Project Report of the

Summer Internship Project

At

Topic- MUTUAL FUND COMPARISON AND ANALYSIS

SUBMITTED BY:

AMIT AGARWAL

PGDM( FINANCE)

ROLL NO: 014

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MUTUAL FUND COMPARISON AND ANALYSIS

By

Amit Agarwal

Under the guidance of

Mr. Bhaskar Singh Dr. Girish Jain Branch Manager HDFC AMC. Bimtech. Noida.

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Certificate of Approval

The following Summer Project Report titled "Mutual Fund Comparison and Analysis " is hereby

approved as a certified study in management carried out and presented in a manner satisfactory to

warrant its acceptance as a prerequisite for the award of Post-Graduate Diploma in Business

Management for which it has been submitted. It is understood that by this approval the undersigned

do not necessarily endorse or approve any statement made, opinion expressed or conclusion drawn

therein but approve the Summer Project Report only for the purpose it is submitted.

Summer Project Report Examination Committee for evaluation of Summer Project Report

Name Signature

1. Faculty Examiner _______________________ __________________

2. PG Summer Project Co-coordinator _______________________ __________________

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Certificate from Summer Project Guides

This is to certify that Mr. Amit Agarwal, a student of the Post-Graduate Diploma in Business

Management has worked under our guidance and supervision. This Summer Project Report has the

requisite standard and to the best of our knowledge no part of it has been reproduced from any other

summer project, monograph, report or book.

Dr.Girish Jain Organizational Guide: Mr. Bhaskar Singh Designation : Branch Manager

BIMTECH Organization: HDFC AMC Ltd. Address :Pearl Plaza , , Ground Floor36/37

Sector 18, Noida.

Date: Date:

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Declaration

I hereby declare that the following project report titled “Mutual Fund Comparison and Analysis” is

an authentic work done by me. This is to declare that all the work indulged in the completion of this

work such as research, data collection, analysis is a profound and honest work of mine.

Date:Place: New Delhi

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Amit Agarwal BIMTECH

Acknowledgement

I take this opportunity to firstly thank my institute, for giving me this opportunity to undergo this

Project in one of the most reputed financial company. It has been a great learning experience in terms

of gaining exposure into the market and knowing how actually a business can be developed and run.

I thank my Faculty Guide, Prof. Girish Jain and Mr.Bhaskar Singh (Branch Manager) who put all

their efforts in making me understand the overall theme of the Project and thereby increasing my

knowledge. Their time and efforts have indeed been very fruitful.

I also thank all other employees at HDFC AMC particularly Mr. Saurabh Kumar and Mr.Amit

Girdhar with whom I have spent my training period. They have helped me in every possible manner

in my endeavor to complete this Project successfully. I acknowledge the support and knowledge they

have given

In this project the great emphasis is given to comparison of different mutual fund schemes,study of

Sip and Rebalancing .

I hope HDFC AMC; Noida will recognize this as well as take more references from this project

report.

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Table of Contents

S.no Topic Page No.

1 Executive Summary

2 Company Profile

3 Industry Profile

I. Introduction

II. History of Mutual funds

III. Regulatory framework

IV. Concept Of Mutual Fund

V. Types of Mutual Fund

VI. Advantages Of Mutual Fund

VII. Terms Used In Mutual Funds

VIII. Fund management

IX. Risk

X. Basis Of Comparisons

XI. How to pick right fund

4 Systematic Investment Plan and Lump Sum investment

5 Rebalancing and its effects.

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6 Research Methodology

I. Problem statement

II. Research Objective

III. Data source

IV. Data Anlysis

V. Scope of Study

VI. Limitations

7 Findings and Analysis

8 Rankings

9 Conclusion

1. Executive Summary

The topic of this project is Mutual Fund Comparison and Analysis. The mutual fund industry in India

has seen dramatic improvements in quantity as well as quality of product and service offerings in

recent years and hence here focus is on comparing schemes of different mutual fund companies on

different performance parametrers. Along with this project also touches on the aspect of Systematic

Investment Plan and Rebalancing.

Project analysis past three years data of different mutual fund schemes. Different measures like

beta ,Sharpe, Treynor, Jensen etc. have been taken to analyse the performance.

An effort has been made to work on the concepts that have been taught in class along with other

useful parameters so that better study can be done.

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2. Company Profile

Vision Statement:

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HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act, 1956,

on December 10, 1999, and was approved to act as an Asset Management Company for the HDFC

Mutual Fund by SEBI vide its letter dated July 3, 2000.

The registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg, 169,

Back bay Reclamation, Churchgate, Mumbai - 400 020.

In terms of the Investment Management Agreement, the Trustee has appointed the HDFC Asset

Management Company Limited to manage the Mutual Fund. The paid up capital of the AMC is Rs.

25.161 crore.

Zurich Insurance Company (ZIC), the Sponsor of Zurich India Mutual Fund, following a review of its

overall strategy, had decided to divest its Asset Management business in India. The AMC had entered

into an agreement with ZIC to acquire the said business, subject to necessary regulatory approvals.

Following the decision by Zurich Insurance Company (ZIC), the sponsor of Zurich India Mutual

Fund, to divest its Asset Management Business in India, HDFC AMC acquired the schemes of Zurich

India Mutual Fund effective from June 19, 2003.

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HDFC AMC has a strong parentage – CO Sponsored by Housing Development Finance Corporation

Limited (HDFC Ltd.) and Standard Life Investment Limited, the investment arm of The Standard

Life Group, UK.

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

Housing Development Finance Corporation Limited was incorporated in 1977 as the first

specialized Mortgage Company in India, its activities include housing finance, and property

related services (property identification, valuation etc.), training and consultancy. HDFC Ltd.

contributes the 60% of the paid up equity capital of the AMC.

Standard Life Insurance Limited is a leading Asset management company with approximately

US$ 282 billion of asset under management as on June 30, 2007. The company operates in

UK, Canada, Hong Kong, China, Korea, Ireland and USA to ensure it is able to form a truly

global investment view. SLI Ltd. contributes the 40% of the paid up equity capital of the

AMC.

The AMC is managing 24 open-ended schemes of the Mutual Fund viz. HDFC Growth Fund (HGF),

HDFC Balanced Fund (HBF), HDFC Income Fund (HIF), HDFC Liquid Fund (HLF), HDFC Long

Term Advantage Fund (HLTAF), HDFC Children's Gift Fund (HDFC CGF), HDFC Gilt Fund

(HGILT), HDFC Short Term Plan (HSTP), HDFC Index Fund, HDFC Floating Rate Income Fund

(HFRIF), HDFC Equity Fund (HEF), HDFC Top 200 Fund (HT200), HDFC Capital Builder Fund

(HCBF), HDFC Tax Saver (HTS), HDFC Prudence Fund (HPF), HDFC High Interest Fund (HHIF),

HDFC Cash Management Fund (HCMF), HDFC MF Monthly Income Plan (HMIP), HDFC Core &

Satellite Fund (HCSF), HDFC Multiple Yield Fund (HMYF), HDFC Premier Multi-Cap Fund

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(HPMCF), HDFC Multiple Yield Fund . Plan 2005 (HMYF-Plan 2005), HDFC Quarterly Interval

Fund (HQIF) and HDFC Arbitrage Fund (HAF).The AMC is also managing 11 closed ended

Schemes of the HDFC Mutual Fund viz. HDFC Long Term Equity Fund, HDFC Mid-Cap

Opportunities Fund, HDFC Infrastructure Fund, HDFC Fixed Maturity Plans, HDFC Fixed Maturity

Plans - Series II, HDFC Fixed Maturity Plans - Series III, HDFC Fixed Maturity Plans - Series IV,

HDFC Fixed Maturity Plans - Series V, HDFC Fixed Maturity Plans - Series VI, HFDC Fixed

Maturity Plans - Series VII and HFDC Fixed Maturity Plans - Series VIII.

The AMC is also providing portfolio management / advisory services and such activities are not in

conflict with the activities of the Mutual Fund. The AMC has renewed its registration from SEBI vide

Registration No. - PM / INP000000506 dated December 8, 2006 to act as a Portfolio Manager under

the SEBI (Portfolio Managers) Regulations, 1993.

3. Industry Profile

I. Introduction

The Indian mutual fund industry has witnessed significant growth in the past few years driven by

several favourable economic and demographic factors such as rising income levels, and the

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increasing reach of Asset Management Companies and distributors. However, after several years of

relentless growth ,the industry witnessed a fall of 8% in the assets under management in the financial

year 2008-2009 that has impacted revenues and profitability. Whereas in 2009-10 the industry is on

the road of recovery.

II. History of Mutual Funds

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the

initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India

can be broadly divided into four distinct phases.

First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the

Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve

Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of

India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme

launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 Crores of assets

under management.

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

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life

Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual

Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual

Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89),

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Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in

June 1989 while GIC had set up its mutual fund in December 1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 Crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry,

giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first

Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be

registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was

the first private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised

Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund)

Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds setting up

funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of

January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 Crores. The Unit Trust of

India with Rs.44, 541 Crores of assets under management was way ahead of other mutual funds

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into

two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under

management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of

US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of

India, functioning under an administrator and under the rules framed by Government of India and

does not come under the purview of the Mutual Fund Regulations.

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The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with

SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI

which had in March 2000 more than Rs.76,000 Crores of assets under management and with the

setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund.

