MAHINDRA AND MAHINDRA

FINANCIAL SERVICES LIMITED

A
Project
on

“ASSET
ASSET ALLOCATION”
BY
VINAY PATAWARI

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PERSONAL DETAILS

Name : Vinay Patawari

Address : A-16/202 Siddharth nagar,

W.E highway, Borivali – (east)

Course : PGDM

Roll. No : 35

Specialization : Finance

COMPANY DETAILS

Company: MAHINDRA AND MAHINDRA FINANCIAL SERVICES LTD.

Address : Sadhana house, 2nd floor, 570,

P.b. Marg, Worli,

Mumbai- 400018.

Guide : Deepali Parkar

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 ACKNOWLEDGEMENT

In preparation of this report, I feel great pleasure because it

has given me an extensive in hand exposure in my career. With
the help of this project report I got an opportunity to
understand about the Mutual Fund.

It’s my pleasure to thank Ms. Deepali Parkar the Relationship

Manager at MAHINDRA AND MAHINDRA FINANCIAL
SERVICES LIMITED for giving me the opportunity to work as a
summer trainee and undertake the project on “ASSET
ALLOCATION IN MUTUAL FUND”. I express my deep sense of
gratitude to the employees of MAHINDRA AND MAHINDRA
FINANCIAL SERVICES LIMITED who guided me in completing
my project work.

I also thank my Institute i.e. “Thakur Institute of Management

Studies and Research” for giving the students a chance to
work on the practical project and to have an exposure towards
industry.

I would like to take an opportunity to express my gratitude

towards all of them who have contributed directly or indirectly
in my project work.

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 TABLE OF CONTENT
CONTENT

Sr.No. Contents Page No.

1. Executive Summary 5

2. Mutual fund and its benefits 6

3. Overview of mutual fund industry in India 7

4. Asset allocation and asset classes 8–9

5. Types of asset allocation 9 –12

6. Various schemes 12 – 20

7. Conclusion 21

8. Bibliography and webliography 22

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 EXECUTIVE SUMMARY

The main purpose of preparing this report on “Asset allocation in

Mutual Fund” is to understand the relation between risk and return. If
the investor is risk averse or risk lover the investment
style/scheme/asset allocation will differ.

It's a hard fact that investments in mutual fund are always risky.
Investors should always be conscious of the fact that Mutual Funds
invest their funds in capital market instruments such as shares,
debentures, bonds etc and that all the capital market instruments
have risk.

Even there is no one mutual fund that will be suitable to all kinds of
investors. Hence, mutual fund investors need to identify a suitable
scheme for them. It will be the first step towards making successful
investments in mutual funds to make Mutual Funds their “CUP OF
TEA”.

The NAV of the scheme is largely dependent on the performance of

the companies and the sectors wherein the investment has been
made. The scheme may use techniques and instruments for efficient
portfolio management and to attempt to hedge or reduce the risk of
such fluctuations. However these techniques and instruments if
imperfectly used have the risk of the scheme incurring losses due to
mismatches particularly in a volatile market. The Fund’s ability to use
these techniques may be limited by market conditions, regulatory
limits. The use of these techniques is dependent on the ability to
predict movements in the prices of securities being hedged and
movements in interest rates. There exists an imperfect correlation
between the hedging instruments and the securities or market
sectors being hedged. Besides, the fact those skills needed to use
these instruments.

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MUTUAL FUND
• Mutual fund is a pool of money, which is collected from many
investors and is invested by an asset management company to
achieve some common objective of the investors.

• An Asset Management Company (AMC) collects many investors

money and invests this money in various securities to generate
returns for the investors.

• Investors get the net returns after deducting the related

expenses and if there is any loss, it would be borne by the
investors.

• An Asset Management Company (ARC) manages the pool of

money, therefore it is also known as ‘Indirect form of
investment’ for the investors.

BENEFITS OF MUTUAL FUND

• Increases the purchasing power of the investors.

• Enables them to have a well diversified portfolio even with very

small amount of investment.

• Money would be managed by a professional at low cost and

reduction of risk .

• Reduction of transaction costs due to economies of operation

at a large scale.

• Convenience of investing the money and tracking the

performance of money and maintains liquidity.

• Flexibility to change investment objectives.

