Executive Summary

The mutual fund is structured around a fairly simple concept, the mitigation of risk through the
spreading of investments across multiple entities, which is achieved by the pooling of a number of
small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate
and prolonged regulatory effort in the history of the country.

According to March 2010, the Indian mutual fund industry has 40 players. The number of public
sector players has reduced from 11 to 5. The public sector has gradually receded into the
background, passing on a large chunk of market share to private sector players.

HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act,
1956, on December 10, 1999, and was approved to act as an Asset Management Company for the
HDFC Mutual Fund by SEBI (The Securities and Exchange Board of India) vide its letter dated
July 3, 2000.

Title of my project is Mutual Funds- Diversified Investments. Main Objective is to study in detail
about Mutual Funds and its investment portfolio. Sub-Objectives are to understand the role of fund
manager in achieving the investment objective by diversifying the portfolio. (Comparing
performance of 3 selective funds).Comparison between growth and dividend option of 5 major
funds. To study mutual fund investment valuation. To study the various types of Mutual Funds,
investment pattern used by the fund managers for various fund, learn how to select a mutual fund
and how mutual funds can be used for financial planning.

Main Findings are Diversification is the main tool used by the fund managers to dilute the risk
factor. Diversification minimizes the concentration of investor’s money in single stock and thus
minimizes the risk. There are mainly three patterns used by the fund managers during investment.
They are: Aggressive plan, Moderate plan, and Conservative plan. Each plan is carefully designed
by taking into account the asset allocation, risk and return and the investors view. The NAV of
Growth option is greater than the dividend option of the fund. As the investor withdraws the
dividend, that portion of the amount is not subject to growth. But in case of growth option the
investor can enjoy the growth of the whole amount. In dividend option, if the investor is able to
use the dividend amount of fund ‘X’ in some other investment and the money can have a growth
more than growth option’s NAV of fund ‘X’. Then it is a good decision to opt for dividend option.
Otherwise, growth option gives better growth of the investment. Fund managers diversify their
portfolio across different industries and maximum weightage is given to those industries which
have growth perspective in the future years. Now, it is banking, software, and consumer non
durables industries that are given more weightage. But, in future fund managers have predicted
that the infrastructure industry will have better prospects.

To conclude mutual fund is a very smart avenue to invest as it is managed by fund managers who
carefully invest in different portfolio, and they diversify risk across the industries.
 Contents
Chapter Contents Page No.

Introduction:

Chapter I a. Need for study

b. Company profile
c. Industry Profile

Objectives:

Chapter II a. Conceptual aspect of mutual fund

b. Objectives
c. Literature Review

Methodology:

Chapter III a. Collection of data

b. Statistical Tools
c. Limitation of study

Analysis of the Study:

a. Comparison between growth and dividend option plan

b. Analysis of fund manager diversification & portfolio
Chapter IV management plan.
• HDFC Top 200
• HDFC Balance Fund
• HDFC High Interest Fund

Chapter V Findings

Chapter VI Conclusion

Chapter VII References

 Chapter I
Introduction

Contents

• Need for study

• Company Profile

• Industry Profile

Need for the Study

The main purpose of doing this project was to know about mutual fund and its functioning. This
helps to know in details about mutual fund industry right from its inception stage, growth and
future prospects.

It also helps in understanding different schemes of mutual funds. Because my study depends upon
prominent funds in India and their schemes like equity, income, balance as well as the returns
associated with those schemes. And how the fund managers diversify risk and obtain maximum
returns.

The project study was done to ascertain the asset allocation, entry load, exit load, associated with
the mutual funds.

Scope of the Study

In my project the scope is limited to some prominent mutual funds in the mutual fund industry. I
analyzed the funds depending on their schemes like equity, income, balance.

My study is mainly concentrated on equity schemes, the returns, in income schemes the rating of
CRISIL, ICRA and other credit rating agencies.

Company Profile
HDFC Asset Management Company Limited (AMC)

HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act,
1956, on December 10, 1999, and was approved to act as an Asset Management Company for the
HDFC Mutual Fund by SEBI vide its letter dated July 3, 2000.

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

In terms of the Investment Management Agreement, the Trustee has appointed the HDFC Asset
Management Company Limited to manage the Mutual Fund. The paid up capital of the AMC is
Rs. 25.161 crore.

The present equity shareholding pattern of the AMC is as follows:

% of the paid up
Particulars equity capital
Housing Development Finance Corporation
Limited 60
Standard Life Investments Limited 40

The AMC is also providing portfolio management / advisory services and such activities are not
in conflict with the activities of the Mutual Fund. The AMC has renewed its registration from
SEBI vide Registration No. - PM / INP000000506 dated December 21, 2009 to act as a Portfolio
Manager under the SEBI (Portfolio Managers) Regulations, 1993. The Certificate of Registration
is valid from January 1, 2010 to December 31, 2012.
The Board of Directors of the HDFC Asset Management Company Limited (AMC) consists of
the following eminent persons.

• Mr. Deepak S. Parekh

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

Sponsors
HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED (HDFC)

HDFC was incorporated in 1977 as the first specialized Mortgage Company in India. HDFC
provides financial assistance to individuals, corporates and developers for the purchase or
construction of residential housing. It also provides property related services (e.g. property
identification, sales services and valuation), training and consultancy. Of these activities, housing
finance remains the dominant activity. HDFC has a client base of around 11 lac borrowers, 10 lac
depositors, over 1.23 lac shareholders and 25,000 deposit agents, as at March 31, 2010.

HDFC had raised funds from international agencies such as the World Bank, IFC (Washington),
USAID, DEG, ADB and KfW, international syndicated loans, domestic term loans from banks
and insurance companies, bonds and deposits. HDFC has received the highest rating for its bonds
and deposits program for the fifteenth year in succession.

STANDARD LIFE INVESTMENTS LIMITED

Standard Life Investments was launched as an investment management company in 1998. It is the
dedicated investment management company of the Standard Life group and is a wholly owned
subsidiary of Standard Life Investments (Holdings) Limited, which in turn is a wholly owned
subsidiary of Standard Life plc.

With global assets under management of approximately US$224 billion (£138.7 billion) as at
December 31, 2009 Standard Life Investments Limited is one of the world's major investment
companies, operating in the UK, Canada, Hong Kong, China, Korea, Ireland and the USA, and is
responsible for investing money on behalf of five million retail and institutional clients worldwide.

Trustees
HDFC Trustee Company Limited, a company incorporated under the Companies Act, 1956 is the
Trustee to HDFC Mutual Fund vides the Trust deed dated June 8, 2000, as amended from time to
time. HDFC Trustee Company Ltd is wholly owned subsidiary of HDFC

The Board of Directors of HDFC Trustee Company Limited consists of the following eminent
persons.

• Mr. Anil Kumar Hirjee

• Mr. Vincent Joseph O’Brien
• Mr. Shishir K. Diwanji
• Mr. Ranjan Sanghi
• Mr. V. Srinivasa Rangan

Registrar & Transfer Agents

 Computer Age Management Services Pvt. Ltd.,
Rayala Towers - I,
158 Anna Salai,
Chennai 600002.
Tel: (+91) 044 2852 0516
Fax: (+91) 044 4203 2952
Website: www.camsonline.com

Custodian

HDFC BANK LIMITED

Kamala Mills Compound,
Senapati Bapat Marg,
Lower Parel,
Mumbai 400 013.
Website: www.hdfcbank.com

CITIBANK N.A.
Ramnord House,
77, Dr. Annie Besant Road,
Worli, Mumbai 400 018.
Website: www.citibank.com

Auditors

DELOITTE HASKINS & SELLS

Chartered Accountants
12, Dr. Annie Besant Road,
Opp. Shiv Sagar Estate,
Worli,
Mumbai 400 018.
Website: www.deloitte.com

Awards

ICRA Mutual Fund Awards 2010

 ICRA Gold Award for 'Best Performance' - Seven Star Fund Ranking

• HDFC Prudence Fund in the category of Open Ended Balanced

• HDFC MF Monthly Income Plan - Long Term Plan in the category of Open Ended
Marginal Equity
• HDFC High Interest Fund - Short Term Plan in the category of Open Ended Debt -
Short Term for three year period

ICRA Five Star Fund Ranking

• HDFC Multiple Yield Fund - Plan 2005

• HDFC MF Monthly Income Plan - Long Term Plan
• HDFC Cash Management Fund - Savings Plan

Lipper Fund Awards 2010

• HDFC Equity Fund - Growth Option was Category (from amongst 53 schemes)
• HDFC Prudence Fund – Growth Option category (from amongst 24 schemes)
• HDFC MF Monthly Income Plan – Long Term Plan - Growth Option category
(from amongst 58 schemes)

CNBC TV18 - CRISIL Mutual Fund Awards 2010

HDFC Top 200 Fund was among the only two schemes that won the “Best Performing Mutual
Fund of the Year” Award # in the Large Cap Oriented Funds category at CNBC TV18 - CRISIL
Mutual Fund Awards 2010 for the calendar year 2009 (from amongst 24 schemes)

HDFC Cash Management Fund - Treasury Advantage Plan was among the only two schemes that
won the “Best Performing Mutual Fund of the Year” Award # in the Ultra Short Term Debt Funds
category at CNBC TV18 - CRISIL Mutual Fund Awards 2010 for the calendar year 2009 (from
amongst 28 schemes)

Mutual fund industry and structure

Some facts for the growth of mutual funds in India
 • Mutual funds have seen 100% growth in the last 6 years.

