Professional Documents
Culture Documents
In
By
Somesh Behere
SESSION (2008-2010)
BONOFIDE CERTIFICATE
This is to certify that the Report on Project Work titled “RISK RETURN ANALYSIS AND
COMPARATIVE STUDY OF MUTUAL FUNDS” for HDFC Asset Management Company
Ltd. is a bonafide record of the work done by
Somesh Behere
The performance evaluation of mutual fund is a vital matter of concern to the fund managers,
investors, and researchers alike. The core competence of the company is to meet objectives
and the needs of the investors and to provide optimum return for their risk. This study tries to
find out the risk and return allied with the mutual funds.
This project paper is segmented into three sections to explore the link between conventional
subjective and statistical approach of Mutual Fund analysis. To start with, the first section
deals with the introductory part of the paper by giving an overview of the Mutual fund
industry and company profile.
This section also talks about the theory of portfolio analysis and the different measures of risk
and return used for the comparison.
The second section details on the need, objective, and the limitations of the study. It also
discusses about the sources and the period for the data collection. It also deals with the data
interpretation and analysis part wherein all the key measures related to risk and return are
done with the interpretation of the results.
In the third section, an attempt is made to analyse and compare the performance of the equity
mutual fund. For this purpose β-value, standard deviation, and risk adjusted performance
measures such as Sharpe ratio, Treynor measure, Jenson Alpha, and Fema measure have been
used.
The portfolio analysis of the selected fund has been done by the measure return for the
holding period.
At the end, it illustrates the suggestions and findings based on the analysis done in the
previous sections and finally it deals with conclusion part.
ACKNOWLEDGEMENT
I take this opportunity to express my deep sense of gratitude to all those who have
contributed significantly by sharing their knowledge and experience in the completion of
this project work. I am greatly obliged to, for providing me with the right kind of
opportunity and facilities to complete this venture.
I am extremely thankful to Miss. Gargi Naidu – my internal faculty guide under whose
able guidance this project work was carried out. I thank her for her continuous support
and mentoring during the tenure of the project. Finally, I would also like to thank all my dear
friends for their cooperation, advice and encouragement during the long and arduous task of
carrying out the project and preparing this report.
PREFACE
This is the age of technical up gradation. Nothing remains same for a long period every thing
change with a certain span of time. So it is must for every organization to put a birds eye
view on it’s over all functioning.
The objective of my study was Risk Return Analysis And Comparative Study Of Mutual
Funds “HDFC Asset Management Company Ltd.” I however present this report In all my
modesty to the readers with a faith that it shall serve the causes of subject.
DATE…………..
TABLE OF CONTENTS Page No.
Part-I 1-37
1.2.3 Why Has It Become One Of The Largest Financial Instruments? 22-25
1.2.6 A Study of Portfolio Analysis from The Point Of Fund Manager 28-29
Part-II 38-40
Research Methodology
Part-III 41-102
Case Analysis
3.3 Findings 98
References 102
PART-I
Mutual fund is an investment company that pools money from small investors and
invests in a variety of securities, such as stocks, bonds and money market instruments. Most
open-end Mutual funds stand ready to buy back (redeem) its shares at their current net asset
value, which depends on the total market value of the fund's investment portfolio at the
time of redemption. Most open-end Mutual funds continuously offer new shares to
investors. It is also known as an open-end investment company, to differentiate it from a
closed-end investment company.
Mutual funds invest pooled cash of many investors to meet the fund's stated investment
objective. Mutual funds stand ready to sell and redeem their shares at any time at the fund’s
current net asset value: total fund assets divided by shares outstanding.
INVEST
MARKET (FLUCTUATIONS)
MONEY STOCKS/BONDS
INVESTOR
Figure: 1.1
In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing units
to the investors and investing funds in securities in accordance with objectives as
disclosed in offer document.
S. Advant
Particulars
No. age
Portfoli
Mutual Funds invest in a well-diversified portfolio of securities
o
1. which enables investor to hold a diversified investment portfolio
Diversif
(whether the amount of investment is big or small).
ication
Professi
Fund manager undergoes through various research works and has
onal
2. better investment management skills which ensure higher returns
Manage
to the investor than what he can manage on his own.
ment
Investors acquire a diversified portfolio of securities even with a
Less
3. small investment in a Mutual Fund. The risk in a diversified
Risk
portfolio is lesser than investing in merely 2 or 3 securities.
Low
Due to the economies of scale (benefits of larger volumes), mutual
Transac
4. funds pay lesser transaction costs. These benefits are passed on to
tion
the investors.
Costs
An investor may not be able to sell some of the shares held by him
Liquidit
5. very easily and quickly, whereas units of a mutual fund are far
y
more liquid.
S. Disadva
Particulars
No. ntage
Costs
Control
Investor has to pay investment management fees and fund
Not in
distribution costs as a percentage of the value of his
1. the
investments (as long as he holds the units), irrespective of the
Hands
performance of the fund.
of an
Investor
No The portfolio of securities in which a fund invests is a decision
Custom taken by the fund manager. Investors have no right to interfere
2. ized in the decision making process of a fund manager, which some
Portfoli investors find as a constraint in achieving their financial
os objectives.
Difficult
y in
Many investors find it difficult to select one option from the
Selectin
plethora of funds/schemes/plans available. For this, they may
3. g a
have to take advice from financial planners in order to invest in
Suitable
the right fund to achieve their objectives.
Fund
Scheme
BASED ON THEIR
STURCTURE
Figure:1.2
ELSS ARBITAGE
FUNDS
Mutual funds can be classified as follow:
Open-ended funds: Investors can buy and sell the units from the fund, at any point of
time.
Close-ended funds: These funds raise money from investors only once. Therefore,
after the offer period, fresh investments cannot be made into the fund. If the fund is
listed on a stocks exchange, the units can be traded like stocks (E.g., Morgan Stanley
Growth Fund). Recently, most of the New Fund Offers of close-ended funds provided
liquidity window on a periodic basis such as monthly or weekly. Redemption of units
can be made during specified intervals. Therefore, such funds have relatively low
liquidity.
Equity funds: These funds invest in equities and equity related instruments. With
fluctuating share prices, such funds show volatile performance, even losses. However,
short term fluctuations in the market, generally smoothens out in the long term,
thereby offering higher returns at relatively lower volatility. At the same time, such
funds can yield great capital appreciation as, historically, equities have outperformed
all asset classes in the long term. Hence, investment in equity funds should be
considered for a period of at least 3-5 years. It can be further classified as:
1. Index funds- In this case a key stock market index, like BSE Sensex or Nifty is tracked.
Their portfolio mirrors the benchmark index in terms of both composition and individual
stock weightages.
2. Equity diversified funds- 100% of the capital is invested in equities spreading across
different sectors and stocks.
3. Dividend yield funds- it is similar to the equity-diversified funds except that they invest in
companies offering high dividend yields.
4. Thematic funds- Invest 100% of the assets in sectors which are related through some
theme.
e.g. -An infrastructure fund invests in power, construction, cements sectors etc.
5. Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking sector fund
will invest in banking stocks.
6. ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.
Balanced fund: Their investment portfolio includes both debt and equity. As a result,
on the risk-return ladder, they fall between equity and debt funds. Balanced funds are
the ideal mutual funds vehicle for investors who prefer spreading their risk across
various instruments. Following are balanced funds classes:
2 Debt-oriented funds -Investment below 65% in equities.
Debt fund: They invest only in debt instruments, and are a good option for investors
averse to idea of taking risk associated with equities. Therefore, they invest
exclusively in fixed-income instruments like bonds, debentures, Government of India
securities; and money market instruments such as certificates of deposit (CD),
commercial paper (CP) and call money. Put your money into any of these debt funds
depending on your investment horizon and needs.
