Equity Schemes invest a bulk of their corpus 85%-95% or even more in equity shares or equity linked instruments and

nd the balance in cash. Equity schemes offered by mutual funds in India may be classified broadly into the following sub-types: Diversified Equity Schemes Index Schemes Sectoral Schemes Tax Planning Schemes Arbitrage Schemes

Hdfc top 200 This fund invests in stocks drawn from the companies in the BSE 200 Index as well as 200 largest capitalised companies in India. With equity exposure up to 90 per cent, the fund manages to achieve capital appreciation over time. In the 14-year history of this fund; it has consistently proven itself barring 1999 when the high exposure to FMCG and Healthcare backfired in the Tech-dominated rally. In 2008, the funds success in standing upright in a bear market, without resorting to debt or high cash levels, was a testimony to the managers skill. The large-cap bias and exposure to FMCG and Healthcare restricted the fall to just 45 per cent, around 11 per cent less than BSE 200 and 8 per cent lower than the category average.

Index fund Taurus Nifty Index Fund is an open-ended passively managed fund which replicates the benchmark Index by investing in securities of benchmark Index in the same proportion/weightage. Investors who are looking for diversification in medium risk, long term benefit and who do not have time or expertise to evaluate individual stocks or track the actively managed funds should be the one looking towards Index Funds. The strategy of the fund is to reduce the tracking error to the least possible through rebalancing of the portfolio taking into account the change in the weights of the stocks in the index as well as the incremental collections/redemptions in the scheme.

Tax Planning Schemes Most of the tax saving instruments in India under Section 80C are saving-oriented instruments with returns after adjusting for inflation either in the negative or slightly positive. 1

The exceptions to this are Ulips (Life and Pension Funds) and the ELSS Mutual Funds. An ELSS (Equity Linked Savings Scheme) is a mutual fund that has to invest a minimum of 80% in Equity Shares. The balance 20% can be in debt, money market instruments, cash or even more equity. There is a 3 year lock-in period for the ELSS mutual funds. Post the 36 months, the funds remain invested and work like any other open-ended mutual fund.

3 techqniques for passive portfolio mgmt: Full Replication Passive Strategy ETFs tracking highly liquid indices and assets are often constructed via full replication, holding a portfolio of securities that exactly matches the benchmark in composition and weight. By its very nature, a full-replication ETF should show minimal tracking error (although discrepancies sometimes arise, due to management and transaction expenses). Sometimes, however, full replication is infeasible, due to the illiquidity of the underlying securities, the sheer size of the index or country-specific tax laws for foreign holdings. In some cases, fund managers may also be limited by diversification regulations, which generally prohibit mutual funds (including ETFs) from concentrating more than 25% of their total assets in any one security. This makes full replication impossible for ETFs tracking narrow sectors or industries, such as telecom, which are dominated by one particular company or a small handful of companies.

Full replication can also be highly problematic where an index is itself massive and consists of securities with varying liquidity-a category that includes most major broad-market bond indexes Sampling Passive Strategy In this type of Passive Strategy, the fund manager buys a representative sample of stocks in the benchmark index according to their weights in the index Because the trading is in fewer stocks, the transaction costs will be lower. The biggest problem with Sampling strategy will be the higher probability of tracking error Will not track the index as closely, so there will be some tracking error

Quadratic Optimization Passive The alternative to full replication is to construct ETFs using index optimization, relying on mathematical models that attempt to build a smaller representative portfolio that mimics the performance characteristics of the broader benchmark. Optimization can work both ways positive and negative. 2

To be specific, it is a choice made by an investment manager on how a portfolio will be run one that has surprisingly large impacts on investor experience, despite the fact many investors are unaware of the very concept.

Funds tend to benefit with tracking error when the markets go down financial meltdown 2008.

