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Comparative Analysis of Mutual Fund of HDFC & ICICI
Comparative Analysis of Mutual Fund of HDFC & ICICI
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"Comparative Analysis of Mutual Fund of HDFC & ICICI"
1
CONTENT
DESCRIPTION
S.No. Title Page No.
1. Acknowledgement
2. Certificate
3. Executive summary
9. Conclusion
10. Questionnaire
11. Bibliography
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EXECUTIVE SUMMARY
INTRODUCTION:
The Indian financial system based on four basic components like Financial
Market, Financial Institutions, Financial Service, Financial Instruments. All are
play important role for smooth activities for the transfer of the funds and allocation
of the funds. The main aim of the Indian financial system is that providing the
efficiently services to the capital market. The Indian capital market has been
increasing tremendously during the second generation reforms. The first generation
reforms started in 1991 the concept of LPG. (Liberalization, privatization,
Globalization)
Then after 1997 second generation reforms was started, still the it’s going
on, its include reforms of industrial investment, reforms of fiscal policy, reforms of
ex- imp policy, reforms of public sector, reforms of financial sector, reforms of
foreign investment through the institutional investors, reforms banking sectors. The
economic development model adopted by India in the post-independence era has
been characterized by mixed economy with the public sector playing a dominating
role and the activities in private industrial sector control measures emaciated form
time to time. The last two decades have been a phenomenal expansion in the
geographical coverage and the financial spread of our financial system.
The spared of the banking system has been a major factor in promoting
financial intermediation in the economy and in the growth of financial savings with
progressive liberalization of economic policies, there has been a rapid growth of
capital market, money market and financial services industry including merchant
banking, leasing and venture capital, leasing, hire purchasing. Consistent with the
growth of financial sector and second generation reforms its need to fruition of the
financial sector. Its also need to providing the efficient service to the investor
mostly if the investors are supply small amount, in that point of view the mutual
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fund play vital for better service to the small investors. The main vision for the
analysis for this study is to scrutinize the performance of five star rated mutual
funds, given the weight of risk, return, and assets under management, net assets
value, book value and price earnings ratio.
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War U.S. economy. The Scottish American Investment Trust, Formed on
February1, 1873 by fund pioneer Robert Fleming, invested in the economic
potential of the United States, Chiefly through American railroad bonds. Many
other trusts followed that not only targeted investment in America, but led to the
introduction of the fund investing concept on U.S. shores in the late 1800 and early
1900s.
Nov. 1925. All these funds were open – ended having redemption feature.
Similarly, they had almost all the features of a good modern Mutual Funds – like
sound investment policies and restrictions, open end ness, self – liquidating
features, a publicized portfolio, simple capital structure, excellent and professional
fund management and diversification etc…….and hence they are the honored
grand – parents of today’s funds. Prior to these funds all the initial investment
companies were closed – ended companies. Therefore, it can be said that although
the basic concept of diversification and professional fund management, were
picked by U.S.A. from England Investment Companies “The Mutual Fund is an
American Creation.”
ecause of their exclusive feature, open – ended Mutual Funds rapidly
became very popular. By 1929, there were 19 open – ended Mutual Funds in USA
with total assets of $ 140 millions. But the 1929 Stock Market crash followed by
great depression of 1930 ravaged the U.S. Financial Market as well as the Mutual
Fund Industry. This necessitated stricter regulation for mutual funds and for
Financial Sectors. Hence, to protect the interest of the common investors, U.S.
Government passed various Acts, such a Securities Act 1933, Securities Exchange
Act 1934 and the Investment Companies Act 1940. A committee called the
National Committee of Investment Company (Now, Investment Company
Institute), was also formed to co – operate with the Federal Regulatory Agency and
to keep informed of trends in Mutual Fund Legislation.
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As a result of these measure, the Mutual Fund Industry began to develop
speedily and the total net assets of the Mutual Funds Industry increased form $ 448
million in 1940 to $ 2.5 billion in 1950. The number of shareholder’s accounts
increased from 296000, to more than one Million during 1940 – 1951. “As a result
of renewed interest in Mutual Fund Industry they grew at 18% annual compound
rate reaching peak of their rapid growth curve in the late 1960s.”
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inside of return and how to minimize the risk. When fund provided high return
with high risk, investors attract to invest more fund for same scheme.
The Mutual fund organization as per the SEBI formation and necessary
formation is needed for sooth activities of the companies and achieved the desire
objectives. Transfer agent and custodian play role for dematerialization of the
fund and unit holders hold the account statement, but custody of the unit is on
particular Asset Management Company. Custodian holds all the fund units on
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dematerialization form. Sponsor had decided the responsibility of custodian
when investor to purchase the fund and to sell the unit. Application forms,
transaction slip and other requests received by transfer agent, middle men
between investors and Assts Management Companies.