1. Liquid funds- These funds invest 100% in money market instruments, a large
portion being invested in call money market.
2. Gilt funds ST- They invest 100% of their portfolio in government securities of and
T-bills.
3. Floating rate funds - Invest in short-term debt papers. Floaters invest in debt
instruments, which have variable coupon rate.
4. Arbitrage fund- They generate income through arbitrage opportunities due to miss-
pricing between cash market and derivatives market. Funds are allocated to equities,
derivatives and money markets. Higher proportion (around 75%) is put in money
markets, in the absence of arbitrage opportunities.
5. Gilt funds LT- They invest 100% of their portfolio in long-term government
securities.
6. Income funds LT- Typically, such funds invest a major portion of the portfolio in
long-term debt papers.
7. MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an exposure
of 10%-30% to equities.
8. FMPs- fixed monthly plans invest in debt papers whose maturity is in line with that
of the fund.
Table:1.3
Equity Funds High level of return, but has a high level of risk too
1. Systematic Investment Plan: Under this, a fixed sum is invested each month on a fixed
date of a month. Payment is made through post-dated cheques or direct debit facilities. The
investor gets fewer units when the NAV is high and more units when the NAV is low. This is
called as the benefit of Rupee Cost Averaging (RCA)
2. Systematic Transfer Plan: Under this, an investor invest in debt-oriented fund and give
instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same
mutual fund.
3. Systematic Withdrawal Plan: if someone wishes to withdraw from a mutual fund then he
can withdraw a fixed amount each month.
Figure:1.4
Sponsor is the person who acting alone or in combination with another body corporate
establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the
Investment managed and meet the eligibility criteria prescribed under the Securities and
Exchange Board of India (Mutual Fund) Regulations, 1996. The sponsor is not responsible or
liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial
contribution made by it towards setting up of the Mutual Fund.
TRUST
The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian
Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration
Act, 1908.
TRUSTEE
The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The
AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act
as an asset management company of the Mutual Fund. At least 50% of the directors of the
AMC are independent directors who are not associated with the Sponsor in any manner. The
AMC must have a net worth of at least 10 cores at all times.
Mutual funds posses a very strong distribution channel so that the ultimate customers doesn’t
face any difficulty in the final procurement. The various parties involved in distribution of
mutual funds are:
1. Direct marketing by the AMCs: the forms could be obtained from the AMCs directly.
The investors can approach to the AMCs for the forms. some of the top AMCs of India are;
Reliance ,Birla Sunlife, Tata, SBI magnum, Kotak Mahindra, HDFC, Sundaram, ICICI,
Mirae Assets, Canara Robeco, Lotus India, LIC, UTI etc. whereas foreign AMCs include:
Standard Chartered, Franklin Templeton, Fidelity, JP Morgan, HSBC, DSP Merill Lynch,
etc.
2. Broker/ sub broker arrangements: the AMCs can simultaneously go for broker/sub-
broker to popularize their funds. AMCs can enjoy the advantage of large network of these
brokers and sub brokers.
3. Individual agents, Banks, NBFC: investors can procure the funds through individual
agents, independent brokers, banks and several non- banking financial corporations too,
whichever he finds convenient for him.
AMC was incorporated under the Companies Act, 1956, on December 10, 1999, and was
approved to act as an AMC for the Mutual Fund by SEBI on July 30, 2000.
The registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg,
169, Back bay Reclamation, Church gate, Mumbai - 400 020.
In terms of the Investment Management Agreement, the Trustee has appointed HDFC Asset
Management Company Limited to manage the Mutual Fund
As per the terms of the Investment Management Agreement, the AMC will conduct the
operations of the Mutual Fund and manage assets of the schemes, including the schemes
launched from time to time.
Table:1.5
On obtaining the regulatory approvals, the Schemes of Zurich India Mutual Fund has now
migrated to HDFC Mutual Fund on June 19, 2003.
The AMC is also providing portfolio management / advisory services and such activities are
not in conflict with the activities of the Mutual Fund. The AMC has renewed its registration
from SEBI vide Registration No. - PM / INP000000506 dated December 22, 2000 to act as a
Portfolio Manager under the SEBI (Portfolio Managers) Regulations, 1993. The Certificate of
Registration is valid from January 1, 2004 to December 31, 2006.
Board of Directors
The Board of Directors of the HDFC Asset Management Company Limited (AMC) consists
of the following eminent persons.
Table:1.6
Mr. Deepak Parekh, the Chairman of the Board, is associated with HDFC Ltd. in his
capacity as its Executive Chairman.
Mr. Parekh joined HDFC Ltd. in a senior management position in 1978. He was inducted as
Wholetime Director of HDFC Ltd. in 1985 and was appointed as the Executive Chairman in
1993.
Mr. N. Keith Skeoch is associated with Standard Life Investments Limited as its Chief
Executive and is responsible for all company business and investment operations within
Standard Life Investments Limited.
Mr. Keki M. Mistry is an associate director on the Board. He is the Vice-Chairman &
Managing Director of Housing Development Finance Corporation Limited (HDFC Ltd.) He is
with HDFC Ltd. since 1981 and was appointed as the Executive Director of HDFC Ltd. in
1993. He was appointed as the Deputy Managing Director in 1999, Managing Director in
2000 and Vice Chairman & Managing Director in 2007.
SPONSORS
HDFC was incorporated in 1977 as the first specialised housing finance institution in India.
HDFC provides financial assistance to individuals, corporate and developers for the purchase
or construction of residential housing. It also provides property related services (e.g. property
identification, sales services and valuation), training and consultancy. Of these activities,
housing finance remains the dominant activity.
HDFC currently has a client base of over 8, 00,000 borrowers, 12, 00,000 depositors, 92,000
shareholders and 50,000 deposit agents. HDFC raises funds from international agencies such
as the World Bank, IFC (Washington), USAID, CDC, ADB and KFW, domestic term loans
from banks and insurance companies, bonds and deposits. HDFC has received the highest
rating for its bonds and deposits program for the ninth year in succession. HDFC Standard
Life Insurance Company Limited, promoted by HDFC was the first life insurance company in
the private sector to be granted a Certificate of Registration (on October 23, 2000) by the
Insurance Regulatory and Development Authority to transact life insurance business in India.
HDFC is India's premier housing finance company and enjoys an impeccable track record in
India as well as in international markets. Since its inception in 1977, the Corporation has
maintained a consistent and healthy growth in its operations to remain the market leader in
mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC
has developed significant expertise in retail mortgage loans to different market segments and
also has a large corporate client base for its housing related credit facilities. With its
experience in the financial markets, a strong market reputation, large shareholder base and
unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian
environment.
The Standard Life Assurance Company was established in 1825 and has considerable
experience in global financial markets. In 1998, Standard Life Investments Limited became
the dedicated investment management company of the Standard Life Group and is owned
100% by The Standard Life Assurance Company.
With global assets under management of approximately US$186.45 billion as at March 31,
2005, Standard Life Investments Limited is one of the world's major investment companies
and is responsible for investing money on behalf of five million retail and institutional clients
worldwide. With its headquarters in Edinburgh, Standard Life Investments Limited has an
extensive and developing global presence with operations in the United Kingdom, Ireland,
Canada, USA, China, Korea and Hong Kong. In order to meet the different needs and risk
profiles of its clients, Standard Life Investments Limited manages a diverse portfolio
covering all of the major markets world-wide, which includes a range of private and public
equities, government and company bonds, property investments and various derivative
instruments. The company's current holdings in UK equities account for approximately 2% of
the market capitalization of the London Stock Exchange.
