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A STUDY ON MUTUAL FUNDS IN INDIA (WITH REFERANCE TO HDFC MUTUAL FUND)

Dr. R. Geetha, Associate professor in Commerce, V.V.V. College for Women, Virudhunagar Ms. G. Jothi Lakshmi, Ph.D Scholar, V.V.V. College for Women, Virudhunagar *********************************************************************************** ABSTRACT

Mutual Fund was introduced in the year 1963 in India. Unit trust of India was the first association to launch the concept of Mutual Fund in India. Mutual funds are financial instruments offered to the public by the finance corporations. These funds are resourcefully managed collective investments, which pools money from a number of investors and use that money as investment in various stocks, short-term money market financial instruments, bonds, and other securities to earn interest and distribute it as dividends. Funds that are managed by the same fund manager and that have the same brand name are known as a "fund family" or "fund complex". A mutual Fund is a fund which is managed by an investment company and it is the right way to make savings for retirement, education or other financial purposes. There are many investors who wish to enjoy benefits of professional portfolio management but are hindered by various restrictions on money matters. The Mutual Fund is governed by a fund manager who buys various portfolios of investments with the money collected from various investors. The important types of mutual funds in India, the top funds of India, the points to be considered while selecting a fund for investment and the performance of HDFC top funds are discussed in this paper.

A STUDY ON MUTUAL FUNDS IN INDIA (WITH REFERANCE TO HDFC MUTUAL FUND)

Dr. R. Geetha, Associate professor in Commerce, V.V.V. College for Women, Virudhunagar Ms. G. Jothi Lakshmi, Ph.D Scholar, V.V.V. College for Woman, Virudhunagar

********************************************************************* INTRODUCTION Mutual Fund was introduced in the year 1963 in India. Unit trust of India was the first association to launch the concept of Mutual Fund in India. It invited a lot of investors to invest in UTI Mutual Funds in order to make savings. UTI Mutual Fund ruled India for around 30 years and there were no competitors till 1988 when some new mutual fund companies came into existence. Mutual funds are financial instruments offered to the public by the finance corporations. These funds are resourcefully managed collective investments, which pools money from a number of investors and use that money as investment in various stocks, short-term money market financial instruments, bonds, and other securities to earn interest and distribute it as dividends. A mutual fund is registered with the Securities and Exchange Commission (SEC) and is overseen by a board of directors (if organized as a corporation) or board of trustees (if organized as a trust). The board is charged with ensuring that the funds are managed in the best interests of the fund's investors and with hiring the fund manager and other service providers to the fund. A fund manager must be a registered investment advisor. Funds that are managed by the same fund manager and that have the same brand name are known as a "fund family" or "fund complex". Mutual funds are not taxed on their income as long as they comply with certain requirements established in the Internal Revenue Code. Specifically, they must diversify their investments, limit ownership of voting securities, distribute most of their income to their investors annually, and earn most of the income by investing in securities and currencies. Mutual funds pass taxable income on to their investors. The type of income they earn is unchanged as it passes through to the shareholders. For example, mutual fund distributions of dividend income are reported as dividend income by the investor.

There is an exception that the net losses incurred by a mutual fund are not distributed or passed through to fund investors. OBJECTIVES OF THE SYUDY To discuss the different types of mutual funds in India.

To analyze the points to be considered by an investor while selecting a mutual fund.

To examine the ranked mutual funds in India. To give the profile of HDFC mutual fund being the top most fund. COLLECTION OF DATA Secondary data from websites and journals have been collected for the study. TYPES OF MUTUAL FUNDS There are three basic types of registered investment companies defined in the Investment Company Act of 1940: open-end funds, unit investment trusts (UITs); and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange. Open-end funds Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. Most open-end funds also sell shares to the public every business day. These shares are also priced at net asset value. A professional investment manager oversees the portfolio, buying and selling securities as appropriate. The total investment in the fund will vary based on share purchases, share redemptions and fluctuation in market valuation.

