A Dissertation Project Report

On
"Comparative Analysis of Mutual Fund of HDFC & ICICI"

Submitted in partial fulfillment for the award of

degree of

1
 CONTENT

DESCRIPTION

S.No. Title Page No.

1. Acknowledgement

2. Certificate

3. Executive summary

4. Types of Mutual Fund

Advantages of mutual funds:

5.
Disadvantages of mutual funs
6.
Mf industry synopsis
7.
Mf category analysis
8. Recommended funds

9. Conclusion

10. Questionnaire

11. Bibliography

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 EXECUTIVE SUMMARY
INTRODUCTION:
The Indian financial system based on four basic components like Financial
Market, Financial Institutions, Financial Service, Financial Instruments. All are
play important role for smooth activities for the transfer of the funds and allocation
of the funds. The main aim of the Indian financial system is that providing the
efficiently services to the capital market. The Indian capital market has been
increasing tremendously during the second generation reforms. The first generation
reforms started in 1991 the concept of LPG. (Liberalization, privatization,
Globalization)
Then after 1997 second generation reforms was started, still the it’s going
on, its include reforms of industrial investment, reforms of fiscal policy, reforms of
ex- imp policy, reforms of public sector, reforms of financial sector, reforms of
foreign investment through the institutional investors, reforms banking sectors. The
economic development model adopted by India in the post-independence era has
been characterized by mixed economy with the public sector playing a dominating
role and the activities in private industrial sector control measures emaciated form
time to time. The last two decades have been a phenomenal expansion in the
geographical coverage and the financial spread of our financial system.
The spared of the banking system has been a major factor in promoting
financial intermediation in the economy and in the growth of financial savings with
progressive liberalization of economic policies, there has been a rapid growth of
capital market, money market and financial services industry including merchant
banking, leasing and venture capital, leasing, hire purchasing. Consistent with the
growth of financial sector and second generation reforms its need to fruition of the
financial sector. Its also need to providing the efficient service to the investor
mostly if the investors are supply small amount, in that point of view the mutual
fund play vital for better service to the small investors. The main vision for the
3
analysis for this study is to scrutinize the performance of five star rated mutual
funds, given the weight of risk, return, and assets under management, net assets
value, book value and price earnings ratio.

WHAT IS A MUTUAL FUND?

Mutual fund is the pool of the money, based on the trust who invests the
savings of a number of investors who shares a common financial goal, like the
capital appreciation and dividend earning. The money thus collect is then invested
in capital market instruments such as shares, debenture, and foreign market.
Investors invest money and get the units as per the unit value which we called as
NAV (net assets value). Mutual fund is the most suitable investment for the
common man as it offers an opportunity to invest in diversified portfolio
management, good research team, professionally managed Indian stock as well as
the foreign market, the main aim of the fund manager is to taking the scrip that
have under value and future will rising, then fund manager sell out the stock. Fund
manager concentration on risk – return trade off, where minimize the risk and
maximize the return through diversification of the portfolio. The most common
features of the mutual fund unit are low cost. The below I mention the how the
transactions will done or working with mutual fund.

GROWTH OF MUTUAL FUND INDUSTRY:

The history of mutual funds dates support to 19th century when it was
introduced in Europe, in particular, Great Britain. Robert Fleming set up in 1868
the first investment trust called Foreign and colonial investment trust which
promised to manage the finances of the moneyed classes of Scotland by scattering
the investment over a number of different stocks. This investment trust and other
investment trusts which were afterward set up in Britain and the U.S., resembled
today’s close – ended mutual funds. The first mutual fund in the U.S.,
4
Massachusetts investor’s trust, was set up in March 1924. This was the open –
ended mutual fund.
The stock market crash in 1929, the Great Depression, and the outbreak of the
Second World War slackened the pace of growth of the mutual fund industry.
Innovations in products and services increased the popularity of mutual funds in
the 1950s and 1960s. The first international stock mutual fund was introduced in
the US in 1940. In 1976, the first tax – exempt municipal bond funds emerged and
in 1979, the first money market mutual funds were created. The latest additions are
the international bond fund in 1986 arm funds in 1990. This industry witnessed
substantial growth in the eighties and nineties when there was a significant
increase in the number of mutual funds, schemes, assets, and shareholders. In the
US the mutual fund industry registered s ten – fold growth the eighties. Since
1996, mutual fund assets have exceeds bank deposits. The mutual fund industry
and the banking industry virtually rival each other in size.
A Mutual fund is type of Investment Company that gathers assets form investors
and collectively invests in stocks, bonds, or money market instruments. The
investment company concepts date to Europe in the late 1700s, according to K.
Geert Rouwenhost in the Origins Mutual Funds, when “a Dutch Merchant and
Broker Invited subscriptions from investor with limited means.” The
materialization of “investment Pooling“ in England in the 1800s brought the
concept closer to U.S. shores. The enactment of two British Laws, the Joint Stock
Companies Acts of 1862 and 1867, permitted investors to share in the profits of an
investment enterprise, and limited investor liability to the amount of investment
capital devoted to the enterprise.
May be more outstandingly, the British fund model established a direct link
with U.S. Securities markets, serving finance the development of the post – Civil
War U.S. economy. The Scottish American Investment Trust, Formed on
February1, 1873 by fund pioneer Robert Fleming, invested in the economic
potential of the United States, Chiefly through American railroad bonds. Many

5
other trusts followed that not only targeted investment in America, but led to the
introduction of the fund investing concept on U.S. shores in the late 1800 and early
1900s.
Nov. 1925. All these funds were open – ended having redemption feature.
Similarly, they had almost all the features of a good modern Mutual Funds – like
sound investment policies and restrictions, open end ness, self – liquidating
features, a publicized portfolio, simple capital structure, excellent and professional
fund management and diversification etc…….and hence they are the honored
grand – parents of today’s funds. Prior to these funds all the initial investment
companies were closed – ended companies. Therefore, it can be said that although
the basic concept of diversification and professional fund management, were
picked by U.S.A. from England Investment Companies “The Mutual Fund is an
American Creation.”
ecause of their exclusive feature, open – ended Mutual Funds rapidly
became very popular. By 1929, there were 19 open – ended Mutual Funds in USA
with total assets of $ 140 millions. But the 1929 Stock Market crash followed by
great depression of 1930 ravaged the U.S. Financial Market as well as the Mutual
Fund Industry. This necessitated stricter regulation for mutual funds and for
Financial Sectors. Hence, to protect the interest of the common investors, U.S.
Government passed various Acts, such a Securities Act 1933, Securities Exchange
Act 1934 and the Investment Companies Act 1940. A committee called the
National Committee of Investment Company (Now, Investment Company
Institute), was also formed to co – operate with the Federal Regulatory Agency and
to keep informed of trends in Mutual Fund Legislation.
As a result of these measure, the Mutual Fund Industry began to develop
speedily and the total net assets of the Mutual Funds Industry increased form $ 448
million in 1940 to $ 2.5 billion in 1950. The number of shareholder’s accounts
increased from 296000, to more than one Million during 1940 – 1951. “As a result

6
of renewed interest in Mutual Fund Industry they grew at 18% annual compound
rate reaching peak of their rapid growth curve in the late 1960s.”

WORLDWIDE ROLE OF MUTUAL FUND

ORGANIZATION STRUCTURE OF MUTUAL FUNDS:
Mutual funds have organization straucture as per ther Security Exchange
Board of India guideline, Security Exchange Board of India specified authority and
responsibility of Trustee and Aeest Management Companies. The objectives is to
controlling, to promoted, to regulate, to protected the investors right and
efficient trading of units. Operation of Mutual fund start with investors save their
money on mutual fund, than Mutual Fund manager handling the funds and
strategic investment on scrip. As per the objectives of particular scheme manager
selected scrips. Unit value will become high when fund manager investment
policy generate the return on capital market. Unit return depends on fund return
and efficient capital market. Also affects international capital market, liquidity and
at last economic policy. Below the graph indicates how the process was going on
to investors to earn returns. Mutual fund manager having high responsibility
inside of return and how to minimize the risk. When fund provided high return
with high risk, investors attract to invest more fund for same scheme.

7
 The Mutual fund organization as per the SEBI formation and necessary
formation is needed for sooth activities of the companies and achieved the desire
objectives. Transfer agent and custodian play role for dematerialization of the
fund and unit holders hold the account statement, but custody of the unit is on
particular Asset Management Company. Custodian holds all the fund units on

8
 dematerialization form. Sponsor had decided the responsibility of custodian
when investor to purchase the fund and to sell the unit. Application forms,
transaction slip and other requests received by transfer agent, middle men
between investors and Assts Management Companies.