The graph indicates the growth of assets over the years:

Assets of the mutual fund industry touched an all-time high of Rs639,000 crore (approximately $136 billion)

in May, aided by the spike in the stock market by over 50 per cent in the last one month and fresh inflows in

liquid funds, data released by the Association of Mutual Funds in India (AMFI) shows yesterday.

The country's burgeoning mutual fund industry is expected to see its assets growing by 29% annually

in the next five years. The total assets under management in the Indian mutual funds industry are

estimated to grow at a compounded annual growth rate (CAGR) of 29 per cent in the next five years,"

the report by global consultancy Celent said. However, the profitability of the industry is expected to

remain at its present level mainly due to increasing cost incurred to develop distribution channels and

falling margins due to greater competition among fund houses, it said.

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III. Regulatory Framework

Securities and Exchange Board of India (SEBI)

The Government of India constituted Securities and Exchange Board of India, by an Act of

Parliament in 1992, the apex regulator of all entities that either raise funds in the capital markets or

invest in capital market securities such as shares and debentures listed on stock exchanges. Mutual

funds have emerged as an important institutional investor in capital market securities. Hence they

come under the purview of SEBI. SEBI requires all mutual funds to be registered with them. It issues

guidelines for all mutual fund operations including where they can invest, what investment limits and

restrictions must be complied with, how they should account for income and expenses, how they

should make disclosures of information to the investors and generally act in the interest of investor

protection. To protect the interest of the investors, SEBI formulates policies and regulates the mutual

funds. MF either promoted by public or by private sector entities including one promoted by foreign

entities are governed by these Regulations. SEBI approved Asset Management Company (AMC)

manages the funds by making investments in various types of securities. Custodian, registered with

SEBI, holds the securities of various schemes of the fund in its custody. According to SEBI

Regulations, two thirds of the directors of Trustee Company or board of trustees must be

independent.

Association of Mutual Funds in India (AMFI)

With the increase in  mutual fund players in India, a need for mutual fund association in India

was generated to function as a non-profit organisation. Association of Mutual Funds in India

(AMFI) was incorporated on 22nd August, 1995.

AMFI is an apex body of all Asset   Management   Companies (AMC) which has been registered

with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its member. It

functions under the supervision and guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a

professional and healthy market with ethical line enhancing and maintaining standards. It follows the

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principle of both protecting and promoting the interests of mutual funds as well as their unit

holders. 

The objectives of Association of Mutual Funds in India

The Association of Mutual Funds of India works with 30 registered AMCs of the country. It

has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The

objectives are as follows:

This mutual fund association of India maintains high professional and ethical standards in all

areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conduct which

is followed by members and related people engaged in the activities of mutual fund and asset

management. The agencies who are by any means connected or involved in the field

of capital   markets  and financial services also involved in this code of conduct of the

association.

AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund

industry.

Association of Mutual Fund of India do represent the Government of India, the Reserve Bank

of India and other related bodies on matters relating to the Mutual Fund Industry.

It develops a team of well qualified and trained Agent distributors. It implements a program

of training and certification for all intermediaries and other engaged in the mutual fund

industry.

AMFI undertakes all India awareness program for investors in order to promote proper

understanding of the concept and working of mutual funds.

At last but not the least association of mutual fund of India also disseminate information on

Mutual Fund Industry and undertakes studies and research either directly or in association

with other bodies.

IV. Concept of Mutual Fund

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A Mutual Fund is a trust that pools the savings of a number of investors who share a common

financial goal. The money thus collected is then invested in capital market instruments such as shares,

debentures and other securities. The income earned through these investments and the capital

appreciations realized are shared by its unit holders in proportion to the number of units owned by

them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an

opportunity to invest in a diversified, professionally managed basket of securities at a relatively low

cost. The flow chart below describes the working of a mutual fund:

Mutual fund operation flow chart

Mutual funds are considered as one of the best available investments as compare to others. They are

very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund,

investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on

their own. But the biggest advantage to mutual funds is diversification, by minimizing risk &

maximizing returns.

Organization of a Mutual Fund

There are many entities involved and the diagram below illustrates the organizational set up of a

mutual fund

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V. Types of Mutual Fund schemes in INDIA

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk

tolerance and return expectations.

Overview of existing schemes existed in mutual fund category: BY STRUCTURE

Open - Ended Schemes: An open-end fund is one that is available for subscription all through the

year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset

Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

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Close - Ended Schemes: A closed-end fund has a stipulated maturity period which generally ranging

from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can

invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units

of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the

investors, some close-ended funds give an option of selling back the units to the Mutual Fund through

periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit

routes is provided to the investor.

Interval Schemes: Interval Schemes are that scheme, which combines the features of open-ended and

close-ended schemes. The units may be traded on the stock exchange or may be open for sale or

redemption during pre-determined intervals at NAV related prices.

Overview of existing schemes existed in mutual fund category: BY NATURE

Equity fund: These funds invest a maximum part of their corpus into equities holdings. The structure

of the fund may vary different for different schemes and the fund manager’s outlook on different

stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:

-Diversified Equity Funds

-Mid-Cap Funds

-Sector Specific Funds

-Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-

return matrix.

Debt funds: The objective of these Funds is to invest in debt papers. Government authorities, private

companies, banks and financial institutions are some of the major issuers of debt papers. By investing

in debt instruments, these funds ensure low risk and provide stable income to the investors.

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Gilt Funds : Invest their corpus in securities issued by Government, popularly known as Government

of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk.

These schemes are safer as they invest in papers backed by Government.

Income Funds : Invest a major portion into various debt instruments such as bonds, corporate

debentures and Government securities.

Monthly income plans ( MIPs): Invests maximum of their total corpus in debt instruments while they

take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme

ranks slightly high on the risk-return matrix when compared with other debt schemes.

Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds

primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers

(CPs). Some portion of the corpus is also invested in corporate debentures.

Liquid Funds : Also known as Money Market Schemes, These funds provides easy liquidity and

preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank

call money market, CPs and CDs. These funds are meant for short-term cash management of

corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank

low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

Balanced funds : They invest in both equities and fixed income securities, which are in line with pre-

defined investment objective of the scheme. These schemes aim to provide investors with the best of

both the worlds. Equity part provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment parameter. It means

each category of funds is backed by an investment philosophy, which is pre-defined in the objectives

of the fund. The investor can align his own investment needs with the funds objective and can invest

accordingly

By investment objective:

Growth Schemes : Growth Schemes are also known as equity schemes. The aim of these schemes is to

provide capital appreciation over medium to long term. These schemes normally invest a major part

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of their fund in equities and are willing to bear short-term decline in value for possible future

appreciation.

Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to

provide regular and steady income to investors. These schemes generally invest in fixed income

securities such as bonds and corporate debentures. Capital appreciation in such schemes may be

limited.

Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically

distributing a part of the income and capital gains they earn. These schemes invest in both shares and

fixed income securities, in the proportion indicated in their offer documents.

Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of

capital and moderate income. These schemes generally invest in safer, short-term instruments, such

as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

Other schemes

Tax Saving Schemes :

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time.

Under Sec.80C of the Income Tax Act, contributions made to any Equity Linked Savings Scheme

(ELSS) are eligible for rebate.

Index Schemes :

Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or

the Nifty 50. The portfolio of these schemes will consist of only those stocks that constitute the index.

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The percentage of each stock to the total holding will be identical to the stocks index weightage. And

hence, the returns from such schemes would be more or less equivalent to those of the Index.

Sector Specific Schemes:

These are the funds/schemes which invest in the securities of only those sectors or industries as

specified in the offer documents. Ex- Pharmaceuticals, Software, Fast Moving Consumer Goods

(FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the

respective sectors/industries. While these funds may give higher returns, they are more risky

compared to diversified funds. Investors need to keep a watch on the performance of those

sectors/industries and must exit at an appropriate time.

VI. Advantages of Mutual Funds

Diversification – It can help an investor diversify their portfolio with a minimum investment.

Spreading investments across a range of securities can help to reduce risk.  A stock mutual fund, for

example, invests in many stocks .This minimizes the risk attributed to a concentrated position.  If a

few securities in the mutual fund lose value or become worthless, the loss maybe offset by other

securities that appreciate in value.  Further diversification can be achieved by investing in multiple

funds which invest in different sectors.

Professional Management- Mutual funds are managed and supervised by investment professional.

These managers decide what securities the fund will buy and sell. This eliminates the investor of the

difficult task of trying to time the market. 

Well regulated- Mutual funds are subject to many government regulations that protect investors from

fraud.

Liquidity- It's easy to get money out of a mutual fund.

Convenience- we can buy mutual fund shares by mail, phone, or over the Internet.

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Low cost- Mutual fund expenses are often no more than 1.5 percent of our investment. Expenses for

Index Funds are less than that, because index funds are not actively managed. Instead, they

automatically buy stock in companies that are listed on a specific index

Transparency- The mutual fund offer document provides all the information about the fund and the

scheme. This document is also called as the prospectus or the fund offer document, and is very

detailed and contains most of the relevant information that an investor would need.

Choice of schemes – there are different schemes which an investor can choose from according to his

investment goals and risk appetite.

Tax benefits – An investor can get a tax benefit in schemes like ELSS (equity linked saving scheme)

VII. Terms used in Mutual Fund

Asset Management Company (AMC)

An AMC is the legal entity formed by the sponsor to run a mutual fund. The AMC is usually a

private limited company in which the sponsors and their associates or joint venture partners are the

shareholders. The trustees sign an investment agreement with the AMC, which spells out the

functions of the AMC. It is the AMC that employs fund managers and analysts, and other personnel.

