RISK RETURN ANALYSIS AND COMPARATIVE STUDY OF MUTUAL FUNDS

“RISK RETURN ANALYSIS AND COMPARATIVE STUDY OF MUTUAL FUNDS” FOR HDFC Asset Management Company Ltd.

A Report on Project work In MASTER OF BUSINESS ADMINISTRATION (MBA) By Somesh Behere

GUIDED BY:

SUBMITTED BY:

PROF.GARGI NAIDU

SOMESH BEHERE

HOD ACADEMICS

MBA IV Semester

VIM BHOPAL

BHOPAL

VIDYASAGAR INSTITUTE OF MANAGEMENT BARKATULLAH UNIVERSITY BHOPAL(M.P.) 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

studying in Master of Business Administration in Vidhyasagar Institute of Management ,Bhopal during the year 2008-10.

Project Viva-Voce held on.....................

Internal examiner

External examiner

EXECUTIVE SUMMARY

The performance evaluation of mutual fund is a vital matter of concern to the fund managers, investors, and researchers alike. The core competence of the company is to meet objectives and the needs of the investors and to provide optimum return for their risk. This study tries to find out the risk and return allied with the mutual funds.

This project paper is segmented into three sections to explore the link between conventional subjective and statistical approach of Mutual Fund analysis. To start with, the first section deals with the introductory part of the paper by giving an overview of the Mutual fund industry and company profile.

This section also talks about the theory of portfolio analysis and the different measures of risk and return used for the comparison.

The second section details on the need, objective, and the limitations of the study. It also discusses about the sources and the period for the data collection. It also deals with the data interpretation and analysis part wherein all the key measures related to risk and return are done with the interpretation of the results.

In the third section, an attempt is made to analyse and compare the performance of the equity mutual fund. For this purpose β-value, standard deviation, and risk adjusted performance measures such as Sharpe ratio, Treynor measure, Jenson Alpha, and Fema measure have been used.

The portfolio analysis of the selected fund has been done by the measure return for the holding period.

At the end, it illustrates the suggestions and findings based on the analysis done in the previous sections and finally it deals with conclusion part.

ACKNOWLEDGEMENT

I take this opportunity to express my deep sense of gratitude to all those who have contributed significantly by sharing their knowledge and experience in the completion of this project work. I am greatly obliged to, for providing me with the right kind of opportunity and facilities to complete this venture.

My first word of gratitude is due to Mr.Sidhartha Chattergee – Branch Manager, HDFC AMC,Allhabad, my corporate guide, for his kind help and support and his valuable guidance throughout my project. I am thankful to him for providing me with necessary insights and helping me out at every single step. I am also thankful to Prof Ashok Diwedi Executive Trainee, the former student of VIDHYASAGAR INSTITUTE OF MANAGEMENT, Bhopal for her constant valuable assistance and consultancy. I also thank Mr.Ankit Kumr, Unit Manager for his kind words of encouragement. Above all, I express my words of gratitude to HDFC AMC, Allahabad Branch for proving me with all the knowledge resources and enabling me to pass AMFI-MTUTUAL FUND (ADVISOR) MODULE; NSE’s CERTIFICATION IN FINANCIAL MARKETS (NCFM) with 74.5 percentages.

I am extremely thankful to Miss. Gargi Naidu – my internal faculty guide under whose able guidance this project work was carried out. I thank her for her continuous support and mentoring during the tenure of the project. Finally, I would also like to thank all my dear friends for their cooperation, advice and encouragement during the long and arduous task of carrying out the project and preparing this report.

PREFACE

This is the age of technical up gradation. Nothing remains same for a long period every thing change with a certain span of time. So it is must for every organization to put a birds eye view on it’s over all functioning.

This report was preparing during practical training of Master of business administration (M.B.A.) from Vidyasagar institute of management Bhopal (M.P.) .The student of M.B.A.essentially required a practical training of 4to6 weeks in any organization.

It gives an opportunity to the student to test their acquired knowledge through practical experiences.

The objective of my study was Risk Return Analysis And Comparative Study Of Mutual Funds “HDFC Asset Management Company Ltd.” I however present this report In all my modesty to the readers with a faith that it shall serve the causes of subject. .

PLACE-………..

DATE…………..

SOMESH BEHERE

TABLE OF CONTENTS

Page No.

Part-I

1-37

Executive Summary

Iii

A. Mutual Fund Overview

1-19

1.1 Mutual Fund an Investment Platform

1-2

1.2 Advantages of Mutual Fund

3

1.3 Disadvantage of Investing Through Mutual Funds

4

1.4 Categories of Mutual Fund

4-8

1.5 Investment Strategies

8

1.6 Organisation of Mutual Fund

9-11

1.7 Distribution Channels

12

1.8 HDFC AMC Company Overview

12-19

B. Measuring and Evaluating Mutual Funds Performance

20-37

1.2.1

Purpose of Measuring and Evaluating

20-21

1.2.2

Financial Planning for Investors referring to Mutual Funds

22

1.2.3

Why Has It Become One Of The Largest Financial Instruments?

22-25

1.2.4 Evaluating Portfolio Performance

26

1.2.5 How to Reduce Risk While Investing

26-28

1.2.6

A Study of Portfolio Analysis from The Point Of Fund Manager

28-29

1.2.7

Measures of Risk and Return

29-37

Part-II

38-40

Research Methodology 2.1 Need For the Study

38-39

2.2 Objective of the Study

39

2.3 Limitations of the Study

40

2.4 Data Collection

40

Part-III

41-102

Case Analysis 3.1 Data Interpretation

41-87

3.2 Analysis of the observation

87-97

3.3 Findings

98

3.4 Recommendations

99-100

3.5 Conclusion

101

References

102

PART-I

1. MUTUAL FUND OVERVIEW 1.1 MUTUAL FUND AN INVESTMENT PLATFORM Mutual fund is an investment company that pools money from small investors and invests in a variety of securities, such as stocks, bonds and money market instruments. Most open-end Mutual funds stand ready to buy back (redeem) its shares at their current net asset value, which depends on the total market value of the fund's investment portfolio at the time

of redemption.

Most open-end Mutual funds continuously offer new shares to

investors. It is also known as an open-end investment company, to differentiate it from a closed-end investment company.

Mutual funds invest pooled cash of many investors to meet the fund's stated investment objective. Mutual funds stand ready to sell and redeem their shares at any time at the fund’s

PROFIT/LOSS FORM PORTFOLIO OF INVESTMENT

INVEST IN VARIETY OF STOCKS/BONDS

PROFIT/LOSS FROM INDIVIDUAL

MARKET (FLUCTUATIONS)

INVESTOR

INVEST THEIR MONEY

MUTUAL FUND SHEMES

current net asset value: total fund assets divided by shares outstanding.

Figure: 1.1

In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because not all stocks may move in the same direction in the same proportion at the same time. Mutual fund issues units t o the investors in accordance with quantum of money invested by them.

Investors of Mutual fund are known as unit holders. The profits or losses are shared by the investors in proportion to their investments. The Mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time.

In India, A Mutual fund is required to be registered with Securities and Exchange Boa rd of India (SEBI) which regulates securities markets before it can collect funds from the public.

In Short , a Mutual fund is a common pool of money in to which investors with common investment objective place their contributions that are to be invested in accordance with the state d investment objective of the scheme. The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective

of the scheme. For example, a n equity fund would invest

equity and equity related instruments and a debt fund would invest in bonds, debentures, gilts etc. Mutual fund is a suitable investment for the common ma n a s it offers an Oporto unity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

1.2 ADVANTAGES OF MUTUAL FUND Table:1.1 S. No.

Advant age

Particulars

1.

Portfoli o Diversif ication

Mutual Funds invest in a well-diversified portfolio of securities which enables investor to hold a diversified investment portfolio (whether the amount of investment is big or small).

2.

Professi onal Manage ment

Fund manager undergoes through various research works and has better investment management skills which ensure higher returns to the investor than what he can manage on his own.

3.

Less Risk

Investors acquire a diversified portfolio of securities even with a small investment in a Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities.

4.

Low Transac tion Costs

Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction costs. These benefits are passed on to the investors.

5.

Liquidit y

An investor may not be able to sell some of the shares held by him very easily and quickly, whereas units of a mutual fund are far more liquid.

6.

Choice of Scheme s

Mutual funds provide investors with various schemes with different investment objectives. Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. These schemes further have different plans/options

7.

Transp arency

Funds provide investors with updated information pertaining to the markets and the schemes. All material facts are disclosed to investors as required by the regulator.

Flexibili ty

Investors also benefit from the convenience and flexibility offered

by Mutual Funds. Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa. Option of systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end schemes.

Safety

Mutual Fund industry is part of a well-regulated investment environment where the interests of the investors are protected by the regulator. All funds are registered with SEBI and complete transparency is forced.

8.

9.

1.3 DISADVANTAGE OF INVESTING THROUGH MUTUAL FUNDS Table:1.2 S. No.

Disadva ntage

Particulars

1.

Costs Control Not in the Hands of an Investor

Investor has to pay investment management fees and fund distribution costs as a percentage of the value of his investments (as long as he holds the units), irrespective of the performance of the fund.

2.

No Custom ized Portfoli os

The portfolio of securities in which a fund invests is a decision taken by the fund manager. Investors have no right to interfere in the decision making process of a fund manager, which some investors find as a constraint in achieving their financial objectives.

3.

Difficult y in Selectin g a Suitable Fund Scheme

Many investors find it difficult to select one option from the plethora of funds/schemes/plans available. For this, they may have to take advice from financial planners in order to invest in the right fund to achieve their objectives.

1.4 CATEGORIES OF MUTUAL FUND

BASED ON THEIR STURCTURE

OPEN ENDED FUNDS

CLOSE-ENDED FUNDS

Figure:1.2

2. BASED ON INVESTMENT OBJECTIVE

EQUITY FUNDS

BALANCED FUNDS

DEBT FUNDS

INDEX FUNDS

LEQUID FUNDS DEBT ORIENTED GUILT FUNDS

DEVIDEND YEILD EQUITY ORIENTED EQUITY DIVERSIFIED

INCOME FUNDS

THEMANTIC FUND

FMPS FUNDS

SECTOR FUND

FLOATING RATE

ELSS

ARBITAGE FUNDS

Mutual funds can be classified as follow: Based on their structure:  Open-ended funds: Investors can buy and sell the units from the fund, at any point of time.  Close-ended funds: These funds raise money from investors only once. Therefore, after the offer period, fresh investments cannot be made into the fund. If the fund is listed on a stocks exchange, the units can be traded like stocks (E.g., Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of close-ended funds provided liquidity window on a periodic basis such as monthly or weekly. Redemption of units can be made during specified intervals. Therefore, such funds have relatively low liquidity.

Based on their investment objective:

 Equity funds: These funds invest in equities and equity related instruments. With fluctuating share prices, such funds show volatile performance, even losses. However, short term fluctuations in the market, generally smoothens out in the long term, thereby offering higher returns at relatively lower volatility. At the same time, such

funds can yield great capital appreciation as, historically, equities have outperformed all asset classes in the long term. Hence, investment in equity funds should be considered for a period of at least 3-5 years. It can be further classified as: 1. Index funds- In this case a key stock market index, like BSE Sensex or Nifty is tracked.

Their

portfolio mirrors the benchmark index in terms of both composition and individual

stock weightages.

2. Equity diversified funds- 100% of the capital is invested in equities spreading across different sectors and stocks.

3. Dividend yield funds- it is similar to the equity-diversified funds except that they invest in companies offering high dividend yields.

4. Thematic funds- Invest 100% of the assets in sectors which are related through some theme. e.g. -An infrastructure fund invests in power, construction, cements sectors etc.

5. Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking sector fund will invest in banking stocks.

6. ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.  Balanced fund: Their investment portfolio includes both debt and equity. As a result, on the risk-return ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments. Following are balanced funds classes: 2

Debt-oriented funds -Investment below 65% in equities.

3

Equity-oriented funds -Invest at least 65% in equities, remaining in debt.

 Debt fund: They invest only in debt instruments, and are a good option for investors averse to idea of taking risk associated with equities. Therefore, they invest exclusively in fixed-income instruments like bonds, debentures, Government of India securities; and money market instruments such as certificates of deposit (CD),

commercial paper (CP) and call money. Put your money into any of these debt funds depending on your investment horizon and needs.

1.

Liquid funds- These funds invest 100% in money market instruments, a large portion being invested in call money market.

2. Gilt funds ST- They invest 100% of their portfolio in government securities of and Tbills.

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 misspricing between cash market and derivatives market. Funds are allocated to equities, derivatives and money markets. Higher proportion (around 75%) is put in money markets, in the absence of arbitrage opportunities.

5. Gilt funds LT- They invest 100% of their portfolio in long-term government securities.

6.

Income funds LT- Typically, such funds invest a major portion of the portfolio in long-term debt papers.

7.

MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an exposure of 10%-30% to equities.

8.

FMPs- fixed monthly plans invest in debt papers whose maturity is in line with that of the fund.

How are funds different in terms of their risk profile: Table:1.3

Equity Funds

High level of return, but has a high level of risk too

Debt funds

Returns comparatively less risky than equity funds

Liquid

and

Market funds

Money Provide stable but low level of return

1.5 INVESTMENT STRATEGIES 1. Systematic Investment Plan: Under this, a fixed sum is invested each month on a fixed date of a month. Payment is made through post-dated cheques or direct debit facilities. The investor gets fewer units when the NAV is high and more units when the NAV is low. This is called as the benefit of Rupee Cost Averaging (RCA) 2. Systematic Transfer Plan: Under this, an investor invest in debt-oriented fund and give instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund.

3. Systematic Withdrawal Plan: if someone wishes to withdraw from a mutual fund then he can withdraw a fixed amount each month.

1.6. ORGANISATION OF MUTUAL FUND:

Figure:1.4

THE STRUCTURE CONSISTS OF:

SPONSOR Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the Investment managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Fund) Regulations, 1996. The sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.

TRUST The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.

TRUSTEE Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals).

The main responsibility of the Trustee is to safeguard the interest of the unit holders and ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner.

ASSET MANAGEMENT COMPANY (AMC) The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 cores at all times.

REGISTRAR AND TRANSFER AGENT

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form, redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.

