Windfall Mutual Fund – A Report

Authors:

Buddy Group 3 (TYBBA-B)

Name Roll Number SAP ID

Deep Shah 14 74021019633
Priyansh Rajoria 40 74021019571
Sarthak Moudgil 47 74021019501
Siddharth Gada 53 74021019205
Tanmay Munjal 56 74021019505
Pratham Masrani 63 74021019459

Course: Investment Analysis and Portfolio Management

Date of Submission: 25th September, 2021

Submitted to: Mr. Harsh Thakrar

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ACKNOWLEDGEMENT
We would like to convey our heartful thanks to our Investment Analysis and Portfolio Management Professor –
Mr. Harsh Thakrar for providing us with the opportunity to work upon a practical and real-life based project and
also for his patience, motivation, comprehensive and valuable advice along with intrinsic insights which helped
us a lot while doing the project.

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EXECUTIVE SUMMARY
We have created a mutual fund portfolio, Windfall Mutual Fund. The portfolio focuses on diverse sectors to meet
the objective of providing consistent periodic returns and capital appreciation over a long period of time,
investing predominantly in the equity sector. This shall ensure the investors receive maximum benefits from their
investments with the portfolio. The fund seeks to fulfil the objective through an active portfolio management
strategy and a diverse portfolio to ensure low risk for the investors.
Professionals have conducted a thorough and in-depth analysis of stocks and their sectors to provide the best
results for their clients and retain their trust in the long term.
The major target customers are those with a low to average risk appetite seeking to invest their funds for a long
period of time to ensure capital growth. Equity stocks invested in initially were Reliance Ltd., Nestle Ltd., Shree
Cements Ltd., and Bajaj Finance. Underperforming stocks were replaced by periodic churning based on time and
stock performance. In the first churn, Bajaj Finance was replaced with Dr. Reddy’s Laboratories Ltd. Later, for
the second churn out Shree Cement Ltd. was replaced by HCL Technologies Ltd.

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 INDEX

Sr. No. Topic Page

No.
1. Introduction 5

2. Fund Details 8

2.1 Name of fund 8

2.2 Investment Policy 8

2.2.1 Objective of fund 8

2.2.2 Target customer 8

2.2.3 Type of fund 9

2.2.4 Investment strategy 9

3. List of Asset/Asset class and its justification 11

4. Asset allocation process 22

5. Portfolio evaluation 33

6. Costs (exit loads) 38

7. Portfolio managers’ background 39

8. Conclusion 40

9. References 41

10. Contribution by each student 42

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1. INTRODUCTION

The mutual fund industry in India started in the year 1963 with the Unit Trust of India. Post-1991, various other
players entered the Indian mutual fund industry. The fate of the mutual funds has been closely tied to the Indian
equity market. There are 40 funds houses with 2000 schemes providing various investment alternatives to suit
goals, objectives, risk-taking capacities and return expectations of individuals.

Benefits of investing in a mutual fund:

Diversification
One of the most prominent advantages of investing in mutual funds is diversification. It is the process of
spreading a given investment over multiple assets classes. Diversification helps us create an assorted portfolio
that segregates the headwinds experienced in various sectors. Money is invested in a mixture of assets according
to one’s risk appetite.
As mentioned earlier, diversification helps us reduce the risk associated with different asset classes. This proves
to be beneficial when an underlying component of a given mutual fund experiences market headwinds. With
diversification, the risk associated with one asset class is countered by the others. This way, you don’t lose out
on the entire value of your investment if a particular component of your portfolio goes through a turbulent period.

Professional Management
A lot of investors do not have the time or resources to conduct their research and purchase individual stocks. This
is where professional management becomes quite useful. Several people invest in mutual funds for the
professional expertise it provides to one’s investments. A fund manager continuously monitors investments and
adjusts the portfolio accordingly to meet its objectives. This professional management is one of the most
important advantage of a mutual fund.

Tax Benefits

The tax benefits associated with a particular kind of mutual fund is perhaps what draws most investors to this
investment vehicle. To encourage investments in mutual funds, the Government of India offers several tax
benefits.
For e.g., investments in Equity-Linked Saving Schemes (ELSS) qualify for tax deduction under Section 80C of
the Income Tax Act. One can invest up to Rs1.5 lakh in this instrument to avail a tax saving of approximately
Rs46,800 (assuming the highest slab of income tax i.e. @30% plus health & education cess 4% excluding
surcharge as applicable) on their taxable income. The only caveat here is that the instrument comes with a lock-
in period of 3 years, which means that you would not be able to access the invested funds during this period.

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Highly Liquid
One can easily sell mutual funds to meet their financial needs. Upon liquidation, the money is deposited in your
bank account in few days. Additionally, there are mutual funds that provide faster disbursal. They are called
funds having instant redemption facility, wherein the money is transferred to your bank on the same day.

Higher Return on Investment (RoI)

All investors aim to achieve a higher RoI by investing in financial instruments such as mutual funds to beat
inflation and increase their wealth of the long-term. Mutual funds have greater prospects of potentially providing
high returns over time as one can invest in a diverse range of sectors and industries.

Well-regulated
All mutual funds are regulated by the capital markets watchdog Securities and Exchange Board of India (SEBI).
This means that all mutual fund houses are required to follow the various mandates as laid down by SEBI. This,
in turn, protects the interests of the investors. Moreover, SEBI makes it mandatory for all mutual funds to disclose
their portfolios every month.

Easy Investment
It is very easy to invest in mutual funds, i.e., you can do this either online or offline. You simply need to visit
your Asset Management Company’s (AMC) website and submit the necessary documents to start on your
investment journey. Moreover, you can also visit your AMC in person and sign the physical documents to get
started. This ease of investment makes mutual funds are preferable avenue.
SIP and Lumpsum
Most importantly, investing in mutual funds is very affordable. For those who cannot earmark a significant
portion of their earnings towards mutual funds, they can start investing with amounts as low as Rs500 at
predefined intervals. This is known as a Systematic Investment Plan or SIP. On the contrary, if you have a
significant chunk of money to invest, you can even make a lumpsum investment in a mutual fund.

Windfall Mutual Fund is introducing a mutual fund scheme for individuals with a low to average risk appetite
and high returns. The portfolio consists of investments in 4 stocks to provide returns from diversified sectors.
The assets are selected on the basis of technical and fundamental analysis to ensure portfolio stability and to
avoid high risks.

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Advantages of Investing in Windfall Mutual Fund

-Professional Management: Our mutual fund is primarily managed by fund managers who have experience and
expertise in the field. The funds invested by individuals are professionally managed by conducting in-depth
research, prudent investment processes and used to fulfill the investment objective of the fund.

-Diversified Portfolio: The fund provides exposure to various assets in diverse sectors to provide the best
returns at a given risk appetite. If the portfolio is more diverse it ensures that even if one investment fails, the
rest remain intact.

-Liquidity: Investors avoid having their money blocked in particular investments. Such investments are referred
to as illiquid investments. Mutual fund schemes generally have 3 different structures:

1. Close ended schemes: Investment can be recovered on the maturity of the scheme, but these are traded on
the stock exchange and hence can be sold when the investor wants.

2. Interval schemes: Invested amount can be recovered at specific intervals.

3. Open ended schemes: Investment can be recovered at any given point of time.

-Convenience: Schemes are often income-oriented or growth-oriented. Hence, it leaves the investors an option
to invest money according to their requirements and preferences.

-Tax Advantage: Returns earned are tax-free so the investor can grow their returns without the tax expenditure.
If the same money had to be blocked in other investments, tax for the financial year would be charged.

Windfall Mutual Fund is an open-ended scheme, which means that investors can recover their funds at any point
of time. However, we do not recommend that they withdraw their investment early because our fund aims at
providing steady returns over a period of time, and hence is suitable for long term investments. If investors
withdraw their money soon after their initial investment, we charge them a penalty, which is called an exit load.