• Number of foreign AMC's are in the queue to enter the Indian markets like Fidelity
Investments, US based, with over US$1trillion assets under management worldwide.

• Our saving rate is over 23%, highest in the world. Only channelizing these savings in
mutual funds sector is required.

• We have approximately 29 mutual funds which is much less than US having more than
800. There is a big scope for expansion.

• 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are
concentrating on the 'A' class cities. Soon they will find scope in the growing cities.

• Mutual fund can penetrate rural like the Indian insurance industry with simple and limited
products.

• SEBI allowing the MF's to launch commodity mutual funds.

• Emphasis on better corporate governance.

• Trying to curb the late trading practices.

• Introduction of Financial Planners who can provide need based advice.

According to March 2010, the Indian mutual fund industry has 40 players. The number of public
sector players has reduced from 11 to 5. The public sector has gradually receded into the
background, passing on a large chunk of market share to private sector players.
The Association of Mutual Funds in India (AMFI) is the industry body set up to facilitate the
growth of the Indian mutual fund industry. It plays a pro-active role in identifying steps that need
to be taken to protect investors and promote the mutual fund sector. It is noteworthy that AMFI is
not a Self-Regulatory Organisation (SRO) and its recommendations are not binding on the industry
participants. By its very nature, AMFI has an advisor’s or a counsellor’s role in the mutual fund
industry. Its recommendations become mandatory if and only if the Securities and Exchange Board
of India (SEBI) incorporates them into the regulatory framework it stipulates for mutual funds.

The Indian mutual fund industry follows a 3-tier structure as shown below:

Sponsor
s

Trust

Asset Management Company

Let’s understand what each of these terms means and their roles in the mutual fund industry.

1. Sponsors
They are the individuals who think of starting a mutual fund. The Sponsor approaches SEBI, the
market regulator and also the regulator for mutual funds. Not everyone can start a mutual fund.
SEBI will grant a permission to start a mutual fund only to a person of integrity, with significant
experience in the financial sector and a certain minimum net worth. These are just some of the
factors that come into play.

2. Trust
Once SEBI is satisfied with the credentials and eligibility of the proposed Sponsors, the Sponsors
then establish a Trust under the Indian Trust Act 1882. Trusts have no legal identity in India and
thus cannot enter into contracts. Hence the Trustees are the individuals authorized to act on
behalf of the Trust. Contracts are entered into in the name of the Trustees. Once the Trust is
created, it is registered with SEBI, after which point, this Trust is known as the mutual fund.

3. Asset Management Company (AMC)

The Trustees appoint the AMC, which is established as a legal entity, to manage the investor’s
(unit holder’s) money. In return for this money management on behalf of the mutual fund, the
AMC is paid a fee for the services provided. This fee is to be borne by the investors and is
deducted from the money collected from them.
The AMC has to be approved by SEBI and it functions under the supervision of its Board of
Directors, and also under the direction of the Trustees and the regulatory framework established
by SEBI. It is the AMC, which in the name of the Trust, that floats new schemes and manages
these schemes by buying and selling securities.

Apart from these parties, we also have the following:

1. Custodian
The Custodian maintains the custody of the securities in which the scheme invests. It also keeps a
tab on corporate actions such as rights, bonus and dividends declared by the companies in which
the fund has invested. The Custodian is appointed by the Board of Trustees. The Custodian also
participates in a clearing and settlement system through approved depository companies on behalf
of mutual funds, in case of dematerialized securities.

2. Transfer Agents
Registrar and Transfer Agents (RTAs) maintain the investor’s (unit holder’s) records, reducing the
burden on the AMCs.

A comprehensive structure of a mutual fund appears as depicted in the chart below:

SEBI Regulations

Shareholding Sponsors Trust deed

AMC Trustees
Mutual I M agreement
Fund
Transfer Agent
Custodian

Unit Holders
 Chapter II
Objectives

Contents:

• Conceptual aspect of mutual Fund

• Objectives

Conceptual aspect of mutual Fund

Mutual Fund

A mutual fund is an investment vehicle which pools investors’ money and invests the same for
and on behalf of investors, into stocks, bonds, money market instruments and other assets. The
money is received by the AMC with a promise that it will be invested in a particular manner by a
professional manager (commonly known as fund managers). The fund managers are expected to
honor this promise. The SEBI and the Board of Trustees ensure that this actually happens.

The organization that manages the investments is the Asset Management Company (AMC). The
AMC employs various employees in different roles who are responsible for servicing and
managing investments. The AMC offers various products (schemes/funds), which are structured
in a manner to benefit and suit the requirement of investors’. Every scheme has a portfolio
statement, revenue account and balance sheet.

Some less known facts about Mutual Funds:

➢ Mutual Funds perform well even during market downfall. This is because of the investment
decisions taken by the AMC. The SENSEX considers the trading in only 30 indices and
decides the market volatility. But MF’s on the other hand invest in the top 300 indices and
not just the 30 which BSE considers. Therefore even when the SENSEX falls, the MF’s
outperform i.e. they give good returns because not all 300 companies register a fall at a
time.

➢ The returns given by Mutual Funds Equity related funds the tax on long term growth is tax
free. While Income schemes/FMPs bear a tax rate of 22.115% for short term(less than a
year) and for a long term (more than a year) it is 11.22% and if dividend is distributed, it
is 14.16% at TDS and in the hands of investor it is TAX FREE, whereas the amount
deposited in fixed deposits of the Banks on maturity have to pay a tax rate of
33.3%(depending on the depositors IT slab). Thus the investors who invest in MF’s earn a
tax benefit over the investors in bank.

Typical classification of mutual fund schemes on various bases:

  Tenor

Tenor refers to the ‘time’. Mutual funds can be classified on the basis of time as under;

1. Open ended funds

These funds are available for subscription throughout the year. These funds do not have a fixed
maturity. Investors have the flexibility to buy or sell any part of their investment at any time, at
the prevailing price (Net Asset Value - NAV) at that time.
We can buy and sell at any point of time. But if we do so before maturity we must bear the exit
load.

2. Close Ended funds

These funds begin with a fixed corpus and operate for a fixed duration. These funds are open for
subscription only during a specified period. When the period terminates, investors can redeem
their units at the prevailing NAV. Some closed ended funds are converted into open ended fund
after certain lock-in period. (egg: HDFC Tax saver)

 Asset classes

1. Equity funds
These funds invest in shares. These funds may invest money in growth stocks, momentum stocks,
value stocks or income stocks depending on the investment objective of the fund. These funds are
volatile in nature and gives higher returns.
(eg: HDFC Equity fund and HDFC Growth fund)

Performance of Top Equity

Funds
Equity Diversified

Asset Size NAV

(in cr.) (Rs./unit) 1wk 1mth 3mth 6mth 1yr 2yr 3yr

ICICI Pru Discovery Fund 1,083.58

(G) 45.57 0.7 8.2 7.8 14 68.8 83 61.3
IDFC Small&Midcap Eqty - 686.89
G 17.33 2 8.8 8.2 15.2 54.3 93 --
IDFC Premier Equity - A 1,376.30
(G) 29.92 2.2 11.7 9.1 14.9 54.7 59 77.5
384.83
Birla SL Dividend Yield (G) 78.82 1.7 8.5 11.7 14.5 53.1 86 68
DSP-BR Small & Mid Cap - 847.67
RP (G) 16.65 2.3 9.2 10 14.3 64.6 69 45.7