ORIGIN OF MUTUAL FUND IN INDIA

The history of mutual funds dates backs to 19th century when it was
introduced in Europe, in particular, Great Britain. Robert Fleming set up in 1968
the first investment trust called Foreign and Colonial Investment Trust which
promised to manage the finances of the moneyed classes of Scotland by
spreading the investment over a number of different stocks. This investment trust
and other investments trusts which were subsequently set up in Britain and the
US, resembled today’s close – ended mutual funds. The first mutual in the U.S.,
Massachusetts investor’s Trust, was set up in March 1924. This was the open –
ended mutual fund.
The stock market crash in 1929, the Great Depression, and the outbreak of
the Second World War slackened the pace of mutual fund industry, innovations in
products and services increased the popularity of mutual funds in the 1990s and
1960s. The first international stock mutual fund was introduced in the U.S. in
1940. In 1976, the first tax – exempt municipal bond funds emerged and in 1979,
the first money market mutual funds were created. The latest additions are the
international bond fund in 1986 and arm funds in 1990. This industry witnessed
substantial growth in the eighties and nineties when there was a significant
increase in the number of mutual funds, schemes, assets, and shareholders. In the
US, the mutual fund industry registered a ten – fold growth the eighties. Since

9
1996, mutual fund assets have exceeded bank deposits. The mutual fund industry
and the banking industry virtually rival each other in size.

GROWTH OF MUTUAL FUNDS IN INDIA

By the year 1970, the industry had 361 Funds with combined total assets of
47.6 billion dollars in 10.7 million shareholder’s account. However, from 1970 and
on wards rising interest rates, stock market stagnation, inflation and investors some
other reservations about the profitability of Mutual Funds, Adversely affected the
growth of mutual funds. Hence Mutual Funds realized the need to introduce new
types of Mutual Funds, which were in tune with changing requirements and
interests of the investors. The 1970’s saw a new kind of fund innovation; Funds
with
no
sales
commissions called “ no load “ funds. The largest and most successful no load
family of funds is the Vanguard Funds, created by John Bogle in 1977.
In the series of new product, the First Money Market Mutual Fund (MMMF)
i.g. The Reserve Fund” was started in November 1971. This new concept signaled
a dramatic change in Mutual Fund Industry. Most importantly, it attracted new
small and individual investors to mutual fund concept and sparked a surge of
creativity in the industry.

TYPES OF MUTUAL FUNDS

Wide variety of Mutual Fund Schemes exists to cater to the needs such as
financial position, risk tolerance and return expectations etc. The table below gives
an overview into the existing types of schemes in the Industry.

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ADVANTAGES OF MUTUAL FUNDS:
Mutual funds have designed to provide maximum benefits to investors, and
fund manager have research team to achieve schemes objective. Assets
Management Company has different type of sector funds, which need to proper
planning for strategic investment and to achieve the market return.

Portfolio Diversification
Mutual Funds invest in a well-diversified portfolio of securities which enables investor to hold a
diversified investment portfolio (whether the amount of investment is big or small).

Professional Management
Fund manager undergoes through various research works and has better investment management
skills which ensure higher returns to the investor than what he can manage on his own.

Less Risk
Investors acquire a diversified portfolio of securities even with a small investment in a Mutual
Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities.

Low Transaction Costs

Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction
costs. These benefits are passed on to the investors.

Liquidity
An investor may not be able to sell some of the shares held by him very easily and quickly,
whereas units of a mutual fund are far more liquid.

Choice of Schemes
Mutual funds provide investors with various schemes with different investment objectives.
Investors have the option of investing in a scheme having a correlation between its investment
objectives and their own financial goals. These schemes further have different plans/options

11
Transparency
Funds provide investors with updated information pertaining to the markets and the schemes. All
material facts are disclosed to investors as required by the regulator.

Flexibility
Investors also benefit from the convenience and flexibility offered by Mutual Funds. Investors
can switch their holdings from a debt scheme to an equity scheme and vice-versa. Option of
systematic (at regular intervals) investment and withdrawal is also offered to the investors in
most open-end schemes.

Safety
Mutual Fund industry is part of a well-regulated investment environment where the interests of
the investors are protected by the regulator. All funds are registered with SEBI and complete
transparency is forced.

DISADVANTAGES OF MUTUAL FUNS

The mutual fund not just advantage of investor but also has disadvantages
for the funds. The fund manager not always made profits but might creates loss for
not properly managed. The fund have own strategy for investment to hold, to sell,
to purchase unit at particular time period.

Costs Control Not in the Hands of an Investor

Investor has to pay investment management fees and fund distribution costs as a percentage of
the value of his investments (as long as he holds the units), irrespective of the performance of the
fund

No Customized Portfolios
The portfolio of securities in which a fund invests is a decision taken by the fund manager.
Investors have no right to interfere in the decision making process of a fund manager, which
some investors find as a constraint in achieving their financial objectives.

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Difficulty in Selecting a Suitable Fund Scheme
Many investors find it difficult to select one option from the plethora of funds/schemes/plans
available. For this, they may have to take advice from financial planners in order to invest in the
right fund to achieve their objectives.

MUTUAL FUND & CAPITAL MARKET

Indian institute of capital market (IICM) aims is to educate and develop
professionals for the securities industry in India and other developing countries,
other objectives like to function on a centre for creating investors awareness
through research & turning and to provide specialized consultancy related to the
securities industry.
Capital market play vital role for the growth of Mutual fund in India, capital
market divided into the two parts one is the primary market and another is
secondary market, primary market concern with issue management, as per the
mutual fund concern the primary called as the NFO New Fund Offer, all the AMC
(Assets Management Company) are issuing all the funds all the way through the
NFO, Every NFO came with particularly investment objectives, style of
investment and allocation of the funds all that thing depend on the fund manager
style of investment. The other portion of the capital market is secondary market, as
we have a discussion with reference with mutual fund secondary market means
when the market bull stage the investors sole the units. Opposite when the bear
stage the investor buy or some of the investor time wait for sale.

Role of SEBI
A index fund scheme’ means a mutual fund scheme that invests in securities
in the same proportion as an index of securities;” A mutual fund may lend and
borrow securities in accordance with the framework relating to short selling and
securities lending and borrowing specified by the Board.”A mutual fund may enter

13
into short selling transactions on a recognized stock exchange, subject to the
framework relating to short selling and securities lending and borrowing specified
by the Board.” “Provided that in case of an index 13 fund scheme, the investment
and advisory fees shall not exceed three fourths of one percent (0.75%) of the
weekly average net assets.“
“Provided further that in case of an index fund scheme, the total expenses of
the scheme including the investment and advisory fees shall not exceed one and
one half percent (1.5%) of the weekly average net assets.” Every mutual fund shall
buy and sell securities on the basis of deliveries and shall in all cases of purchases,
take delivery of relevant securities and in all cases of sale, deliver the securities:
Provided that a mutual fund may engage in short selling of securities in accordance
with the framework relating to short selling and securities lending and borrowing
specified by theBoard: Provided further that a mutual fund may enter into
derivatives transactions in a recognized stock exchange, subject to the framework
specified by the Board.”

Role of AMFI (Association Mutual Fund in India)

The Association of Mutual Funds in India (AMFI) is dedicated to
developing the Indian Mutual Fund Industry on professional, healthy and ethical
lines and to enhance and maintain standards in all areas with a view to protecting
and promoting the interests of mutual funds and their unit holders.
AMFI working group on Best Practices for sales and marketing of Mutual
Funds under the Chairmanship of Shri B. G. Daga, Former Executive Director of
Unit Trust of India with Shri Vivek Reddy of Pioneer ITI, Shri Alok Vajpeyi of
DSP Merrill Lynch, Shri Nikhil Khattau of Sun F & C and Shri Chandrashekhar
Sathe, Formerly of Kotak Mahindra Mutual Fund has suggested formulation of
guidelines and code of conduct for intermediaries and this work has been ably done
by a sub-group consisting of Shri B. G. Daga and Shri Vivek Reddy. 14

14
Following are ts Management Companies under India

15
16
Tax Planning and Mutual Fund
Investors in India opt for the tax-saving mutual fund schemes for the simple reason
that it helps them to save money. The tax-saving mutual funds or the equity-linked
savings schemes (ELSS) receive certain tax exemptions under Section 88 of the
Income Tax Act. That is one of the reasons why the investors in India add the tax-
saving mutual fund schemes to their portfolio. The tax-saving mutual fund
schemes are one of the important types of mutual funds in India that investors can
option for. There are several companies in India that offer – tax – saving mutual
fund schemes in the country.

NISM (National Institute of Securities Market)

NISM has the sub – part of national stock exchange. National stock exchange
established one branch who handling the activities which have been related with
the capital market and security market. Here the national institute market has six
constitutes of securities markets
1) Investors

2) Regulation

3) Intermediaries

4) Opinion Market

5) Knowledge Generate

6) Issuer

NISM organized six types of school which are as under

1. School of certificate of Intermediaries (SCI)

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2. School of Regulatory Studies and Supervision (SRSS)

3. School of Corporate Governance (SCG)

4. School of Investors Education & Financial Literacy (SIEFL)

5. School of Securities Education (SSE)

6. School of Securities Information and Research (SSIR)

NICM (National Institute of Capital Market)

National Institution of Capital Market also sub division of National Stock
Exchange, NSE have seven Subsidiaries, which included necessary for growth of
capital market. Institute provided education which related with capital market
transaction. Seminar and workshop related with transparency for trading activities
develop technology on trading and doing market research.

SEBI Guideline of Mutual Fund

SEBI Regulation Act 1996
Establishment of a Mutual Fund:
In India mutual fund play the role as investment with trust, some of the formalities
laid down by the SEBI to be establishment for setting up a mutual fund. As the part
of trustee sponsor the mutual fund, under the Indian Trust Act, 1882, under the
trustee company are represented by a board of directors. Board of Directors is
appoints the AMC and custodians. The board of trustees made relevant agreement
with AMC and custodian. The launch of each scheme involves inviting the public
to invest in it, through an offer documents.
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Depending on the particular objective of scheme, it may open for further sale and
repurchase of units, again in accordance with the particular of the scheme, the
scheme may be wound up after the particular time period.

