Analysis of Mutual Funds

1 Alliance Business School
Report On To study and analyse the mutual fund schemes from HSBC Asset Management (India) Pvt. Ltd.
Prepared by: Bayed Samar J. Registration No: 07PG011 Under the Guidance of Prof. Chowdari Prasad
In partial fulfillment of the Course: Students Internship Programme (SIP) In Term IV of the Post Graduate Programme in Management (Batch: 2007 2009)
Bangalore
HSBC Asset Management (India) Private Limited
Post Graduate Programme
Post Graduate Diploma in Management: 2007-09 Term IV: Students Internship Programme (SIP) Declaration
This is to declare that the Report entitled To study and analyse the mutual fund schemes from HSBC Asset Management (India) Pvt Ltd has been made for the partial fulfillment of the Course: Students Internship Programme (SIP) in Term IV (Batch: 2007-2009) by me at HSBC Asset Management (India) Pvt Ltd under the guidance of Prof. Chowdari Prasad.
I confirm that this Report truly represents my work undertaken as a part of my Students Internship Programme (SIP). This work is not a replication of work done previously by any other person. I also confirm that the contents of the report and the views contained therein have been discussed and deliberated with the Faculty Guide.
Signature of the Student

Name of the Student
:
: BAYED SAMAR J.
Registration No Date
: 07PG011 :
Post Graduate Program in Management Certificate This is to certify that MR. BAYED SAMAR J. has completed the Report entitled To study and analyse the mutual fund schemes from HSBC Asset Management (India) Pvt Ltd under my guidance for the partial fulfillment of the Course: Students Internship Program (SIP) in Term IV of the Post Graduate Program in Management (Batch: 2007 2009).
Signature of Faculty Guide: Name of the faculty Guide: Date: PROF. CHOWDARI PRASAD
ACKNOWLEDGEMENT I take this opportunity to express my deep and sincere sense of gratitude to Prof.Chowdari Prasad, Prof. in finance and Registrar, Alliance Business School and to Mr. Naveen, Associate Vice President, Sales, HSBC Asset Management (India) Pvt Ltd. for their effective guidance, encouragement and stimulating discussions. Being more than a guide, their inestimable help and creative criticism have paved way to successful completion of the project. I would also like to extend my thanks to Mr. Christopher Almeida, Head of Investments and Mr. Jyotish Varghese, Branch Manager and also Ms. Jyothi Kaushik and various others members at Trans Financial Corporation for their active support and sincere cooperation without which this project would not have materialized.
Table of Content Page no.

1. 2.
Executive Summary Introduction

2.1
7 8 9 9 11 13 21 22 22 23 24 26 32 33 34 36 36 36 36 37
Industry overview
2.1.1 2.1.2 2.1.3 2.1.4
Brazil Russia India China
2.2 Company overview 2.2.1 Companys History 2.2.2 Management 2.2.3 Sponsors and Trustees 2.2.4 Investment philosophy and Process 3. Project Profile 4. Objective of the study 5. Observations 6. Analysis 6.1 Comparison between HEF, HAIF and HDF 6.1.1 HSBC Equity Fund 6.1.2 HSBC Advantage India Fund 6.1.3 HSBC Dynamic Fund
6.2 Analysis of HEF, with three similar schemes offered by other fund houses 6.2.1 HSBC Equity Fund 6.2.2 HDFC Equity Fund 6.2.3 DWS Alpha Equity Fund 6.2.4 Reliance Equity Fund 7. Findings 7.1 Trend in mutual fund i.e. Sales and Redemptions from 1997- 07 7.2 Strategy for selection of a stock 7.3 Money market instruments used by AMC 7.4 Key parameters that help in selection of Mutual Fund scheme 7.5 Rise in AUM and change in investment objectives 7.6 Other important findings 7.7 Work done at the organisation 8. Recommendations and Conclusion REFERENCE ANNEXURE
48 50 52 53 54 65 65 66 66 70 70 71 71 72 74
1. Executive Summary
Mutual Fund industry is fast growing in developing countries like India. Here in this report attempt is made to study the asset allocation of various mutual fund scheme and return that they have given in the past. Statistical tool like average, standard deviation, median, Skewness etc are used for purpose of analysis. Important parameters like Beta, R-squared and Expense ratio are taken to analyse and compare the scheme internally. Report also gives a clear idea about the number of various classes of schemes launched, sales made by such scheme in rupee and redemption from 1997-98 to 2007-2008. Interfund comparison of HSBC Equity Fund, HDFC Equity Fund, DWS Alpha Equity Fund and Reliance Equity Fund is done taking into consideration data of their net asset value per unit (NAV/unit) from 1st October 2007 to 31st March 2008 that is 6 months. To make the report broader a brief analysis of global market is also covered by including scenario in Brazil, Russia and China. In this report one can also find the trend in Asset Under Management in India and shift in outlook of people towards private Asset Management Company. It also contains the analysis that shows a change in investment objective of people from 2003 onwards. Report contains data and information from genuine sources and can be of great help to researchers, academician or Corporates.
2. Introduction
Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies. At the beginning of this millennium, mutual funds out numbered all the listed securities in New York Stock Exchange. Mutual funds have an upper hand in terms of diversity and liquidity at lower cost in comparison to bonds and stocks. The popularity of mutual funds may be relatively new but not their origin which dates back to 18th century. Holland saw the origination of mutual funds in 1774 as investment trusts before spreading to Anglo-Saxon countries in its current form by 1868. We will discuss now as to what are mutual funds before going on to seeing the advantages of mutual funds. Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies. The stocks these mutual funds have are very fluid and are used for buying or redeeming and/or selling shares at a net asset value. Mutual funds posses shares of several companies and receive dividends in lieu of them and the earnings are distributed among the share holders.
A Brief of How Mutual Funds Work

Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares. Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values).
Are Mutual Funds Risk Free and what are the Advantages?
One must not forget the fundamentals of investment that no investment is insulated from risk. Then it becomes interesting to answer why mutual funds are so popular. To begin with, we can say mutual funds are relatively risk free in the way they invest and manage the funds. The investment from the pool is well diversified across securities and shares from various sectors. The fundamental understanding behind this is not all corporations and sectors fail to perform at a time. And in the event of a security of a corporation or a whole sector doing badly then the possible losses from that would be balanced by the returns from other shares. This logic has seen the mutual funds to be perceived as risk free investments in the market. Yes, this is not entirely untrue if one takes a look at performances of various mutual funds. This relative freedom from risk is in addition to a couple of advantages mutual funds carry with them. So, if you are a retail investor and planning an investment in securities, you will certainly want to consider the advantages of investing in mutual funds.

