Professional Documents
Culture Documents
BY BABASAB PATIL
Table of Contents
S.no 1 2 3 Topic Executive Summary Company Profile Industry Profile
I. II. III. IV. V. VI. VII. VIII. IX. X. XI.
Page No.
Introduction History of Mutual funds Regulatory framework Concept Of Mutual Fund Types of Mutual Fund Advantages Of Mutual Fund Terms Used In Mutual Funds Fund management Risk Basis Of Comparisons How to pick right fund
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Systematic Investment Plan and Lump Sum investment Rebalancing and its effects. Research Methodology
I. II.
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1. Executive Summary
The topic of this project is Mutual Fund Comparison and Analysis. The mutual fund industry in India has seen dramatic improvements in quantity as well as quality of product and service offerings in recent years and hence here focus is on
comparing schemes of different mutual fund companies on different performance parametrers. Along with this project also touches on the aspect of Systematic Investment Plan and Rebalancing. Project analysis past three years data of different mutual fund schemes. Different measures like beta ,Sharpe, Treynor, Jensen etc. have been taken to analyse the performance. An effort has been made to work on the concepts that have been taught in class along with other useful parameters so that better study can be done.
2. Company Profile
Vision Statement:
HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act, 1956, on December 10, 1999, and was approved to act as an Asset Management Company for the HDFC Mutual Fund by SEBI vide its letter dated July 3, 2000. The registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg, 169, Back bay Reclamation, Churchgate, Mumbai - 400 020. In terms of the Investment Management Agreement, the Trustee has appointed the HDFC Asset Management Company Limited to manage the Mutual Fund. The paid up capital of the AMC is Rs. 25.161 crore. Zurich Insurance Company (ZIC), the Sponsor of Zurich India Mutual Fund, following a review of its overall strategy, had decided to divest its Asset Management business in India. The AMC had entered into an agreement with ZIC to acquire the said business, subject to necessary regulatory approvals. Following the decision by Zurich Insurance Company (ZIC), the sponsor of Zurich India Mutual Fund, to divest its Asset Management Business in India, HDFC AMC acquired the schemes of Zurich India Mutual Fund effective from June 19, 2003. HDFC AMC has a strong parentage CO Sponsored by Housing Development Finance Corporation Limited (HDFC Ltd.) and Standard Life Investment Limited, the investment arm of The Standard Life Group, UK.
The AMC is managing 24 open-ended schemes of the Mutual Fund viz. HDFC Growth Fund (HGF), HDFC Balanced Fund (HBF), HDFC Income Fund (HIF), HDFC Liquid Fund (HLF), HDFC Long Term Advantage Fund (HLTAF), HDFC Children's Gift Fund (HDFC CGF), HDFC Gilt Fund (HGILT), HDFC Short Term Plan (HSTP), HDFC Index Fund, HDFC Floating Rate Income Fund (HFRIF), HDFC Equity Fund (HEF), HDFC Top 200 Fund (HT200), HDFC Capital Builder Fund (HCBF), HDFC Tax Saver (HTS), HDFC Prudence Fund (HPF), HDFC High Interest Fund (HHIF), HDFC Cash Management Fund (HCMF), HDFC MF Monthly Income Plan (HMIP), HDFC Core & Satellite Fund (HCSF), HDFC Multiple Yield Fund (HMYF), HDFC Premier Multi-Cap Fund (HPMCF), HDFC Multiple Yield Fund . Plan 2005 (HMYF-Plan 2005), HDFC Quarterly Interval Fund (HQIF) and HDFC Arbitrage Fund (HAF).The AMC is also managing 11 closed ended Schemes of the HDFC Mutual Fund viz. HDFC Long Term Equity Fund, HDFC Mid-Cap Opportunities Fund, HDFC Infrastructure Fund, HDFC Fixed Maturity Plans, HDFC Fixed Maturity Plans - Series II, HDFC Fixed Maturity Plans - Series III, HDFC Fixed Maturity Plans - Series IV, HDFC Fixed Maturity Plans - Series V, HDFC Fixed Maturity Plans - Series VI, HFDC Fixed
3. Industry Profile
I. Introduction
The Indian mutual fund industry has witnessed significant growth in the past few years driven by several favourable economic and demographic factors such as rising income levels, and the increasing reach of Asset Management Companies and distributors. However, after several years of relentless growth ,the industry witnessed a fall of 8% in the assets under management in the financial year 2008-2009 that has impacted revenues and profitability. Whereas in 2009-10 the industry is on the road of recovery.
