were 33 mutual funds with total assets of Rs44, 541 crores. The Unit Trust of India with Rs. 44,541 crores of assets under management was way ahead of other mutual funds. Fourth phase (February 2003 onwards): In February 2003, following the repeal of the United Trust of India Act of 1963, UTI bifurcated into two separate families. One is the specified undertaking of the United Trust of India with the assets under management of Rs. 29,835 crores as the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The specified undertaking if the Unit Trust of India, functioning under the administrator and under the rulings of the Government of India does not come under the Mutual fund Regulations. The second is the UTI Mutual Fund Ltd., sponsored by SBI, PNB, DOB and LIC. With the bifurcation of the erstwhile UTI which had, in March 2000 more than Rs. 7,600 crores of assets under management and with the setting up of the UTI Mutual Fund, conforming to the SEBI Mutual Funds Regulations and with the recent mergers talking place in the private sector funds, the mutual fund industry had entered its current phase of growth. As at the end of (research for present day figures). Rs.323602.79 January 2006

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Classification of Mutual Funds

Money market funds

Aiming for protection, money market funds are considered the safest place to invest money in mutual funds. They do not provide much potential for income or growth. However, they do seek to generate a small amount of return by loaning money on a short-term basis, anywhere from one day to up to a year. These loans are considered low-risk because they are such short-term. On the other hand, they are also typically the class of fund that earns the least for investors. Money market funds charge low interest rates for the loans, thus earning you small amounts on your investment. Money market funds try to maintain a consistent share price of $1 by paying out all of the earnings to shareholders and by avoiding securities that can rise and fall in price (so there are no capital gains to distribute).

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You have a choice of varieties of money market funds:

Taxable: These are simply called "money market funds" if offered by a mutual fund company; or "money market accounts" if offered by a bank. Both make short-term loans, but those offered by a bank are FDIC insured. Those offered by mutual funds are insured by the private insurer, SIPC (Securities Investors Protection Corporation). Government: These funds only make loans to national governments or agencies of those governments. Earnings are free from federal taxation. Municipal: These funds only make loans to various state and local governments and their agencies. The income from these funds is free from federal taxation, and any portion of the income that comes from the state in which you live is also free from state taxation. You can also find money market funds that make loans only within a particular state, so you can find a money market fund for your own state and generally be free from all taxation.

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

Bond Funds Aiming for income, bond funds loan money to corporations and/or government agencies. So, in general, if you invest in a bond fund, you are loaning money in order to receive regular interest payments until the borrower has repaid the balance of the loan (or you've sold your shares). Bond funds, therefore, are typically for earning a somewhat predictable amount of income. In times of falling interest rates, however, a bond fund could increase in value, growing your money 13

through capital appreciation, as stock funds are meant to do. The opposite is also true; in times of rising interest rates, the bonds in your fund may lose value and cause you to lose money, even while you're earning income from interest.

Types of bond funds

Bond funds tend to be grouped according to the kinds of bonds in the fund. You can buy a fund that invests in:

Corporate bonds: a corporation is the borrower Government bonds: the national government or its agency is the borrower

Municipal bonds: a state or local government or its agency is the borrower Bond funds can also be grouped according to the average length of the life of the bonds (their "average maturity") in the fund:

Short-term bond funds: bonds typically maturing in less than five years Intermediate bond funds: bonds typically maturing in five to ten years Long-term bond funds: bonds typically maturing in ten to thirty years

Share prices, interest rates and yield Share prices of bond funds reflect the value of the fund's underlying bonds. If interest rates drop, the fund's share price (net asset value) will tend to rise because the bonds in the fund will appreciate in value. If rates rise, the share prices will usually fall. Yield is the percentage you're earning on your investment. It will differ depending on when you invest. For example, if the bond fund is earning $1 a share annually, and you paid $10 a share, you would have a yield of 10%. But if you waited until the NAV dropped and then paid $9 a share, you would have a yield of 11%. A fund's yield, or earnings, will differ from your total return. If the NAV drops, the loss in value of your investment will reduce your overall return (called total

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return). If you sell your fund shares while the NAV is down, you could actually lose money even if you have earned some income. Average maturity and credit rating

This is the average number of years until the bonds in the fund expire (mature). Generally, the longer the average maturity of a fund, the higher the fund's yield, because loans for longer periods tend to be made at higher interest rates. However, credit rating can also affect the price of a bond fund. Generally, the better the overall credit rating of the bonds held in the fund, the lower the fund's overall yield - but the higher the stability of the fund's NAV.

Stock Funds
Stock funds generally aim for growth, income or a combination of both. Stock funds are probably the most common of all mutual funds, even though they come in many shapes and sizes. A stock fund invests mainly in stocks and may focus on a particular type of stock or segment of the stock market, depending on its goal and strategy.

Types of stock funds The fund's strategy focuses on the types of securities the managers will target as potential investments. For example, it might be stocks of well-established companies, or stocks of small companies with high growth potential.

Aggressive growth. These are the start-up, or relatively new companies who have not yet established themselves in their product or service market. They may also be companies in high risk businesses, such as the Internet, biotechnology, and a number of other highly competitive and money-intensive industries. Growth. These are companies that have moved beyond the phase of uncertainty but still have a lot of room to grow. The more and faster they grow, the more stock price movement investors can expect to see.

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Value. These are well-established companies with histories of consistent earnings and growth, whose stock prices are viewed by the portfolio manager as being an attractive value. Industry and sector. Some industries will do well while others will do poorly. The companies in the software business are in the same industry; while others in the high tech hardware business are in a different industry. All of these companies, however, would be grouped into the high tech sector. Country or region. The economies of different countries act differently at different times. So there are mutual funds, for instance, that invest in specific countries or regions. If you hear the term, "emerging growth fund," it may be a fund that invests in countries that have small but growing economies.

OTHER FUNDS
Balanced funds

Balanced funds aim for the best of both stocks and bonds. These funds mix stocks and bonds to give you a mixture of growth potential and income potential, as well as a little more protection during periods of dropping prices. The stocks are typically meant to provide price appreciation potential, while the bonds are meant to provide income and a measure of price stability.

Balanced funds may either keep their ratio of stocks to bonds fairly constant or switch the ratio of stocks to bonds depending on market conditions. Because of the mix, balanced funds tend to offer a return on investment over the long-term somewhere between a growth stock fund and a traditional bond fund. Asset Allocation Funds

Asset allocation funds can invest in a mixture of stocks, bonds and cash equivalents. The ratio of each asset class is typically based on investor risk profiles, such as conservative, moderate and aggressive. Index funds

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Index funds are low-cost mutual funds that seek to mirror the performance of the broader markets they represent. Years of investment research show that mutual fund managers who try to buy and sell individual companies based on their own research have a hard time outperforming the broader markets over time. That's why index funds are so attractive. Lifestyle Funds

These funds aim to provide all the diversification that you need in a single fund. They have gained in popularity along with the growth in 401(k) plans. They are designed for consumers who dont have much time or knowledge to make investment decisions. They can go by a number of different names, such as retirement, target date (e.g., target date 2040), life-cycle or asset allocation funds. Some lifestyle funds are geared to a certain risk level. So, for example, there may be funds designed for conservative, moderate and aggressive investors. With these funds, it is up to the consumer to switch into a different fund if their goals change. With lifestyle funds that are designed for a specific age group or retirement target date, the asset mix shifts as time goes on. As the group ages or moves closer to retirement, the asset mix automatically becomes more conservative. Exchange traded funds (ETFs): An alternative

Exchange Traded Funds are baskets of stocks, somewhat like mutual funds, that are traded on the stock market. The fees may be even lower than mutual funds, and the tax consequences more favorable. But you pay a commission to buy them, just like when you buy stocks. So, if you want to invest on a regular basis, ETFs can get very expensive because you pay a commission every time you buy more shares. For example, if you automatically invest $100 out of your checking account each month into an ETF, you would pay a commission every month. So, for automatic investing, you would likely be better off investing in mutual funds. Open Ended funds V/s Closed Ended Funds:

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An open ended fund is one that has units available for sale and repurchase at all times. An investor can buy or redeem units from the fund itself based on the Net Asset Value (NAV) per share. The NAV per unit is obtained by dividing the amount of market value of the funds assets (adding accrued income and subtracting the funds liabilities) by the number of units outstanding. The number of units outstanding goes up/ down every time the fund purchases new/repurchases existing units. In other words, the unit capital of an open ended mutual fund is variable. The fund size and its total investment go up if more new subscriptions come in from new investors than redemptions by existing investors; the fund shrinks when redemptions of units exceed fresh subscriptions. In the case of a close ended fund, the unit capital is fixed, as it makes a one-time sale of a fixed number of units. Unlike open ended funds, closed ended funds do not allow investors to buy or redeem units directly from the fund. Investors are provided the much needed liquidity by many close ended funds getting listed in the Stock Exchange(s).Trading through a stock exchange enables investors to buy/sell units of a close ended mutual fund from each other, through a stock broker, in the same fashion as buying and selling stocks of a company. The funds units may be traded at a discount or premium to NAV based on the investors perception about the funds future performance and other market factors affecting the demand for a funds unit. Note, that the number of outstanding units of a close ended fund do not vary on account of trading in the funds units in a stock exchange. On the other hand, funds often do buy back of fund shares/units, thus offering another avenue of liquidity for close ended funds. In this case, the number the mutual fund actually reduces the number of units outstanding with investors. Load v/s No Load Funds: Marketing of a new mutual fund scheme involves initial expenses. These expenses may be recovered from the investors in different ways at different times. Three usual ways in which a funds sales expenses may be recovered from the investors are: 1. At the time of investors entry into the fund/scheme by deducting a specific amount from his initial contribution, or 2. By charging the fund/scheme with a fixed amount each year, during the stated number of years, or 3. At the time of the investors exit from the fund/scheme, by deducting a specified amount from the redemption proceeds payable to the investor.