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substantial growth in the eighties and nineties when there was a significant
increase in the number of mutual funds, schemes, assets, and shareholders. In the
US, the mutual fund industry registered a ten – fold growth the eighties. Since
1996, mutual fund assets have exceeded bank deposits. The mutual fund industry
and the banking industry virtually rival each other in size.
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Wide variety of Mutual Fund Schemes exists to cater to the needs such as
financial position, risk tolerance and return expectations etc. The table below gives
an overview into the existing types of schemes in the Industry.
Portfolio Diversification
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).
Professional Management
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.
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.
Liquidity
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.
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Choice of Schemes
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
Transparency
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.
Flexibility
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.
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No Customized Portfolios
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.
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Role of SEBI
A index fund scheme’ means a mutual fund scheme that invests in securities
in the same proportion as an index of securities;” A mutual fund may lend and
borrow securities in accordance with the framework relating to short selling and
securities lending and borrowing specified by the Board.”A mutual fund may enter
into short selling transactions on a recognized stock exchange, subject to the
framework relating to short selling and securities lending and borrowing specified
by the Board.” “Provided that in case of an index 13 fund scheme, the investment
and advisory fees shall not exceed three fourths of one percent (0.75%) of the
weekly average net assets.“
“Provided further that in case of an index fund scheme, the total expenses of
the scheme including the investment and advisory fees shall not exceed one and
one half percent (1.5%) of the weekly average net assets.” Every mutual fund shall
buy and sell securities on the basis of deliveries and shall in all cases of purchases,
take delivery of relevant securities and in all cases of sale, deliver the securities:
Provided that a mutual fund may engage in short selling of securities in accordance
with the framework relating to short selling and securities lending and borrowing
specified by theBoard: Provided further that a mutual fund may enter into
derivatives transactions in a recognized stock exchange, subject to the framework
specified by the Board.”
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lines and to enhance and maintain standards in all areas with a view to protecting
and promoting the interests of mutual funds and their unit holders.
AMFI working group on Best Practices for sales and marketing of Mutual
Funds under the Chairmanship of Shri B. G. Daga, Former Executive Director of
Unit Trust of India with Shri Vivek Reddy of Pioneer ITI, Shri Alok Vajpeyi of
DSP Merrill Lynch, Shri Nikhil Khattau of Sun F & C and Shri Chandrashekhar
Sathe, Formerly of Kotak Mahindra Mutual Fund has suggested formulation of
guidelines and code of conduct for intermediaries and this work has been ably done
by a sub-group consisting of Shri B. G. Daga and Shri Vivek Reddy. 14
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Tax Planning and Mutual Fund
Investors in India opt for the tax-saving mutual fund schemes for the simple reason
that it helps them to save money. The tax-saving mutual funds or the equity-linked
savings schemes (ELSS) receive certain tax exemptions under Section 88 of the
Income Tax Act. That is one of the reasons why the investors in India add the tax-
saving mutual fund schemes to their portfolio. The tax-saving mutual fund schemes
are one of the important types of mutual funds in India that investors can option
for. There are several companies in India that offer – tax – saving mutual fund
schemes in the country.
2) Regulation
3) Intermediaries
4) Opinion Market
5) Knowledge Generate
6) Issuer
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2. School of Regulatory Studies and Supervision (SRSS)
Depending on the particular objective of scheme, it may open for further sale and
repurchase of units, again in accordance with the particular of the scheme, the
scheme may be wound up after the particular time period.
The body corporate being in the financial services business for at least five
years
Having a positive net worth in the five years immediately preceding the
application of registration.
Net worth in the immediately preceding year more than its contribution to
the capital of the AMC.
Earning a profit in the three out of the five preceding years, including the
fifth year.
3. The sponsor should hold at least 40% of the net worth of the AMC.
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4. A party which is not eligible to be a sponsor shall not hold 40% or more of the
net worth
of the AMC.
5. The sponsor has to appoint the trustees, the AMC and the custodian.
6. The trust deed and the appointment of the trustees have to be approved by SEBI.
LAUNCHING OF A SCHEMES
Before its launch, a scheme has to be approved by the trustees and a copy of its
offer documents filed with the SEBI.
1. Every application form for units of a scheme is to be accompanies by a
memorandum containing key information about the scheme.
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3. All advertisements for a scheme have to be submitted to SEBI within seven days
from the issue date.
5. The offer documents and advertisements should not contain any misleading
information or any incorrect statement or opinion.
6. The initial offering period for any mutual fund schemes should not exceed 45
days, the only exception being the equity linked saving schemes.
9. All advertisements need to carry the name of the sponsor, the trustees, the AMC
of the fund.
11. All advertisements shall clarify that investment in mutual funds is subject to
market risk and the achievement of the fund’s objectives can not be assured.
12. When a scheme is open for subscription, no advertisement can be issued stating
that the scheme has been subscribed or over subscription.