Equity Tax Saver

 Asset Size NAV
(in cr.) (Rs./unit) 1wk 1mth 3mth 6mth 1yr 2yr 3yr
Can Robeco Eqty TaxSaver 174.14
(G) 24.37 1 6.8 5.7 12.3 43.3 72 63.8
1,159.48
ICICI Pru Tax Plan (G) 131.7 1.6 8.6 4.4 9.4 55 50 43.8
2,465.31
HDFC Tax Saver (G) 216.1 1.6 8.9 5.3 10.1 48.9 64 39.4
97.58
Religare Tax Plan (G) 16.58 0.9 9.3 6.1 10.4 46 60 57.6
1,155.62
Fidelity Tax Advantage (G) 20.41 1.5 10.4 8.3 12.5 46.4 54 45

2. Debt funds or Income funds

These funds invest money in bonds and money market instruments. These funds may invest
into/long-term and/or short-term maturity bonds. They give lower returns, these returns are the
interest on debentures. Debt funds are suggestible to retired individuals and companies who want
to make short term investments.( eg: HDFC High Interest Fund)
Top Funds in Debt Category

Debt Short –Term

Asset Size(in NAV
cr.) (Rs./unit) 1wk 1mth 3mth 6mth 1yr 2yr 3yr
IDFC SSIF -MTP - RP A (G) 58.92 16.07 0.2 0.4 2.9 4.9 9.6 24 32.6
Kotak Bond (Deposit) (G) 40.8 25.26 0.1 -0.9 3.5 4.4 6.5 26 34.3
Can Robeco Income (G) 215.44 19.93 -- 0.1 2.6 2.9 5.3 36 47.4
Fortis Flexi Debt Fund-RP (G) 322.72 16.15 0.1 0.1 1.5 2.9 5.1 26 36.9
HDFC High Interest - STP (G) 3,891.48 18.7 0.2 0.3 1.7 3.3 7.2 22 34

Debt Long –Term

Asset Size(in NAV
cr.) (Rs./unit) 1wk 1mth 3mth 6mth 1yr 2yr 3yr
Birla Sun Life GSec - LTF (G) 86.42 27.45 0.1 0.3 5.7 7 11.9 37 36.6
ICICI Pru Gilt Inv Plan - PF 79.17 18.49 -- 0.2 1.4 1.9 2.5 44 55.2
Templeton (I) ST Income (G) 4,991.56 1,876.90 0.1 0.4 1.7 3.4 8.7 23 33.8
DSP-BR Govt. Sec. (G) 68.75 32.72 0.2 0.1 3.2 3.9 4.5 33 40.5
Birla SL Dynamic Bond -RP
(G) 8,611.67 15.72 0.2 0.4 1.5 3.3 7 21 34

3. Hybrid funds

These funds invest in a mix of both equity and debt. In order to retain their equity status for tax
purposes, they generally invest at least 65% of their assets in equities and roughly 35% in debt
instruments, failing which they will be classified as debt oriented schemes and be taxed
accordingly. Monthly Income Plans (MIPs) fall within the category of hybrid funds. MIPs invest
up to 25% into equities and the balance into debt.

4. Real asset funds

These funds invest in physical assets such as gold, platinum, silver, oil, commodities and real
estate. Gold Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs) fall within
the category of real asset funds.(eg: HDFC Infrastructure Fund)

 Investment Philosophy

1. Diversified Equity Funds

These funds diversify the equity component of their Asset Under Management (AUM), across
various sectors. Such funds avoid taking sectoral bets i.e. investing more of their assets towards a
particular sector such as oil & gas, construction, metals etc. Thus, they use the diversification
strategy to reduce their overall portfolio risk.

2. Sector Funds
These funds are expected to invest predominantly in a specific sector. For instance, a banking fund
will invest only in banking stocks. Generally, such funds invest 65% of their total assets in a
respective sector.

3. Index Funds
These funds seek to have a position which replicates the index, say BSE Sensex or NSE Nifty.
They maintain an investment portfolio that replicates the composition of the chosen index, thus
following a passive style of investing.

4. Exchange Traded Funds (ETFs)

These funds are open-ended funds which are traded on the exchange (BSE / NSE). These funds
are benchmarked against the stock exchange index. For example, funds traded on the NSE are
benchmarked against the Nifty. The Benchmark Nifty BeES is an example of an ETF which links
to the stocks in the Nifty. Unlike an index fund where the units are traded at the day’s NAV, in
ETFs (since they are traded on the exchange) the price keeps on changing during the trading hours
of the exchange. If you as an investor want to buy or sell ETF units, you can do so by placing
orders with your broker, who will in-turn offer a two-way real time quote at all times. The AMC
does not offer sale and re-purchase for the units. Today, ETFs are available for pre-specified
indices. (eg: HDFC Gold ETF)

5. Fund of Funds (FOF)

These funds invest their money in other funds of the same mutual fund house or other mutual fund
houses. They are not allowed to invest in any other FOF and they are not entitled to invest their
assets other than in mutual fund schemes/funds, except to such an extent where the fund requires
liquidity to meet its redemption requirements, as disclosed in the offer document of the FOF
scheme.

6. Fixed Maturity Plan (FMP)

These funds are basically income/debt schemes like Bonds, Debentures and Money market
instruments. They give a fixed return over a period of time. FMPs are similar to close ended
schemes which are open only for a fixed period of time during the initial offer. However, unlike
closed ended schemes where your money is locked for a particular period, FMPs give you an
option to exit. Remember though, that this is subject to an exit load as per the funds regulations.
FMPs, if listed on the exchange, provide you with an opportunity to liquidate by selling your units
at the prevailing price on the exchange. FMPs are launched in the form of series, having different
maturity profiles. The maturity period varies from 3 months to one year.

 Geographic Regions

1. Country or Region Funds

These funds invest in securities (equity and/or debt) of a specific country or region with an
underlying belief that the chosen country or region is expected to deliver superior performance,
which in turn will be favourable for the securities of that country. The returns on country fund are
affected not only by the performance of the market where they are invested, but also by changes
in the currency exchange rates.

2. Offshore Funds
These funds mobilize money from investors for the purpose of investment within as well as outside
their home country. So we have seen that funds can be categorized based on tenor, investment
philosophy, asset class, or geographic region. Now, let’s get down to simplifying some jargon with
the help of a few definitions, before getting into understanding the nitty-gritty of investing in
mutual funds.
Advantages of investing in mutual funds

While everyone fantasizes about investing in the stock markets and is passionate about investing
in stocks, what’s more important is; how smartly are these investments done.

One can invest in the stock markets either through the direct route i.e. stocks or through the indirect
route i.e. mutual funds.

Both have their own pros and cons, and so it’s important for us to understand both routes before
embarking on an investment spree.

If an investor has a profound insight into stocks and investments with the requisite time and skill
to analyze companies, then he can surely begin independent stock-picking. However, if an investor
lacks any one or all these pre-requisites, then he’s better off investing in stocks through the indirect
route i.e. through mutual funds. Mutual funds offer several important advantages over direct stock
picking.

1. Diversification
• Investing in stocks directly has one serious drawback - lack of diversification. By putting
your money into just a few stocks, you can subject yourself to considerable risk.
• Decline in a single stock can have an adverse impact on your investments, damaging the
returns of your portfolio. A mutual fund, by investing in several stocks, tries to overcome
the risk of investing in just 3-4 stocks.
• By holding say, 15 stocks, the fund avoids the danger of one rotten apple spoiling the whole
portfolio.
• A diversified portfolio may thus fall to a lesser extent, even if a few stocks fall dramatically.
Also, a mutual fund’s NAV may certainly drop, but mutual funds tend to not fall as freely
or as easily as stocks.
• The legal structure and stringent regulations that bind a mutual fund do a very good job of
safeguarding investor interest.

