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PERFORMANCE EVALUATION OF SCHEMES OF HDFC MUTUAL FUNDS

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A

MINOR PROJECT REPORT

ON

“PERFORMANCE ANALYSIS OF SCHEMES OF HDFC MUTUAL FUNDS”

Submitted by

SAGAR LINGAM

(1225110149)

Under the Guidance of

Mrs. G. ARTI

GITAM UNIVERSITY

(Declared as Deemed to be University u\s 3 of the UGC Act, 1956)

Rushikonda, VISAKHAPATNAM.

A Project Report submitted in partial fulfillment of the requirement of

Master in Business Administration




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S no Name of the Topic Page no

1 Conceptual Framework 3

2The Present Study

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3Organization Profile

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4Analysis 21

5Findings, Suggestions and Conclusion 27




3

CONCEPTUAL FRAMEWORK




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PREFACE

The National Stock Exchange of India Ltd. (NSE), set up in the year 1993, is today the largest

stock exchange in India and a preferred exchange for trading in equity, debt and derivatives

instruments by investors. NSE has set up a sophisticated electronic trading, clearing and settlement

platform and its infrastructure serves as a role model for the securities industry. The standards set

by NSE in terms of market practices; products and technology have become industry benchmarks

and are being replicated by many other market participants.

NSE has four broad segments Wholesale Debt Market Segment (commenced in June 1994), Capital

Market Segment (commenced in November 1994) Futures and Options Segment (commenced June

2000) and the Currency Derivatives segment (commenced in August 2008). Various products which

are traded on the NSE include, equity shares, bonds, debentures, warrants, exchange traded funds,

mutual funds, government securities, futures and options on indices & single stocks and currency

futures. Thousands of investors rely on the NSE’s accessible, liquid and transparent markets for order

execution.

MAIN SUBJECT: MUTUAL FUNDS

Concept

A mutual fund is a professionally managed type of collective investment scheme that pools

money from many investors and invests it in stocks, bonds, short-term money market

instruments and other securities. Mutual funds have a fund manager who invests the money on

behalf of the investors by buying / selling stocks, bonds etc. Currently, the worldwide value of

all mutual funds totals more than $US 26 trillion.

Reason for Preferring

There are many reasons why investors prefer mutual funds. Buying shares directly from the

market is one way of investing. But this requires spending time to find out the performance of

the company whose share is being purchased, understanding the future business prospects of the

company, finding out the track record of the promoters and the dividend, bonus issue history of

the company etc.




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An informed investor needs to do research before investing. However, many investors find it

cumbersome and time consuming to pore over so much of information, get access to so much of

details before investing in the shares.

Investors therefore prefer the mutual fund route. It leaves it to the mutual fund and its

professional fund management team. Another reason why investors prefer mutual funds is

because mutual funds offer diversification. An investor’s money is invested by the mutual fund

in a variety of shares, bonds and other securities thus diversifying the investor’s portfolio across

different companies and sectors.

This diversification helps in reducing the overall risk of the portfolio. It is also less expensive to

invest in a mutual fund since the minimum investment amount in mutual fund units is fairly low

(Rs. 500 or so). With Rs. 500 an investor may be able to buy only a few stocks and not get the

desired diversification. These are some of the reasons why mutual funds have gained in

popularity over the years.

Structure

Mutual Funds in India follow a 3-tier structure. There is a Sponsor (the First tier), who thinks of

starting a mutual fund. The Sponsor approaches the Securities & Exchange Board of India

(SEBI), which are the market regulator and also the regulator for mutual funds.




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SEBI checks whether the person is of integrity, whether he has enough experience in the

financial sector, his net worth etc. Once SEBI is convinced, the sponsor creates a Public Trust

(the Second tier) as per the Indian Trusts Act, 1882. Trusts have no legal identity in India and

cannot enter into contracts, hence the Trustees are the people 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 this trust is known as the mutual fund.

It is important to understand the difference between the Sponsor and the Trust. They are two

separate entities. Sponsor is not the Trust; i.e. Sponsor is not the Mutual Fund. It is the Trust

which is the Mutual Fund.

This is the role of the Asset Management Company (the Third tier). Trustees appoint the Asset

Management Company (AMC), to manage investor’s money. The AMC in return charges a fee

for the services provided and this fee is borne by the investors as it is deducted from the money

collected from them.




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The AMC’s Board of Directors must have at least 50% of Directors who are independent

directors. The AMC has to be approved by SEBI. The AMC functions under the supervision of

its Board of Directors, and also under the direction of the Trustees and SEBI. It is the AMC,

which in the name of the Trust, floats new schemes and manages these schemes by buying and

selling securities.