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These charges are made by the fund managers to the investors to cover distribution/sales/marketing expenses are called loads. The load charged on the entry of the investor into the scheme is called a front end load or an entry load. This is the Case 1 above. The load amount charged to the scheme over a period of time is called a deferred load. This is the Case 2. The load that the investor pays at the time of his exit is called a back end or exit load. This is the Case 3. Some funds may also charge different amounts of loads to the investors, depending on the number of years the investor has stayed with the fund; the longer the time period for which the investor has stayed with the fund the lesser the exit load charged. This is called the contingent deferred sales charge. Note that the front end load amount is deducted from the initial contribution/purchase amount paid by the incoming investor, thus reducing his initial investment amount. Similarly exit loads would reduce the redemption proceeds paid out to the outgoing investor. If the sales charge is made on a deferred basis directly on the scheme, the amount of the load may not be apparent to the investor, as the schemes NAV would reflect the net amount after the deferred load. Funds that change front end, back end or deferred loads are called load funds. Funds that make no such charges or loads for sales expenses are called no load funds.

Tax Exempt V/s Non Tax Funds: When a fund invests in tax exempt securities, it is called a tax exempt fund. For example, in the US municipal bonds pay interest that is tax free, while interest on corporate and other bonds is taxable. In India, after the 1999 Union Government Budget, all of the dividend income received from any of the mutual funds is tax free in the hands of the investor. However, other than equity funds have to pay a distribution tax, before distributing income to investors. Equity mutual funds are tax exempt investment avenues. Tax rules for mutual fund investors as per Finance Bill 2008: Equity Oriented schemes.

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TAX STRUCTURE OF MUTUAL FUNDS

FOR EQUITY
Resident individual / HUF Partnership firms/AOP/BOI Domestic Companies NRIs Short Term Capital Gains Tax 200708 200809 Long Term Capital Gains Tax 2007-08 2008-09 Dividend Income 2007- 08 200809

Dividend Distribution tax 2007-0 8 2008- 09

TDS
2007- 08 2008- 09

10% !0% 10% 10%

!5% 15% 15% 15%

Nil Nil Nil Nil

Nil Nil Nil Nil

Tax free Tax free Tax free Tax free

Tax free Tax free Tax free Tax free

Dividend Distribution taxOther than liquid/money market Schemes 2007-08 2008- 09 14.025% 14.1% 22.44% 22.44% 14.025% 22.6% 22.6% 14.2%

Nil Nil Nil Nil

Nil Nil Nil Nil

Nil Nil Nil

Nil Nil Nil

STCG-10% LTCG Nil

FOR DEBT

Short Term Capital Gains Tax 200708 As per slab As per slab As per slab As per slab 200809 As per slab As per slab As per slab As per slab

Long Term Capital Gains Tax 2007-08 10% (20% indexation) 10% ( 20% indexation) 10% ( 20% indexation) 10% ( 20% indexation) 2007-08 10% ( 20% indexation) 10% ( 20% indexation) 10% ( 20% indexation) 10% ( 20% indexation)

Dividend Income 200809 Tax Free Tax Free Tax Free Tax Free 200809 Tax Free Tax Free Tax Free Tax Free

Dividend Distribution taxLiquidity/Money Market Schemes 2007-0 8 14.025% 22.4% 28.3% 14.025% 2008- 09 28.3% 28.3% 28.3% 28.3%

TDS
200708 200809

Resident individual / HUF Partnership firms/AOP/BOI Domestic Companies NRIs

Nil Nil Nil

Nil Nil Nil

STCG-30% LTCG-20%

ADVANTAGES OF MUTUAL FUNDS:

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Mutual Funds: A Packaged Product

Professional Management
Diversification

Liquidity

Convenience

Tax Benefits

Mutual funds offer a number of advantages, including diversification, professional management, cost efficiency and liquidity.

Diversification. A mutual fund spreads your investment dollars around better than you could do by yourself. This diversification tends to lower the risk of losing money. Diversification usually results in lower volatility, because when some investments are doing poorly, others may be doing well. Professional management. Many people don't have the time or expertise to make investment decisions. A mutual fund's investment managers, however, are trained to search out the best possible returns, consistent with the fund's strategies and goals. In essence, your mutual fund investment brings you the services of a professional money manager. Cost efficiency. Putting your money together with other investors creates collective buying power that may help you achieve more than you could on your own. As a group, mutual fund investors can buy a large variety and number of specific investments. They can also afford to pay for

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professional money managers and fund operating expenses, where they wouldn't be able to afford it on their own.

Liquidity. With most funds, you can easily sell your fund shares for cash. Some mutual fund shares are traded only once a day at a fixed price, while stocks and bonds can be bought or sold any time the markets are open at whatever price is then available. Convenient Administration Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. Return Potential Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. Transparency You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. Flexibility Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. Affordability Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.

Funds typically give you two ways in which to invest:

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Lump sum. You can invest any amount you want at one time, as long as you meet the minimum requirements of that fund. Some funds have no minimum for opening an account or no minimum for additional share purchases, while others do. Automatic investment. Most funds offer plans that allow you to transfer set amounts on a regular basis automatically from your bank account or paycheck. This is a great way to save money on a routine basis. With automatic investing, you get the benefits of dollar cost averaging. That is, when you make regular investments in a mutual fund, such as investing $100 every month, you can take advantage of both the ups and downs of the market. When the market is down, your monthly investment typically buys you more shares of the fund, helping to increase your ownership in the fund. When the market is up, your monthly investment typically buys you fewer shares of the fund, helping you avoid buying too many shares at higher prices. Over a long period of time, the end result is that the average cost of your fund shares is lower than the average price of the fund shares during the same period.

Exchanging and selling shares

Many funds allow you to make free exchanges of your shares for shares of another fund owned by the same fund company. Typically, there is a limit to the number of free exchanges you can make. Be aware that even though an exchange may be free, there may be tax consequences associated with it. To sell shares, you either call the fund directly if you have a no-load fund, or have your broker or bank officer do it if you have a load fund. Typically, you are given the option to have the proceeds deposited into your account or sent directly to you by check or wire. Some funds will charge you a fee if you don't keep the fund shares for a minimum amount of time (e.g., 90 or 180 days).

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Share price

The value of a mutual fund share is calculated based on the value of the assets owned by the fund at the end of every trading day. Here is how it works:

The fund calculates the value: A share's value is called the Net Asset Value (NAV). The fund calculates the NAV by adding up the total value of all of the securities it owns, subtracting the expenses of the fund, and then dividing by the number of shares owned by shareholders like you. Value changes daily: Since the value of the stocks or bonds owned by the fund can change daily, the value of the fund can also change daily. Therefore, a fund is required by law to adjust its price once every trading day to provide investors with the most current NAV. How many shares you own: To see the value of your investment, you take the value of one share and multiply it by the number of shares you have in the fund. Or, if you are considering investing say $1,000 in the fund, you would divide that money by the value of one share to see how many shares that $1,000 would give you. While you cannot buy a fraction of a share of stock, you can own a fraction of a mutual fund share, if the amount you invest does not divide evenly by the NAV.

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

Appreciation: The value of a fund share can appreciate or go up in value. (Of course, it can also go down in value.) When the total value of the securities owned by the fund rises, the value of your fund shares rises with it. Again, the reverse is also true. Dividends: If the fund receives dividends from stocks, interest from bonds, or other investment income, it distributes those earnings to shareholders as a dividend according to the terms outlined in its prospectus. Depending on the fund, these distributions can be monthly, quarterly, or annually. Capital gain distributions: Every time the fund manager sells securities at a profit, the fund earns capital gains. Funds are required to distribute these gains to the shareholders at regular intervals, typically once or twice

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a year. You can choose to have the fund automatically reinvest the money in more fund shares, keep it as cash in your account, or send the money to you.