Lowest per unit investment in almost all the cases Your investment will be diversified Your investment will be managed by professional money managers 2.1 Industry overview
To give a specific approach to the overview we will take a look at the mutual fund industry in BRIC countries on four parameters namely total asset under management and growth of the sector. 2.1.1 Brazil. The GDP in term of Rs. was 2,14,273.9 crore in 2005 while it was around Rs. 2,55,882.1 crore in 2007 which shows a steep growth in GDP. For any economy which grows at this rate its necessary that people keep pumping their income in the capital market so as to maintain the growth. In such a market mutual funds are considered organisations which help the common people to enter the market with minimum risk. Table 2.1.1.1 Socio-economic data, (%) Period GDP Population GDP per capita
1961-70 1971-80 1981-90 1991-00 Source: FGV and IBGE
6.17 8.63 1.57 2.64
2.89 2.44 2.14 1.57
3.19 6.04 -0.56 1.06
As you can see from the table above that GDP growth has fallen in the 1990s drastically which can be blamed primarily on the lack in growth in population and thus investments. During this decade most of the population was in the aging bracket. Brazil Mutual Fund Industry may grow at 20% in 2008 as forecast by Bloomberg. Brazil's mutual fund industry may expand at a slower pace of about 20 percent this year as higher interest rates curb investments in equity, said Alfredo Setubal, president of the National Investment Bank Association. The mutual fund industry grew 23 percent in 2007, ending the year with 1.16 trillion reais ($710 billion) in assets. Growth may be slower this year as the stock market is expected to expand less because of higher interest rates, Setubal said. Monetary policy makers raised the benchmark interest rate twice this year to 12.25 percent from a record low of 11.25 percent. Three companies went public for the first time this year, and another 11 have filed with the securities regulator to sell shares, said the banking association known as Anbid. The number of IPOs might be higher in the second half of the year as the investors become less risk averse, said Luiz Chrysostomo, a partner at Neo Investimentos, which manages about 1.3 billion reais in assets.
2.1.2 Russia. Russian mutual funds date back to 1996, but it was only in the 2000s, with the recovery of the Russian stock market from the 1998 crisis, that these funds were given a major boost. High returns on Russian stocks on average, over 40% a year after 1998 contributed to the rapid expansion of the industry. While in 2001 there were 35 management companies offering 55
funds, at the end of 2006 investors could choose from among 587 funds and 282 management companies. During the same period, the assets under management increased from US$30 million to US$16 billion, or 0.5% of Russian GDP (for comparison, in the US this ratio is about 70%). Thus, the mutual fund industry demonstrates an impressive rate of growth, but still accounts for only a small segment of the Russian financial market. What Restrains Growth? What is holding back the development of the asset management industry in Russia? One reason is the poor state of financial education in the country. During Soviet times, knowledge about financial investment was considered to be part of a market economy that was irrelevant in a country where the state assumed major risks connected with wages and pensions. A lack of organizational failures and impressive yields since 1998 helped to attract new private investors to mutual funds, yet even now they account for a mere 2% of Russia's population its most dynamic and educated groups. Oddly enough, the numerous slumps in the Russian stock market have played a positive role disabusing investors of the notion that easy money can be made through mutual funds and making them more risk-conscious. Another restraining factor is that the Russian equity market is not highly developed. In spite of the impressive dynamics, a limited number of stocks is regularly traded, with the bulk of liquidity coming from a few blue chips like Gazprom and RAO UES. Moreover, liquid stocks are concentrated in several sectors of the economy, mainly extraction industries. As a result, mutual funds can hardly form a truly diversified portfolio and their returns are largely determined by Russia's country risk and other factors that are hard to quantify. Until recently, legislation effectively banned Russian funds from including foreign assets and derivatives in their portfolios. At the end of 2006 only 23% of the Russian mutual funds were of the open type; that is, marking their price to the market daily. The remaining funds invest a large part of their portfolio into second-tier stocks, real estate and other illiquid assets. The choice of strategies is also limited: large funds usually hold a portfolio close to the market index whereas small ones actively rebalance their portfolios trying to time the market. In recent years, we have seen many index and sector funds emerging, but their portfolios may turn out to be very different from what their names suggest.
Qualified Assessment Needed In the current environment, it is very important to have a qualified independent assessment of the performance of mutual funds, which would guide investors and give funds proper incentives for composing their portfolios. In the developed financial markets such assessment is provided by rating agencies, which divide funds into categories in line with their actual (not formally declared) investment strategy and rate them relative to other funds in the same category. A fund's performance should be adjusted for risk, since funds can easily outperform the market index with an aggressive strategy when the market is growing. Unfortunately, until now Russia has had no fund rating system meeting these requirements. The mutual funds are usually divided into three broad categories: equity, bond and mixed funds, even though such a breakdown does not adequately reflect the investment risks. As a rule, funds are rated according to raw returns, or at best according to the Sharpe ratio (i.e. return per unit of total risk) or Jensen's alpha (i.e. the component of a fund's return unrelated to the market index). However, given the specifics of the Russian financial market, these measures do not always reflect the true added value that a fund provides to investors. A new classification and rating system is needed to evaluate the performance of Russian funds properly. To further understand the investment in Russian Mutual Fund Industry we will take a look at the chart on the next page
Fig 2.1.2.1 Investors in thousands
Source: The Newsletter About Reforming Economies, Beyond Transition, World Bank, 2007 2.1.3 India. The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank .The history of mutual funds in India can be broadly divided into four distinct phases First Phase 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.
Second Phase 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.
Third Phase 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds. Fourth Phase since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. The chart below shows that the Asset Under Management (AUM), in India has shown a steep rise since past 5 years form 2003.
Fig 2.1.3.1 Asset Under Management in Indian market March 1965 to March 2008
Source: AMFI, 4th July 2008. Mutual fund industry in India is regulated by the body called Association of Mutual Funds in India. It has the following objective:
To define and maintain high professional and ethical standards in all areas of operation of mutual fund industry
To recommend and promote best business practices and code of conduct to be followed by members and others engaged in the activities of mutual fund and asset management including agencies connected or involved in the field of capital markets and financial services.
To interact with the Securities and Exchange Board of India (SEBI) and to represent to SEBI on all matters concerning the mutual fund industry.
To represent to the Government, Reserve Bank of India and other bodies on all matters relating to the Mutual Fund Industry.
To develop a cadre of well trained Agent distributors and to implement a programme of training and certification for all intermediaries and other engaged in the industry.
To undertake nationwide investor awareness programme so as to promote proper understanding of the concept and working of mutual funds.
To disseminate information on Mutual Fund Industry and to undertake studies and research directly and/or in association with other bodies. Under this strict regulatory body mutual fund schemes are becoming quite popular in India. The tables followings in the next page explain Sales, Redemption and Launch of various Mutual Fund scheme in India in various year.
Fig 2.1.3.2 Sales in Rs. crore, 1997-98 to 2007-08
The chart shown above depicts the trend of sales in various type of Mutual Fund Scheme in India since 1997-98 till 2007-2008. Y-axis shows the amount in Rs crore and X-axis shows years. It can be easily seen here that while income scheme has found huge following Balanced Fund and ELSS schemes are finding difficulties in attracting the investment. This trend says that majority of the investors treat mutual fund as source of regular additional income rather than looking at it as a long term investment, with intention of having a capital gain.
Fig 2.1.3.3 Redemption in Rs. crores, 1997-98 to 2007-08
Here the amount of redemption in Rs crore is shown in various schemes on Y-axis and years on X-axis. We can see that redemption from income scheme went high in 2003-2004 and lowered down during the same period in growth schemes which shows that people have cultivated a positive attitude towards market and their willingness to stay with the fund for a considerable period also went up.
Fig 2.1.3.4 Number of schemes launched, 1997-98 to 2007-2008
In this chart number of new schemes launched is shown on Y-axis and years in which they are launched as shown on X-axis. As shown above ELSS and Balanced schemes are launched in a very small numbers as compared to Growth and Income schemes. This makes it clear that these schemes were not finding much favor from Indian investors who are more willing to invest for regular income or capital gain, at a more-than-average risk appetite.
2.1.4 China.
China Merchants Bank accepts the consignment of the mutual fund management institution to safe keep the fund assets for the interest of the fund owners, and to supervise the routine
investment operation of the fund management institution. The custodian opens independent account for fund assets, performs clearing and transferring upon instructions from the management institution, safe keeps the entrusted fund assets, and supervises fund operations within its authority prescribed by pertinent state laws and mutual fund contracts. All services are subjected to proper charges. In short one of its target clients is Mutual Fund Companies. Chinas mutual fund industry is blossoming amid bullish equity markets that have climbed to new heights. But more importantly, the countrys city dwellers are more willing than before to invest their hard-earned money. Asset management companies in China have little problem selling their newly launched funds to the public. In November alone, seven funds were launched, four of which managed to raise more than 10 billion Yuan (RM4.8bil). Beijing-based Harvest Fund Management Co Ltd, which launched the Jiashi Strategic Growth Fund early, last month, collected 40 billion Yuan (RM19bil) in just one day the biggest amount in Chinas fund management history. Given the overwhelming response from the investing public, Harvest Fund Management shortened the sale period to just one day. Harvest Fund Management is Chinas leading asset Management Company, in which Deutsche Asset Management (a subsidiary of Deutsche Bank AG) holds a 19.5% stake, with an option of increasing it to 49%. For the entire year, nearly 350 billion Yuan (RM166bil) were pumped into the 65 mutual funds that were launched. A quarterly survey done by The Peoples Bank of China (PBOC) shows the peoples willingness to save has dropped in the urban areas something that is quite unusual given that the Chinese are mostly hard savers. A record 18.5% of the 20,000 respondents to the central banks survey said they would either invest their savings in the stock market directly or via mutual funds, instead of putting them in the banks. Citigroups head of China Strategy, Xue Lan, pointed out that the deposits in banks were earning 0.75% to 2.07% returns year. After deducting interest income tax of 20% and considering under-reported CPI (consumer price index) of 1.8%, Chinese depositors are actually earning negative returns on their bank savings, Xue said. People need alternatives to hedge their inflation risks, she noted, adding there was a surge of retail interest in the domestic stock markets. Like many equity markets in Asia, Chinas two exchanges are charging up to new peaks after being in the doldrums for five years. The Shanghai and Shenzhen exchanges now have a combined market capitalisation of more than eight trillion Yuan (RM3.8 trillion), which is an increase of 2.5 times compared with a year ago. The total net asset value of mutual funds also ballooned to 700 billion Yuan (RM333bil) a
historical level in China as share prices soar. According to the China Securities Regulatory Commission (CSRC), institutional funds currently account for about 30% of the market capitalisation compared with only 5% five years ago. In comparison, it had taken the United States nearly 30 years to see institution fund participation reaching 25%.
2.2 Company overview