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Recent Trend of Mutual Fund
India is at the first stage of a revolution that has already peaked in the U.S. The
U.S. boasts of an Asset base that is much higher than its bank deposits. In India,
mutual fund assets are not even 10% of the bank deposits, but this trend is
beginning to change. Recent figures indicate that in the first quarter of the current
fiscal year mutual fund assets went up by 115% whereas bank deposits rose by
only 17%. (Source: Thinktank, the Financial Express September, 99) This is
forcing a large number of banks to adopt the concept of narrow banking wherein
the deposits are kept in Gilts and some other assets which improves liquidity and
reduces risk. The basic fact lies that banks cannot be ignored and they will not
close down completely. Their role as intermediaries cannot be ignored. It is just
that Mutual Funds are going to change the way banks do business in the future.
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GROWTH OF MUTUAL FUNDS IN LUCKNOW
By the year 1970, the industry had 361 Funds with combined total assets of
47.6 billion dollars in 10.7 million shareholder’s account. However, from
1970 and on wards rising interest rates, stock market stagnation, inflation
and investors some other reservations about the profitability of Mutual
Funds, Adversely affected the growth of mutual funds. Hence Mutual Funds
realized the need to introduce new types of Mutual Funds, which were in
tune with changing requirements and interests of the investors. The 1970’s
saw a new kind of fund innovation; Funds with no sales commissions called
“ no load “ funds. The largest and most successful no load family of funds is
the Vanguard Funds, created by John Bogle in 1977. In the series of new
product, the First Money Market Mutual Fund (MMMF) i.e., the Reserve
Fund" was started in 1971.This new concept signaled a dramatic change in
Mutual Fund Industry. Most importantly, it attracted new small and
individual investors to mutual fund concept and sparked a surge of
creativity in the industry.
1. To study the perception of customers towards various types of
mutual funds.
2. To evaluate the awareness of customers towards various mutual
funds.
3. To determine the expected return and risk involved in investing in
mutual funds.
4. To under the customers' investing power and their interest in financial
product
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METHODOLOGY & STUDY
A large number of studies on the growth and financial performance of mutual
funds have been carried out during the past, in the developed and developing
countries. Brief reviews of the following research works reveal the wealth of
contributions towards the performance evaluation of mutual fund, market timing
and stock selection abilities of fund managers.
In LUCKNOW, one of the earliest attempts was made by National Council of
Applied Economics Research (NCAER) in 1964 when a survey of households was
undertaken to understand the attitude towards and motivation for savings of
individuals. Another NCAER study in 1996 analyzed the structure of the capital
market and presented the views and attitudes of individual shareholders. SEBI –
NCAER Survey (2000) was carried out to estimate the number of households and
the population of individual investors, their economic and demographic profile,
portfolio size, and investment preference for equity as well as other savings
instruments. Data was collected from 30,00,000 geographically
the study are : Households preference for instruments match their risk
perception; Bank Deposit has an appeal across all income class; 43% of the non-
investor households equivalent to around 60 million households apparently lack
awareness about stock markets; and, compared with low income groups, the higher
income groups have higher share of investments in Mutual Funds signifying that
Mutual funds have still not become truly the investment vehicle for small
investors.
Since 1986, a number of articles and brief essays have been published in financial
dailies, periodicals, professional and research journals, 20 explaining the basic
concept of Mutual Funds and highlighted their importance in the LUCKNOWn
capital market environment. They touched upon varied aspects like regulation of
Mutual Funds, Investor expectations, Investor protection, and growth of Mutual
Funds and some on the performance and functioning of Mutual Funds. A few
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among them are Vidyashankar (1990), Sarkar (1991), Agarwal (1992), Sadhak
(1991), Sharma C. Lall (1991), Samir K. Barua et al., (1991), Sandeep Bamzai
(2001), Atmaramani (1995), Atmaramani (1996), Subramanyam (1999),
Krishnan (1999), Ajay Srinivsasn (1999). Segmentation of investors on the basis
of their characteristics was highlighted by Raja Rajan (1997). Investor’s
characteristics on the basis of their investment size Raja Rajan (1997), and the
relationship between stages in life cycle of the investors and their investment
pattern was studied Raja Rajan (1998).
Friend, et al., (1962) made an extensive and systematic study of 152 mutual funds
found that mutual fund schemes earned an average annual return of 12.4 percent,
while their composite benchmark earned a return of 12.6 percent. Their alpha was
negative with 20 basis points. Overall results did not suggest widespread
inefficiency in the industry. Comparison of fund returns with turnover and expense
categories did not reveal a strong relationship. Irwin, Brown, FE (1965) analyzed
issues relating to investment policy,
portfolio turnover rate, performance of mutual funds and its impact on the stock
markets. They identified that mutual funds had a significant impact on the price
movement in the stock market. They concluded that, on an average, funds did not
perform better than the composite markets and there was no persistent relationship
between portfolio turnover and fund performance.