It is the AMC that handles all operational matters of a mutual fund – from launching schemes to

managing them to interacting with investors.

Fund Offer document

The mutual fund is required to file with SEBI a detailed information memorandum, in a prescribed

format that provides all the information about the fund and the scheme. This document is also called

as the prospectus or the fund offer document, and is very detailed and contains most of the relevant

information that an investor would need

Trust

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The Mutual Fund is constituted as a Trust in accordance with the provisions of the Indian Trusts Act,

1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908. The Trust

appoints the Trustees who are responsible to the investors of the fund.

Trustees

Trustees are like internal regulators in a mutual fund, and their job is to protect the interests of the

unit holders. Trustees are appointed by the sponsors, and can be either individuals or corporate

bodies. In order to ensure they are impartial and fair, SEBI rules mandate that at least two-thirds of

the trustees be independent, i.e., not have any association with the sponsor.

Trustees appoint the AMC, which subsequently, seeks their approval for the work it does, and reports

periodically to them on how the business being run.

Custodian

A custodian handles the investment back office of a mutual fund. Its responsibilities include receipt

and delivery of securities, collection of income, distribution of dividends and segregation of assets

between the schemes. It also track corporate actions like bonus issues, right offers, offer for sale, buy

back and open offers for acquisition. The sponsor of a mutual fund cannot act as a custodian to the

fund. This condition, formulated in the interest of investors, ensures that the assets of a mutual fund

are not in the hands of its sponsor. For example, Deutsche Bank is a custodian, but it cannot service

Deutsche Mutual Fund, its mutual fund arm.

NAV

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit

NAV is the net asset value of the scheme divided by the number of units outstanding on the

Valuation Date.The NAV is usually calculated on a daily basis. In terms of corporate valuations, the

book values of assets less liability.

The NAV is usually below the market price because the current value of the fund’s assets is higher

than the historical financial statements used in the NAV calculation.

Market Value of the Assets in the Scheme + Receivables + Accrued Income

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- Liabilities - Accrued Expenses

NAV = ------------------------------------------------------------------------------------------------

No. of units outstanding

Where,

Receivables: Whatever the Profit is earned out of sold stocks by the Mutual fund is called

Receivables.

Accrued Income: Income received from the investment made by the Mutual Fund.

Liabilities: Whatever they have to pay to other companies are called liabilities.

Accrued Expenses: Day to day expenses such as postal expenses, Printing, Advertisement Expenses

etc.

Calculation of NAV

Scheme ABN

Scheme Size Rs. 5, 00, 00,000 (Five Crores)

Face Value of Units Rs.10/-

Scheme Size 5, 00, 00,000

--------------------------- = ------------------- = 50, 00,000

Face value of units 10

The fund will offer 50, 00,000 units to Public.

Investments: Equity shares of Various Companies.

Market Value of Shares is Rs.10, 00, 00,000 (Ten Crores)

Rs. 10, 00, 00,000

NAV = -------------------------- = Rs.20/-

50, 00,000 units

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Thus each unit of Rs. 10/- is Worth Rs.20/-

It states that the value of the money has appreciated since it is more than the face value.

Sale price

Is the price we pay when we invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase price

Is the price at which units under open-ended schemes are repurchased by the Mutual Fund. Such prices are NAV related

Redemption Price

Is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV

related

Sales load

Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that

do not charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’ Load

Is a charge collected by a scheme when it buys back the units from the unit holders

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CAGR (compounded annual growth rate)

The year-over-year growth rate of an investment over a specified period of time. The compound

annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is

the number of years in the period being considered.

VIII. Fund Management

Actively managed funds:

Mutual Fund managers are professionals.  They are considered professionals because of their

knowledge and experience.  Managers are hired to actively manage mutual fund portfolios.  Instead

of seeking to track market performance, active fund management tries to beat it.  To do this, fund

managers "actively" buy and sell individual securities.  For an actively managed fund, the

corresponding index can be used as a performance benchmark.

Is an active fund a better investment because it is trying to outperform the market? Not necessarily.

While there is the potential for higher returns with active funds, they are more unpredictable and

more risky. From 1990 through 1999, on average, 76% of large cap actively managed stock funds

actually underperformed the S&P 500. (Source - Schwab Center for Investment Research)

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Actively managed fund styles:

Some active fund managers follow an investing "style" to try and maximize fund performance while meeting the investment objectives of the fund. Fund styles usually fall within the following three categories.

Fund Styles:

Value: The manager invests in stocks believed to be currently undervalued by the market.

Growth: The manager selects stocks they believe have a strong potential for beating the

market.

Blend: The manager looks for a combination of both growth and value stocks.

To determine the style of a mutual fund, consult the prospectus as well as other sources that review

mutual funds.  Don't be surprised if the information conflicts.  Although a prospectus may state a

specific fund style, the style may change.  Value stocks held in the portfolio over a period of time

may become growth stocks and vice versa.  Other research may give a more current and accurate

account of the style of the fund. 

Passively Managed Funds:

Passively managed mutual funds are an easily understood, relatively safe approach to investing in

broad segments of the market. They are used by less experienced investors as well as

sophisticated institutional investors with large portfolios. Indexing has been called investing on

autopilot. The metaphor is an appropriate one as managed funds can be viewed as having a pilot at

the controls. When it comes to flying an airplane, both approaches are widely used. 

a high percentage of investment professionals, find index investing compelling for the

following reasons:  

Simplicity. Broad-based market index funds make asset allocation and diversification easy. 

Management quality. The passive nature of indexing eliminates any concerns about human

error or management tenure. 

29

Low portfolio turnover. Less buying and selling of securities means lower costs and fewer tax

consequences. 

Low operational expenses. Indexing is considerably less expensive than active fund

management. 

Asset bloat. Portfolio size is not a concern with index funds. 

Performance. It is a matter of record that index funds have outperformed the majority of

managed funds over a variety of time periods.

You make money from your mutual fund investment when:

The fund earns income on its investments, and distributes it to you in the form of dividends.

The fund produces capital gains by selling securities at a profit, and distributes those gains to

you.

You sell your shares of the fund at a higher price than you paid for them

IX. Risk

Every type of investment, including mutual funds, involves risk.  Risk refers to the possibility that

you will lose money (both principal and any earnings) or fail to make money on an investment.  A

fund's investment objective and its holdings are influential factors in determining how risky a fund

is.  Reading the prospectus will help you to understand the risk associated with that particular fund. 

Generally speaking, risk and potential return are related. This is the risk/return trade-off.  Higher risks

are usually taken with the expectation of higher returns at the cost of increased volatility.   While a

fund with higher risk has the potential for higher return, it also has the greater potential for losses or

negative returns.  The school of thought when investing in mutual funds suggests that the longer your

investment time horizon is the less affected you should be by short-term volatility.   Therefore, the

30

shorter your investment time horizon, the more concerned you should be with short-term volatility

and higher risk.  

Defining Mutual fund risk

Different mutual fund categories as previously defined have inherently different risk characteristics

and should not be compared side by side. A bond fund with below-average risk, for example, should

not be compared to a stock fund with below average risk. Even though both funds have low risk for

their respective categories, stock funds overall have a  higher risk/return potential than bond funds.

Of all the asset classes, cash investments (i.e. money markets) offer the greatest price stability but

have yielded the lowest long-term returns. Bonds typically experience more short-term price swings,

and in turn have generated higher long-term returns. However, stocks historically have been subject

to the greatest short-term price fluctuations—and have provided the highest long-term returns. 

Investors looking for a fund which incorporates all asset classes may consider a balanced or hybrid

mutual fund.  These funds can be very conservative or very aggressive.  Asset allocation portfolios

are mutual funds that invest in other mutual funds with different asset classes.  At the discretion of

the manager(s), securities are bought, sold, and shifted between funds with different asset classes

according to market conditions.

Mutual funds face risks based on the investments they hold. For example, a bond fund faces interest

rate risk and income risk.  Bond values are inversely related to interest rates.  If interest rates go up,

bond values will go down and vice versa.  Bond income is also affected by the change in interest

rates.  Bond yields are directly related to interest rates falling as interest rates fall and rising as

interest rise.  Income risk is greater for a short-term bond fund than for a long-term bond fund.

Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is at

risk that its price will decline due to developments in its industry. A stock fund that invests across

many industries is more sheltered from this risk defined as industry risk.

Following is a glossary of some risks to consider when investing in mutual funds.

31

Call Risk. The possibility that falling interest rates will cause a bond issuer to redeem—or

call—its high-yielding bond before the bond's maturity date

Country Risk. The possibility that political events (a war, national elections), financial

problems (rising inflation, government default), or natural disasters (an earthquake, a poor

harvest) will weaken a country's economy and cause investments in that country to decline.

Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in a

timely manner. Also called default risk.

Currency Risk. The possibility that returns could be reduced for Americans investing in

foreign securities because of a rise in the value of the U.S. dollar against foreign currencies.

Also called exchange-rate risk.

Income Risk. The possibility that a fixed-income fund's dividends will decline as a result of

falling overall interest rates.

Industry Risk. The possibility that a group of stocks in a single industry will decline in price

due to developments in that industry.

X. Basis Of Comparison Of Various Schemes Of Mutual Funds

Beta

Beta measures the sensitivity of the stock to the market. For example if beta=1.5; it means the stock

price will change by 1.5% for every 1% change in Sensex. It is also used to measure the systematic

risk. Systematic risk means risks which are external to the organization like competition, government

policies. They are non-diversifiable risks.