Closed-end funds Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering. Their shares are then listed for trading on a

stock exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund). Instead, they must sell their shares to another investor in the market; the price they receive may be significantly different from net asset value. It may be at a "premium" to net asset value (meaning that it is higher than net asset value) or, more commonly, at a "discount" to net asset value (meaning that it is lower than net asset value). A professional investment manager oversees the portfolio, buying and selling securities as appropriate. Unit investment trusts Unit investment trusts or UITs issue shares to the public only once, when they are created. Investors can redeem shares directly with the fund (as with an open-end fund) or they may also be able to sell their shares in the market. Unit investment trusts do not have a professional investment manager. Their portfolio of securities is established at the creation of the UIT and does not change. UITs generally have a limited life span, established at creation. Growth or Equity Oriented Scheme The aim of growth is to provide capital appreciation over the medium to longterm. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation and the like. The investors may choose an option depending on their preferences. The investors must indicate the options at a later date. Growth schemes are good for investors having a long-term outlook seeing appreciation over a period of time.

Income or Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money market instruments. Such funds are less

risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rate in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run vice versa. However, long term investors may not bother about these fluctuations. Balanced fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60 per cent in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. Money Market or Liquid Fund These funds are also income funds and their aim is to provide liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificate of deposit, commercial paper and inter-bank call money and government securities. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

Gilt Fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Index funds

Index funds replicate the portfolio of a particular index such as the BSE sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or in the index, though not exactly by the same percentage due to some factors known as tracking error in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. Exchange - trade funds A retatively recent innovation, the exchange - trade fund or ETF is often structured as an Open-end investment company. Though ETFs may also be structured as unit investment trust, grantor trusts or bonds (as an exchange trade note). ETFs combine characteristics of both closed - end funds and open - end funds. Like closed -end funds, ETFs are traded throughout the day on a stock exchange at a price determined by the market. However, as with open- end funds, investors normally receive a price that is close to net asset value. To keep the market price close to net asset value. ETFs issue and redeem large blocks of their shares with institutional investors. Most ETFs are index funds.

POINTS TO BE CONSIDERED BEFORE INVESTING IN A MUTUAL FUND There are various factors that one has to consider while selecting a particular mutual fund for investment. Before one looks at specific factors there has to be a clear distinction between the type of funds that are present in the market. The overall funds have to be separated in equity funds, debt funds, balanced funds, monthly income schemes or other funds that could be real estate funds or gold funds or some other funds that are newly introduced in the market . Within each of the categories there has to be selection of the relevant factors. Track record of the fund

A lot of active management has to be undertaken in respect of debt schemes where the position for the individual matters quite a lot even when the difference might not seem to be very large. A good fund manager is one which has a good track record. Hence the past performance of the fund or other schemes managed by the fund must be analysed. Track record of the fund manager The fund manager is a very important component of the whole investment process. Even though there might be the necessary systems in place in a particular fund house the ultimate buy and sell decisions have to be taken by the fund manager. In this respect the track record of the fund manager and how they have performed through good as well as bad times need to be considered. What is also important is the element of continuity of the fund manager especially with the scheme under management. If there are fund managers who keep moving between funds then it would be very difficult to judge the performance of the fund manager. Investor needs and scheme types The needs of the investors have to be considered paramount because they will set the base on which the entire investment is based. Once the needs of the investor are clear one has to see whether the investment in that particular scheme fulfils the need of the investors. For example if there is an investor who wants to take risk that is higher than that of the market then even sectoral schemes might turn out to be a good investment option for the individual. Due to the differing needs of investors there are no schemes that are good or bad or relevant or irrelevant because they might be useful for someone while completely unsuitable for several others. Thus the final suitability will have to be considered in relation to the needs of the investor. Some special feature

There are similar funds belonging to different fund houses and hence making a selection for a particular scheme becomes a very important factor. The scheme that an investor is putting their money into should have something that is different from the other options around so that it has its own place in the investment plan. This means that the scheme should have a distinguishing character that will set it out and make the investment a must. Portfolio Even though this is not the first point mentioned on the check list it is probably the most important point that one has to consider while making a particular investment decision. The portfolio composition in a particular scheme will determine the way it performs in the future as the performance is dependent upon the performance of the assets in the portfolio. The composition of the portfolio in terms of the selection of shares apart the way in which these have been weighted is also an important factor. The composition of the portfolio in terms of the sectoral weights plus the ability for the fund manager to liquidate this in terms of need would also have to be considered carefully. Convenience There might be a lot of things right about a mutual fund but if it does not offer convenience to an investor then it is useless. This means that a scheme where 1 lakh is the minimum amount of investment will not be worth pursuing for someone who wants to invest 10,000. This plus some other conveniences and this factor could change from investor to investor would have to be considered in the decision making process. There are several services that are provided by the funds and these can be matched with the conditions required by the investor to match convenience. Risk adjusted returns