Balanced Funds
Debt Funds
HDFC Prudence Fund was the only scheme that won the CNBC - TV 18 - CRISIL Mutual
Fund of the Year Award 2008 in the Most Consistent Balanced Fund under CRISIL ~
CPR for the calendar year 2007 (from amongst 3 schemes).
HDFC Cash Management Fund - Savings Plan was the only scheme that won the CNBC -
TV 18 - CRISIL Mutual Fund of the Year Award 2008 in the Most Consistent Liquid Fund
under CRISIL ~ CPR for the calendar year 2007 (from amongst 5 schemes).
HDFC Cash Management Fund - Savings Plan was the only scheme that won the CNBC -
TV 18 - CRISIL Mutual Fund of the Year Award 2008 in the Liquid Scheme – Retail
Category for the calendar year 2007 (from amongst 19 schemes).
HDFC Equity Fund - Growth has been awarded the 'Best Fund over Ten Years' in
the 'Equity India Category' at the Lipper Fund Awards 2008 (form amongst 23 schemes).
It was awarded the Best Fund over ten years in 2006 and 2007 as well. 2008 makes it three in
a row.
Lipper Fund Awards 2009 :
HDFC Equity Fund - Growth has been awarded the 'Best Fund over Ten Years' in the 'Equity
India Category' (form amongst 34 schemes) and HDFC Prudence Fund – Growth Plan in
the ‘Mixed Asset INR Aggressive Category’ (from amongst 6 schemes), have been awarded
the ‘Best Fund over 10 Years’ by Lipper Fund Awards India 2009.
HDFC MF Monthly Income Plan - Long Term Plan - Ranked a Seven Star Fund and has
been awarded the Gold Award for "Best Performance" in the category of "Open Ended
Marginal Equity" for the three year period ending December 31, 2007 (from amongst 27
schemes)
HDFC High Interest Fund - Short Term Plan - Ranked a Five Star Fund indicating
performance among the top 10% in the category of "Open Ended Debt - Short Term" for
one year period ending December 31, 2007 (from amongst 20 schemes).
HDFC Prudence Fund - Ranked a Five Star Fund indicating performance among the top
10% in the category of "Open Ended Balanced" for the three year period ending December
31, 2007 (from amongst 16 schemes)
B. MEASURING AND EVALUATING MUTUAL FUNDS
PERFORMANCE:
Every investor investing in the mutual funds is driven by the motto of either wealth creation
or wealth increment or both. Therefore it’s very necessary to continuously evaluate the funds’
performance with the help of factsheets and newsletters, websites, newspapers and
professional advisors like HDFC AMC. If the investors ignore the evaluation of funds’
performance then he can lose hold of it any time. In this ever-changing industry, he can face
any of the following problems:
5. The funds’ ratings may go down in the various lists published by independent rating
agencies.
6. It can merge into another fund or could be acquired by another fund house.
Performance measures:
Equity funds: the performance of equity funds can be measured on the basis of: NAV
Growth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns and
Distributions, Computing Total Return (Per Share Income and Expenses, Per Share Capital
Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio Turnover Rate, Fund
Size, Transaction Costs, Cash Flow, Leverage.
Debt fund: Likewise, the performance of debt funds can be measured on the basis of: Peer
Group Comparisons, The Income Ratio, Industry Exposures and Concentrations, NPAs,
besides NAV Growth, Total Return and Expense Ratio.
Liquid funds: the performance of the highly volatile liquid funds can be measured on the
basis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio.
Every fund sets its benchmark according to its investment objective. The funds performance
is measured in comparison with the benchmark. If the fund generates a greater return than the
benchmark then it is said that the fund has outperformed benchmark , if it is equal to
benchmark then the correlation between them is exactly 1. And if in case the return is lower
than the benchmark then the fund is said to be underperformed.
Some of the benchmarks are:
1. Equity funds: market indices such as S&P CNX nifty, BSE100, BSE200, BSE-PSU, BSE
500 index, BSE bankex, and other sectoral indices.
2. Debt funds: Interest Rates on Alternative Investments as Benchmarks, I-Bex Total Return
Index, JPM T-Bill Index Post-Tax Returns on Bank Deposits versus Debt Funds.
3. Liquid funds: Short Term Government Instruments’ Interest Rates as Benchmarks, JPM
T- Bill Index.
To measure the fund’s performance, the comparisons are usually done with:
Investors are required to go for financial planning before making investments in any mutual
fund. The objective of financial planning is to ensure that the right amount of money is
available at the right time to the investor to be able to meet his financial goals. It is more than
mere tax planning. Steps in financial planning are:
Asset allocation.
Selection of fund.
In case of mutual funds, financial planning is concerned only with broad asset allocation,
leaving the actual allocation of securities and their management to fund managers. A fund
manager has to closely follow the objectives stated in the offer document, because financial
plans of users are chosen using these objectives.
If we take a look at the recent scenario in the Indian financial market then we can find the
market flooded with a variety of investment options which includes mutual funds, equities,
fixed income bonds, corporate debentures, company fixed deposits, bank deposits, PPF, life
insurance, gold, real estate etc. all these investment options could be judged on the basis of
various parameters such as- return, safety convenience, volatility and liquidity. Measuring
these investment options on the basis of the mentioned parameters, we get this in a tabular
form
Table:1.7
We can very well see that mutual funds outperform every other investment option. On three
parameters, it scores high whereas it’s moderate at one. comparing it with the other options,
we find that equities gives us high returns with high liquidity but its volatility too is high with
low safety which doesn’t makes it favourite among persons who have low risk- appetite.
Even the convenience involved with investing in equities is just moderate.
II) Dispense the shortcomings of the other options: every other investment option has
more or less some shortcomings. Such as if some are good at return then they are not safe, if
some are safe then either they have low liquidity or low safety or both….likewise, there
exists no single option which can fit to the need of everybody. But mutual funds have
definitely sorted out this problem. Now everybody can choose their fund according to their
investment objectives.
III) Returns get adjusted for the market movements: as the mutual funds are managed by
experts so they are ready to switch to the profitable option along with the market movement.
Suppose they predict that market is going to fall then they can sell some of their shares and
book profit and can reinvest the amount again in money market instruments.
IV) Flexibility of invested amount: Other then the above mentioned reasons, there exists
one more reason which has established mutual funds as one of the largest financial
intermediary and that is the flexibility that mutual funds offer regarding the investment
amount. One can start investing in mutual funds with amount as low as Rs. 500 through SIPs
and even Rs. 100 in some cases.
Many investors feel that a simple way to invest in Mutual funds is to just keep investing in
award winning funds. First of all, it is important to understand that more than the
awards; it is the methodology to choose winners t at is more relevant.
A rating firm generally elaborates on the criteria for deciding the winner’s i.e.
consistent performance, risk adjusted returns, total returns and protection of capital. Each
of these factors is very important and ha s its significance for different categories of
funds.
Besides, each of these factors has varying degree of significance for different kinds of
investors. For example, consistent return re ally focuses on risk. If someone is afraid of
negative returns, consistency will be a more import ant measure than tot al ret urn i.e.
Growth in NAV as well as dividend received.
A fund can have very impressive total ret urns overtime, but can be very volatile and tough
for a risk adverse investor. Therefore, all the ward winning funds in different
categories may not be suitable for everyone. Typically, when one has to select funds, the
first step should be to consider personal goals and objectives. Invest ors need to decide which
element they value the most and the n prioritize the other criteria
Once one knows what one is looking for, one should go about selecting the funds according
to the asset allocation. Most investors need just a few funds, carefully picked, watched and
managed over period of time.