The HSBC Group is one of the largest banking and financial services organisations in the world. The Group has around 10,000 offices in 83 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa, serves over 128 million customers and has assets of US$ 2,354 billion as at 31 December 2007.
2.2.1 Companys History. HSBC Global Asset Management draws upon a long history of serving clients of the HSBC Group, tracing its roots back to the foundation of the Hongkong and Shanghai Banking Corporation in 1865. The HSBC Group has identified asset management as a key constituent of the HSBC Groups wealth management strategy and at HSBC Investments; we have been dedicated to managing assets on behalf of our clients for more than 30 years. In 1994 the HSBC Group recognised the increasingly global nature of financial markets, would create the need for a credible global asset management organisation to ensure delivery of the best possible solutions for clients. In response, the separate regional asset management businesses of HSBC were unified to create a single powerful investment manager aimed at delivering global investment capabilities combined with significant local expertise. In 2001, following the integration of CCF and its investment businesses into HSBC, a new global strategy was launched for asset management. The strategy aimed to create a core proprietary global investment management business HSBC Asset Management, operating alongside a series of Specialist investment businesses, namely: Sinopia for quantitative and structured products, HSBC Specialist Investments for property and infrastructure investments, and HSBC Multimanager for best-inclass open architecture investments and HSBC Alternative Investments for single-manager hedge fund strategies. In 2004, following a strong period of growth in HSBCs investment
businesses, a new strategy was announced for the investment businesses of HSBC. The strategy is intended to position HSBC for market leadership in the provision of investment solutions that meet client needs and involved a reorganisation of HSBCs investment businesses including HSBC Asset Management and HSBC Investment Management, leading to the creation of: HSBC Investments. In 2008, HSBC Investments is re-named to HSBC Global Asset Management. The name change is more closely to align it with Global Banking and Markets (the new name for Corporate, Investment Banking and Markets). 2.2.2 Management. Table 2.2.2.1 Name of the board of directors Name Sanjay Prakash Naina Lal Kidwai Ayaz Ebrahim Nawshir Khurody Vithal Palekar Jagjit Lal Pasricha Designation Director & Chief Executive Officer - HSBC Asset Management (India) Private Limited Chairman of the Board of Directors Director Director Director Director
Ms. Naina Lal Kidwai, Mr. Ayaz Ebrahim and Mr. Sanjay Prakash are associated with the Sponsor. Mr. Nawshir Khurody, Mr. Vithal Palekar and Mr. Jagjit Lal Pasricha are independent Directors. Thus, 3 out of the 6 Directors are independent Directors. Key personnel
Table 2.2.2.2 Name of key personnel and their Designation Name Sanjay Prakash Suyash Choudhary Venkatesh Iyer Jitendra Sriram Mihir Vora Sanjay Vaid Designation Chief Executive Officer VP & Fund Manager, Fixed Income Chief Operating Officer V P & Fund Manager, Equities Sr. VP & Head of Fund Management, Equities Vice President, Dealing
Chandresh Shah Nilang Mehta Shailendra Jhingan Alok Kumar Sahoo K. Sriram R. Srinivasan Dhimant Shah Deepali Naair O.V. Ravi Gaurav Mehrotra Niren Parekh Amresh Mishra Aditya Khemani
VP & Head of Risk Management VP and Fund Manager, Equities VP & Head of Fund Management, Fixed Income VP & Fund Manager, Fixed Income VP & Head of Finance & Customer Services VP & Head of Operations VP & Fund Manager, Equities VP & Head-Product Strategy & Development VP & Head of Compliance Associate VP, Investment Management Associate VP, Investment Management Associate VP, Investment Management Associate VP, Investment Management
2.2.3 Sponsors & Trustees. The Sponsor of HSBC Mutual Fund is HSBC Securities and Capital Markets (India) Private Limited (HSCI), a member of the HSBC Group. HSCI is one of the largest banking and financial services organisations, in the world. Headquartered in London, HSBC operates through long-established businesses in five regions: Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. Through its global network of some 10,000 offices in 83 countries and territories, HSBC provides a comprehensive range of financial services to personal, commercial, corporate, institutional and investment and private banking clients. HSCI offers integrated investment banking services, securities and corporate finance & advisory. HSCI is a member of The Bombay Stock Exchange Limited and National Stock Exchange (capital and derivative market segments) and is also a category I merchant banker and underwriter registered with Securities and Exchange Board of India. Equities: HSCI is primarily an institutional stockbroker, with a client base spanning foreign institutional investors, Indian financial institutions, mutual funds and select retail clients. The
business is backed by comprehensive research covering around 62 of India's largest, actively traded securities across 13 industry groups. Global Investment Banking: HSCI provides public and private sector corporate and government clients with strategic and financial advice in the areas of mergers and acquisitions, primary and secondary market funding, privatisations, structured financial solutions and project export finance. HSCI holds 100% of the paid up equity share capital of the ISIN. Trustees of HSBC Mutual Fund. Table 2.2.3.1 Name of Trustees Name N P Gidwani Dr. Rudolf Apenbrink Nasser Munjee Manu Tandon Mehli Mistri Dilip J Thakkar Designation Chairman of the Board of Trustees Trustee Trustee Trustee Trustee Trustee 2.2.4 Investment Philosophy & Process Our investment process is the result of our belief in the applicability of business cycles as well as a combination of top-down macro-economic analysis and bottom-up securities research. Fig 2.2.4.1 Investment Philosophy
Source: HSBC Asset Management (India) Pvt Ltd
2.2.4.1 Investment Philosophy & Process / Equity Process HSBC Global Asset Management possesses substantial experience and expertise in managing equities-based portfolios. Investment Approach - Equity
Disciplined investment approach - combines global and regional considerations with a local focus. Team approach in investment decision-making - we leverage on the collective expertise and insight of our experienced team members 'Business cycle, relative value' investment style - offers the flexibility to add substantial value throughout the different stages of economic cycles.
Investment Philosophy and Process - Equity
Our equities investment process uses the fact that economic and business cycles are the primary determinants of value changes in markets, sectors and stocks.
A top-down and bottom-up approach is used to invest in equities. We believe that we need to change our portfolio positioning based on our views on the local and global business cycle. So the top-down overlay comes from the call of the business cycle at the global and local level. This determines our asset allocation and sector calls. The bottomup approach comes from stock selection within sectors.
Time-to-time, when we see a shift in the cycle, we may change our style from pure growth investing to a blend of growth and value investing, or a bias towards more value investing if we believe the cycle is turning for the worse. The process thus has a "blend style" and is not purely growth or value oriented.
Fig: 2.2.4.1.1 Business cycle
Business fundamentals are keys to stock selection. This involves analysis of companies on parameters like management, business strategy to deliver earnings growth & improving capital efficiency, identifiable competitive advantages and financial performance & strength. We use valuations of different sectors and stocks to determine
the optimal portfolio composition and this is reviewed constantly to take into account new information and price movements. We monitor absolute and relative valuations (Price / Earnings per Share, Price/ Book Value per Share etc.) very closely at the market, sector and stock level. In conjunction with valuations, we also look at growth prospects, capital efficiency ratios (Return on Capital, Return on Equity etc.) and intangibles like corporate governance, transparency etc.
We broadly form our investment universe based on specific investment mandate of each fund. We currently look at around 250 stocks across sectors. Our investment process has strict investment guidelines to ensure that we contain portfolio risk within specified levels and run a diversified portfolio to deliver consistent risk adjusted returns to our investors. We have risk control measures and procedures to achieve the same. We have a team for risk management and measurement independent of the investments team.
The risk management team performs analytics and ensures that all risk parameters are adhered to. Thus we do portfolio performance attribution, measure ex-ante tracking error etc. We also measure portfolio liquidity risk. This is to ensure adequate liquidity in our portfolios to take care of large inflows or outflows.
The objective of all this is to measure and control portfolio risk and to enable consistency and true-to-label portfolio management, in line with stated objectives and positioning.
2.2.4.2 Investment Philosophy & Process - Fixed Income
They believe that the Fixed Income Market offers a number of attractive investment opportunities, which we endeavor to capture with a rigorous but flexible investment process.
At the same time they, believe that a given level of conviction in our views should result in the same amount of risk in a portfolio over time i.e. We scale our duration risk and credit percentage parameter on a six point scale from very bearish to very bullish, which then translates into a set of numbers. Therefore over different periods of time, if our view is say "slightly bullish", it would translate into the same level of duration that we would
run in our portfolios. For e.g. over the last 4years since inception we have not changed these bands, but that does not mean that if we feel that there is a major structural shift in the market structure, participants and instruments, we would not revisit these levels.
Their success lies in the belief that product focus is the key to creating excellence across our entire product range i.e. we launch products which are sustainable over the long term and time them to market for the benefit of investors.
And also due analysis is don e based on their belief that Credit and Duration are the key determinants of performance in a fixed income portfolio e.g. while interest rates were coming down from 2000-2003, duration played a bigger role than credit, with most of the return coming from trading the duration of gilts and longer term bonds; however from 2004 to date, as interest rates headed higher, with investor funds essentially concentrated at the short end of the spectrum, credit calls in terms of identifying new credits, identifying credit upgrades, going down the credit curve have assumed a larger role in generation of total return compared to duration calls, with most portfolios being essentially credit oriented.
The Curve Positioning and Individual security selection are also drivers of the fixed income market e.g. while the yield curve might indicate that the 5year point is the best for positioning, there may not be liquid 5year instruments to implement that call. Hence, one may need to achieve the same 5yr positioning through a combination of cash and a liquid 10year instrument. Thus curve positioning and individual security selection go hand in hand and the process is iterative in arriving at the final construction of the portfolio.
Active management of the above drivers enhances returns and can outperform passive investing. We do this by running the process on a fortnightly basis and active monitoring and re-balancing of portfolios on a daily basis to generate relative value.
And finally one of their strategies includes effective control of risk is an essential element in the management of fixed income portfolios. This is integral to the HSBC philosophy and the level of Risk Management is substantially higher than that required by the regulator. Discretionary investment guidelines go sideways into the investment process and ensure that portfolios are diversified, liquid and devoid of concentration risk. All risk wherever possible is monitored online and risk guidelines are framed by the Risk
Management Committee keeping changing market structure, regulations and instrument innovation in mind, so that the Investment Team is always in line with market. Investment Process - Fixed Income The four components in terms of criticality to risk/return performance on a fixed income portfolio are: 1. Duration 2. Credit 3. Curve Positioning 4. Individual Security Selection The process is a "Top Down - Bottom Up" approach with a Top Down perspective being applied to Duration and Credit and a Bottom Up perspective being applied on Curve Positioning and Individual Security Selection. Fig 2.2.4.2.1 Investment Approach
3. Project Profile
As project profile we were given four major tasks which are as mentioned below:
Bringing to light various benefits of investing in Mutual Funds schemes to prospective customers.
Advising the client, willing to invest, on suitable scheme for their requirement. For example Tax Saver fund for those looking for tax benefit and are ready to stay with the scheme for at least 3 years and Systematic Fund Transfer (STF) to client, who are looking for high return at lowest risk along with fixed income.
Making presentations on HSBC Mutual Fund Scheme at various corporate houses. Looking for prospective business tie-up with professionals like Chartered Accountants.
The work was assigned to us on target basis. A target of 75 SIP (Systematic Investment Plan) of Rs.2000 per month, on an average was set by them. Out of many Mutual Fund Schemes offered by HSBC Mutual Fund we were given three main schemes which are HSBC Equity Fund, HSBC Advantage India Fund and HSBC Dynamic Fund. Under the 2 month of rigorous programme three major financial awareness campaigns were carried out. This includes presentations at companies like Elcoteq, a Finish semiconductor company, Quinnox a Canadian IT company and TaskTel an office communication provider. Apart from this we also handled financial planning, which include suggesting ideal asset allocation depending on present asset allocation of the client. The work that has been carried out was under the supervision of experienced financial planner.
4. Objective of the Study.