Returns for a fund are important because ultimately the investor expects the fund to earn something for her. However just absolute returns might not turn out to be the right prescription for everyone. This is why risk adjusted returns are necessary to see the kind of risk that is being taken for earning a certain rate of return. This will also help in selecting the right type of scheme depending upon their risk profile. Size of the fund Take a very careful look at the size of debt funds because this can make a huge difference to the way in which they are managed. The lot size for putting through a transaction in the debt market is quite huge and due to this fund with small corpus find themselves on the fringe with these being unable to even gather a diversified portfolio. On the other hand the corpus can also balloon to thousands of crores and even this can be a very tough thing to manage and hence both these extremes should be considered as factors by investors before they make an investment decision with regard to the fund. Loads Entry and exit loads are a common part of mutual fund investing and they are quite significant when it comes to equity oriented schemes. In many cases compared to the return that equity schemes generate the load becomes a small part of the investors gain. The situation changes when it comes to debt oriented funds. The best option here is of no loads in these schemes because with the overall returns already being quite low the loads can eat away a significant chunk of the total returns of the scheme. Most schemes have no entry loads but several of them have an exit load if the investment is withdrawn before a specific period of time. The danger here is that such an exit load can completely disrupt the entire calculation of the investor because of the fact that the overall returns here are not

very high and hence even a one percentage figure can make a huge difference to the overall returns of the fund.
TOP SCHEMES IN MUTUAL FUNDS 2010 Mutual funds are the best way to invest at present. They yield high profits. There are many fund companies in India. These companies have introduced many best plans in 2010. Top companies: HDFC SBI Reliance Tata fund DSP Black Rock fund Kotak fund Birla Sun Life Mutual Fund Franklin Templeton Mutual Fund Sundaram BNP Paribas Mutual Fund These companies have introduced various schemes according to the needs of different people. Systematic investment plan works on the monthly basis. It is similar to savings deposit or recurring deposit. Huge investment amount is broken into smaller pieces. The monthly investment is based on time period of the scheme. So, you can select any scheme which suits your financial status. PROFILE OF HDFC MUTUAL FUND The HDFC mutual fund that was approved by SEBI in June 2000 offers Equity Funds, Balanced Funds, and Debt Funds schemes. HDFC Mutual Fund has witnessed significant growth in the past few years. It is regulated by HDFC Asset Management Company Limited which is a Joint Venture between Indias largest housing finance company HDFC and British investment firm Standard Life Investments Limited. The

HDFC Asset Management Company Limited manages the assets of various mutual fund schemes and has assets over . 25000 crores.

TOP HDFC MUTUAL FUNDS HDFC mutual fund was incorporated on December, 10th 1999. It was setup on June 30th, 2000. In 2003 HDFC Asset Management Company had entered into an agreement with Zurich Insurance Company to acquire the asset management business. Consequently, all the schemes of Zurich Mutual Fund in India had been transferred to HDFC Mutual Fund. The HDFC AMC now offers Equity Funds, Balanced Funds and Debt Funds. They have been the best performing mutual funds in the last several years. The assets under management are 86,648.10 crores as of June 30, 2010.

The best performing HDFC mutual funds in the Balanced Fund, Equity Fund and Equity Linked Savings Scheme (ELSS) categories are discussed below: Best performing Balanced Funds are:

HDFC Prudence Fund: The objective is to provide periodic returns and capital appreciation over a long period of time, by investing in equity and debt investments, with an aim to minimize any capital erosion. This scheme was launched on December 16, 1993. The top sector allocations for this fund are BFSI, Pharmaceuticals, Oil and Gas. The fund manager is Prashant Jain.

HDFC Balanced Fund: The objective is to generate capital appreciation along with current income from a combined portfolio of equity, debt and money market instruments. This scheme was launched on September 11, 2000. The top sector allocation for this fund is Pharmaceuticals.

BALANCED FUNDS

Total returns annualized Scheme Fund Size (in Crore ) Asset Allocation 1 Year in (%) 3 Year 5 Year

Volatility measures (1 year) Std Dev (%) Sharpe Ratio

Beta

HDFC Prudence HDFC Balanced

Equity=74.61% 4398 Debt=23.23% Cash=2.16% Equity=66.87% 167 Debt=20.95% Cash=12.18% 40.9 16.2 19.6 1.69 0.79 0.33 44.8 16.3 24.8 1.95 0.93 0.32

Source: Morningstar Direct, June 30, 2010 The annualized return for both the funds during the last three years is equivalent to 16% (approx). This shows both funds performed equally well during the recession period. When markets were recovering in the last one year the returns for HDFC Prudence showed 4% higher returns while comparing to its peer fund HDFC Balanced. Also, in the last five years HDFC Prudence has managed to outperform HDFC Balanced fund. Best performing Equity Funds are:

HDFC Equity Fund: The objective of this fund is to provide capital appreciation through investments in equity oriented securities. This scheme was launched on December 8, 1994. The benchmark index is S&P CNX 500. The top sector allocations for this fund are BFSI, Pharmaceuticals, Oil and Gas.