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Topic related concepts

MUTUAL FUND PRODUCTS AND FEATURES

1. EQUITY FUNDSa. Open ended and Closed ended funds

b. Index funds

c. Large cap funds

d. Mid cap funds

e. Sectoral funds

f. Arbitrage funds

g. Multi-cap funds

h. Growth schemes

i. ELSS

j. NAV

k. Entry and Exit load

2. GOLD ETFS

a. New Fund Offer

3. DEBT FUND

a. Capital Protection funds

b. Monthly Income Plans

c. Balanced funds

4. LIQUID FUNDS

a. Floating rate scheme

5. TAXATION

a. Capital Gainsb. FMPs- Growth and Dividend options

6. REGULATIONS

a. Objectives of AMFI

b. Systematic Investment Plan (SIP)

c. Systematic Transfer Plan (STP)




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THE PRESENT STUDY / METHODOLOGY




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a. Need of the Study:

The project’s idea is to venture Mutual Funds as a better avenue for investment on a long-

term or short-term basis. Mutual Fund is a productive package for a lay-investor with

limited finances, this project creates an awareness that the Mutual Fund is a worthy

investment practice. Mutual Fund is a globally proven instrument.

The driving force of Mutual Funds is the ‘safety of the principal’

guaranteed, plus the added advantage of capital appreciation together with the income earned

in the form of interest or dividend. The various schemes of Mutual Funds provide the

investor with a wide range of investment options according to his risk bearing capacities and

interest besides; they also give handy return to the investor. Mutual Funds offers an investor

to invest even a small amount of money, each Mutual Fund has a defined investment

objective and strategy. Mutual Funds schemes are managed by respective asset managed

companies sponsored by financial institutions, banks, private companies or international

firms. A Mutual Fund is the ideal investment vehicle for today’s complex and modern

financial scenario.

The study is basically made to analyze the performance of the any two growth schemes

of HDFC Mutual Funds based on factors like Sharpe’s Ratio, Treynor’s Ratio.

b. Objectives of the Study:

1. To project Mutual Fund as the ‘productive avenue’ for investing activities.

2. To show the wide range of investment options available in Mutual Funds by explaining

its various schemes.

3. To compare the schemes based on Sharpe’s ratio, Treynor’s ratio and show which

scheme is best for the investor based on his risk profile.

4. To help an investor make a right choice of investment, while considering the inherent

risk factors.

c. Scope of the study:

The scope of the study is to measure the Sharpe’s ratio and Treynor’s ratio of various

schemes in the organizations in order to identify the risk factor and evaluating the

performance of the schemes.




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1. The Sharpe’s Measure:-

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a

ratio of returns generated by the fund over and above risk free rate of return and the total

risk associated with it. According to Sharpe, it is the total risk of the fund that the

investors are concerned about. So, the model evaluates funds on the basis of reward per

unit of total risk. Symbolically, it can be written as:

Sharpe Index (Si) = (RI - RF)/Si

Where,

Si is Standard Deviation of the fund.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a

fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.

2. The Treynor Measure:-

Developed by Jack Treynor, this performance measure evaluates funds on the basis of

Treynor's Index. This Index is a ratio of return generated by the fund over and above risk

free rate of return (generally taken to be the return on securities backed by the

government, as there is no credit risk associated), during a given period and systematic

risk associated with it (beta). Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where,

Ri represents return on fund,

Rf is risk free rate of return,

And Bi is beta of the fund.

All risk-averse investors would like to maximize this value. While a high and positive

Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative

Treynor's Index is an indication of unfavorable performance.




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13

ORGANIZATION PROFILE




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HDFC Mutual Fund

HDFC Mutual Fund (Housing Development Finance Corporation) is one of the largest

mutual funds and well-established fund house in the country with consistent and above

average fund performance across categories since its incorporation on December 10, 1999.

While our past experience does make us a veteran, but when it comes to investments, we have

never believed that the experience is enough.

Investment Philosophy:

The single most important factor that drives HDFC Mutual Fund is its belief to give the

investor the chance to profitably invest in the financial market, without constantly worrying

about the market swings. To realize this belief, HDFC Mutual Fund has set up the

infrastructure required to conduct all the fundamental research and back it up with effective

analysis. Our strong emphasis on managing and controlling portfolio risk avoids chasing the

latest “fads” and trends.