Choosing a Mutual Fund

Choosing the right fundsand trusting your decisions enough to back them with your moneyis challenging. To keep from getting overwhelmed, be sure you understand what you want for your money (protection, income, growth), then look only at the funds that aim for the same thing. But where can you look for information? Look at the fund prospectus The prospectus is essentially the user's manual for a mutual fund. It has the reputation of being dense and complicated to read, but recent changes in regulations have required funds to make every prospectus much simpler, especially in the key areas of understanding performance and expenses. Simply looking at the charts and tables in the first few pages will tell you a lot you need to know. What's in a prospectus? The SEC requires every fund to publish a prospectus and update it annually. It covers all of the important elements, such as the history, management, financial condition, performance, expenses, goals, strategies, types of allowable investments, and policies.

Performance. Each fund must tell you how much it has increased or decreased in value in each of the past 10 years (or for every year of its existence, if shorter). This is labeled in the prospectus as "performance" or

as "annual total return." Fund performance is required to be shown against a relevant industry benchmark, a performance measure used by the industry of how the market segment has performed as a whole compared to the investments in that segment held by the fund. Typically, the benchmark will be an "index" for that category.

Average annual return. While every fund has to show its annual performance, every fund also must to tell you its average return on a yearly basis. Average annual return is important because it keeps funds

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from promoting their best years and ignoring their worst years. It takes the total returns for each year and averages them across the number of years the fund has been in existence.

Fees and expenses. The prospectus will tell you if a fund charges a sales charge or is a "no-load" fund, meaning that there is no up-front sales charge. All funds charge management fees and expenses, which will be described in the prospectus.

Risks Because mutual funds typically hold a large number of securities, their level of diversification provides them with a lower level of risk than investing in a single stock or bond. However, investing in mutual funds still contains a number of risks that you should consider before investing, including:

You could lose money Your money may lose buying power You may not achieve your goal Your investment may rise and fall in value

Other risks You could lose money Every mutual fund prospectus will highlight this point. It's the most obvious and feared risk of investing. There are, however, many strategies for managing this risk, particularly over the long term. Your money may lose buying power This risk is also known as inflation risk: as prices increase, your investments must increase in value at least at the same pace, or you'll lose purchasing power. You may not achieve your goal Probably the biggest, yet most overlooked risk of investing, is the risk of not achieving your goal. It's probably overlooked so often because so few investors actually set goals, and many others set unrealistic goals. Furthermore, many investors don't buy the right investments to help them achieve their goals. This type of risk is often called shortfall risk (falling short of your goal). For example, if

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you are investing to pay for a future college education, a money market fund might feel safe. But it's highly unlikely that you'll reach your goal Your investment may rise and fall in value Almost all investments have the potential to gain and lose value. This is known as market risk. In other words, the price of any investment, whether it's stocks, bonds, mutual funds, or any other, is likely to rise and fall over time. Seasoned investors tend to ignore the relatively small price movements in their investments, preferring to try and capture the more significant fluctuations they can better anticipate. If you invest for longer periods of time, market risk may become less dangerous to you. That's because, over the long-term, most investments tend to rise in price. Market risk, however, can place investors at a significant disadvantage if they are forced to sell at a time when prices happen to be down. Foreign exchange or currency risk If you invest overseas, the exchange rate between your home currency and the foreign currency adds an extra layer of risk to your investment. The stock or bond you buy may go up, but the exchange rate may go down so far that it wipes out your gain. The halo effect When something wonderful happens to one stock in an industry, many of the others in that industry may also enjoy a rise. This is known as the Halo Effect. But it also occurs in reverse, taking value out of perfectly good investments just because they are linked in the minds of investors to another investment that is experiencing a problem.

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Mutual Fund Investment Styles

The growth in the number of mutual funds is due, in part, to the variety of investment styles employed by money managers. Studies have shown that investment style can play an important role in fund returns; as a result, there is considerable debate within the investment community about the effectiveness of the various styles. The following is an overview of the dominant styles employed by todays money managers. Active vs. Passive Active investors believe in their ability to outperform the overall market by picking stocks they believe may perform well. Passive investors, on the other hand, feel that simply investing in a market index fund may produce potentially higher longterm results. The majority of mutual funds underperform market indexes.* Passive investors believe this is due to market efficiency. In other words, all information available about a company is reflected in that companys current stock price, and its impossible to forecast and profit on future stock prices. Rather than trying to second-guess the market, passive investors can buy the entire market via index funds. Growth vs. Value Active investors can be divided into growth and value seekers. Proponents of growth seek companies they expect (on average) to increase earnings by 15% to 25%. Of course, there is no assurance that this objective will be obtained. Stocks in these companies tend to have high price to earnings ratios (P/E) since investors pay a premium for higher returns. They usually pay little or no dividends. The result is that growth stocks tend to be more volatile, and therefore more risky. Value investors look for bargains cheap stocks that are often out of favor, such as cyclical stocks that are at the low end of their business cycle. A value investor is primarily attracted by asset-oriented stocks with low prices compared to underlying book, replacement, or liquidation values. Value stocks also tend to have lower P/E ratios and potentially higher dividend yields. These potentially higher yields tend to cushion value stocks in down markets while certain cyclical stocks will lead the market following a recession. Small Cap vs. Large Cap

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Some investors use the size of a company as the basis for investing. Studies of stock returns going back to 1925 have suggested that "smaller is better." On average, the highest returns have come from stocks with the lowest market capitalization (common shares outstanding times share price). But since these returns tend to run in cycles, there have been long periods when large-cap stocks have outperformed smaller stocks. Small-cap stocks also have higher price volatility, which translates into higher risk. Some investors choose the middle ground and invest in mid-cap stocks with market capitalizations between $500 million and $8 billion seeking a tradeoff between volatility and return. In so doing, they give up the potential return of small-cap stocks. Bottom-Up vs. Top-Down A top-down investor looks first at economic factors and then selects industries accordingly. For example, during periods of low inflation, consumer spending increases, which might be a good time to buy automobile stocks or retail stocks. The top-down investor would then search for the best values in these industries. A bottom-up investor is more concerned with individual companies fundamentals. They reason that even if its industry is doing poorly, a strong company will still outperform the market. Both of these styles emphasize fundamentals, but place different emphasis on the economic environment. Technical vs. Fundamental Analysis Another difference is that some equity investors look at the fundamentals of individual stocks, while others invest based on technical analysis. Fundamentalists, who represent the majority, spend time poring over annual reports and visiting companies attempting to uncover investment opportunities and seek greater return potential over the long run. Technical analysts pore over charts of stock prices and economic data in an attempt to divine patterns that could be indicative of future trends, and are more concerned with short-term market timing than individual stock picking. Although technical analysts fell out of favor as studies questioned their forecasting powers, increased access to information and the growing power of computers have led to a resurgent interest.

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Performance Measures of Mutual Funds

Mutual Fund industry today, with about 34 players and more than five hundred schemes, is one of the most preferred investment avenues in India. However, with a plethora of schemes to choose from, the retail investor faces problems in selecting funds. Factors such as investment strategy and management style are qualitative, but the funds record is an important indicator too. Though past performance alone can not be indicative of future performance, it is, frankly, the only quantitative way to judge how good a fund is at present. Therefore, there is a need to correctly assess the past performance of different mutual funds. Worldwide, good mutual fund companies over are known by their AMCs and this fame is directly linked to their superior stock selection skills. For mutual funds to grow, AMCs must be held accountable for their selection of stocks. In other words, there must be some performance indicator that will reveal the quality of stock selection of various AMCs. Return alone should not be considered as the basis of measurement of the performance of a mutual fund scheme, it should also include the risk taken by the fund manager because different funds will have different levels of risk attached to them. Risk associated with a fund, in a general, can be defined as variability or fluctuations in the returns generated by it. The higher the fluctuations in the returns of a fund during a given period, higher will be the risk associated with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces. First, general market fluctuations, which affect all the securities present in the market, called market risk or systematic risk and second, fluctuations due to specific securities present in the portfolio of the fund, called unsystematic risk. The Total Risk of a given fund is sum of these two and is measured in terms of standard deviation of returns of the fund. Systematic risk, on the other hand, is measured in terms of Beta, which represents fluctuations in the NAV of the fund vis--vis market. The more responsive the NAV of a mutual fund is to the changes in the market; higher will be its beta. Beta is calculated by relating the returns on a mutual fund with the returns in the market. While unsystematic risk can be diversified through investments in a number of instruments, systematic risk can not. By using the risk return relationship, we try to assess the competitive strength of the mutual funds vis--vis one another in a better way.