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OVERVIEW OF MUTUAL FUND INDUSTRY IN INDIA
• Indian mutual fund industry’s average asset under
management slid from the record high of Rs.6.02 Lakhs cr in
May 2008 to 5.66 Lakhs cr in June.

• The asset under management fell down by almost 6% owing to

the weakness in the equity markets and tight liquidity
conditions after advance tax outflows of almost Rs.25000 cr.

• Reliance mutual fund continued to top of the asset chart with an

average AUM of Rs.90183 cr but assets were down by almost
8% from the previous month.

• ICICI Prudential and HDFC mutual fund followed it with average

assets of Rs.59505 cr and Rs.52711 cr respectively.

• ICICI Prudential mutual funds average assets rose by 0.7%

while HDFC mutual funds saw a decline of 6% in the average
assets under management for the month of June.

• UTI and BIRLA mutual fund continued to figure among the top 5
mutual fund.

• UTI and BIRLA mutual fund were at the 4th and 5th spot with
average assets under management of Rs.50770 cr and
Rs.41093 cr respectively.

• Mutual funds continued to be buyers in the secondary equity

market in June and bought equities worth Rs.3179 cr. vs. a net
buyer position of Rs.64 cr in May.

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ASSET ALLOCATION
• Asset allocation is the current rage in the mutual fund
industry.

• Asset allocation refers to the process of adjusting the

relative proportion of different asset classes in an
investment portfolio.

• It is based on the fact that both the probable return and

probable volatility of each asset class is different.

• By combining asset classes in different proportions, it is

supposed to be possible to modify the portfolio’s overall
volatility and return.

• It is the process of spreading the investments among

categories with different risks and returns that categorize
the risk return trade off of investing.

• Investors are likely to benefit by integrating asset allocation

into one’s investing strategy irrespective of age of the
investor.

• The appropriate asset allocation is contingent upon type of

investor, risk appetite and overall objective.

• The basic input of asset allocation model are expected

returns, expected yields, risk estimates, correlations, time
frame, expected payouts and other clients specific factors.

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ASSET CLASSES IN ASSET ALLOCATION
• There are three major types of asset classes they are :-

Cash

Stocks

Bonds

• The amount of investment in each category depends upon

investor’s risks tolerance, investment horizon and financial
goals.

• Mutual funds are a convenient way to make some or all of the

investor’s allocation.

• If the investor is 35 year old who allocates 70% of his portfolio

to stocks, 20% to bonds and 10% to cash, so he can easily
reach that allocation by buying shares of mutual funds.

• Most investment policies set discrete allocation targets for

each class depending upon the level of risk and the respective
asset class to allow an acceptable range along the targets.

TYPES OF ASSET ALLOCATION

Strategic Asset Allocation

Fixed and Flexible Asset Allocation

Tactical Asset Allocation

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STARTEGIC ASSET ALLOCATION
• It recommends adjusting the percentages for each group of
investors after taking into account of their age, financial
circumstances and objectives.

• It classifies investors in terms of their lifecycle phases.

• During the Accumulation phase, an investor would be building

assets by periodic investments of capital and reinvestments of
all dividends received.

• During the Distribution phase, he will stop adding assets and

start receiving dividends as income.

• Distribution phase :-
Older investor - 50/50 (equity/ debt)
Younger investor - 60/40 (equity/ debt)

• Accumulation phase :-
Older investor - 70/30 (equity/ debt)
Younger investor - 80/20 (equity/ debt)

• In other words, younger investors can be more aggressive and

let the magic of compounding work for them.

• While older investor take a more conservative approach.

• Similarly investors in the Accumulation phase can take greater

risk than those who need income and are in their Distribution
phase.

• For example, a 30 year old investor makes 70/30 asset

allocation and at age 50 let him balance it out and so on.

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FIXED VS. FLEXIBLE ASSET ALLOCATION
• A fixed ratio of asset allocation means that balance is
maintained by liquidating a part of the position in the asset
class with higher return and reinvesting in the other assets with
lower return.

• This is not what the investor normally do. They tend to increase
their equity position when equity prices tend to climb up and
vice versa.

• But, this approach is more disciplined and lets investor to book

profits in rising markets and increase holdings in falling,
markets.

• A flexible ratio of assets allocation means not doing re-

balancing and letting the profits run.