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2.FUND DETAILS
2.1 Fund Name
Our fund is called the Windfall Mutual Fund. The name is inspired from the word ‘windfall’ which means a large
amount of money that one wins or receives.

2.2 Investment Policy

a) Asset Allocation Policy:
-The Committee believes that a majority of the portfolio will be invested in equity to generate high returns and
maximize growth in the long run.

-The Committee believes that actual returns and expected returns of the fund may vary. They have the power of
flexibility and can filter out the bad performing assets through multiple churn outs over the course of the fund.

-The Committee recognizes that the strategic allocation of assets across various categories and sectors with
varying degrees of risk and return will play a role in determining portfolio asset value stability and returns in the
long run.

b) Rebalancing Policy: It is expected that the portfolio’s actual asset allocation will vary from its target asset
allocation as a result of the varying periodic returns earned on its investments in different asset and sub-asset
classes. The portfolio will be rebalanced to its target normal asset allocation through multiple churn outs.

c) Spending Policy:
-We do not want to erode the fund’s real assets over time. Hence, spending and distribution will be controlled so
as to ensure this does not happen.
-The spending policy of the fund will be reviewed periodically. If it is deemed necessary, the appropriate changes
will be made.

2.2.1 Objective of Fund

The objective of the fund is to provide periodic returns and capital appreciation over a long period of time,
investing predominantly in the equity sector. However, Windfall Mutual Fund does not give any kind of
assurance or guarantee that the investment objective of the fund will be met. The returns of the fund are subject
to market risk. The fund does not assure or guarantee any returns.

2.2.2 Target Customer

The fund mainly consists of low-risk assets. Therefore, the target client is someone who is willing to invest funds
for a long period of time. Possible clientele could be senior citizens who wish to save up for a comfortable
retirement, or people in their mid-40s who could be saving up for their child’s future education.

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2.2.3 Type of Fund
Windfall Mutual Fund is an open-ended mutual fund scheme which invests mainly in equity and equity-based
securities.

2.2.4 Investment Strategy

The investment strategy of our fund relies mainly on the growth potential of the companies we will invest in. We
plan to invest in equity related securities of companies from various industries. This will result in diversification
of our portfolio, so that our fund is not dependent only on one sector. We will mainly invest in low-risk stocks
which yield decent returns.
We will identify which stocks to choose by studying the company, its future plans and projections, past
performance and valuations, and analyzing the technical aspect of it. We will also calculate the Sharpe ratio and
the coefficient of variation. Based on these parameters, we will select the stocks the portfolio and evaluate them
for a period of six months. After this these six months, we will remove stocks which are performing poorly.
We will use portfolio simulation to get the right proportion of assets and build an efficient portfolio. Apart from
this, we have conducted external research to help us understand more about which companies to invest in.
Information was taken from various magazines, journals, newspapers and databases for help in the research
process.

a) Short Term:
15% of the entire investments in our fund will be kept in liquid assets like cash or cash equivalents, so that they
can be used for immediate requirements. This will be kept as an emergency fund to meet the requirements in case
there are any requests for redemption of units. It could also be used to in case of any adverse market movements.

b) Intermediate term:
As we have already mentioned, our fund aims at picking companies which are likely to grow and perform better
than the market. However, we do not guarantee that the fund will outperform the market. Mutual fund
investments are subject to market risks. Please read all scheme related documents carefully.
In the long term, the main aim of our fund is to provide a steady increase in asset value. This fund is suited for
people who are looking for long term returns because we aim to provide them with an increase in their capital
over a long period of time. As stated earlier, our target customers will be people who are willing to invest their
money for long periods of time, because our returns are significantly better in the long run.

c) Investment Diversification:
-The most important aspect of any mutual fund is diversification, and ours is no different. It is how we try to
minimize the risk of our portfolio but still keep our returns high. Diversification will help limit the level of
diversifiable risk in the portfolio. However, the risk cannot be reduced to zero, because there will always be an
element of non-diversifiable risk in our portfolio. This risk is due to market conditions and is not in our control.

-In order to reduce diversifiable risk, the investments will be concentrated over various sectors which have a low
correlation. The committee will also be carrying out regular churn outs on the basis of market conditions.

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-SEBI guidelines state that a mutual fund should not own more than 10% of any company’s paid-up capital
carrying voting rights; we must abide by this. Also, in our fund, securities will be purchased and sold for delivery
only; intra-day and short-selling transactions are extremely risky and will be avoided.

d) Finance and Audit Committee approval:

A mutual fund audit committee is responsible for overseeing the accounting processes of the fund. It is also
responsible for the financial reporting aspect. They will select independent auditors for the investment company
and will handle all communications with these auditors so as to make sure all legal requirements are met. An
audit committee also often monitors management’s accounting and internal control systems for the funds.

e) Investment responsibilities
Laws and Regulations: The fund managers must ensure that all operations within a fund comply with the
regulations laid down by governing bodies. SEBI’s regulations could cover many aspects of our operations, and
our managers look after all parts of such operations.
Protection of Wealth: As fund managers, our primary duty is to protect the wealth of our clients. As we try to
make the investment grow, there will be certain elements of risk, and no fund can avoid that entirely. However,
we must ensure that our clients’ money is kept as safe as possible and we must avoid doing anything that could
have a huge negative impact on their investment.
Outsourcing: Since the fund managers have many other responsibilities, we try to focus on the things we
specialize at and outsource all the other aspects of the business. Outsiders are hired to perform functions like
accounting, reporting, negotiating and so on. The fees of these third parties are included in the expense ratio.
Reporting requirements: Even though our fund managers get outside help with the reporting, it is their
responsibility to make sure all the regulations are met, and all documents are completed and submitted on time.

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3. ASSETS/ASSET CLASS JUSTIFICATION

1. Reliance Industries

Reliance Industries is a leading Indian private equity company in all major financial sectors. In 2004 it became
the first Indian non-public company to be listed on the Fortune Global 500 list. Things need to change over time
which is why changes are evident in business ideas and the ideas of the Reliance industry. The company now
plans to make Reliance Industries a holding company with:
- Reliance Jio
- Reliance Retail
-TV Network 18
-Reliable infrastructure
-Oils and Chemicals

Why Reliance Industries

-Reliance Industries reported its profit after tax increased by 11.3% to ₹44324 crores from ₹39837 crores in the
previous financial year. Reliance Industries turnover and EPS increased by almost 6% which is a positive sign.
Its telecommunications arm, Reliance Jio, is widely regarded as a disruptive player in the communications
industry and has shown tremendous growth in back-to-back housing.

-Reliance Jio has gained a lot of weight with a base of subscribers around 160.1 million. It also holds about 80%
of the basis of the 4G smartphone. Through voice calls and cheap data, the average per capita expenditure is
slowly increasing and will eventually increase through newer features. Reliance Jio Infocomm Limited also plans
to create its own cryptocurrency, JioCoin. It plans to form a team of young professionals to work with blockchain
technology, which can also be used to improve programs such as smart contracts and asset management. It is
also ready with the infrastructure in order to launch next generation 5G internet services in the country.

-Reliance Retail, the commercial arm of Reliance Industries, plans to launch cameras, electronics, dongles and
tablets under Reconnect. Reliance Retail plans to sell these products through digital shops. The company already
offers a wide range of electrical products including computer mouse, connectors, television sets, and speakers
through Reliance Digital and online stores. Over the past few months, Reliance Industries, and its subsidiaries,
including Reliance Industrial Investment Holdings, has acquired poles in various fields works - Indian Film
Combine, Eros International, Saavn, Embibe and KareXpert Technologies. In February 2018, Reliance Industries
had acquired 65% participated in The Indian Film Combine Private Limited, which built a playground, hotel,
shopping mall and club on the 12-hectare band in Bandra-Kurla Complex of Mumbai for INR 1,1050 million.