Second Phase 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 Crores. The Unit Trust of India with Rs.44, 541 Crores of assets under management was way ahead of other mutual funds Fourth Phase since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.
Assets of the mutual fund industry touched an all-time high of Rs639,000 crore (approximately $136 billion) in May, aided by the spike in the stock market by over 50 per cent in the last one month and fresh inflows in liquid funds, data released by the Association of Mutual Funds in India (AMFI) shows yesterday.
The country's burgeoning mutual fund industry is expected to see its assets growing by 29% annually in the next five years. The total assets under management in the Indian mutual funds industry are estimated to grow at a compounded annual growth rate (CAGR) of 29 per cent in the next five years," the report by global
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been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its member. It functions under the supervision and guidelines of its Board of Directors.
Association of Mutual
Mutual
Fund Industry to a professional and healthy market with ethical line enhancing and maintaining standards. It follows the principle of both promoting the protecting and
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A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes the working of a mutual fund:
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Overview of existing schemes existed in mutual fund category: BY STRUCTURE Open - Ended Schemes: An open-end fund is one that is available for subscription
all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
Close - Ended Schemes: A closed-end fund has a stipulated maturity period which
generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.
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sub-classified depending upon their investment objective, as follows: -Diversified Equity Funds -Mid-Cap Funds -Sector Specific Funds -Tax Savings Funds (ELSS) Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
Debt funds: The objective of these Funds is to invest in debt papers. Government
authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors.
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Monthly income plans ( MIPs): Invests maximum of their total corpus in debt
instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.
Short Term Plans (STPs): Meant for investment horizon for three to six months.
These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
Liquid Funds: Also known as Money Market Schemes, These funds provides easy
liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.
Balanced funds: They invest in both equities and fixed income securities, which are
in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. Further the mutual funds can be broadly classified on the basis of investment parameter. It means each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and can invest accordingly
By investment objective:
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Income Schemes: Income Schemes are also known as debt schemes. The aim of
these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
Balanced Schemes: Balanced Schemes aim to provide both growth and income by
periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents.
Money Market Schemes: Money Market Schemes aim to provide easy liquidity,
preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Other schemes
Tax Saving Schemes:
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.80C of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.
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Transparency- The mutual fund offer document provides all the information about the fund and the scheme. This document is also called as the prospectus or the fund offer document, and is very detailed and contains most of the relevant information that an investor would need. Choice of schemes there are different schemes which an investor can choose from according to his investment goals and risk appetite. Tax benefits An investor can get a tax benefit in schemes like ELSS (equity linked saving scheme)
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Trustees Trustees are like internal regulators in a mutual fund, and their job is to protect the interests of the unit holders. Trustees are appointed by the sponsors, and can be either individuals or corporate bodies. In order to ensure they are impartial and fair, SEBI rules mandate that at least two-thirds of the trustees be independent, i.e., not have any association with the sponsor. Trustees appoint the AMC, which subsequently, seeks their approval for the work it does, and reports periodically to them on how the business being run. Custodian A custodian handles the investment back office of a mutual fund. Its
responsibilities include receipt and delivery of securities, collection of income, distribution of dividends and segregation of assets between the schemes. It also track corporate actions like bonus issues, right offers, offer for sale, buy back and
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NAV Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.The NAV is usually calculated on a daily basis. In terms of corporate valuations, the book values of assets less liability.
The NAV is usually below the market price because the current value of the funds assets is higher than the historical financial statements used in the NAV calculation.
Market Value of the Assets in the Scheme + Receivables + Accrued Income - Liabilities - Accrued Expenses NAV -------------------No. of units outstanding
Where,
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Receivables: Whatever the Profit is earned out of sold stocks by the Mutual fund is called Receivables. Accrued Income: Income received from the investment made by the Mutual Fund. Liabilities: Whatever they have to pay to other companies are called liabilities. Accrued Expenses: Day to day expenses such as postal expenses, Printing, Advertisement Expenses etc.
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Investments: Equity shares of Various Companies. Market Value of Shares is Rs.10, 00, 00,000 (Ten Crores)
Rs. 10, 00, 00,000 NAV = -------------------------50, 00,000 units Thus each unit of Rs. 10/- is Worth Rs.20/It states that the value of the money has appreciated since it is more than the face value. = Rs.20/-
Sale price Is the price we pay when we invest in a scheme. Also called Offer Price. It may include a sales load.