For any economy to grow it is necessary that savings of the masses are converted into investments. Mutual Fund is one of such a tool which allow amateur person to invest because this funds are managed by experienced fund managers. It has been predicted that if the investment becomes 77% of income in various avenues then only we would be able to maintain our GDP growth rate of 8-9%. Here the objective of our study is to compare various HSBC scheme. To make the report more comprehensive the report also contains an extensive detail on schemes from other fund houses like HDFC, Reliance Mutual Fund and DWS Asset Management. The report will be useful in drawing out inferences about the sectoral allocation of all this four funds. As we know that the NAV of any fund depends upon the sector to which it allocate its fund and the performance of those sector. The report will also throw light on various schemes launched in India during past 10 years that is from 1997 to 2007. The real purpose of this is to get the preference of the Indian investors when it comes to investment in Mutual Funds. Putting this in brief we can say that the report has following objectives:
To study preferred form of Mutual Fund scheme namely Growth, Income, Balanced and ELSS
To perform comparative analysis of three HSBC Mutual Fund scheme namely HSBC Equity Fund, HSBC Advantage India Fund and HSBC Dynamic Fund
Interfund comparison with HDFC Equity Fund, DWS Alpha Equity Fund and Reliance Equity Fund
To examine the effect of sectoral allocation of the fund on its NAV