Evaluate the record of accomplishment against similar funds. Success in managing a small
or in a fund focusing on a particular segment of the market cannot be re lied upon as an
evidence of anticipated performance in managing a large or a broad based fund.
Discipline in investment approach is an important factor as the pressure to perform can make
a fund manager susceptible to have a n urge to change tracks in terms of stock selection as
well a s investment strategy.
The objective should be to differentiate investment skill of the fund manager from luck
and to identify those funds with the greatest potential of future success.
Any kind of investment we make is subject to risk. In fact we get return on our
investment purely and solely because at the very beginning we take the risk of parting
with our funds, for getting higher value back at a later date. Partition it self is a risk. Well
known economist and Nobel Prize recipient William Sharpe tried to segregate the total
risk faced in any kind of investment into two parts - systematic (Systemic) risk and
unsystematic (Unsystematic) risk.
Systematic risk is that risk which exists in the system. Some of the biggest examples of
systematic risk are inflation, recession, war, political situation etc.
Inflation erodes returns generated from all investments e .g. If return from fixed deposit is 8
percent and if inflation is 6 per cent then real rate of return from fixed deposit is reduced by 6
percent. Similarly if returns generated from equity market is 18 percent and inflation is still 6
per cent then equity returns will be lesser by the rate of inflation. Since inflation exists in the
system there is no way one can stay away from the risk of inflation.
Economic cycles, war and political situations have effects on all forms of investments. Also
these exist in the system and there is no way to stay away from them. It is like learning
to walk. Anyone who wants to learn to walk has to first fall; you cannot learn to walk
without falling. Similarly, anyone who wants to invest has to first face systematic risk.
Therefore, one can never make any kind of investment without systematic risk.
Another form of risk is unsystematic risk. This risk does not exist in the system and
hence is not applicable to all forms of investment.
If we have placed fixed deposit in several banks, then even if one of the banks goes
bankrupt our entire fixed de posit investment is not lost. Similarly if our equity
investment is in Tata Motors, HLL, Infosys, adverse news about Infosys will only
impact investment in Infosys, all other stocks will not have any impact . To reduce the
impact of systematic risk, we should invest regularly. By investing regularly, we average out
the impact of risk. Mutual fund, as an investment vehicle gives us benefit of both
diversification and averaging. Portfolio of mutual funds consists of multiple securities
and hence adverse news about single security will have nominal impact on overall portfolio.
By systematically investing in mutual fund, we get benefit of rupee cost averaging. Mutual
fund as an investment vehicle helps reduce, both, systematic as well a s unsystematic risk
The considerations underlying the portfolio analysis is a matter of concern to the fund
managers, investors, and researchers alike. This study attempts to answer two questions
relating to the portfolio analysis:
• Make an average (or fair) return for the level of risk in the portfolio
• To find out the portfolio which best meets the purpose of the investor.
At a minimum, any comprehensive mutual fund selection and analysis approach should
include the following generalized processes:
• Fund selection
The fund portfolio analysis gives the ability to select funds that are aligned with the
investor’s strategies and objectives. It helps the fund manager to make the best use of
available opportunities by applying to the highest priority of the investor. A fund manager
can regularly assess how securities and stocks are contributing to portfolio health and can
make the corrective action to keep the portfolio in compliance with the investor’s interest and
objectives.
Mutual funds do not determine risk preference. However, once investor determines his/her
return preferences, he/she can choose a mutual fund a large and growing variety of alternative
funds designed to meet almost any investment goal. Studies have showed that the funds
generally were consistent in meeting investors stated goals for investment strategies, risk, and
return. The major benefit of the mutual fund is to diversify the portfolio to eliminate
unsystematic risk. The instant diversification of the funds is especially beneficial to the small
investors who do not have the resources to acquire 100 shares of 12 or 15 different issues
required to reduce unsystematic risk.
Mutual funds have generally maintained the stability of their correlation with the market
because of reasonably well diversified portfolios. There are some measures for the analysis
and each of them provides unique perspectives. These measures evaluate the different
components of performance.
It is the uncertainty that an investment will earn its expected rate of return. For an investor,
evaluating a future investment alternative expects or anticipates a certain rate of return is very
important.
Portfolio risk management includes processes that identify, analyse, respond to, track, and
control any risk that would prevent the portfolio from achieving its business objectives. These
processes should include reviews of project level risks with negative implications for the
portfolio, ensuring that the project manager has a responsible risk mitigation plan.
The return on mutual fund investment includes both income (in the form of dividends or
investment payments) and capital gains or losses (increase or decrease in the value of a
security). The return is calculated by taking the change in a fund’s Net Asset Value, which is
the market value of securities the fund holds divided by the number of the fund’s shares
during a given time period, assuming the reinvestment all income and capital gains
distributions, and dividing it by the original net asset value. The return is calculated net of
management fees and other expenses charged to the fund. Thus, a fund’s monthly return can
be expressed as follows:
Where,
NAVt is the closing net asset value of the fund on the last trading day of the month
NAVt-1 is the closing net asset value of the fund on the last day of the previous month
Measure of risk
Investors are interested not only in fund’s return but also in risk taken to achieve those
returns. So risk can be thought as the uncertainty of the expected return, and uncertainty is
generally equated with variability. Variability and the risk are correlated; hence high returns
will tend to high variability.
Standard deviation:
in simple terms standard deviation is one of the commonly used statistical parameter to
measure risk, which determines the volatility of a fund. Deviation is defined as any variation
from a mean value (upward & downward). Since the markets are volatile, the returns
fluctuate every day. High standard deviation of a fund implies high volatility and a low
standard deviation implies low volatility.
Where,
T is the number of observations in the period for which the standard deviation is being
calculated.
Systematic risk is measured in terms of Beta, which represents fluctuations in the NAV of the
fund vis-à-vis market. The more responsive the NAV of a Mutual Fund is to the changes in
the market; higher will be its beta. Beta is calculated by relating the returns on a Mutual Fund
with the returns in the market. While unsystematic risk can be diversified through
investments in a number of instruments, systematic risk cannot. By using the risk return
relationship, we try to assess the competitive strength of the Mutual Funds vis-à-vis one
another in a better way.
Beta is used to measure the risk. It basically indicates the level of volatility associated with
the fund as compared to the market. In case of funds, as compared to the market. In case of
funds, beta would indicate the volatility against the benchmark index. It is used as a short
term decision making tool. A beta that is greater than 1 means that the fund is more volatile
than the benchmark index, while a beta of less than 1 means that the fund is more volatile
than the benchmark index. A fund with a beta very close to 1 means the fund’s performance
closely matches the index or benchmark.
The success of beta is heavily dependent on the correlation between a fund and its
benchmark. Thus, if the fund’s portfolio doesn’t have a relevant benchmark index then a beta
would be grossly inappropriate. For example if we are considering a banking fund, we should
look at the beta against a bank index.
R-Squared (R2):
R squared is the square of ‘R’ (i.e.; coefficient of correlation). It describes the level of
association between the fun’s market volatility and market risk. The value of R- squared
ranges from0 to1. A high R- squared (more than 0.80) indicates that beta can be used as a
reliable measure to analyze the performance of a fund. Beta should be ignored when the r-
squared is low as it indicates that the fund performance is affected by factors other than the
markets.
For example:
Case 1 Case 2
R2 0.65 0.88
B 1.2 0.9
In the above tableR2 is less than 0.80 in case 1, implies that it would be wrong to mention
that the fund is aggressive on account of high beta. In case 2, the r- squared is more than 0.85
and beta value is 0.9. it means that this fund is less aggressive than the market.