2. Professional management
• Active portfolio management requires not only sound investment sense, but also
considerable time and skill.
• Track of the prospects and potential of the companies in the mutual fund portfolio are
maintained by skilled research professionals appointed by the mutual fund houses,
professionals whose job it is to continuously research and monitor these companies.
3. Lower entry level
There are very few quality stocks today that investors can buy with Rs. 5,000 in hand. This
is especially true when valuations are expensive. Sometimes, with as much as Rs 5,000
you can buy just a single stock. In the case of mutual funds, the minimum investment
amount requirement is as low as Rs. 500. This is especially encouraging for investors who
start small and at the same time take exposure to the fund’s portfolio of 20-30 stocks.
Minimum investments:
• 5000/- lumpsum
• 1000/- through SIP
• 500/- Tax free scheme

4. Economies of scale
By buying a handful of stocks, the stock investors lose out on economies of scale. This
directly impacts the profitability of portfolio. If investors buy or sell actively, the impact
on profitability would be that much higher. On the other hand, in case of mutual funds,
frequent voluminous purchases/sales results in proportionately lower trading costs than
individuals thus translating into significantly better investment performance.

5. Innovative plans/services for investors

• By investing in the stock market directly, investors deprive themselves of various
innovative plans offered by fund houses.
• For example, mutual funds offer automatic re-investment plans, systematic investment
plans (SIPs), systematic withdrawal plans (SWPs), asset allocation plans, and triggers etc.,
tools that enable you to efficiently manage your portfolio from a financial planning
perspective too.
• These features allow you to enter/exit funds, or switch from one fund to another, seamlessly
-something that will probably never be possible in case of stocks.

6. Liquidity
• A stock investor may not always find the liquidity in a stock to the extent they may want.
• There could be days when the stock is hitting an upper/lower circuit, thus curtailing
buying/selling. Further, if an investor is invested in a penny stock, he may find it difficult
to get out of it.
• On the other hand, mutual funds offer some much required liquidity while investing. In
case of an open-ended fund, you can buy/sell at that day's NAV by simply approaching the
fund house directly, or by approaching your mutual fund distributor or even by transacting
online.
• As highlighted above, investing in mutual funds has some unique benefits that may not be
available to stock investors. However by no means are we insinuating that mutual fund
investing is the only way of clocking growth. This can also be done even by investing
directly into the right stocks. However, mutual funds offer the investor a relatively safer
and surer way of picking growth minus the hassle and stress that has become synonymous
with stocks over the years.
 • On account of the aforementioned advantages which mutual funds offer, they (mutual
funds) have emerged as immensely popular asset class, especially for retail investor, and
for the investor looking for growth with lower risks.

Disadvantages of investing in Mutual Funds:

• Some funds charge hefty fees, leading to lower overall returns.

• Over time, statistics have shown that most actively managed funds tend to underperform
their benchmark averages
• Mutual Funds cannot be bought or sold during regular trading hours, but instead are priced
just once per day.

How mutual funds can be used for financial Planning

“This time, like all other times, is a very good time, if we but know what to do with it."
- Ralph Waldo Emerson
Financial Planning couldn’t have been summed up better; to put it simply it allows an investor to
know today what is required for achieving financial goals tomorrow.

A financial plan helps an investor in the following ways:

1. Enabling investors to identify his goals and investment needs

2. Understand the various financial products with respect to their risk, return, liquidity and
maturity profile
3. Combine the features of financial products with the investor’s financial needs and determine
appropriate mix of investments, technically referred to as asset allocation
4. Suggest suitable instruments as part of asset allocation Mutual fund allows a financial planner
to enhance the effectiveness of his financial plan in the following fashion:

1. Diversification

Diversification as practiced in financial planning can be done at three levels by assets,

investment style and management style.
a. Diversification of assets – Assets can be diversified on many levels for example holding a
mix of stocks, bonds and cash. Possibly then by geographic sector taking advantage of
global opportunities and the fact that if one economy is weak, another is strong. And then
by economic sector, to include a variety of industries, because when one industry is slowing
down, another is picking up. Each of these diversifications will serve to increase returns
and reduce risk.

b. Diversification of styles - Each asset class is then diversified into multiple investment styles
– such as growth, value, and opportunities.

c. Diversification of managers - Portfolio returns can be enhanced by using multiple

managers with complementary investment styles who react in their own ways to varying
market conditions. However, we opine investors not to provide primacy to the fund managers
in the diversification criteria.

Asset Allocation
Except for the most conservative portfolios which do not hold equities, every portfolio should be
diversified to hold all major assets classes:

a. Cash for security and liquidity, so that one can take advantage of opportunities as they arise
b. Bonds, to help preserve capital and provide a steady income
c. Stocks, for growth to help you beat inflation and counter the impact of taxes
d. Real estate, because of their low correlation with stocks and bonds
e. Gold, for its ability to be a hedge against uncertainties
An important inference could be, that one should spend considerable amount of time and energy
in choosing a tailor made or customized asset allocation strategy. Once the strategy is in place,
then the next important action point would be the instruments to fulfill the role of respective asset
classes.

2. Portfolio Strategy

Most portfolios are structured with 5 financial objectives in mind:

a. Growth
b. Income
c. Inflation protection
d. Peace of mind and preservation of capital
e. Minimize taxes
A financial planner has to balance the importance of each of these, and keep them in mind as he
goes about structuring a portfolio. There is no such thing as an optimal balance that’s right for
everyone. The balance is a personal choice depending on the relative importance of these factors
for a given investor. While doing financial planning through mutual funds, one must try to answer
the following questions.

a. Towards what objective/goal is the investor allocating his money

Knowing the objective of investing enables the investor to select the right options offered by a
mutual fund house. For example, if an individual has a long term objective, then he may go in for
a long term equity fund and for investors with short term objectives or needing intermediate
returns, a liquid fund is the right option.

b. What is the time horizon?

Time horizon refers to, when does the investor want to enjoy the fruit of investment? This
ascertainment is critical because both, the risk and the reward of investments can vary according
to the time horizon. Generally, a longer horizon allows for more aggression in investment. The
less time, the more one needs to avoid risk.

c. What is the risk tolerance of the investor?

There is a risk-reward continuum running from cash to bonds to stocks. Returns are
commensurate with the risk someone is willing to tolerate. Risk has other dimensions investor to
replace capital. If not earning any income, replacing lost capital will be difficult, which means a
more conservative approach. Other considerations could be the present financial situation,
estate planning and level of taxation. One other important factor is age. As a general rule, the
younger one is, the more aggressive someone can afford to be with their investment portfolio.
This is because the investor has more time to recover from any possible setbacks in the value of
the portfolio.

3. Rebalancing

Rebalancing is the action of bringing a portfolio of investments that has deviated away from
target asset allocation. The goal of rebalancing is to move the current asset allocation back in
line to the originally planned asset allocation. Rebalancing is primarily warranted under
conditions where the returns have significantly deviated than expected or to stay in line with
market conditions. For example, an equity heavy portfolio needs to be restructured in
contraction phases where company profits are hit harder and interest rates move up. It could be
done by moving a portion of equity holdings to debt instruments. Mutual funds probably allow
the easiest window to rebalancing due to their diversity of offerings.

A case would help to understand better on rebalancing.

Mr. X has planned for his son’s marriage in 2020, for which the estimated cost in 2020 would be
Rs 1.7 crores. In 2010 he is advised to invest Rs 70,000 in equity and Rs 30,000 in Debt assuming
an average return of 12% for equity and 5% for debt the expected value of investments at year end
would be 78,400 for equity and 31,500 for debt. At year end, at 8%, the equity markets performed
worse than expected and at 14% the debt markets performed better than expected. Hence, the
portfolio value, instead of the planned Rs 109,900 ended up as Rs 109,800.
Consequently, the ratio of debt to equity changed from the original 70:30 to 69:31. To rebalance
the portfolio, Mr. X has to liquidate his debt holdings by Rs 2,700 and invest in equity and also
add Rs 100 cash from his own personal reserves.

4. Tax efficiency

Where mutual funds score head and shoulder over other instruments in a financial planner’s eyes
is when it comes to tax efficiency and reduction in transaction charges. Imagine a scenario where
a person holds the individual stocks BSE-Sensex in the same proportion as it is meant to be and
another person holds a unit of an index fund. The chances are that the Mutual Fund unit holder
would be a happier person for the fact that:

a. The mutual fund unit holder is safe from transaction fees the stockholder might have to pay for
using his DEMAT account for equity trading
b. The incidence of capital gains tax would be zero for a mutual fund holder as it is the fund which
is involved in equity trading and that equity trading is considered primary business and hence is
exempt

c. Dividends declared by equity-oriented funds (i.e. mutual funds with more than 65% of assets in
equities) are tax-free in the hands of investor. There is also no dividend distribution tax
applicable on these funds under section 115R. Diversified equity funds, sector funds, balanced
funds are examples of equity-oriented funds.
Thus, mutual funds allow the financial planner to align the investment goals on the mantra of
DIVERSIFICATION + PATIENCE = SUCCESS
To invest prudently in a mutual fund, one can taking into the account the following 10 pointers for
the concluding quick read.