ASSET UNDER MANAGEMENT: Table1.4 ASSET UNDER MANAGEMENT OF TOP AMC,S as on Jun 30, 2009 Mutual Fund Name

No.

of

Corpus (Rs.Crores)

schemes Reliance Mutual Fund

263

108,332.36

HDFC Mutual Fund

202

78,197.90

ICICI Prudential Mutual Fund

325

70,169.46

UTI Mutual Fund

207

67,978.19

Birla Sun Life Mutual Fund

283

56,282.87

SBI Mutual Fund

130

34,061.04

LIC Mutual Fund

70

32,414.92

Kotak Mahindra Mutual Fund

124

30,833.02

Franklin Templeton Mutual Fund

191

25,472.85

IDFC Mutual Fund

164

21,676.29

Tata Mutual Fund

175

21,222.81

The graph indicates the growth of assets over the years.

Figure:1.5

1.7 DISTRIBUTION CHANNELS:

Mutual funds posses a very strong distribution channel so that the ultimate customers doesn’t face any difficulty in the final procurement. The various parties involved in distribution of mutual funds are:

1. Direct marketing by the AMCs: the forms could be obtained from the AMCs directly.

The investors can approach to the AMCs for the forms. some of the top AMCs of India are; Reliance ,Birla Sunlife, Tata, SBI magnum, Kotak Mahindra, HDFC, Sundaram, ICICI, Mirae Assets, Canara Robeco, Lotus India, LIC, UTI etc. whereas foreign AMCs include: Standard Chartered, Franklin Templeton, Fidelity, JP Morgan, HSBC, DSP Merill Lynch, etc.

2. Broker/ sub broker arrangements: the AMCs can simultaneously go for broker/subbroker to popularize their funds. AMCs can enjoy the advantage of large network of these brokers and sub brokers.

3. Individual agents, Banks, NBFC: investors can procure the funds through individual agents, independent brokers, banks and several non- banking financial corporations too, whichever he finds convenient for him.

1.8 HDFC AMC COMPANY OVERVIEW HDFC ASSET MANAGEMENT COMPANY LIMITED (AMC) AMC was incorporated under the Companies Act, 1956, on December 10, 1999, and was approved to act as an AMC for the Mutual Fund by SEBI on July 30, 2000.

The registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg, 169, Back bay Reclamation, Church gate, Mumbai - 400 020.

In terms of the Investment Management Agreement, the Trustee has appointed HDFC Asset Management Company Limited to manage the Mutual Fund

As per the terms of the Investment Management Agreement, the AMC will conduct the operations of the Mutual Fund and manage assets of the schemes, including the schemes launched from time to time.

The present share holding pattern of the AMC is as follows: Table:1.5

Particulars

% of the paid up capital

Housing Development Finance Corporation Limited 50.10 Standard Life Investments Limited

49.90

Zurich Insurance Company (ZIC), the Sponsor of Zurich India Mutual Fund, following a review of its overall strategy, had decided to divest its Asset Management business in India.

The AMC had entered into an agreement with ZIC to acquire the said business, subject to necessary regulatory approvals.

On obtaining the regulatory approvals, the Schemes of Zurich India Mutual Fund has now migrated to HDFC Mutual Fund on June 19, 2003.

The AMC is also providing portfolio management / advisory services and such activities are not in conflict with the activities of the Mutual Fund. The AMC has renewed its registration from SEBI vide Registration No. - PM / INP000000506 dated December 22, 2000 to act as a Portfolio Manager under the SEBI (Portfolio Managers) Regulations, 1993. The Certificate of Registration is valid from January 1, 2004 to December 31, 2006.

Board of Directors The Board of Directors of the HDFC Asset Management Company Limited (AMC) consists of the following eminent persons.

Table:1.6

Mr. Deepak S. Parekh Mr. N. Keith Skeoch Mr. Keki M. Mistry Mr. James Aird Mr. P. M. Thampi Mr. Humayun Dhanrajgir Dr. Deepak B. Phatak Mr. Hoshang S. Billimoria Mr. Rajeshwar Raj Bajaaj Mr. Vijay Merchant Ms. Renu S. Karnad

Chairman of the board CEO of Standard Life Investments Ltd. Associate director Investment director Independent director Independent director Independent director Independent director Independent director Independent director Joint managing director

Mr. Milind Barve

Managing director

Mr. Deepak Parekh, the Chairman of the Board, is associated with HDFC Ltd. in his capacity as its Executive Chairman.

Mr. Parekh joined HDFC Ltd. in a senior management position in 1978. He was inducted as Wholetime Director of HDFC Ltd. in 1985 and was appointed as the Executive Chairman in 1993.

Mr. N. Keith Skeoch is associated with Standard Life Investments Limited as its Chief Executive and is responsible for all company business and investment operations within Standard Life Investments Limited.

Mr. Keki M. Mistry is an associate director on the Board. He is the Vice-Chairman & Managing Director of Housing Development Finance Corporation Limited (HDFC Ltd.) He is with HDFC Ltd. since 1981 and was appointed as the Executive Director of HDFC Ltd. in 1993. He was appointed as the Deputy Managing Director in 1999, Managing Director in 2000 and Vice Chairman & Managing Director in 2007.

SPONSORS HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED (HDFC): HDFC was incorporated in 1977 as the first specialised housing finance institution in India.

HDFC provides financial assistance to individuals, corporate and developers for the purchase or construction of residential housing. It also provides property related services (e.g. property identification, sales services and valuation), training and consultancy. Of these activities, housing finance remains the dominant activity.

HDFC currently has a client base of over 8, 00,000 borrowers, 12, 00,000 depositors, 92,000 shareholders and 50,000 deposit agents. HDFC raises funds from international agencies such as the World Bank, IFC (Washington), USAID, CDC, ADB and KFW, domestic term loans from banks and insurance companies, bonds and deposits. HDFC has received the highest rating for its bonds and deposits program for the ninth year in succession. HDFC Standard Life Insurance Company Limited, promoted by HDFC was the first life insurance company in

the private sector to be granted a Certificate of Registration (on October 23, 2000) by the Insurance Regulatory and Development Authority to transact life insurance business in India.

HDFC is India's premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities. With its experience in the financial markets, a strong market reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment.

STANDARD LIFE INVESTMENTS LIMITED The Standard Life Assurance Company was established in 1825 and has considerable experience in global financial markets. In 1998, Standard Life Investments Limited became the dedicated investment management company of the Standard Life Group and is owned 100% by The Standard Life Assurance Company.

With global assets under management of approximately US$186.45 billion as at March 31, 2005, Standard Life Investments Limited is one of the world's major investment companies and is responsible for investing money on behalf of five million retail and institutional clients worldwide. With its headquarters in Edinburgh, Standard Life Investments Limited has an extensive and developing global presence with operations in the United Kingdom, Ireland, Canada, USA, China, Korea and Hong Kong. In order to meet the different needs and risk profiles of its clients, Standard Life Investments Limited manages a diverse portfolio covering all of the major markets world-wide, which includes a range of private and public equities, government and company bonds, property investments and various derivative instruments. The company's current holdings in UK equities account for approximately 2% of the market capitalization of the London Stock Exchange.

HDFC MUTUAL FUND PRODUCTS

Equity Funds HDFC Growth Fund HDFC Long Term Advantage Fund HDFC Index Fund HDFC Equity Fund HDFC Capital Builder Fund HDFC Tax saver HDFC Top 200 Fund HDFC Core & Satellite Fund HDFC Premier Multi-Cap Fund HDFC Long Term Equity Fund HDFC Mid-Cap Opportunity Fund Balanced Funds HDFC Children's Gift Fund Investment Plan HDFC Children's Gift Fund Savings Plan HDFC Balanced Fund HDFC Prudence Fund Debt Funds HDFC Income Fund HDFC Liquid Fund HDFC Gilt Fund Short Term Plan HDFC Gilt Fund Long Term Plan HDFC Short Term Plan HDFC Floating Rate Income Fund Short Term Plan HDFC Floating Rate Income Fund Long Term Plan HDFC Liquid Fund - PREMIUM PLAN HDFC Liquid Fund - PREMIUM PLUS PLAN

HDFC Short Term Plan - PREMIUM PLAN HDFC Short Term Plan - PREMIUM PLUS PLAN HDFC Income Fund Premium Plan HDFC Income Fund Premium plus Plan HDFC High Interest Fund HDFC High Interest Fund - Short Term Plan HDFC Sovereign Gilt Fund - Savings Plan HDFC Sovereign Gilt Fund - Investment Plan HDFC Sovereign Gilt Fund - Provident Plan HDFC Cash Management Fund - Savings Plan HDFC Cash Management Fund - Call Plan HDFCMF Monthly Income Plan - Short Term Plan HDFCMF Monthly Income Plan - Long Term Plan HDFC Cash Management Fund - Savings Plus Plan HDFC Multiple Yield Fund HDFC Multiple Yield Fund Plan 2005

ACHIEVEMENT AND AWARDS CNBC - TV 18 - CRISIL Mutual Fund of the Year Awards 2008 : HDFC Prudence Fund was the only scheme that won the CNBC - TV 18 - CRISIL Mutual Fund of the Year Award 2008 in the Most Consistent Balanced Fund under CRISIL ~ CPR for the calendar year 2007 (from amongst 3 schemes).

HDFC Cash Management Fund - Savings Plan was the only scheme that won the CNBC TV 18 - CRISIL Mutual Fund of the Year Award 2008 in the Most Consistent Liquid Fund under CRISIL ~ CPR for the calendar year 2007 (from amongst 5 schemes).

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).

Lipper Fund Awards 2008: HDFC Equity Fund - Growth has been awarded the 'Best Fund over Ten Years' in the 'Equity India Category' at the Lipper Fund Awards 2008 (form amongst 23 schemes).

It was awarded the Best Fund over ten years in 2006 and 2007 as well. 2008 makes it three in a row.

Lipper Fund Awards 2009 : HDFC Equity Fund - Growth has been awarded the 'Best Fund over Ten Years' in the 'Equity India Category' (form amongst 34 schemes) and HDFC Prudence Fund – Growth Plan in the ‘Mixed Asset INR Aggressive Category’ (from amongst 6 schemes), have been awarded the ‘Best Fund over 10 Years’ by Lipper Fund Awards India 2009.

ICRA Mutual Fund Awards – 2008 : HDFC MF Monthly Income Plan - Long Term Plan - Ranked a Seven Star Fund and has been awarded the Gold Award for "Best Performance" in the category of "Open Ended Marginal Equity" for the three year period ending December 31, 2007 (from amongst 27 schemes) HDFC High Interest Fund - Short Term Plan - Ranked a Five Star Fund indicating performance among the top 10% in the category of "Open Ended Debt - Short Term" for one year period ending December 31, 2007 (from amongst 20 schemes).

HDFC Prudence Fund - Ranked a Five Star Fund indicating performance among the top 10% in the category of "Open Ended Balanced" for the three year period ending December 31, 2007 (from amongst 16 schemes)

B. MEASURING AND EVALUATING MUTUAL FUNDS PERFORMANCE:

1.2.1 PURPOSE OF MEASURING AND EVALUATING Every investor investing in the mutual funds is driven by the motto of either wealth creation or wealth increment or both. Therefore it’s very necessary to continuously evaluate the funds’ performance with the help of factsheets and newsletters, websites, newspapers and professional advisors like HDFC AMC. If the investors ignore the evaluation of funds’ performance then he can lose hold of it any time. In this ever-changing industry, he can face any of the following problems:

1. Variation in the funds’ performance due to change in its management/ objective.

2. The funds’ performance can slip in comparison to similar funds.

3. There may be an increase in the various costs associated with the fund.

4 .Beta, a technical measure of the risk associated may also surge.

5. The funds’ ratings may go down in the various lists published by independent rating agencies.

6. It can merge into another fund or could be acquired by another fund house.

Performance measures:

Equity funds: the performance of equity funds can be measured on the basis of: NAV Growth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns and Distributions, Computing Total Return (Per Share Income and Expenses, Per Share Capital Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio Turnover Rate, Fund Size, Transaction Costs, Cash Flow, Leverage.

Debt fund: Likewise, the performance of debt funds can be measured on the basis of: Peer Group Comparisons, The Income Ratio, Industry Exposures and Concentrations, NPAs, besides NAV Growth, Total Return and Expense Ratio.

Liquid funds: the performance of the highly volatile liquid funds can be measured on the basis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio.

Concept of benchmarking for performance evaluation: Every fund sets its benchmark according to its investment objective. The funds performance is measured in comparison with the benchmark. If the fund generates a greater return than the benchmark then it is said that the fund has outperformed benchmark , if it is equal to benchmark then the correlation between them is exactly 1. And if in case the return is lower than the benchmark then the fund is said to be underperformed.

Some of the benchmarks are: 1. Equity funds: market indices such as S&P CNX nifty, BSE100, BSE200, BSE-PSU, BSE 500 index, BSE bankex, and other sectoral indices.

2. Debt funds: Interest Rates on Alternative Investments as Benchmarks, I-Bex Total Return Index, JPM T-Bill Index Post-Tax Returns on Bank Deposits versus Debt Funds.

3. Liquid funds: Short Term Government Instruments’ Interest Rates as Benchmarks, JPM T-

Bill Index.

To measure the fund’s performance, the comparisons are usually done with: I) with a market index. ii) Funds from the same peer group. iii) Other similar products in which investors invest their funds.

1.2.2 FINANCIAL PLANNING FOR INVESTORS REFERRING TO MUTUAL FUNDS:

Investors are required to go for financial planning before making investments in any mutual fund. The objective of financial planning is to ensure that the right amount of money is available at the right time to the investor to be able to meet his financial goals. It is more than mere tax planning. Steps in financial planning are:

Asset allocation.

Selection of fund.

Studying the features of a scheme.

In case of mutual funds, financial planning is concerned only with broad asset allocation, leaving the actual allocation of securities and their management to fund managers. A fund

manager has to closely follow the objectives stated in the offer document, because financial plans of users are chosen using these objectives.