Portfolio turnover is a measure of a fund's trading activity and is calculated by dividing the
lesser of purchases or sales (excluding securities with maturities of less than one year) by the
average monthly net assets of the fund. Turnover is simply a measure of the percentage of
portfolio value that has been transacted, not an indication of the percentage of a fund's
holdings that have been changed. Portfolio turnover is the purchase and sale of securities in a
fund's portfolio. A ratio of 100%, then, means the fund has bought and sold all its positions
within the last year. Turnover is important when investing in any mutual fund, since the
amount of turnover affects the fees and costs within the mutual fund.
A measure of the total costs associated with managing and operating an investment fund such
as a mutual fund. These costs consist primarily of management fees and additional expenses
such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of
the fund is divided by the fund's total assets to arrive at a percentage
amount, which represents the TER:
The Treynor’Measure
Jenson Model
Fama Model
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:
Where,
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund,
a low and negative Sharpe Ratio is an indication of unfavourable performance.
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,
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.
Sharpe and Treynor measures are similar in a way, since they both divide the risk premium
by a numerical risk measure. The total risk is appropriate when we are evaluating the risk
return relationship for well-diversified portfolios. On the other hand, the systematic risk is the
relevant measure of risk when we are evaluating less than fully diversified portfolios or
individual stocks. For a well-diversified portfolio the total risk is equal to systematic risk.
Rankings based on total risk (Sharpe measure) and systematic risk (Treynor measure) should
be identical for a well-diversified portfolio, as the total risk is reduced to systematic risk.
Therefore, a poorly diversified fund that ranks higher on Treynor measure, compared with
another fund that is highly diversified, will rank lower on Sharpe Measure.
Jenson Model:
Jenson's model proposes another risk adjusted performance measure. This measure was
developed by Michael Jenson and is sometimes referred to as the differential Return Method.
This measure involves evaluation of the returns that the fund has generated vs. the returns
actually expected out of the fund1 given the level of its systematic risk. The surplus between
the two returns is called Alpha, which measures the performance of a fund compared with the
actual returns over the period. Required return of a fund at a given level of risk (Bi) can be
calculated as:
E(Ri) = Rf + Bi (Rm - Rf)
Where,
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 cannot mitigate unsystematic risk, as his knowledge of market is
primitive.
Fama Model:
The Eugene Fama model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return commensurate
with the total risk associated with it. The difference between these two is taken as a measure
of the performance of the fund and is called Net Selectivity.
The Net Selectivity represents the stock selection skill of the fund manager, as it is the excess
returns over and above the return required to compensate for the total risk taken by the fund
manager. Higher value of which indicates that fund manager has earned returns well above
the return commensurate with the level of risk taken by him.
Selectivity: measures the ability of the portfolio manager to earn a return that is consistent
with the portfolio’s market (systematic) risk. The selectivity measure is:
Ri –[ Rf + Bi (Rm - Rf) ]
Diversification: measures the extent to which the portfolio may not have been completely
diversified. Diversification is measured as:
Net selectivity measures, how well the portfolio mangers did manager did at earning a fair
return for the portfolio’ systematic risk and diversifying away unsystematic risk. Positive net
selectivity indicates that the fund earned a better return.
The comparison, done based on sharpe ratio, Treynor measure, Jensen alpha, and Fema
measure notifies that the portfolio performance can be evaluated on the following basis:
Jensen’s alpha: measures the average return over and above that predicted.
Fema measure: measures return of portfolio for its systematic risk and diversifying away
unsystematic risk.
Among the above performance measures, two models namely, Treynor measure and Jenson
model use Systematic risk is based on the premise that the Unsystematic risk is diversifiable.
These models are suitable for large investors like institutional investors with high risk taking
capacities as they do not face paucity of funds and can invest in a number of options to dilute
some risks. For them, a portfolio can be spread across a number of stocks and sectors.
However, Sharpe measure and Fama model that consider the entire risk associated with fund
are suitable for small investors, as the ordinary investor lacks the necessary skill and
resources to diversify. Moreover, the selection of the fund on the basis of superior stock
selection ability of the fund manager will also help in safeguarding the money invested to a
great extent. The investment in funds that have generated big returns at higher levels of risks
leaves the money all the more prone to risks of all kinds that may exceed the individual
investors' risk appetite.
PART-II
RESEARCH METHODOLOGY
The Mutual Fund Companies periodically build up a study, which can prioritize and analyse
the portfolio of the mutual funds. This study is helpful in having a comparison among the
mutual funds based on the risk bearing capacity and expected return of the investor and will
also carry out an analysis of the portfolio of the selected mutual fund.
The mutual fund industry is growing globally and new products are emerging in the market
with all captivating promises of providing high return. It has become difficult for the
investors to choose the best fund for their needs or in other words to find out a fund which
will give maximum return for minimum risk. Therefore, they turn to their financial adviser to
get precise direct investment. Hence, the company asked me to prepare a model, which will
facilitate them to analyse the fund and to have reasonable estimation for the fund
performance.
The driving force of Mutual Funds is the ‘safety of the principal’ guaranteed, plus the added
advantage of capital appreciation together with the income earned in the form of interest or
dividend. The various schemes of Mutual Funds provide the investor with a wide range of
investment options according to his risk bearing capacities and interest besides; they also give
handy return to the investor. Mutual Funds offers an investor to invest even a small amount
of money, each Mutual Fund has a defined investment objective and strategy. Mutual Funds
schemes are managed by respective asset managed companies, sponsored by financial
institutions, banks, private companies or international firms. A Mutual Fund is the ideal
investment vehicle for today’s complex and modern financial scenario.
The study is basically made to analyze the various open-ended equity schemes of HDFC
Asset Management Company to highlight the diversity of investment that Mutual Fund offer.
Thus, through the study one would understand how a common person could fruitfully convert
a meagre amount into great penny by wisely investing into the right scheme according to his
risk taking abilities.
Sharpe ratio is a performance measure, which reflects the excess return earned on a portfolio
per unit of its total risk (standard deviation). Treynor measure indicates the risk premium
return per unit risk of the portfolio. While Jensen alpha talks about the deviation of the actual
return from its expected one. Fema measure decomposes the portfolio total return into two
main components: systematic return and the unsystematic return. It determines whether the
portfolio is perfectly diversified or not. Hence, it is a significant measure to evaluate the
performance of the fund manager.
The analysis of the fund portfolio has been done to find out the influence of the top holdings
on the performance of the fund. All these measures give fair implication and results about the
portfolio performance and can show the ground reality to a rational investor.
Whether the growth oriented Mutual Fund are earning higher returns than the
benchmark returns (or market Portfolio/Index returns) in terms of risk.
Whether the growth oriented mutual funds are offering the advantages of
Diversification, Market timing and Selectivity of Securities to their investors
This study provides a proper investigation for logical and reasonable comparison and
selection of the funds.
The study is limited only to the analysis of different schemes and its suitability to
different investors according to their risk-taking ability.
The study is based on secondary data available from monthly fact sheets, websites and
other books, as primary data was not accessible.
The assumption that all investors have the same information and beliefs about the
distribution of returns.
Banks are free to accept deposits at any interest rate within the ceilings fixed by the
Reserve Bank of India and interest rate can vary from client to client. Hence, there
can be inaccuracy in the risk free rates.
The study excludes the entry and the exit loads of the mutual funds.
The Methodology involves the selected Open-Ended equity schemes of HDFC mutual fund
for the purpose of risk return and comparative analysis the competitive funds. The data
collected for this project is basically from secondary sources, they are;
The monthly fact sheets of HDFC AMC fund house and research reports from banks.
The NAVs of the funds have been taken from AMFI websites for the period starting from 31 st
jan 2007 to 31st May, 2009.
For the Benchmark prices, data has been taken from BSE and NSE sites.