Observing the similarity in term of asset allocation amongst this given four funds
5. Observations
This section of the report would contain detail on the various observation made during the course of our internship programme. The observations that are noted down may be useful in process improvement and thereby making the operations smoother. The main observations are as follows. In advisory business, given high skills, its better to enter in face to face conversation with the customer rather than on phone. This approach helps mainly in building good rapport with the customer as well as gives the advisor to keep the customer listening. The most important benefit of this approach is the trust it helps building amongst both the parties
The follow up process comes after first conversation with the client; this process can make or mar the deal. Followed seriously it can lead to smooth closure of the deal whereas a delay or carelessness in the approach would not lead to closure of the deal
It also came to light that for any two mutual fund scheme given all or some parameters like date of inception, NAV at inception, beta and sectoral asset allocation the thing to look at is the expense ratio of the fund. The fund with high expense ratio will give much less return than that of the other fund with lesser expense ratio. Where the value of mutual fund should increase at increasing rate in long run, in fund with high expense ratio value of the mutual fund increase at a decreasing rate. So in deciding between such two schemes it is better to invest in the scheme with lesser expense ratio.
As the programme include working with one of HSBCs distributor who are in financial planning also, it is observed from the few visits that are made with financial planner to the customer that to get accurate information about their asset allocation it is very necessary that client has trust in the planner. At the same time suggesting suitable product to the client requires extensive product knowledge. Which means that financial planner
has to have sound knowledge of latest macro and micro economic policies, in-depth knowledge of the return given by various asset class and above all ability to time the market so as to deliver maximum return
After first conversation with the customers its observed many of them required a personal presentation which requires the advisor to go to his/her resident or office and explain the plan. Such trips consumed a lot of time of the advisor which could have been used more productively otherwise. If the advisor is new to the city he takes double the time to reach the place. Time management is required when such a situation arises.
6. Analysis
This portion would be divided in two parts: Comparison between HSBC Equity Fund, HSBC Advantage India Fund and HSBC Dynamic Fund Analysis of HSBC Equity Fund, mutual fund Scheme offered by HSBC with three similar scheme offered by other fund houses. 6.1 Comparison between HEF, HAIF and HDF HSBC Mutual Fund is operating across India having large number of distributors and a strong sales team. In the past HSBC Mutual Fund schemes have performed far better than many schemes available in India. Recently they have come out with NFO of a scheme named HSBC Emerging market fund which invests mainly in foreign markets namely Russia, Brazil, South Africa and China. Now the following pages contain a brief description of the various funds by HSBC that is namely HSBC Equity Fund, HSBC Advantage India Fund and HSBC Dynamic Fund.
6.1.1 HSBC Equity Fund HSBC Equity Fund (HEF) seeks to generate long-term capital appreciation by predominantly investing in a diversified range of large and midsized companies. This ensures that your money is spread across a variety of stocks and sectors so that risk is controlled 6.1.2 HSBC Advantage India Fund HSBC Advantage India Fund is an equity fund that seeks to generate long-term capital growth by investing primarily in themes that play an important role in, and/or benefit from Indias progress and economic development. It uses a flexi-theme approach in selection of areas in which to invest. The Fund will look to predominantly invest in one or more themes that, according to the Fund Manager, will drive Indias growth story at a given point in time.
The Fund Manager will be flexible in changing the theme based on changing market conditions & economic factors. What are the Focus areas for the Funds portfolio? The Fund will look to focus predominantly on one or more themes (at any given point in time) that, in the view of the Fund Manager, are important for Indias economic development. Key focus areas are: a) Infrastructure b) Consumption c) Outsourcing d) Global competitiveness e) Reforms 6.1.3 HSBC Dynamic Fund HSBC Dynamic Fund (HDF), a fund that seeks to capitalise on the potential upside in equity markets, and yet attempts to limit the downside risk by the active use of money market instruments and derivatives. The fund aims to normally invest in equity but can react quickly to a negative market by moving 100% of its assets into money market instruments, fixed income securities and derivatives with an aim to limit the downside risk, in the event that the fund manager is bearish on the market. To better understand all the three schemes let us now put the important facts about the scheme into a table which makes our reference easy. The table is given on the next page.
Table 6.1 Fund facts, HSBC Equity Fund, HSBC Advantage India and HSBC Dynamic Fund
Fund
Options
Date
of Minimum amount
Mode of Asset allocation
Dividend frequency
Fund manager
allotment HSBC Equity Fund Dividend (Payout and Growth / Reinvestment)
application Holding Rs 10,000/per application
10 December 2002
Declaration of dividend 65-100% and its equity and frequency equity will interrelated alia depend Single, securities, upon the Joint or 0-35% distributable Mihir Vora & Anyone money surplus. Jitendra or market Dividend Sriram Survivo instruments may be r (including declared cash, from time to money at time at the call). discretion of the Trustees. Single, Joint or Anyone or Survivo r 65-100% equity related securities, Declaration and frequency will interthe its Mihir Vora
HSBC India Fund
Dividend
23 / February
Advantage (Payout and Growth
Reinvestment) 2006
Rs 10,000/per application
equity and of dividend
0-35% debt alia depend instruments upon & market (including cash money call). surplus. may be money distributable
instruments Dividend & declared at from time to time at the
discretion of Trustees. HSBC Dynamic Fund Dividend (Payout and Growth 24 Rs per application Equity and Dividend equity related 0 Frequency Declaration to and and will upon to surplus. Dividend may declared from time to time at the discretion of Trustees. Here is another table on which helps in comparison. Table 6.2 Fund facts, HSBC Equity Fund, HSBC Advantage India and HSBC Dynamic Fund Fund HSBC Equity Fund HSBC Advantage
the Jitendra Sriram Mihir & Vora equity Sahoo fixed
/ September 10,000/-
Reinvestment) 2007
instruments of dividend (for its portion) Alok inter- (for the portion) 100%, and frequency Debt Single, Joint or Anyone or Survivo r money market 0
alia depend income
instruments distributable 100%
be
the
Beta 0.7103 0.7249
Sharpe ratio -0.4492 -0.4638
Standard Deviation 1.26% 1.29%
Rsquared 0.9646 0.9573
Portfolio Turnover 1.45 1.22
Expense Ratio 2.02% 2.16%
India Fund HSBC Dynamic Fund Source: HSBC Asset Management (India) Pvt Ltd Now let us comment on each parameter Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole is known as Beta. It is also known as "beta coefficient". Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. So a beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk 0.5335 -0.4991 0.97 0.9066 4.24 2.24%
Sharpe ratio: A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns Standard deviation: In probability and statistics, the standard deviation is a measure of the dispersion of a set of values. It can apply to a probability distribution, a random variable, a population or a
multiset. The standard deviation is usually denoted with the letter (lowercase sigma). It is defined as the root-mean-square (RMS) deviation of the values from their mean, or as the square root of the variance. R-squared: A statistical measure that represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index is called R-squared. For fixedincome securities, the benchmark is the T-bill. For equities, the benchmark is the S&P 500. R-squared values range from 0 to 100. And so an R-squared of 100 means that all movements of a security are completely explained by movements in the index. A high R-squared (between 85 and 100) indicates the fund's performance patterns have been in line with the index. A fund with a low R-squared (70 or less) doesn't act much like the index. A higher R-squared value will indicate a more useful beta figure. For example, if a fund has an R-squared value of close to 100 but has a beta below 1, it is most likely offering higher risk-adjusted returns. A low R-squared means you should ignore the beta. Portfolio Turnover: A measure of how frequently assets within a fund are bought and sold by the managers is called portfolio turnover. Portfolio turnover is calculated by taking either the total amount of new securities purchased or the amount of securities sold - whichever is less - over a particular period, divided by the total net asset value (NAV) of the fund. The measurement is usually reported for a 12-month time period. The portfolio turnover measurement should be considered by an investor before deciding to purchase a given mutual fund or similar financial instrument. After all, a firm with a high turnover rate will incur more transaction costs than a fund with a lower rate. Unless the superior asset selection renders benefits that offset the added transaction costs they cause, a less active trading posture may generate higher fund returns. In addition, cost conscious fund investors should take note that the transactional brokerage fee costs are not included in the calculation of a fund's operating expense ratio and thus represent what can be, in high-turnover portfolios, a significant additional expense that reduces investment return.
Expense ratio: A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund's operating expenses are divided by the average dollar value of its assets under management. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors. Depending on the type of fund, operating expenses vary widely. The largest component of operating expenses is the fee paid to a fund's investment manager/advisor. Other costs include recordkeeping, custodial services, taxes, legal expenses, and accounting and auditing fees. Some funds have a marketing cost referred to as a 12b-1 fee, which would also be included in operating expenses. A fund's trading activity, the buying and selling of portfolio securities, is not included in the calculation of the expense ratio. Costs associated with mutual funds but not included in operating expenses are loads and redemption fees, which, if they apply, are paid directly by fund investors. It is also known as "management expense ratio" (MER). Having defined the parameters we are now ready to note down our analysis of the above mentioned table
Analysis of the table: Here we can see that the Beta value is lesser than 1 in all three fund which implies that the fund has lesser volatility than the capital market. Having known this we can choose the fund depending upon the situations the market are going through, if we can judge the market to certain extent. For example: Selecting the fund with Beta value greater than 1 when market are doing well and are predicted to be doing well in future. Having said that, however we can say that value of Beta which is lower than 1 or higher than 1 does not say anything about the fund, because a lot depends upon the market it is operating into. Sharpe ratio that is given in the table gives the idea about the % of return that is coming because of risk that the manager is taking. A smaller Sharpe ratio indicates positive things about the fund. Here in all the three funds Sharpe ratio is negative which means that risky investments are few. Also higher return of 50% of that the HSBC Equity Fund is giving is due to efficient management with
minimum risk. The main purpose of mutual fund investments is to give high return at lowest risk. The fund which has high Sharpe ratio is not following the principle on which the investments are made. Thus in such a scenario it is better to have fund which is having lower Sharpe ratio with sufficiently high return. At the same time here let us examine R-squared value. Here all the three value are closer to 100 and hence it shows that the movement of the unit price is moving in direct proportion with the benchmark index. At the same time this indicated that value of Beta is highly reliable. Here R-squared value is 0.96, 0.95 and 0.90 this means which are very high. Portfolio turnover our next parameter indicates the time the portfolio is churned out. Higher the Portfolio turnover ratio, higher the shuffling and vice versa. In one glance we can know that Portfolio turnover increases the expense ratio because churning of portfolio comes with additional expenses like fund managers commission, and fee of other professionals and charges.
Going further now let us come to the final stage of intrafund comparison of the HSBC schemes, which we will be doing using the graphs showing their return over several different durations. But before we do that let us look at the table below to get an idea about this various funds and their return in different durations. Table 6.3 Fund facts, Return on investments Fund HSBC Equity Fund HSBC Advantage India Fund HSBC Dynamic Fund
1 week 4.03 4.30
1 month 8.72 5.78
3 months -18.19 -25.55
6 months -7.13 -12.87
1 year 31.19 21.82
2 years 20.84 14.56
3 years 37.67
5 years 54.64
3.26
4.66
-19.33
-8.62
Chart for each of this funds are shown below. HSBC Equity Fund: Fig 6.1 Return in percentage from HSBC Equity Fund
Source: Value Research Online
From the graph above we can say that the return of the fund has been extremely good in long run however it has given negative return in 1 month and 3 month.
HSBC Advantage India Fund: Fig: 6.2 Return in percentage from HSBC Advantage India Fund (%)
Source: Value Research Online Here too like HSBC Equity Fund we can say that the return that they have given in short run is negative but in long run it has done well here we can see that at the end of 3rd and 6th month the
cumulative return of the fund is a negative one while it has done extremely in comparison at the end of the year of its inception. While it has given a weaker performance at the end of 2 years compared to its performance at the end of first year from its inception.
HSBC Dynamic Fund Fig 6.3 Returns in percentage HSBC Dynamic Fund (%)
From the figure that we see above we can say that being a very new fund of just 9 months its long term performance is yet to be seen. However now its giving negative return like any other mutual fund. So in brief its been found out that all the three mutual fund scheme of HSBC analysed here is giving negative return in the first 3 months of its inception, However HSBC Equity Fund is
giving positive return from 6th month. The same is true about HSBC Advantage India Fund. This makes it clear that mutual funds are investment which intends to give returns in long term. HSBC Advantage India Fund and HSBC Dynamic Fund are comparatively new than HSBC Equity Fund. From the table 6.3 following things are clear HSBC Equity Fund gave negative return at the end of 3 months while gave positive return from the end of six months from the date of inception
Here it is also observed that, while HSBC Equity Fund
and HSBC Advantage India Fund gave positive return from end of six months HSBC Dynamic Fund still gave negative return
6.2 Analysis of HEF, with three similar schemes offered by other fund houses In the following pages we will see how the mutual fund industry has changed over a period of time since 1997-98 to 2007-08. The chart below shows the total asset under management under the entire mutual fund scheme in India in 1998-99. Fig 6.4 Allocation of Fund
Source: AMFI
Here the major part of the investment is in equities followed by debt which shows that Indian market was an extreme having two broad groups of people, one who are extremely risk taking and other who are highly risk averse or conservative.
Fig 6.5 Asset Under Management (AUM), Rs. crores.
In the chart given above we can see the growth in AUM of various companies in India. While fund houses like SBI saw a constant increase in the corpus. UTIs trend line shows a big dip in the asset that they manage. At the same time we can see that PNB Asset Management which was a small player in the beginning, become a big player after its tie up with Principal.
Fig 6.5 Net Asset Value of HSBC Equity Fund and HDFC Equity Fund
The chart shows the NAV of HDFC Equity Fund and HSBC Equity Fund here Y-axis shows NAV in Rs. and X-axis shows date. We can see that NAV of HSBC is quiet higher that HDFCs NAV the difference is due to inception date of the schemes. But here the comparison is made because in past few years HDFC has given return of 50-56% which is in line with the average return that HSBC has been giving since last 6 years. For the purpose of understanding we will take a look at some of the mutual fund plans which did well in the Indian market in last few years. For this purpose we will take the schemes NAV for 6 months from 1st October 2007 to 31st March 2008. The schemes that we will take are as mentioned below. HSBC Equity Fund HDFC Equity Fund Reliance Equity Fund DWS Alpha Equity Fund 6.2.1 HSBC Equity Fund. This is an open-ended diversified equity scheme and aims to generate long term growth from an actively managed portfolio of equity and equity related securities. Fig 6.2.1.1 Asset allocation of HSBC Equity Fund
Fig 6.2.1.2 Comparison of HSBC Equity Fund with benchmark index, BSE 200
Source: HSBC Asset Management (India) Pvt Ltd The NAV movement that is shown above gives a clear picture that fund has outperformed BSE 200 which is its benchmarked index. The margin by which it did this is also very high.The suggested ideal time horizon for this scheme is minimum 3 years.
6.2.2 HDFC Equity Fund. This scheme is also open-ended one. It was launched in 1995. Objective of this scheme is to achieve capital appreciation. Prashant Jain is the fund manager since 2003. Fig 6.2.2.1 Asset allocation of HDFC Equity Fund
Source: HDFC Asset Management Compny Ltd