1.2.3 WHY HAS IT BECOME ONE OF THE LARGEST FINANCIAL INSTRUMENTS?

If we take a look at the recent scenario in the Indian financial market then we can find the market flooded with a variety of investment options which includes mutual funds, equities, fixed income bonds, corporate debentures, company fixed deposits, bank deposits, PPF, life insurance, gold, real estate etc. all these investment options could be judged on the basis of various parameters such as- return, safety convenience, volatility and liquidity. Measuring these

investment options on the basis of the mentioned parameters, we get this in a tabular

form

Table:1.7

Return

Safety

Volatility

Liquidity

Convenienc e

Equity

High

Low

High

High

Moderate

Bonds

Moderate

High

Moderate

Moderate

High

Co. Moderate Debent ures

Moderate

Moderate

Low

Low

Co. FDs

Moderate

Low

Low

Low

Moderate

Bank Deposi ts

Low

High

Low

High

High

PPF

Moderate

High

Low

Moderate

High

Life Insura nce

Low

High

Low

Low

Moderate

Gold

Moderate

High

Moderate

Moderate

Gold

Real Estate

High

Moderate

High

Low

Low

Mutual Funds

High

High

Moderate

High

High

We can very well see that mutual funds outperform every other investment option. On three parameters, it scores high whereas it’s moderate at one. comparing it with the other options, we find that equities gives us high returns with high liquidity but its volatility too is high with low safety which doesn’t makes it favourite among persons who have low risk- appetite.

Even the convenience involved with investing in equities is just moderate.

Now looking at bank deposits, it scores better than equities at all fronts but lags badly in the parameter of utmost important ie; it scores low on return , so it’s not an happening option for person who can afford to take risks for higher return. The other option offering high return is real estate but that even comes with high volatility and moderate safety level, even the liquidity and convenience involved are too low. Gold have always been a favourite among Indians but when we look at it as an investment option then it definitely doesn’t gives a very bright picture. Although it ensures high safety but the returns generated and liquidity are moderate. Similarly, the other investment options are not at par with mutual funds and serve the needs of only a specific customer group. Straightforward, we can say that mutual fund emerges as a clear winner among all the options available.

The reasons for this being:

I)Mutual funds combine the advantage of each of the investment products: mutual fund is one such option which can invest in all other investment options. Its principle of diversification allows the investors to taste all the fruits in one plate. just by investing in it, the investor can enjoy the best investment option as per the investment objective.

II) Dispense the shortcomings of the other options: every other investment option has more or less some shortcomings. Such as if some are good at return then they are not safe, if some are safe then either they have low liquidity or low safety or both….likewise, there exists no single option which can fit to the need of everybody. But mutual funds have definitely sorted out this problem. Now everybody can choose their fund according to their investment objectives.

III) Returns get adjusted for the market movements: as the mutual funds are managed by experts so they are ready to switch to the profitable option along with the market movement.

Suppose they predict that market is going to fall then they can sell some of their shares and book profit and can reinvest the amount again in money market instruments.

IV) Flexibility of invested amount: Other then the above mentioned reasons, there exists one more reason which has established mutual funds as one of the largest financial intermediary and that is the flexibility that mutual funds offer regarding the investment amount. One can start investing in mutual funds with amount as low as Rs. 500 through SIPs and even Rs. 100 in some cases.

Not all award-winning funds may be suitable for everyone Many investors feel that a simple way to invest in Mutual funds is to just keep investing in award winning funds. First of all, it is important to understand that more than the awards; it is the methodology to choose winners t at is more relevant.

A rating firm generally elaborates on the criteria for deciding the winner’s i.e. consistent performance, risk adjusted returns, total returns and protection of capital. Each

of these factors is very important and ha s its significance for different categories of funds.

Besides, each of these

factors has varying degree of significance for different kinds of

investors. For example, consistent return re ally focuses on risk. If someone is afraid of negative returns, consistency will be a more import ant measure than tot al ret urn i.e.

Growth in NAV as well as dividend received.

A fund can have very impressive total ret urns overtime, but can be very volatile and tough for a

risk adverse

investor. Therefore, all the ward winning funds in different

categories may not be suitable for everyone. Typically, when one has to select funds, the first step should be to consider personal goals and objectives. Invest ors need to decide which element they value the most and the n prioritize the other criteria Once one knows what one is looking for, one should go about selecting the funds according to the asset allocation. Most investors need just a few funds, carefully picked, watched and managed over period of time.

1.2.4 EVALUATING PORTFOLIO PERFORMANCE It is important to evaluate the performance of the portfolio on an on-going basis. The following factors are important in this process: Consider long-term record of accomplishment rather than short -term performance. It is important because long-term track record moderates the effects which unusually good or bad short -term performance can have on a fund's track record. Besides, longer-term track record compensates for the effects of a fund manager's particular investment style.

Evaluate the record of accomplishment against similar funds. Success in managing a small or in a fund focusing on a particular segment of the market cannot be re lied upon as an evidence of anticipated performance in managing a large or a broad based fund.

Discipline in investment approach is an important factor as the pressure to perform can make a fund manager susceptible to have a n urge to change tracks in terms of stock selection as well a s investment strategy.

The objective should be to differentiate investment skill of the fund manager from luck and to identify those funds with the greatest potential of future success.

1.2.5 HOW TO REDUCE RISK WHILE INVESTING:

Any kind of investment we make

is subject to risk. In fact we get return on our

investment purely and solely because at the very beginning we take the risk of parting with our funds, for getting higher value back at a later date. Partition it self is a risk.

Well

known economist and Nobel Prize recipient William Sharpe tried to segregate the total risk faced in any kind of investment into two parts - systematic (Systemic) risk and unsystematic (Unsystematic) risk.

Systematic risk is that risk which exists in the system. Some of the biggest examples of systematic risk are inflation, recession, war, political situation etc.

Inflation erodes returns generated from all investments e .g. If return from fixed deposit is 8 percent and if inflation is 6 per cent then real rate of return from fixed deposit is reduced by 6 percent. Similarly if returns generated from equity market is 18 percent and inflation is still 6 per cent then equity returns will be lesser by the rate of inflation. Since inflation exists in the system there is no way one can stay away from the risk of inflation.

Economic cycles, war and political situations have effects on all forms of investments. Also these exist in the system and there is no way to stay away from them. It is like learning to walk.

Anyone who wants to learn to walk has to first fall; you cannot learn to walk

without falling. Similarly, anyone who wants to invest has to first face

systematic risk.

Therefore, one can never make any kind of investment without systematic risk.

Another form of risk is unsystematic risk. This risk does not exist in the system and hence is not applicable to all forms of investment.

Unsystematic risk is associated with particular form of investment.

Suppose we invest in

stock market and the market falls, then only our investment in equity gets affected OR if we have placed a fixed deposit in particular bank and bank goes bankrupt, than we only lose money placed in that bank.

While there is no way to keep away from risk, we can

always reduce the

impact of risk.

Diversification helps in reducing the impact of

unsystematic risk. If our investment is distributed across various asset classes, the impact of unsystematic risk is reduced.

If we have placed fixed deposit in several banks, then even if one of the banks goes bankrupt our entire fixed de posit investment is not lost.

Similarly if our equity

investment is in Tata Motors, HLL, Infosys, adverse news about Infosys will only impact investment in Infosys, all other stocks will not have any impact .

To reduce the

impact of systematic risk, we should invest regularly. By investing regularly, we average out the impact of risk.

Mutual fund, as an investment vehicle gives us benefit

diversification and averaging.

of both

Portfolio of mutual funds consists of multiple securities

and hence adverse news about single security will have nominal impact on overall portfolio.

By systematically investing in mutual fund, we get benefit of rupee cost averaging.

Mutual

fund as an investment vehicle helps reduce, both, systematic as well a s unsystematic risk

1.2.6 A STUDY OF PORTFOLIO ANALYSIS FROM THE POINT OF FUND MANAGER:

Effective use of portfolio management disciplines improves customer satisfaction, reduces the number of risks problems, and increases success. The goal of portfolio analysis is to realize these same benefits at the portfolio level by applying a consistent structured management approach.

The considerations underlying the portfolio analysis is a matter of concern to the fund managers, investors, and researchers alike. This study attempts to answer two questions relating to the portfolio analysis: •

Make an average (or fair) return for the level of risk in the portfolio

•

To find out the portfolio which best meets the purpose of the investor.

At a minimum, any comprehensive mutual fund selection and analysis approach should include the following generalized processes: •

Fund selection

•

Fund prioritize/ reprioritize

•

Selection of the acceptable and required fund

•

Fund analysing and monitoring

•

Corrective action management

The fund portfolio analysis gives the ability to select funds that are aligned with the investor’s strategies and objectives. It helps the fund manager to make the best use of available opportunities by applying to the highest priority of the investor. A fund manager can regularly assess how securities and stocks are contributing to portfolio health and can make the corrective action to keep the portfolio in compliance with the investor’s interest and objectives.

Mutual funds do not determine risk preference. However, once investor determines his/her return preferences, he/she can choose a mutual fund a large and growing variety of alternative funds designed to meet almost any investment goal. Studies have showed that the funds generally were consistent in meeting investors stated goals for investment strategies, risk, and return. The major benefit of the mutual fund is to diversify the portfolio to eliminate unsystematic risk. The instant diversification of the funds is especially beneficial to the small investors who do not have the resources to acquire 100 shares of 12 or 15 different issues required to reduce unsystematic risk.

Mutual funds have generally maintained the stability of their correlation with the market because of reasonably well diversified portfolios. There are some measures for the analysis and each of them provides unique perspectives. These measures evaluate the different components of performance.

1.2.7 MEASURES OF RISK AND RETURN:

Risk is variability in future cash flows. It is also known as uncertainty in the distribution of possible outcomes. A risky situation is one, which has some probability of loss or unexpected results. The higher the probability of loss or unexpected results is, the greater the risk.

It is the uncertainty that an investment will earn its expected rate of return. For an investor, evaluating a future investment alternative expects or anticipates a certain rate of return is very important.

Portfolio risk management includes processes that identify, analyse, respond to, track, and control any risk that would prevent the portfolio from achieving its business objectives. These processes should include reviews of project level risks with negative implications for the portfolio, ensuring that the project manager has a responsible risk mitigation plan.

Additionally, it is important to do a consolidated risk assessment for the portfolio overall to determine whether it is within the already specified limits. Since portfolio and their environments are dynamic, managers should review and update their portfolio risk management plans on a regular basis through the fund life cycle.  Simple measure of returns: The return on mutual fund investment includes both income (in the form of dividends or investment payments) and capital gains or losses (increase or decrease in the value of a security). The return is calculated by taking the change in a fund’s Net Asset Value, which is the market value of securities the fund holds divided by the number of the fund’s shares during a given time period, assuming the reinvestment all income and capital gains distributions, and dividing it by the original net asset value. The return is calculated net of management fees and other expenses charged to the fund. Thus, a fund’s monthly return can be expressed as follows:

Rt= (NAVt- NAVt-1)/NAVt-1 Where, Rt is the return in month t NAVt is the closing net asset value of the fund on the last trading day of the month NAVt-1 is the closing net asset value of the fund on the last day of the previous month

Measure of risk Investors are interested not only in fund’s return but also in risk taken to achieve those returns. So risk can be thought as the uncertainty of the expected return, and uncertainty is generally equated with variability. Variability and the risk are correlated; hence high returns will tend to high variability.

 Standard deviation: in simple terms standard deviation is one of the commonly used statistical parameter to measure risk, which determines the volatility of a fund. Deviation is defined as any variation from a mean value (upward & downward). Since the markets are volatile, the returns fluctuate every day. High standard deviation of a fund implies high volatility and a low standard deviation implies low volatility.

S.D. =√1/T× (Rt-AR) ² Where, S.D. is the periodic standard deviation, AR is the average periodic return, T is the number of observations in the period for which the standard deviation is being calculated.

Rt is the return in month t

 Beta analysis: ) β(Beta) Co-efficient: Systematic risk is measured in terms of Beta, which represents fluctuations in the NAV of the fund vis-à-vis market. The more responsive the NAV of a Mutual Fund is to the changes in the market; higher will be its beta. Beta is calculated by relating the returns on a Mutual Fund with the returns in the market. While unsystematic risk can be diversified through investments in a number of instruments, systematic risk cannot. By using the risk return

relationship, we try to assess the competitive strength of the Mutual Funds vis-à-vis one another in a better way.

β(Beta) is calculated as = [N (ΣXY) – ΣXΣY]/ [N (ΣX2) – (ΣX) 2 ]

Beta is used to measure the risk. It basically indicates the level of volatility associated with the fund as compared to the market. In case of funds, as compared to the market. In case of funds, beta would indicate the volatility against the benchmark index. It is used as a short term decision making tool. A beta that is greater than 1 means that the fund is more volatile than the benchmark index, while a beta of less than 1 means that the fund is more volatile than the benchmark index. A fund with a beta very close to 1 means the fund’s performance closely matches the index or benchmark.

The success of beta is heavily dependent on the correlation between a fund and its benchmark. Thus, if the fund’s portfolio doesn’t have a relevant benchmark index then a beta would be grossly inappropriate. For example if we are considering a banking fund, we should look at the beta against a bank index.  R-Squared (R2): R squared is the square of ‘R’ (i.e.; coefficient of correlation). It describes the level of association between the fun’s market volatility and market risk. The value of R- squared ranges from0 to1. A high R- squared (more than 0.80) indicates that beta can be used as a reliable measure to analyze the performance of a fund. Beta should be ignored when the rsquared 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 ratio: Portfolio turnover is a measure of a fund's trading activity and is calculated by dividing the lesser of purchases or sales (excluding securities with maturities of less than one year) by the average monthly net assets of the fund. Turnover is simply a measure of the percentage of portfolio value that has been transacted, not an indication of the percentage of a fund's holdings that have been changed. Portfolio turnover is the purchase and sale of securities in a fund's portfolio. A ratio of 100%, then, means the fund has bought and sold all its positions within the last year. Turnover is important when investing in any mutual fund, since the amount of turnover affects the fees and costs within the mutual fund.

Total expenses ratio: A measure of the total costs associated with managing and operating an investment fund such as a mutual fund. These costs consist primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of the

fund is

divided

by

the fund's

total

assets

to

arrive

amount, which represents the TER: Total expense ratio = (Total fund Costs/ Total fund Assets)

The most important and widely used measures of performance are: The Sharpe Measure The Treynor’Measure Jenson Model Fama Model

 The Sharpe Measure :-

at a

percentage

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it.

According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be written as:

Sharpe Ratio (Si) = (Ri - Rf)/Si

Where, Si is standard deviation of the fund, Ri represents return on fund, and Rf is risk free rate of return.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a low and negative Sharpe Ratio is an indication of unfavourable performance.

 The Treynor Measure: Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's Index.

This Index is a ratio of return generated by the fund over and above risk free rate of return (generally taken to be the return on securities backed by the government, as there is no credit risk associated), during a given period and systematic risk associated with it (beta).

Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi. Where, Ri represents return on fund, Rf is risk free rate of return, and Bi is beta of the fund.