Part-III
CASE ANALYSIS
3.1 DATA INTERPRETATION
In this section, a sample of HDFC equity related funds have been studied, evaluated and
analysed. This study could facilitate to get a fair comparison.
The expectations of the study are to give value to the funds by keeping the risk in the view.
Here equity funds are taken as they bear high return with high risk.
Following are the products of HDFC Mutual Fund, which have been taken the evaluation
purpose.
Investment Objective
Table:3.1
Lock-In-Period Nil
Table:3.2
Investment in Securitised debt, if undertaken, would not exceed 20% of the net assets of the
scheme. The Scheme may also invest upto 25% of net assets of the Scheme in derivatives
such as Futures & Options and such other derivative instruments as may be introduced from
time to time for the purpose of hedging and portfolio balancing and other uses as may be
permitted under the Regulations.
In order to provide long term capital appreciation, the Scheme will invest predominantly in
growth companies. Companies selected under this portfolio would as far as practicable
consist of medium to large sized companies which: are likely achieved above average growth
than the industry; enjoy distinct competitive advantages, and have superior financial
strengths.
The aim will be to build a portfolio, which represents a cross-section of the strong growth
companies in the prevailing market. In order to reduce the risk of volatility, the Scheme will
diversify across major industries and economic sectors.
Benchmark Index : S&P CNX 500. HDFC Equity, which is benchmarked to S&P CNX 500
Index is not sponsored, endorsed, sold or promoted by Indian Index Service & Products
Limited (IISL).
Fund Manager : Mr. Prashant Jain
Table:3.3
Figure:3.1
σm= √123.9077
=11.13239
β (Beta) =[N (Σ XY) – Σ XΣ Y ]/[ N (Σ X2) – (Σ X) 2 ]
= 98077.36/ 97143.672
= 1.0096114
Table:3.4
2007
JAN
=2.392215
= (1.063454-5)/ 2.392215
=-1.64557
Treynor's Index (Ti) = (Ri - Rf)/Bi.
=(1.063454-5)/ 1.0096114
=-3.89907
=0.070488
=[ 5+1.0096114 (1.031112-5)]
=0.992965
Fema Measures
=0.070488
=3.154092
=0.070488-3.15409
=-3.0836
HDFC CAPITAL BUILDER FUND
Investment Objective
The Investment Objective of the Scheme is to achieve capital appreciation in the long term.
Minimum Application For new investors :Rs.5000 and any amount thereafter.
Amount For existing investors : Rs. 1000 and any amount thereafter.
(Other than Systematic
Investment Plan (SIP)/
Systematic Transfer Plan
(STP))
Lock-In-Period Nil
Current Expense Ratio (#) On the first 100 crores average weekly net assets 2.50%
(Effective Date 22nd May On the next 300 crores average weekly net assets 2.25%
2009) On the next 300 crores average weekly net assets 2.00%
On the balance of the assets 1.75%
Pattern
The asset allocation under the Scheme will be as follows :
2 Debt & Money Market Instruments Not more than 20% Low to Medium
Investment in Securitised debt, if undertaken, would not exceed 20% of the net assets of the
scheme.
Investment Strategy
This Scheme aims to achieve its objectives by investing in strong companies at prices which
are below fair value in the opinion of the fund managers.
The Scheme defines a "strong company" as one that has the following characteristics :
• a market price quote that is around 30% lower than its value, as determined by the
discounted value of its estimated future cash flows
• a P/E multiple that is lower than the company's sustainable Return on funds employed
• a P/E to growth ratio that is lower than those of the company's competitors
• in case of companies in cyclical businesses, a market price quote that is around 50%
lower than its estimated replacement cost
Fund Manager
Mr. Chirag Setalvad (since Apr 2, 07)
Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities
Table:3.5
σm = √123.9077
=11.13239
Table:3.6
Ri Rm Ri-Rm Dev frm sq of Dev frm av
ave
2007 JAN
=2.545136
= (0.752867-5)/ 2.545136
=-1.66872
=(0.752867-5/ 0.936265
=-4.53625
=0.752867
- [5+0.936265(1.031112-5)]
= -0.39357
Expected return E(Ri) = Rf + Bi (Rm - Rf)
=[5+0.936265(1.031112-5)]
=1.284069
Fema Measures
=0.75286
7- [5+0.936265(1.031112-5)]
= -0.39357
=2.808464
=-0.39357-2.808464
=-3.33967
HDFC GROWTH FUND
Investment objective
The primary investment objective of the Scheme is to generate long term capital appreciation
from a portfolio that is invested predominantly in equity and equity related instruments.
Table:3.7
Lock-In-Period Nil
The corpus of the Scheme will be invested primarily in equity and equity related instruments.
The Scheme may invest a part of its corpus in debt and money market instruments, in order to
manage its liquidity requirements from time to time, and under certain circumstances, to
protect the interests of the Unit holders. The asset allocation under the Scheme will be as
follows :
Table:3.8
The investment approach will be based on a set of well established but flexible principles that
emphasise the concept of sustainable economic earnings and cash return on investment as the
means of valuation of companies. In summary, the Investment Strategy is expected to be a
function of extensive research and based on data and reasoning, rather than current fashion
and emotion. The objective will be to identify "businesses with superior growth prospects and
good management, at a reasonable price".
Figure:3.3
σm= √120.7738
=10.98971
Table:3.10
2007
JAN
=2.54769
= (1.085701-5)/ 2.54769
=-1.53641
=(1.085701-5)/ 0.921779
=-4.24646
=1.08570
1- [5+0.921779 (0.738601-5)]
= 0.013767
=[5+0.921779 (0.738601-5)]
=1.071934
Fema Measures
=1.08570
1- [5+0.921779 (0.738601-5)]
= 0.013767
=2.940167
=0.013767-2.940167
=-2.9264
Nature of Scheme Close Ended Equity Scheme with a maturity period of 5 years
with automatic conversion into an open-ended scheme upon
maturity of the Scheme.
Specified Redemption Period A Unit holder can submit redemption/ switch-out request
only during the Specified Redemption Period. Presently, the
Specified Redemption Period is the first five Business Days
immediately after the end of each calendar half year.
Lock-In-Period Nil
Current Expense Ratio (#) On the first 100 crores average weekly net assets 2.50%
(Effective Date 22nd May On the next 300 crores average weekly net assets 2.25%
2009) On the next 300 crores average weekly net assets 2.00%
On the balance of the assets 1.75%
Investment Pattern
The following table provides the asset allocation of the Schemes portfolio.
The aim will be to build a portfolio that adequately reflects a cross-section of the growth
areas of the economy from time to time. While the portfolio focuses primarily on a buy and
hold strategy at most times, it will balance the same with a rational approach to selling when
the valuations become too demanding even in the face of reasonable growth prospects in the
long run.
Fund Manager
Mr. Srinivas Rao Ravuri (since Apr 3, 06)
Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities
Table:3.11
σm= √120.7738
=10.98971
Table:3.12
Ri Rm Ri-Rm Dev frm ave sq of Dev frm av
2007
JAN
=2.353486
= (0.243891-5)/ 2.353486
=-2.02088
=(0.243891-5)/ 0.904883
=-5.25605
=[5+0.904883 (0.738601-5)]
=1.143932
Fema Measures
=2.943474
=-0.90004-2.943474
=-3.84352
HDFC TAXSAVER
Investment Objective
The investment objective of the Scheme is to achieve long term growth of capital.
Table:3.13
Lock-In-Period 3 yrs
Investment Pattern
Table:3.14
Investment in Securitized debt, if undertaken, would not exceed 20% of the net assets of the
scheme.