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In order to determine the risk-adjusted returns of investment portfolios, several eminent authors have worked since 1960s to develop composite performance indices to evaluate a portfolio by comparing alternative portfolios within a particular risk class. The most important and widely used measures of performance are: The Treynor Measure The Sharpe Measure Jenson Model Coefficient of Variation The Treynor Measure Developed by Jack Treynor, this performance measure evaluates funds on 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. The Sharpe Measure In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be written as: Sharpe Index (Si) = (Ri - Rf)/Si

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

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 welldiversified 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 fund 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:

Er = Rf + Bi (Rm - Rf)
Where, Rm is average market return during the given period. After calculating it, alpha can be obtained by subtracting required return from the actual return of the fund. 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 can not mitigate unsystematic risk, as his knowledge of market is primitive. Among the above performance measures, two models namely, Treynor measure and Jenson model use systematic risk based on the premise that the

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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 considers the entire risk associated with fund are suitable for small investors, as the ordinary investor lacks the necessary skill and resources to diversified. 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. Coefficient of Variation Coefficient of Variation is the measure of dispersion which gives us a feel about dispersion, ie. total risk associated with the fund, relative to its mean return. It is expresses as standard deviation of the fund as a percentage of the mean return. It can be calculated as Coefficient of Variation = (Si/ Ri) * 100 Where Si stands for standard deviation of the fund & Ri stands for mean return of the fund. A lower coefficient of variation describes a better total risk adjusted performance of the fund & vice versa.

Evaluating funds on basis of Risk and Return

Under my Dissertation study I have decided to evaluate open ended equity diversified fund schemes of H.D.F.C Mutual Fund. I have selected the top five equity diversified schemes of H.D.F.C Mutual Fund on the basis of the past 12 months performance. Now, for evaluating these schemes, the performance measures I have selected are as under: % Return over 12 month period Treynors Measure Sharpes Measure Jenson Model Coefficient of Variation 33

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

For the evaluation of the funds, the following parameters are considered: Risk free rate has been taken as the 91 day T Bill rate as on March, 2008 = 5% Benchmark Market return over 12 month period.

1. H.D.F.C GROWTH FUND

Objective: To generate long term capital appreciation from a portfolio that is invested predominantly in equity and equity related instruments. Investment Information Type of Scheme Nature of Scheme Launch Face Value(Rs./unit) Fund size(Rs. In lakhs) Plans Returns and Risk Aggregates Annual Returns (Ri)
34

Open Ended Equity 11-09-2000 10 87867.92 march 31, 2008 Growth

36.48 %

Beta (Bi) Standard Deviation (Si) Benchmark Market Return (Rm) Risk Free Rate (Rf) PERFORMANCE ANALYSIS : - 12 month return = 36.48% = 0.3648 - Treynors Ratio = (Ti) = (Ri - Rf)/Bi

0.9230 7.20% 19.56% 5%

= (0.3648 0.05)/ 0.9230 = 0.3410

- Sharpes Ratio = (Si) = (Ri - Rf)/Si =(0.3648 0.05)/ 0.072 = 4.37 - Jensons Model = Ri (Er) Er = Rf + Bi (Rm - Rf) Er= 0.05 + 0.9230(0.1956-0.05) = 0.1844 Alpha = 0.3648 0.1844 = 0.1804 - Coefficient of Variation = (Si/ Ri) * 100 = (0.072/ 0.3648) * 100 = 19.74 %

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2. H.D.F.C EQUITY FUND

Objective: To achieve capital appreciation. Investment Information Type of Scheme Nature of Scheme Launch Face Value(Rs./unit) Fund size(Rs. In lakhs) Plans Returns and Risk Aggregates Annual Returns (Ri) Beta (Bi) Standard Deviation (Si) Benchmark Market Return (Rm) Risk Free Rate (Rf) PERFORMANCE ANALYSIS : - 12 month return = 16.16% = 0.1616 16.16% 0.8890 7.30% 21.51% 5% Open Ended Equity 01-01-1995 10 394439.11 march 31, 2008 Growth

36

- Treynors Ratio = (Ti) = (Ri - Rf)/Bi = (0.1616 0.05)/ 0.8890 = 0.1255

- Sharpes Ratio = (Si) = (Ri - Rf)/Si =(0.1616 0.05)/ 0.073 = 1.53 - Jensons Model = Ri (Er) Er = Rf + Bi (Rm - Rf) Er= 0.05 + 0.8890(0.2151-0.05) = 0.1968 Alpha = 0.1616 0.1968 = 0.0352 - Coefficient of Variation = (Si/ Ri) * 100 = (0.073/ 0.1616) * 100 = 45.17 %

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

Objective : To generate long term capital appreciation from a portfolio of equity and equity linked instruments primarily drawn from companies in BSE 200 index. Investment Information Type of Scheme Nature of Scheme Launch Face Value(Rs./unit) Fund size(Rs. In lakhs) Plans Returns and Risk Aggregates Annual Returns (Ri) Beta (Bi) Standard Deviation (Si) Benchmark Market Return (Rm) Risk Free Rate (Rf) PERFORMANCE ANALYSIS : 25.72% 0.8730 7.00% 23.99% 5% Open Ended Equity 11-10-1996 10 210243.97 march 31, 2008 Growth

38

- 12 month return = 25.72% = 0.2572 - Treynors Ratio = (Ti) = (Ri - Rf)/Bi = (0.2572 0.05)/ 0.8730 = 0.2373

- Sharpes Ratio = (Si) = (Ri - Rf)/Si =(0.2572 0.05)/ 0.07 = 2.96

- Jensons Model = Ri (Er) Er = Rf + Bi (Rm - Rf) Er= 0.05 + 0.8730(0.2399-0.05) = 0.2157 Alpha = 0.2572 0.2156 = 0.0416

- Coefficient of Variation = (Si/ Ri) * 100 = (0.07/ 0.2572) * 100 = 27.21 %

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

Objective: To achieve capital appreciation in the long term. Investment Information Type of Scheme Nature of Scheme Launch Face Value(Rs./unit) Fund size(Rs. In lakhs) Plans Open Ended Equity 01-02-1994 10 64571.81 march 31, 2008 Growth

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

40

- 12 month return = 25.82% = 0.2582 - Treynors Ratio = (Ti) = (Ri - Rf)/Bi = (0.2582 0.05)/ 0.9470 = 0.2199

- Sharpes Ratio = (Si) = (Ri - Rf)/Si =(0.2582 0.05)/ 0.081= 2.57 - Jensons Model = Ri (Er) Er = Rf + Bi (Rm - Rf) Er= 0.05 + 0.9470(0.2151-0.05) = 0.2063 Alpha = 0.2582 0.2063 = 0.0519 - Coefficient of Variation = (Si/ Ri) * 100 = (0.081/ 0.2582)*100 =31.37%S

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

Objective: To generate capital appreciation through equity investment in companies whose shares are quoting at prices below their true value. Investment Information Type of Scheme Nature of Scheme Launch Face Value(Rs./unit) Fund size(Rs. In lakhs) Plans Returns and Risk Aggregates Annual Returns (Ri) Beta (Bi) Standard Deviation (Si) Benchmark Market Return (Rm) Risk Free Rate (Rf) 14.26% 0.9430 8.00% 23.99 5% Open Ended Equity 17-09-2004 10 42974.98 march 31 2008 Growth

42

PERFORMANCE ANALYSIS: - 12 month return = 14.26 = 0.1426 - Treynors Ratio = (Ti) = (Ri - Rf)/Bi = (0.1426 0.05)/ 0.9430 = 0.0981

- Sharpes Ratio = (Si) = (Ri - Rf)/Si =(0.1426 0.05)/ 0.08= 1.16 - Jensons Model = Ri (Er) Er = Rf + Bi (Rm - Rf) Er= 0.05 + 0.9430(0.2399-0.05) = 0.2290 Alpha = 0.1426 0.2290 = 0.0864

- Coefficient of Variation = (Si/ Ri) * 100 = (0.08/ 0.1426)*100 =56.10%

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RANKING OF FUNDS BASED ON 12 MONTHS RETURN AS ON 31st MARCH, 2008

RANK 1. 2. 3. 4. 5.

NAME OF FUND H.D.F.C GROWTH FUND H.D.F.C CAPITAL BUILDER FUND H.D.F.C TOP 200 FUND H.D.F.C EQUITY FUND H.D.F.C CORE & SATELLITE FUND

12 MONTH RETURN % 36.48% 25.82% 25.72% 16.16% 14.26%

RANKING OF FUNDS BASED ON TREYNORS RATIO

RANK

NAME OF FUND

TREYNORS RATIO

44

1. 2. 3. 4. 5.

H.D.F.C GROWTH FUND H.D.F.C TOP 200 FUND H.D.F.C CAPITAL BUILDER FUND H.D.F.C EQUITY FUND H.D.F.C CORE & SATELLITE FUND

.3410 .2373 .2199 .1255 .0981

RANKING OF FUNDS BASED ON SHARPES RATIO

RANK 1. 2. 3. 4. 5.