Treynor (1965) used ‘characteristic line’ for relating expected rate of return of a
fund to the rate of return of a suitable market average. He coined a fund
performance measure taking investment risk into account. Further, to deal with a
portfolio, ‘portfolio-possibility line’ was used to relate expected return to the
portfolio owner’s risk preference. Sharpe, William F (1966) developed a composite
measure of return and risk. He evaluated 34 open-end mutual funds for the period
1944-63. Reward to variability ratio for each scheme was significantly less than
DJIA (Dow Jones Industrial Average) and ranged from 0.43 to 0.78. Expense ratio
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was inversely related with the fund performance, as correlation coefficient was
0.0505. The results depicted that good performance was associated with low
expense ratio and not with the size. Sample schemes showed consistency in risk
measure. Treynor and Mazuy (1966) evaluated the performance of 57 fund
managers in terms of their market timing abilities and found that, fund managers
had not successfully outguessed the market. The results suggested that, investors
were completely dependent on fluctuations in the market. Improvement in the rates
of return was due to the fund managers’ ability to identify under-priced industries
and companies. The study adopted Treynor’s (1965) methodology for reviewing
the performance of mutual funds.
Jensen (1968) developed a composite portfolio evaluation technique
concerning risk-adjusted returns. He evaluated the ability of 115 fund managers in
selecting securities during the period 1945-66. Analysis of net returns indicated
that, 39 funds had above average returns, while 76 funds yielded abnormally poor
returns. Using gross returns, 48 funds showed above average results and 67 funds
below average results. Jensen concluded that, there was very little evidence that
funds were able to perform significantly better than expected as fund managers
were not able to forecast securities price movements. Fama (1972) developed
methods to distinguish observed return due to the ability to pick up the best
securities at a given level of risk from that of predictions of price movements in the
market. He introduced a multiperiod model allowing evaluation on a period-by-
period and on a cumulative basis. He concluded that, return on a portfolio
constitutes of return for security selection and return for bearing risk. His
contributions combined the concepts from modern theories of portfolio selection
and capital market equilibrium with more traditional concepts of good portfolio
management.
Williamson (1972) compared ranks of 180 funds between 1961-65 and 1966-70.
There was no correlation between the rankings of the two periods. The investment
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abilities of most of the fund managers were identical. He highlighted the growing
prominence of volatility in the measurement of investment risk. Klemosky (1973)
analyzed investment performance of 40 funds based on quarterly returns during the
period 1966-71. He acknowledged that, biases in Sharpe, Treynor, and Jensen’s
measures, could be removed by using mean absolute deviation and semi-standard
deviation as risk surrogates compared to the composite measures derived from the
CAPM (Capital Asset Pricing Modal).
McDonald and John (1974) examined 123 mutual funds and identified the
existence of positive relationship between objectives and risk. The study identified
the existence of positive relationship between return and risk. The relationship
between objective and risk-adjusted performance indicated that, more aggressive
funds experienced better results. Gupta (1974) evaluated the performance of
mutual fund industry for the period 1962-71 using Sharpe, Treynor, and Jensen
models. All the funds covered under the study outperformed the market
irrespective of the choice of market index. The results indicated that all the three
models provided identical results. Return per unit of risk varied with the level of
volatility assumed and he concluded that, funds with higher volatility exhibited
superior performance. Klemosky (1977) examined performance consistency of 158
fund managers for the period 1968-75. The ranking of performance showed better
consistency between four-year periods and relatively lower consistency between
adjacent two-year periods. Ippolito’s (1989) results and conclusions were relevant
and consistent with the theory of efficiency of informed investors. He estimated
that risk-adjusted return for the mutual fund industry was greater than zero and
attributed positive alpha before load charges and identified that fund performance
was not related to expenses and turnover as predicted by efficiency arguments.
Gupta Ramesh (1989) evaluated fund performance in LUCKNOW comparing the
returns earned by schemes of similar risk and similar constraints. An explicit risk-
return relationship was developed to make comparison across funds with different
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risk levels. His study decomposed total return into return from investors risk,
return from managers’ risk and target risk. Baruan Varuan (1991) made an attempt
to evaluate the master share scheme of UTI using the data from 1987 to 1980.
Their conclusion was that the Master Share Scheme outperformed the market in
terms of net assets value (NAV) and the master share scheme (MSS) benefited
large investors rather than small investors.
24 Obaidulla and Sridhar (1991) evaluated the performance of two major growth
oriental mutual fund schemes - Master share and Canshare. They both concluded
that both the funds provided abnormal returns. Master share out performed based
on market risk. Gupta L C (1992) attempted a household survey of investors with
theobjective of identifying investors’ preferences for mutual funds so as to help
policy makers and mutual funds in designing mutual fund products and in shaping
the mutual fund industry.