Beta is calculated using regression analysis, Beta can also be defined as the tendency of a security's

returns to respond to swings in the market. A beta of 1 indicates that the security's price will move

32

with the market. A beta less than 1 means that the security will be less volatile than the market. A

beta greater than 1 indicates that the security's price will be more volatile than the market. For

example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

Beta>11thenxaggressivexstocks

If1beta<1xthen1defensive1stocks

If beta=1 then neutral

So, it’s a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the

market as a whole.

Many utilities stocks have a beta of less than 1. Conversely, most hi-tech NASDAQ-based stocks

have a beta greater than 1, offering the possibility of a higher rate of return but also posing more risk.

Alpha

Alpha takes the volatility in price of a mutual fund and compares its risk adjusted performance to a

benchmark index. The excess return of the fund relative to the returns of benchmark index is a

fundamental ALPHA. It is calculated as a return which is earned in excess of the return generated by

CAPM. Alpha is often considered to represent the value that a portfolio manager adds to or subtracts

from a fund's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index

by 1%. Correspondingly, a similar negative alpha would indicate underperformanceof 1%. .

If a CAPM analysis estimates that a portfolio should earn 35% return based on the risk of the

portfolio but the portfolio actually earns 40%, the portfolio's alpha would be 5%. This 5% is the

excess return over what was predicted in the CAPM model. This 5% is ALPHA.

Sharpe Ratio

A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted performance. It is

calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the

result by the standard deviation of the portfolio returns.

33

The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment decisions

or a result of excess risk. This measurement is very useful because although one portfolio or fund can

reap higher returns than its peers, it is only a good investment if those higher returns do not come

with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted

performance has been.

Treynor Ratio

The treynor ratio, named after Jack Treynor, is similar to the Sharpe ratio, except that the risk

measure used is Beta instead of standard deviation. This ratio thus measures reward to volatility.

Treynor Ratio = (Return from the investment – Risk free return) / Beta of the

investment.

The scheme with the higher treynor Ratio offers a better risk-reward equation for the investor.

Since Treynor Ratio uses Beta as a risk measure, it evaluates excess returns only with respect to

systematic (or market) risk. It will therefore be more appropriate for diversified schemes, where the

non-systematic risks have been eliminated. Generally, large institutional investors have the requisite

funds to maintain such highly diversified portfolios.

Also since Beta is based on capital asset pricing model, which is empirically tested for equity,

Treynor Ratio would be inappropriate for debt schemes.

M- SQUARED

Modigliani and Modigliani recognized that average investors did not find the Sharpe ratio intuitive

and addressed this shortcoming by multiplying the Sharpe ratio by the standard deviation of the

excess returns on a broad market index, such as the S&P 500 or the Wilshire 5000, for the same time

34

period. This yields the risk-adjusted excess return. This, too, is a significant and useful statistic, as it

measures the return in excess of the risk-free rate, which is the basis from which all risky investments

should be measured.

M–Squared= [ (Ri – Rf)/ Sd. Inv] * Sd. Mkt + Rf

OR

M–Squared= Sharpe Ratio* Sd. Mkt + Rf

Ri = Return from the investment

Rf = Risk free return

Sd. Inv= Standard Deviation Investment

Sd. Mkt= Standard Deviation Market

Leverage Factor:

It reports the comparison of the total risk in the fund with the total risk in the market portfolio and

can be used in making investment decisions. It is calculated by dividing market standard deviation by

the fund standard deviation.

Li = Standard deviation of the market Standard deviation of the fund

for example a leverage factor greater than one implies that standard deviation of the fund is less than

standard deviation of the market index, and that the investor should consider levering the fund by

borrowing money and invest in that particular fund. while this would tend to increase the risk of

investment somewhat ,there would be an greater than proportional increase in returns. On the other

hand leverage factor less than one implies that the risk of fund is greater than risk of market index

and the investor should consider unlevering the fund by selling of the part of the holding in the fund

and investing the proceeds I a risk free security, such as treasury bill in this way returns on the

investment reduce somewhat, there would be an greater than proportional reduction in risk.

Standard Deviation:

35

A measure of the dispersion of a set of data from its mean. The more spread apart the data is, the

higher the deviation. Standard deviation is applied to the annual rate of return of an investment to

measure the investment's volatility (risk).

A volatile stock would have a high standard deviation. The standard deviation tells us how much the

return on the fund is deviating from the expected normal returns.

Standard deviation can also be calculated as the square root of the variance.

XI. How To Pick The Right Mutual Fund

Identifying Goals and Risk Tolerance

Before acquiring shares in any fund, an investor must first identify his or her goals and desires for the

money being invested. Are long-term capital gains desired, or is a current income preferred? Will the

money be used to pay for college expenses, or to supplement a retirement that is decades away. One

should consider the issue of risk tolerance. Is the investor able to afford and mentally accept dramatic

swings in portfolio value? Or, is a more conservative investment warranted? Identifying risk

tolerance is as important as identifying a goal. Finally, the time horizon must be addressed. Investors

must think about how long they can afford to tie up their money, or if they anticipate any liquidity

concerns in the near future. Ideally, mutual fund holders should have an investment horizon with at

least five years or more.

Style and Fund Type

If the investor intends to use the money in the fund for a longer term need and is willing to assume a

fair amount of risk and volatility, then the style/objective he or she may be suited  for is a fund. These

types of funds typically hold a high percentage of their assets in common stocks, and are therefore

considered to be volatile in nature. Conversely, if the investor is in need of current income, he or she

should acquire shares in an income fund. Government and corporate debt are the two of the more

common holdings in an income fund. There are times when an investor has a longer term need, but is

36

unwilling or unable to assume substantial risk. In this case, a balanced fund, which invests in both

stocks and bonds, may be the best alternative.

Charges and Fees  

Mutual funds make their money by charging fees to the investor. It is important to gain an

understanding of the different types of fees that you may face when purchasing an investment.

Some funds charge a sales fee known as a load fee, which will either be charged upon initial

investment or upon sale of the investment. A front-end load/fee is paid out of the initial investment

made by the investor while a back-end load/fee is charged when an investor sells his or her

investment, usually prior to a set time period. To avoid these sales fees, look for no-load funds, which

don't charge a front- or back-end load/fee. However, one should be aware of the other fees in a no-

load fund, such as the management expense ratio and other administration fees, as they may be very

high.

The investor should look for the management expense ratio. The ratio is simply the total percentage

of fund assets that are being charged to cover fund expenses. The higher the ratio, the lower the

investor's return will be at the end of the year.

Evaluating Managers/Past Results

Investors should research a fund's past results. The following is a list of questions that perspective

investors should ask themselves when reviewing the historical record:

Did the fund manager deliver results that were consistent with general market returns?

Was the fund more volatile than the big indexes (it means did its returns vary dramatically

throughout the year)?

This information is important because it will give the investor insight into how the portfolio manager

performs under certain conditions, as well as what historically has been the trend in terms of turnover

and return. Prior to buying into a fund, one must review the investment company's literature to look

for information about anticipated trends in the market in the years ahead.

Size of the Fund

Although, the size of a fund does not hinder its ability to meet its investment objectives. However,

there are times when a fund can get too big. For example - Fidelity's Magellan Fund. Back in 1999

37

the fund topped $100 billion in assets, and for the first time, it was forced to change its investment

process to accommodate the large daily (money) inflows. Instead of being nimble and buying small

and mid cap stocks, it shifted its focus primarily toward larger capitalization growth stocks. As a

result, its performance has suffered.

Fund Transactional Activity

Portfolio Turnover

Measure of how frequently assets within a fund are bought and sold by the managers. Portfolio

turnover is calculated by taking either the total amount of new securities purchased or the amount of

securities sold -whichever is less - over a particular period, divided by the total net asset value (NAV)

of the fund. The measurement is usually reported for a 12-month time period

Fund Performance Metrics

Historical Performance

The investor should see the past returns of the fund and should compare it with the peer group fund.

Whatever the objective, the mutual fund is an excellent medium to accumulate financial assets and

grow them over time to achieve any of these goals.

4. Systematic Investment Plan (SIP)

SIP is similar to a Recurring Deposit. Every month on a specified date an amount you choose is invested in a

mutual fund scheme of your choice. The dates currently available for SIPs are the 1st, 5th, 10th, 15th,

20th and the 25th of a month. There are many benefits of investing through SIP. 

Benefit 1

Become A Disciplined Investor

38

Being disciplined - It’s the key to investing success. With the Systematic Investment Plan you commit an

amount of your choice (minimum of Rs. 500 and in multiples of Rs. 100 thereof*) to be invested every month

in one of our schemes.

Think of each SIP payment as laying a brick. One by one, you’ll see them transform into a building. You’ll see

your investments accrue month after month. It’s as simple as giving at least 6 postdated monthly cheques to us

for a fixed amount in a scheme of your choice. It’s the perfect solution for irregular investors.

Benefit 2

Reach Your Financial Goal

Imagine you want to buy a car a year from now, but you don’t know where the down-payment will come from.

SIP is a perfect tool for people who have a specific, future financial requirement. By investing an amount of

your choice every month, you can plan for and meet financial goals, like funds for a child’s education, a

marriage in the family or a comfortable postretirement life.

Benefit 3

Take Advantage of Rupee Cost Averaging

Most investors want to buy stocks when the prices are low and sell them when prices are high. But timing the

market is timeconsuming and risky. A more successful investment strategy is to adopt the method called

Rupee Cost Averaging. We can reap this benefit by investing the amounts through a SIP .