NAME OF FUND H.D.F.C GROWTH FUND H.D.F.C TOP 200 FUND H.D.F.C CAPITAL BUILDER FUND H.D.F.C EQUITY FUND H.D.F.C CORE & SATELLITE FUND

SHARPES RATIO 4.37 2.96 2.57 1.53 1.16

RANKING OF FUNDS BASED ON JENSONS MODEL - ALPHA RANK NAME OF FUND ALPHA

45

1. 2. 3. 4. 5.

H.D.F.C GROWTH FUND H.D.F.C CORE & SATELLITE FUND H.D.F.C CAPITAL BUILDER FUND H.D.F.C TOP 200 FUND H.D.F.C EQUITY FUND

.1804 .0864 .0519 .0416 .0352

RANKING OF FUNDS BASED ON COEFFICIENT OF VARIATION RANK 1. 2. 3. 4. 5. NAME OF FUND H.D.F.C CORE & SATELLITE FUND H.D.F.C EQUITY FUND H.D.F.C CAPITAL BUILDER FUND H.D.F.C TOP 200 FUND H.D.F.C GROWTH FUND COEFFICIENT OF VARIATION % 56.10% 45.17% 31.37% 27.21% 19.74%

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Saving and other Investment Options: In India

There are many savings and investment options available in India. Although all these are not provided necessarily provided in an organised fashion, they can, nonetheless, be made available. . Bank Fixed Deposits (FD) Fixed Deposit or FD is the most preferred investment option today. It yields up to 8.5% annual return depends on the Bank and period. Minimum period is 15 days and maximum is 5 years and above. Senior citizens get special interest rates for Fixed Deposits. This is considered to be a safe investment because all banks operated under the guidelines of Reserve Bank of India. National Saving Certificate (NSC) NSC is backed by Govt. of India so it is a safe investment method. Lock in period is 6 years. Minimum amount is Rs100 and no upper limit. You get 8% interest calculated twice a year. NSC comes under Section 80C so you will get an income tax deduction up to Rs 1, 00,000. From FY 2005-'06 onwards interest accrued on NSC is taxable. Public Provident Fund (PPF) PPF is another form of investment backed by Govt. of India. Minimum amount is Rs500 and maximum is Rs70,000 in a financial year. A PPF account can be opened in a head post office, GPO and selected branches of nationalized banks. PPF also comes under Section 80C so individuals could avail income tax deduction up to Rs 1, 00,000. Lock in period for PPF is 15 years and interest rate is 8%. Unlike NSC, PPF interest rate is calculated annually. Both PPF and NSC considered to be best investment option as it is backed by Government of India. Stock Market Investing in share market is another investment option to get more returns. But share market investment is volatile to market conditions. Before investing you should have a thorough knowledge about its operation. Direct investment in the stock market is generally a high risk high returns ventures because market trends are affected factors that vary from weather change to political change to a change in the economic climate of another trading economy at any point in time. Fund diversification and management is far more efficient and has lesser risk under skilled fund managers.

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Gold Gold is a unique risk-return matrix, a safe-haven asset, an efficient diversifier against inflation against falls in the equity market and badly performing fixed securities. In India, gold is highly liquid. It is a reserve asset a defense against domestic currency fluctuations, providing the means to tackle a debt crisis, preserving confidence in the economy, and providing a private investment portfolio, which among the Indian public is now estimated at 10,000 to 15,000 tones. Finally, gold can act as a stabilizing factor to manage Indias external crises. It is crucial for those living in rural and semi-urban parts of India to have access to gold as an investment option since a majority of people living in these areas lack complete knowledge of the financial markets. Studies conducted by SEBI (Security Exchange Board of India) reveal that gold, either in primary or in jewellery form, still remains the second most preferred option among the Indian public after deposits in the banks. Gold is chiefly held for its safety and liquidity though very little gold is purchased for investment purposes. This is mainly due to its liquidity and the fact that there are not many players involved in either the sales or purchases of gold as an investment product. Although India is still the among largest consumer of physical gold, there is no benchmark price at any given point of time or on any given date. For instance, we would not know exactly how much 100gms of gold, 12gms of gold or 10gms of gold would cost in Delhi, or how much it would be worth if one wanted to sell the same amount of gold in Mumbai or in Agra or in Jaipur. Therefore, a benchmark price needs to be established.

A Comparison of mutual fund with other Investment options:

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Investment in Real estate

In general, property is considered a fairly low-risk investment, and can be less volatile than shares (although, this is not always the case). Some of the advantages of investing in property include:

Tax benefits a number of deductions can be claimed on your tax return, such as interest paid on the loan, repairs and maintenance, rates and taxes, insurance, agent's fees, travel to and from the property to facilitate repairs, and buildings depreciation. Negative gearing tax deductions can also be claimed as a result of negative gearing, where the costs of keeping the investment property exceed the income gained from it. Long-term investment many people like the idea of an investment that can fund them in their retirement. Rental housing is one sector that rarely decreases in price, making it a good potential option for long-term investments . Positive asset base there are many benefits from having an investment property when deciding to take out another loan or invest in something else. Showing your potential lender that you have the ability to maintain a loan without defaulting will be highly regarded. The property can also be useful as security when taking out another home, car or personal loan. Safety aspect Low-risk investments are always popular with untrained "mum and dad" investors. Property fits this criteria with returns in some country areas reaching 10% per year. Housing in metropolitan areas is constantly in demand with the high purchase price being offset by substantial rental income and a yearly return of between 6% and 9%. High leverage possibilities investment properties can be purchased at 80% LVR (loan to valuation ratio), or up to 90% LVR with mortgage insurance. The LVR is calculated by taking the amount of the loan and dividing it by the value of the property, as determined by the lender. This high leverage capacity results in a higher return for the investor at a lower risk due to having less personal finances ties up in the property (80% of the purchase price was provided by the mortgagee).

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Disadvantages of Investment in Real estate: Liquidity This can take many months unless you're willing to accept a price less than the property is worth. Unlike the stock market, you will have to wait for any financial rewards. Vacancies Mortgage payments need to be covered from the investors pocket due to the property being untenanted. This could just be a result of a gap between tenants or because of maintenance issues. Bad tenants Tenants significantly damage your property, refuse to pay rent and refuse to leave. Disputes can sometimes take months to resolve. Property oversupply Inner-city builders have created a glut of high-rise apartment blocks, resulting in fierce competition and many units being increasingly difficult to rent out. Ongoing costs In addition to the standard costs associated with a property, ongoing maintenance costs, especially with an older building, can be substantial. Capital Gains Tax Imposed by the Federal Government on the appreciation of investments and payable on disposal. Other costs Negative gearing may offer tax deductions each financial year, however ongoing payments to cover the shortfall need to be budgeted for every month. Also, costs involved in purchasing and disposing of the property can be substantial. ON COMPARISION of the advantages & disadvantages of investment in real estate and investment in mutual funds, it is clear that mutual funds offer a safer, legal & hassle free investment option. Mutual funds are not only managed by professional fund managers with minimal fees but they are also diversified. This reduces the risk involved to a large degree. Mutual fund transactions in AMCs like the HDFC Mutual Funds are transparent and there are no hidden costs that the investors are unaware of. Also, another major advantage that the mutual fund investments have over real estate investment is that in case of the latter the money loses liquidity. In case of mutual funds whether it be open & close ended the exit window option is always available to the investor.

Investment in Gold
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Types of Gold The investor can invest in physical gold or through paper documents like shares and certificates. Some of the popular modes of investing gold are gold coin investing, gold stock investing, online gold investing, and gold bullion investing. Before you decide to invest in the metal you must decide which form suits you in terms of convenience convertibility and preference. Some of the popular forms of investment are as follows Raw Gold This is the most common form of gold. However it is not regarded to be safe and maintenance becomes difficult. This is generally stored in commercial bank lockers. Jewellery This form of investment is also equally famous. The advantage of raw gold and jewellery is that they facilitate liquidity in no time. However, maintenance of jewellery and gold is high. Gold Coin This form of investment is advantageous when compared with the earlier two forms because it is easily portable. However there are lots of gold coins specific to national boundaries and the investor must have a clear idea of their values before trading. Gold coins are very liquid. Investment in gold has its own limitations for example, many investors blindly take decisions on the basis of the ups and downs in the stock markets and this creates havoc especially when the gold market is demonstrating a different behaviour. Gold investment is very important as it contributes to the national and international economy. These investments are also very high on maintenance.

Fixed Deposits:
With FDs one deposits a lump sum of money for a fixed period ranging from a few weeks to a few years and earns a pre-determined rate of interest. FDs are offered by both banks and companies though putting your money with the latter is generally considered riskier.