Lal C and Sharma Seema (1992) identified that, the household sector’s share in
the LUCKNOW domestic savings increased from 73.6 percent in 1950-51 to 83.6
percent in 1988-89. The share of financial assets increased from 56 percent in
1970-71 to over 60 percent in 1989-90 bringing out a tremendous impact on all the
constituents of the financial market. Shashikant Uma (1993) critically examined
the rationale and relevance of mutual fund operations in LUCKNOW Money
Markets. She pointed out that money market mutual funds with low-risk and low
return offered conservative investors a reliable investment avenue for short-term
investment.
Ansari (1993) stressed the need for mutual funds to bring in innovative schemes
suitable to the varied needs of the small savers in order to become predominant
financial service institution in the country.
Shukla and Singh (1994) attempted to identify whether portfoliomanager’s
professional education brought out superior performance. They found that equity
mutual funds managed by professionally qualified managers were riskier but better
29
diversified than the others. Though the performance differences were not
statistically significant, the 25 three professionally qualified fund managers
reviewed outperformed others.
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RECENT TRENDS IN MUTUAL FUND MARKETING
The mutual fund industry in India has evolved little over three decades but
the real impetus has come after the changes in the mutual fund regulations in early
80s. Private and foreign mutual funds are operating in the Lucknow market and
constitute a substantial portion of the mutual fund industry. Today the industry
consists of Unit Trust of India, mutual funds sponsored by public sector banks and
insurance corporations, private and foreign mutual funds. Investors are constantly
being bombarded byquestions concerning their risk profile. Either a money market
or guilt fund is targeted for the risk averse or a low graded company offering a high
return on its fixed deposits. Banks like Many managers are now taking interest in
designing mutual fund products with multi feature options for investors. Customers
are often benefited from the improvements that are offered by new features, for
example by enhanced quality products [Garvin (1984)]. These additions of features
also offer advantages to others in the value chain. For the mutual fund agents new
features provide new sales arguments in seller buyer interaction. New features do
not only infuse single products but also entire product categories periodically with
new lease of life [Broadbent (1980), Dowdy W.L. (1986)].
31
Update
Indian equity markets have been volatile and trading in a
broader rangein the last 15 months with selling pressure being
witnessed at higherlevels and buying emerging at lower levels
32
inflation to 43% YoY vs.30% YoY in September 2015. The effect
of two successive years ofuneven monsoon rains is being felt
acutely in pulses. In the wake ofspiralling prices of pulses, the
NDA government had launched amassive de-hoarding operation
to ensure that pulses are easily availableto common people. The
operation resulted in seizure of 50475 MT ofpulses. It is believed
inflation may moderate once festival demandsoftens and prices
of lentils and vegetables fall as imports increase
Outlook
The government has initiated a number of structural policy
reforms likepower reforms, road sector reforms, implementation
of DBT in centrallyfunded welfare schemes, increasing FDI in
many sectors, thrust on manufacturing in sectors like defence,
focus on ease of doing business,taxation reforms, etc
34
Debt Market
Update
The yield on government securities was under pressure on the
back ofweak global cues as strong jobs data and comments from
US Fedofficials increased the probability of a rate hike in
December 2015.Comments from the RBI Governor that they are
comfortable with thecurrent level of rates for the near term,
indicating status quo for the nextfew months, also impacted
market sentiments
After touching a low of ~7.5% post the recent repo rate cut by the
RBIin its last policy meeting, 10-year G-Sec yields continued to
harden inthe last month. During October, the benchmark US 10
year G-Sec yieldmoved up 36 bps from below 2% to 2.34%
currently
35
October 2015 inched up to -3.81% but was still in the red for the
twelfth
consecutive month. Core WPI at -2.04 signifies slack in demand
for input commodities.