Offers:

We believe, that, by giving the investor long-term benefits, we have to constantly review

the markets for new trends, to identify new growth sectors and share this knowledge with our

investors in the form of product offerings. We have come up with various products across

asset and risk categories to enable investors to invest in line with their investment objectives

and risk taking capacity. Besides, we also offer Portfolio Management Services.

Our Achievements:

HDFC Asset Management Company (AMC) is the first AMC in India to have been

assigned the ‘CRISIL Fund House Level – 1’ rating. This is its highest Fund Governance and




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Process Quality Rating which reflects the highest governance levels and fund management

practices at HDFC AMC It are the only fund house to have been assigned this rating for two

years in succession. Over the past, we have won a number of awards and accolades for our

performance.

Sponsors:

Housing Development Finance Corporation Limited (HDFC)

HDFC was incorporated in 1977 and it is the first specialized Mortgage Company in

India. HDFC provides financial assistance to individuals, corporate and developers for the

purchase or construction of residential housing. It also provides property related services (e.g.

property identification, sales services and valuation), training and consultancy. Of these

activities, housing finance remains the dominant activity.

HDFC has a client base of around 12 lac borrowers, around 8 lac depositors, over 1.08

lac shareholders and 50,000 deposit agents, as at March 31, 2008.

HDFC has 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

thirteenth year in succession. HDFC Standard Life Insurance Company Limited, promoted by

HDFC was the first life insurance company in the private sector to be granted a Certificate of

Registration (on October 23, 2000) by the Insurance Regulatory and Development Authority

to transact life insurance business in India.




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Trustee

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

Awards & Accolades

CNBC - TV 18 - CRISIL Mutual Fund of the Year Awards 2008: (3 awards)

1. HDFC Prudence Fund was the only scheme that won the CNBC - TV 18 - CRISIL

Mutual Fund of the Year Award 2008 in the Most Consistent Balanced Fund under

CRISIL ~ CPR for the Calendar year 2007 (from amongst 3 schemes).

2. HDFC Cash Management Fund - Savings Plan was the only scheme that won the CNBC

- TV 18 - CRISIL Mutual Fund of the Year Award 2008 in the Most Consistent Liquid

Fund under CRISIL ~ CPR for the calendar year 2007 (from amongst 5 schemes).

3. HDFC Cash Management Fund - Savings Plan was the only scheme that won the CNBC

- TV 18 - CRISIL Mutual Fund of the Year Award 2008 in the Liquid Scheme – Retail

Category for the calendar year 2007 (from amongst 19 schemes).

ICRA Mutual Fund Awards 2008: (3 awards)

1. HDFC MF Monthly Income Plan-Long Term Plan- Ranked a Seven Star Fund and

has been awarded the Gold Award for "Best Performance" in the category of "Open

Ended Marginal Equity" for the three year period ending December 31, 2007 (from

amongst 27 schemes)




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2. HDFC High Interest Fund - Short Term Plan - Ranked a Five Star Fund indicating

Performance among the top 10% in the category of "Open Ended Debt - Short Term" for

one Year period ending December 31, 2007 (from amongst 20 schemes).

3. HDFC Prudence Fund - Ranked a Five Star Fund indicating performance among the

top 10% In the category of "Open Ended Balanced" for the three year period ending

December 31, 2007 (From amongst 16 schemes).

Lipper Fund Awards 2008:

• HDFC Equity Fund - Growth has been awarded the 'Best Fund over Ten Years' in

the 'Equity Indian Category at the Lipper Fund Awards 2008 (form amongst 23

schemes). It was awarded as the Best Fund over ten years in 2006 and 2007 as well.

2008 makes it three in a row.

It’s Competitors:

Major Mutual Fund Companies in India:

• ABN AMRO MUTUAL FUND

• BRILA SUNLIFE MUTUAL FUND

• HDFC MUTUAL FUND

• HSBC MUTUAL FUND

• ING VYSYA MUTUAL FUND

• PRUDENTIAL ICCI MUTUAL FUND

• SAHARA MUTUAL FUND

• TATA MUTUAL FUND

• STATE BANK OF INDIA MUTUAL FUND

• KOTAK MAHINDRA MUTUAL FUND

• UNIT TRUST OF INDIA MUTUAL FUND




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• RELIANCE MUTUAL FUND

• LIC MUTUAL FUND

• GIC MUTUAL FUND

• BANK OF BARODA MUTUAL FUND

It’s Products:

HDFC Mutual Fund Product Schemes:

Equity Funds

HDFC growth fund

HDFC long-term advantage fund

HDFC index fund

HDFC equity fund

HDFC capital builder fund

HDFC tax saver

HDFC top 200 funds

HDFC core and satellite fund

HDFC premier multi-cap fund HDFC long-term equity fund

Balanced Fund

HDFC Children’s Gift Fund Investment Plan

HDFC Children’s Gift Fund Savings Plan

HDFC Balanced Fund

HDFC Prudence Fund

Debt Funds

HDFC income fund

HDFC liquid fund

HDFC gilt fund short-term plan




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HDFC gilt fund long-term plan

HDFC short –term plan

HDFC floating rate income fund short-term plan

HDFC floating rate income fund long- term plan

HDFC liquid fund- PREMIUM PLAN

HDFC liquid fund- PREMIUM PLUS PLAN

HDFC short –term plan - PREMIUM PLAN

HDFC short –term plan- PREMIUM PLUS PLAN

HDFC income fund PREMIUM PLAN

HDFC income fund PREMIUM PLUSPLAN

HDFC high interest fund

HDFC high interest fund-short –term plan

HDFC sovereign gilt fund-savings plan

HDFC sovereign gilt fund –investment plan

HDFC sovereign gilt fund-provident plan

HDFC cash management fund-savings plan

HDFC cash management-call plan

HDFCMF monthly income plan-short-term plan

HDFCMF monthly income plan-long –term plan

HDFC cash management fund-savings plus plan

HDFC multiple yield fund

HDFC multiple yield fund plan-2005

Value Added Services:

• SIP (systematic investment plan)

• STP (systematic transfer plan)

• SWAP (systematic withdrawal advantage plan)




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ANALYSIS




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1. HDFC MF Monthly Income Plan (HDFC MF MIP)

Nature of Scheme: An open-ended income scheme

Monthly income is not assured and is subject to availability of distributable surplus.

Investment Objective

The primary objective of Scheme is to generate regular returns through investment

primarily in Debt and Money Market Instruments. The secondary objective of the Scheme is to

generate long-term capital appreciation by investing a portion of the Scheme’s assets in equity

and equity related instruments.

Inception Date (Date of Allotment): December 26, 2003

Exit Load (For Short-Term Plan & Long-Term Plan)

● In respect of each purchase / switch-in of Units, an Exit Load of 1% is payable if units are

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

● No Exit Load is payable if Units are redeemed /switched-out after 1 year from the date of

allotment.

Investment Plan / Options: (Short Term Plan (STP) & Long Term Plan (LTP)

Each Plan offers Growth, Monthly Dividend & Quarterly Dividend Option. The Dividend

Option offers Dividend Payout and Reinvestment facility.

Net Asset Value (NAV): Growth Option: 17.2169, Monthly Dividend Option: 11.1509,

Quarterly Dividend Option 11.4654.

Redemption Proceeds: Normally dispatched within 3-4 Business Days.




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Calculations:

1.Mean(X bar): ∑X/N, where n is the number of observations.

2.Standard Deviation σ: √ S(X-X bar) 2 / N

3.Beta Coefficient β: (N(∑XY) – ∑X ∑Y)/(N(∑X2) – (X)2)4.Sharpe’s Ratio: ∑(Rp-Rf)/β

5.Treynor’s Ratio: ∑(Rp-Rf)/σ

Relative Performance (Growth Option):;

Where, Rp - Portfolio Return, Rm- Benchmark returns-SENSEX, Rf- Risk free rate of return.

Σ 2.07829 Sharp Ratio -0.00491

Β 1.08262 Treynor ratio -0.00942

Year Rp Rm Rf Rm-

Rf

Rp-

Rf

X2 XY X-X

bar

D2

Returns Benchmark Risk free X Y D

Last 6 month 2.98 3.98 7.47 -3.49 -4.49 12.1801 15.6701 -3.414 11.6554

Last 1 year 6.73 7 7.47 -0.47 -0.74 0.2209 0.3478 -0.394 0.15523

Last 3 years 6.49 5.7 4.82 0.88 1.67 0.7744 1.4696 0.956 0.91393

Last 5 years 7.09 7.9 5 2.9 2.09 8.41 6.061 2.976 8.85657

Since

Inception

7.92 7.27 7.47 -0.2 0.45 0.04 -0.09 -0.124 0.01537

Summation 31.21 31.85 32.23 -0.38 -1.02 21.6254 23.4585 0 21.5965



PER

Graph showin

1. HDFC M

Nature of Scheme:

An open-ended income scheme

Investment Objective:

To optimize returns while maint

Inception Date (Date of Allotm

September 11, 2000

Exit Load:

• In respect of each purcha

are redeemed / switched-

• No Exit Load is payable

date of allotment.