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 Source: Reliance Annual Report 2019-2020

-Therefore, we see a huge upside potential with Reliance Industries Limited in the long run. There is consistency
because of the company’s new focus in diversifying its business into Telecom through Reliance Jio, which is
already a market giant within a few years of launch, and also into Media through various new acquisitions (like
Eros International) and expansions. The retail arm, Reliance Retail, is also looking at aggressive expansion. Saudi
Aramco is looking for a 20% stake in the oil business for a hefty $15 billion, so we think it is safe to assume that
the company is looking at consistent growth in the coming future.

-From its peak of ₹1,610 in mid-December 2019, the stock had crashed to about ₹880 by end-March, hammered
by the coronavirus impact; this had caused a historic crash in oil prices and raised skepticism whether Saudi
Aramco will go ahead with its proposed plan to buy 20 per cent in the refining and petrochemical businesses of
RIL. But within a month, the stock gained more than 50 per cent despite the turmoil in the oil market; a good
part of this rally was thanks to RIL’s top-dollar stake sale of about 10 per cent in Jio Platforms, the digital business
holding company, to Facebook in April. This was followed by a series of rapid-fire stake sales in Jio Platforms
to other marquee investors, culminating with Google in July; in all, more than ₹1.5 lakh crore was raised by
selling nearly 33 per cent stake in Jio Platforms.

-In between, RIL also raised about ₹53,000 crore through a rights issue in May -June. These huge fund-raises
significantly eased concerns about RIL’s balance-sheet deleveraging plans. It also helped that in August, RIL
announced important stake acquisitions – digital pharma marketplace Netmeds (for ₹620 crore) and the chunk of
the Future Group’s businesses (for about ₹25,000 crore) – at attractive valuations to drive growth in the retail
segment.

2. Nestle Ltd.
Nestle India is a company owned by Nestle S.A. of Switzerland. Nestle is a strong player in the food and beverage
space with leadership in 85% of the product portfolio. The company has dairy products, beverages, prepared
dishes and cooking utensils, as well as chocolates and confectionery. The company has 8 production centers in
India with brand names under brand names such as Nestea, Nescafe, Maggi, Milkmaid and Milkybar.

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Why Nestle Ltd.

-Nestlé's diversification, both geographically and product portfolio wise, provides the company with necessary
the help in weathering-off the negative impact of the pandemic. Although its sales are projected to contract owing
to COVID-19, growth in the food business is expected to limit the losses and provide a platform for the company
to revive over the next couple of years.

-Nestle India said the impact of coronavirus pandemic on its business operations has not been materially adverse
so far. The company also does not see any specific challenge in terms of its capital or financial resources or any
significant deviation in profitability, it has strong cash position and is in a comfortable liquidity position to meet
its financial commitments.

-Further, the company does not foresee any challenge in realizing/recovering its assets and thus there shall not
be any significant impairment to the carrying value of its assets.

-Nestle India, which follows January-December financial year, had reported 13.54% rise in January-March
quarter net profit at ₹525.43 crore and 10.84% increase in its net sales at ₹3,305.78 crore.

-The company had witnessed a volume growth and contribution from e-commerce went up significantly, while
out of home sector performance was subdued.

-The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows
earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful
long-term investors. Over the last three years, Nestlé has grown EPS by 16% per year. That's a good rate of
growth, if it can be sustained.

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-We believe that a well-functioning environment coupled with management's focus on profitable growth driven
by volume, design and cost management will enable Nestle to maximize over-average wage growth over the
medium term.

3. Bajaj Finance
Bajaj Finance is one of the leading NBFCs in India. It was incorporated on 20 October 1987. Formerly known
as Bajaj Auto Finance Ltd., it became a listed public company in the year 1994-95. The company’s wide offering
includes consumer durable loans, home loans, property loans, gold loans, vehicle loans, construction equipment
loans, and advisory services. The company’s credit rating holds strong at AAA/Stable by CRISIL, ICRA and
CARE.
Why Bajaj Finance
-The company had acquired 100% equity share capital of Bajaj Financial Securities Limited in July 2018, which
was a wholly owned subsidiary of Bajaj Housing Finance Limited (BHFL), for a consideration of Rs.20.38 crore.
The consolidated performance of Bajaj Finserv and Bajaj Finance Limited provides promising returns for the
company in the future.

-The following is a comparative table of the quarter 3 results of Bajaj Finance Limited for the years 2018 and
2019. This shows that the performance of the NBFC has increased by more than 40% in assets under
management. The company also has a 46% increase in its net interest income. The company has a highly

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diversified portfolio of products for consumer, rural, SME and commercial lines of business driving up the net
interest income and assets. This is supported by a huge surge in rural lending as well as small and medium
enterprise.

Q3 FY20 Q3FY19 Year on Year

AUM 109930 78033 41%
NET INTEREST 3209 2195 46%
INCOME

PROFIT AFTER TAX 1060 690 54%

Source: Bajaj Finance Investor Report (Q3, FY2019)

-The asset liability management shows how the company manages its liabilities in line with its assets so
as to provide maximum returns with appropriate risk levels. One significant advantage of Bajaj Finance
Limited is its model. They provide short term loans and borrow long term loans. As their landings are
short term, they turn in money faster hence closing the mismatch between assets and liabilities.

Source: Bajaj Finance Investor Presentation

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 -One of the major reasons why Bajaj Finance Limited over other NBFCs is that it has a more diversified
portfolio. It focuses on lending for consumer durables, rural segments and MSME. This provides the
company with a comparative advantage as the market for the presence of NBFCs in the consumer durables
segment is not penetrated to its fullest potential.

-In light of Covid-19, the Senior Management is trying to cut operational costs wherever possible, while
simultaneously improving efficiency and the IT infrastructure for even faster delivery. Large
organisations tend to build up costs. It needs a jolt such as COVID-19 to examine these costs in great
detail, and prune them wherever possible. This is what the company will do throughout FY2021. If these
efforts are successful, the cost savings should counteract the downward pull of revenues in the first half
of the financial year. And the benefits of such cost savings will continue even as revenues improve.

-In conclusion, Bajaj Finance Limited has a huge potential to provide promising returns to investors.
Their unique business model, along with the strategic acquisition of Bajaj Financial Securities and Bajaj
Housing Finance Limited, proves to be a great opportunity for the company to expand its interest incomes
as these arms are ready to run operations at full capacity. The consolidated loans increased by 53% to
reach 23.50 million while consciously dedicating itself to managing the risks in the organization across
the verticals and specific units of business. It also follows “acquiring and cross-selling” in order to manage
the risk levels across portfolios. All these efforts of the company to safeguard against challenging external
environment and remaining stable even when most of the NBFC sector struggles makes it a promising
investment for the future.

4. Shree Cements
Shree Cements was founded in the year 1979 with its promoters being industrialists P.D. Bangur and B.G.
Bangur. The company is a premier cement maker in the Indian market. Its manufacturing units are majorly spread
across the northern and eastern regions. They hold three brands under their hat which include Shree Ultra Jung
Rodhak Cement, Rock-strong Cement and Bangur Cement. The company also produces synthetic gypsum to
replace the use of natural gypsum in cement manufacturing. In 2011, the company was identified by the World
Economic Forum as the New Sustainability Champion. In its initial years, the company decided to use pet coke
as a replacement for coal. This could reduce their production cost by at least 40%. They had to go through many
challenges, but they had the first mover advantage in using pet coke as a fuel. They developed the capacity to
such an extent that even giants like Ultratech and ACC can’t function at the same level. In August 2014 its CFO
Ashok Bhandari stated, “Outside China, we are the biggest power generator through waste heat recovery
method.”

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Why Shree Cements
-The following table depicts the growth of Shree Cement on various parameters in the past 10 years.