Top 10 holding % of the fund is show in the pie chart above. Fig 6.2.2.2 Comparison of HDFC Equity fund with benchmark index, BSE 100
Source: HDFC Asset Management Company Ltd Benchmark index for the fund is S&P CNX 500 and we can see here that fund has outperformed its benchmarked index. 6.2.3 DWS Alpha Equity Fund An open-ended equity scheme with the objective to generate long-term capital growth by investing in diversified equity and equity related securities. The fund mainly invest in only large capitalization companies. Fig 6.2.3.1 Asset allocation in percentage of DWS Alpha Equity Fund
Given above is the pie chart showing allocation to the top 10 sectors where the fund manager invests the money or corpus of the fund.
Fig 6.2.3.2 Comparison of NAV of DWS Alpha Equity fund with Benchmark Index.
Here Y-axis shows percentage of Compound Annual Growth Rate and X-axis shows year eg: At the end of 1 year CAGR % of DWS Alpha Equity Fund was 27.21 % whereas that of Benchmark Index was 13.37 %. 6.2.4 Reliance Equity Fund This open-ended scheme has the main objective of generating capital appreciation and provide long-term growth opportunities by investing in a portfolio constituted of equity and equity related securities of top 100 companies by market capitalization and of
companies which are available in the derivatives segment from time to time and the secondary objective is to generate consistent returns by investing in debt and money market securities.
Fig 6.2.4.1 Asset allocation in percentage of Reliance Equity Fund
The chart shows the allocation of the corpus in various kind of sector. Here we can see that cement has received the highest percentage of asset allocation which comes to 23.66 % of the total. After understanding this scheme let us start the final analysis. But before that let us take a look at the chart which gives various useful data regarding the fund. Table 6.4 Fund facts, HSBC Equity Fund, HDFC Equity Fund, Reliance Equity Fund and DWS Alpha Equity Fund Name of Fund Allotment Benchmar Fund Entry Load Exit Load
Date HSBC Fund Equity 10th December 2002
k Index BSE 200
Manager Mihir Jiterndra Sriram 2.25% for the 1% if Vora and investmet/swi crore, otherwise nil reedemed/switched out crore within one year otherwise nil. if reedemed/switched out crore within one year otherwise nil. planof For less
tch in < Rs. 5 at any amout < Rs. 5
HDFC Fund
Equity 1st January S&P CNX Prshant 1995 500 Jain
2.25% for the 1% investmet/swi crore, otherwise nil
Reliance Fund
Equity 30th March S&P CNX Sunil 2006 Nifty Singhani a
Retail Plan < Retail 2.25%,
Rs. 2crore @ subscription
from than Rs. 5 crore per reedemed/switched year from the date of allotment. For subscription of Rs. 5 crore and above per purchase charged, Plan: Nil transaction, Institutional if no exit load shall be
Rs. 2-5 crore transaction @ 1% if @1.25%,> nil, Institutional Plan- nil Rs. 5 crore after completion of 1
DWS Equity Fund
Alpha October 2002
NSE Nifty
Nilang Mehta.
2.25% for the 1% investmet/swi crore, otherwise nil
reedemed/switched out crore within one year otherwise nil.
Taking a brief look at the table now we can start our analysis. This analysis will include data of 6 month NAV of all the scheme mentioned above and will be done using statistical measures of average, standard deviation, Skewness and Median etc. HSBC Equity Fund: The table below present the various statistics associated with our analysis. Table 6.5 HSBC Equity Funds statistical values, 1st October 2007 to 31st March 2008 Statistical tool Average Standard Deviation Median Skewness Value 77.64101 16.86212 72.9925 0.875588
Fig 6.2.3.1 Asset allocation in top 10 sectors and individusl companis by HSBC Equity Fund
As seen here we have Average of the scheme over last six months which comes to 77.64101 at the same time the Standard Deviation of the fund comes to 16.86212 which
indicates high degree of fluctuation. Median is 72.9925 which means its the middle value of the entire spread. Here we will also look at the Skewness which comes to 0.875588 which shows a positive sign because it means that most of the movement in the unit value were upward. This justifies that asset allocation as mentioned above is idle for any asset management company. As we can see from the pie charts above here too Banking sector has received second preference in the investment which comes to 9.55% when we look at any single sector receiving the investment. Consumer Non Durables rank first while Petroleum Products comes at 8.78% of total corpus. Oil, Telecom, Software, Auto, Finance, Industrial Capital Goods follows in that order. The table shown below shows the three top sector in which the fund has allocated its assets. Table 6.6 Top three sector in term of asset allocation (%) Sector Others Consumer Non-Durable Banks Percentage % 34.58 9.88 9.55
HDFC Equity Fund: The table below present the various statistis associated with our analysis. Table 6.7 HDFC Equity Funds statistical value, 1st October 2007 to 31st March 2008 Statistical tool Average Standard Deviation Median Skewness Value 196.5964 17.5873 195.405 -0.21446
The Average of this fund comes to 196.5964 where as Standard Deviation is 17.5873 and Median comes to 195.405 whereas Skewness here is -0.21446 which means that most of the time unit value or NAV made a positive movement. Now let us take a look at the asset
allocation of the fund which we have given below in the form of a pie chart depicting various sectors which are idicated by different colors. Fig 6.3.2.2 Asset allocation in top 10 companies (%) by HDFC Equity Fund
Here we can see that highest percentage of investment is seen in Pharmaceutical sector that comes to around 17.9% and thus making the biggest chunk of the pie. Banks ranks second in drawing investment from the fund. Industrial Capital goods, Consumer Durables, Media and Entertainment, Auto Ancilliaries, Construaction, Ferrous Metals, Pesticides follows in that order as leding sectors that got preference of investment in those funds. Top three sector that receive the investment from this fund are as mentioned below in the table.
Table 6.8 Top three sectors in term of asset allocation (%) Sector Pharmaceuticals Banks Industrial Capital Goods Percentage % 17.9 17.09 12.29
Reliance Equity Fund: The table below present the various statistis associated with our analysis. Table 6.9 Reliance Equity Funds statistical value, 1st October 2007 to 31st March 2008 Statistical tool Average Standard Deviation Median Skewness Value 16.27145 0.834855 16.315 -0.22289
Here in the table above there are all the statistics necessary for the analysis. Looking at it we can say that, as standard deviation is less Reliance Equity Fund is comparitively more consistent in its performance. Standard Deviation of other funds is very high which comes to 16 and 17 which shows that the funds are comparitively more vulnerable to the various changes that take place in the factors that affects the fund. And it has been very much observed that this fund has given stable return of 50-55% whereas other funds has given 31-32% return on an average. Thus after this analysis it becomes very clear that this fund has been performing far more better that most other funds. This analysis presents the score of various statistical tools which is taken on the basis of a broad data of NAV of 6 months. The table shown below shows us the top three sector which got the preference in investment. Table 6.10 Top three sector in term of asset allocation (%) Sector Telecom-services Construction Banks Percentage % 23.66 14.1 11.87
Fig 6.2.3.4 Asset allocation in top 10 sector by Reliance Equity Fund in (%)
Reliance Equity Fund as we can observe from the chart is having extremely skewed ratio having approximately 49% of its investment in only three sectors. Which are namely Cement, Construction and Banking sector. This kind of highly lopsided allocation of asset is not observed in any of the other three schemes. Only HDFC Equity Fund comes closest to this scheme which has 44% of the allocation in three sector. DWS Alpha Equity Fund: The table below present the various statistis associated with our analysis. Table 6.11 DWS Alpha Equity Funds statistical value, 1st October 2007 to 31st March 2008 Statistical tool Average Standard Deviation Median Skewness Value 79.23 10.30828 82.21 -1.19218
Here looking at the Standard Deviation we can say that its lower than HSBC Equity Fund and DWS Alpha Equity Fund but very high when compared to Reliance Equity Fund. Skewness of the data comes to a very high number of -1.19218 which means that more of the schemes NAV saw a negative movement rather than positive one. Now let us look at the asset allocation. Fig 6.2.3.5 Asset allocation of DWS Alpha Equity Fund in (%)
The pie-chart here says that the fund has majorly kept a diversified portfolio. With chemicals ranking second. Difference observed in this fund is the investment strategy of this fund. Here we can observe that whereas other funds has invested a big chunk in single sector this fund has invested its major chunk in diversified sector. Table below shows us the three top sectors in which the fund has invested into. Table 6.12 Top three sector in term of asset allocation (%) Sector Diversified Chemical Finance Percentage % 11.7 8.98 8.06
So finally we can put all the important statistical analysis from all the four funds in a single table Table 6.13 Various parameters for analysis, 1st December 2007 to 31st March 2008
Fund
Average
Standard deviation
Median Skewness Sector that received highest 72.9925 0.875588 investment and its (%)
HSBC Equity Fund HDFC Equity Fund DWS Alpha Equity Fund Reliance Equity Fund
77.64101
16.86212
Others 34.58%
196.5964
17.5873
195.405 -0.21446
Pharmaceuticals 17.9%
79.23
10.30828
82.21
-1.19218
Diversified 11.7%
16.27145
0.834855
16.315
-0.22289
Telecom 23.66%
services
From the above table it is clear that HSBC Equity Fund is less sensitive than HDFC Equity Fund as standard deviation for the NAV is lesser while it is far more vulnerable to macro and micro changes than DWS Alpha Equity Fund and Reliance Equity Fund. At the same time HSBC Equity Fund is showing positive skewness which means that most of the time the NAV has seen a positive movement while the other three funds analysed in the report has seen negative movement most of the times in the six month for which the data was taken from 1st of October 2007 till 31st March 2006
7.Findings
This section of the report will include the result that we observed through analysis. Here entire finding will be divided in sections and sub-sections. The headings are as mentioned below. 7.1 Trend in mutual fund ie Sales and Redeemption from 1997 to 2007 7.2 Strategy for selection of a stock 7.3 Money market instruments used by Asset Management Companies 7.4 Key parameters that help in selection of Mutual Fund Scheme 7.5 Rise in Asset Under Management and change in investment preference 7.6 Other important findings Having mentioned the key headings of the findings we start our findings from the following pages. 7.1 Trend in mutual fund ie Sales Redeemption from 1997-07 It has been observed that the till 2002 most of the sales that happened was of incom scheme while people had little trust to invest in ELSS, Growth and Balanced fund. Through this we found that most of the people preferred mutual fund for having regular income rather than for the sake of having a capital gain. Till 2002-2003 the sales and redeemption did not have huge
difference, and thus making little impact on the industry. But form 2003 onwards its observed that reedemption from Income schemes went drastically up thus while the redeemption from Growth scheme fell, which means that people started taking mutual fund as a avenue of long term investment.
7.2 Strategy for selection of a stock To give highest possible return at the lowest risk, HSBC uses many strategy but one of the strategy is Top-down and Bottom-up approach. Top-down approach helps in selection of a a particular sector, considering the macroeconomic factors. Bottom-up approach comes after selection of the sector is done through above metioned process is done. Bottom-up approach helps zeroing down on a particular stock. HSBC considers 250 companies across the sector they have decided. HSBC analyses this companies on the basis of return on capital, return on equity, management and identifiable competitive advantage. Below is the diagramatical representation of the approach that is discussed
7.3 Money market instruments used by the AMC. The Money Market is an instrument of the fixed income market. Generally speaking, the term "fixed income" is synonymous with bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities, and their near-liquid nature (almost immediate access upon request). Money market securities are essentially IOU's issued by governments, financial institutions, and large corporations. These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower return than most other securities. They are used by this asset management companies to hedge the risk that they create by investing in the stock market. Call/ Notice/ Term Money Call money market is that part of the national money market where the day to day surplus of funds, of banks and primary dealers, are traded in. Call/ Notice/ term money market ranges between one day to 15 days borrowing and considered as highly liquid. Other key feature is that the borrowings are unsecured and the interest rates are very volatile depending on the demand and supply of the short term surplus/ deficiency amongst the interbank players. The average daily turnover in the call money market is around Rs. 12000-13000 cr. every day and the market is active between 9:30 to 2:30 every working day and 9:30to 12:30 every Saturday. Repo/ Reverse Repo It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price. Similarly, the buyer purchases the securities with an
agreement to resell the same to the seller on an agreed date in future at a predetermined price. Such a transaction is called a Repo when viewed from the prospective of the seller of securities (the party acquiring fund) and Reverse Repo when described from the point of view of the supplier of funds. Thus, whether a given agreement is termed as Repo or a Reverse Repo depends on which party initiated the transaction. The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty. Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interest mutually agreed with the buyer of the security who has lent the funds to the seller. The rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the underlying securities and is influenced by overall money market conditions. The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities). Uses of Repo are as follows: It helps banks to invest surplus cash It helps investor achieve money market returns with sovereign risk. It helps borrower to raise funds at better rates An SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR positions simultaneously.
RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system.
Inter Corporate Deposits For short term cash management of the rich corporate, the company offers to borrow through Inter corporate deposits. The company has P1+ credit rating (Highest Rating in its category) for an amount of Rs. 250 crores. The company offers two variables of the Inter Corporate Deposits:
Fixed Rate ICD : the quantum/ rates/ term to maturity of the ICD are negotiated by the two parties at the beginning of the contract and remains same for the entire term of the ICD. As per the RBI guidelines the minimum period of the ICD is 7 days and can be extended to period of 1 year. The rates are generally linked to Interbank Call Money Market Rates. Floating Rate ICD: Corporates interested in using the daily volatility of the call money market are offered Floating Rate ICD which may be benchmarked/ linked to either NSE Overnight Call/ Reuters Overnight Call rates. The Corporates are also given Put/ Call option after 7 days for managing their funds in the event of uncertainty of availability of idle funds. Commercial Paper It is a short term money market instrument comprising of unsecured, negotiable, short term usance promissory note with fixed maturity, issued at a discount to face value. CPs are issued by Corporates to impart flexibility in raising working capital resources at market determined rates. CPs is actively traded in the secondary market since they are issued in the form of Promissory Notes and are freely transferable in Demat form. Certificate of Deposit Certificates of Deposit (CD) were introduced in 1989 following the acceptance of the Vaghul Working Group of Money Market. These are also usance promissory notes issued at a discount to the face value and transferable in Demat form. They attract stamp duty. CDs are issued by scheduled commercial banks and it offers them an opportunity to mobilise bulk resources for better fund management. To the investors they offer better cash management opportunity with market related yield and high safety. Bills Rediscounting The bills rediscounting scheme was introduced by RBI in November 1970 under which all licensed scheduled commercial banks were eligible to rediscount with RBI genuine trade bills arising out of sale/ purchase of goods. In November 1981 RBI stopped rediscounting bills but permitted banks to rediscount the bills with one another as well as with approved financial
institutions. To augment facilities for this activity and also make a larger pool of resources available, RBI has been progressively enlarging the number of institutions eligible for bills rediscounting including primary dealers.
7.4 Key parameters To present the key parameters in a better way, they are shown in the table below. Table 7.4.1 Parameters and their purpose Parameter Applicability Beta Sharpe ratio A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole is known as Beta. A ratio developed by Nobel laureate William F. Sharpe to measure riskadjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns
Expense ratio Portfolio turnover R-squared
A measure of what it costs an investment company to operate a mutual fund. A measure of how frequently assets within a fund are bought and sold by the managers is called portfolio turnover. A measure of how closely the NAV of the unit is related to the benchmarked index.
7.5 Trend in AUM of the Asset Management Companies (AMC)
One of the major finding is that UTI has seen a big fall in their AUM from 1st June 2002 it has constantly fallen till 1st June 2004. The important thing to notice here is that it has seen a very drastic fall between 1st December 2002 and 1st June 2003. At the same time SBI saw a tremendous inflow of investment from 1st December 2005 onwards and on 1st December 2007 it became more than Rs. 49000 crore. 7.6 Other important findings This section will give an idea about the findings which can come out to be very important in certain scenarios:
Performance of HSBC Emerging Markets Fund has been extraordinary initially giving a return of 172%. As it is launched recently long term performance is yet to be seen
It came to light that smaller Asset Management Companies can suddenly become major player through merger. Example: PNB Asset Management Company Pvt Ltd become a major player having huge Asset Under Management after it merged with Principal Asset Management Company
Banking sector remained in top three sector of preference in asset allocation for all funds analysed in the report.
Idle time horizon for mutual fund to get substantial return is three years or longer
7.7 Work done at the organisation: Direct interaction with clients and explaining them benefits of investing in Mutual Funds Conducted corporate campaign and explained various scheme namely HSBC Equity Fund, HSBC Advantage India Fund and HSBC Dynamic Fund at Elcoteq a Finish company located in Electronic city, TaskTel India Pvt. Ltd., Quinnox Business communication with Chartered Accountants in Bangalore. Manian & Rao was one of the company with whom two meetings were arranged to work out strategic
partnership, wherein Trans Financial Corporation and Manian & Rao can benefit by sharing their expertise.
8. Recommendations and Conclusion