• As stocks and bonds will give different returns over time, initial
asset allocation will change, generally in favour of equity
portion as its return would be higher than bond portion.

• The Distribution- oriented investor will find his initial ratio

change in favour of equities much more than the accumulation-
oriented investor.

• Rs.200 invested equally in stocks and bonds with returns being

10% and 7% at the end of 10 yrs for accumulating investor will
result in 57/43 ratio and at the end of 20 yrs 63/37 ratio.

• But for distribution receiving investor after 10 yrs ratio will be

66/34 and after 20 yrs ratio will be 79/21 ratio.

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TACTICAL ASSET ALLOCATION
• Despite the difficulty of forecasting people do it and fund
managers themselves change their asset allocation
percentages in the light of their views on the future movements
in asset prices.

• They seek extra returns by taking bets on the relative valuation

of different assets.

• For example an investor may invest in the small company more

than the large company shares or prefer value stocks over
growth stocks, further investor may change the equity/debt mix
itself in favour of where he expects a greater returns.

• These tactical changes in asset allocation within the overall

percentages holding or in the strategic ratio itself may yield
extra returns if the bet is right.

• But clearly there is no guarantee.

VARIOUS SCHEMES

Equity/growth schemes

Debt/income schemes

Sector specific schemes

Balanced schemes

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EQUITY/GROWTH SCHEMES
• The aim of the growth fund is to provide capital appreciation
over the medium to long run.

• Such schemes invest major part of their corpus in equities and

have comparatively a higher risk.

• These options provide various options to the investors like

dividend option, capital appreciation and etc. and investor may
chose an option depending upon their preferences.

• The investor must indicate the option in the application form

and mutual fund also allows the investor to change the option at
a later date.

• Growth schemes are good for the investors having a long term
outlook seeking appreciation over a period of time.

• Some of the examples of funds having Equity/Growth schemes

are Reliance growth fund, Reliance vision fund and etc.

• Reliance Growth Fund – Equity/Growth Scheme

Fund manager – Mr. Sunil Singhania

Average returns –

• 1st year return – 14.11%

• 3rd year return – 51.81%

• 5th year return – 60.72%

• Since Inception – 32.79%

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PORFOLIO OF RELIANCE GROWTH FUND AS ON 31ST MARCH, 08

MARKET COMPOSITION WEIGHTAGE

Equities 84.41%
Cash an other receivable 15.59%

Grand total 100%

TOP HOLDINGS AS A % OF TOTAL ASSETS

Divis laboratories ltd. 4.29

Reliance industries ltd. 4.18
Jindal steel and power ltd. 4.05
Jindal saw ltd. 3.43
Jaiprakash associates ltd. 2.88

CORPUS AMOUNT – Rs.4748.62 cr as on 31st march, 08.

ANALYSIS – Here most of the funds are invested into equities and as
a result the return on the amount invested has increased from
14.11% to 60.72% after the end of 5 years. So here the risk higher is
the return. Here young aged investors can take the advantage of this
kind of the funds.

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DEBT/INCOME SCHEMES
• The aim of the income funds is to provide regular and steady
income to the investors.

• Such schemes generally invest in the fixed income securities

such as bonds, corporate debentures, government securities
and money market securities.

• These funds are not affected by the market fluctuations in the

equity markets and such funds are less risky as compared to
equity schemes.

• However opportunities of capital appreciation are also limited

in such funds.

• The NAV’S of such funds are affected because of change in

interest rates in the country, if the interest rates falls NAV’s of
such funds are likely to increase in short run and vice versa.

• However long term investors may not bother about these

fluctuations.

• Some of the examples of funds having Debt/Income schemes

are Reliance regular savings fund and etc.

• Reliance regular savings Fund – Debt/Income Scheme

Fund manager – Mr.Prashant Pimple

Average returns –

• 6 months return – -8.22%

• 1st year return – 20.17%

• Since Inception – 14.34%

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PORFOLIO OF RELIANCE REGULAR SAVINGS (DEBT OPTION)
FUND AS ON 31ST MARCH, 08

MARKET COMPOSITION WEIGHTAGE

Commercial papers 83.03%
Cash an other receivable 16.97%

Grand total 100%

• TOP HOLDINGS AS A % OF TOTAL ASSETS

Non- banking finance company 83.03%

Cash and other receivable 16.97%

Grand total 100%

CORPUS AMOUNT – Rs.1.18 cr as on 31st march, 08

ANALYSIS – Here most of the funds are invested into debt

instruments such as commercial papers and as a result the return on
the amount invested are less as compared to the amount invested
into the equities and here the amount of risk involved is less. These
kinds of the fund are suitable to low risk taking investers.