Advantages and disadvantages of Fixed Deposits:

51

The main advantage is that FDs from reputed banks are a very safe investment because such banks are carefully regulated by the Reserve Bank of India. An advantage of FDs is that you have the option of receiving regular income through the interest payments that are made every month or quarter. This option is especially useful for retirees. On the other hand, a fixed deposit will not give an investor the same returns that he may get in the stock markets. For instance a stock-portfolio may rise 20-30 per cent in a good year whereas a fixed deposit typically earns only 7-10 per cent. Mutual funds and stocks can offer higher returns but the main issue is whether there are low risk investment products which offer a better return than FDs. Many financial experts believe that fixed maturity plans (FMP) offer exactly such a superior alternative. Fixed Maturity Plans are similar to FDs in that they have a pre-determined tenure (say 3 years like the maturity of an FD) ranging from a few weeks to a few years. The investors money is invested in fixed-income assets like governments bonds and money-market instruments which carry a low risk. The main advantage of FMP's is that you can take into account inflation while calculating your taxes which means that your after-tax return may be superior to FDs, especially if you lie in the top income tax bracket.

Investment options and Inflation; Mutual Funds Beat Inflation

Inflation is a persistent increase in price within an economy. It denotes an increased money supply in the economy along with a fall in the value of money. Inflation and its effect on the value of money affects the investments to a major degree. The nominal interest rate is the growth rate of your money, while the real interest rate is the growth of your purchasing power. In other words, the real rate of interest is the nominal rate reduced by the rate of inflation. Fixed deposits do not offer protection against inflation. If inflation rises steeply during the maturity of the Fixed Deposit then the inflation adjusted return will fall. Say, for example, the inflation when the money was deposited was at a fixed return of 8 per cent per annum is 3 per cent. Now when the FD matures say after 2 years, the inflation increases to 5 per cent. In this case, the inflation adjusted returns is only 3 per cent (8-5). Had inflation remained at 3 per cent by the time your deposit matured, the real rate of return would be 5 per cent (8-3). 52

On the 10th of May 2008, Prabhakar Sinha, TNN reported in the article titled Thanks to inflation, you are losing money on FDs reported Inflation is no longer just eating into your pocket by way of higher grocery bills. It's also eroding the money you've safely put away in a fixed deposit in your bank or post office. That's because at 7.61%, it is more than enough to offset your interest earnings, giving you negative real returns. Most banks offer interest in the range of 8% to 8.75% on fixed deposits of tenures ranging from one year to 10 years. The country's largest bank, SBI, for instance, offers 8.5% on deposits of two years or more, while for shorter duration deposits, it gives 8.75 %. That may seem like it still gives you some positive real return after accounting for inflation, but that's an illusion for most. This is because the interest income is taxable, even if your deposit is covered by Section 80C of the Income Tax Act. Real estate and gold, which typically appreciate fast in inflationary periods, are possible options that are relatively risk-free. Equity could be another option. When it comes to inflation, it is an especially important issue for people living on a fixed income. The impact of inflation on an investors portfolio depends on the type of securities you hold. If the investment is only in stocks, the investor has an advantage. Over the long run, a companys revenue and earnings should increase at the same pace as inflation with the exception of stagflation. The company is in the same situation as a normal consumer - the more cash it carries, the more its purchasing power decreases with increases in inflation. The main problem with stocks and inflation is that a companys returns tend to be WPI* Value of Re Value of investors areValue 0f Nethit Inf inflation. FD** BSE YOY Value of overstated. Fixed-income the hardest of by
Rs 1 Lac Rs. 1 Lac return 1 Lac 1.0000 100000 100000 100 100000 Inflation and Mutual Funds: 108500 9.50% 0.9132 91324 8.50% 99087 129 29.00% 129000 9.10% 0.8371 83707 9.50% 118808 99450 173 34.11% 173000 The paper 10.00%th The 12.70% Business Line e 74274 on 11 October read, 97067 stock market, on an 0.7427 130688 218 26.01% 218000 average, provides a return of 20-25 per cent annually. When the returns are 20 8.00% 0.6877 68772 9.00% 142450 97966 212 -2.75% 212000 per cent, the maturity 61131 at the end of 20 years would be doubled to Rs 24 value 10.00% 12.50% 0.6113 156695 95789 245 15.57% 245000 lakhs. Investment of Rs 500 10.00% month could get a return 354Rs 44.49% 35 every of 30- Rs 354000 5.20% 0.5811 58109 172365 100160 7.10% 54257 189601 lakhs after0.5426 20 years whereas 10.00% the actual investment 102872 for 574 7 years. No is only 6 or 62.15% 574000 9.20% savings could match the 10.00% provided by Mutual Funds. 510 -11.15% 0.4969 49686 208561 103626 510000 other return 9.30% 0.4546 45458 10.00% 229417 104289 398 -21.96% 398000 9.70% 0.4144 41439 10.00% 252359 104574 714 79.40% 714000 5.40% 0.3932 39316 10.00% 277595 109138 781 9.38% 781000 13.70%far as mutual fund 34578 0.3458 11.00% 308131 106547 1168 As investment was concerned, the investors would49.55% 1168000 be able to 13.10% more0.3057 only30573 increase their understanding and4285 266.87% the 12.00% 345106 105510 earn money if they knowledge of 4285000 8.00% 0.2831 28309 2281 -46.77% 2281000 various funds by reading news10.00% about them. 107464 articles 379617 8.60% 0.2607 26067 10.00% 417579 108850 3779 65.67% 3779000 9.50% 0.2381 23805 10.00% 459336 109347 3261 -13.71% 3261000 This is evident from the following chart: 9.70% 0.2170 21700 11.00% 509863 110643 3367 3.25% 3367000 10.40% 0.1966 19656 11.00% 565948 111244 3361 -0.18% 3361000 6.30% 0.1849 18491 11.00% 628203 116162 3893 15.83% 3893000 15.30% 0.1604 16037 11.00% 697305 111830 3740 -3.93% 3740000 0.50% 0.1596 15958 10.25% 768779 122679 5001 33.72% 5001000 3.50% 0.1542 15418 9.75% 53843735 130088 3604 -27.93% 3604000 5.20% 0.1466 14656 8.25% 913343 133859 3469 -3.75% 3469000 4.30% 0.1405 14052 7.25% 979560 137645 3049 -12.11% 3049000

Year

Net of Inf

FD

1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

117808 144813 161917 145797 149771 205707 311435 253398 180924 295872 307055 403876 1310067 645720 985067 776293 730653 660644 719864 599802 798045 555668 508416 428438

54

SURVEY FINDINGS AND RECOMMANDATIONS

Survey findings
Q1

55

w a p r e ta e o y u in o e d y us v ? h t ec n g f o r c m o o a e F qec re u n y V lid a 0 0 -1 % 1 -1 0 5 1 -3 5 0 a o e3 % bv 0 T ta o l 1 0 7 1 1 2 3 0 P rc n e et 3 .3 3 2 .3 3 3 .7 6 6 .7 10 0 .0 V lid P rc n a e et 3 .3 3 2 .3 3 3 .7 6 6 .7 10 0 .0 C m la e u u tiv P rc n e et 3 .3 3 5 .7 6 9 .3 3 10 0 .0

Q2 56

w ic o th a a b in e tm n o tio s a e u a a o h h f e v ila le v s e t p n r w re f? F qec re u n y V lid a m tu l fu d u a ns fd 's n tio a s v g c rtific te a n l a in e a pf p in u n e s ra c o e th rs a ll T ta o l 3 2 1 1 4 1 1 8 3 0 P rc n e et 1 .0 0 6 .7 3 .3 3 .3 1 .3 3 3 .3 6 .0 0 10 0 .0 V lid P rc n a e et 1 .0 0 6 .7 3 .3 3 .3 1 .3 3 3 .3 6 .0 0 10 0 .0 C m la e u u tiv P rc n e et 1 .0 0 1 .7 6 2 .0 0 2 .3 3 3 .7 6 4 .0 0 10 0 .0

Q3

57

if u invest w hich investm ent option w ould u prefer? Frequency 12 8 2 7 1 30 P ercent 40.0 26.7 6.7 23.3 3.3 100.0 V alid P ercent 40.0 26.7 6.7 23.3 3.3 100.0 C ulative um P ercent 40.0 66.7 73.3 96.7 100.0

V alid

m utual funds fd's N sc's insurance real estate n other precious m etals Total

58

Q4
what is the usual time period of your investment? Frequency less than 1 year 2 1-3 year 12 3-5 year 6 more than 5 year 9 5 1 Total 30 Percent 6.7 40.0 20.0 30.0 3.3 100.0 Valid Percent 6.7 40.0 20.0 30.0 3.3 100.0 Cumulative Percent 6.7 46.7 66.7 96.7 100.0

Valid

59

Q5

how much return do u get from your investment at present? Frequency 2 13 11 4 30 Percent 6.7 43.3 36.7 13.3 100.0 Valid Percent 6.7 43.3 36.7 13.3 100.0 Cumulative Percent 6.7 50.0 86.7 100.0