Particulars 2009-10 2019-20 CAGR

Cement Production Capacity 12 40.4 12.91%
Power Generation Capacity 210 742 13.45%
Revenue from Operations (Rs. Crore) 3632 11904 12.60%
EBITDA (Rs. Crore) 1578 3946 9.50%
PAT (Rs. Crore) 676 1570 8.79%
Net Worth (Rs. Crore) 1833 12936 21.58%
Market Cap (Rs. Crore) 8228 63309 22.64%
Source: Shree Cement Annual Reports

-The company has a high expansion and low-cost structure which will provide huge benefits as the
demand for cement increases. The company observes a lower rate of growth in its profits majorly due to
the fair value loss of Rs. 178.13 crore in respect of investment in preference shares of the IL&FS group.
In the year 2018-19, it has launched two new products to cater to its customer base. Over the years, the
products are expected to add to the earning capacity of the firm.

-Shree Cements has a strong focus on operating efficiencies, with one of its strongest competitive
advantages being the lowest production costs as compared to its Tier-1 players. Being the pioneer in the
usage of pet coke has driven up its cost efficiencies. This ensures that despite fluctuating prices, their
business remains cost efficient. The company is further looking into renewable resources to further
deplete its costs and sustainably manufacture its products.

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 Source: Shree Cements, SKP Research

-In line with the company history, it used to follow large volume building targets, but to keep up with the
market shifts, the company wishes to place itself as a value player and earn a remunerative growth rather
than volumized growth. Hence, the company launched new products, invests in the gradual expansion of
operations and provide greater returns in the long- run.

-Due to Covid-19, the uncertainty around the continuation of the impact of the pandemic makes it difficult
to make any proposition about the outlook for the near future. While short term outlook is uncertain, the
long-term outlook of the cement industry continues to be positive on account of the various economic
reforms, increasing aspirations, sustained consumption momentum and persistent infra spending.

-In conclusion, Shree Cement is a stable stock with a strong balance sheet and a seemingly high growth
potential. The company follows a cost-efficient structure and is continuously working towards
functioning sustainably. Hence, in our view, continuing along this path with government support and
continue onto the infrastructure development projects a favorable view for the progress of Shree Cement.

5. Dr. Reddy’s Laboratories

Dr. Reddy’s Laboratories is a 25-year-old company founded by Dr. Anji Reddy, to cater to the needs of the
pharmaceutical sector. It started its operation in 1984 with a single facility near Hyderabad. It is a global company
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with its headquarters in India and subsidiaries in the United States, Russia, Germany and Brazil with an in total
presence in 100 countries. They mainly focus on three sectors – pharma, global generics and proprietary products.
The company was listed on the Bombay Stock Exchange in 1986. The organization has a global footprint through
joint ventures and acquisitions with companies such as GSK and Pfizer.
Why Dr. Reddy’s Laboratories

Particulars 2020 2019 2018 2017 2016

EBITDA Margin 27% 22% 17% 18% 23%
Net Profit Margin 11.20% 12.20% 6.90% 8.50% 12.90%
Return on Net worth 13% 13% 8% 10% 16%
Earnings per share 117.4 113.1 59 72 117
Dividend Payout Ratio 21% 18% 34% 28% 17%
Source: Dr. Reddy’s Annual Report (2019-20)

-The company’s EBITDA saw a consistent rise in 2019-20 due to the company’s focus on trimming cost
structures by enhancing productivity and eliminating arms that drained the business.

-The company’s revenues from emerging markets stood at Rs. 32.8 billion with a YoY growth of 14%,
the revenue expansion from Emerging markets can be due to the product launches and high focus on
scaling up businesses in these markets. While revenues from Indian stood at Rs. 28.9 billion with a YoY
growth of 11%. A report by IQVIA stated that the growth of the company stood at 11.4% as compared to
market growth of 10.8%. In the following year, the company launched Celevida, marking its entry into
the nutritional segment.

-Dr. Reddy’s presence in the United States was facing challenges due to increased competition across
major products. But the company focused on gaining back market share by filing eight abbreviated new
drug applications (ANDAs) and 99 generic filings waiting for approval from the USFDA. All this
combined with its wide portfolio and strong global presence supports the growth of the company in terms
of volume and financials.

-The company entered into a deal with Wockhardt Pharma in February 2020 for which is expected to
complete in the first quarter of FY21. It will acquire select divisions of its brands in India, Nepal, Sri
Lanka Bhutan and Maldives. This will bring in 62 brands under the umbrella of Dr. Reddy’s Laboratories
with annual sales of Rs. 1830 crore.

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 -In the trying times of COVID-19, there are many uncertainties but with the company’s presence in the
pharmaceutical sector and a strong R&D base, the company’s operations shall continue so as to provide
for ‘essentials’ amidst lockdown. There can be an increased demand for over-the-counter medicines,
especially relating to immunity and vitamins, which could lead to stockpiling.

-Along with this, the biggest risk for the Indian pharmaceutical sector had been the dependence of
companies of China for intermediates and APIs. But, supply chain disruptions in China due to COVID-
19 provide an opportunity for Indian companies to become end-to-end manufacturers in the supply chain.

-To summarize, Dr. Reddy’s Laboratories is a strong stock with a rapidly expanding global presence and
vast earnings. During this pandemic, the company shall prove to have a positive projection as compared
to companies in other industries.

6. HCL Tech Ltd

HCL Technologies Limited is a leading IT services company, ranked among the top five financial service
companies. Since its inception in 1999, HCL Tech has focused on ‘transformational innovation’ and offers a
portfolio of integrated services, including software-led software solutions, remote infrastructure management,
engineering services and BPO services. HCL Tech expands its comprehensive maritime infrastructure and office
network in 32 countries to provide a wide range of services in key industry sectors including financial,
manufacturing, aerospace and defense services, telecommunications, consumer goods, health sciences and health
care, media, travel and tourism, transport and operations, automotive, government projects, energy and resources.
Why HCL Tech Ltd
-In FY20, HCL Tech emerged as the fastest growing large technology company for the fourth consecutive
year with revenue and net income growth of 17.0% and 9.3% respectively. This momentum was led by
their superior organic growth and acceleration of their Mode 2 and Mode 3 revenue – that is, revenue
involving next-generation technologies such as digital and analytics, IoT, cloud native and cybersecurity,
as well as new IPs and products – which helped deliver strong double-digit growth across all segments,
geographies and verticals. Mode 2 and Mode 3 revenues for the year made up 33% of total revenues,
increasing from 28.4% in fiscal 2019.

-HCLT has marked a significant milestone in the country's value and cost, including high visa
revenues/proof of request, BREXIT, high attraction and shortage of onshore and digital talent. India is
the world's largest innovation & technology country, accounting for about 55 percent of the US $ 185-
190 billion market in 2017-18. India’s most well-qualified talent pool for technical graduates is one of
the largest in the world.

Page 20 of 47
 Source: HCL Technologies Ltd Annual Report (2019-20)

-HCL Tech has also increased its net income and earnings per share for FY20 and as the trend shows it’s
been increasing every year. This is something that company would like to maintain even in times of
Covid-19. It has also been the fastest growing large technology company globally over the past four years
with 59.3% growth. The average of IT Services Industry is only 16.3%.

-India's IT-BPM sector is projected to grow to $350 billion by 2025, and BPM is anticipated to invest
about $55 billion in gross revenue. In addition, revenue from the digital sector is expected to generate
38% of total industrial revenue by 2025.

-To further strengthen this posture, HCL Tech launched a new business unit called ‘HCL Software,’
which provides modernized software products to help businesses transform their environment. They
acquired and tucked in select IBM products for Security, Marketing, Commerce and Digital solutions -
AppScan, BigFix, Commerce, Connections, Digital Experience (Portal and Content Manager), Notes,
Domino and Unica - under this BU. The business made significant strides in FY20, onboarding 2,000+
partners and concluding 13,000+ sales transactions.