All risk-averse investors would like to maximize this value. While a high and positive Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index is an indication of unfavorable performance.

Comparison of Sharpe and Treynor Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a numerical risk measure. The total risk is appropriate when we are evaluating the risk return relationship for well-diversified portfolios. On the other hand, the systematic risk is the relevant measure of risk when we are evaluating less than fully diversified portfolios or individual stocks. For a well-diversified portfolio the total risk is equal to systematic risk.

Rankings based on total risk (Sharpe measure) and systematic risk (Treynor measure) should be identical for a well-diversified portfolio, as the total risk is reduced to systematic risk.

Therefore, a poorly diversified fund that ranks higher on Treynor measure, compared with another fund that is highly diversified, will rank lower on Sharpe Measure.

 Jenson Model: Jenson's model proposes another risk adjusted performance measure. This measure was developed by Michael Jenson and is sometimes referred to as the differential Return Method.

This measure involves evaluation of the returns that the fund has generated vs. the returns actually expected out of the fund1 given the level of its systematic risk. The surplus between the two returns is called Alpha, which measures the performance of a fund compared with the actual returns over the period. Required return of a fund at a given level of risk (Bi) can be calculated as:

E(Ri) = Rf + Bi (Rm - Rf) Where, E(Ri) represents expected return on fund, and Rm is average market return during the given period, Rf is risk free rate of return, and Bi is Beta deviation of the fund.

After calculating it, Alpha can be obtained by subtracting required return from the actual return of the fund.

αp= Ri –[ Rf + Bi (Rm - Rf) ]

Higher alpha represents superior performance of the fund and vice versa. Limitation of this model is that it considers only systematic risk not the entire risk associated with the fund and an ordinary investor cannot mitigate unsystematic risk, as his knowledge of market is primitive.

 Fama Model: The Eugene Fama model is an extension of Jenson model. This model compares the performance, measured in terms of returns, of a fund with the required return commensurate with the total risk associated with it. The difference between these two is taken as a measure of the performance of the fund and is called Net Selectivity.

The Net Selectivity represents the stock selection skill of the fund manager, as it is the excess returns over and above the return required to compensate for the total risk taken by the fund manager. Higher value of which indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him.

Selectivity: measures the ability of the portfolio manager to earn a return that is consistent with the portfolio’s market (systematic) risk. The selectivity measure is:

Ri –[ Rf + Bi (Rm - Rf) ] Diversification: measures the extent to which the portfolio may not have been completely diversified. Diversification is measured as:

[Rf +(Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf)] If the portfolio is completely diversified, contains no unsystematic risk, then diversification measure would be zero. A positive diversification measure indicates that the portfolio is not completely diversified; it would contain unsystematic risk and it represents the extra return that the portfolio should earn for not being completely diversified. The performance of the portfolio can be measured as: Net selectivity = selectivity – diversification Net selectivity measures, how well the portfolio mangers did manager did at earning a fair return for the portfolio’ systematic risk and diversifying away unsystematic risk. Positive net selectivity indicates that the fund earned a better return.

The comparison, done based on sharpe ratio, Treynor measure, Jensen alpha, and Fema measure notifies that the portfolio performance can be evaluated on the following basis: Sahrpe ratio: measures the reward to total risk trade off Treynor: measures the reward to systematic risk trade off Jensen’s alpha: measures the average return over and above that predicted.

Fema measure: measures return of portfolio for its systematic risk and diversifying away unsystematic risk.

Among the above performance measures, two models namely, Treynor measure and Jenson model use Systematic risk is based on the premise that the Unsystematic risk is diversifiable.

These models are suitable for large investors like institutional investors with high risk taking capacities as they do not face paucity of funds and can invest in a number of options to dilute some risks. For them, a portfolio can be spread across a number of stocks and sectors.

However, Sharpe measure and Fama model that consider the entire risk associated with fund are suitable for small investors, as the ordinary investor lacks the necessary skill and resources to diversify. Moreover, the selection of the fund on the basis of superior stock selection ability of the fund manager will also help in safeguarding the money invested to a great extent. The investment in funds that have generated big returns at higher levels of risks leaves the money all the more prone to risks of all kinds that may exceed the individual investors' risk appetite.

PART-II

RESEARCH METHODOLOGY 2.1 NEED FOR THE STUDY The Mutual Fund Companies periodically build up a study, which can prioritize and analyse the portfolio of the mutual funds. This study is helpful in having a comparison among the mutual funds based on the risk bearing capacity and expected return of the investor and will also carry out an analysis of the portfolio of the selected mutual fund.

The mutual fund industry is growing globally and new products are emerging in the market with all captivating promises of providing high return. It has become difficult for the investors to choose the best fund for their needs or in other words to find out a fund which will give maximum return for minimum risk. Therefore, they turn to their financial adviser to get precise direct investment. Hence, the company asked me to prepare a model, which will facilitate them to analyse the fund and to have reasonable estimation for the fund performance.

The driving force of Mutual Funds is the ‘safety of the principal’ guaranteed, plus the added advantage of capital appreciation together with the income earned in the form of interest or dividend. The various schemes of Mutual Funds provide the investor with a wide range of investment options according to his risk bearing capacities and interest besides; they also give

handy return to the investor. Mutual Funds offers an investor to invest even a small amount of money, each Mutual Fund has a defined investment objective and strategy. Mutual Funds schemes are managed by respective asset managed companies, sponsored by financial institutions, banks, private companies or international firms. A Mutual Fund is the ideal investment vehicle for today’s complex and modern financial scenario.

The study is basically made to analyze the various open-ended equity schemes of HDFC Asset Management Company to highlight the diversity of investment that Mutual Fund offer.

Thus, through the study one would understand how a common person could fruitfully convert a meagre amount into great penny by wisely investing into the right scheme according to his risk taking abilities.

Sharpe ratio is a performance measure, which reflects the excess return earned on a portfolio per unit of its total risk (standard deviation). Treynor measure indicates the risk premium return per unit risk of the portfolio. While Jensen alpha talks about the deviation of the actual return from its expected one. Fema measure decomposes the portfolio total return into two main components: systematic return and the unsystematic return. It determines whether the portfolio is perfectly diversified or not. Hence, it is a significant measure to evaluate the performance of the fund manager.

The analysis of the fund portfolio has been done to find out the influence of the top holdings on the performance of the fund. All these measures give fair implication and results about the portfolio performance and can show the ground reality to a rational investor.

2.2 OBJECTIVE OF THE STUDY

 Whether the growth oriented Mutual Fund are earning higher returns than the benchmark returns (or market Portfolio/Index returns) in terms of risk.



Whether the growth oriented mutual funds are offering the advantages of Diversification, Market timing and Selectivity of Securities to their investors

 This study provides a proper investigation for logical and reasonable comparison and selection of the funds.  It also assists in analysing the portfolio of the selected funds.

2.3 LIMITATIONS OF THE STUDY

 The study is limited only to the analysis of different schemes and its suitability to different investors according to their risk-taking ability.  The study is based on secondary data available from monthly fact sheets, websites and other books, as primary data was not accessible.  The study is limited by the detailed study of six schemes of HDFFC.  Many investors are all price takers.  The assumption that all investors have the same information and beliefs about the distribution of returns.  Banks are free to accept deposits at any interest rate within the ceilings fixed by the Reserve Bank of India and interest rate can vary from client to client. Hence, there can be inaccuracy in the risk free rates.  The study excludes the entry and the exit loads of the mutual funds.

2.4 DATA COLLECTION The Methodology involves the selected Open-Ended equity schemes of HDFC mutual fund for the purpose of risk return and comparative analysis the competitive funds. The data collected for this project is basically from secondary sources, they are; 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 Risk returns analysis and comparative study of funds 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.

HDFC Equity Fund Growth option HDFC Capital Builder HDFC Growth Fund HDFC Long Term Advantage Fund HDFC Top 200 Fund

HDFC EQUITY FUND

Investment Objective The investment objective of the Scheme is to achieve capital appreciation.

Basic Scheme Information Table:3.1

Nature of Scheme

Open Ended Growth Scheme

Inception Date

Jan 01, 1995

Option/Plan

Dividend Option, Growth Option,

Entry Load

NIL

(purchase / additional purchase / switch-

(With effect from August 1, 2009)

in)

Exit Load.

Nil

(as a % of the Applicable NAV) Minimum Application Amount

Rs.5000 and in multiples of Rs.100 thereof to open an account / folio.

Additional purchases is Rs. 1000 and in multiples of Rs. 100 thereof

Lock-In-Period

Nil

Net Asset Value Periodicity

Every Business Day

Redemption Proceeds

Normally despatched within 3 Business days

Investment Pattern The asset allocation under the Scheme will be as follows: Table:3.2

SR NO.

TYPE OF INSTRUMENTS

NORMAL ALLOCATION (%of net asset)

1

Equities & Equities related

RISK PROFILE

80-100

Medium to high

0-100

Low to medium

instruments 2

Debt securities, money market 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.

Investment Strategy & Risk Control 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

HDFC EQUITY FUND-GROWTH OPTION Table:3.3 NAV

S&P

Ri

Rm

Ri Rm

CNX

Rm-Rm

sqr(Rm-

av

Rm av)

Rm2

500 2007

151.389

4899.39

FEB

141.228

4504.73

-6.71185

-8.05529

54.06587

-9.0864

82.56268

64.88767

MAR

142.602

4605.89

0.972895

2.24564

2.184771

1.214527

1.475077

5.042897

APL

151.16

4934.46

6.001318

7.133692

42.81156

6.10258

37.24148

50.88956

MAY

161.281

5185.95

6.695554

5.096606

34.1246

4.065494

16.52824

25.9754

JUN

165.313

5223.82

2.499984

0.730242

1.825594

-0.30087

0.090523

0.533254

JULY

172.325

5483.25

4.241651

4.966289

21.06526

3.935177

15.48562

24.66403

AUG

168.827

5411.29

-2.02989

-1.31236

2.663941

-2.34347

5.491863

1.72229

SEP

182.84

6094.11

8.300213

12.61843

104.7357

11.58732

134.266

159.2248

OCT

210.3

7163.3

15.0186

17.54465

263.4959

16.51353

272.6968

307.8146

NOV

206.176

6997.6

-1.96101

-2.31318

4.536164

-3.34429

11.18429

5.3508

DEC

223.324

7461.48

8.317166

6.62913

55.13557

5.598018

31.3378

43.94536

2008

188.42

6245.45

-15.6293

-16.2974

254.7177

-17.3285

300.2786

265.6065

FEB

187.594

6356.92

-0.43838

1.784819

-0.78243

0.753707

0.568075

3.18558

MAR

165.788

5762.88

-11.624

-9.34478

108.6241

-10.3759

107.6591

87.32486

APL

178.191

6289.07

7.481241

9.130678

68.3088

8.099566

65.60296

83.36928

MAY

169.605

5937.81

-4.81843

-5.58525

26.91209

-6.61636

43.77619

31.19497

JAN

JAN

JUN

143.171

4929.98

-15.5856

-16.9731

264.5363

-18.0042

324.1514

288.0859

JULY

151.715

5297.47

5.967689

7.454188

44.48428

6.423076

41.25591

55.56493

AUG

158.924

5337.28

4.751673

0.751491

3.570838

-0.27962

0.078188

0.564738

SEP

145.721

4807.2

-8.30774

-9.93165

82.50962

-10.9628

120.1822

98.63768

OCT

110.322

3539.57

-24.2923

-26.3694

640.5738

-27.4005

750.7883

695.3455

NOV

101.808

3379.53

-7.71741

-4.52145

34.8939

-5.55257

30.83098

20.44354

DEC

112.377

3635.87

10.38131

7.585078

78.74302

6.553966

42.95447

57.53341

2009

103.754

3538.57

-7.67328

-2.67611

20.53456

-3.70723

13.74352

7.161582

FEB

98.163

3403.33

-5.38871

-3.82188

20.59501

-4.85299

23.55156

14.60679

MAR

108.852

3720.51

10.88903

9.319696

101.4825

8.288584

68.70062

86.85673

APL

127.097

4278.54

16.76129

14.99875

251.3984

13.96764

195.0949

224.9625

MAY

169.897

5480.11

33.67507

28.08365

945.7186

27.05253

731.8396

788.6911

Total

29.7767

28.87114

3533.466

0

3469.417

3499.186

average

1.063454

1.031112

126.1952

0

123.9077

JAN

Figure:3.1

σm= √123.9077 =11.13239 β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ] = (98937.047- 859.6872)/( 97977.214- 833.54264) = 98077.36/ 97143.672 = 1.0096114

Table:3.4 Ri

Rm

Ri-Rm

Dev frm ave

sq of Dev frm av

FEB

-6.71185

-8.05529

1.34344

-1.3111

1.71898

MAR

0.972895

2.24564

-1.27274

1.305086

1.70325

APL

6.001318

7.133692

-1.13237

1.164715

1.356561

MAY

6.695554

5.096606

1.598948

-1.56661

2.454256

JUN

2.499984

0.730242

1.769742

0.75698

0.573018

JULY

4.241651

4.966289

-0.72464

0.75698

0.573018

AUG

-2.02989

-1.31236

-0.71753

0.749866

0.5623

SEP

8.300213

12.61843

-4.31822

4.350562

18.92739

OCT

15.0186

17.54465

-2.52605

2.558392

6.545367

NOV

-1.96101

-2.31318

0.352172

-0.31983

0.102291

2007 JAN

DEC

8.317166

6.62913

1.688036

-1.65569

2.741324

2008

-15.6293

-16.2974

0.668127

-0.63579

0.404223

FEB

-0.43838

1.784819

-2.2232

2.255543

5.087475

MAR

-11.624

-9.34478

-2.27926

2.311604

5.343511

APL

7.481241

9.130678

-1.64944

1.681778

2.828377

MAY

-4.81843

-5.58525

0.76682

-0.73448

0.539459

JUN

-15.5856

-16.9731

1.387467

-1.35513

1.836366

JULY

5.967689

7.454188

-1.4865

1.518841

2.306878

AUG

4.751673

0.751491

4.000182

-3.96784

15.74376

SEP

-8.30774

-9.93165

1.623906

-1.59156

2.533078

OCT

-24.2923

-26.3694

2.077092

-2.04475

4.181006

NOV

-7.71741

-4.52145

-3.19596

3.228297

10.4219

DEC

10.38131

7.585078

2.796228

-2.76389

7.639067

2009

-7.67328

-2.67611

-4.99717

5.029507

25.29594

FEB

-5.38871

-3.82188

-1.56683

1.599166

2.557333

MAR

10.88903

9.319696

1.569336

-1.53699

2.362352

APL

16.76129

14.99875

1.76254

-1.7302

2.993588

MAY

33.67507

28.08365

5.591422

-5.55908

30.90337

Total

29.7767

28.87114

0.90556

160.2354

avrage

1.063454

1.031112

0.032341

5.722694

JAN

JAN

Standard Deviation for the fund’s excess return (S.D.) σi=√5.722694 =2.392215

Sharpe Index (Si) = (Ri - Rf)/Si

= (1.063454-5)/ 2.392215 =-1.64557

Treynor's Index (Ti) = (Ri - Rf)/Bi. =(1.063454-5)/ 1.0096114 =-3.89907 Jenson alpha (αp)= Ri –[ Rf + Bi (Rm - Rf) ] = 1.063454 - [ 5+1.0096114 (1.031112-5)] =0.070488

Expected return E(Ri) = Rf + Bi (Rm - Rf) =[ 5+1.0096114 (1.031112-5)] =0.992965 Fema Measures Selectivity =Ri –[ Rf + Bi (Rm - Rf) ] =

1.063454 - [ 5+1.0096114 (1.031112-5)]

=0.070488

Diversification =[Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf) ] =[5+(1.031112-5)(2.392215/11.13139)]- [ 5+1.0096114 (1.031112-5)] =3.154092

Net selectivity= selectivity- diversification =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.