Benefit 4

Grow Your Investment With Compounded Benefits

It is far better to invest a small amount of money regularly, rather than save up to make one large investment.

This is because while you are saving the lump sum, your savings may not earn much interest. 

With HDFC MF SIP, each amount you invest grows through compounding benefits as well. That is, the

interest earned on your investment also earns interest. The following example illustrates this.

Imagine Neha is 20 years old when she starts working. Every month she saves and invests Rs. 5,000 till she is

25 years old. The total investment made by her over 5 years is Rs. 3 lakhs.Arjun also starts working when he is

20 years old. But he doesn’t invest monthly. He gets a large bonus of Rs. 3 lakhs at 25 and decides to invest

39

the entire amount.

Both of them decide not to withdraw these investments till they turn 50. At 50, Neha’s Investments have

grown to Rs. 46,68,273* whereas Arjun’s investments have grown to Rs. 36,17,084*. Neha’s small

contributions to a SIP and her decision to start investing earlier than Arjun have made her wealthier by over

Rs. 10 lakhs. 

*Figures based on 10% p.a. interest compounded monthly. 

Benefit 5

Do All This Effortlessly

Investing with SIP is easy. Simply give us post-dated cheques or opt for an Auto Debit from your bank

account for an amount of your choice (minimum of Rs. 500 and in multiples of Rs. 100 thereof*) and we’ll

invest the money every month in a fund of your choice. The plans are completely flexible. You can invest for a

minimum of six months, or for as long as you want. You can also decide to invest quarterly and will need to

invest for a minimum of two quarters.

 

All you have to do after that is sit back and watch your investments accumulate

SIP and LUMPSUM Investment in HDFC EQUITY FUND

YEAR 2007-08

  NAV SIP UNITS

Apr-07 151.6 1000 6.596306

May-07 159.28 1000 6.278173

Jun-07 165.31 1000 6.049131

Jul-07 166.8 1000 5.995175

Aug-07 168.83 1000 5.923223

Sep-07 182.84 1000 5.469323

40

Oct-07 210.1 1000 4.759638

Nov-07 206.18 1000 4.850225

Dec-07 223.32 1000 4.477819

Jan-08 188.42 1000 5.307292

Feb-08 188.24 1000 5.312367

Mar-08 165.78 1000 6.032091

SIP UNITS : 67.05076

AVERAGE UNIT PRICE=178.968

LUMPSUM: 12000/151.6= 79.155

AVERAGE UNIT PRICE=151.6

YEAR 2008-09:

NAV SIP UNITS

Apr-08 178.19 1000 5.611987

May08 169.6 1000 5.896226

Jun-08 143.72 1000 6.958119

Jul-08 151.72 1000 6.591306

Aug-08 158.92 1000 6.292316

Sep-08 145.72 1000 6.862429

41

0

50

100

150

200

250

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

PERIOD

NAV

Series1

Oct-08 110.32 1000 9.064375

Nov-08 101.81 1000 9.822411

Dec-08 112.38 1000 8.898618

Jan-09 103.75 1000 9.638183

Feb-09 98.163 1000 10.18714

Mar-09 108.85 1000 9.186786

SIP UNITS : 95.00989

AVERAGE UNIT PRICE=126.3026

LUMPSUM: 12000/178.19= 67.34385

AVERAGE UNIT PRICE=178.19

YEAR 2009-10:

NAV SIP UNITS

Apr-09 127.07 1000 7.869678

May09 169.9 1000 5.885919

Jun-09 172.81 1000 5.786702

Jul-09 185.35 1000 5.395344

Aug-09 193.03 1000 5.180542

Sep-09 211.82 1000 4.720923

42

0

20

40

60

80

100

120

140

160

180

200

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

PERIOD

NAV

Series1

Oct-09 209.02 1000 4.784163

Nov-09 224.32 1000 4.457917

Dec-09 231.01 1000 4.328817

Jan-10 224.93 1000 4.445828

Feb-10 223.39 1000 4.476576

Mar10 235.72 1000 4.242375

SIP UNITS : 61.5747

AVERAGE UNIT PRICE=194.885

LUMPSUM: 12000/127.07= 94.4361

AVERAGE UNIT PRICE=127.07

In the year 2007-08 when the there is not much change in the opening and ending NAV there is not

much difference in the units earned through SIP investment and lump sum investment.

There is a constant decrease in the NAV of the fund and there is a noticeable change in the opening

and ending NAV for the year 2008-09. This fall in market helps the investors in earning more units as

the NAV is continuously going down. As the number of units earned increases as the average unit

price of the mutual fund scheme decreases.

43

0

50

100

150

200

250

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

PERIODS

NAV

Series1

In 2009-10 there continuous increase in the NAV and hence lump sum investment gives more units

compared to SIP investments. Due to low number of units earned the average unit price is more

compared to lump sum investment.

SIP investments are beneficial to investors in obtaining more units when the market is down. By

investing in small amounts but in continuous manner investors can reap benefits of market

volatility.SIP investment benefits the investor as small amount of money can be invested in a

systematic manner hence not burdening him/her with need to make large investment at one time

Hence along with convenience to the investors it also gives them advantage to reap the benefits of

having extra units when the markets are down.

5. Portfolio Rebalancing

Rebalancing is defined as the periodic adjustment of a portfolio to restore the original asset allocation

mix of your mutual fund portfolio. If an investor's investment strategy or risk threshold has changed,

he can rebalance his investments so that asset classes in the portfolio align with his new asset

44

allocation plan. It is the process of selling assets that are performing well and buying assets that are

underperforming. Portfolio rebalancing is one of the very few ways to generate additional returns for

a portfolio without incurring any additional risk.

Ex-if there is a portfolio with a 50%stocks / 50% bonds policy asset mix.

If stocks return 25% return while bonds produce a 5% return, stocks become overweighed at the end

of the year (54% vs. 46%). Rebalancing involves selling 4% in stocks and buying 4% in bonds to

bring the asset mix back to the desired 50/50 asset mix.

One of a very important step before rebalancing is to assign a strategic asset allocation plan appropriate to risk

profile, investment goals and time horizon.

Rebalancing in volatile market

In rising stock markets, people often take on more risk than they're suited for ,as a result of which, they ended

up with a larger percentage of stocks in their portfolios than their risk levels warranted, Many even added to

their already over weighted positions by buying more and more, assuming the stellar performance trend would

continue indefinitely, but when the market began a sharp fall in 2000, their investments were pounded—more

than they likely expected and more than if had they rebalanced.

Rebalancing effects

45

Financial Research studied a portfolio of 60% stocks and 40% bonds to see what would  happen if no

rebalancing took place. As the stock market performed well from 1994 to 1999, the portfolio's 60% stock

allocation grew to nearly 80%. This portfolio became over weighted in stocks just in time for the 2000 bear

market

 Without rebalancing, a portfolio in the 1990s became too aggressive

but the same mix of 60% stocks and 40% bonds, starting in 2000. This time, the stock market was falling. By

2002, the portfolio's allocation had flipped, consisting of 40% stocks and 60% bonds. 

Without rebalancing, a portfolio in the 2000s became too conservative

46

The value of regular rebalancing

A regular rebalancing plan helps instill discipline in investing process. In most cases, a rebalanced portfolio

had lower risk and similar to slightly higher returns. The chart below shows what happened when we

rebalanced a portfolio with a moderate risk profile annually from 1970 through 2006.

Rebalancing lowered risk and increased returns

Source: The Schwab Center for Financial Research with data from Ibbotson Associates, Inc.

47

Rebalancing has proven to be more efficient than a buy and hold strategy over a full market cycle and by

rebalancing periodically back to the original weighting of the portfolio, it has also been effective at risk

reduction. A buy and hold strategy can be more profitable over the short term as rebalancing sole driving force

is to sell off what is up and buy what is down. Because of this it is possible to reduce your position in an asset

class that is still on the rise thus reducing your potential for short-term gains. Overall, or more precisely, over a

full market cycle of (on average) 5-7 years, rebalancing does add value.

By rebalancing we can retain control of the overall risk of a portfolio. In a volatile market, rebalancing could

add to fees, but it would also keep the portfolio on target for our goals and in line with our desired level of risk

Advantages of rebalancing

1. It keeps portfolio’s risk within tolerable limit.

2. It generates stable return.

3. It will instill the discipline essential for investment success.

4. By rebalancing the portfolio, the investor systematically takes profit in these expense asset classes and

reinvests the proceeds into the underperforming assets.

Analysis of investments in Equity and Debt and how rebalancing the portfolio will help in

-Risk Management

- Stability

- Maximize returns

Understanding debt and equity

48

Equity

Pros - High returns, Low risk in Long term, High Liquidity

Cons - Risky, not suitable for short term investment

Debt

Pros - Stable and assured returns, Good investment for short term goals

Cons - Low returns

Equity + Debt- When we combine Equity and Debt, returns are better than Debt but less than Equity, but at the

same time risk is also minimized, and when we apply technique of Portfolio Rebalancing, both risk and returns

are well managed.

Each person should concentrate on both returns and risk.

Case 1: Equity: Debt goes up.

Action: Decrease the Equity part and shift it to Debt so that Equity:Debt is same as earlier.

Reason: As our Equity has gone up, we could loose a lot of it if something bad happens; we shift the excess

part to Debt so that it is safe and grows at least.

Case 2: Equity: Debt Goes Down.