How to select a mutual fund

The increased number of New Fund Offerings (NFOs) lately has led also to an increased dilemma
in the mind of investors. Investors often get confused when it comes to selecting the right fund
from the plethora of funds available. Many investors also feel that 'any' mutual fund can help them
achieve their desired goals. But the fact is, not all mutual funds are same. There are various aspects
within a fund that an investor must carefully consider before short-listing it for making
investments. These aspects which were briefly covered in the Path to Knowledge section are given
in a little more detail below:

 Performance
The past performance of a fund is important in analyzing a mutual fund. But, as learnt earlier past
performance is not everything. It just indicates the fund’s ability to clock returns across market
conditions. And, if the fund has a well-established track record, the likelihood of it performing
well in the future is higher than a fund which has not performed well.

Under the performance criteria, we must make a note of the following:

1. Comparisons:

A fund’s performance in isolation does not indicate anything. Hence, it becomes crucial to
compare the fund with its benchmark index and its peers, so as to deduce a meaningful
inference. Again, one must be careful while selecting the peers for comparison. For
instance, it doesn’t make sense comparing the performance of a mid-cap fund to that of a
largecap.

2. Time period:
 It’s very important that investors have a long term (atleast 3-5 years) horizon if they wish
to invest in equity oriented funds. So, it becomes important for them to evaluate the long
term performance of the funds. However this does not imply that the short term
performance should be ignored. Besides, it is equally important to evaluate how a fund has
performed over different market cycles (especially during the downturn). During a rally it
is easy for a fund to deliver above-average returns; but the true measure of its performance
is when it posts higher returns than its benchmark and peers during the downturn.
Remember.

3. Returns:

Returns are obviously one of the important parameters that one must look at while
evaluating a fund. But remember, although it is one of the most important, it is not the only
parameter. Many investors simply invest in a fund because it has given higher returns. In
our opinion, such an approach for making investments is incomplete. In addition to the
returns, investors must also look at the risk parameters, which explain how much risk the
fund has taken to clock higher returns.

4. Risk:

We have seen in our Definitions section and on our Path to Knowledge, that risk is
normally measured by Standard Deviation (SD). SD signifies the degree of risk the fund
has exposed its investors to. From an investor’s perspective, evaluating a fund on risk
parameters is important because it will help to check whether the fund’s risk profile is in
line with their risk profile or not.
For example, if two funds have delivered similar returns, then a prudent investor will invest in the
fund which has taken less risk i.e. the fund that has a lower SD.

5. Risk-adjusted return:

This is normally measured by Sharpe Ratio. It signifies how much return a

fund has delivered vis-à-vis the risk taken. Higher the Sharpe Ratio better is the fund’s
performance. From an investor’s perspective, it is important because they should choose a
fund which has delivered higher risk-adjusted returns. In fact, this ratio tells us whether the
high returns of a fund are attributed to good investment decisions, or to higher risk.

6. Portfolio Concentration:

Funds that have a high concentration in particular stocks or sectors tend to be very risky
and volatile. Hence, investors should invest in these funds only if they have a high risk
appetite. Ideally, a well diversified fund should hold no more than 40% of its assets in its
top 10 stock holdings. Remember: Make sure your fund does not put all its eggs in one
basket.
 7. Portfolio Turnover:

The portfolio turnover rate measures the frequency with which stocks are
bought and sold. Higher the turnover rate, higher the volatility. The fund might not be able to
compensate the investors adequately for the higher risk taken. Remember: Invest in funds with a
low turnover rate if you want lower volatility.

 Fund Management

The performance of a mutual fund scheme is largely linked to the fund manager and his team.
Hence, it’s important that the team managing the fund should have considerable experience in
dealing with market ups and downs. As mentioned earlier, investors should avoid fund’s that owe
their performance to a ‘star’ fund manager. Simply because if the fund manager is present today,
he might quit tomorrow, and hence the fund will be unable to deliver its ‘star’ performance without
its ‘star’ fund manager. Therefore, the focus should be on the fund houses that are strong in their
systems and processes. Remember: Fund houses should be process-driven and not 'star' fund
manager driven.

 Costs

If two funds are similar in most contexts, it might not be worth buying the high cost fund if it is
only marginally better than the other. Simply put, there is no reason for an AMC to incur higher
costs, other than its desire to have higher margins.

The two main costs incurred are:

1. Expense Ratio:
Annual expenses involved in running the mutual fund include administrative
costs, management salary, overheads etc. Expense Ratio is the percentage of assets that go
towards these expenses. Every time the fund manager churns his portfolio, he pays a brokerage
fee, which is ultimately borne by investors in the form of an Expense Ratio.
Remember: Higher churning not only leads to higher risk, but also higher cost to the investor.

2. Exit Load:
Due to SEBI’s recent ban on entry loads, investors now have only exit loads to worry
about. An exit load is charged to investors when they sell units of a mutual fund within a
particular tenure; most funds charge if the units are sold within a year from date of
purchase. As exit load is a fraction of the NAV, it eats into your investment value.
Remember: Invest in a fund with a low expense ratio and stay invested in it for a longer
duration. Among the factors listed above, while few can be easily gauged by investors,
there are others on which information is not widely available in public domain. This makes
analysis of a fund difficult for investors and this is where the importance of a mutual fund
advisor comes into play.
Investment Pattern used by the fund managers

Aggressive Plan:

 This plan has 60-70% of growth schemes that is purely equities which helps the
investor’s money to grow over years.
 10-20% of the fund is in balanced schemes which have both debt and equities in
certain proportions.
 10-15% is in income schemes which give timely interest on debt funds.
Moderate Plan:

 This plan has 30-40% of growth schemes that is equities, because here the investor
is not ready to take higher risk.
 40-50% of the fund is in balanced schemes which have both debt and equities in
certain proportions. Here the fund manager balances the fund such that he gets
maximum returns and manages the risk.
 20% are in income schemes which give timely interest on debt funds.
Conservative Plan:

 This plan has 10% of growth schemes that is equities, because here the investor
wants very low amount of risk.
 Balanced fund is 20-30% because even balanced fund has some amount of risk, so
to reduce risk it is taken in small portion.
 50-60% is in income schemes which give timely interest on debt funds, which the
retired investors expect.
Investment Valuation of Mutual Funds

1. Net Asset Value (NAV)

NAV is the sum total of all the assets of the mutual fund (at market price) less the liabilities (fund
manager fees, audit fees, registration fees among others); divide this by the number of units and
you arrive at the NAV per unit of the mutual fund.

NAV (per unit) =Net Assets of the scheme / No. of units of the scheme

Eg: Total Assets = 20, 00,000

No. of units= 20,000

NAV= 20, 00,000/20,000= 100

2. Standard Deviation (SD)

SD is the measure of risk taken by, or volatility borne by, the mutual fund. Mathematically
speaking, SD tells us how much the values have deviated from the mean (average) of the values.
SD measures by how much the investor could diverge from the average return either upwards or
downwards. It highlights the element of risk associated with the fund. The SD is calculated by
using returns of the scheme i.e. Net Asset Value (NAV).

A fund that has consistent 4 year return of 3% would have a mean of 3%. The S.D for this fund
would then be zero because the fund’s return in any given year does not differ from its four year
mean of 3%. On the other hand the fund that returned in each of last four years -4%, 17%, 2%, and
30% will have a mean return of 11% the fund will also exhibit a high S.D because each the return
differs from the mean return, this fund is therefore more risky because it fluctuates.

3. Sharpe Ratio (SR)

SR is a measure developed to calculate risk-adjusted returns. It measures how much return you
can expect over and above a certain risk-free rate (for example, the bank deposit rate), for every
unit of risk (i.e. Standard Deviation) of the scheme. Statistically, the Sharpe Ratio is the difference
between the annualized return (Rib) and the risk-free return (Rf) divided by the Standard Deviation
(SD) during the specified period.

Sharpe Ratio = (Rib-Rf)/SD.