1. The sponsor has to register the mutual fund with SEBI

2. To be eligible to be a sponsor, the body corporate should have a sound track

record and a general reputation of fairness and integrity in all his business
transactions.

Means of Sound Track Records


 The body corporate being in the financial services business for at least five
years

 Having a positive net worth in the five years immediately preceding the
application of registration.

 Net worth in the immediately preceding year more than its contribution to
the capital of the AMC.

 Earning a profit in the three out of the five preceding years, including the
fifth year.

3. The sponsor should hold at least 40% of the net worth of the AMC.

4. A party which is not eligible to be a sponsor shall not hold 40% or more of the
net worth

19
of the AMC.

5. The sponsor has to appoint the trustees, the AMC and the custodian.

6. The trust deed and the appointment of the trustees have to be approved by SEBI.

7. An AMC or its officers or employees can not be appointed as trustees of the

mutual fund.

8. At least two thirds of the business should be independent of the sponsor.

9. Only an independent trustee can be appointed as a trustee of more than one

mutual fund, such appointment can be made only with the prior approval of the
fund of which the person is already acting as a trustees.

LAUNCHING OF A SCHEMES
Before its launch, a scheme has to be approved by the trustees and a copy of its
offer documents filed with the SEBI.
1. Every application form for units of a scheme is to be accompanies by a
memorandum containing key information about the scheme.

2. The offer document needs to contain adequate information to enable the

investors to make informed investments decisions.

3. All advertisements for a scheme have to be submitted to SEBI within seven days
from the issue date.

4. The advertisements for a scheme have to disclose its investment objective.

20
5. The offer documents and advertisements should not contain any misleading
information or any incorrect statement or opinion.

6. The initial offering period for any mutual fund schemes should not exceed 45
days, the only exception being the equity linked saving schemes.

7. No advertisements can contain information whose accuracy is dependent on

assumption.

8. An advertisement cannot carry a comparison between two schemes unless the

schemes are comparable and all the relevant information about the schemes is
given.

9. All advertisements need to carry the name of the sponsor, the trustees, the AMC
of the fund.

10. All advertisements need to disclose the risk factors.

11. All advertisements shall clarify that investment in mutual funds is subject to
market risk and the achievement of the fund’s objectives can not be assured.

12. When a scheme is open for subscription, no advertisement can be issued stating
that the scheme has been subscribed or over subscription.

Recent Trend of Mutual Fund

India is at the first stage of a revolution that has already peaked in the U.S. The
U.S. boasts of an Asset base that is much higher than its bank deposits. In India,
mutual fund assets are not even 10% of the bank deposits, but this trend is

21
beginning to change. Recent figures indicate that in the first quarter of the current
fiscal year mutual fund assets went up by 115% whereas bank deposits rose by
only 17%. (Source: Thinktank, the Financial Express September, 99) This is
forcing a large number of banks to adopt the concept of narrow banking wherein
the deposits are kept in Gilts and some other assets which improves liquidity and
reduces risk. The basic fact lies that banks cannot be ignored and they will not
close down completely. Their role as intermediaries cannot be ignored. It is just
that Mutual Funds are going to change the way banks do business in the future.

Comparison of investment in Banks V/S Mutual Funds

GROWTH OF MUTUAL FUNDS IN LUCKNOW

By the year 1970, the industry had 361 Funds with combined total assets of
47.6 billion dollars in 10.7 million shareholder’s account. However, from
1970 and on wards rising interest rates, stock market stagnation, inflation
and investors some other reservations about the profitability of Mutual
Funds, Adversely affected the growth of mutual funds. Hence Mutual Funds
22
realized the need to introduce new types of Mutual Funds, which were in
tune with changing requirements and interests of the investors. The 1970’s
saw a new kind of fund innovation; Funds with no sales commissions called
“ no load “ funds. The largest and most successful no load family of funds is
the Vanguard Funds, created by John Bogle in 1977. In the series of new
product, the First Money Market Mutual Fund (MMMF) i.e., the Reserve
Fund" was started in 1971.This new concept signaled a dramatic change in
Mutual Fund Industry. Most importantly, it attracted new small and
individual investors to mutual fund concept and sparked a surge of
creativity in the industry.
1. To study the perception of customers towards various types of
mutual funds.
2. To evaluate the awareness of customers towards various mutual
funds.
3. To determine the expected return and risk involved in investing in
mutual funds.
4. To under the customers' investing power and their interest in financial
product

23
METHODOLOGY & STUDY
A large number of studies on the growth and financial performance of mutual
funds have been carried out during the past, in the developed and developing
countries. Brief reviews of the following research works reveal the wealth of
contributions towards the performance evaluation of mutual fund, market timing
and stock selection abilities of fund managers.
In LUCKNOW, one of the earliest attempts was made by National Council of
Applied Economics Research (NCAER) in 1964 when a survey of households was
undertaken to understand the attitude towards and motivation for savings of
individuals. Another NCAER study in 1996 analyzed the structure of the capital
market and presented the views and attitudes of individual shareholders. SEBI –
NCAER Survey (2000) was carried out to estimate the number of households and
the population of individual investors, their economic and demographic profile,
portfolio size, and investment preference for equity as well as other savings
instruments. Data was collected from 30,00,000 geographically
the study are : Households preference for instruments match their risk
perception; Bank Deposit has an appeal across all income class; 43% of the non-
investor households equivalent to around 60 million households apparently lack
awareness about stock markets; and, compared with low income groups, the higher
income groups have higher share of investments in Mutual Funds signifying that
Mutual funds have still not become truly the investment vehicle for small
investors.
Since 1986, a number of articles and brief essays have been published in financial
dailies, periodicals, professional and research journals, 20 explaining the basic
concept of Mutual Funds and highlighted their importance in the LUCKNOWn
capital market environment. They touched upon varied aspects like regulation of
Mutual Funds, Investor expectations, Investor protection, and growth of Mutual
Funds and some on the performance and functioning of Mutual Funds. A few
among them are Vidyashankar (1990), Sarkar (1991), Agarwal (1992), Sadhak
24
(1991), Sharma C. Lall (1991), Samir K. Barua et al., (1991), Sandeep Bamzai
(2001), Atmaramani (1995), Atmaramani (1996), Subramanyam (1999),
Krishnan (1999), Ajay Srinivsasn (1999). Segmentation of investors on the basis
of their characteristics was highlighted by Raja Rajan (1997). Investor’s
characteristics on the basis of their investment size Raja Rajan (1997), and the
relationship between stages in life cycle of the investors and their investment
pattern was studied Raja Rajan (1998).
Friend, et al., (1962) made an extensive and systematic study of 152 mutual funds
found that mutual fund schemes earned an average annual return of 12.4 percent,
while their composite benchmark earned a return of 12.6 percent. Their alpha was
negative with 20 basis points. Overall results did not suggest widespread
inefficiency in the industry. Comparison of fund returns with turnover and expense
categories did not reveal a strong relationship. Irwin, Brown, FE (1965) analyzed
issues relating to investment policy,
portfolio turnover rate, performance of mutual funds and its impact on the stock
markets. They identified that mutual funds had a significant impact on the price
movement in the stock market. They concluded that, on an average, funds did not
perform better than the composite markets and there was no persistent relationship
between portfolio turnover and fund performance.
Treynor (1965) used ‘characteristic line’ for relating expected rate of return of a
fund to the rate of return of a suitable market average. He coined a fund
performance measure taking investment risk into account. Further, to deal with a
portfolio, ‘portfolio-possibility line’ was used to relate expected return to the
portfolio owner’s risk preference. Sharpe, William F (1966) developed a composite
measure of return and risk. He evaluated 34 open-end mutual funds for the period
1944-63. Reward to variability ratio for each scheme was significantly less than
DJIA (Dow Jones Industrial Average) and ranged from 0.43 to 0.78. Expense ratio
was inversely related with the fund performance, as correlation coefficient was
0.0505. The results depicted that good performance was associated with low

25
expense ratio and not with the size. Sample schemes showed consistency in risk
measure. Treynor and Mazuy (1966) evaluated the performance of 57 fund
managers in terms of their market timing abilities and found that, fund managers
had not successfully outguessed the market. The results suggested that, investors
were completely dependent on fluctuations in the market. Improvement in the rates
of return was due to the fund managers’ ability to identify under-priced industries
and companies. The study adopted Treynor’s (1965) methodology for reviewing
the performance of mutual funds.
Jensen (1968) developed a composite portfolio evaluation technique
concerning risk-adjusted returns. He evaluated the ability of 115 fund managers in
selecting securities during the period 1945-66. Analysis of net returns indicated
that, 39 funds had above average returns, while 76 funds yielded abnormally poor
returns. Using gross returns, 48 funds showed above average results and 67 funds
below average results. Jensen concluded that, there was very little evidence that
funds were able to perform significantly better than expected as fund managers
were not able to forecast securities price movements. Fama (1972) developed
methods to distinguish observed return due to the ability to pick up the best
securities at a given level of risk from that of predictions of price movements in the
market. He introduced a multiperiod model allowing evaluation on a period-by-
period and on a cumulative basis. He concluded that, return on a portfolio
constitutes of return for security selection and return for bearing risk. His
contributions combined the concepts from modern theories of portfolio selection
and capital market equilibrium with more traditional concepts of good portfolio
management.
Williamson (1972) compared ranks of 180 funds between 1961-65 and 1966-70.
There was no correlation between the rankings of the two periods. The investment
abilities of most of the fund managers were identical. He highlighted the growing
prominence of volatility in the measurement of investment risk. Klemosky (1973)
analyzed investment performance of 40 funds based on quarterly returns during the