Action: Decrease the Debt part and shift it to Equity, so that Equity: Debt is same as earlier.

Reason: As out Equity part has decreased, we make sure that it is increased so that we don't loose out on any

opportunity. Limitations of this strategy is that, once our equity exposure has gone up, if we rebalance and

bring down your Equity Exposure, we will loose out on the profits if Equity provides great returns.

Case 3: Understanding the Game of Equity and Debt

As we know that the markets are unexpected and they can go in any direction, so its better to be safe. Many

people are confused that if there equity has done very well then shall they book profits and get out with money

and wait for markets to come down so that they can reinvest. Portfolio rebalancing is the same thing but a little

49

different name and methodology, so once you get good profit in something which was risky you transfer some

part to non-risk Debt.

The rebalancing analysis can be done with the help of an example.

Eight sensex levels have been selected starting from 1st January 2007 till 1st June 2010 semiannually. The

sensex levels on the below mentioned dates were:

Dates Sensex

1st January 07 13942.24

1st July 07 14664.26

1st January 08 20300.71

1st July 08 12961.68

1st January 09 9903.46

1st July 09 14645.47

1st January 10 17558.73

1st June 10 16572.03

Working note:

50

14664.26-13942.24/13942.24*100 = 5.18%

20300.71-14664.26/14664.26 * 100 = 38.44%

12961.68 – 20300.71/20300.71 * 100 = -36.15%

9903.46 – 12961.68/12961.68 * 100 = -23.59 %

14645.47 – 9903.46/9903.46*100 = 47.88 %

17558.53- 14645.47/14645.47 * 100 = 19.89% and

16572.03 -17558.53/17558.53* 100 = -5.62%

Time periodReturns

(%) Equity debt@9%

equity + debt without

rebalancingequity+debt

with rebalancing

Jan 07- July 07 5.18 105178.7 109000 107090 107089.4

July 07- Jan 08 38.44 145605.8 118810 132210.5 132490.9

Jan 08- July 08 -36.15 92966.98 129503 111237.8 114504.2

July 08 - Jan 10 -23.59 71032.96 141158 106099.3 106148.7

Jan 09- July 09 47.88 105043.9 153862 129459 136377.4

July 09- Jan 10 19.89 125939.1 167709 146830 156031.3

Jan 10 - Jun 10 -5.62 118873.6 182802 150837.8 158668.7

Analysis:

51

As we can see clearly from the above table that,Hence if we consistently rebalance our portfolio we

get more returns while reducing risk in our portfolio.

Working note:

(Assumption: tax has been ignored for calculation purposes)

For equity: 1 lack is the amount of investment, we are getting 5.18% returns in the first quarter. So it

will be 105178.7. Now in the next quarter return is 38.44 %,so the amount will be

105178.7*1.3844=145605.8

Similarly the rest calculations will be;

145605.8*0.6385=92966.98

92966.98*0.7641=71032.96

71032.96*1.4788=105043.9

105043.9*1.1989=125939.1

125939.1*0.9438= 118873.6

So at the end the amount becomes 118873.6

For debt @ 9%

For 1st quarter: 9%*100000=109000

For 2nd quarter: 9%*109000=118810

For 3rd quarter: 9% 118810=129503

For 4th quarter: 9% 129503=141158

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For 5th quarter: 9% 141158=153862

For 6th quarter: 9% 153862=167709

For 7th quarter: 9% 167709=182802

For equity + debt (50:50) of amount 100000 without rebalancing:

(118873.6+182802)/2 = 150837.8

For equity + debt (50:50) of amount 100000 with rebalancing:

1 st quarter: 50*105178.70= 52589.35

50*109000=54500

So total capital now is =107089.40 .we can see that our 50,000 in equity becomes 52589.35 and

50,000 in debt becomes 54500 .so in order to bring it to our original 50:50 ratio we will now

rebalance.

2 nd quarter : 50*107089.40 =53544.68 and

50*107089.40=53544.68

Now this 54175 amount becomes the opening balance for quarter 2.

Calculating the returns now,

53544.68 *1.3844= 74127.25

53544.68 *1.09 =58363.7

So the total capital now becomes=132490.9 .Now again 53544.68 amount becomes 74127.25and

53544.68 becomes 58363.7disrupting our 50:50 ratio. so we will again rebalance it

For 3 rd quarter :

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50%*132490.9=66245.47

50%*132490.9=66245.47

Calculating return in these two figures. in equity the return is -36.15% and in debt it is 9%.

66245.47*.6385=42296.68

66245.47*1.09 =72207.56

The total amount now is 114504.2.

For 4 th quarter

50%* 114504.2=57252.12 and

50% 114504.2= 57252.

57252.12 *1.3843= 43743.87

57252.12*1.09 = 62404.81

The final amount will be 106148.7

For 5 th quarter

50%*106148.7 =53074.34

50% * 106148.7 =53074.34

53074.34*1.4788= 78486.34

53074.34*1.09= 57851.03

So the total is 136337.4

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For 6 th quarter

50% * 136337.4= 68168.69

50% * 136337.4= 68168.69

68168.69*1.1989 = 81727.44

68168.69*1.09 = 74303.87

So the total is 156031.3

For 7 th quarter

50% 156031.3= 78015.65

50% 156031.3= 78015.65

78015.65*.9438 = 73631.62

78015.65*1.09 = 85037.06

So the final total is 158668.7

Analysis

Comparing the debt+ equity with and without rebalancing.

Calculating CAGR without rebalancing: (150837.8/100000) 0.2857 - 1 = 12.46% p.a

Calculating CAGR with rebalancing: (158668.7/100000) 0.2857 - 1 = 14.09 % p.a

55

So it can be concluded that with the help of rebalancing we are getting 2.26% higher CAGR while

reducing the risk and maintaining our desired portfolio allocation.

6. Research Methodology

I. Problem Statement

Aim of the project is to analyze the performance flagship equity diversified schemes of six fund

houses by calculating different performance measures for the data of past three years. Through this

we aim to evaluate the performance in terms of risk and the returns of the schemes.

II. Research Objective

1. To compare the performance of various 5 star rated equity diversified mutual fund schemes

over a period of three years.

2. To compare the schemes with the returns of benchmark for the past three years.

3. To identify the level of risk involved in investing in various equity diversified mutual fund

schemes.

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II. Data Sources

Primary data

Most of the data about the schemes of HDFC has been provided by the HDFC Asset Management

Company.

My industry mentor helped me obtain monthly portfolios and returns data of schemes which were

available to him and also helped me acquire data from company’s intranet.

Secondary data

Data collection: Secondary data is collected from various published journals, company fact sheets,

books and from Internet.

IV. Data analysis

The data that has been collected for this study has been analysed by widely used performance

parameters as:

Treynor Ratio

Sharpe Ratio

Jensen’s Alpha

M Squared

Leverage Factor

Other analysis are done by using graphs, calculations, tables etc.

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V Scope Of The Study

This study calculates different measures to compare equity diversified schemes of different fund

houses . For this study past three years data of the schemes and their benchmarks have been taken

into consideration. It helps us see how the funds stand in comparison with each other.

VI Limitations Of The Study

1. Time constraints: Due to shortage or less availability of time it may be possible that all the related

and concerned aspects may not be covered in the project.

2. Only past three year data has been taken in this project which might not give complete scheme

performance.

3. Analysis done is limited to the availability of data.

7 Findings And Analysis

Here six funds of different companies are taken which are rated 5 star by Value Research Ratings.

Value research Funds ratings are a composite measure of historical risk adjusted returns. In the case

of equity and hybrid funds this rating is based on the weighted average monthly returns for the last 3

and 5 – year period. In the case of debt fund this rating is based on the weighted average weekly

returns for the last 18 months and 3 years period and in case of short term debt funds –weekly returns

for the last 18 months. Each category must have a minimum of 10 funds to be rated. Effective since

July 2008,additional qualifying criteria, whereby a fund with less than Rs. 5 crore of average AUM in

the past six months will not be eligible for rating.

Five star indicate that a fund is in the 10% of its category in terms of historical risk adjusted returns

Four star indicate that fund is in the next 22.5% ,middle 35% receive 3 star, the next 22.5%are

assigned 2 star bottom 10% receive 1 star.

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For our study here six schemes have been selected:

HDFC EQUITY FUND

ICICI PRUDENTIAL DISCOVERY FUND

UTI OPPUTTUNITIES FUND

IDFC PREMIER EQUITY PLAN A

RELIANCE RSF FUND

SUNDARAN BNP PARIBAS S.M.I.L.E REG-

SCHEME PROFILE:

HDFC EQUITY FUND

AMC HDFC Asset Management Company Ltd.

Fund Category Equity diversified

Scheme Plan Growth

Scheme Type Open Ended

Launch Date January 01, 1995

Fund Manager Mr. Prashant Jain

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Benchmark S&P CNX 500

Assets (RS crore) 6355.7

ICICI PRUDENTIAL DISCOVERY FUND

AMC ICICI Prudential Asset Management Co. Ltd.

Fund Category Equity diversified

Scheme Plan Growth

Scheme Type Open Ended

Launch Date August 16,2004

Benchmark S&P CNX Nifty

Fund Manager Mr. Sankaren Naren

Assets (RS crore) 1088.9

UTI OPPORTUNITIES FUND

AMC UTI Asset Management Co. Ltd.