Higher the magnitude of the Sharpe Ratio, higher is the performance rating of the scheme.
 4. Compounded Annual Growth Rate (CAGR)

It means the year-over-year growth rate of an investment over a specified period of time.
Mathematically it is calculated as under:
1
CAGR= Ending Value
# of years
Beginning Value -1

Eg: 1 Jan 2004 NAV of a fund is 10 and 31 Dec 2004 NAV is 14. What is the compounded return
per annum

CAGR = [(14/10)1/2]-1
=.1832
=18.32%

5. Absolute Returns

These are the simple returns, i.e. the returns that an asset achieves, from the day of its purchase to
the day of its sale, regardless of how much time has elapsed in between. This measure looks at the
appreciation or depreciation that an asset - usually a stock or a mutual fund – achieves over the
given period of time. Mathematically it is calculated as under:

Ending Value – Beginning Value x 100

Beginning Value

According to above example:

=[(14-10)/14]*100
=28.57%

6. Beta
Beta determines the volatility or risk of a fund in comparison to that of its index or benchmark.
Fund with a beta very close to 1 means the fund’s performance closely matches the index or
benchmark. A beta greater than 1 indicates greater volatility than the overall market. A beta less
than 1 indicates less volatility.

If a fund has a beta of 1.1 in relation to the Sensex the fund has been moving 10% more than the
index. Therefore if the Sensex increased 20% the fund would be expected to increase 22% on the
other hand a fund with a beta of 2.4 would be expected to move 2.4 times more than its
corresponding index. So, if the Sensex moved 20% the fund would be expected to rise 48% and if
the Sensex declined 10% the fund would be expected to lose 24%
Title of the Project: Mutual Funds- Diversified Investments.

Objectives:
Main Objective: To study in detail about Mutual Funds and its investment portfolio.

Sub-Objectives:

1. To understand the role of fund manager in achieving the investment objective by

diversifying the portfolio. (comparing performance of 3 selective funds)
2. Comparison between growth and dividend option of 5 major funds.
3. To study mutual fund investment valuation.
4. To study the various types of Mutual Funds, investment pattern used by the fund
managers for various fund, learn how to select a mutual fund and how mutual funds
can be used for financial planning.

Literature Review:
LITERATURE REVIEW

Literature on mutual fund performance evaluation is enormous. A few research studies that have
influenced the preparation of this paper substantially are discussed in this section.

Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance.
Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has
suggested a new predictor of mutual fund performance, one that differs from virtually all those
used previously by incorporating the volatility of a fund's return in a simple yet meaningful
manner.

Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance (Jensen’s

alpha) that estimates how much a manager’s forecasting ability contributes to fund’s returns. As
indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the portfolio
over the return of the benchmark index, where the portfolio is leveraged to have the benchmark
index’s standard deviation.

S.Narayan Rao, et. al., evaluated performance of Indian mutual funds in a bear market through
relative performance index, risk-return analysis, Treynor’s ratio, Sharpe’s ratio, Sharpe’s measure
, Jensen’s measure, and Fama’s measure. The study used 269 open-ended schemes (out of total
schemes of 433) for computing relative performance index. Then after excluding funds whose
returns are less than risk-free returns, 58 schemes are finally used for further analysis. The results
of performance measures suggest that most of mutual fund schemes in the sample of 58 were able
to satisfy investor’s expectations by giving excess returns over expected returns based on both
premium for systematic risk and total risk.

Bijan Roy, et. al., conducted an empirical study on conditional performance of Indian mutual
funds. This paper uses a technique called conditional performance evaluation on a sample of
eighty-nine Indian mutual fund schemes .This paper measures the performance of various mutual
funds with both unconditional and conditional form of CAPM, Treynor- Mazuy model and
Henriksson-Merton model. The effect of incorporating lagged information variables into the
evaluation of mutual fund managers’ performance is examined in the Indian context. The results
suggest that the use of conditioning lagged information variables improves the performance of
mutual fund schemes, causing alphas to shift towards right and reducing the number of negative
timing coefficients.

Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In this
paper, measures of evaluating portfolio performance based on lower partial moment are developed.
Risk from the lower partial moment is measured by taking into account only those states in which
return is below a pre-specified “target rate” like risk-free rate.

Kshama Fernandes(2003) evaluated index fund implementation in India. In this paper, tracking
error of index funds in India is measured .The consistency and level of tracking errors obtained by
some well-run index fund suggests that it is possible to attain low levels of tracking error under
Indian conditions. At the same time, there do seem to be periods where certain index funds appear
to depart from the discipline of indexation.

K. Pendaraki et al. studied construction of mutual fund portfolios, developed a multi-criteria

methodology and applied it to the Greek market of equity mutual funds. The methodology is based
on the combination of discrete and continuous multi-criteria decision aid methods for mutual fund
selection and composition. UTADIS multi-criteria decision aid method is employed in order to
develop mutual fund’s performance models. Goal programming model is employed to determine
proportion of selected mutual funds in the final portfolios.
Zakri Y. Bello (2005) matched a sample of socially responsible stock mutual funds matched to
randomly select conventional funds of similar net assets to investigate differences in characteristics
of assets held, degree of portfolio diversification and variable effects of diversification on
investment performance. The study found that socially responsible funds do not differ significantly
from conventional funds in terms of any of these attributes. Moreover, the effect of diversification
on investment performance is not different between the two groups. Both groups underperformed
the Domini 400 Social Index and S & P 500 during the study period.
 Chapter III
Methodology

Contents:

a. Collection of data
a. Primary Data
b. Secondary Data

b. Statistical Tools
a. Graphs
b. Charts

c. Limitation of study
Collection of Data
Primary:

• Discussion with the branch manager and the employees of HDFC AMC Ltd Hubli
Branch. The discussion was based on basics of mutual funds, working of mutual funds,
financial planning, and some calculation based on NAV, Sharpe Ratio, and Beta etc.

Secondary:

• Information regarding Mutual Fund industry and working of mutual funds was referred
from Personal FN magazine
• Performance of funds, their industry allocation, and other facts of funds were captured
from Fact Sheets
• Information regarding company profile, products, NAV and Returns was taken from the
website www.hdfcfund.com
• Performance of some were observed from www.moneycontrol.com
• Growth and Dividend option of some top funds were compared and the information was
got from www.mutualfundindia.com

Statistical Tools

Graphs
Graphs are used to analyze the difference between growth option and dividend option.

Charts
• Charts depicting the pattern used by fund managers are used.

• Pie chart depicting the different debt and money market instruments used in HDFC High
interest fund is used.
Limitation of the Study
1. This study is limited to some prominent funds and all the funds of HDFC AMC are not
taken into account.

2. Due to unavailability of investor’s information regarding the growth and dividend option
comparison of the funds, I have compared the NAV’s of the both option.
 Chapter IV
Analysis of the Study
Contents:

a. Comparison between growth and dividend option plan

b. Analysis of fund manager diversification & portfolio management plan.
i. HDFC Top 200
ii. HDFC Balance Fund
iii. HDFC High Interest Fund

Comparison between Dividend option and Growth option of HDFC Top 200 Fund.

Time period- 5yrs (from July, 2005 to July, 2010)

Name Key
HDFC Top 200 – Dividend
HDFC Top 200 – Growth
Inference:

The NAV of Growth option is greater than the dividend option of the fund. As the investor
withdraws the dividend, that portion of the amount is not subject to growth. But in case of growth
option the investor can enjoy the growth of the whole amount.

As HDFC Top 200 fund is equity oriented fund it yields high returns, but during the year 2008-09
the dividend option of this fund observed negative NAV but the growth option observed only
positive values.

Comparison between Dividend option and Growth option of HDFC Growth Fund.

Time period- 5yrs (from July, 2005 to July, 2010)

Name Key

HDFC Growth Fund - Dividend

HDFC Growth Fund - Growth

Inference:

The NAV of Growth option is greater than the dividend option of the fund. As the investor
withdraws the dividend, that portion of the amount is not subject to growth. But in case of growth
option the investor can enjoy the growth of the whole amount.

As HDFC Growth fund is equity oriented fund it yields high returns, but during the year 2008-09
the dividend option of this fund observed negative NAV but the growth option observed only
positive values.

Comparison between Dividend option and Growth option of HDFC Tax Saver.

Time period- 5yrs (from July, 2005 to July, 2010)

Name Key
HDFC TaxSaver – Dividend
HDFC TaxSaver – Growth
Inference:

The NAV of Growth option is greater than the dividend option of the fund. As the investor
withdraws the dividend, that portion of the amount is not subject to growth. But in case of growth
option the investor can enjoy the growth of the whole amount.