26
period 1966-71. He acknowledged that, biases in Sharpe, Treynor, and Jensen’s
measures, could be removed by using mean absolute deviation and semi-standard
deviation as risk surrogates compared to the composite measures derived from the
CAPM (Capital Asset Pricing Modal).
McDonald and John (1974) examined 123 mutual funds and identified the
existence of positive relationship between objectives and risk. The study identified
the existence of positive relationship between return and risk. The relationship
between objective and risk-adjusted performance indicated that, more aggressive
funds experienced better results. Gupta (1974) evaluated the performance of
mutual fund industry for the period 1962-71 using Sharpe, Treynor, and Jensen
models. All the funds covered under the study outperformed the market
irrespective of the choice of market index. The results indicated that all the three
models provided identical results. Return per unit of risk varied with the level of
volatility assumed and he concluded that, funds with higher volatility exhibited
superior performance. Klemosky (1977) examined performance consistency of 158
fund managers for the period 1968-75. The ranking of performance showed better
consistency between four-year periods and relatively lower consistency between
adjacent two-year periods. Ippolito’s (1989) results and conclusions were relevant
and consistent with the theory of efficiency of informed investors. He estimated
that risk-adjusted return for the mutual fund industry was greater than zero and
attributed positive alpha before load charges and identified that fund performance
was not related to expenses and turnover as predicted by efficiency arguments.
Gupta Ramesh (1989) evaluated fund performance in LUCKNOW comparing the
returns earned by schemes of similar risk and similar constraints. An explicit risk-
return relationship was developed to make comparison across funds with different
risk levels. His study decomposed total return into return from investors risk,
return from managers’ risk and target risk. Baruan Varuan (1991) made an attempt
to evaluate the master share scheme of UTI using the data from 1987 to 1980.
Their conclusion was that the Master Share Scheme outperformed the market in

27
terms of net assets value (NAV) and the master share scheme (MSS) benefited
large investors rather than small investors.
24 Obaidulla and Sridhar (1991) evaluated the performance of two major growth
oriental mutual fund schemes - Master share and Canshare. They both concluded
that both the funds provided abnormal returns. Master share out performed based
on market risk. Gupta L C (1992) attempted a household survey of investors with
theobjective of identifying investors’ preferences for mutual funds so as to help
policy makers and mutual funds in designing mutual fund products and in shaping
the mutual fund industry.
Lal C and Sharma Seema (1992) identified that, the household sector’s share in
the LUCKNOW domestic savings increased from 73.6 percent in 1950-51 to 83.6
percent in 1988-89. The share of financial assets increased from 56 percent in
1970-71 to over 60 percent in 1989-90 bringing out a tremendous impact on all the
constituents of the financial market. Shashikant Uma (1993) critically examined
the rationale and relevance of mutual fund operations in LUCKNOW Money
Markets. She pointed out that money market mutual funds with low-risk and low
return offered conservative investors a reliable investment avenue for short-term
investment.
Ansari (1993) stressed the need for mutual funds to bring in innovative schemes
suitable to the varied needs of the small savers in order to become predominant
financial service institution in the country.
Shukla and Singh (1994) attempted to identify whether portfoliomanager’s
professional education brought out superior performance. They found that equity
mutual funds managed by professionally qualified managers were riskier but better
diversified than the others. Though the performance differences were not
statistically significant, the 25 three professionally qualified fund managers
reviewed outperformed others.

28
 RECENT TRENDS IN MUTUAL FUND MARKETING

The mutual fund industry in India has evolved little over three decades but
the real impetus has come after the changes in the mutual fund regulations in early
80s. Private and foreign mutual funds are operating in the Lucknow market and
constitute a substantial portion of the mutual fund industry. Today the industry
consists of Unit Trust of India, mutual funds sponsored by public sector banks and
insurance corporations, private and foreign mutual funds. Investors are constantly
being bombarded byquestions concerning their risk profile. Either a money market
or guilt fund is targeted for the risk averse or a low graded company offering a
high return on its fixed deposits. Banks like Many managers are now taking
interest in designing mutual fund products with multi feature options for investors.
Customers are often benefited from the improvements that are offered by new
features, for example by enhanced quality products [Garvin (1984)]. These
additions of features also offer advantages to others in the value chain. For the
mutual fund agents new features provide new sales arguments in seller buyer
interaction. New features do not only infuse single products but also entire product
categories periodically with new lease of life [Broadbent (1980), Dowdy W.L.
(1986)].

29
 Update
 Indian equity markets have been volatile and trading in a broader
rangein the last 15 months with selling pressure being witnessed at
higherlevels and buying emerging at lower levels

 Domestic markets recovered smartly from the lows since the lows
ofaround 26000 on the Sensex levels at the start of October to
27500levels before correcting at end-October and beginning of
November

 The comments of the US Federal Reserve Chair indicating a rate hike

inDecember and weak results of many index heavyweight
companiesweigh on market sentiments

 Corporate earnings growth has failed to pick up structurally so far.

Consequently, we have revised down our earnings growth for
Sensexcompanies for FY15-16 from 18% to 13%. However, we continue
toexpect improved growth of around 19% in FY16-17

 Price pressures remained contained across major sub-

componentsexcept in pulses, which saw a sharp spike in inflation to 43%
YoY vs.30% YoY in September 2015. The effect of two successive years
ofuneven monsoon rains is being felt acutely in pulses. In the wake
ofspiralling prices of pulses, the NDA government had launched

30
 amassive de-hoarding operation to ensure that pulses are easily
availableto common people. The operation resulted in seizure of 50475
MT ofpulses. It is believed inflation may moderate once festival
demandsoftens and prices of lentils and vegetables fall as imports
increase

 Some improvement has been visible in terms of increased auto

sales,especially in passenger vehicle and commercial vehicles, which
aremore urban and macro centric. However, the growth in rural
centrictwo-wheeler has been subdued over the last few months
indicatingweak conditions in rural India

Outlook
 The government has initiated a number of structural policy reforms
likepower reforms, road sector reforms, implementation of DBT in
centrallyfunded welfare schemes, increasing FDI in many sectors, thrust on
manufacturing in sectors like defence, focus on ease of doing
business,taxation reforms, etc

 Structurally, the outlook for the Indian equity markets remains bright on the
back of a steep correction in commodities, especially crude oil &industrial
metals, a 125 bps repo rate cut and subsequent transmissionof the same to
the corporate balance sheets along with relatively stableexchange rates

 In the near term, markets may continue to trade in a broad range as aslow
improvement in earnings growth and fears of a US Fed rate hikemay
pressurise while the government’s reform and policy action maykeep
sentiments upbeat

31
 Any intermediate throwbacks from here on should be utilised to buy ina
staggered fashion from a medium-term perspective to ride the
largeruptrend

32
 Debt Market

Update
 The yield on government securities was under pressure on the back
ofweak global cues as strong jobs data and comments from US Fedofficials
increased the probability of a rate hike in December 2015.Comments from
the RBI Governor that they are comfortable with thecurrent level of rates for
the near term, indicating status quo for the nextfew months, also impacted
market sentiments

 After touching a low of ~7.5% post the recent repo rate cut by the RBIin its
last policy meeting, 10-year G-Sec yields continued to harden inthe last
month. During October, the benchmark US 10 year G-Sec yieldmoved up
36 bps from below 2% to 2.34% currently

 Foreign portfolio investors have been on the sidelines in the last

month.They have actually been net sellers to the tune of around
US$500million in the last two weeks

 CPI October 2015 picked up to 5.0% while WPI came in at -

3.8%,marginally higher than expectations. CPI food inflation (CFPI) spiked
upto a multi-month high of 5.26% given the rise in prices of pulses
andwaning of the positive base effect. Core CPI is hovering around
4.5%YoY (0.4% MoM). CPI September 2015 was unchanged at 4.41%.
WPI

 October 2015 inched up to -3.81% but was still in the red for the twelfth

33
 consecutive month. Core WPI at -2.04 signifies slack in demand for input
commodities.

 Liquidity stays comfortable with inter-bank call money rates largelyhovering

near repo rate. In the last month, CP yields hovered between8.25% and
8.50% whereas CD yields were between 7.40% and 7.60%

Outlook
 An increase in FII limit in a phased manner to 5% of
outstandinggovernment securities (that are currently at 3.8%) along with
2%additional limit for state development loans are a structural positive
forlong term bonds

 A US Fed rate hike may induce some volatility across global

markets.However, India’s improving macro fundamentals will prevent any
sharpsell-off.

 We believe the current tightening in yield is temporary in nature. Oncethe

US Fed event is over, domestic fundamentals will push yieldsacross the
curve lower.