Hedge fund strategies: Convertible Arbitrage A convertible arbitrage strategy is derived from an equity long-short strategy which involves taking long positions in stocks that are expected to increase in value and short positions in stocks that are expected to decrease in value. Instead of purchasing and shorting stocks, however, convertible arbitrage takes a long position in, or purchases, convertible securities. It simultaneously takes a short position in, or sells, the same companys common stock. The idea behind convertible arbitrage is that a companys convertible bonds are sometimes priced inefficiently relative to the companys stock. Convertible arbitrage attempts to profit from this pricing error.

Dedicated Short Bias In hedge funds, an investment strategy where the funds take more short positions than long positions. The hedge fund uses this strategy in the belief that more securities will decline in price than rise. This can be a risky investment strategy, especially in a prolonged bull market. Short bias managers take short positions in mostly equities and derivatives. The short bias of a manager's portfolio must be constantly greater than zero to be classified in this category.

2009 was a bad year for dedicated short bias funds as equity markets just kept going all through the year.

Emerging Markets Hedge Fund This strategy focuses on investing in lesser developed countries whose financial markets provided exploitable pricing inefficiencies. Popular geographic regions include Latin America, Eastern Europe, Asia-Pacific and Africa where investments could be made in asset classes including stocks, bonds and currencies. Emerging Market Hedge Fund capital reached a record new level in the first quarter of 2011, according to research from HFR. Total assets invested in Emerging Markets hedge funds reached over $121 billion, which surpassed the $117 billion record set in 2007.

The record level of assets invested in Emerging Market hedge funds represents the latest evidence that global investors continue to exhibit a preference for accessing specialized Emerging Markets exposure via hedge funds. Equity Market Neutral Fund typically have long and short equity positions with approximately zero net dollar exposure. In addition, some funds will attempt to be beta, sector or market cap neutral to further reduce equity market risk. Funds within this style utilize a range a range of methods from quantitative modeling to fundamental pairs trading. The first step in designing a pairs trade is finding two stocks that are highly correlated which are usually from the same industry or sub-sectors. Indices could also be used for pair trading NIFTY and BANK Nifty

Event Driven Risk Arbitrage Event-driven investing is an investing strategy that seeks to exploit pricing inefficiencies that may occur before or after a corporate event, such as a bankruptcy, merger, acquisition or spinoff. Event-driven is one of the least recognised hedge fund strategies and yet, over the long term, 25 per cent of hedge fund assets are allocated to it. Its diversification benefits from mainstream indices are the principal reason for its prevalence in hedge fund portfolios. By far the most common, however, is M&A arbitrage where the fund shorts shares of the acquiring company and buys shares in the target. Sometimes, where a deal is uncertain the reverse strategy is employed. Event-driven investing is an investing strategy that seeks to exploit pricing inefficiencies that may occur before or after a corporate event, such as a bankruptcy, merger, acquisition or spinoff.

Event-driven is one of the least recognised hedge fund strategies and yet, over the long term, 25 per cent of hedge fund assets are allocated to it. Its diversification benefits from mainstream indices are the principal reason for its prevalence in hedge fund portfolios. By far the most common, however, is M&A arbitrage where the fund shorts shares of the acquiring company and buys shares in the target. Sometimes, where a deal is uncertain the reverse strategy is employed.

Event Driven Fixed Income Arbitrage Fixed-income arbitrage is an investment strategy generally associated with hedge funds, which consists of the discovery and exploitation of inefficiencies in the pricing of bonds, i.e. instruments from either public or private issuers, yielding a contractually fixed stream of income. One prime reason for the 1998 collapse of famous LTCM Hedge fund was the fixed income arbitrage trading strategies as the differences between bonds diverged and not converged post the Russian debt default. Fixed Income swaps accounted for the major portion of the losses incurred by LTCM.

Event Driven Global Macro Macro investment strategy involves the hedge fund manager investing in securities to capitalize on market opportunities across countries. The fund manger makes leveraged bets on price movements of a wide variety of assets like currencies and interest rate products in the global markets. The economic variables are assessed based on their impact on equity, fixed income, currency and commodities. The most common macro strategy is employed on currencies where the fund manager takes positions in currencies betting on the macroeconomic fundamentals of a country.