Repurchase price
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Redemption Price Is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV related
Sales load Is a charge collected by a scheme when it sells the units. Also called, Front-end load. Schemes that do not charge a load are called No Load schemes.
Repurchase or Back-end Load Is a charge collected by a scheme when it buys back the units from the unit holders
CAGR (compounded annual growth rate) The year-over-year growth rate of an investment over a specified period of time. The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.
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because of their knowledge and experience. Managers are hired to actively manage mutual fund portfolios. Instead of seeking to track market performance, active fund management tries to beat it. To do this, fund managers "actively" buy and sell individual securities. For an actively managed fund, the corresponding index can be used as a performance benchmark. Is an active fund a better investment because it is trying to outperform the market? Not necessarily. While there is the potential for higher returns with active funds, they are more unpredictable and more risky. From 1990 through 1999, on average, 76% of large cap actively managed stock funds actually underperformed the S&P 500. (Source - Schwab Center for Investment Research)
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Fund Styles :
Value: The manager invests in stocks believed to be currently undervalued by the market. Growth: The manager selects stocks they believe have a strong potential for beating the market. Blend: The manager looks for a combination of both growth and value stocks. To determine the style of a mutual fund, consult the prospectus as well as other sources that review mutual funds. Don't be surprised if the information conflicts. Although a prospectus may state a specific fund style, the style may change. Value stocks held in the portfolio over a period of time may become growth stocks and vice versa. Other research may give a more current and accurate account of the style of the fund.
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IX. Risk
Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. A fund's investment objective and its holdings are influential factors in determining how risky a fund is. Reading the prospectus will help you to understand the risk associated with that particular fund. Generally speaking, risk and potential return are related. This is the risk/return trade-off. Higher risks are usually taken with the expectation of higher returns at the cost of increased volatility. While a fund with higher risk has the potential for
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Defining Mutual fund risk Different mutual fund categories as previously defined have inherently different risk characteristics and should not be compared side by side. A bond fund with below-average risk, for example, should not be compared to a stock fund with below average risk. Even though both funds have low risk for their respective categories, stock funds overall have a higher risk/return potential than bond funds. Of all the asset classes, cash investments (i.e. money markets) offer the greatest price stability but have yielded the lowest long-term returns. Bonds typically experience more short-term price swings, and in turn have generated higher long-term returns. However, stocks historically have been subject to the greatest short-term price fluctuationsand have provided the highest long-term returns. Investors looking for a fund which incorporates all asset classes may consider a balanced or hybrid mutual fund. These funds can be very conservative or very aggressive. Asset allocation portfolios are mutual funds that invest in other mutual funds with different asset classes. At the discretion of the manager(s), securities are bought, sold, and shifted between funds with different asset classes according to market conditions. Mutual funds face risks based on the investments they hold. For example, a bond fund faces interest rate risk and income risk. Bond values are inversely related to interest rates. If interest rates go up, bond values will go down and vice versa. Bond income is also affected by the change in interest rates. Bond yields are
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Beta Beta measures the sensitivity of the stock to the market. For example if beta=1.5; it means the stock price will change by 1.5% for every 1% change in Sensex. It is also used to measure the systematic risk. Systematic risk means risks which are external to the organization like competition, government policies. They are non-diversifiable risks. Beta is calculated using regression analysis, Beta can also be defined as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta less than 1 means that the security will be less volatile than the market. A beta greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Beta>11thenxaggressivexstocks If1beta<1xthen1defensive1stocks If beta=1 then neutral
So, its a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Many utilities stocks have a beta of less than 1. Conversely, most hi-tech NASDAQ-based stocks have a beta greater than 1, offering the possibility of a higher rate of return but also posing more risk.
Alpha
Alpha takes the volatility in price of a mutual fund and compares its risk adjusted performance to a benchmark index. The excess return of the fund relative to the
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If a CAPM analysis estimates that a portfolio should earn 35% return based on the risk of the portfolio but the portfolio actually earns 40%, the portfolio's alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model. This 5% is ALPHA.
Sharpe Ratio
A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.
The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.
Treynor Ratio
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Treynor Ratio = (Return from the investment Risk free return) / Beta of the investment.