Basic Scheme Information

Nature of Scheme

Open Ended Growth Scheme

Inception Date

February 01, 1994

Option/Plan

Dividend Option,Growth Option. The Dividend Option offers Dividend Payout and Reinvestment Facility.

Entry Load

NIL

(purchase / additional

(With effect from August 1, 2009)

purchase / switch-in)

Exit Load

•

In respect of each purchase / switch-in of Units less

(as a % of the Applicable

than Rs. 5 crore in value, an Exit Load of 1.00% is

NAV)

payable if Units are

(Other than Systematic

redeemed/switched-out within 1 year from the date of

Investment Plan (SIP)/

allotment.

Systematic Transfer Plan (STP))

•

In respect of each purchase / switch-in of Units equal to or greater than Rs. 5 crore in value, no Exit Load is payable.

No Exit Load shall be levied on bonus units and units allotted on dividend reinvestment.

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

Net Asset Value Periodicity

Every Business Day.

Redemption Proceeds

Normally despatched within 3 business Days

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 : Sr.No.

Asset Type

(% of Portfolio)

1

Equities and Equity Related Instruments Upto 100%

2

Debt & Money Market Instruments

Risk Profile Medium to High

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 :

•

strong management, characterized by competence and integrity

•

strong position in its business (preferably market leadership)

•

efficiency of operations, as evidenced by profit margins and asset turnover, compared to its peers in the industry

•

working capital efficiency

•

consistent surplus cash generation

•

high profitability indicators (returns on funds employed)

In common parlance, such companies are also called 'Blue Chips'.

The Scheme defines "reasonable prices" as : •

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

HDFC CAPITAL BUILDER FUND Table:3.5

NAV

S&P CNX 500

Ri

Rm

Ri Rm

Rm-Rm av

sqr(RmRm av)

Rm2

2007 JAN

64.459

4899.39

FEB

61.259

4504.73

-4.9644

-8.05529

39.98964

-9.0864

82.5626 8

64.88 767

MAR

60.3

4605.89

-1.56548

2.24564

-3.51551

1.214527

1.47507 7

5.042 897

APL

65.818

4934.46

9.150912

7.133692

65.27979

6.10258

37.2414 8

50.88 956

MAY

69.818

5185.95

6.077365

5.096606

30.97394

4.065494

16.5282 4

25.97 54

JUN

73.27

5223.82

4.944284

0.730242

3.610525

-0.30087

0.09052 3

0.533 254

JULY

76.914

5483.25

4.973386

4.966289

24.69927

3.935177

15.4856 2

24.66 403

AUG

76.323

5411.29

-0.76839

-1.31236

1.008405

-2.34347

5.49186 3

1.722 29

SEP

83.09

6094.11

8.866266

12.61843

111.8784

11.58732

134.266

159.2 248

OCT

96.061

7163.3

15.61078

17.54465

273.8857

16.51353

272.696 8

307.8 146

NOV

99.034

6997.6

3.094908

-2.31318

-7.15908

-3.34429

11.1842 9

5.350 8

DEC

106.53 8

7461.48

7.577196

6.62913

50.23022

5.598018

31.3378

43.94 536

2008 JAN

88.367

6245.45

-17.0559

-16.2974

277.9672

-17.3285

300.278 6

265.6 065

FEB

87.439

6356.92

-1.05017

1.784819

-1.87436

0.753707

0.56807 5

3.185 58

MAR

75.967

5762.88

-13.12

-9.34478

122.6035

-10.3759

107.659 1

87.32 486

APL

79.418

6289.07

4.542762

9.130678

41.4785

8.099566

65.6029 6

83.36 928

MAY

75.065

5937.81

-5.48113

-5.58525

30.61343

-6.61636

43.7761 9

31.19 497

JUN

64.169

4929.98

-14.5154

-16.9731

246.3716

-18.0042

324.151 4

288.0 859

JULY

67.228

5297.47

4.767099

7.454188

35.53486

6.423076

41.2559 1

55.56 493

AUG

70.149

5337.28

4.344916

0.751491

3.265164

-0.27962

0.07818 8

0.564 738

SEP

63.365

4807.2

-9.67084

-9.93165

96.04744

-10.9628

120.182 2

98.63 768

OCT

47.587

3539.57

-24.9002

-26.3694

656.603

-27.4005

750.788 3

695.3 455

NOV

44.556

3379.53

-6.36939

-4.52145

28.79888

-5.55257

30.8309 8

20.44 354

DEC

48.064

3635.87

7.873238

7.585078

59.71913

6.553966

42.9544 7

57.53 341

2009 JAN

45.564

3538.57

-5.2014

-2.67611

13.91953

-3.70723

13.7435 2

7.161 582

FEB

43.34

3403.33

-4.88105

-3.82188

18.65479

-4.85299

23.5515 6

14.60 679

MAR

46.604

3720.51

7.531149

9.319696

70.18802

8.288584

68.7006 2

86.85 673

APL

53.006

4278.54

13.73702

14.99875

206.0381

13.96764

195.094 9

224.9 625

MAY

67.6

5480.11

27.53273

28.08365

773.2195

27.05253

731.839 6

788.6 911

TOTAL

21.08029

28.87114

3270.029

0

3469.41 7

3499.

186

AVERA GE

0.752867

1.031112

116.7868

0

123.907 7

Figure:3.2

σm = √123.9077 =11.13239

β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ] = (91560.82- 608.6119)/ (97977.21- 833.5426) = 90952.21/ 97143.67 = 0.936265

Table:3.6 Ri

Rm

Ri-Rm

Dev frm ave

sq of Dev frm av

FEB

-4.9644

-8.05529

3.090893

-3.36914

11.35109

MAR

-1.56548

2.24564

-3.81112

3.532879

12.48124

APL

9.150912

7.13369 2

2.01722

-2.29546

5.269159

MAY

6.077365

5.09660 6

0.980759

-1.259

1.585089

JUN

4.944284

0.73024 2

4.214041

-4.49229

20.18063

JULY

4.973386

4.96628 9

0.007097

-0.28534

0.08142

AUG

-0.76839

-1.31236

0.54397

-0.82221

0.676037

SEP

8.866266

12.6184 3

-3.75217

3.473923

12.06814

OCT

15.61078

17.5446 5

-1.93386

1.655617

2.741069

NOV

3.094908

-2.31318

5.408088

-5.68633

32.33438

DEC

7.577196

6.62913

0.948066

-1.22631

1.503837

2008 JAN

-17.0559

-16.2974

-0.75845

0.480204

0.230596

FEB

-1.05017

1.78481 9

-2.83499

2.55674

6.536922

MAR

-13.12

-9.34478

-3.77523

3.496982

12.22888

APL

4.542762

9.13067 8

-4.58792

4.309671

18.57326

MAY

-5.48113

-5.58525

0.10412

-0.38237

0.146203

JUN

-14.5154

-16.9731

2.457673

-2.73592

7.485245

JULY

4.767099

7.45418 8

-2.68709

2.408844

5.802531

AUG

4.344916

0.75149 1

3.593425

-3.87167

14.98983

SEP

-9.67084

-9.93165

0.260807

-0.53905

0.290577

OCT

-24.9002

-26.3694

1.469223

-1.74747

3.053642

2007 JAN

NOV

-6.36939

-4.52145

-1.84793

1.569689

2.463923

DEC

7.873238

7.58507 8

0.28816

-0.5664

0.320814

2009 JAN

-5.2014

-2.67611

-2.52528

2.24704

5.049189

FEB

-4.88105

-3.82188

-1.05916

0.780919

0.609834

MAR

7.531149

9.31969 6

-1.78855

1.510302

2.281012

APL

13.73702

14.9987 5

-1.26173

0.983487

0.967247

MAY

27.53273

28.0836 5

-0.55091

0.272669

0.074348

TOTAL

21.08029

28.8711 4

-7.79085

181.3761

0.75286 7

1.03111 2

-0.27824

6.477719

AVERAGE

Standard Deviation for the fund’s excess return (S.D.) σi=√6.477719 =2.545136 Sharpe Index (Si) = (Ri - Rf)/Si = (0.752867-5)/ 2.545136 =-1.66872 Treynor's Index (Ti) = (Ri - Rf)/Bi. =(0.752867-5/ 0.936265 =-4.53625 Jenson alpha (αp)= Ri –[ Rf + Bi (Rm - Rf) ]

=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 Selectivity =Ri –[ Rf + Bi (Rm - Rf) ]

=0.752867- [5+0.936265(1.031112-5)]

=

-0.39357

Diversification =[Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf) ] =[5+(1.031112-5)( 2.545136/11.13139)]- [5+0.936265(1.031112-5)] =2.808464 Net selectivity= selectivity- diversification =-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.

Basic Scheme Information Table:3.7

Nature of Scheme

Open Ended Growth Scheme

Inception Date

Sep 11, 2000

Option/Plan

Dividend Option, Growth Option,

Entry Load

NIL

(purchase / additional purchase / switch-

(With effect from August 1, 2009)

in)

Exit Load.

Nil

(as a % of the Applicable NAV) Minimum Application Amount

Rs.5000 and in multiples of Rs.100 thereof to open an account / folio.

Additional purchases is Rs. 1000 and in multiples of Rs. 100 thereof

Lock-In-Period

Nil

Net Asset Value Periodicity

Every Business Day

Redemption Proceeds

Normally despatched within 3 Business

days

Investment pattern 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

SR

TYPE OF INSTRUMENTS

NO.

NORMAL ALLOCATION (%of net asset)

1

Equities & Equities related

80-100

instruments 2

Debt securities, money market instruments & cash

RISK PROFILE Medium to high

0-100

Low to medium

Investment Strategy & Risk Control 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".

Benchmark Index : SENSEX Fund Manager : Mr. Shrinivas Rao

HDFC GROWTH FUND Table:3.9 NAV

SENSEX

Ri

Rm

Ri Rm

Rm-Rm av

sqr(RmRm av)

Rm2

2007 JAN

48.917

14090.92

FEB

45.047

12938.09

-7.91136

-8.18137

64.72575

-8.91997

79.56584

66.93478

MAR

45.461

13072.1

0.91904

1.035779

0.951922

0.297178

0.088315

1.072838

APL

48.581

13872.37

6.863025

6.12197

42.01523

5.383369

28.98066

37.47851

MAY

53.198

14544.46

9.503715

4.84481

46.0437

4.106209

16.86095

23.47219

JUN

54.695

14650.51

2.814016

0.729144

2.051821

-0.00946

8.94E-05

0.53165

JULY

58.716

15550.99

7.351677

6.146407

45.1864

5.407806

29.24437

37.77832

AUG

58.17

15318.6

-0.9299

-1.49437

1.389618

-2.23298

4.986179

2.233155

SEP

63.82

17291.1

9.71291

12.8765

125.0683

12.1379

147.3287

165.8043

OCT

73.682

19837.99

15.45284

14.72949

227.6123

13.99088

195.7448

216.9577

NOV

74.895

19363.19

1.646264

-2.39339

-3.94015

-3.13199

9.809352

5.728304

DEC

80.576

20286.99

7.585286

4.770908

36.1887

4.032307

16.2595

22.76156

2008 JAN

68.432

17648.71

-15.0715

-13.0048

196.0015

-13.7434

188.8807

169.1245

FEB

67.827

17578.72

-0.88409

-0.39657

0.350606

-1.13517

1.28862

0.15727

MAR

62.15

15644.44

-8.36982

-11.0035

92.09761

-11.7421

137.8777

121.0777

APL

66.196

17287.31

6.510056

10.5013

68.36407

9.762702

95.31035

110.2774

MAY

62.813

16415.57

-5.11058

-5.04266

25.77091

-5.78126

33.42296

25.4284

JUN

53.472

13461.6

-14.8711

-17.9949

267.6048

-18.7335

350.9451

323.8174

JULY

56.819

14355.75

6.259351

6.642227

41.57603

5.903626

34.8528

44.11918

AUG

58.871

14564.53

3.611468

1.45433

5.252267

0.715729

0.512268

2.115076

SEP

54.54

12860.43

-7.35676

-11.7003

86.07665

-12.4389

154.7273

136.898

OCT

42.283

9788.06

-22.4734

-23.8901

536.8922

-24.6287

606.5731

570.737

NOV

40.089

9092.72

-5.18885

-7.10396

36.86137

-7.84256

61.50578

50.46627

DEC

41.652

9647.31

3.898825

6.099275

23.78001

5.360674

28.73683

37.20116

2009 JAN

38.443

9424.24

-7.70431

-2.31225

17.8143

-3.05085

9.307696

5.346504

FEB

36.429

8891.61

-5.23893

-5.6517

29.60885

-6.3903

40.83598

31.94174

MAR

38.73

9708.5

6.316396

9.1872

58.03

8.448599

71.37883

84.40465

APL

44.131

11403.25

13.94526

17.45635

243.4334

16.71775

279.4832

304.7242

MAY

56.982

14625.25

29.12012

28.2551

822.792

27.5165

757.1579

798.3508

TOTAL

30.39962

20.68083

3139.6

0

3381.666

3396.941

AVG

1.085701

0.738601

112.1286

0

120.7738

Figure:3.3

σm= √120.7738 =10.98971

β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ] = (87908.8-628.6893)/ (95114.34-427.6966) = 87280.12/ 94686.64 = 0.921779