This section will include recommendations which are based on the observations that were made while working with HSBC and its distributor namely Trans Financial Corporation. The recommendations are made keeping in mind the present problem the company is facing. At the same time this section also contains recommendations that can help firm from damage or loss of business in future.
Taking attrition as a problem, it is hereby recommended that Trans Financial Corporation make their candidate selection procedure slightly rigorous, eg: Adopting stress interview. The level of rigor can be adjusted depending upon the post they are appearing for. Because a candidate going through rigorous selection procedure is more likely to stay with the firm than those who move in smoothly. But the process can be successful only if adopted with due care otherwise the effect can be negative
It is also recommended that a team of two financial planners should advice a client. There are two benefits of this approach, client will have benefit of different views and suggestion from experienced advisors at the same time in case one of the advisor leave the firm, other will serve as link between the firm and the client, finally helping to restore the business
Most importantly its recommended that if one have investment horizon of three years or longer he should invest only in Equity Fund as all the Equity Fund gives high return from the third year onward from the date of inception. At the same
time these long term investors should not invest in sector funds where positive return are not sure even after long investment period of three years, as the performance of the fund becomes dependent on a single sector.
Putting in brief the fact that though Mutual Funds are subject to market risk but in long turn, that is after one year or longer they give a substantial return. The equity globally had been the best performer in comparison of other sort of investments.
Fig 8.1Performance of Equity globally compared to other modes of investments.
From the chart above it becomes clear that equity investment has power of giving maximum return globally and this power can be tapped through mutual fund. Throughout the report it has been observed that variation in performance of two mutual fund schemes having same objective, can easily occur because of parameters like asset allocation, date of inception, benchmark index of the fund, fund managers investment style, portfolio turnover and expense ratio.
REFRENCE: BOOKS: Finance For Growth: A World Bank report Mutual Fund Insight Investment Review (ICICI) Fund Fact Sheet o HSBC Equity Fund o HSBC Advantage India Fund o HSBC Dynamic Fund o HDFC Equity Fund o Reliance Equity Fund o DWS Alpha Equity Fund o SBI Equity Fund
WEBSITES:
www.fundsavvy.com www.bcb.gov.br www.bloomberg.com www.russiaprofile.org www.english.cmbchina.com www.amfiindia.com www.rbi.org.in www.geojit.com www.pwc.com www.valueresearchonline.com www.assetmanagement.hsbc.co.in www.hdfcfund.com www.dws-india.com www.reliancemutual.com