The Scheme may also invest up to 25% of net assets of the Scheme in derivatives such as
Futures & Options and such other derivative instruments as may be introduced from time to
time for the purpose of hedging and portfolio balancing and and other uses as may be
permitted under the regulations and guidelines.
The Scheme may also invest a part of its corpus, not exceeding 40% of its net assets, in
overseas markets in Global Depository Receipts (GDRs), ADRs, overseas equity, bonds and
mutual funds and such other instruments as may be allowed under the Regulations from time
to time. The ELSS (Equity Linked Savings Scheme) guidelines, as applicable, would be
adhered to in the management of this Fund. If the investment in equities and related
instruments falls below 80% of the portfolio of the Scheme at any point in time, it would be
endeavoured to review and rebalance the composition.
Benchmark Index :
S&P CNX 500. HDFC Tax saver, which is benchmarked to S&P CNX 500 Index is not
sponsored, endorsed, sold or promoted by Indian Index Service & Products Limited (IISL).
σm= √123.9077
=11.13139
2007
JAN
Standard Deviation for the fund’s excess return (S.D.) σi=√ 5.254467
= 2.292262
= (0.548703-5)/ 2.292262
=-1.94188
=(0.548703-5)/ 0.944765
=-4.71154
Jenson alpha (αp) = Ri –[ Rf + Bi (Rm - Rf) ]
=[5+0.944765 (1.031112-5)]
=1.250332
Fema Measure:
=0.548703
- [5+0.944765 (1.031112-5)]
= -0.70163
=2.932363
=-0.70163-2.932363
=-3.63399
Investment Objective
The investment objective is to generate long-term capital appreciation from a portfolio of
equity and equity linked instruments. The investment portfolio for equity and equity-linked
instruments will be primarily drawn from the companies in the BSE 200 Index. Further, the
Scheme may also invest in listed companies that would qualify to be in the top 200 by market
capitalisation on the BSE even though they may not be listed on the BSE This includes
participation in large IPO’s where in the market capitalisation of the company based on issue
price would make the company a part of the top 200 companies listed on the BSE based on
market capitalisation.
Table:3.17
Lock-In-Period Nil
Investment Pattern
PROFILE
2 Debt securities, money Balance in Debt & Money Market Low to medium
market instruments & Instruments
cash
Investment in Securitised debt, if undertaken, would not exceed 20% of the net assets of the
scheme. The Scheme may also invest upto 25% of net assets of the Scheme in derivatives
such as Futures & Options and such other derivative instruments as may be introduced from
time to time for the purpose of hedging and portfolio balancing and other uses as may be
permitted under the regulations and guidelines.
The investment strategy of primarily restricting the equity portfolio to the BSE 200 Index
scrips is intended to reduce risks while maintaining steady growth. Stock specific risk will be
minimised by investing only in those companies / industries that have been thoroughly
researched by the investment manager's research team. Risk will also be reduced through a
diversification of the portfolio.
Figure:3.6
σm= √147.9045
=12.1616
Table:3.20
2007
JAN
Fema Measure:
Selectivity =Ri –[ Rf + Bi (Rm - Rf) ]
=1.332192- [5+0.868932 (0.920507-5)]
= -0.12301
The table given below illustrates the comparison among the analysed funds based on the
different measures of comparison.
FUND BENCHMARK
RETURNS RETURN
Figure:3.7
The above table presents return and risk of the six funds along with market return and risk.
From the table it is evident that, Top 200, Equity fund and Growth fund have earned greater
return as against the market earning. Capital builder, Long term advantage and Tax saver
funds have not earned higher return than the Market portfolio. Long-term advantage and Tax
saver funds have even negative returns.
Comparison of ratios:
Table:3.22
Fund S.D. S.D. fund B value Sharpe Treynor Jenson’s Fema Retuns
name market ratio ratio alpha jan07-
may08(29
months)
High standard deviation of a fund implies high volatility and a low standard deviation implies
low volatility. HDFC equity fund, HDFC capital Builder and HDFC Tax saver take S&P
CNX 500 as their benchmark, HDFC Growth fund and HDFC long term have taken Sensex
as bench mark and HDFC Top 200 has taken BSE 200 as its bench mark. We found out that
BSE 200’s S.D. is 12.1616, which is greater than Sensex and S&P CNX 500 having
10.98971 and 11.13139 S.D. respectively. Therefore, BSE 200 is more volatile than Sensex
and S&P CNX 500.
It has been found that HDFC Top 200’s S.D. is lesser than all other funds. Although
benchmark index (BSE 200) is more volatile as it has higher S.D. than other indexes still
HDFC Top 200 is less volatile because of lesser fund S.D. This is might be because of
diversification of unsystematic risk as it compensates the systematic risk.
β Value :
As we know in case of funds, beta would indicate the volatility against the benchmark index.
It is used as a short term decision making tool. A beta that is greater than 1 means that the
fund is more volatile than the benchmark index, while a beta of less than 1 means that the
fund is more volatile than the benchmark index. A fund with a beta very close to 1 means the
fund’s performance closely matches the index or benchmark.
The analysis illustrates that HDFC Equity fund’s is less volatile and its performance is very
close to its benchmark as its beta value is 1.0096114 compared to other funds which have
beta value lesser than 1 point. HDFC Top 200’s beta value is more volatile than the
benchmark as its value is 0.868932, which is very far from point 1.
Sharpe ratio:
A fund with a higher Sharpe ratio means that these returns have been generated taking lesser
risk. In other words, the fund is less volatile and yet generating good return.
The analysis shows that all the funds have negative Sharpe ratio therefore they are more
risky. Comparing all the funds HDFC growth fund has lesser negative marks that means its
return 16.48711 is generated taking lesser risk.
Treynor ratio:
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 unfavourable performance
(systematic risk associated with it (beta)).
All the funds are having negative Treynor’s ratio which means they are affected by the
volatility of the market (systematic risk)or by the great recession.
Jenson’s alpha:
Its 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. Higher alpha
represents superior performance of the fund and vice versa.
The analysis points out that all the funds are having negative alpha except HDFC Equity fund
and HDFC Growth fund which have positive points. Jenson alpha ratio justifies that these
two funds are at least able to achieve the expected return given the level of their systematic
risk.
Fema measure:
The Net Selectivity (Fema) represents the stock selection skill of the fund manager, as it is
the excess returns over and above the return required to compensate for the total risk taken by
the fund manager. Higher value of which indicates that fund manager has earned returns well
above the return commensurate with the level of risk taken by him.
It has been that all the funds are having negative net selectivity because of the higher risk
found both in systematic risk (B) and unsystematic risk. This findings point out, that the stock
selection of the fund manager has been failed because of the systematic risk i.e. recession.
Comparing to other funds HDFC Growth fund (-2.9264) has lesser negative points in this
time of great crisis. This indicates that HDFC Growth fund is getting enhanced return by
nullifying systematic risk and unsystematic risk.
From the above analysis there is no fund which has consistency. The funds are being affected
very badly either by the systematic risk or by the unsystematic risk. As we observe closely, it
is the HDFC Growth fund, which has better option for the investment. Its Sharpe ratio is
lesser negative than other funds which illustrates that its return is less affected by overall risk.
Its alpha value is more than 0 which means its less affected by the market risk (systematic
risk) and also its Fema value (selectivity) has lesser negative value which has managed to
nullify systematic risk and unsystematic risk during the time of recession.
An investor who is entering into the capital market for making long-term investment, the
volatility of the market is important to accomplish his or her goal and these expectations are
often formed on the basis of historical record of monthly returns, measured for holding period
and other important ratios. We will take this fund (HDFC Growth fund) for further analysis
of its portfolio.