Table:3.10 Ri

Rm

Ri-Rm

Dev frm ave

sq of Dev frm av

Rm2

FEB

-7.91136

-8.18137

0.270008

0.077092104

0.005943

66.93478

MAR

0.91904

1.035779

-0.11674

0.463838642

0.215146

1.072838

APL

6.863025

6.12197

0.741056

-0.393955855

0.155201

37.47851

MAY

9.503715

4.84481

4.658905

-4.311805316

18.59167

23.47219

JUN

2.814016

0.729144

2.084872

-1.737772055

3.019852

0.53165

JULY

7.351677

6.146407

1.20527

-0.85817039

0.736456

37.77832

AUG

-0.9299

-1.49437

0.564474

-0.217374552

0.047252

2.233155

SEP

9.71291

12.8765

-3.16359

3.510692544

12.32496

165.8043

OCT

15.45284

14.72949

0.723351

-0.376251086

0.141565

216.9577

NOV

1.646264

-2.39339

4.039651

-3.692551406

13.63494

5.728304

DEC

7.585286

4.770908

2.814378

-2.467278063

6.087461

22.76156

2008 JAN

-15.0715

-13.0048

-2.0667

2.413797413

5.826418

169.1245

FEB

-0.88409

-0.39657

-0.48752

0.834616326

0.696584

0.15727

MAR

-8.36982

-11.0035

2.633708

-2.286608411

5.228578

121.0777

APL

6.510056

10.5013

-3.99125

4.338346289

18.82125

110.2774

MAY

-5.11058

-5.04266

-0.06792

0.415022146

0.172243

25.4284

JUN

-14.8711

-17.9949

3.123803

-2.776702677

7.710078

323.8174

JULY

6.259351

6.642227

-0.38288

0.729975995

0.532865

44.11918

AUG

3.611468

1.45433

2.157138

-1.810037944

3.276237

2.115076

SEP

-7.35676

-11.7003

4.34358

-3.996480234

15.97185

136.898

2007 JAN

OCT

-22.4734

-23.8901

1.416689

-1.069589295

1.144021

570.737

NOV

-5.18885

-7.10396

1.915115

-1.568014871

2.458671

50.46627

DEC

3.898825

6.099275

-2.20045

2.547549815

6.49001

37.20116

2009 JAN

-7.70431

-2.31225

-5.39206

5.73916105

32.93797

5.346504

FEB

-5.23893

-5.6517

0.412777

-0.065677352

0.004314

31.94174

MAR

6.316396

9.1872

-2.8708

3.217903695

10.3549

84.40465

APL

13.94526

17.45635

-3.51109

3.858190515

14.88563

304.7242

MAY

29.12012

28.2551

0.865017

-0.517917027

0.268238

798.3508

TOTAL

30.39962

20.68083

9.718797

-4.44089E-15

181.7403

3396.941

AVG

1.085701

0.738601

0.3471

-1.58603E-16

6.490725

Standard Deviation for the fund’s excess return (S.D.) σi=√6.490725 =2.54769 Sharpe Index (Si) = (Ri - Rf)/Si = (1.085701-5)/ 2.54769 =-1.53641 Treynor's Index (Ti) = (Ri - Rf)/Bi. =(1.085701-5)/ 0.921779 =-4.24646 Jenson alpha (αp)= Ri –[ Rf + Bi (Rm - Rf) ]

=1.085701- [5+0.921779 (0.738601-5)] =

0.013767

Expected return E(Ri) = Rf + Bi (Rm - Rf)

=[5+0.921779 (0.738601-5)] =1.071934

Fema Measures Selectivity =Ri –[ Rf + Bi (Rm - Rf) ]

=1.085701- [5+0.921779 (0.738601-5)] =

0.013767

Diversification =[Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf)] =[5+(0.738601-5)( 2.54769/10.98971)]- [5+0.921779 (0.738601-5)] =2.940167 Net selectivity= selectivity- diversification =0.013767-2.940167 =-2.9264

HDFC LONG TERM FUND Investment Objective To achieve long term capital appreciation.

Basic Scheme Information

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.

Inception Date

10-Feb-06

Closing Date

27-Jan-06

Option/Plan

Dividend Option,Growth Option. Dividend Option currently offers payout facility only.

Entry Load

NIL

(purchase / additional

(With effect from August 1, 2009)

purchase / switch-in)

Exit Load (as a % of the Applicable NAV) (Other than Systematic Investment Plan (SIP)/ Systematic Transfer Plan (STP))

Redemption / Switch-out from the Date of Allotment : •

Upto 12 months 4%

•

After 12 months upto 24 months 3%

•

After 24 months upto 36 months 2%

•

After 36 months upto 48 months 1%

•

After 48 months upto 54 months 0.5%

•

After 54 months upto Maturity Nil

No Exit Load shall be levied on bonus units and units allotted on dividend reinvestment.

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.

Minimum Application

Currently no purchases/ switch-ins are allowed into this

Amount

scheme.

(Other than Systematic Investment Plan (SIP)/ Systematic Transfer Plan (STP)) Lock-In-Period

Nil

Net Asset Value Periodicity

Every Business Day.

Redemption Proceeds

Normally dispatched within 3 Days

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.

Type of Instruments

Minimum Allocation Minimum Allocation Risk Profile of the Instrument

Equity & Equity related

(% of Net Assets)

(% of Net Assets)

70

100

High

0

30

Low

instruments Fixed Income Securities

(including money market instruments) Investment Strategy The investment strategy of the Scheme is to build and maintain a diversified portfolio of equity stocks that have the potential to appreciate in the long run. Companies identified for selection in the portfolio will have demonstrated a potential ability to grow at a reasonable rate for the long term.

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

HDFC LONG TERM FUND Table:3.11 NAV

SENSEX

Ri

Rm

Ri Rm

Rm-Rm av

sqr(RmRm av)

Rm2

2007 JAN

95.224

14090.92

FEB

87.782

12938.09

-7.81526

-8.18137

63.93949

-8.91997

79.56584

66.93478

MAR

86.337

13072.1

-1.64612

1.035779

-1.70502

0.297178

0.088315

1.072838

APL

91.627

13872.37

6.127153

6.12197

37.51024

5.383369

28.98066

37.47851

MAY

96.561

14544.46

5.384876

4.84481

26.0887

4.106209

16.86095

23.47219

JUN

100.695

14650.51

4.281232

0.729144

3.121633

-0.00946

8.94E-05

0.53165

JULY

102.976

15550.99

2.265256

6.146407

13.92319

5.407806

29.24437

37.77832

AUG

102.627

15318.6

-0.33891

-1.49437

0.506464

-2.23298

4.986179

2.233155

SEP

109.68

17291.1

6.87246

12.8765

88.49326

12.1379

147.3287

165.8043

OCT

118.185

19837.99

7.754376

14.72949

114.218

13.99088

195.7448

216.9577

NOV

119.445

19363.19

1.066125

-2.39339

-2.55165

-3.13199

9.809352

5.728304

DEC

128.983

20286.99

7.985265

4.770908

38.09697

4.032307

16.2595

22.76156

2008 JAN

112.202

17648.71

-13.0102

-13.0048

169.1954

-13.7434

188.8807

169.1245

FEB

110.554

17578.72

-1.46878

-0.39657

0.582478

-1.13517

1.28862

0.15727

MAR

96.105

15644.44

-13.0696

-11.0035

143.8121

-11.7421

137.8777

121.0777

APL

103.44

17287.31

7.632277

10.5013

80.14885

9.762702

95.31035

110.2774

MAY

99.18

16415.57

-4.11833

-5.04266

20.76733

-5.78126

33.42296

25.4284

JUN

85.045

13461.6

-14.2519

-17.9949

256.4613

-18.7335

350.9451

323.8174

JULY

88.972

14355.75

4.617555

6.642227

30.67085

5.903626

34.8528

44.11918

AUG

93.359

14564.53

4.930765

1.45433

7.17096

0.715729

0.512268

2.115076

SEP

82.286

12860.43

-11.8607

-11.7003

138.7739

-12.4389

154.7273

136.898

OCT

63.504

9788.06

-22.8253

-23.8901

545.298

-24.6287

606.5731

570.737

NOV

57.237

9092.72

-9.86867

-7.10396

70.10665

-7.84256

61.50578

50.46627

DEC

61.406

9647.31

7.28375

6.099275

44.42559

5.360674

28.73683

37.20116

2009 JAN

58.709

9424.24

-4.39208

-2.31225

10.15559

-3.05085

9.307696

5.346504

FEB

55.785

8891.61

-4.9805

-5.6517

28.14829

-6.3903

40.83598

31.94174

MAR

59.209

9708.5

6.137851

9.1872

56.38966

8.448599

71.37883

84.40465

APL

68.298

11403.25

15.35071

17.45635

267.9674

16.71775

279.4832

304.7242

MAY

87.958

14625.25

28.78562

28.2551

813.3405

27.5165

757.1579

798.3508

TOTAL

6.828943

20.68083

3065.056

0

3381.666

3396.941

AVG

0.243891

0.738601

109.4663

0

120.7738

Figure:3.4

σm= √120.7738 =10.98971 β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ] = (85821.57- 141.2282)/ (95114.34- 427.6966) = 85680.34/ 94686.64 = 0.904883

Table:3.12

Ri

Rm

Ri-Rm

Dev frm ave

sq of Dev frm av

FEB

-7.81526

-8.18137

0.366111

-0.860821325

0.741013

MAR

-1.64612

1.035779

-2.6819

2.187192079

4.783809

APL

6.127153

6.12197

0.005183

-0.499893333

0.249893

MAY

5.384876

4.84481

0.540065

-1.034775537

1.07076

JUN

4.281232

0.729144

3.552088

-4.046798071

16.37657

JULY

2.265256

6.146407

-3.88115

3.386440599

11.46798

AUG

-0.33891

-1.49437

1.15546

-1.650170515

2.723063

SEP

6.87246

12.8765

-6.00404

5.509332488

30.35274

OCT

7.754376

14.72949

-6.97511

6.48039862

41.99557

NOV

1.066125

-2.39339

3.459513

-3.954222903

15.63588

DEC

7.985265

4.770908

3.214357

-3.709067209

13.75718

2008 JAN

-13.0102

-13.0048

-0.00545

-0.489256261

0.239372

FEB

-1.46878

-0.39657

-1.07221

0.577496505

0.333502

MAR

-13.0696

-11.0035

-2.0661

1.571389464

2.469265

APL

7.632277

10.5013

-2.86903

2.374315379

5.637374

MAY

-4.11833

-5.04266

0.924329

-1.419039116

2.013672

JUN

-14.2519

-17.9949

3.743063

-4.237772814

17.95872

JULY

4.617555

6.642227

-2.02467

1.529961243

2.340781

AUG

4.930765

1.45433

3.476435

-3.971144712

15.76999

SEP

-11.8607

-11.7003

-0.16032

-0.334386466

0.111814

OCT

-22.8253

-23.8901

1.064835

-1.559545364

2.432182

NOV

-9.86867

-7.10396

-2.76471

2.26999821

5.152892

DEC

7.28375

6.099275

1.184475

-1.679185121

2.819663

2009 JAN

-4.39208

-2.31225

-2.07983

1.585118054

2.512599

FEB

-4.9805

-5.6517

0.671205

-1.165915514

1.359359

MAR

6.137851

9.1872

-3.04935

2.554639268

6.526182

2007 JAN

APL

15.35071

17.45635

-2.10565

1.610935739

2.595114

MAY

28.78562

28.2551

0.530513

-1.025223388

1.051083

TOTAL

6.828943

20.68083

-13.8519

-4.44089E-15

210.478

AVG

0.243891

0.738601

-0.49471

-1.58603E-16

5.538895

Standard Deviation for the fund’s excess return (S.D.) σi=√5.538895 =2.353486 Sharpe Index (Si) = (Ri - Rf)/Si = (0.243891-5)/ 2.353486 =-2.02088 Treynor's Index (Ti) = (Ri - Rf)/Bi. =(0.243891-5)/ 0.904883 =-5.25605 Jenson alpha (αp)= Ri –[ Rf + Bi (Rm - Rf) ] =0.243891- [5+0.904883 (0.738601-5)] =

-0.90004

Expected return E(Ri) = Rf + Bi (Rm - Rf) =[5+0.904883 (0.738601-5)] =1.143932

Fema Measures Selectivity =Ri –[ Rf + Bi (Rm - Rf) ]

=0.243891- [5+0.904883 (0.738601-5)] =

-0.90004

Diversification =[Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf)] =[5+(0.738601-5)( 2.353486/10.98971)]- [5+0.904883 (0.738601-5)] =2.943474 Net selectivity= selectivity- diversification =-0.90004-2.943474 =-3.84352

HDFC TAXSAVER Investment Objective The investment objective of the Scheme is to achieve long term growth of capital.

Basic Scheme Information Table:3.13

Nature of Scheme

Open Ended Equity Linked Saving Scheme

Inception Date

Mar 31, 1996

Option/Plan

Dividend Option, Growth Option,

Entry Load

NIL

(purchase / additional purchase / switch-

(With effect from August 1, 2009)

in)

Exit Load.

Nil

(as a % of the Applicable NAV) Minimum Application Amount

Rs.5000 and in multiples of Rs.100

thereof to open an account / folio.

Lock-In-Period

3 yrs

Net Asset Value Periodicity

Every Business Day

Redemption Proceeds

Normally despatched within 3 Business days

Investment Pattern The asset allocation under the Scheme will be as follows: Table:3.14

SR NO.

ASSET TYPE

(% OF PORTFOLIO)

1

Equities & Equities

RISK PROFILE

Minimum 80%

Medium to high

Minimum 20%

Low to medium

related instruments 2

Debt securities, money market instruments & cash

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).