-So, all the factors of growth are in favor of the IT sector in India in the current scenario and HCL Tech
is a leading IT company that has the capacity to exploit the hidden potential. Hence, we expect a multi-
fold growth in the long run for HCL Tech.

Page 21 of 47
4. ASSET ALLOCATION PROCESS
Now that we have finalized our stocks, we need to decide the proportion of each stock in our portfolio.
We aim to select stocks in such a way that we maximize the portfolio returns and minimize the risk. Since
our fund’s objective is to provide steady returns, we will choose our portfolio accordingly. The first four
stocks we have chosen are Reliance Industries, Nestle India,Shree Cement and Bajaj Finance.We will
select these stocks for the first period, which is from March 2015 to March 2020. After that, we evaluate
the returns of this portfolio for 6 months and replace one stock with a new one. We will then analyze the
data of these stocks from September 2015 to September 2020. Finally, we will again replace one stock
and analyze the latest portfolio based on data from March 2016 toMarch 2021.

FIRST CHURN OUT

Step 1
In order to allocate weights, we must first calculate the individual returns and risks of each stock.Keeping
our time period in mind, we have taken the monthly closing prices of our 4 stocks from March 2015 to
March 2020 (61 months). We then calculate the monthly holding period returns (HPR) for each stock
using the formula below. For this analysis, we have not included dividend payments for the calculation
of HPR.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 − 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒

𝐻𝑃𝑅 =
𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒
Step 2

After calculating the monthly HPRs, we find the average return and risk of each stock for the giventime
period. Return can be calculated by finding the average of the HPRs, and risk can be calculated by finding
the standard deviation of the HPRs. Both of these functions are easily available on Excel and will give us
the monthly risk and return. To find annualized return, we canmultiply the monthly return into 12. For
annualized risk, multiply monthly standard deviation intothe square root of 12(or 3.464). Following is a
table containing the annualized risk and returns of each of the four stocks.

Stock Returns Risk

Reliance Industries Ltd. 23.71% 27.69%
Nestle India Ltd. 19.38% 21.06%
Bajaj Finance Ltd. 43.82% 41.16%
Shree Cements Ltd. 21.58% 28.94%
Page 22 of 47
Step 3
Next, we calculate the correlation between each of the stocks. A higher correlation (anything more than
0.5) means if one stock rises, the other one will too, and vice versa. Hence, it is advisableto select stocks
with a low correlation so as to diversify your portfolio and minimize huge losses.
Correlation can be calculated using the CORREL function in Excel. By using this for all the stocks,we get
a 4x4 matrix in which the lower half mirrors the upper half. As depicted in the table, the middle diagonal
line will be the divider. Those values indicate the correlation of a stock with itself,and will always be 1. The
highest correlation we have obtained is 0.4086, between Bajaj Finance andReliance. This means that our
stocks are unlikely to move in the same direction. It indicates that ourstock selection is relatively safe, and
the probability of massive losses are lower.

Correlation Matrix

Reliance Nestle Bajaj Finance Shree Cement

Reliance 1.0000 0.1473 0.4086 -0.2552
Nestle 0.1473 1.0000 0.3313 0.0793
Bajaj Finance 0.4086 0.3313 1.0000 -0.0682
Shree Cement -0.2552 0.0793 -0.0682 1.0000

Step 4

Now that we have found the correlation, we can calculate the covariance between stocks using the
formula given below. Covariance indicates the direction of the movement of two stocks; a negative
covariance means there is an inverse relationship. We see one negative covariance, whichis good as that
indicates diversification in our portfolio.
Again, we get a 4x4 matrix in which the lower half mirrors the upper half. The middle diagonal line
indicates the covariance of a stock with itself. Since the correlation in such cases is 1, the covariance will
be equal to the square of its standard deviation; in other words, the variance of thestock.

𝐶𝑜𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = 𝐶𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛(𝑎, 𝑏) ∗ 𝑆𝐷(𝑎) ∗ 𝑆𝐷(𝑏)

Covariance Matrix

Reliance Nestle Bajaj Finance Shree Cement

Reliance 0.0767 0.0086 0.0466 -0.0205
Nestle 0.0086 0.0444 0.0287 0.0048
Bajaj Finance 0.0466 0.0287 0.1695 -0.0081
Shree Cement -0.0205 0.0048 -0.0081 0.0837

Page 23 of 47
Step 5
Using the covariances found in Step 4, we will now create the bordered covariance matrix. Thebordered
covariance of each pair is calculated by multiplying the weight of each stock and the covariance between
the two stocks. As in the earlier steps, we get a 4x4 matrix in which the lowerhalf mirrors the upper half,
and the middle diagonal acts as a divider. For the initial calculation, we assume that our four stocks have
equal allocations in the portfolio. Therefore, the weight of each one will be 0.25. Using these weights, we
can calculate the initial border covariance matrix for each pair. The variance of each stock is the sum of
the bordered covariance of that stock with all the other stocks (sum of the column).

Bordered Covariance Matrix

Reliance Nestle Bajaj Shree Cement Initial Weights

Finance
Reliance 0.0048 0.0005 0.0029 -0.0013 0.25
Nestle 0.0005 0.0028 0.0018 0.0003 0.25
Bajaj Finance 0.0029 0.0018 0.0106 -0.0005 0.25
Shree Cement -0.0013 0.0003 -0.0005 0.0052 0.25
TOTAL 0.0070 0.0054 0.0148 0.0038 1

Step 6

Now, we start working on the portfolio’s risk and return. The variance of the portfolio is equal to the
sum of all bordered covariances, or the sum of the entire 4x4 matrix. Since variance is equalto standard
deviation squared, the risk of the portfolio is the square root of the variance. As for portfolio return, we
can calculate it by multiplying the returns of each stock into the weights allocated and adding them all up.
The Excel function SUMPRODUCT can also be used for this calculation.

Step 7

Now that we have all our values ready, we need to decide the optimal allocation of weights. We can do
this using the Solver function in Excel. Solver is extremely useful because it will change aparticular cell’s
Return

value by changing other cells that are linked to it. For our initial calculation, we will minimize the
objective cell, which is portfolio risk, by changing the proportions of the assets.However, we will have to
set some constraints.
Firstly, we must set a constraint which states that the sum of weights must always be equal to one.Secondly,
we must make sure the weight of each stock is greater than 0, because a weight of zerowill reduce our 4-
stock portfolio to one which has three stocks. Finally, we must make sure allweights are less than one,
because a weight of more than one will indicate external borrowing.
By running the solver with these inputs, we will get the weights of stocks at which the portfolio risk is
minimized.

Page 24 of 47
Step 8
We have obtained one point, but we need a few more to create an efficient frontier. In order to create more
points, we can go back to the Solver and change the value of the objective cell, that isthe portfolio risk.
We can also manually manipulate the weights so as to get a different risk level,but we must make sure
the sum of weights is always 1. By following this process multiple times, we obtained multiple asset
allocations, each with a different risk and return. We then plot these points on a scatter graph, with risk on
the X-axis and return on the Y-axis. The resultant graph willbe an efficient frontier, and will always slope
upwards and to the right. If at any point, the slope is going downwards, that allocation is poor because for
a higher level of risk, your return is actually decreasing. Such portfolios are inefficient and must be
removed from the data set.

Weights of each stock

Option Risk Return
Reliance Nestle Bajaj Shree
Finance Cement
1 0.2876 0.3552 0.0500 0.3072 14.69% 22.52%
2 0.2617 0.3300 0.1000 0.3083 15.08% 23.64%
3 0.2098 0.2795 0.2000 0.3107 16.43% 25.86%
4 0.2500 0.2500 0.2500 0.2500 17.58% 27.12%

Efficient Frontier Curve

28.00%

27.00%

26.00%

25.00%
Return

24.00%

23.00%

22.00%

21.00%

20.00%
14.00% 14.50% 15.00% 15.50% 16.00% 16.50% 17.00% 17.50% 18.00%
Risk

Page 25 of 47
Step 9

Once we have our efficient frontier, we select a particular point from it as our portfolio. This selection
will be based on our client’s objectives as well as the performance of that portfolio. Thecorresponding
weights will be the proportion of each stock in our asset, and the risk and return forthat particular point
will be our portfolio risk and return.