Analysis of Mutual Funds

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Analysis of Mutual Funds

Uploaded by

Copyright:

Available Formats

1 Alliance Business School

HSBC Asset Management (India) Private Limited

2 Alliance Business School

Post Graduate Programme

Signature of the Student

HSBC Asset Management (India) Private Limited

3 Alliance Business School

HSBC Asset Management (India) Private Limited

4 Alliance Business School

HSBC Asset Management (India) Private Limited

5 Alliance Business School

Table of Content Page no.

Executive Summary Introduction

Brazil Russia India China

HSBC Asset Management (India) Private Limited

6 Alliance Business School

HSBC Asset Management (India) Private Limited

7 Alliance Business School

HSBC Asset Management (India) Private Limited

8 Alliance Business School

A Brief of How Mutual Funds Work

HSBC Asset Management (India) Private Limited

9 Alliance Business School

HSBC Asset Management (India) Private Limited

10 Alliance Business School

1961-70 1971-80 1981-90 1991-00 Source: FGV and IBGE

6.17 8.63 1.57 2.64

2.89 2.44 2.14 1.57

3.19 6.04 -0.56 1.06

11 Alliance Business School

HSBC Asset Management (India) Private Limited

12 Alliance Business School

Fig 2.1.2.1 Investors in thousands

HSBC Asset Management (India) Private Limited

13 Alliance Business School

HSBC Asset Management (India) Private Limited

14 Alliance Business School

Second Phase 1987-1993 (Entry of Public Sector Funds)

HSBC Asset Management (India) Private Limited

15 Alliance Business School

HSBC Asset Management (India) Private Limited

16 Alliance Business School

HSBC Asset Management (India) Private Limited

17 Alliance Business School

Fig 2.1.3.2 Sales in Rs. crore, 1997-98 to 2007-08

HSBC Asset Management (India) Private Limited

18 Alliance Business School

Fig 2.1.3.3 Redemption in Rs. crores, 1997-98 to 2007-08

HSBC Asset Management (India) Private Limited

19 Alliance Business School

Fig 2.1.3.4 Number of schemes launched, 1997-98 to 2007-2008

HSBC Asset Management (India) Private Limited

20 Alliance Business School

21 Alliance Business School

22 Alliance Business School

2.2 Company overview

23 Alliance Business School

24 Alliance Business School

HSBC Asset Management (India) Private Limited

25 Alliance Business School

HSBC Asset Management (India) Private Limited

26 Alliance Business School

Source: HSBC Asset Management (India) Pvt Ltd

Investment Philosophy and Process - Equity