Fund Manager : Dhawal Mehta

HDFC TAX SAVER FUND Table:3.15 NAV

S&P CNX 500

Ri

Rm

Ri Rm

Rm-Rm av

sqr(RmRm av) Rm2

2007 JAN

146.134

4899.39

FEB

135.133

4504.73

-7.52802

-8.05529

60.64039

-9.0864

82.56268

64.88767

MAR

133.882

4605.89

-0.92575

2.24564

-2.07891

1.214527

1.475077

5.042897

APL

144.308

4934.46

7.787455

7.133692

55.5533

6.10258

37.24148

50.88956

MAY

153.765

5185.95

6.553344

5.096606

33.39982

4.065494

16.52824

25.9754

JUN

156.535

5223.82

1.80145

0.730242

1.315495

-0.30087

0.090523

0.533254

JULY

163.61

5483.25

4.519756

4.966289

22.44641

3.935177

15.48562

24.66403

AUG

161.481

5411.29

-1.30127

-1.31236

1.707729

-2.34347

5.491863

1.72229

SEP

173.27

6094.11

7.300549

12.61843

92.12149

11.58732

134.266

159.2248

OCT

198.737

7163.3

14.69787

17.54465

257.8689

16.51353

272.6968

307.8146

NOV

196.735

6997.6

-1.00736

-2.31318

2.330208

-3.34429

11.18429

5.3508

DEC

204.284

7461.48

3.837141

6.62913

25.43691

5.598018

31.3378

43.94536

2008 JAN

173.277

6245.45

-15.1784

-16.2974

247.3687

-17.3285

300.2786

FEB

171.845

6356.92

-0.82642

1.784819

-1.47501

0.753707

0.568075

3.18558

MAR

152.02

5762.88

-11.5366

-9.34478

107.8066

-10.3759

107.6591

87.32486

APL

158.411

6289.07

4.204052

9.130678

38.38584

8.099566

65.60296

83.36928

265.6065

MAY

148.793

5937.81

-6.07155

-5.58525

33.91109

-6.61636

43.77619

31.19497

JUN

126.45

4929.98

-15.0162

-16.9731

254.8707

-18.0042

324.1514

288.0859

JULY

135.953

5297.47

7.515223

7.454188

56.01989

6.423076

41.25591

55.56493

AUG

142.358

5337.28

4.711187

0.751491

3.540414

-0.27962

0.078188

0.564738

SEP

132.682

4807.2

-6.79695

-9.93165

67.50492

-10.9628

120.1822

98.63768

OCT

99.119

3539.57

-25.2958

-26.3694

667.0357

-27.4005

750.7883

695.3455

NOV

90.957

3379.53

-8.23455

-4.52145

37.23212

-5.55257

30.83098

20.44354

DEC

98.972

3635.87

8.811856

7.585078

66.83862

6.553966

42.95447

57.53341

2009 JAN

93.555

3538.57

-5.47327

-2.67611

14.64708

-3.70723

13.74352

FEB

89.449

3403.33

-4.38886

-3.82188

16.77372

-4.85299

23.55156

14.60679

MAR

97.063

3720.51

8.512113

9.319696

79.3303

8.288584

68.70062

86.85673

APL

112.05

4278.54

15.44049

14.99875

231.588

13.96764

195.0949

224.9625

MAY

144.827

5480.11

29.25212

28.08365

821.5062

27.05253

731.8396

788.6911

TOTAL

15.36369

28.87114

3293.627

0

3469.417

3499.186

AVG

0.548703

1.031112

117.6295

7.161582

123.9077

Figure:3.5

σm= √123.9077 =11.13139 β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ] = (92221.54- 443.5671)/ (97977.21- 833.5426) = 91777.98/ 97143.67 = 0.944765 Table:3.16 Ri

Rm

Ri-Rm

Dev frm ave

sq of Dev frm av

FEB

-7.52802

-8.05529

0.527266

-1.00968

1.019444

MAR

-0.92575

2.24564

-3.17139

2.688985

7.230641

APL

7.787455

7.133692

0.653763

-1.13617

1.290886

MAY

6.553344

5.096606

1.456738

-1.93915

3.760291

JUN

1.80145

0.730242

1.071208

-1.55362

2.413726

JULY

4.519756

4.966289

-0.44653

-0.03588

0.001287

AUG

-1.30127

-1.31236

0.011095

-0.4935

0.243546

SEP

7.300549

12.61843

-5.31788

4.835475

23.38182

OCT

14.69787

17.54465

-2.84678

2.364366

5.590227

NOV

-1.00736

-2.31318

1.305818

-1.78823

3.197757

DEC

3.837141

6.62913

-2.79199

2.30958

5.334158

2008 JAN

-15.1784

-16.2974

1.119058

-1.60147

2.564696

FEB

-0.82642

1.784819

-2.61124

2.128833

4.531929

MAR

-11.5366

-9.34478

-2.19178

1.709373

2.921956

APL

4.204052

9.130678

-4.92663

4.444217

19.75106

2007 JAN

MAY

-6.07155

-5.58525

-0.4863

0.003894

1.52E-05

JUN

-15.0162

-16.9731

1.956929

-2.43934

5.950372

JULY

7.515223

7.454188

0.061035

-0.54344

0.295331

AUG

4.711187

0.751491

3.959696

-4.44211

19.7323

SEP

-6.79695

-9.93165

3.134702

-3.61711

13.08349

OCT

-25.2958

-26.3694

1.073584

-1.55599

2.421115

NOV

-8.23455

-4.52145

-3.71309

3.230684

10.43732

DEC

8.811856

7.585078

1.226778

-1.70919

2.921319

2009 JAN

-5.47327

-2.67611

-2.79715

2.314743

5.358035

FEB

-4.38886

-3.82188

-0.56698

0.08457

0.007152

MAR

8.512113

9.319696

-0.80758

0.325174

0.105738

APL

15.44049

14.99875

0.441737

-0.92415

0.854046

MAY

29.25212

28.08365

1.168474

-1.65088

2.725415

TOTAL

15.36369

28.87114

-13.5075

147.1251

AVG

0.548703

1.031112

-0.48241

5.254467

Standard Deviation for the fund’s excess return (S.D.) σi=√ 5.254467

= 2.292262

Sharpe Index (Si) = (Ri - Rf)/Si = (0.548703-5)/ 2.292262 =-1.94188 Treynor's Index (Ti) = (Ri - Rf)/Bi. =(0.548703-5)/ 0.944765 =-4.71154

Jenson alpha (αp) = Ri –[ Rf + Bi (Rm - Rf) ] =0.548703- [5+0.944765 (1.031112-5)] =

-0.70163

Expected return E(Ri) = Rf + Bi (Rm - Rf) =[5+0.944765 (1.031112-5)] =1.250332 Fema Measure: Selectivity =Ri –[ Rf + Bi (Rm - Rf) ]

=0.548703- [5+0.944765 (1.031112-5)] =

-0.70163

Diversification = [Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf)] =[5+(1.031112-5)( 2.292262/11.13139)]- [5+0.944765 (1.031112-5)] =2.932363 Net selectivity= selectivity- diversification =-0.70163-2.932363 =-3.63399

HDFC TOP 200 FUND

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.

Basic Scheme Information Table:3.17

Nature of Scheme

Open Ended Equity Growth Scheme

Inception Date

Oct 11, 1996

Option/Plan

Dividend Option, Growth Option,

Entry Load

NIL

(purchase / additional purchase / switch-

(With effect from August 1, 2009)

in)

Exit Load.

Nil

Minimum Application Amount

Rs.5000 and in multiples of Rs.100 thereof to open an account / folio.

Additional purchases is Rs. 1000 and in multiples of Rs. 100 thereof.

Lock-In-Period

Investment Pattern

Nil

The asset allocation under the Scheme will be as follows: Table:3.18

SR NO.

ASSET TYPE

(% OF PORTFOLIO)

RISK PROFILE

1

Equities & Equities

Upto 100% (including use of

related instruments

derivatives for hedging and other

Medium to high

uses as permitted by prevailing SEBI Regulations) 2

Debt securities, money

Balance in Debt & Money Market

market instruments &

Instruments

Low to medium

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.

Investment Strategy & Risk Control 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.

Benchmark Index : BSE 200 Fund Manager : Mr. Prashant Jain

HDFC TOP 200 FUND Table:3.19 Ri

Rm

Ri Rm

Rm-AvRm

(RmAvRm)2

Rm2

2007 JAN

112.359

1687.35

FEB

103.269

1545.27

-8.09014

-8.4203

68.12144

-9.34081

87.25075

70.90152

MAR

104.504

1556.72

1.195906

0.740971

0.886131

-0.17954

0.032233

0.549038

APRI L

111.805

1666.14

6.986335

7.028881

49.10612

6.108374

37.31223

49.40517

MAY

119.096

1766.08

6.521175

5.998295

39.11594

5.077788

25.78393

35.97955

JUNE

120.34

1804.81

1.044536

2.192992

2.290658

1.272485

1.619219

4.809216

JULY

127.614

1894.18

6.04454

4.951768

29.93116

4.031261

16.25106

24.52

AUG

126.201

1857.7

-1.10725

-1.9259

2.132443

-2.84641

8.10203

3.709088

SEPT

140.49

2118.86

11.32241

14.05824

159.1733

13.13774

172.6001

197.6342

OCT

160.215

2439.87

14.04015

15.15013

212.71

14.22962

202.4821

229.5264

NOV

158.356

2454.23

-1.16032

0.588556

-0.68291

-0.33195

0.110192

0.346398

DEC

169.794

2656.52

7.222966

8.242504

59.53532

7.321997

53.61163

67.93887

2008 JAN

147.718

2230.39

-13.0016

-16.0409

208.5581

-16.9614

287.6897

257.3108

FEB

147.689

2217.47

-0.01963

-0.57927

0.011372

-1.49978

2.249334

0.335555

MAR

131.544

1932.41

-10.9318

-12.8552

140.5298

-13.7757

189.7699

165.2559

APRI L

143.025

2157.52

8.727878

11.64918

101.6727

10.72868

115.1045

135.7035

MAY

137.675

2038.22

-3.7406

-5.5295

20.68366

-6.45

41.60255

30.57534

JUNE

115.424

1644.18

-16.162

-19.3326

312.4523

-20.2531

410.1865

373.7477

JULY

123.902

1749.11

7.345093

6.381905

46.87568

5.461398

29.82686

40.72871

AUG

129.235

1782.08

4.304208

1.884959

8.113254

0.964452

0.930167

3.553069

SEPT

118.754

1555.7

-8.11003

-12.7031

103.0228

-13.6236

185.6036

161.3696

OCT

92.324

1145.68

-22.2561

-26.356

586.5812

-27.2765

744.0068

694.6377

NOV

86.546

1062.35

-6.25839

-7.27341

45.51987

-8.19392

67.14027

52.90249

DEC

92.798

1156.59

7.223904

8.870899

64.08253

7.950392

63.20874

78.69286

2009 JAN

88.074

1107.06

-5.09063

-4.28242

21.80018

-5.20292

27.07041

18.33909

FEB

84.379

1044.94

-4.19534

-5.61126

23.54111

-6.53177

42.66396

31.48622

MAR

92.552

1140.43

9.686059

9.138324

88.51435

8.217817

67.53251

83.50896

APRI L

107.584

1339.38

16.24168

17.44517

283.3389

16.52467

273.0646

304.3341

MAY

139.341

1772.82

29.51833

32.36124

955.2498

31.44073

988.5198

1047.25

Total

37.30138

25.7742

3632.867

0

4141.326

4165.051

Avera ge

1.332192

0.920507

129.7453

0

147.9045

Figure:3.6

σm= √147.9045 =12.1616

β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ]

= (101720.3- 961.4133)/ (116621.4- 664.3093) = 100758.9/ 115957.1 = 0.868932

Table:3.20 Ri

Rm

Ri-Rm

dev frm av

sq of dev

Rm2

FEB

-8.09014

-8.4203

0.330164

0.081521

0.006646

70.90152

MAR

1.195906

0.740971

0.454935

-0.04325

0.001871

0.549038

APRIL

6.986335

7.028881

-0.04255

0.454231

0.206326

49.40517

MAY

6.521175

5.998295

0.52288

-0.11119

0.012364

35.97955

JUNE

1.044536

2.192992

-1.14846

1.560142

2.434043

4.809216

JULY

6.04454

4.951768

1.092773

-0.68109

0.46388

24.52

AUG

-1.10725

-1.9259

0.818654

-0.40697

0.165624

3.709088

SEPT

11.32241

14.05824

-2.73583

3.147515

9.906851

197.6342

OCT

14.04015

15.15013

-1.10998

1.521668

2.315473

229.5264

NOV

-1.16032

0.588556

-1.74887

2.160557

4.668006

0.346398

DEC

7.222966

8.242504

-1.01954

1.431223

2.048399

67.93887

2008 JAN

-13.0016

-16.0409

3.039273

-2.62759

6.90422

257.3108

FEB

-0.01963

-0.57927

0.559639

-0.14795

0.02189

0.335555

MAR

-10.9318

-12.8552

1.923436

-1.51175

2.285389

165.2559

APRIL

8.727878

11.64918

-2.92131

3.332991

11.10883

135.7035

MAY

-3.7406

-5.5295

1.788892

-1.37721

1.896699

30.57534

2007 JAN

JUNE

-16.162

-19.3326

3.170579

-2.75889

7.611496

373.7477

JULY

7.345093

6.381905

0.963188

-0.5515

0.304156

40.72871

AUG

4.304208

1.884959

2.41925

-2.00756

4.030315

3.553069

SEPT

-8.11003

-12.7031

4.593101

-4.18142

17.48424

161.3696

OCT

-22.2561

-26.356

4.099889

-3.6882

13.60285

694.6377

NOV

-6.25839

-7.27341

1.015015

-0.60333

0.364007

52.90249

DEC

7.223904

8.870899

-1.647

2.058681

4.238165

78.69286

2009 JAN

-5.09063

-4.28242

-0.80821

1.219896

1.488145

18.33909

FEB

-4.19534

-5.61126

1.415923

-1.00424

1.008493

31.48622

MAR

9.686059

9.138324

0.547736

-0.13605

0.01851

83.50896

APRIL

16.24168

17.44517

-1.20349

1.615179

2.608803

304.3341

MAY

29.51833

32.36124

-2.84291

3.254597

10.5924

1047.25

37.30138

25.7742

11.52718

107.7981

4165.051

1.332192

0.920507

0.411685

3.849932

Standard Deviation for the fund’s excess return (S.D.) σi=√3.849932 =1.962124 Sharpe Index (Si) = (Ri - Rf)/Si = (1.332192-5)/ 1.962124 =-1.8693 Treynor's Index (Ti) = (Ri - Rf)/Bi. = (4.528901-5)/ 0.868932 =-4.22105 Jenson alpha (αp)= Ri –[ Rf + Bi (Rm - Rf) ] =1.332192- [5+0.868932 (0.920507-5)] =

-0.12301

Expected return E(Ri) = Rf + Bi (Rm - Rf)

=[5+0.868932 (0.920507-5)] =1.455198

Fema Measure: Selectivity =Ri –[ Rf + Bi (Rm - Rf) ] =1.332192- [5+0.868932 (0.920507-5)] =

-0.12301

Diversification =[Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf)] =[5+(0.920507-5)( 1.962124/12.1616)]- [5+0.868932 (0.920507-5)] =2.886626 Net selectivity= selectivity- diversification =-0.12301-2.886626 =-2.87834

3.2 ANALYSIS OF THE OBSERVATION: The table given below illustrates the comparison among the analysed funds based on the different measures of comparison.