The evaluation of the portfolio’s performance has been done using four ratios which, will be explained in
the next section. Based on these ratios, and as per our client’s requirements of comparatively lower risk,
we will select Option 1. This will be our portfolio from March 2020 to September 2020. It has a risk of
14.69%, and an expected return of 22.52%.

Weight Allocated to each Stock

Reliance Industries Ltd. Nestle India Ltd. Bajaj Finance Ltd. Shree Cements Ltd.

SECOND CHURN OUT

Step 10
After 6 months, we decide that one stock should be replaced. This decision will be taken based onthe
stocks’ performance. When we compare our four stocks, we see that Bajaj Finance is the one that is
performing the poorest with a risk of 41.16%. Therefore, we will choose to remove Bajaj Finance, and
replace it with a new stock, Dr. Reddy’s Laboratories.

Stock Risk
Reliance 27.69%
Nestle 21.06%
Bajaj Finance 41.16%
Shree Cement 28.94%

Page 26 of 47
We now calculate the HPRs, risk and return of each stock individually. However, the only changewill be
the time period. We will now take the closing prices of stocks from September 2015 to September 2020.
Even though three of our stocks are the same as last time, their risk and returns may vary because the time
periods are different.

Stock Returns Risk

Reliance 37.90% 31.14%
Nestle 20.65% 20.76%
Shree Cement 15.29% 29.83%
Dr Reddy's Laboratories 8.93% 30.19%

Step 11
Now we will start the process for our second churn out. Go back to Step 3, where we calculatedthe
correlation between stocks. We will have to repeat the entire process starting from there. We will find the
correlation and covariance between stocks, form the bordered covariance matrix, getmultiple data points
and construct an efficient frontier. Again, we see that the correlation betweenstocks is generally quite low
(exception: Nestle and Shree Cement), which is good as it helps us diversify the risk.

Correlation Matrix

Reliance Nestle Shree Cement Dr Reddy’s

Laboratories
Reliance 1.0000 0.1637 0.4367 0.2431
Nestle 0.1637 1.0000 0.3695 0.1115
Shree Cement 0.4367 0.3695 1.0000 0.1632
Dr Reddy's
0.2431 0.1115 0.1632 1.0000
Laboratories

Covariance Matrix

Reliance Nestle Shree Cement Dr Reddy’s

Laboratories
Reliance 0.0970 0.0106 0.0406 0.0229
Nestle 0.0106 0.0431 0.0229 0.0070
Shree Cement 0.0406 0.0229 0.0890 0.0147
Dr Reddy's
0.0229 0.0070 0.0147 0.0912
Laboratories

Page 27 of 47
 Bordered Covariance Matrix

Reliance Nestle Shree Cement Dr Reddy’s Initial Weights

Laboratories
Reliance 0.0022 0.0009 0.0005 0.0008 0.25
Nestle 0.0009 0.0131 0.0009 0.0009 0.25
Shree Cement 0.0005 0.0009 0.0005 0.0002 0.25
Dr Reddy's
0.0008 0.0009 0.0002 0.0045
0.25
Laboratories
TOTAL 0.0044 0.0158 0.0021 0.0064 1

Weights of each stock

Option Risk Return
Reliance Nestle Shree Cement Dr Reddy’s
Laboratories
1 0.15 0.49 0.15 0.21 17.06% 20.03%
2 0.15 0.55 0.07 0.22 16.93% 20.27%
3 0.25 0.25 0.25 0.25 18.66% 20.69%

Efficient Frontier Curve

20.80%
20.70%
20.60%
20.50%
Return

20.40%
20.30%
20.20%
20.10%
20.00%
19.90%
16.50% 17.00% 17.50% 18.00% 18.50% 19.00%
Risk

Page 28 of 47
Step 12
Now we select a point from our efficient frontier. The weights will be the proportion of each stockin our
asset, and the risk and return for that particular point will be our portfolio risk and return. We evaluate
using the four ratios which are explained later. As per these ratios and our client’s requirements of
having a low risk, we will select Option 2. This will be our portfolio from September 2020 to March
2021. It has a risk of 16.93%, and an expected return of 20.27%.

Weight Allocated to each Stock

Reliance Industries Ltd. Nestle India Ltd.

Shree Cements Ltd. Dr Reddy's Laboratories Ltd.

THIRD CHURN OUT

Step 13
In March 2021, we decide that one stock should be replaced. Even though our portfolio did well in the
previous 6 months, this change is vital because of the scenario at that time. Hence, we must alter our
portfolio so as to minimize the impact of the lockdown on our investment.
After analyzing the market, we decide that the construction industry is the most likely to suffer from the
lockdown. Hence, of our four stocks, we decide to remove Shree Cement and replace it with HCL
Technologies Ltd.

Page 29 of 47
We now calculate the HPRs, risk and return of each stock individually. Again, the time period willchange;
now we take the closing prices from March 2015 to March 2021. When these values are compared across
stocks, Dr Reddy’s is significantly lower than the others, and many of our clientsmay be wondering why
we have selected it at all. However, as mentioned above, the pharma industry is likely to grow, and we
expect the return of this stock to improve substantially.

Stock Returns Return

Reliance Industries Ltd. 31.93% 32.03%
Nestle India Ltd. 23.93% 19.68%
HCL Technologies Ltd. 21.02% 26.25%
Dr Reddy's Laboratories Ltd. 11.78% 28.37%

Step 14

Now we will start the process for our third churn out. The entire process will be repeated once more.
Again, we calculate the correlation and covariance between stocks, form the bordered covariance matrix,
get multiple data points and construct an efficient frontier.
Correlation Matrix

Reliance Nestle HCL Tech Dr Reddy’s

Laboratories
Reliance 1.0000 0.0920 0.5599 0.2739
Nestle 0.0920 1.0000 0.0228 0.0933
HCL Tech 0.5599 0.0228 1.0000 0.4391
Dr Reddy’s
0.2739 0.0933 0.4391 1.0000
Laboratories

Covariance Matrix

Reliance Nestle HCL Tech Dr Reddy’s

Laboratories
Reliance 0.1026 0.0058 0.0471 0.0249
Nestle 0.0058 0.0387 0.0012 0.0052
HCL Tech 0.0471 0.0012 0.0689 0.0327
Dr Reddy’s
0.0249 0.0052 0.0327 0.0805
Laboratories

Page 30 of 47
 Bordered Covariance Matrix

Reliance Nestle HCL Tech Dr Reddy’s Initial Weights

Laboratories
Reliance 0.0064 0.0004 0.0029 0.0016 0.25
Nestle 0.0004 0.0024 0.0001 0.0003 0.25
HCL Tech 0.0029 0.0001 0.0043 0.0020 0.25
Dr Reddy’s 0.25
0.0016 0.0003 0.0020 0.0050
Laboratories
TOTAL 0.0113 0.0032 0.0094 0.0090 1

Weights of each stock

Option Risk Return
Reliance Nestle HCL Tech Dr Reddy’s
Laboratories
1 0.1500 0.4000 0.2355 0.2145 16.15% 21.84%
2 0.0600 0.5720 0.2209 0.1470 15.34% 21.98%
3 0.2500 0.2500 0.2500 0.2500 18.10% 22.17%

Efficient Frontier Curve

22.20%

22.15%

22.10%

22.05%
Return

22.00%

21.95%

21.90%

21.85%

21.80%
15.00% 15.50% 16.00% 16.50% 17.00% 17.50% 18.00% 18.50%
Risk

Page 31 of 47
Step 15
While selecting a point from this graph, we must take into account not only our clients’ objectivesbut also
the market scenario. Given our need to keep the risk low, especially in these uncertain times, we will
select Option 2. This will be our portfolio from March 2021 onwards. It has a riskof 15.34%, and an
expected return of 21.98%. Based on how long it takes for the market to recover, and which sectors
are booming at the time, we will make the necessary changes to ourportfolio in the future.