In case of HDFC Tax Saver fund the dividend option and the growth option NAV’s are close and
there is and by 2010 there is much difference between the two because of the hike in Sensex

Comparison between Dividend option and Growth option of HDFC Balanced Fund.

Time period- 5yrs (from July, 2005 to July, 2010)

Name Key
HDFC Balanced Fund – Dividend
HDFC Balanced Fund – Growth
Inference:

The NAV of Growth option is greater than the dividend option of the fund. As the investor
withdraws the dividend, that portion of the amount is not subject to growth. But in case of growth
option the investor can enjoy the growth of the whole amount.

Compared to all other funds balanced fund has less fluctuations in its NAV this is because it is
balanced with the debt and equity funds and balanced funds are preferred by investors who wants
to take lesser risk.

Comparison between Dividend option and Growth option of HDFC Balanced Fund.

Time period- 5yrs (from July, 2005 to July, 2010)

Name Key
HDFC Income Fund – Dividend
HDFC Income Fund – Growth
Inference:

The NAV of Growth option is greater than the dividend option of the fund. As the investor
withdraws the dividend, that portion of the amount is not subject to growth. But in case of growth
option the investor can enjoy the growth of the whole amount.

HDFC Income Fund is a debt and money market oriented fund and its returns are in the form of
interest earned by the instruments. There is a huge difference between the growth and dividend
option’s NAV.

HDFC TOP 200

Investment Objective

To generate long term capital appreciation from a portfolio of equity and equity-linked instruments
primarily drawn from the companies in BSE 200 index.

Fund Manager Details

Mr. Prashant Jain (since Jun19, 03)

Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities
Investment Scheme and Risk Exposure

Sr.no. Asset Type (% of Portfolio) Risk Profile

Equities and Upto 100% (including use of derivatives for
Equity Related hedging and other uses as permitted by
1 Instruments prevailing SEBI Regulations) High
Portfolio Holdings(as on May 31, 2010)

Company Industry+ % to NAV

EQUITY & EQUITY RELATED
State Bank of India Banks 6.97
Infosys Technologies Ltd. Software 5.34
ICICI Bank Ltd. Banks 4.43
Oil & Natural Gas Corporation Ltd. Oil 4.34
Bank of Baroda Banks 4.04
Construction
Larsen & Toubro Ltd. Project 3.79
Consumer
ITC Ltd. Non Durables 3.56
Petroleum
Reliance Industries Ltd. Products 3.49
GAIL (India) Ltd. Gas 3.03
LIC Housing Finance Ltd. Finance 2.81
Total of Top Ten Equity Holdings 41.8
Total Equity & Equity Related Holdings 96.81
Total Money Market Instrument & Other Credit Exposures
(aggregated holdings in a single issuer) 0
Cash margin / Earmarked cash for Futures & Options 0.09
Other Cash, Cash Equivalents and Net Current Assets 3.1
Grand Total 100
Net Assets (Rs. In Lakhs) 749021.2
Industry Allocation

% of % of
Industry allocation Industry allocation
Banks 20.99 Power 3.68
Consumer Non Durables 8.73 Telecom-Services 2.3
Pharmaceuticals 8.29 Transportation 1.87
Software 7.81 Media and Entertainment 1.85
Oil 6.55 Ferrous Metals 1.67
Construction Project 5.97 Non- Ferrous Metals 1.14
Auto 5.59 Diversified 1.07
Petroleum Products 5.37 Hardware 0.44
Finance 4.96 Auto Ancillaries 0.25
Industrial Capital Goods 4.44 Cement 0.12
Gas 3.72
Relative Performance

HDFC
Top 200
Fund (NAV as at evaluation date 31-May-2010, Rs. 184.857 Per unit)
NAV Per Unit Returns (%) Benchmark Returns
Date Period (Rs.) $$ ^ (%) #
30-Mar-07 Last 1158 days 104.504 19.69** 10.75**
Last Six months (182
30-Nov-09 days) 176.161 4.94* 2.22*
29-May- Last 1 Year (367
09 days) 139.341 32.46** 21.27**
31-May- Last 3 Years (1096
07 days) 119.096 15.77** 6.81**
31-May- Last 5 Years (1826
05 days) 54.931 27.45** 19.32**
31-May- Last 10 Years (3652
00 days) 15.83 27.84** 16.5**
Since Inception (4980
11-Oct-96 days) 10 25.65** 15.16**

HDFC Balanced Fund

Investment Objective
The primary objective of the Scheme is to generate capital appreciation along with current income
from a combined portfolio of equity and equity related and debt and money market instruments.

Fund Manager Details

Mr. Chirag Setalvad (since April 2, 07)

Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities

Investment Scheme and Risk Profile

Sr. Normal Normal Risk Profile of

No. Type of Instruments Allocation Deviation the instrument
 (% of Normal
(% of Net Assets) Allocation)
Equity and Equity Related Medium to
1 Instruments 60 20 High
Debt Securities (including
securitized debt) and Money Low to
2 Market instruments 40 30 Medium

Portfolio - Holdings (as on June 30, 2010)

Company / Issuer Industry+ / Rating % to NAV
EQUITY & EQUITY RELATED
Coromandel International Ltd. Fertilizers 3.91
Tata Consultancy Services Ltd. Software 3.6
Ipca Laboratories Ltd. Pharmaceuticals 3.5
Infosys Technologies Ltd. Software 3.34
Balkrishna Industries Ltd. Auto Ancillaries 3.34
Sun Pharmaceutical Industries Ltd. Pharmaceuticals 3.21
Consumer Non
Dabur India Ltd. Durables 3.15
Biocon Ltd. Pharmaceuticals 3.12
Motherson Sumi Systems Ltd. Auto Ancillaries 2.95
Bank of Baroda Banks 2.94
Total of Top Ten Equity Holdings 33.06
Total Equity & Equity Related Holdings 66.87
Total Credit Exposures (aggregated holdings in a single
issuer) 20.95
Cash, Cash Equivalents and Net Current Assets 12.18
Grand Total 100
Net Assets (Rs. In Lakhs) 16702.24

Industry Allocation

% of % of
Industry allocation Industry allocation
Pharmaceuticals 12.19 Construction Project 2.7
Banks 8.5 Construction 2.17
Software 7.23 Telecom-Services 2.03
Fertilizers 6.98 Power 1.86
Auto Ancillaries 6.37 Consumer Durables 1.69
Industrial Capital Goods 5.26 Chemicals 1.29
Consumer Non Durables 4.68 Industrial Products 1.03
 Petroleum Products 4.07

Relative Performance

HDFC
Balanced (NAV as at evaluation date 30-June-2010, Rs. 50.713 Per unit)
Fund
NAV Per Unit Returns Benchmark Returns
Date Period (Rs.) (%) ^ (%) #
30-Mar-07 Last 1188 days 29.183 18.5** 10.95**
30-Dec-09 Last 182 days 44.624 13.65* 3.05*
30-Jun-09 Last 1 Year (365 days) 36.003 40.86* 17.34*
Last 3 Years (1097
29-Jun-07 days) 32.314 16.18** 8.73**
Last 5 Years (1826
30-Jun-05 days) 20.698 19.62** 14.89**
Last 10 Years (3652
30-Jun-00 days) N.A N.A. N.A.
Since Inception (3579
11-Sep-00 days) 10 18.01** N.A.

HDFC High Interest Fund

Investment Objective

The investment objective of HDFC High Interest Fund is to generate income by investing in a
range of debt and money market instruments of various maturity dates with a view to maximizing
income while maintaining the optimum balance of yield, safety and liquidity.