Performance of Fund portfolio and Benchmark return for 29 months (jan07-may08) Table:3.21 FUND BENCHMARK RETURNS RETURN EQUITY FUND

12.22546

11.8529

Capital builder

4.872865

11.8529

Growth fund

16.48711

3.792016

Long term adv

-7.63043

3.792016

Tax saver

-0.89438

11.8529

Top 200

24.0141

5.065339

Figure:3.7

Performance Evaluation against Benchmarks 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 name

S.D. market

S.D. fund

B value

Sharpe ratio

Treynor ratio

Jenson’s alpha

Fema

Retuns jan07may08(29 months)

HDFC Equity

11.13239

2.392215

1.0096114

-1.64557

-3.89907

0.070488

-3.0836

12.22546

HDFC Capital Builder

11.13239

2.545136

0.936265

-1.66872

-4.53625

-0.39357

-3.33967

4.872865

HDFC Growth Fund

10.98971

2.54769

0.921779

-1.53641

-4.24646

0.013767

-2.9264

16.48711

HDFC Long Term Adv

10.98971

2.353486

0.904883

-2.02088

-5.25605

-0.90004

-3.84352

-7.63043

HDFC Tax saver

11.13139

2.292262

0.944765

-1.94188

-4.71154

-0.70163

-3.63399

-0.89438

HDFC Top 200

12.1616

1.962124

0.868932

-1.8693

-4.22105

-0.12301

-2.87834

24.0141

Standard Deviation of the Market: 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.

Standard deviation of the Fund: 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.

HDFC Growth Fund Portfolio Analysis Table:3.23 Portfolio

31-May-09

Name of Instrument

Industry +

Quantity

Market/ Fair Value(Rs. In Lakhs)

% toNAV

Equity & Equity Related (a) Listed / awaiting listing on Stock Exchanges State Bank of India

Banks

448,000

8,372.45

7.20

Zee Entertainment Enterprises Ltd.

Media & Entertainment

4,160,179

7,001.58

6.02

ICICI Bank Ltd.

Banks

932,397

6,901.14

5.93

Bharti Airtel Ltd.

Telecom - Services

750,346

6,159.59

5.30

Crompton Greaves Ltd.

Industrial Capital Goods

2,099,819

5,513.07

4.74

Bharat Petroleum Corporation Limited

Petroleum Products

926,557

4,305.71

3.70

Housing Development Finance Corporation Ltd.$

Finance

182,500

3,977.77

3.42

Exide Industries Ltd.

Auto Ancillaries

5,319,910

3,769.16

3.24

Divis Laboratories Ltd.

Pharmaceuticals

318,535

3,666.18

3.15

Sun Pharmaceutical Industries Ltd.

Pharmaceuticals

272,365

3,305.83

2.84

H T Media Ltd.

Media & Entertainment

2,307,000

2,861.83

2.46

Solar Explosives Ltd.

Chemicals

913,257

2,807.81

2.41

Nestle India Ltd.

Consumer Non Durables

160,268

2,766.79

2.38

Dr Reddys Laboratories Ltd.

Pharmaceuticals

420,000

2,719.50

2.34

ITC Ltd.

Consumer Non Durables

1,462,305

2,685.52

2.31

Coromandel Fertilisers Ltd.

Fertilisers

1,433,271

2,608.55

2.24

Biocon Limited

Pharmaceuticals

1,319,006

2,397.95

2.06

Reliance Industries Ltd.

Petroleum Products

104,250

2,368.46

2.04

Hindustan Petroleum Corporation Ltd.

Petroleum Products

633,721

2,300.09

1.98

Dabur India Ltd.

Consumer Non Durables

2,050,115

2,264.35

1.95

Bank of Baroda

Banks

469,151

2,058.63

1.77

Infosys Technologies Ltd

Software

120,000

1,926.12

1.66

MphasiS Limited

Software

569,000

1,916.96

1.65

Axis Bank Ltd

Banks

220,000

1,713.69

1.47

Apollo Tyres Ltd

Auto Ancillaries

5,367,120

1,682.59

1.45

Tata Steel Limited

Ferrous Metals

400,000

1,621.40

1.39

Hindustan Unilever Ltd.

Consumer Non Durables

653,355

1,507.94

1.30

Noida Toll Bridge Company Ltd.

Transportation

3,607,000

1,441.00

1.24

Thermax Ltd.

Industrial Capital Goods

367,366

1,345.29

1.16

Oil & Natural Gas Corporation Ltd.

Oil

111,353

1,301.99

1.12

Nagarjuna Construction Co. Ltd.

Construction Project

711,738

990.03

0.85

Ballarpur Industries Ltd.

Paper Products

3,967,287

987.85

0.85

Eimco Elecon (India) Ltd.

Industrial Capital Goods

276,428

811.18

0.70

Amara Raja Batteries Ltd.

Auto Ancillaries

836,454

705.97

0.61

C & C Constructions Ltd

Construction

396,496

635.78

0.55

Maytas Infra Ltd

Construction

761,912

552.01

0.47

KNR Construction limited

Construction

710,597

531.53

0.46

ISMT Ltd.

Ferrous Metals

1,175,668

413.25

0.36

Ahmednagar Forgings Ltd.

Industrial Products

424,234

245.21

0.21

Disa India Ltd

Engineering

12,612

207.85

0.18

Technocraft Industries (India) Ltd

Ferrous Metals

538,745

199.07

0.17

Sub total

101,548.67

87.33

Total

101,548.67

87.33

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

Other Cash,Cash Equivalents and Net Current Assets

8,679.32

7.45

Net Assets

116,299.99

100.00

Table:3.24 Sectoral Allocation of Assets(%) Banks

16.37

Pharmaceuticals

10.39

Media & Entertainment

8.48

Consumer Non Durables

7.94

Petroleum Products

7.72

Industrial Capital Goods

6.60

Telecom - Services

5.30

Auto Ancillaries

5.30

Finance

3.42

Software

3.31

Chemicals

2.41

Fertilisers

2.24

Ferrous Metals

1.92

Construction

1.48

Transportation

1.24

Oil

1.12

Construction Project

0.85

Paper Products

0.85

Industrial Products

0.21

Engineering

0.18

Cash,Cash Equivalents and Net Current Assets

12.67

TOTAL

100

Figure:3.8

Table:3.25 HDFC Growth Fund

(NAV as at evaluation date 30-June-09, Rs. 57.219 Per unit)

Date

Period

NAV Per Unit (Rs.)

Returns (%) ^

Benchmark Returns (%) Sensex

December 30, 2008

Last Six months (182 days)

41.697

37.23

49.17

June 30, 2008

Last 1 Year (365 days)

53.472

7.01

7.67

June 30, 2006

Last 3 Years (1096 days)

36.034

16.65

10.95

June 30, 2004

Last 5 Years (1826 days)

16.439

28.31

24.74

June 30, 1999

Last 10 Years (3653 days)

N.A

N.A.

13.34

September 11, 2000

Since Inception (3214 days)

10

21.91

13.65

Figrure:3.9

HDFC Growth Fund - Analysis It requires a lot of research and constant watch on the capital market for a fund manager to analyze the portfolio of the particular fund. I took the secondary data from the fund review of the article corner from The Business Line web site. I comprehended the analysis and concluded my view as stated below.

HDFC Growth Fund invests in stocks across market capitalisations. Despite a large-cap bias, mid and small cap stocks account for 28 per cent of the portfolio. The fund has managed to consistently beat its benchmark Sensex over one-, three- and five-year periods.

In the latest portfolio, the fund has invested in as many as 52 stocks across 18 different sectors making it a fairly diversified portfolio. This may indicate net inflows into the fund.

Sector Moves: There is a fair bit of stability in terms of top sector holdings in the portfolio.

Banks (16.39 per cent) and pharmaceuticals (10.37 per cent) sectors continue to be the top two sector holdings, although exposures have been a bit reduced.

Banks and consumer non-durables also figure among top holdings in the fund, and have seen increased exposures over the September-February period. While capital goods and banks have done well in the past year, they have been among the worst hit in the recent meltdown.

The respective sector indices were beaten down by over 25 per cent in the last couple of months. Construction and predictably, software exposures have been pared in the six-month period.

Interestingly, media and entertainment (8.48 per cent), which were not part of the portfolio six months ago is now in the top ten sector holdings for the fund. The power sector has been exited, while telecom services and auto ancillaries exposures have been increased substantially.

Stock Moves: Most stocks are those whose prices have fallen during September-February, include stocks such as Zee Entertainment, HT Media and Dr Reddy's Labs.

The fund has also taken profit booking opportunities, with several stocks whose prices rose between 60-105 per cent have been exited. These include, Axis Bank, Hanung Toys and Tata Power. Other high-profile exits include DLF, HPCL, Ranbaxy Labs, and Punj Lloyd.

Reliance Industries, SBI, ONGC and BHEL are the stocks retained by the fund during the period and are among the fund's top holdings.

3.4 FINDINGS  As far as analysis is concerned, we found out that the HDFC Growth Fund was among the best performers fund. Although all the funds are affected by the global meltdown, (recession) still HDFC Growth Fund has better performed comparing to other funds for its systematic and unsystematic risk. It offers advantages of diversification, market timing, and selectivity. In the comparison of sample of funds, HDFC Growth fund is found highly diversified fund and because of high diversification, it has reduced the total risk of portfolio.  Further, other funds were found very poor in diversification, market timing, and selectivity. Although HDFC Top 200 Fund and Equity Fund performed better in terms of returns but these suffered by the systematic risk (market volatility) and lack of diversification. For the further clarification, we too studied the portfolio of HDFC Growth fund.  One of the findings that I came across is that generally, a good model of asset classes is the one that can explain a large portion of the variance of returns on the assets and

there were some stocks in the fund portfolio, which were not aligned with strategy of the fund portfolio.  The optimal situation involves the selection that proceeds from sensible assumptions, is carefully and logically constructed, and is broadly consistent with the data while collecting the stocks for the portfolio. The portfolio was showing constructive outcome in long time horizon and the results can be improved by making the minor changes in fund portfolio.  Hence, the portfolio theory teaches us that investment choices are made on the basis of expected risk and returns and these expectations can be satisfied by having right mix of assets.

3.5 RECOMMENDATIONS: Considering the above analysis, it can be noted that the three growth oriented mutual funds (HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200 fund) have performed better than their benchmark indicators. Other funds such as HDFC Capital Builder Fund, HDFC Long term Advantage Fund did not perform well even some performed negatively. Though HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200 fund have performed better than the benchmark of their systematic risk (volatility) but with respect to total risk the fund have not outperformed the Market Index.

Growth oriented mutual funds are expected to offer the advantages of Diversification, Market timing and Selectivity. In the sample, HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200 fund is found to be diversified fund and because of high diversification, it has reduced total risk of the portfolio. Whereas, others are low diversified and because of low diversification their total risk is found to be very high. Further, the fund managers of these under performing funds are found to be poor in terms of their ability of market timing and selectivity.  The fund manager of HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200 fund can improve the returns to the investors by increasing the systematic risk of the

portfolio, which in turn can be done by identifying highly volatile shares.

Alternatively, these can take advantage by diversification, which goes to reduce the risk if the same return is given to the investor at a reduced risk level, the compensation for risk might seem adequate. The fund manager of HDFC Capital Builder Fund, HDFC Long term Advantage Fund can earn better returns by adopting the marketing timing strategy and selecting the under priced securities.  The fund manager can divide all securities into several asset classes and tries to construct an efficient portfolio based on expected returns, risk, and correlations of indexes representing these asset classes. The investment should be done in the bench mark indexes to get an “efficient” portfolio in such a way that no other combination of these indexes would result in a portfolio with a higher return for a given level of risk. It should be emphasized, however, that this is not a fully efficient portfolio because information about correlations among individual securities within an index and across the indexes is lost in the transition from individual securities to the benchmarks that represent them.  These measures are more useful to investors who are putting their money into one diversified fund and are able to use leverage or invest in the risk-free asset. When the investor is investing in the different funds, the fund’s marginal contribution to the portfolio’s risk and return is more important than its individual security characteristics. To construct an efficient portfolio, an investor must take account of the correlations among the being considered.

It is not advisable to apply just procedure or approach for all situations at least when it comes to investments though the used measures are highly reliable in the studies done on similar veins. Even at this juncture it would still be recommended that instead of going ahead only on the basis of risk and return, other indicators like new projects, sector impact, individual sentiments about companies etc besides ‘common sense and intuition’ may also be looked into.

3.6 CONCLUSIONS: Mutual fund has become one of the important sources for investing. It is quite likely that a more efficient portfolio can be constructed directly from funds. Thus, the two-step process of choosing an asset allocation based on the information about benchmark indexes and then choosing funds in each category may be one of the best realistically attainable approaches. To use this approach to portfolio selection effectively, investors would benefit from estimates of future asset returns, risks and correlations, as well as from fund management’s disclosure of future asset exposures and appropriate benchmarks.

It has been a great opportunity for me to get a first experience of Mutual Funds. My study is to get the feel of how the work is carried out in relation to fund’s portfolio aspect. I got an opportunity in relation to the documentation and also the portfolio analysis that have been carrying out in facilitating the investor and the fund manager.

REFERENCES Books: 1. Security Analysis and Portfolio Management (sixth Edition 1995) by Donald E. Fisher and Ronald J. Jordan. Publication: Pearson education.

2. The Indian Financial System (second edition) by Bharati V. Pathak. Published

by Dorling Kindersley (India) Pvt. Ltd., licensees of Pearson Education in South Asia.

3. Security Analysis and Portfolio Management by Khan and Jain.

Magazines: •

Money Outlook (May &June 2009)

•

Business world (May & June 2009)

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