Outlook
An increase in FII limit in a phased manner to 5% of
outstandinggovernment securities (that are currently at 3.8%)
along with 2%additional limit for state development loans are a
structural positive forlong term bonds
36
The Indian debt markets remain attractive from a medium-
termperspective as the inflation trend remains on a downward
trajectory andwell within the RBI’s target range
MF industry synopsis
from 27% in October 2014. Total net inflows in MFs were | 134564
crore inOctober 2015 due to substantial inflows in all major
categories viz.income, equity and liquid funds
37
MF Category Analysis
Equity funds
Midcap funds delivered 10% return in the last year,
significantlyoutperforming large cap funds that delivered negative
returns of 2.5%
38
Exposure to banks and finance stocks together account for the highest
proportion with 27% of equity assets followedby technology and pharma
View
Short term: Positive
Long-term: Positive
39
for Sensexcompanies for FY15-16 from 18% to 13%. However,
we continue toexpect improved growth of around 19% in FY16-
17
40
Caution is required in midcap and small cap mutual funds as
they havesignificantly outperformed large caps in the current
market rally sinceSeptember 2013. Therefore, if overall market
volatility increases midcap and small caps funds in the near
term may underperform Investment in the same should only be
over a five year investmenthorizon
Recommended funds
Large cap
Axis Equity
Birla Sunlife Frontline Equity
ICICI Prudential Focused Bluechip Equity
SBI Bluechip
UTI Opportunities
Diversified
Midcap
41
HDFC Mid-Cap Opportunities Fund
Franklin India Smaller Companies Fund
SBI Magnum Global Fund
View
Short-term: Positive
Long-term: Positive
Thirdly, the recent RBI action to reduce the repo rate by 50 basis
points (bps) also augurs well for the infrastructure sector as this
will not only reduce their borrowing cost but also improve liquidity
through a better working capital cycle
Fourthly, with the RBI's action allowing banks to issue long term
bonds for infrastructure with benefits such as relaxation of CRR &
SLR norms and longer duration of bonds, we believe the pressure
on developers to fund infrastructure projects would ease. Hence,
cost of funds and strain on cash flow are likely to reduce, going
ahead
Preferred Picks
43
Franklin Build India Fund
View
Short-term: Neutral
Long-term: Positive
44
Provisions will continue to stay high as asset quality still remains
underpressure. Slippages i.e. fresh NPAs remain elevated for most
PSUbanks. Addition of | 19000 crore was seen in GNPA Q2FY16.
Slippagescame from the restructured book, as well as fresh pain.
Freshrestructuring under the 5:25 scheme is gradually building
and addingfurther four SDR cases, can form ~1% of banking
credit
Preferred Picks
45
UTI Thematic - Banking Sector Fund
View
Short-term: Neutral
Long-term: Neutral
Equity FMCG
FMCG companies continue to witness muted demand from both
rural and urban India. With the significant correction in commodity
price the industry has taken price cuts to pass on raw material
benefits. Thishas affected revenue growth, mainly due to the
absence of a price hikein sales. However, a decline in commodity
prices has resulted in aconsiderable expansion in operating
margins despite companiesincreasing their advertisement &
promotion (A&P) spend
View
Short-term: Neutral
Long-term: Positive
View
Short-term: Neutral
48
Long-term: Positive
49
Preferred Picks
50
However, brokerage (which varies)is applicable on ETFs while
there are no entry loads now on index funds.
There are over 400 ETFs traded globally. ETFs are transparent and
costefficient. The decision on which ETF to buy should be largely
governedby the decision on getting exposure in that asset class.
CPSE ETF is a new entry in the Goldman Sachs ETF offering. The
ETFinvests in select 10 PSU stocks and has been listed on the
exchangesince April. It has delivered 16% return since its launch.
51
52
View
Short-term: Positive
Long-term: Positive
Balanced funds
Balanced funds are hybrid funds. More than 65% of the overall
portfoliois invested in equities. Hence, as per provisions of the
Income Tax Act, 1961,any capital gains over one year become tax
free. Also, dividendsdeclared by funds are tax free
53
Preferred Picks
54
HDFC Balanced Fund
View
Short-term: Neutral
Long-term: Positive
55
The change in taxation announced in the Union Budget 2014,
shall beapplicable to MIP funds (refer to debt funds section for
details)
Preferred Picks
View
Short-term: Positive
Long-term: Positive
Arbitrage Funds
Arbitrage funds seek to exploit market inefficiencies that get
manifestedas mispricing in the cash (stock) and derivative
markets
56
Arbitrage funds are classified as equity funds as they invest into
equityshare and equity derivative instruments. Since these are
classified asequity funds for taxation, dividends declared by the
funds are tax free.No capital gains tax will be applicable if they
are sold after a year
57
On the other hand, negative bias attracts fresh sellers in the
market.Speculators try to sell the stock much cheaper than
theoretical prices. Insuch situations, reverse arbitrage
opportunities arise
On the other hand, a range bound market does not give ample
room tocreate arbitrage positions
Preferred Picks
58
With yields correcting over 70 bps in a year,Giltandduration
funds outperformed
The RBI has cut its repo rate by125 bps in the current year,Whichwill push
overall interestRatesdown, thus benefitingduration funds further
59
Investment into securities with maturity of less than 90 days and more than
one year dominate total investments bymutual funds
60
View
Neutral
Liquid Funds
Liquid fund returns moderated to 8.1-8.7% pre tax from over 9%
earnedin the previous year. Liquid funds witnessed an inflow of |
103306 croreas a quarter end phenomenon
For less than a year, individuals in the higher tax bracket should
opt fordividend option as the dividend distribution tax @ 28.325%
is marginally lower. Also, though the tax arbitrage has reduced,
they stillearn better pre-tax returns over bank savings (3-4%) and
currentaccounts (0-3%)
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three-yearperiod get reduced for individuals falling in the higher
tax bracket (30%tax slab) and for corporates.