Fund Category Equity diversified

Scheme Plan Growth

Scheme Type Open Ended

Launch Date July 16,2005

Benchmark BSE 100

Fund Manager Mr. Harsh Upadhyaya

Assets (RS crore) 1432.78

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IDFC PREMIER EQUITY PLAN A

AMC IDFC Asset Management Company Ltd.

Fund Category Equity diversified

Scheme Plan Growth

Scheme Type Open Ended

Launch Date September 28, 2005

Benchmark BSE 500

Fund Manager Mr. Kenneth Andrade

Assets (RS crore) 1443.25

RELIANCE RSF FUND

AMC RELAINCE Asset Management Co. Ltd.

Fund Category Equity diversified

Scheme Plan Growth

Scheme Type Open Ended

Launch Date June 8,2005

Benchmark BSE 100

Fund Manager Mr. Arpit Malaviya

Assets (RS crore) 2722.39

SUNDARAM BNP PARIBAS S.M.I.L.E REG-G

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AMC ICICI Prudential Asset Management Co. Ltd.

Fund Category Equity diversified

Scheme Plan Growth

Scheme Type Open Ended

Launch Date February 15,2005

Benchmark CNX midcap

Fund Manager Mr. S Krishna Kumar

Assets (RS crore) 695.139

For all the above schemes returns of the past three years i.e. 2007-10 , have been considered. Similarly

returns are taken for the benchmarks of the respective schemes. Calculation of different parameters like

average return , beta, standard deviation, sharpe ratio, treynor ratio have been done for all the schemes for

all years separately.

AVERAGE MONTHLY RETURN

SCHEMES  2007-08 2008-09 2009-10

HDFC EQUITY FUND  1.72  (2.56)  5.95

ICICI PRUDENTIAL DISCOVERY

FUND  1.11 (2.86) 7.50

UTI OPPORTUNITIES FUND  3.27 (1.83)   4.14

      IDFC PREMIER EQUITY PLAN A  3.79 (3.31)  5.46

      RELIANCE RSF FUND  4.38  (2.9)  5.77

     SUNDARAM BNP PARIBAS

S.M.I.L.E REG-G  2.65 (3.86)   6.30

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The table above average monthly returns of the mutual fund schemes for 2007-08, 2008-09 and 2009-10.

During the period of analysis, it was in the year 2009- 10, that the funds have yielded the maximum return.

Among them, the top return was provided by ICICI Prudential Discovery Fund with a value of 7.5%. The

lowest return giving fund for the year was UTI Opportunities Fund and the value was 4.14%.

Performance in the year 2008-09 was the least in all the three years. Least returns this year was from

Sundaram BNP Paribas SMILE REG-G fund with the returns being -3.86% and highest were of UTI

Opportunities Fund with returns of -1.83%. Low returns in this year were because of recession that hit the

market.

In the year 2007-08 highest returns were given by Reliance RSF Fund with returns being 4.38% and lowest

returns were 1.11% of ICICI Prudential Discovery Fund.

STANDARD DEVIATION

SCHEMES  2007-08 2008-09 2009-10HDFC EQUITY FUND  0.08 0.12  0.10

ICICI PRUDENTIAL DISCOVERY FUND  0.09 0.12   0.09

UTI OPPUTTUNITIES FUND  0.09 0.10  0.08      IDFC PREMIER EQUITY PLANA  0.09  0.11 0.07

      RELAINCE RSF FUND 0.10  0.12 0.12

     SUNDARAN BNP PARIBAS S.M.I.L.E REG-G  0.10  0.13 0 .11

Standard Deviation of a fund depicts, that how much the returns of the fund have deviated from the

mean level. The higher the value of standard deviation, the greater will be the volatility in the fund's

returns. In 2007-08 ,standard deviation of 10% was highest among all for Reliance RSF Fund and

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Sundaram BNP Paribas SMILE REG-G meaning that the fund's return fluctuated in either direction

(up or down) by 10% from its average return ,whereas HDFC Equity fund showed minimum

deviation of 8%.

In the year 2008-09 Sundaram BNP Paribas SMILE REG-G showed the maximum volatility by having

standard deviation of 13%. UTI Opportunities Fund had the minimum standard deviation of 10%

For the year 2009-10 Reliance RSF Fund was the most volatile fund with standard deviation of 12%.

IDFC Premier Equity Plan A had the least value of 7%

BETA

SCHEMES  2007-08 2008-09 2009-10HDFC EQUITY FUND 0.87 0.91 0.86

ICICI PRUDENTIAL DISCOVERY FUND 0.84 0.98 0.87

UTI OPPORTUNITIES FUND 0.95 0.82 0.80      IDFC PREMIER EQUITY PLAN

A 0.87 0.87 0.71      RELAINCE RSF FUND 0.99 1.00 1.02

     SUNDARAM BNP PARIBAS S.M.I.L.E REG-G 0.95 0.97 1.10

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Beta measures the non- diversifiable risk of a portfolio. Normally, the value of beta lies somewhere between

0.4 and 1.9. In this case, the sample involves only equity diversified schemes. Therefore, the beta lies at a

range from 0.71 to 1.10. During the financial year 2007- 08, Reliance RSF Fund was considered as the highest

risky fund as it was having highest beta value of 0.99. The lowest risky fund was ICICI Prudential Discovery

Fund with a beta of 0.84.

In the year 2008- 09, high risky fund was Reliance RSF Fund and the value was 1. The low risky fund for this

financial year was UTI Opportunities Fund and the value was 0.82.

The high risky fund for the financial year 2009- 10 was Sundaram BNP Paribas SMILE REG-G Fund with the

Beta value of 1.1 next was Relaince RSF Fund with beta of 1.02.Low risk fund for this year was IDFC Equity

Plan A with beta value of 0.71.

SHARPE RATIO

SCHEMES  2007-08 2008-09 2009-10HDFC EQUITY FUND  2.06 (3.40)   11.44

ICICI PRUDENTIAL DISCOVERY FUND  0.63  (3.47) 13.97 

UTI OPPUTTUNITIES FUND  4.11  (3.23)  9.94     IDFC PREMIER EQUITY PLAN

A  6.11  (3.63)  14.63      RELIANCE RSF FUND  5.24  (3.64)  10.48

     SUNDARAM BNP PARIBAS S.M.I.L.E REG-G  3.59  (3.54)  10.87

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The above table shows the Sharpe ratio of various schemes for the financial years 2007-08, 2008-09 and 2009-

10. Sharpe ratio is a measure of the excess return per unit of risk in an investment asset of a trading strategy.

The Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk

taken. The selected mutual fund schemes showed the best risk adjusted performance during the financial year

2009- 10. Among them, IDFC Equity Plan A was considered as the best one with a ratio of 14.63. The least

performance was shown by UTI Opportunities Fund which has a ratio of 9.94.

The performance of all selected mutual fund schemes was really low during the financial year 2008- 09. Funds

were even having negative Sharpe ratio. The lowest risk adjusted performance was shown by Reliance RSF

Fund and the value was -3.64. UTI Opportunities Fund which showed the risk adjusted performance with a

Sharpe ratio of -3.23 which was best among all.

In the year 2007-08, IDFC Premier Equity Plan A is the fund which has shown the maximum Sharpe ratio of

6.11. It means that the fund has provided the maximum risk adjusted return as compared to other funds. The

fund having the least Sharpe value is ICICI Prudential Discovery Fund with a value of 0.63.

TREYNOR RATIO

 SCHEMES 2007-08 2008-09 2009-10HDFC EQUITY FUND 0.19  (0.43)  1.26

ICICI PRUDENTIAL DISCOVERY FUND  0.07 (0.32)  1.73

UTI OPPORTUNITIES FUND  0.37  (0.38) 0.99     IDFC PREMIER EQUITY PLAN

A 0.60 (0.46)  1.46      RELAINCE RSF FUND  0.53 (0.43)  1.01

     SUNDARAM BNP PARIBAS S.M.I.L.E REG-G  0.37  (0.47)  1.11

Treynor’s ratio measures the fund’s performance in relation to the market’s performance. The table shows the

Treynor’s ratio of selected mutual fund schemes for three financial years 2007-08,2008-09 and 2009-10. .It

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was during the financial year 2009- 10, that the funds showed the highest performance among the three years

of analysis. All the funds were having its highest Treynor ratio during this financial year. Among them, the

top performing fund was ICICI Prudential Discovery Fund. The value was 1.73. The lowest performance was

shown by UTI Opportunities Fund. The value was 0.99.

The financial year 2008- 09 was a low performance year for almost all mutual fund schemes. The returns

reduced significantly as compared to previous financial year. Some schemes showed even a negative

Treynor’s ratio. ICICI Prudential Discovery Fund is the fund which showed the maximum Treynor’s ratio

during this financial year. The value was -0.32 and the least performing fund was SUNDARAM BNP Paribas

SMILE REG- G Fund. Its value was -0.47.

In the year 2007-08, IDFC Equity Plan A Fund is having the maximum Treynor’s ratio of 0.60. It means that

the scheme has a better risk adjustedperformance as compared to other schemes. The scheme having the

lowest Treynor ratio is ICICI Prudential Discovery Fund. The ratio is 0.07. This shows that the fund is having

a low risk adjusted performance.