 The Indian debt markets remain attractive from a medium-termperspective

as the inflation trend remains on a downward trajectory andwell within the
RBI’s target range

34
 Investors may consider both duration as well as accrual fundsdepending on
their risk-return profile.

MF industry synopsis

 In October 2015, assets under management (AUM) grew 21% YoY

to1324165 crore with the share of equity oriented funds at 30% from 27%
in October 2014. Total net inflows in MFs were | 134564 crore inOctober
2015 due to substantial inflows in all major categories viz.income, equity
and liquid funds

 Inflows into equity schemes were | 6269 crore in October 2015 while
inincome funds were | 22875 crore. Liquid funds also witnessed inflows to
the tune of | 103306 crore

35
 MF Category Analysis

Equity funds
 Midcap funds delivered 10% return in the last year,
significantlyoutperforming large cap funds that delivered negative returns of
2.5%

 Among sector funds, pharma funds delivered highest returns followedby

FMCG and technology

Equity AUM increased by | 10248

crore in the last month
whereas the net inflow into the equity fund is | 6269 crore
indicating that an increase in AUM was on account of
inflows as well as increase in market value

36
 Exposure to banks and finance stocks together account for the highest proportion with
27% of equity assets followedby technology and pharma

View
Short term: Positive
Long-term: Positive

Equity diversified funds:

 Equity diversified funds delivered healthy returns last year. Midcapfunds
were outperformers with 10% one year average return followedby
multicap funds with one year average return of 2% and then largecaps
with -2.5% return against the BSE Sensex return of -9% as onNovember
16, 2015

 Corporate earnings growth has failed to pick up structurally so

far.Consequently, we have revised down our earnings growth for
Sensexcompanies for FY15-16 from 18% to 13%. However, we continue
toexpect improved growth of around 19% in FY16-17

37
 The government has initiated a number of structural policy reforms
likepower reforms, road sector reforms, implementation of DBT in
centrallyfunded welfare schemes, increasing FDI in many sectors, thrust
onmanufacturing in sectors like defence focus on ease of doing business
taxation reforms, etc

 Structurally, the outlook for the Indian equity markets has

improvedsignificantly. This is on the back of a steep correction in
commodities,especially crude oil & industrial metals, a 125 bps repo rate
cut andsubsequent transmission of the same to corporate balance
sheets alongwith relatively stable exchange rates

 Investors should start accumulating from current levels. Every sharp

correction should be used as an incremental buying opportunity from
amedium-term perspective

 The Sensex is currently trading at 16.0x FY16E EPS of | 1608 and

13.6xFY17E EPS of | 1901, which provides comfort. Investors
shouldaccumulate multicap funds following a buy on dips or SIP strategy

 Caution is required in midcap and small cap mutual funds as they

havesignificantly outperformed large caps in the current market rally
sinceSeptember 2013. Therefore, if overall market volatility increases
midcap and small caps funds in the near term may underperform
Investment in the same should only be over a five year
investmenthorizon

38
 Recommended funds

Large cap

 Axis Equity
 Birla Sunlife Frontline Equity
 ICICI Prudential Focused Bluechip Equity
 SBI Bluechip
 UTI Opportunities

Diversified

 Franklin India Prima Plus Fund

 Reliance Equity Opportunities
 ICICI Prudential Value Discovery Fund

Midcap

 HDFC Mid-Cap Opportunities Fund

 Franklin India Smaller Companies Fund
 SBI Magnum Global Fund

39
 View
Short-term: Positive
Long-term: Positive

Equity Infrastructure fund

 The government has been making efforts towards reform such as online
environment clearance, de-regulating diesel prices, FDI inDefence,
Railways, etc. It has also been trying to tap innovative financial avenues,
which will not only bring in new investments but also revivestalled projects
(worth | 8.8 lakh crore)

 In terms of vertical, the road sector is likely to be in a sweet spot. The

government has rolled out projects worth $93 billion including the $45
billion flagship road building project NHDP over the next three
years.Besides NHDP, opportunities include 'Bharat Mala' project of $12
billion for 6000 km and 'CharDham' connectivity for 2500 km for $8
billion.This awarding would offer humungous opportunities for EPC players
like NCC, KNR & Simplex Infrastructure and BOT players such as Ashoka
Buildcon and IRB Infrastructure

 Thirdly, the recent RBI action to reduce the repo rate by 50 basis points
(bps) also augurs well for the infrastructure sector as this will not only
reduce their borrowing cost but also improve liquidity through a better
working capital cycle

40
 Fourthly, with the RBI's action allowing banks to issue long term bonds for
infrastructure with benefits such as relaxation of CRR & SLR norms and
longer duration of bonds, we believe the pressure on developers to fund
infrastructure projects would ease. Hence, cost of funds and strain on cash
flow are likely to reduce, going ahead

 Going ahead, while we believe there would be opportunities

ininfrastructure, we remain selectively positive on the sector

Preferred Picks

 Franklin Build India Fund

 L&T Infrastructure Fund

 ICICI Prudential Infrastructure Fund

41
 View
Short-term: Neutral
Long-term: Positive

Equity Banking Funds

 Banking credit growth reached new lows at 9% YoY as on October
30,2015. Accordingly, we expect credit growth for PSU banks to
besubdued (lower than industry traction) and at ~15-17% for private banks.
This would result in muted net interest income growth for PSBsvs. private

 Provisions will continue to stay high as asset quality still remains

underpressure. Slippages i.e. fresh NPAs remain elevated for most
PSUbanks. Addition of | 19000 crore was seen in GNPA Q2FY16.
Slippagescame from the restructured book, as well as fresh pain.
Freshrestructuring under the 5:25 scheme is gradually building and
addingfurther four SDR cases, can form ~1% of banking credit

 Private banks continued with the healthy performance at 16% YoYgrowth in

profitability. Among PSU banks, BoI & IOB reported losses of| 1126 crore
and | 655 crore, respectively, during Q2FY16. Bank ofBaroda, Bank of
Maharashtra and Dena Bank saw a sharp fall in theirprofitability. We
believe higher provisions and lower growth willcontinue to mar bank
earnings in future also

 We believe that, going ahead, asset quality woes and, consequently,growth

concerns for PSU banks will continue for the bulk of FY16E.Apart from

42
 lowering bad assets formation, revival of capex and a surgein credit growth
are key factors to provide boost to the sector. Weremain neutral on the
sector in the near term

Preferred Picks

 ICICI Prudential Banking & Financial Services

 Reliance Banking Fund

 UTI Thematic - Banking Sector Fund

View
Short-term: Neutral
Long-term: Neutral

Equity FMCG
 FMCG companies continue to witness muted demand from both rural and
urban India. With the significant correction in commodity price the industry
has taken price cuts to pass on raw material benefits. Thishas affected
revenue growth, mainly due to the absence of a price hikein sales.

43
 However, a decline in commodity prices has resulted in aconsiderable
expansion in operating margins despite companiesincreasing their
advertisement & promotion (A&P) spend

 In the last few months, the valuation multiples of FMCG companies have
seen some contraction in the wake of concerns over a demandrevival. We
believe a delay in demand revival could result in a furthercontraction in
multiples.

Preferred Picks

 ICICI Prudential FMCG Fund

 SBI FMCG Fund

44
 View
Short-term: Neutral
Long-term: Positive

Equity pharma funds

 Despite near term headwinds like regulatory issues and emergingmarkets
currency volatility, long term visibility remains intact on theback of a good
product basket and a reasonable base business growth.US and Indian
formulations remain main growth drivers for the sector on the back of a
strong pipeline and incremental product launches.Healthy operating
margins, relatively low leverage and strong returnratios are some of the
other attributes for most pharma players
 The rupee has weakened vis-à-vis the US$ and is likely to stay at thehigher
level, which is likely to nullify the currency impact in Europe andrest of the
world

 We continue to maintain our long term bullish view on the sectordespite

premium valuations on the back of earnings visibility, consistentoperating
cash flows and strong balance sheets
Preferred Pick
s
 Reliance Pharma Fund

 SBI Pharma Fund

 UTI-Pharma & Healthcare

45
 View
Short-term: Neutral
Long-term: Positive

Equity Technology Funds

 Tier-I IT companies reported average 2.9% QoQ dollar revenue growthin
Q2FY16 vs. 3.1% decline in Q1FY16 and 1.2% decline in
Q4FY15.Constant currency revenues grew 3.8% as dollar growth was
negativelyimpacted (~80 bps) by cross currency headwinds. Infosys
reportedstellar revenue beat, Wipro was middling while TCS and HCL Tech
weresoft led by company specific reasons. Currency tailwinds
andoperational efficiency were key margin tailwinds partially offset by wage
hikes and business re-investments (S&M, onsite). The FY16Ecommentary
was upbeat led by healthy deal signings and traction indigital technologies.

 Operationally, discretionary spending remains healthy in the US and

ledgrowth while Europe rebounded modestly. Insurance, telecom and oil
&gas verticals are structurally challenged and growth continues to be
Uneven

 Average rupee has depreciated ~5.2% in H1FY16 and could aidmargins

leading to earnings upgrade in FY16E, FY17E. Upsides couldbe in line with
earnings upgrades given blended valuations are at ~16xFY17E. However,
sharp sell-offs should be used to accumulate givenlong-term growth
prospects

46
 Preferred Picks

 ICICI Prudential Technology Fund

 DSPBR Technology fund

Traded volumes should be the major criterion that is used while deciding on
investment in ETFs. Higher volumes ensure lower spread and better pricing to
investors...Tracking error, though it should be considered, is not the deciding
factor as variation among funds is not huge...