View
Ultra-short term: Positive
Short-term: Positive
Long-term: Positive
Income funds
In the income funds category, long term debt funds
outperformeddelivering 9.2% absolute return in the last year (as
on November 17,2015). RBI’s recent 50 bps rate cut has boosted
returns of long-termbond funds, including income and gilt medium
and long-term funds
62
that were hovering aroundcorporate bonds’ riskiness subsided in
the current month
Given the sharp rate cuts of 125 basis points this calendar year, it
isbelieved there may be an extended pause or another 25 basis
points tillMarch 2016. Hence, it may make sense to invest in a mix
of short-termincome funds and dynamic bond funds and avoid
long duration gilt funds.
Dynamic bond funds are suitable for all types of investorsand for longer
duration.They can take exposure to all durations as per the interest rate
outlook and switch between G secs and corporate bonds
Recommended funds
63
Birla Sun Life Savings Fund
ICICI Prudential Flexible income
Long term/Dynamic
64
View
Short-term: Neutral
Long-term: Neutral
Gilt Funds
In October 2015, gilt funds delivered 9% absolute return last year,
thehighest among debt funds. We believe the odds remain in
favour of thegovernment securities yield trending down over the
next year or two. Inthe quarter gone by, 10 year G-sec yields
have fallen 28 bps. While thespread between these instruments
and repo rate was generally 40-50bps, it is currently around 90
bps, meaning yields could slide further by~40 bps. However, gilt
funds will be less attractive due to the longerholding period (more
than three years) as lower accrual income willneutralise the
impact of moderate capital gains in the near term
65
The 125 bps rate cut by the RBI in CY15 can push overall interest
ratesdown depending on how soon banks transmit it into the
system byrepricing their assets and liabilities lower
On the supply front, the Budget has pegged the market borrowing
forFY16 at | 6 lakh crore on a gross basis and | 4.56 lakh crore on
a netbasis (out of this, | 2.34 lakh crore through dated securities
and | 15000through gold bonds have been scheduled for H2FY16).
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Both gross andnet market borrowings were close to market
expectations. Borrowingrelated concern is expected to come
down, given the government’scommitment towards reducing the
fiscal deficit to 3% of GDP by FY17
Recommended funds
Technically, after the multiyear bull phase during 2004-12, gold prices
corrected significantly. The violation of the long term trend line highlights the
breach of a decade long trend of outperformance and signals a period of
medium-termConsolidation
New Fund
Offer will not be
kept open
for more than 30
days
Offer of Units of ` 10/- each for cash issued at a premium approximately equal to the difference between face value
and allotment price during the New Fund Offer Period and at NAV based prices during continuous offer.
68
Introduction
The previous chapter dealt with the impact of liberalization on the Indian mutual
funds industry. The chapter also dealt with the various issues and challenges of the
industry, regulatory frame work for the industry, and the role of mutual funds in the
mobilization of the house hold sector savings. The present chapter is devoted to the
study of HDFC Asset Management Company Ltd (AMC), sponsors and trustee.
Theresearcher has selected five schemes namely HDFC Balanced
Funds(HBF),HDFC growth Funds(HGF), HDFC Equity Funds(HEF), HDFC Tax
Saver(HTS) and HDFC TOP –200(HT200) to find out the performance of these
funds in comparison to the market, their diversification and the relationships
between these funds objectives and their risk characteristics.
It can be observed from the table that HDFC is the bigger partner ofthe AMC
having a share of 60percent while Standard Life Investment limited has share of
40percent2. To consolidate its business HDFC Asset Management Company took
over Zurich Insurance Company (ZIC), the sponsor of Zurich India MF. The AMC
entered into an agreement with ZIC to acquire the said business, subject to
necessary regulatory approvals. After getting necessary clearance, the following
schemes as shown in table were acquired by HDFC mutual funds on June 19,
2003. The schemes were than rechristened as can be observed from table 4.2. It is
evident from the table that in total 8 schemes were acquired by HDFC Mutual
Fund.
71
Sponsors
The sponsors of HDFC Mutual Fund are Housing DevelopmentFinance
Corporation Limited and Standard Life Investments Limited. Bothhave contributed
sum of Rs. one lakh each to the trustee in the corpus of the Fund.
72
Standard Life Investments Limited
Standard Life Investments Limited is wholly owned subsidiary of
Standard Life Investments (Holdings) Limited, which in turn is a wholly
owned subsidiary of Standard Life plc. It is the investment management
company of standard life. It has global assets under management of
approximately US$ 169 billion as at March 31, 2009 and is one of the
world's largest investment company5. It invests money on behalf of five
million institutional and retail clients throughout the world. The company
has its operation in USA, UK, Canada, Korea, Ireland and Australia
making it a truly global investment company.