JENSEN ALPHA

SCHEMES  2007-08 2008-09 2009-10HDFC EQUITY FUND  (0.0109) (0.0026) 0.0110

ICICI PRUDENTIAL DISCOVERY FUND  (0.0207) (0.0050) 0.0377

UTI OPPORTUNITIES FUND  (0.0013) 0.0052 (0.0111)     IDFC PREMIER EQUITY PLAN

A  0.0693 0.0097 (0.0005)      RELAINCE RSF FUND  0.0235 (0.0342)  0.0045

     SUNDARAM BNP PARIBAS S.M.I.L.E REG-G (0.0026) (0.0024) (0.0018)

Jensen’s performance index is used as a measure of absolute performance of the portfolio. The above table

shows the Jensen’s alpha measure for the financial years2007-08, 2008-09 and 2009- 10. In the year 2007-08,

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the highest risk- adjusted performance is shown by IDFC Premier Equity Plan A with a value of 0.0693. The

lowest risk- adjusted performance was shown by ICICI Prudential Discovery Fund and the value was -0.0207.

During the financial year 2008- 09, the least value was shown by Relaince RSF Fund and the value was -

0.0342. The highest risk adjusted performance for this financial year was shown by IDFC Premier Equity Plan

A and the value was 0.0097.

For the year 2009-10, the highest Jensen’s measure is for ICICI Prudential Discovery Fund and the value is

0.0377. The lowest value is for UTI Opportunities Fund and it is -0.0111.

M^2(M SQUARE)

SCHEMES  2007-08 2008-09 2009-10HDFC EQUITY FUND 0.2340  (0.3512) 1.1423

ICICI PRUDENTIAL DISCOVERY FUND  0.1033 (0.3309) 1.5213

UTI OPPORTUNITIES FUND 0.4711 (0.3225)  0.9809      IDFC PREMIER EQUITY PLAN

A  0.5952 (0.4399)  1.5624      RELIANCE RSF FUND 0.5056  (0.3698) 1.0319

     SUNDARAM BNP PARIBAS S.M.I.L.E REG-G 0.4012 (0.4211)  1.124

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The M-squared is a performance measurement using return per unit of total risk as measured by the standard

deviation. The table above shows that in the year 2007-08 IDFC Premier Equity Plan A fund scored high on it

with a value of 0.5952 and ICICI Prudential Discovery Fund showed least value with 0.10.

In 2008-09 all the funds showed negative performance as the markets were down too. Among all UTI

Opportunities Fund showed best performance with value of -0.3225 and IDFC Equity Plan A gave the

minimum value of -0.4399.

For the year 2009-10 IFDC Premier Equity Plan A Fund showed highest values of 1.5624 among all the funds.

And UTI Opportunities Fund had the minimum values of 0.98.

LEVERAGE FACTOR (Li):

SCHEMES  2007-08 2008-09 2009-10HDFC EQUITY FUND  1.14 1.02  1.00

ICICI PRUDENTIAL DISCOVERY FUND 0.89 0.92 0.98

UTI OPPORTUNITIES FUND  1.01 1.20  1.18      IDFC PREMIER EQUITY PLAN

A  1.009 1.22  1.45      RELAINCE RSF FUND  0.87  0.96  0.95

     SUNDARAM BNP PARIBAS S.M.I.L.E REG-G 1.00 1.02 0.88

69

The above table shows the leverage factor of various schemes for the financial years 2007-08, 2008-09 and

2009- 10. In 2007-08 leverage factor is highest for HDFC Equity fund this means that it has low fund standard

deviation compared to market standard deviation and hence investor should consider levering this fund by

investing more in it. Similarly for IDFC Premier Equity plan A in 2008-09 and 2009-10 investor should

consider to invest more as they are having leverage factor more than one.

For year 2007-08, Reliance RSF Fund has the lowest Leverage factor and also less than one means fund

standard deviation is more than market standard deviation and hence investor should consider unlevering this

fund by selling of part of holding in the fund . Similarly for Sundaram BNP Paribas SMILE REG- G fund in

2008-09 and ICICI Prudential Discovery Fund in 2009-10 investor should take similar steps as there leverage

factor is less than one.

8. Rankings

2007-08

Rank  Sharpe Treynor Jensen M2Leverage

Factor

1IDFC PREMIER EQUITY PLAN A

IDFC PREMIER EQUITY PLAN A

IDFC PREMIER EQUITY PLAN A

IDFC PREMIER EQUITY PLAN A

HDFC EQUITY FUND

2RELIANCE RSF FUND

RELIANCE RSF FUND

RELIANCE RSF FUND

RELIANCE RSF FUND

UTI OPPORTUNITIES FUND

70

3

UTI OPPORTUNITIES FUND

SUNDARAM BNP PARIBAS S.M.I.L.E REG-G

SUNDARAM BNP PARIBAS S.M.I.L.E REG-G

UTI OPPORTUNITIES FUND

IDFC PREMIER EQUITY PLAN A

During the financial year 2007- 08, Treynor’s ratio, Sharpe, Jensen’s and M-Squared measure rate

IDFC Premier Equity Plan A as the best one, whereas, HDFC Equity Fund got the best rating in case

of Leverage Factor. Thus, the best picks of financial year 2007- 08 include HDFC Equity Fund, IDFC

Equity Plan A , Reliance RSF Fund , UTI Opportunities Fund .

2008-09

Rank  Sharpe Treynor Jensen M2 Leverage Factor

1

UTI OPPORTUNITIES FUND

ICICI PRUDENTIAL DISCOVERY FUND

IDFC PREMIER EQUITY PLAN A

UTI OPPORTUNITIES

FUND IDFC PREMIER EQUITY PLAN A

2 HDFC EQUITY FUND

UTI OPPUTTUNITIES FUND

UTI OPPUTTUNITIES FUND

ICICI PRUDENTIAL DISCOVERY

FUND 

UTI OPPORTUNITIES FUND

3

ICICI PRUDENTIAL DISCOVERY FUND

HDFC EQUITY FUND

SUNDARAM BNP PARIBAS S.M.I.L.E REG-G

 HDFC EQUITY FUND

HDFC EQUITY FUN

In the year 2008-09 according to Jensen Alpha and Leverage Factor IDFC Equity Plan A was the best

performing fund whereas on the basis of M-Squared and Sharpe ratio UTI OpportunitiesFund was

the best in performance . ICICI Prudential Discovery Fund did best on M-Squared . Amongst the top

three ranked fund were Sundaram BNP Paribas SMILE REG and HDFC Equity Fund .

2009-10

Rank  Sharpe Treynor Jensen M2Leverage

Factor

1IDFC PREMIER EQUITY PLAN A

ICICI PRUDENTIAL DISCOVERY FUND

ICICI PRUDENTIAL DISCOVERY FUND

IDFC PREMIER EQUITY PLAN A 

IDFC PREMIER EQUITY PLAN A

2

ICICI PRUDENTIAL DISCOVERY FUND

IDFC PREMIER EQUITY PLAN A

HDFC EQUITY FUND

ICICI PRUDENTIAL DISCOVERY FUND

UTI OPPORTUNITIES FUND

71

3HDFC EQUITY FUND

HDFC EQUITY FUND

RELIANCE RSF FUND

HDFC EQUITY FUND

HDFC EQUITY FUND

In the year 2009-10, ICICI Prudential Discovery Fund performed well on Treynor Ratio and Jensen

Alpha whereas IDFC Premier Equity Plan A performed well on Sharpe Ratio,M-Squared and

Leverage Factor. HDFC Equity Fund, Reliance RSF Fund, UTI Opportunities fund were other funds

that were also in the top three performing funds.

9. Conclusion

In this study the performance of various mutual fund schemes in the equity diversified segment was

considered. Analysis was based on the risk and returns of various schemes. On analysis, it was

revealed that there is a certain amount of risk involved, while investing in equity diversified schemes,

as the beta values of schemes falls within a range of 0.71 and 1.10. The study also revealed the fact

that almost all the equity diversified schemes were affected in the year 2008-09 when recession had

hit the market. Values for average returns, Sharpe and Treynor were lowest. Whereas in the year

2009-10 when the market were recovering and investors were again showing faith in the market

schemes showed good risk adjusted performance, as most of the schemes were having positive values

in case of the performance measures. Schemes like IDFC Equity Plan A and HDFC Equity Fund

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were the top performing schemes in different parameters for 2007-08. In 2008-09 UTI Opportunities

Fund, IDFC Equity Plan A and ICICI Prudential Discovery Fund were the best of all and in 2009-10

IDFC Equity Plan A and ICICI Prudential Discovery Fund performed the best.

The study is highly beneficial to the investors as it gives them chance to compare and analyze

different scheme. Thus, the it helps the investors of all classes, in seeing how the different five star

rated funds stand in comparison with each other.

Along with this we are also able to see that in the difference between Systematic and Lump sum

investment. We found out that if markets are down then then SIP helps us in securing more units. In

todays time when market movements cannot be predicted investors tend to go for SIP as it does help

them take advantage of the low market rates. Also it removes the burden of investing large amount of

money at one time.

Further the effects of rebalancing showed that the returns that were earned when rebalancing was

done was higher compared to the returns that were earned without rebalancing. Hence setting rules

for rebalancing your mutual fund portfolio and adhering to those rules will ensure that you sell high

and buy low in the process of maintaining the desired composition. One need to decide up front how

often he/she will rebalance their portfolio. One should plan on doing it at least once a year and

possibly quarterly. Also, one should set target ranges and rebalance any funds as soon as they blow

through the upper or lower end of their ranges.

References

1. Naresh Malhotra, Research Methodology

2. Reilly/Brown, Investment Analysis and Portfolio Management.

3. www.valueresearchonline.com

4. www.moneycontrol.com

5. www.nseindia.com

6. www.bseindia.com

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7. www.hdfcfund.com.

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