Exchange Traded Funds (ETF)

 In India, three kinds of ETFs are available: Equity index ETFs, liquidETFs
and gold ETFs.

 An equity index ETF tracks a particular equity index such as the

BSESensex, NSE Nifty, Nifty Junior, etc.

 An equity index ETF scores higher than index funds on several

grounds.The expense of investing in ETFs is relatively less by 0.50-1.00%
incomparison to an index fund. The expense ratio for ETFs is in the rangeof
0.50-0.75%, excluding brokerage, while for index funds the expenseratio
varies in the range of 1.0-1.5%. However, brokerage (which varies)is
applicable on ETFs while there are no entry loads now on index funds.

47
 Tracking error, which explains extent of deviation of returns from
theunderlying index, is usually low in ETFs as it tracks the equity index on a
real time basis whereas it is done only once in a day for index funds.

 ETFs also provide liquidity as they are traded on stock exchanges

andinvestors may subscribe or redeem them even on an intra-day
basis.This is unavailable in index funds, which are subscribed/redeemed
onlyon a closing NAV basis.

 There are over 400 ETFs traded globally. ETFs are transparent and
costefficient. The decision on which ETF to buy should be largely
governedby the decision on getting exposure in that asset class.

 Volumes are higher only in the Goldman Sachs Benchmark ETFs

andtracking error is also lowest at 0.01%. Therefore, it is our top pick
forinvestors wanting Nifty-linked returns.

 CPSE ETF is a new entry in the Goldman Sachs ETF offering. The
ETFinvests in select 10 PSU stocks and has been listed on the
exchangesince April. It has delivered 16% return since its launch.

48
49
 View
Short-term: Positive
Long-term: Positive

Balanced funds
 Balanced funds are hybrid funds. More than 65% of the overall portfoliois
invested in equities. Hence, as per provisions of the Income Tax Act,
1961,any capital gains over one year become tax free. Also,
dividendsdeclared by funds are tax free

 In case you separately invest 35% of your investible corpus in a debtfund,

the same will be subject to higher taxation. However, if the wholecorpus is
invested in balanced funds, 100% shall have lower taxationapplicable as
mentioned above

 After a sharp rally in equity markets, the funds can be a

preferredinvestment avenue as the debt proportion serves to protect
onintermediate relief rallies or the downturn while providing
65%participation on further upsides

50
Preferred Picks

51
  ICICI Prudential Balanced - Advantage Fund

 HDFC Balanced Fund

 Tata Balanced Fund

View
Short-term: Neutral
Long-term: Positive

MIP should be a preferred debt investment for funds that

need to be parked for over two years

Monthly Income Plans (MIP)

 An MIP offers investors an option to invest in debt with someparticipation in
equity, ~10-25% of the portfolio. They are suitable forinvestors who seek
higher return from a debt portfolio and arecomfortable taking nominal risk.
The debt corpus of the portfolioprovides regular income while the equity
portion of the fund provides alpha. However, returns can also get eroded by
a fall in equities

 MIPs can be classified into aggressive MIP and conservative MIP basedon
its equity allocation. Risk averse investors should invest in MIPs withlower
equity allocation to avoid capital erosion

52
 The change in taxation announced in the Union Budget 2014, shall
beapplicable to MIP funds (refer to debt funds section for details)

Preferred Picks

 Birla Sun Life MIP II - Savings 5 Plan

 ICICI Prudential MIP 25

 DSPBR MIP Fund

View
Short-term: Positive
Long-term: Positive

Arbitrage Funds
 Arbitrage funds seek to exploit market inefficiencies that get manifestedas
mispricing in the cash (stock) and derivative markets

 Availability of arbitrage positions depends very much on the

marketscenario. A directional movement in the broader index
attractsspeculators in the market and cost of funding makes futures
positionsbiased.

53
 Arbitrage funds are classified as equity funds as they invest into
equityshare and equity derivative instruments. Since these are classified
asequity funds for taxation, dividends declared by the funds are tax free.No
capital gains tax will be applicable if they are sold after a year

 These funds can be looked upon as an alternative to liquid funds.However,

for these funds, returns totally depend on arbitrageopportunities available
at a particular point of time and investors shouldconsider reviewing the
same before investing. Returns of arbitrage funds are non-linear and,
therefore, unsuitable for investors who wantconsistent return across time
period

 Arbitrage funds should be used as a liquid investment and should notbe a

major part of the investor’s portfolio

 Availability of arbitrage positions depends very much on the

marketscenario. Directional movement in the broader index
attractsspeculators in the market while cost of funding makes future
positionsbiased.

 In case of positive movement, long build-up in futures puts pricing in

anupward bias and creates a window for direct arbitrage positions

 On the other hand, negative bias attracts fresh sellers in the

market.Speculators try to sell the stock much cheaper than theoretical
prices. Insuch situations, reverse arbitrage opportunities arise

54
 On the other hand, a range bound market does not give ample room
tocreate arbitrage positions

 Currently, there are few arbitrage opportunities available in the

marketwhich can lead to better returns

Preferred Picks

 ICICI Prudential Equity - Arbitrage Fund – Regular

 IDFC Arbitrage Fund - (Regular)

 Kotak Equity Arbitrage Fund

 SBI Arbitrage Opportunities Fund

With yields correcting over 70 bps in a year,Giltandduration

funds outperformed

55
 The RBI has cut its repo rate by125 bps in the current year,Whichwill push overall
interestRatesdown, thus benefitingduration funds further

Investment into securities with maturity of less than 90 days and more than one year
dominate total investments bymutual funds

56
 View
Neutral

Liquid Funds
 Liquid fund returns moderated to 8.1-8.7% pre tax from over 9% earnedin
the previous year. Liquid funds witnessed an inflow of | 103306 croreas a
quarter end phenomenon

 The Reserve Bank of India’s proactive liquidity management

operationsensured that call rates stayed range bound around the policy
ratereducing day-to-day volatility. CBLO rates also hovered just above
therepo rate. With an improvement in liquidity conditions, the certificate
ofdeposit and commercial paper rates in the three month bracket
alsoeased over 100 bps to the 7.5-8% range from 9.1-9.3%. The same
islikely to moderate returns in liquid funds, going forward

 For less than a year, individuals in the higher tax bracket should opt
fordividend option as the dividend distribution tax @ 28.325% is marginally
lower. Also, though the tax arbitrage has reduced, they stillearn better pre-
tax returns over bank savings (3-4%) and currentaccounts (0-3%)

 Changes in taxation rules announced in Union Budget 2014 are

alsoapplicable to liquid funds, as post tax returns in less than a three-
yearperiod get reduced for individuals falling in the higher tax bracket
(30%tax slab) and for corporates.

57
 View
Ultra-short term: Positive
Short-term: Positive
Long-term: Positive

Income funds
 In the income funds category, long term debt funds outperformeddelivering
9.2% absolute return in the last year (as on November 17,2015). RBI’s
recent 50 bps rate cut has boosted returns of long-termbond funds,
including income and gilt medium and long-term funds

 Amtek Auto's default on its loan repayment to JP Morgan and worriesabout

the presence of stressed companies in fixed income portfoliostriggered
outflows from these funds in September. As a result, incomefunds
witnessed an outflow of | 26717 crore during the month. InOctober, there
was an inflow of | 22875 crore in income funds onaccount of correction in
corporate bond yields, which turned incomefunds attractive once again.
Also, concerns that were hovering aroundcorporate bonds’ riskiness
subsided in the current month

58
 Given the sharp rate cuts of 125 basis points this calendar year, it
isbelieved there may be an extended pause or another 25 basis points
tillMarch 2016. Hence, it may make sense to invest in a mix of short-
termincome funds and dynamic bond funds and avoid long duration gilt
funds.

Ultra-short-term fund returns are attractive on risk adjustedBasis

Short-term funds will benefit as the bond curve reverts to an upward slopping curve.
Credit opportunities funds earnthe highest accrual and are the best in the category

Dynamic bond funds are suitable for all types of investorsand for longer duration.They
can take exposure to all durations as per the interest rate outlook and switch between G
secs and corporate bonds

Recommended funds

Ultra Short Term Funds:

 Birla Sun Life Savings Fund

 ICICI Prudential Flexible income

Short
Term
Funds

 Bir
la
Sunlife
short term fund

59
  HDFC Short Term Fund
 ICICI Pru Short Term Plan

Short Term Funds – Credit opportunities

 Birla Sunlife Short Term opportunities term

 HDFC Corporate debt opportunities
 ICICI Prudential Regular Savings

Long term/Dynamic

 Birla Sunlife income plus

 ICICI Prudential Dynamic Bond Fund
 IDFC dynamic bond fund

60
 View
Short-term: Neutral
Long-term: Neutral

Gilt Funds
 In October 2015, gilt funds delivered 9% absolute return last year,
thehighest among debt funds. We believe the odds remain in favour of
thegovernment securities yield trending down over the next year or two.
Inthe quarter gone by, 10 year G-sec yields have fallen 28 bps. While
thespread between these instruments and repo rate was generally 40-
50bps, it is currently around 90 bps, meaning yields could slide further
by~40 bps. However, gilt funds will be less attractive due to the
longerholding period (more than three years) as lower accrual income
willneutralise the impact of moderate capital gains in the near term