Weights Allocated to each Stock

Reliance Industries Ltd. Nestle India Ltd.

HCL Technologies Ltd Dr Reddy's Laboratories Ltd.

Page 32 of 47
5. PORTFOLIO EVALUATION

For our analysis, we have used four different ratios; Sharpe Ratio, Treynor’s ratio, Jensen’s Alpha and Coefficient
of Variation. Each of these four ratios has been used to evaluate various portfolio options from our efficient frontier
and to select the one that best fits our requirements. We have also used the Sharpe ratio to evaluate individual stocks
and decide which one to remove in each churn out.

Sharpe Ratio
The Sharpe Ratio is a measure of the return above risk free return, per unit risk. In other words, it indicates how much
additional return an investor can gain per unit of additional risk. An investment with a higher Sharpe ratio is considered
superior to one with a lower ratio. It is obtained by dividing excess return over risk free return by the portfolio return.
𝑆ℎ𝑎𝑟𝑝𝑒 𝑅𝑎𝑡𝑖𝑜= (𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑅𝑒𝑡𝑢𝑟𝑛−𝑅𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒)/𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑅𝑖𝑠𝑘

Treynor’s Ratio
Treynor’s ratio shows the risk adjusted performance of the fund. Here the denominator is the portfolio’s beta. Thus, it
considers the systematic risk of the portfolio. While Sharpe uses the standard deviation, Treynor uses beta in the
denominator. The difference between the two is that standard deviation measures the total volatility, whereas beta
measures how sensitive a portfolio is to the market’s movements. The higher this ratio, the better the fund. 𝑇𝑟𝑒𝑦𝑛𝑜𝑟′𝑠
𝑅𝑎𝑡𝑖𝑜= (𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑅𝑒𝑡𝑢𝑟𝑛−𝑅𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒)/𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝐵𝑒𝑡𝑎

Jensen’s Alpha
Jensen's alpha is a measure that indicates the difference between the average return of a portfolio and the return
predicted by the capital asset pricing model. Unlike the other two ratios, this measure can be negative; it indicates the
return is less than that predicted by the CAPM. 𝑱𝒆𝒏𝒔𝒆𝒏′𝒔 𝑨𝒍𝒑𝒉𝒂= 𝑹𝒊−𝑹𝒇+(𝑩𝒆𝒕𝒂∗(𝑹𝒎−𝑹𝒇))
R(i) = the realized return of the portfolio or investment
R(m) = the realized return of the appropriate market index
R(f) = the risk-free rate of return for the time period
B = the beta of the portfolio of investment with respect to the chosen market index

Coefficient of Variation
The coefficient of variation is the risk per unit of return of an investment. It is obtained by dividing the risk of a
portfolio by its return. It indicates the amount of risk that an investor needs to undertake to earn one additional unit of
return. The lower this ratio, the better is the risk-return trade off. A higher value additional risk without a corresponding
increase in return.

Page 33 of 47
The following tables represent Sharpe Ratio, Treynor Ratio and Jensen’s Alpha for the companies for all three
portfolios.

Evaluation for Churn out 1

Company Sharpe Ratio Treynor's Ratio Jensen's Alpha

Reliance Industries Ltd. 0.60 0.16 21.91%
Nestle India Ltd. 0.58 0.25 14.75%
Bajaj Finance Ltd. 0.89 0.21 45.92%
Shree Cements Ltd. 0.50 -0.31 11.96%
Portfolio 1.13 0.47 22.11%

For our first churn out, which is from March 2020 to September 2020, we obtained these figures for the
4 companies and the overall portfolio.

Evaluation for Churn out 2

Company Sharpe Ratio Treynor's Ratio Jensen's Alpha

Reliance Industries Ltd. 0.99 0.25 28.91%
Nestle India Ltd. 0.66 -1.42 12.97%
Shree Cements Ltd. 0.28 -0.55 6.44%
Dr Reddy's Laboratories 0.06 -3.30 1.57%
Portfolio 0.78 0.25 12.38%

For our second churn out, which is from September 2020 to March 2021, we obtained these figures for
the 4 companies and the overall portfolio.

Evaluation for Churn out 3

Company Sharpe Ratio Treynor's Ratio Jensen's Alpha

Reliance Industries Ltd. 0.78 0.22 16.45%
Nestle India Ltd. 0.87 0.67 15.13%
HCL Technologies Ltd. 0.54 0.20 8.62%
Dr Reddy's Laboratories 0.17 0.29 3.62%
Portfolio 0.85 0.39 12.26%

For our third churn out, which is from March 2021 onwards, we obtained these figures for the 4
companies and the overall portfolio.

Page 34 of 47
Evaluation of Performance per Churn out

1. Sharpe Ratio

Comparison of Sharpe Ratio

1.20 1.13

1.00
0.85
0.78
0.80

0.60

0.40

0.20

0.00
Portfolio 1 Portfolio 2 Portfolio 3

2. Treynor’s Ratio

Comparison of Treynor's Ratio

0.50 0.47
0.45
0.39
0.40
0.35
0.30
0.25
0.25
0.20
0.15
0.10
0.05
0.00
Portfolio 1 Portfolio 2 Portfolio 3

Page 35 of 47
 3. Jensen’s Alpha

Comparison of Jensen's Alpha

25.00%
22.11%

20.00%

15.00%
12.38% 12.26%

10.00%

5.00%

0.00%
Portfolio 1 Portfolio 2 Portfolio 3

Comparison with a Benchmark

We compared our portfolio’s risk and return to that of Nifty 100 to evaluate our performance against a
benchmark. The closing prices of Nifty 100 were taken for the respective time period for each of the
three churn outs. For each of our portfolios, we found that even at a lesser risk than Nifty 100, our
portfolio was giving substantially greater returns.

Churn Out 1
25.00% 22.52%

20.00%
16.94%
14.69%
15.00%

10.00%

5.00%
1.99%

0.00%
Our Portfolio Nifty 100

Risk Return

Page 36 of 47
 Churn Out 2
25.00%
20.27%
20.00% 18.31%
16.93%

15.00%

10.00% 8.63%

5.00%

0.00%
Our Portfolio Nifty 100

Risk Return

Churn Out 3
25.00%
21.98%

20.00% 18.27%
15.34% 14.52%
15.00%

10.00%

5.00%

0.00%
Our Portfolio Nifty 100

Risk Return

We have come to the conclusion that our mutual fund would provide greater returns than an index fund
which matches the return of its index. On average, we offer much higher returns without undertaking a
significantly higher level of risk. Even in difficult times, we can provide decent returns whereas an index
fund tracking Nifty 100 would struggle to do so.

Page 37 of 47
6. COSTS

Entry load

-The entry load is not allowed in India and will therefore not be applicable.

Exit load

-This fund has a long-term investment horizon and therefore to discourage early redemptions an exit load of 1.2%, if
redeemed within the first 2 years, is to be charged.

The fee structure that is charged by most mutual fund houses in India for equity schemes is around 1%. However, as
mandated by SEBI, mutual funds are now allowed to charge an extra 20 basis points to protect the interests of the
existing investors. No exit loads will be charged for redemptions after the first two years.
This fee is charged in order to remain competitive in the market as well as to discourage investors from redeeming and
protect the interest of existing investors. The recurring expenses to manage and run the mutual fund are to be borne by
the investors.
For example, if an investor invested ₹1000 when the NAV was ₹100, he had 10 units to his name. If within 6 months,
the NAV had grown to ₹120 and the investor wanted to exit the scheme, his investment would now be worth ₹1200
but with the exit load he would get 1200*(1-0.012) = ₹1185.60/-.