Valid

less than 5% 5-10% 10-30% above than 30% Total

Q6
w a r u in e tm n g a h t r v s e t o l? F qec re u n y V lid a ta s v g x a in fu re s c rity tu eu lo g te p fits n rm ro s o te p fits h rt rm ro o e th rs T ta o l 1 0 1 2 4 3 1 3 0 P rc n e et 3 .3 3 4 .0 0 1 .3 3 1 .0 0 3 .3 10 0 .0 V lid P rc n a e et 3 .3 3 4 .0 0 1 .3 3 1 .0 0 3 .3 10 0 .0 C m la e u u tiv P rc n e et 3 .3 3 7 .3 3 8 .7 6 9 .7 6 10 0 .0

Q7
d e u p e e t in e tm n s tis y u in e tm n g a ? o s r r s n v s e t a fy o r v s e t o ls F qec re u n y V lid a ys e n o 4 T ta o l 2 2 7 1 3 0 P rc n e et 7 .3 3 2 .3 3 3 .3 10 0 .0 V lidP rc n a e et 7 .3 3 2 .3 3 3 .3 10 0 .0 C m la e u u tiv P rc n e et 7 .3 3 9 .7 6 10 0 .0

60

Q8
do you invest in m tual fund? u Frequency 20 10 30 P ercent 66.7 33.3 100.0 V alid P ercent 66.7 33.3 100.0 C ulative um P ercent 66.7 100.0

V alid

yes no Total

Q9

61

if u have invested in m utual funds plz specify the AMC? Frequency V alid UTI HDFC ICICI RELIA NCE BIRLA n.a Total 1 9 3 3 1 13 30 Percent 3.3 30.0 10.0 10.0 3.3 43.3 100.0 Valid Percent 3.3 30.0 10.0 10.0 3.3 43.3 100.0 Cumulative Percent 3.3 33.3 43.3 53.3 56.7 100.0

Q10
do you think that mutual funds are an efficient way of achieving investment goals? Frequency 18 12 30 Percent 60.0 40.0 100.0 Valid Percent 60.0 40.0 100.0 Cumulative Percent 60.0 100.0

Valid

yes no Total

Q11 62

acc.to u w hich m utual fund is the m ost trustable? Frequency V alid U TI H FC D IC I IC R LIA C E N E TA TA B LA IR Total 3 12 2 4 5 4 30 P ercent 10.0 40.0 6.7 13.3 16.7 13.3 100.0 V alid P ercent 10.0 40.0 6.7 13.3 16.7 13.3 100.0 C ulative um P ercent 10.0 50.0 56.7 70.0 86.7 100.0

Q12
what do u think is most efficient promoting investments? Frequency 13 14 3 30 Percent 43.3 46.7 10.0 100.0 Valid Percent 43.3 46.7 10.0 100.0 Cumulative Percent 43.3 90.0 100.0

Valid

advertisements word of mouth presentations by co's heads Total

Q13 63

what is your method of managing funds? Frequency 6 5 17 2 30 Percent 20.0 16.7 56.7 6.7 100.0 Valid Percent 20.0 16.7 56.7 6.7 100.0 Cumulative Percent 20.0 36.7 93.3 100.0

Valid

investment advisors news reports in channels n newspapaers self management others Total

Q14
if u prefer other investment options over mutual funds what is ur reason for doing so? Frequency 2 23 1 4 30 Percent 6.7 76.7 3.3 13.3 100.0 Valid Percent 6.7 76.7 3.3 13.3 100.0 Cumulative Percent 6.7 83.3 86.7 100.0

Valid

better returns safer investments better advertisements better schemes Total

Data Analysis:
The Sample size of the research is 30 people from which 53.3% belonged to the Business class & 46.7 % belonged to the service class. The income distribution of the sample taken was fairly even with 33 % between the income brackets of <2 lakhs annually & 2-3 Lakhs annually, 26.6% earning between 3-5 Lakhs annually & 6% earning above 5 Lakhs annually. The age group of the sample lay 40% in >30 years, 20% between 30-40 years, 40-50 years & >50 years respectively. This shows that the analysis represents a random sample that is inclusive of all income groups, age groups & covers the business & service classes in the areas. From the sample collected 1 commercial area in the city of Kanpur 33% of the people saved 0-10% of their savings while 37% save 15-30% of their income. This shows that the income- saving habits of the people have developed. Thus, there as an immense potential for growth of investment options in the city.

64

50% of the people in the sample taken were graduates and 33.3% had been educated at a post graduate level. The knowledge about the various investment options in the market varied from 3.3% for options like National Savings Certificate to 10% for mutual funds. 60% of the sample of the population had knowledge about most of the options available where as the percentage investing their savings is 73.3%. Thus, there is still a lack of absolute awareness of investments even among the present day investors. The sample percent i.e. 23.7%, which does not invest does not do so for various reasons. 6% sight the reason to be better returns in other investment options like Fixed Deposit Schemes & Insurance, 10% state other reasons like ,3% find the promotion methods of other investment options like Insurance policies more effective. 80% prefer other investment options to mutual funds because they believe that the other investments are safer options. For managing funds, it is evident that most investors i.e. 56.7% prefer self management as compared to the 20% who refer to investment advisors & the 16.7% who follow the newspapers & news channels for investment advice. To promote investments in the market, 46.7% of the sample units believe that word of mouth is the most effective way whereas 43.3% consider the advertising medium effective. Between the 70% of the sample that do invest their savings the most popular investment option (40% of the sample) is Mutual funds followed by approx 26.7% in Fixed deposits & 23.3% in Insurance schemes. The latter two, as mentioned above, are favoured by 80% of the sample because they are considered safer investment options as compared to mutual funds. The time period of investments drawn from this market is mostly 1-3 years (40% of the sample), followed by >5 year investments (30% of sample) and then 3-5 years (20% of sample). It is clear that a only a small percentage (6.7%) of the investors in the sample opt for short term investments. This highlights the significance of the potential investments in the mutual funds because long term investments are far more profitable for any AMC/ commercial bank/ other investment promoting company. From the present investments, 43.3% of the investors are presently getting 510% returns only, whereas 36.7% get a 10-30% yield. Approx 7% even get returns below 5% & 13% above 30% on their present investment. On analysis it is evident that most mutual fund investors fall in the 10-30% yield bracket. As discussed in the paper earlier mutual funds in general are expected to yield at least 15-25% in an economy developing like present day India. Still there are investors who opt for investments with yield <5% returns. This mainly because of the fact that there is improper knowledge about the mutual fund investment

65

options in the economy. There is still a need to increase the awareness of potential customers & to promote professional management & diversification of funds of the investor. The two objectives of investment that came through in the research are tax saving (33%) & future security (40%), as compared to only 23% of the investors aiming at short term (10%) & long term profits (13%). Out of the investors in the sample 66.7% invest in mutual funds. Within these 10% invest in Reliance & ICICI mutual funds and 3% in UTI. As compared to these, HDFC mutual fund seems to be an extremely popular choice between investors with 30% if the investors opting for it as a viable investment option. 23.3% of the people in the sample are not satisfied with their present investments where as 60% believe that mutual funds are an efficient way of achieving investment goals. 40% of the sample size believed that HDFC was the most trustable AMC. As compared to the 16.7% who trust Tata and the 13% who trust Reliance AMCs the most. The analysis clearly shows that HDFC mutual funds are the most accepted & trusted AMC within the investors present in the market. There is the 20% of the sample size, which does not invest their savings and the reason for this varies from reinvesting all savings in present business for the business class, to beating the inflation by the service sector or for reasons like education of children. All these reasons and the unsafe tag that comes along with investment in mutual fund are the major reasons for presence of non-investors in the market today. As shown in the course of the paper, in reality HDFC mutual funds can break these myths in the market by approaching the investor on a one-one level with the help of distributors. HDFC mutual funds offer various schemes that can actually curb inflation, they help the businessman park his money for even 7 days in the liquid money market & there are Growth Schemes that are tailor made for investment in education. Hence, though HDFC AMC is the leader in the present day market, there is still scope of growth in investments by increasing awareness amongst the potential investors.