Fund Manager Details

Mr. Anil Bamboli (since Feb 16, 04),

Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities

Investment Scheme and Risk Profile

(% Of
Sr.no. Asset Type Portfolio) Risk Profile
Low to
1 Debt & Money Market Instruments * 100% Medium

Portfolio Holdings as at May 31st 2010

 Issuer Rating % to NAV
Government Securities,Money Market Instruments and other Credit Exposure
Government Securities Soverign 43.81
Power Finance Corporation Ltd AAA 7.89
National Housing Bank AAA 7.49
Rural Eleectrification Corporation Ltd AAA 5.5
National Aviation Company of India Ltd AAA(SO) 5.5
Indian Railways Finance Corporation AAA 5.35
Corporation Bank P1+ 5.06
National Bank for Agricuture and Rural Development AAA 3.5
Power Grid Corporation of India Ltd AAA 2.68
State Bank of India AAA 2.67
Total of 10 Government Secutities, Money market instruments and
other credit exposure(aggregated holdings in a single issuer) 89.45
Others 2.63
Total of Government Secutities, Money market instruments and
other credit exposure(aggregated holdings in a single issuer) 92.08
Cash, Cash Equalents and net Current Assets 7.92
Grand Total 100
Net Assets(in lakhs) 19,123.17

Portfolio Classification by Asset Class (%)

Relative Performance (Growth option)

Benchmark
Returns Returns
Date Period NAV (%) (%)
 Last six months(182
Nov 30 2009 days) 30.8888 2.72 2.55
May 29 2009 Last 1 Year (367 days) 30.1072 5.36 4.72
Last 3 Years (1096
May 31 2007 days) 24.5138 8.97 7.06
Last 5 years (1826
May 31 2005 days) 23.2925 6.37 5.71
Last 10 years (3652
May 31 2000 days) 14.7 7.99 N.A
Since inception (4781
April 28 1997 days) 10 9.22 N.A

Analysis:

Returns(Since Role of fund

Fund Name Fund Category Risk Profile inception) manager
Highly active
HDFC Top 200 Pure Equity High 25.65
HDFC Balanced Equity and Debt Moderate
Fund Instruments Medium 18.01
HDFC High Interest Debt and Money market Comparatively
Fund instruments Low 9.22 passive

Risk Vs Return Pattern

Chapter V: Findings

1. Mutual funds are classified across asset classes, time period and investment philosophy.
2. There are different types of plans designed for different types of investors depending on
their risk taking ability and return expectation.

3. Diversification is the main tool used by the fund managers to dilute the risk factor.
Diversification minimizes the concentration of investor’s money in single stock and thus
minimizes the risk.
4. There are mainly three patterns used by the fund managers during investment. They are:
Aggressive plan, Moderate plan, and Conservative plan. Each plan is carefully designed
by taking into account the asset allocation, risk and return and the investors view.
5. The NAV of Growth option is greater than the dividend option of the fund. As the investor
withdraws the dividend, that portion of the amount is not subject to growth. But in case of
growth option the investor can enjoy the growth of the whole amount.

6. In dividend option, if the investor is able to use the dividend amount of fund ‘X’ in some
other investment and the money can have a growth more than growth option’s NAV of
fund ‘X’. Then it is a good decision to opt for dividend option. Otherwise, growth option
gives better growth of the investment.
7. Equity funds have better NAV than balanced and income funds because they have greater
risk involved.
8. In case of HDFC Tax Saver fund the dividend option and the growth option NAV’s are
close and there is and by 2010 there is much difference between the two because of the
hike in Sensex

9. Compared to all other funds balanced fund has less fluctuations in its NAV this is because
it is balanced with the debt and equity funds and balanced funds are preferred by investors
who wants to take lesser risk.

10. HDFC Income Fund is a debt and money market oriented fund and its returns are in the
form of interest earned by the instruments. There is a huge difference between the growth
and dividend option’s NAV.

11.
 Returns(Since Role of fund
Fund Name Fund Category Risk Profile inception) manager
Highly active
HDFC Top 200 Pure Equity High 25.65
HDFC Balanced Equity and Debt Moderate
Fund Instruments Medium 18.01
HDFC High Interest Debt and Money market Comparatively
Fund instruments Low 9.22 passive

12. Fund managers diversify their portfolio across different industries and maximum
weightage is given to those industries which have growth perspective in the future years.
13. Now, it is banking, software, and consumer non durables industries that are given more
weightage. But, in future fund managers have predicted that the infrastructure industry will
have better prospects.
14. In case of HDFC High Interest fund the fund managers have allocated the assets in
Government securities, Certificate of Deposits, Credit Exposure and Cash equalents and
Net current assets which are safe and give high interest
Chapter VI: Conclusion
Conclusion
Mutual Fund market provides vast investment avenues for the prospective investors ranging from
bonds to bank deposits and corporate debentures, which are low on risk and high on returns. The
latest mutual fund market has indicated bearish trend which means that investors who are seeking
for profitable investments should opt for highly skilled fund managers who invests on their behalf.

My experience in HDFC AMC Ltd was a very fruitful one. My external guide
Mr.Yashwant.Ponkshse guided me how to go about financial planning, how much it is important
for an individual to invest his money in proper avenues. I learnt about mutual funds their
investment portfolio and how fund managers diversify their portfolio and overcome the risk factor.

There are many kinds of mutual funds to suit the requirements of the investor and each of them
are managed by qualified and experienced fund managers who will smartly invest in proper
avenues.

Working procedure at HDFC AMC Ltd. Hubli is very open. When a New Fund Offer is introduced
all the employees of the branch sit together and share their views that how this fund will work in
future and how to sell the fund.

Finally, I conclude that my project work on the given topic was interesting and I personally felt
of investing in mutual funds. As they are handled by fund managers who are experienced and
manage the funds by diversifying risk in different avenues.
Chapter VII: References
References

Books
➢ Personal FN magazine(mutual fund guide 2010)/ financial planning, Mutual Fund
selection criteria, Mutual Fund Structure
➢ Fact Sheets (issue of May 2010)/ asset allocation, latest NAV etc.
➢ AMFI Study material/ calculations regarding NAV, Sharpe ratio etc.

Websites

➢ www.hdfcfund.com
➢ www.moneycontrol.com
➢ www.mutualfundindia.com
 QUESTIONNAIRE

To study a preferences of the investors for investment in Mutual funds

1. What kind of investments you prefer most? Pl tick (√). All applicable

a. Saving account b. Fixed deposits c. Insurance d. Mutual Fund

e. Post Office-NSC, etc f. Shares/Debentures g. Gold/ Silver h. Real Estate

I. PPF j. PF

2. While investing your money, which factor you prefer most? Any one

Liquidity Low Risk High Return Company reputation

3. Have you ever invested your money in mutual fund?

Yes No

If yes,

a) Where do you find yourself as a mutual fund investor?

Totally ignorant [ ]

Partial knowledge of mutual funds [ ]

Aware only of any specific scheme in which you invested [ ]

Fully aware [ ]

b) In which kind of mutual you would like to invest?

Public [ ] Private [ ]
 c) how do you come to know about Mutual Fund?

a. Advertisement b. Peer Group c. Banks d. Financial Advisors

d) Which mutual fund scheme have you used?

Open-ended Close-ended

Liquid fund Mid- Cap

Growth fund Regular Income fund

Long-Cap Sector fund

If no,

a) If not invested in Mutual Fund then why?

Not aware of MF Higher risk Not any specific reason

4. which feature of the mutual funds allure you most?

Diversification [ ]

Better return and safety [ ]

 Reduction in risk and transaction cost [ ]

Regular Income [ ]

Tax benefit [ ]

5. In which Mutual Fund you have invested? Please tick (√). All applicable.

a. SBIMF
b. UTI
c. HDFC
d. Reliance
e. ICICI prudential funds
f. JM mutual fund
g. Other. Specify

6. When you invest in Mutual Funds which mode of investment will you prefer?

a. One Time Investment b. Systematic Investment Plan (SIP)

7. Where from you purchase mutual funds?

Directly from the AMCs [ ]

Brokers only [ ]

Brokers/ sub-brokers [ ]

Other sources [ ]

8. Which AMC will you prefer to invest?

Assets Management Co.

 a. SBIMF
b. UTI
c. Reliance
d. HDFC
e. Kotak
f. ICICI
g. JM finance
9. Which sector are you investing in mutual fund sector?

i. General 1st
ii. Oil and petroleum
iii. Gold fund
iv. Diversified equity fund
v. Power sector
vi. Debt fund

vii. Banking fund

viii. Real estate fund

ix. General 1st

10. How would you like to receive the returns every year?

a. Dividend payout b. Dividend re-investment c. Growth in NAV

11. Personal Details:

(a). Name:-

(b). Add: - Contact No:-

(c). Age:-

(d). Qualification:-
 Graduation/PG Under Graduate Others

(e). Occupation. Pl tick (√)

Govt. Sec Pvt. Sec Business Agriculture Others

(g). What is your monthly family income approximately? Pl tick (√).

Up to Rs. 10,001 to Rs. 15,001 to Rs. 20,001 to Rs. 30,001 and

Rs.10,000 15000 20,000 30,000 above