Long Short Equity The most frequently used hedge fund strategy by fund managers is the classic long short equity strategy. The hedge fund manager combines long and short position in equity in such a way that market beta is neutralized. Generally, the fund manager take advantage of the equity market inefficiencies by holding long and short positions in selected equities in the same industry or sector. This makes the portfolio sector neutral, protecting the fund from industry specific-market risk.

Managed Futures 5

In this strategy, the hedge fund manager invests in commodities derivatives as a speculator to make money. Managed futures traders adapt a discretionary trading style or systematic trading style. Systematic style traders use technical analysis while discretionary traders use both technical and fundamental trading style at their own discretion. For the years 1980 to 2010, managed futures, as measured by the CASAM CISDM CTA Equal Weighted Index, had a compound average annual return of 14.52%, while for U.S. stocks (based on the S&P 500 total return index) the return was 7.04%.

Hedge Fund Strategy Overview

Phases of Portfolio Management Specification of investment objectives and constraints Choice of Asset Mix Formulation of Portfolio Strategy Selection of Securities Portfolio Execution Portfolio Revision Portfolio Evaluation Specification of Investment Objectives and Constraints The investment objectives are defined by : Return Requirements Risk Tolerance

The fund manager would have to decide the right balance between risk and return to define his investment objectives. ( For eg. Investor class conservative, moderate, aggressive) The constraints for a fund manager would primarily be in the form of regulatory constraints. The fund manager will have to adapt to the regulatory challenges while setting up his objectives. Taxes and market conditions are other two critical factors which could act as constraints for a fund manager.

Choice of Asset Mix Stocks, Bonds and Cash

Formulation of Portfolio Strategy Portfolio Strategies could be broadly classified into two major styles : Passive Active

Two popular active portfolio management strategies would be : value and growth Empirical evidence suggests that value stocks tend to outperform growth stocks . Studies suggest that value managers have outperformed growth managers in several countries and over extended periods of time.

Value managers typically buy out of favour stocks while growth managers buy hot stocks ( Dot come bubble Selection of Securities Cash and Bonds Fixed income securities are usually selected on the following basis YTM Risk of default

 Stocks

Duration

Three broad approaches to selection of equities could be used: Fundamental Analysis Technical Analysis Random Selection

Portfolio Execution In this phase, the fund manager plans to buy or sell specified securities in given amounts. Key issues to be addressed during this phase are : Maintain dialogue with broker : Ensure to keep out of buying or selling pressure, manipulative pricing in stocks and overall market sentiment Place orders that serve your interest best ( market order, limit order) Avoid serious trading errors ( panic selling, waiting beyond stop loss trigger)

Portfolio Revision Portfolio Revision may be necessary for the following reasons ; The asset allocation of a portfolio may have drifted away from its target The risk return characteristics may have changed The objectives and preferences of investors may have changed.

Portfolio Revision could be done by using : Portfolio Rebalancing Portfolio Upgrading

Portfolio Rebalancing involves reviewing and revising the portfolio composition. For eg. A constant mix policy would maintain certain targets for debt: equity. Portfolio Upgrading calls for reassessing the risk-return characteristics or various securities. Shifting from value based stocks to growth based stocks for higher returns could be an example of portfolio upgradation.

Performance Evaluation The key dimensions of performance evaluation are risk and returns. Key performance measures for portfolios include:

Rate of Return ((Dividends + Terminal Value Initial Value)/(Initial Value)) Sharpe Ratio Treynors Ratio Jensens Alpha

Regular review of performance is a good idea but forming bias on short term performance would be incorrect. Tracking the performance of a fund manager over a business cycle would be a good measure of his ability to understand the macro-economic factors which could affect his performance.