66

Internal Analysis Of HDFC AMC

TOTAL AUM IN KANPUR
Client Services: Client services have always been the first preference and the most emphasized matter in HDFC AMC LTD. The company is very sensitive on the issues of client services which bring client services before sales in the list of accomplishments. HDFC as a fund house believes that transparency, integrity, ethics are the fuel of that drive the company on the path of customer satisfaction and a dominant player in the Mutual Fund Industry. There is always a jive to innovate ways to make client services faster and better for the investors and the distributors, as a result of which HDFCMF online was launched as a service to its investors by which they can transact online from their email account with a password provided, with this facility an investor can do all the transactions except changing of Bank Account details and Change in Address for which a signed transaction slip with bank account details with proof is required at the transaction point or an ISC. SWOT Analysis Strengths: 1) Strong Investment & Research Team HDFC AMC has a strong investment team which does all the analysis study and even visits the companys premises whose stock they intend to buy. Only on being completely sure of the dealing, business future, books of accounts etc. it recommends to buy the stock. This is one of Indias best teams. CRISIL has awarded CRISIL LEVEL-1 Fund House rating to HDFC AMC. This is its highest fund governance and process quality rating. The rating reflects

2200 cr

67

the highest governance levels and fund management practices at HDFC AMC. HDFC AMC is the only fund house to have been assigned this rating for two years in succession. 2) Consistent returns HDFC as a fund house has always emphasized on consistent returns. Even in very bullish market the fund managers have always emphasized on consistent returns not taking any momentum stocks into their portfolio to shoot up their returns which other AMCs had done. This strategy was looked as a shortcoming of the AMC by some distributors and investors too but after the recent market crash all the glossy picture has vanished, HDFC was among a few fund houses that had less impact of the crash as compared to other AMCs. 3) Service this is one area where HDFC AMC emphasizes more than others. Service is considered more important. The company feels that it is more important to provide service to existing customers first and then think about more business. This is the reason why HDFC AMC has less service issues. Also HDFC AMC has started the HDFCMF online facility which is an added advantage. 4) Compliance HDFC AMC is more compliant. Complete compliance to SEBI norms is considered first and foremost. At hdfc AMC ISCs too it is told in simple terms ti the distributor that non-compliance will not be tolerated. End of the day its the distributor and investor who is benefited by this stand. Weakness: 1) Marketing & Advertising HDFC AMC has less advertising campaigns as compared to other AMCs. With advertising and aggressive marketing strategies a company is able to have Brand retention in minds of people which help in improving sales. 2) Schemes HDFC AMC has always been positive for diversified schemes. All the schemes it offers are diversified equity funds. With this stand it did

68

not launch any sector fund until recently HDFC Infrastructure Fund was launched. Most of other AMCs have launched such schemes long back. HDFC AMC has to have such schemes in the near future as there is demand for the same.

Opportunities: 1) Scope of business This trend can be seen in every city in the country, the chunk of all investment goes into either secured assets(Bank FDs), ULIPs(Unit Linked Insurance Plans, or conventional Insurance Plans(endowment, money back etc.). ULIPs alone constitute of more than 40% of total savings whereas Mutual Funds and Capital Markets together have 5% share. Also HDFC AMC has started pitching Structured products adapting the change. 2) Untapped areas There are a lot of places from where business can be generated. Still people in rural areas prefer bank deposits, they do not have exposure in mutual funds. Although there has been much expansion in HDFC AMC, mutual funds have less percentage share as compared to other asset classes and HDFC as a brand has a lot of scope to generate business. 3) Widening product range Mutual Funds now are undergoing a sea change with product range widening. HDFC AMC recently went into structured product HDFC Real Estate PMS-1 with HDFC LTD. Being the investment advisor. Similar kind of products will follow in the future as the demand increases. Threats: 1) Changing tastes of investors Investors mostly have different kind of Mutual Funds in their portfolio; they have now started looking at new products. Big as well as retail investors now want to invest in some kind of a

69

fund where it offers an avenue which the investor cannot approach directly, this is the reason structured products have started to float in the market with easy investment options but still have far to go. HDFC AMC will have to offer funds other than 2) Competition from new entrants India has become a dream destination for every financial organization in the world. All the FIIs, Foreign Banks, Financial Institutions and AMCs look at the next 10 years to be very happening in India. So, every company wants to enter the Indian markets, sooner the better. New AMCs in India are being able to collect fair amount of funds with their NFOs and product range, also foreign AMCs have an edge as they have business overseas which increases their reach and capacity to spend on their establishment here. The existing AMCs, if want to retain their customers would have to be above their competitors by giving better returns, better service and new products being some.

70

RECOMMENDATIONS

1) Product offerings HDFC AMC has long waited and has always been on its stand of diversified fund house. Now that the investors have themselves started asking for high risk sector funds and funds with totally new concepts, HDFC must start offering them such products before it gets left out. HDFC AMC recently joined the race with HDFC Infrastructure fund but more must follow. 2) Aggressive marketing HDFC AMC should be more aggressive in marketing and advertising of the Brand. HDFC is left out to some AMCs as they have extensive marketing strategies. Some marketing goodies for distributors of locations like Kanpur and neighboring areas help as the brand becomes more visible. 3) Customer follow up: At HDFC bank, the employees and concerned officers did not keep a track of what the customer was planning to do, what was his view of the plans told. This is the most important feature for any company to earn a customer, by follow up of a customer, his view and thinking about our product can be made positive. 4) Pitching of plan: At some HDFC Bank branches, like GK-II, sector-18 Noida, GK-1 and both the branches at Chandni chowk the officer pitched the plans of Birla Sunlife Co first rather they should have pitched HDFC which definitely has better plans, when asked the Bank employees themselves told that the charges in birla is less thats the reason they told about it first. 5) Information: the companys co-ex (contractual executive) were mostly not present in the Branch as they have to go on calls, so there were some points left out which were important and could have changed the decision of the customer in our favour.

71

Future Expectations from Indian Mutual Fund Industry Taking into consideration the above comparison and the current situation prevailing in the capital markets, the realistic expectations from the Indian Mutual fund Industry could be: Increased Penetration: Because of their experience in managing MFs the AMCs will play an important role in the financial market and increasing penetration. Increased Emphasis on Retail Investors: As urban markets reach a peak mutual funds would target second rung cities and smaller towns to increase their investor base. Diverse Range of Products: In order to make MFs more acceptable to the retail investor mutual fund industry has to mature to offering comprehensive life cycle financial planning and not products alone. These would include products catering to specific life cycle needs like buying a house, funding college admission etc. Increase in the need for financial advice: As the affluence of Indians increases and the range of financial products available to meet peoples needs expands mortgages, deposits, life products, defined contribution pensions, mutual funds, etc the need for financial advice will increase. Mutual fund distribution will become geared towards providing sound financial advice according to investors risk profile and stage in life cycle.

72

Steps to be Taken by AMCs

Make mutual fund offer documents more comprehensible by making disclosures more simple and relevant, and fund structure more distinctive to the common people. Make disclosures regarding the MF expenses more transparent especially distributor expenses which form a major chunk of entry loads.

Make fund managers accountable to unit holders. This can be done by

organizing Annual General Meetings of unit holders where performance of the fund would be reviewed.

73

BIBLIOGRAPHY: Primary survey:

Filling of questionnaire

Magazines:
Outlook Money Investment Monitor Investors INDIA Business World

Newspapers:
Economic Times Business Standard Financial Express Investors Guide Business Line

Internet Sites:
www.google.com www.equityresearch.com www.moneycontrol.com www.indiainfoline.com www.bseindia.com www.nseindia.com www.outlookmoney.com www.timesofmoney.com www.rbi.gov www.investopedia.com

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QUESTIONNAIRE
1. What percentage of your income do you save? 0-10% 15-30% 10-15% Above 30%

2. Which of the available investment option(s) are you aware of? Mutual funds ULIPS Public Provident Fund(P Post office schemes Fixed deposits NSC s (National Saving Certificate) Insurance Other (Kindly specify)

3. Do you invest your savings? Yes No

4. If you invest your savings, please specify which investment option(s) do you prefer? Mutual funds ULIPS Public Provident Fund(PPF) Post office schemes Fixed deposits NSC s Insurance Schemes Real estate and precious metals

5. What is the usual time period of your investments? Less than 1 year 3-5 years 1-3 years More than 5 years

6. How much return do you get from your investment at present?

75

Less than 5% 10-30%

5-10% More than 30%

7. What are your investment goals? Tax saving Long term profits Other (kindly specify) Future security Short term profits

8. Does your present investment (if any) satisfy your investment goal(s)? Yes No

9. Do you invest in mutual funds? Yes No

10. If you have invested in mutual fund then please specify the AMC ?

11. Do you think that mutual funds are an efficient way of achieving investment goals? Yes No

12. According to you, which mutual fund is the most trustable? UTI ICICI Tata HDFC Reliance Birla

76

13. What do you think is the most effective way of promoting investment? Advertisements & endorsement Presentations made by company heads Word of mouth Other (kindly specify)

14. What is your method of managing funds? Investment advisors Self management News reports in channels & newspapers Other (kindly specify)

15. If you prefer other investment options over mutual funds what is your reason for doing so? Better returns Better advertising Safer investment Better schemes

DEMOGRAPHIC PROFILE
Name Contact no. Gender Education Profession Designation Age Annual income Male Below graduation Business If Business: - <30 <200000 30-40 200000-300000 Graduation Female Post graduation Service If Service: - 40-50 300000-500000 > 50 >500000

GAGAN UPADHYAY
77

THANK YOU