Portfolio 31-May-09
Oil & Natural Gas Corporation Ltd. Oil 111,353 1,301.99 1.12
Short Term Deposits as margin for Futures & Options 1,000.00 0.86
Cash margin / Earmarked cash for Futures & Options 5,072.00 4.36
Table:3.24
Banks 16.37
Pharmaceuticals 10.39
Finance 3.42
Software 3.31
Chemicals 2.41
Fertilisers 2.24
Construction 1.48
Transportation 1.24
Oil 1.12
Engineering 0.18
TOTAL 100
Figure:3.8
Table:3.25
HDFC Growth (NAV as at evaluation date 30-June-09, Rs. 57.219 Per unit)
Fund
June 30, 2008 Last 1 Year (365 days) 53.472 7.01 7.67
It requires a lot of research and constant watch on the capital market for a fund manager to
analyze the portfolio of the particular fund. I took the secondary data from the fund review of
the article corner from The Business Line web site. I comprehended the analysis and
concluded my view as stated below.
HDFC Growth Fund invests in stocks across market capitalisations. Despite a large-cap bias,
mid and small cap stocks account for 28 per cent of the portfolio. The fund has managed to
consistently beat its benchmark Sensex over one-, three- and five-year periods.
In the latest portfolio, the fund has invested in as many as 52 stocks across 18 different
sectors making it a fairly diversified portfolio. This may indicate net inflows into the fund.
Sector Moves: There is a fair bit of stability in terms of top sector holdings in the portfolio.
Banks (16.39 per cent) and pharmaceuticals (10.37 per cent) sectors continue to be the top
two sector holdings, although exposures have been a bit reduced.
Banks and consumer non-durables also figure among top holdings in the fund, and have seen
increased exposures over the September-February period. While capital goods and banks
have done well in the past year, they have been among the worst hit in the recent meltdown.
The respective sector indices were beaten down by over 25 per cent in the last couple of
months. Construction and predictably, software exposures have been pared in the six-month
period.
Interestingly, media and entertainment (8.48 per cent), which were not part of the portfolio
six months ago is now in the top ten sector holdings for the fund. The power sector has been
exited, while telecom services and auto ancillaries exposures have been increased
substantially.
Stock Moves: Most stocks are those whose prices have fallen during September-February,
include stocks such as Zee Entertainment, HT Media and Dr Reddy's Labs.
The fund has also taken profit booking opportunities, with several stocks whose prices rose
between 60-105 per cent have been exited. These include, Axis Bank, Hanung Toys and Tata
Power. Other high-profile exits include DLF, HPCL, Ranbaxy Labs, and Punj Lloyd.
Reliance Industries, SBI, ONGC and BHEL are the stocks retained by the fund during the
period and are among the fund's top holdings.
3.4 FINDINGS
As far as analysis is concerned, we found out that the HDFC Growth Fund was among
the best performers fund. Although all the funds are affected by the global meltdown,
(recession) still HDFC Growth Fund has better performed comparing to other funds
for its systematic and unsystematic risk. It offers advantages of diversification, market
timing, and selectivity. In the comparison of sample of funds, HDFC Growth fund is
found highly diversified fund and because of high diversification, it has reduced the
total risk of portfolio.
Further, other funds were found very poor in diversification, market timing, and
selectivity. Although HDFC Top 200 Fund and Equity Fund performed better in terms
of returns but these suffered by the systematic risk (market volatility) and lack of
diversification. For the further clarification, we too studied the portfolio of HDFC
Growth fund.
One of the findings that I came across is that generally, a good model of asset classes
is the one that can explain a large portion of the variance of returns on the assets and
there were some stocks in the fund portfolio, which were not aligned with strategy of
the fund portfolio.
The optimal situation involves the selection that proceeds from sensible assumptions,
is carefully and logically constructed, and is broadly consistent with the data while
collecting the stocks for the portfolio. The portfolio was showing constructive
outcome in long time horizon and the results can be improved by making the minor
changes in fund portfolio.
Hence, the portfolio theory teaches us that investment choices are made on the basis
of expected risk and returns and these expectations can be satisfied by having right
mix of assets.
3.5 RECOMMENDATIONS:
Considering the above analysis, it can be noted that the three growth oriented mutual funds
(HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200 fund) have performed better
than their benchmark indicators. Other funds such as HDFC Capital Builder Fund, HDFC
Long term Advantage Fund did not perform well even some performed negatively. Though
HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200 fund have performed better
than the benchmark of their systematic risk (volatility) but with respect to total risk the fund
have not outperformed the Market Index.
Growth oriented mutual funds are expected to offer the advantages of Diversification, Market
timing and Selectivity. In the sample, HDFC Equity Fund, HDFC Growth Fund and HDFC
Top 200 fund is found to be diversified fund and because of high diversification, it has
reduced total risk of the portfolio. Whereas, others are low diversified and because of low
diversification their total risk is found to be very high. Further, the fund managers of these
under performing funds are found to be poor in terms of their ability of market timing and
selectivity.
The fund manager of HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200
fund can improve the returns to the investors by increasing the systematic risk of the
portfolio, which in turn can be done by identifying highly volatile shares.
Alternatively, these can take advantage by diversification, which goes to reduce the
risk if the same return is given to the investor at a reduced risk level, the
compensation for risk might seem adequate. The fund manager of HDFC Capital
Builder Fund, HDFC Long term Advantage Fund can earn better returns by adopting
the marketing timing strategy and selecting the under priced securities.
The fund manager can divide all securities into several asset classes and tries to
construct an efficient portfolio based on expected returns, risk, and correlations of
indexes representing these asset classes. The investment should be done in the bench
mark indexes to get an “efficient” portfolio in such a way that no other combination
of these indexes would result in a portfolio with a higher return for a given level of
risk. It should be emphasized, however, that this is not a fully efficient portfolio
because information about correlations among individual securities within an index
and across the indexes is lost in the transition from individual securities to the
benchmarks that represent them.
These measures are more useful to investors who are putting their money into one
diversified fund and are able to use leverage or invest in the risk-free asset. When the
investor is investing in the different funds, the fund’s marginal contribution to the
portfolio’s risk and return is more important than its individual security
characteristics. To construct an efficient portfolio, an investor must take account of
the correlations among the being considered.
It is not advisable to apply just procedure or approach for all situations at least when it comes
to investments though the used measures are highly reliable in the studies done on similar
veins. Even at this juncture it would still be recommended that instead of going ahead only on
the basis of risk and return, other indicators like new projects, sector impact, individual
sentiments about companies etc besides ‘common sense and intuition’ may also be looked
into.
3.6 CONCLUSIONS:
Mutual fund has become one of the important sources for investing. It is quite likely that a
more efficient portfolio can be constructed directly from funds. Thus, the two-step process of
choosing an asset allocation based on the information about benchmark indexes and then
choosing funds in each category may be one of the best realistically attainable approaches. To
use this approach to portfolio selection effectively, investors would benefit from estimates of
future asset returns, risks and correlations, as well as from fund management’s disclosure of
future asset exposures and appropriate benchmarks.
It has been a great opportunity for me to get a first experience of Mutual Funds. My study is
to get the feel of how the work is carried out in relation to fund’s portfolio aspect. I got an
opportunity in relation to the documentation and also the portfolio analysis that have been
carrying out in facilitating the investor and the fund manager.
REFERENCES
Books:
Magazines:
Websites
• www.hdfcfund.com
• www.amfiindia.com
• www.moneycontrol.com
• www.sebi.gov.in
• www.bseindia.com
• www.nseindia.com
• www.mutualfundsindia.com
• www.valueresearch.com
• www.indiainfoline.com
• www.in.finance.yahoo.com
• www.investing.businessweek.com
• www.businessline.com