The Trustee
The function of the trustee is performed by the HDFC Trustee
Company Limited (the "Trustee"). Its prime function is to ensure that the
working of the AMC is being carried out in accordance with the "SEBI (MF)
Regulations". It also reviews the activities carried on by the AMC. After
having a comprehensive discussion about the establishment of HDFC
mutual funds, its organizational structure we will have a look at the
sample funds chosen for the purpose of study. The following sample funds
were chosen taking consideration about their duration of operation and
their investment objectives. Attempts has been made that equal number of
observation is taken to find out the result of empirical analysis.
/ Systematic Transfer Plan (STP)) less than Rs. 5 crore in value, an Entry
74
Application not routed through any
distributor/agent/broker : Nil
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units and
Lock-In-Period Nill
Investment Pattern
The investments under the schemes are made primarily in equityand
equity related instruments as well as in debt and in money market
instruments. The table 4.4 provides the asset allocation of the Scheme's
portfolio.
Asset allocation under the HDFC Balanced Fund Scheme
Sr. No. Type of Instruments Normal (% of Net Risk
Allocation Assets) Profile of
76
Assets) Allocation) Instrument
2 Debt Securities
(including
securitized Low to
40 30 Medium
debt) and Money
Market
instruments
However besides the above mentioned allocation of funds under equityand
debt instruments, the AMC can invest in short term deposits of scheduled
commercial banks as per the investment objectives of the schemes.
Investment Strategy
The investment strategy of HDFC Balanced Fund is aimed atlowering
risk and maximizing return. In pursuance of this it allocates its fund in
ratio of 6:4 in equity and debt respectively7. The Scheme also provides the
Investment Manager to make investments as per the worthiness of the
securities. This means that fund manager can exercise their power and
make changes in assets allocation to meet the investment objectives of the
schemes. As the allocation of the balanced fund is based
77
on the mix of equity and debt their ratio is critical in determining future
returns. A good balance between the two will optimize return and
minimize risks.
Investments in Equity
The investment of HDFC balanced fund in equity is to
generateincomes by investing in select category of assets class. For this, five
principles are followed by the fund manager. They are as follows:
When the rise in value of equity has reached its optimum level
andfurther improvement in the present level is not possible.
78
When other avenues of investments offers better return, or
Debt Investments
Debt securities (in the form of non-convertible debentures,
bonds,secured premium notes, zero interest bonds, deep discount
bonds, floatingrate bond / notes, securitised debt, pass through
certificates, asset backedsecurities, mortgage backed securities and
any other domestic fixedincome securities including structured
obligations etc.) include, but are not
limited to:
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Securities issued by Public / Private sector banks and development
financial institutions.
Commercial papers
Commercial bills
Treasury bills
Certificate of deposit
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ranked high investment grade by authorized rating agency. However if
investment is to be made in unrated security than prior approval of the
committee constituted for the purpose is required. This is in strict
adherence to SEBI circular No. MFD/ CIR/9/120/20008. Furtherapproval
of such investment by the AMC board and the trustee isrequired. The AMC
also required to communicate details of such investments in their
periodical reports to the trustee outlining the parameters adopted to
compile the reports. The investment made in debt are less riskier than
those in equity, money market instruments are even less riskier than debt
instruments. The maturity profile of debt instruments is selected in
accordance with the Fund Managers view regarding current market
conditions, interest rate outlook and the stability of ratings.
Controlling Risk
The portfolio construction of HDFC balanced fund is done in a wayby the
fund manager to maintain the risk at moderate level. The Fund Manager
avoids adopting either a very defensive or aggressive posture at any point
of time. To control risk, portfolio is diversified and adequate level of
liquidity is maintained to mitigate unforeseen circumstances. At the macro
level, continuous review of business and economic environment is carried
out to find out ongoing trend and take corrective measures likewise to
minimize the risk. To earn higher rate of return the fund manager can
make investments in securities and other instruments not mentioned
earlier provided that such investment are in accordance with SEBI
regulations. The table 4.5 gives details of the portfolio of the HDFC
balanced fund as on 31st March 2008. From the table it is evident that the
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total share of equity is 68.59. The reliance industries limited has maximum
of 6.99percent followed by Coramandal Fertilizers Ltd. ICICI Bank Ltd. has
the least share of 3.45 percent. The debt and money market instruments
82
CONCLUSION
83
QUESTIONNAIRE
Q.2. Do you have all materials you need to do your work right?
Q.3. Does you supervisor, or someone at work, seems to care about you as a
person?
Q.6. Do you think present system of Forest Department is beneficial for you?
Q.8. Does your supervisor provide you with feedback & guidance?
84
BIBLIOGRAPHY
www.icici.co.in
www.hdfc.com
www.uti.co.in
www. upgvt.com
iciciwikipedia.com
utiwikipedia.com
hdfcwikipedia.com
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