Expense Ratio

-The total expense ratio (TER) is fixed at 1% of the AUM. This is charged to cover expenses like dispatching investor
communications, account statements, redemption cheques, advertisements, custodian fees, among others. An
additional 0.25% will be charged to pay for the fund managers’ expenses, bringing the total costs to 1.25%.

For example, if the TER fund had 100 crores worth of AUM at the end of the year, the next year’s initial fund value
will be 98.75 crores.

The AMC reserves the right to modify the load structure on a prospective basis.

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7. PORTFOLIO MANAGERS’ BACKGROUND

Manager # 1: Deep Shah

Educational Qualifications: has cleared CFA and is also a finance graduate from NMIMS, Mumbai.
Work Experience: In his 10-year journey in the industry, Mr. Deep has managed various HNIs’ portfolios and thus
brings with him great amount of experience and pool of knowledge. His expertise lies in value investing and is known
for picking undervalued securities which have the potential to grow in the future.

Manager # 2: Priyansh Rajoria

Educational Qualifications: Bachelors in Business Administration from NMIMS, PGDM from Indian Institute of
Management Ahmedabad
Work Experience: Mr. Priyansh has 10 years of experience in fund management and has done extensive research on
foreign markets. He has carried out extensive research and has co-authored several research papers on risk analysis of
the finance industry. He has an expertise in spotting opportunities in order to build efficient portfolios in the market.

Manager # 3: Sarthak Moudgil

Educational Qualifications: Bachelors in Business Administration (Finance specialization) from NMIMS, Masters
in Management from London Business School
Work Experience: A professional mutual fund manager and analyst with over 12 years of experience, Mr. Sarthak is
well known for providing stable returns even when other funds are struggling.

Manager # 4: Siddharth Gada

Educational Qualifications: Bachelors in Business Administration with a specialization in Finance from NMIMS
Mumbai, CFA Certification, CMT LEVEL 2, FRM Certification.
Work Experience: Mr. Siddharth is an ex-hedge fund manager with 10+ years’ experience in Technical Analysis.

Manager # 5: Tanmay Munjal

Educational Qualifications: Bachelors in Business Administration (BBA) from NMIMS, PGDM (IIM-B), CFA
Work Experience: Mr. Tanmay has 8 years of experience in fund management and equity research for the mutual
fund industry in India. He is skilled in risk profiling and has a brilliant track record of identifying opportunistic
movements in the market.

Manager # 6: Pratham Masrani

Educational Qualifications: BBA (specialization in finance) from NMIMS University, CFA, MBA from Indian
School of Business
Work Experience: Mr. Pratham is a financial analyst with 9 years of experience at HDFC bank.

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8. CONCLUSION
We found out that our fund provided steady returns without taking a huge amount of risk. Most ofour
stocks had quite a low element of risk, with the exception of Bajaj Finance. Even then, we were able to
diversify our portfolio well and keep the total risk low. The correlation between mostof our stocks were
generally below 0.5, which was again a good sign because it indicates diversification of our portfolio.
To add on, we have allocated minimum 5% to every stock in the portfolio in order to ensure that the
portfolio is diversified.
When we compare our stocks individually, one of the best performers was Reliance; it gave us constant
returns throughout the entire time period. Given that Dr. Reddy’s stock was introduced in the second
churn out, it still contributeda lot to the portfolio’s returns. HCL Tech, which was introduced in the
third churn out, was introduced with the expectation that the stock would still rise a lot in the future.
When comparing our three portfolios independently, the ratios were divided; both the first and second
portfolio were preferred according to the statistical ratios. However, we were of the opinion that our first
portfolio, which is from March 2020 to September 2021, was the best of our 3 portfolios. Each of the
stocks performed well on their own, and there was no obvious weak link visible when it came to
removing one stock for the third churn out. We chose to remove ShreeCement mainly because of the
situation in March 2021; its performance was not the reason we replaced it.

Finally, as mentioned earlier also, we believe that our mutual fund performs better than any othertype
of index fund, and provides a much better return per unit of risk. Since we aim at providing our clients
with long term returns, our steady stream of income and investment model is perfect for those people
who are looking to invest for long periods of time,

In conclusion, our fund provides a portfolio that minimizes risk and still tries to generate sufficient
returns. This is the ideal portfolio for investors who have a low-risk appetite.

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9. REFERENCES

https://www.ril.com › ril-annual-report-2019
https://www.thegalacticadvisors.com/post/everything-you-need-to-know-about-bajaj-finance
https://blog.investyadnya.in/why-bajaj-finance-stock-looks-attractive/
https://forum.valuepickr.com/t/bajaj-finance-limited/267/854
https://economictimes.indiatimes.com/wealth/invest/10-nbfc-stocks-that-have-fared-well-despite-crisis-in-the-
sector/articleshow/69700476.cms?from=mdr
https://economictimes.indiatimes.com/markets/stocks/news/growth-in-nii-rural-lending-drive-up-bajaj-fin-q2-profit-
top-takeaways/articleshow/71704360.cms?from=mdr
https://www.bajajfinserv.in/intimation-under-regulation-30.pdf
https://www.bajajfinservsecurities.in/about-us
https://www.ibef.org/industry/cement-india/showcase/shree-cement
https://www.businesstoday.in/magazine/corporate/shree-cement-growth-path-consistent-performance-behind-
success/story/210086.html
https://www.business-standard.com/company/shree-cement-508/information/company-history
https://www.shreecement.com/pages/investor_center.php
https://economictimes.indiatimes.com/markets/stocks/news/acquisition-in-uae-could-improve-shree-cements-
earnings-prospects/articleshow/62504395.cms?from=mdr
https://www.ndtv.com/business/stock/dr-reddys-laboratories-ltd_drreddy/reports
https://www.business-standard.com/company/dr-reddy-s-labs-815/information/company-history
https://economictimes.indiatimes.com/markets/stocks/recos/buy-dr-reddys-labs-target-price-rs-4382-anand-
rathi/articleshow/75155506.cms
https://economictimes.indiatimes.com/markets/stocks/recos/angel-broking-has-a-buy-call-on-dr-reddys-labs-target-
price-rs-4570/articleshow/76809874.cms?from=mdr
https://www.moneycontrol.com/stocksmarketsindia/
https://www.nestle.in/sites/g/files/pydnoa451/files/2020-05/Nestle-India-Annual-Report-2019
http://www.capitalmarket.com/Company-Information/Corporate-actions/Bonus-Issues/HCL-Technologies-Ltd/5656
https://www.bseindia.com/market_data.html 39
https://simplywall.st/stocks/ch/food-beverage-tobacco/vtx-nesn/nestle-shares/news/heres-why-we-think-nestle-
vtxnesn-is-well-worth-watching
https://www.thehindubusinessline.com/pick-of-the-day/why-you-should-accumulate-the-stock-of-
ril/article33426006.ece

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10. Contribution by each student
Name Work done
Deep Shah (14) Report-Asset class justification, Costs, Managers’
background, Conclusion. Excel- Churn out 2
Priyansh Rajoria (40) Report-Asset allocation process, Portfolio evaluation,
Conclusion. Excel- Churn out 1
Sarthak Moudgil (47) Report-Introduction, Fund details, Conclusion. Excel-
Churn out 3
Siddharth Gada (53) Report-Asset allocation process, Portfolio evaluation,
Conclusion. Excel- Churn out 1
Tanmay Munjal (56) Asset class justification, Costs, Managers’ background,
Conclusion. Excel- Churn out 2
Pratham Masrani (63) Report-Introduction, Fund details, Conclusion. Excel-
Churn out 3

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