 The 125 bps rate cut by the RBI in CY15 can push overall interest
ratesdown depending on how soon banks transmit it into the system
byrepricing their assets and liabilities lower

 The RBI has increased the FPI limit in government bonds to 5% of thetotal
outstanding government securities in a staggered manner byMarch 2018.
Currently, the FPI holding is at 3.8%. The change in FPIlimits has further
opened up room for | 1,20,000 crore in central government securities by
March 2018. All these augur well for debtfunds, especially duration funds

61
 The central government has signed a memorandum with the RBI settingout
a clear inflation objective to bring the inflation rate to the mid-point of the
band of 4 +/- 2%. CPI, as per our assessment, should average close to 5%
for FY16 (on assumption of normal monsoons and a stablecurrency). The
government’s commitment towards controlling priceshocks and steps taken
to improve the supply chain are commendable.Also, global prices have
corrected sharply and are supportive rangingfrom crude, metal to food
prices. Hence, inflation should likely stay onthe intended path. This creates
room for the RBI to cut rates by another100-150 bps in the long term to
earn a real return of ~1.5-2%

 On the supply front, the Budget has pegged the market borrowing forFY16
at | 6 lakh crore on a gross basis and | 4.56 lakh crore on a netbasis (out of
this, | 2.34 lakh crore through dated securities and | 15000through gold
bonds have been scheduled for H2FY16). Both gross andnet market
borrowings were close to market expectations. Borrowingrelated concern is
expected to come down, given the government’scommitment towards
reducing the fiscal deficit to 3% of GDP by FY17

 Aggressive investors can invest in gilt funds with an investment horizonof

one or two years

Recommended funds

 Birla Sun Life Gilt Plus - PF Plan – Regular

 ICICI Prudential LT Gilt Fund - PF Option – Regular

62
 Technically, after the multiyear bull phase during 2004-12, gold prices corrected
significantly. The violation of the long term trend line highlights the breach of a decade
long trend of outperformance and signals a period of medium-termConsolidation

Gold: US rate hike expectations may keep prices

under pressure

Global gold prices in October remained volatile with prices advancing inthe
first half of the month post the weak US jobs data. However, a subsequent
strengthening of the dollar, the hawkish tone of the October FOMC policy
meet and comments by US Fed members fuelling expectations of a rate
hike in December 2015 led to significant pressure on the precious metal

The investment demand as reflected by holdings in SPDR Gold Trust

(largest gold ETF) has slipped significantly over the last few months
indicating lack of investor demand

One of the major determinants for global gold prices is benchmark real
interest rates. With increasing probability of US Federal Reserve hiking
interest rates in December 2015, the opportunity cost of holding gold will
increase while the same is likely to put pressure on gold prices from a
medium-term perspective

Investment demand for gold is largely governed by the broader economic

climate. One of the major determinants of investment demand is
inflationary concerns. With a low global economic growth environment

63
adding to deflationary pressure, inflationary demand factor for gold remains
absent in the near term

New Fund Offer will not be kept open for more than 30 days
Offer of Units of ` 10/- each for cash issued at a premium approximately equal to the difference between face value
and allotment price during the New Fund Offer Period and at NAV based prices during continuous offer.

Introduction
The previous chapter dealt with the impact of liberalization on the Indian mutual
funds

industry. The chapter also dealt with the various issues and challenges of the
industry, regulatory frame work for the industry, and the role of mutual funds in
the mobilization of the house hold sector savings. The present chapter is devoted to

64
the study of HDFC Asset Management Company Ltd (AMC), sponsors and trustee.
Theresearcher has selected five schemes namely HDFC Balanced
Funds(HBF),HDFC growth Funds(HGF), HDFC Equity Funds(HEF), HDFC Tax
Saver(HTS) and HDFC TOP –200(HT200) to find out the performance of these
funds in comparison to the market, their diversification and the relationships
between these funds objectives and their risk characteristics.

HDFC Asset Management Company Limited (AMC): An Overview

HDFC Asset Management Company Ltd (AMC) was established 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, Backbay Reclamation, Churchgate, Mumbai 400
020. For investment management the trustee has appointed the HDFC Asset
Management Company Limited. It manages the Mutual Funds. The paid up capital
of the AMC is Rs. 25.161 crore 1.The present equity shareholding pattern of the
AMC is shown in table

Equity Shareholding Pattern of HDFC Mutual Fund

Particulars % of the paid up equity capital
Housing Development Finance Corporation Limited 60
Standard Life Investments Limited 40

It can be observed from the table that HDFC is the bigger partner ofthe AMC
having a share of 60percent while Standard Life Investment limited has share of
40percent2. To consolidate its business HDFC Asset Management Company took
over Zurich Insurance Company (ZIC), the sponsor of Zurich India MF. The AMC
entered into an agreement with ZIC to acquire the said business, subject to
necessary regulatory approvals. After getting necessary clearance, the following

65
schemes as shown in table were acquired by HDFC mutual funds on June 19,
2003. The schemes were than rechristened as can be observed from table 4.2. It is
evident from the table that in total 8 schemes were acquired by HDFC Mutual
Fund.

New name of Zurich Mutual Funds

Former Name New Name
Zurich India Equity Fund HDFC Equity Fund
Zurich India Prudence Fund HDFC Prudence Fund
Zurich India Capital Builder Fund HDFC Capital Builder Fund
Zurich India TaxSaver Fund HDFC TaxSaver
Zurich India Top 200 Fund HDFC Top 200 Fund
Zurich India High Interest Fund HDFC High Interest Fund
Zurich India Liquidity Fund HDFC Cash Management Fund
Zurich India Sovereign Gilt Fund HDFC Sovereign Gilt Fund*

The AMC at present managing 24 open-ended schemes and 13 closed ended Schemes
of the HDFC Mutual Fund. Besides managing schemes the AMC is also providing portfolio
management / advisory services and such activities which 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. The Certificate
of Registration is valid from January 1, 2007 to December
31, 2009.

An Overview of Sponsor and Trustee of Company

The HDFC Mutual Fund is being constituted as a trust in accordance with
the provisions of the Indian Trusts Act, 1882, as per the terms of the trust deed
dated June 8, 2000 with Housing Development Finance Corporation Limited

66
(HDFC) and Standard Life Investments Limited as the Sponsors and HDFC
Trustee Company Limited, as the Trustee. The Trust Deed has been registered
under the Indian Registration Act, 1908. It is registered with SEBI, under
registration code MF / 044 / 00 / 6 on June 30, 2003.

67
Sponsors
The sponsors of HDFC Mutual Fund are Housing DevelopmentFinance
Corporation Limited and Standard Life Investments Limited. Bothhave contributed
sum of Rs. one lakh each to the trustee in the corpus of the Fund.

Housing Development Finance Corporation Limited (HDFC)

HDFC was incorporated in 1977 as the first specialized Mortgage Company
in India. It is a premier housing finance company in India. It provides financial
assistance to corporate, individuals, and developers for the purchase or setting of
residential housing. It also provides property related services (e.g. property
identification, sales services and valuation), training and consultancy. Of these
activities, housing finance is the prime activity of HDFC. It has a client base of
around 10 lakh borrowers, around 10 lakh depositors, over 1, 23,000 shareholders
and 50,000 deposit agents, as at March 31, 2009. The Company has a total asset
size of Rs. 96,993 crore as at March 31, 2009 and cumulative approvals and
disbursements of housing loans of Rs. 237,450 crore and Rs. 191,806 crore
respectively as at March 31, 20094. It has raised funds from international agencies
such as the World Bank, IFC (Washington), USAID, DEG, ADB and KfW,
international syndicated loans, domestic term loans from banks and insurance
companies, bonds and deposits. It has received the highest rating for its deposits
program for the fourteenth year in succession. HDFC Standard Life Insurance
Company Limited, promoted by HDFC was the first life insurance company in the
private sector to be granted a Certificate of Registration (on October 23, 2000) by
the Insurance Regulatory and Development Authority to transact life insurance
business in India. Beside housing business it has launched HDFC standard life
insurance company, which was first insurance company to be granted certificate in
2000.

Standard Life Investments Limited

68
 Standard Life Investments Limited is wholly owned subsidiary of
Standard Life Investments (Holdings) Limited, which in turn is a wholly
owned subsidiary of Standard Life plc. It is the investment management
company of standard life. It has global assets under management of
approximately US$ 169 billion as at March 31, 2009 and is one of the
world's largest investment company5. It invests money on behalf of five
million institutional and retail clients throughout the world. The company
has its operation in USA, UK, Canada, Korea, Ireland and Australia
making it a truly global investment company.

The Trustee
The function of the trustee is performed by the HDFC Trustee
Company Limited (the "Trustee"). Its prime function is to ensure that the
working of the AMC is being carried out in accordance with the "SEBI (MF)
Regulations". It also reviews the activities carried on by the AMC. After
having a comprehensive discussion about the establishment of HDFC
mutual funds, its organizational structure we will have a look at the sample
funds chosen for the purpose of study. The following sample funds were
chosen taking consideration about their duration of operation and their
investment objectives. Attempts has been made that equal number of
observation is taken to find out the result of empirical analysis.