HDFC Top 200: The objective of this fund is to generate long term capital appreciation by investing in a portfolio of equities and equity linked instruments drawn from the BSE 200 Index. This scheme was launched on August 19, 1996. The benchmark index is BSE 200. The top sector allocations for this fund are BFSI, Oil and Gas.

EQUITY FUNDS

Total returns Scheme Fund Size ( in crore) Asset Allocation annualized in (%) 1 Year HDFC Equity Fund HDFC Top 200 6735 8020 Equity=99.48% Cash=0.52% Equity=98.69% Cash=1.31% 46.5 35.4 3 Year 15.3 17.3 5 Year 28 27.7

Volatility measures (1 year) Std Dev (%) 2.66 2.54 Sharpe Ratio 0.83 0.82 Beta

0.24 0.19

Source: Morningstar Direct, June 30, 2010 The annualized return for HDFC Equity Fund was 46.5 per cent in the last one year. These returns are much higher by comparing it with its peer fund HDFC Top 200. This shows when markets were recovering, the fund manager made the right investment decisions and managed to generate better returns for their investors in HDFC Equity Fund. Whereas, when you compare the returns for the last three years its HDFC Top 200 fund generated 2 per cent higher returns by comparing it to HDFC Equity Fund. In the last five years both funds have given equivalent returns of 28 percentage approximately. Best performing Tax Saving Funds are:

HDFC Long Term Advantage Fund: The objective is to generate long term capital appreciation from a portfolio that is predominantly in equity and equity related instruments and providing tax benefits to investors. This scheme was launched on January 2, 2001. The benchmark index is BSE Sensitive Index. The top sector allocations for this fund are Information Technology and Pharmaceuticals.

HDFC Taxsaver: The objective is to provide tax benefits along with capital appreciation. This scheme was launched on December 18, 1995. The benchmark index is S&P CNX 500. The top sector allocations for this fund are Information Technology, Pharmaceuticals and BFSI.

TAX SAVING FUNDS


Scheme Fund Size ( in Asset Allocation Total returns annualized in (%) Volatility measures (1 year)

crore) HDFC Long Term Advantage Fund HDFC Taxsaver 943

1 Year

3 Year

Std 5 Year Dev (%)

Sharpe Ratio

Beta

Equity=97.5% Cash=2.35% Debt=0.15% 2588 Equity=94% Cash=6% 48.7 11.7 22.8 2.41 0.76 0.28 40.1 7.9 18.9 2.5 0.8 0.23

Source: Morningstar Direct, June 30, 2010 The annualized return for HDFC Taxsaver is much better while comparing to its peer fund HDFC Long Term Advantage Fund. HDFC Taxsaver fund has outperformed in the 1st and 3rd year, as well as in the 5th year returns. In the last three years of global slowdown, which had impacted Indian stock market, HDFC Taxsaver fund managed to deliver 11.7% returns. This is quite appreciable. Also, during the recovery phase in the last one year, HDFC Taxsaver has managed to generate 48.7% returns for their investors. There are many HDFC Mutual Funds in each category other than the schemes discussed above. An investor needs to identify their own risk taking ability, time-frame of investments and goals while taking a decision to invest in any particular mutual funds.

CONCLUSION Mutual Funds in India offer the investors with a wide spectrum of securities. The investment amount collected from various investors cuts down the risk factor and

provides a better way of obtaining some good investments. It is the investor, who should consider the different factors related to the funds and his own requirement and should take the decision regarding investment. Regulations are there to monitor the funds but it is the responsibility of the investor to take reasonable care and deligance while making the investment of his hard earned money. If the mutual fund investment is done carefully, it will certainly be beneficial both to the country and the investor. REFERENCE Sundar Sankaran Indian Mutual Funds Hand book Vision Book, 2007 http://www.hdfcfund.com http://www.mutualfundsindia-index.com