Investment Plan / Options:

Growth & Dividend. The Divide

0123456789

Returns

ORMANCE EVALUATION OF SCHEMES OF HDFC

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HDFC Mutual Fund Monthly Income Plan:

Income fund (HDFC IF)

ining a balance of safety, yield and liquidity

ent):

se / switch-in of Units, an Exit Load of 0.5% is

ut within 6 months from the date of allotment.

if Units are redeemed / switched-out after 6 mo

d Option offers Dividend Payout and Reinvest

Last 6

month

Last 1

year

Last 3

years

Last 5

years

Since

Inception

Time Period

MUTUAL FUNDS

ayable if units

ths from the

ent facility.

Rp

Rm

Rf




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Net Asset Value (NAV): Every Business Day

Redemption Proceeds: Normally dispatched within 3-4 Business Days

Relative Performance^ (Growth Option):

Year Rp Rm Rf Rm-Rf Rp-Rf X2 XY X-Xbar D2

X Y D

Last 6 month 2.5 1.52 7.47 -5.95 -4.97 35.4025 29.57 -2.978 8.8684

Last 1 years 5.59 4.59 7.47 -2.88 -1.88 8.2944 5.414 0.092 0.0084

Last 3 years 7.67 5.68 4.82 0.86 2.85 0.7396 2.451 3.832 14.684

Last 5 years 6.71 5.58 5 0.58 1.71 0.3364 0.991 3.552 12.616

Since Inception 8.16 0 7.47 -7.47 0.69 55.8009 -5.15 -4.498 20.232

Summation 32.23 -14.86 -1.6 100.573 33.27 0 56.409

Sharpe’s and Treynor's ratio:

Σ 3.35886 Sharp Ratio -0.00476

Β 0.50557 Treynor ratio -0.03165

Graph showing HDFC Mutual Fund Monthly Income Plan:



PER

0

1

2

3

4

5

6

7

8

9

ORMANCE EVALUATION OF SCHEMES OF HDFC

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Last 6

month

Last 1 yearLast 3 yearsLast 5 years Since

Inception

MUTUAL FUNDS

Rp

Rm

Rf




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FINDINGS, SUGGESTIONS AND CONCLUSION




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1. Findings

• As observed in the project and the analysis done, financial planning is a very

important thing, every individual has to know in which route he has to invest so we

have found that, most of the people will invest by observing the returns of the

schemes but they are unaware of the return to risk factor.

• Most of the investors have an objective of earning good profits with low amount of

risk to attain their investment objective. As we have observed in the Questionnaire

conducted for 50 people, 70% investors investing only by seeing the returns of the

schemes. Their investment objective is to build a good corpus by investing in a

scheme with high returns.

• HDFC mutual funds are a top most reputed company which is giving very good

returns for the investors. Most of the people are opting for HDFC because of good

returns, well regulated funds; top most reputed ASSET MANAGEMENT

COMPANY (AMC) which is standing in the 3rd position out of the India’s top 20

mutual fund companies.

• As we have observed in the Questionnaire conducted in HDFC mutual funds with the

investors they convey that they don’t want to take much of risk as the market is

fluctuating continuously, they want safer mode for their investment.

• A very important thing we have to observe in the data analysis it is clearly proved that

most of the people are small investors who are interested in investing regularly in

long term with low risk. HDFC fund house is managing their funds in a very efficient

way to increase investors profit and to increase their productivity. It is competing with

the other asset management companies to come in the 1st position in the field of

mutual funds.




2. Suggestions

• The Asset Management Company must design the portfolio in such a way, to increase the

returns.

• The Asset Management Company must design the portfolio in such a way, to lessen the

risk that is common in the market.

• The Asset Management Company must dedicate itself, because it motivates the investors

and potential investors to invest in Mutual Funds.

• The Asset Management Company must manage the Fund efficiently and with dedication

to earn the goodwill of the public.

• The Asset Management Company must make the most advantageous use of print and

electronic media in order to motivate the investors and potential investors to invest inMutual Funds.

Conclusion

After interpreting the above data the performance of the scheme also plays a major role for the

investor to make the decision of investment. The return of the scheme itself is not sufficient in

order to know where to invest. But the return to risk factor is also useful for an investor to decide

upon the purchase of a particular scheme.

Documents

Project Report Sagar