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SECTOR SPECIFIC SCHEMES
• These are the funds/schemes which invest in the securities of
only those sectors or industries as specified in the offer
document e.g. software, FMCG and etc.

• The returns in these funds depend upon the performance of the

respective sectors/industries.

• While these funds may give higher returns and they are more
risky compared to the diversified funds.

• Investors need to keep watch on the performance of those

sectors/industries and must exit at an appropriate time.

• Some of the examples of funds having balanced schemes are

Reliance diversified power sector fund, Reliance pharma fund
and etc.

• Reliance diversified power sector Fund – Sector Scheme

Fund manager – Mr. Sunil Singhania

Average returns –

• 6 months return – 23.15%

• 1st year return – 82.92%

• 3rd year return – 63.74%

• Since Inception – 60.21%

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PORFOLIO OF RELIANCE DIVERSIFIED POWER SECTOR FUND AS
ON 31ST MARCH, 08

MARKET COMPOSITION WEIGHTAGE

Equities 73.32%
Bills re-discounted, debt, 26.28%
derivatives, cash and other
receivable

Grand total 100%

TOP HOLDINGS AS A % OF TOTAL ASSETS

Tata Power company 6.53

Reliance industries ltd. 5.49
Reliance energy ltd. 5.29
Oil and natural gas corp. ltd. 4.96
Jindal steel and power ltd. 4.51

CORPUS AMOUNT – Rs.5374.20 cr as on 31st march, 08

ANALYSIS – Here most of the funds are invested into equities of the
booming sector and as a result the return on the amount invested
has increased from 23.15% to 63.74% after the end of 3 years. Here
risk is high so as the return. This kind of the fund is suitable to
investors who have high risk taking ability.

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BALANCED SCHEMES
• Balanced funds usually invest in equity (shares) and debt (fixed
income instrument).

• Usually they put around 50% of their total investment in debt

and 50% in equity.

• Some of the examples of funds having balanced schemes are

Reliance regular savings fund and etc.

• Reliance regular savings Fund – Balanced Scheme

Fund manager – Mr.Prashant Pimple

Average returns –

• 1st year return – 13.87%

• Since Inception –10.83%

PORFOLIO OF RELIANCE REGULAR SAVINGS (BALANCED OPTION)

FUND AS ON 31ST MARCH, 08

MARKET COMPOSITION WEIGHTAGE

Equities 62.55%
Cash an other receivable 37.45%

Grand total 100%

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TOP HOLDINGS AS A % OF TOTAL ASSETS

Reliance industries ltd. 7.50

Take solution ltd. 6.39
Maruti Suzuki India ltd. 6.31
Infosys technology ltd 5.96
Bharat electronics ltd. 5.30

CORPUS AMOUNT – Rs.24.16 cr as on 31st march, 08

ANALYSIS – Here funds are invested into equities and debt

instruments as a result the return on the amount invested is
moderate and since here the risk involved is less it is suitable to old
aged investors.

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 CONCLUSION

• Try not to time the market.

• Invest systematically.

• Sound Investment Process and through research process.

• Diversify the portfolio to minimize the risk.

• Ultimate objective is to deliver superior risk adjusted returns

over the medium to longer term.

• Look at building a “back to basics” portfolio.

For Equity portion of portfolio maintain a balance between

large, mid and small cap stocks.

Mid and small caps to boost returns and large caps to add
stability to your portfolio.

For Debt portion of portfolio invest in liquid mutual funds

(AAA+ portfolio) and ‘guaranteed return’ investments for
additional safety against any volatility.

• FIIs seeking to invest in Indian markets usually make their first

investment in large cap stocks.

• Access to resources – human and capital.

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BIBLIOGRAPHY

• AMFI Workbook

• Mutual Fund Insight

• India Today

• Business World

• ICFAI Journal

WEBLIOGRAPHY

• www.valueresearch.com

• www.myiris.com

• www.amfiindia.com

• www.moneycontrol.com

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