HDFC Balanced Fund

This scheme was launched in August 2000. The primary objective of the
Scheme is to generate capital appreciation. It also aims at to generating
income by investing in portfolio consisting of equity, debt and money
market instruments. The share of equity in portfolio is 60 percent whereas

69
the share of debt is 40 percent. The entry load for the fund is 1.5 percent6.
The table 4.3 contains basic information of the schemes.

Basic Scheme Information

Nature of Scheme Open Ended Balanced Scheme

Option/Plan Dividend Option,Growth Option. The

Entry Load
(as a % of the Applicable NAV)
(Other than Systematic Investment Plan
Dividend Option
offers Dividend Payout and Reinvestment
Facility.
Application routed through any
distributor/agent /broker :
In respect of each purchase / switch-in of
Units

/ Systematic Transfer Plan (STP)) less than Rs. 5 crore in value, an Entry

Load of 2.25% is payable.

In respect of each purchase / switch-in of

Units

equal to or greater than Rs. 5 crore in value,

no Entry Load is payable.

Application not routed through any

70
 distributor/agent/broker : Nil

No Entry Load shall be levied on bonus

units and

units allotted on dividend reinvestment..

Exit Load In respect of each purchase / switch-in of

Units
(as a % of the Applicable NAV)
less than Rs. 5 crore in value, an Exit
(Other than Systematic Investment Plan
Load of 1.00% is payable. If Units are
/ Systematic Transfer Plan (STP)
redeemed/switched

out within 1 year from the date of allotment

In respect of each purchase / switch-in of

Units

equal to or greater than Rs. 5 crore in value,

no Exit Load is payable.

No Exit Load shall be levied on bonus

units and

units allotted on dividend reinvestment.

71
Minimum Application Amount
(Other than Systematic Investment Plan
/ Systematic Transfer Plan (STP)
For new investors :Rs.5000 and any
amount thereafter.
For existing investors : Rs. 1000 and any
amount thereafter.

Lock-In-Period Nill

Net Asset Value Periodicity Every Business Day.

Redemption Proceeds Normally despatched within 3 Business

days

Investment Pattern
The investments under the schemes are made primarily in equityand
equity related instruments as well as in debt and in money market
instruments. The table 4.4 provides the asset allocation of the Scheme's
portfolio.
Asset allocation under the HDFC Balanced Fund Scheme
Sr. No. Type of Instruments Normal (% of Net Risk
Allocation Assets) Profile of

(% of Net (% of Normal the

Assets) Allocation) Instrument

1 Equity and Equity

72
 Related 60 20 Medium
Instruments to High

2 Debt Securities
(including
securitized Low to
40 30 Medium
debt) and Money
Market
instruments
However besides the above mentioned allocation of funds under equityand
debt instruments, the AMC can invest in short term deposits of scheduled
commercial banks as per the investment objectives of the schemes.

Investment Strategy
The investment strategy of HDFC Balanced Fund is aimed atlowering
risk and maximizing return. In pursuance of this it allocates its fund in
ratio of 6:4 in equity and debt respectively7. The Scheme also provides the
Investment Manager to make investments as per the worthiness of the
securities. This means that fund manager can exercise their power and
make changes in assets allocation to meet the investment objectives of the
schemes. As the allocation of the balanced fund is based
on the mix of equity and debt their ratio is critical in determining future
returns. A good balance between the two will optimize return and
minimize risks.

Investments in Equity

73
 The investment of HDFC balanced fund in equity is to
generateincomes by investing in select category of assets class. For this, five
principles are followed by the fund manager. They are as follows:

 To focus on the long term investment

 To view investments as conferring a proportionate ownership of the

business.
 To maintain a margin of safety (i.e. the price of purchase represents a
discount to the intrinsic value of that business)

 To maintain a balanced outlook on the market by

regularlymonitoring economic trends and investor sentiment.

Thus any decision for investment taken is purely on the basis of

reasonsrather than any other parochial considerations. The decision
to sell aholding would be based on one of three reasons:

 When the rise in value of equity has reached its optimum level
andfurther improvement in the present level is not possible.

 When other avenues of investments offers better return, or

 A fundamental change has taken place in the company or themarket

in which it operates.All these are however subject to elaborative
research based on dataand reasoning.

74
 Debt Investments
Debt securities (in the form of non-convertible debentures,
bonds,secured premium notes, zero interest bonds, deep discount
bonds, floatingrate bond / notes, securitised debt, pass through
certificates, asset backedsecurities, mortgage backed securities and
any other domestic fixedincome securities including structured
obligations etc.) include, but are not
limited to:

 Debt obligations of / Securities issued by the Government of

India,State and local Governments, Government Agencies and
statutorybodies (which may or may not carry a state / central
governmentguarantee).

 Securities that have been guaranteed by Government of India an

State Governments.

 Securities issued by Corporate Entities (Public / Private

sectorundertakings)

 Securities issued by Public / Private sector banks and development

financial institutions.

Money Market Instruments

The investment in money market instruments includes the following:

 Commercial papers

75
  Commercial bills

 Treasury bills

 Government securities having an unexpired maturity upto one year

 Call or notice money

 Certificate of deposit

 Permitted securities under a repo / reverse repo agreement

 Any other like instruments as may be permitted by RBI / SEBI

fromtime to time
The investment of HDFC balanced fund are made through Initial Public
Offers, secondary market purchases, placement and right offers.The AMC
has the liberty to invest in all types of securities, debt and money market
instruments. The investments in debt are usually made in instruments
ranked high investment grade by authorized rating agency. However if
investment is to be made in unrated security than prior approval of the
committee constituted for the purpose is required. This is in strict
adherence to SEBI circular No. MFD/ CIR/9/120/20008. Furtherapproval
of such investment by the AMC board and the trustee isrequired. The AMC
also required to communicate details of such investments in their
periodical reports to the trustee outlining the parameters adopted to
compile the reports. The investment made in debt are less riskier than
76
those in equity, money market instruments are even less riskier than debt
instruments. The maturity profile of debt instruments is selected in
accordance with the Fund Managers view regarding current market
conditions, interest rate outlook and the stability of ratings.

Controlling Risk
The portfolio construction of HDFC balanced fund is done in a wayby the
fund manager to maintain the risk at moderate level. The Fund Manager
avoids adopting either a very defensive or aggressive posture at any point
of time. To control risk, portfolio is diversified and adequate level of
liquidity is maintained to mitigate unforeseen circumstances. At the macro
level, continuous review of business and economic environment is carried
out to find out ongoing trend and take corrective measures likewise to
minimize the risk. To earn higher rate of return the fund manager can
make investments in securities and other instruments not mentioned
earlier provided that such investment are in accordance with SEBI
regulations. The table 4.5 gives details of the portfolio of the HDFC
balanced fund as on 31st March 2008. From the table it is evident that the
total share of equity is 68.59. The reliance industries limited has maximum
of 6.99percent followed by Coramandal Fertilizers Ltd. ICICI Bank Ltd. has
the least share of 3.45 percent. The debt and money market instruments

77
 CONCLUSION

A Structured Questionnaire was given to 300 respondents of Lucknow, and cities

to know their perceptions regarding Mutual Fund Investment. The following broad
conclusions were drawn: People save in Mutual Funds for different purposes i.e.
children education, children marriage, house construction, retirement planning and
tax planning. It was found that main purpose of savings in Mutual Fund by the
respondents was for children education (56.33%) followed by Retirement Planning
(48.33%).Tax planning was given the third priority by the respondents. People
engaged in Business gave the first preference to children education (68.7%)
followed by professionals (58.8%) and then salaried class (53.7%). Professionals
gave the first preference to children marriage (50%), followed by salaried class
(41.3%) and retired people (45.5%). Salaried class gave the first preference to
house construction (44.6%) followed by Business people (36.1%) and professional
(29.4%). Retired people gave the first preference to tax planning (47.1%) followed
by salaried (43.8%) and Business people (42.2%). The relationship between
educational qualifications and purpose of savings revealed that the respondents
gave priority to children’s education (56.3%), retirement planning (48.3%)
followed by tax planning (40%). In case of the relationship between monthly
income and purpose of savings, a unique trend has emerged. As the income
increases, priority is given to tax planning. Majority of the respondents gave the
first preference to children education followed by retirement planning.
If we look at the relationship between age and purpose of savings, it can be seen
that those belonging to the age group below 40 gave the first priority to children’s
education while both the age group 40 to 60 and above 60 gave priority to
retirement planning for investment in Mutual Funds.

78
 QUESTIONNAIRE

Q.1. Do you satisfied about financial packages activities in Forest Department?

Q.2. Do you have all materials you need to do your work right?

Q.3. Does you supervisor, or someone at work, seems to care about you as a
person?

Q.4. Would you recommend this organization as a good place to work?

Q.5. There is need of more conservation of Forest woods & Resources?

Q.6. Do you think present system of Forest Department is beneficial for you?

Q.7. Do you think there is need of more conservation for Wildlife?

Q.8. Does your supervisor provide you with feedback & guidance?

Q.9. There should be Amendment in National Forest Policy?

Q.10. Are Department policies clearly communicated in department?

79
 BIBLIOGRAPHY

www.icici.co.in
www.hdfc.com
www.uti.co.in
www. upgvt.com
iciciwikipedia.com
utiwikipedia.com
hdfcwikipedia.com

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