The scheme with the higher treynor Ratio offers a better risk-reward equation for the investor. Since Treynor Ratio uses Beta as a risk measure, it evaluates excess returns only with respect to systematic (or market) risk. It will therefore be more appropriate for diversified schemes, where the non-systematic risks have been eliminated. Generally, large institutional investors have the requisite funds to maintain such highly diversified portfolios. Also since Beta is based on capital asset pricing model, which is empirically tested for equity, Treynor Ratio would be inappropriate for debt schemes. M- SQUARED
Modigliani and Modigliani recognized that average investors did not find the Sharpe ratio intuitive and addressed this shortcoming by multiplying the Sharpe ratio by the standard deviation of the excess returns on a broad market index, such as the S&P 500 or the Wilshire 5000, for the same time period. This yields the risk-adjusted excess return. This, too, is a significant and useful statistic, as it measures the return in excess of the risk-free rate, which is the basis from which all risky investments should be measured. MSquared= [ (Ri Rf)/ Sd. Inv] * Sd. Mkt + Rf OR MSquared= Sharpe Ratio* Sd. Mkt + Rf
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for example a leverage factor greater than one implies that standard deviation of the fund is less than standard deviation of the market index, and that the investor should consider levering the fund by borrowing money and invest in that particular fund. while this would tend to increase the risk of investment somewhat ,there would be an greater than proportional increase in returns. On the other hand leverage factor less than one implies that the risk of fund is greater than risk of market index and the investor should consider unlevering the fund by selling of the part of the holding in the fund and investing the proceeds I a risk free security, such as treasury bill in this way returns on the investment reduce somewhat, there would be an greater than proportional reduction in risk. Standard Deviation: A measure of the dispersion of a set of data from its mean. The more spread apart the data is, the higher the deviation. Standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility (risk).
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Standard deviation can also be calculated as the square root of the variance.
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Some funds charge a sales fee known as a load fee, which will either be charged upon initial investment or upon sale of the investment. A front-end load/fee is paid out of the initial investment made by the investor while a back-end load/fee is charged when an investor sells his or her investment, usually prior to a set time period. To avoid these sales fees, look for no-load funds, which don't charge a front- or back-end load/fee. However, one should be aware of the other fees in a no-load fund, such as the management expense ratio and other administration fees, as they may be very high.
The investor should look for the management expense ratio. The ratio is simply the total percentage of fund assets that are being charged to cover fund expenses. The higher the ratio, the lower the investor's return will be at the end of the year.
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SIP is similar to a Recurring Deposit. Every month on a specified date an amount you choose
is invested in a mutual fund scheme of your choice. The dates currently available for SIPs are the 1st, 5th, 10th, 15th, 20th and the 25th of a month. There are many benefits of investing through SIP.
Benefit 1
Become A Disciplined Investor Being disciplined - Its the key to investing success. With the Systematic Investment Plan you commit an amount of your choice (minimum of Rs. 500 and in multiples of Rs. 100 thereof*) to be invested every month in one of our schemes. Think of each SIP payment as laying a brick. One by one, youll see them transform into a building. Youll see your investments accrue month after month. Its as simple as giving at least 6 postdated monthly cheques to us for a fixed amount in a scheme of your choice. Its the perfect solution for irregular investors.
Benefit 2
Reach Your Financial Goal Imagine you want to buy a car a year from now, but you dont know where the down-payment will come from. SIP is a perfect tool for people who have a specific, future financial requirement. By investing an amount of your choice every month, you can plan for and meet financial goals, like funds for a childs education, a marriage in the family or a comfortable postretirement life.
Benefit 3
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Benefit 4
Grow Your Investment With Compounded Benefits It is far better to invest a small amount of money regularly, rather than save up to make one large investment. This is because while you are saving the lump sum, your savings may not earn much interest. With HDFC MF SIP, each amount you invest grows through compounding benefits as well. That is, the interest earned on your investment also earns interest. The following example illustrates this. Imagine Neha is 20 years old when she starts working. Every month she saves and invests Rs. 5,000 till she is 25 years old. The total investment made by her over 5 years is Rs. 3 lakhs.Arjun also starts working when he is 20 years old. But he doesnt invest monthly. He gets a large bonus of Rs. 3 lakhs at 25 and decides to invest the entire amount. Both of them decide not to withdraw these investments till they turn 50. At 50, Nehas Investments have grown to Rs. 46,68,273* whereas Arjuns investments have grown to Rs. 36,17,084*. Nehas small contributions to a SIP and her decision to start investing earlier than Arjun have made her wealthier by over Rs. 10 lakhs. *Figures based on 10% p.a. interest compounded monthly.
Benefit 5
Do All This Effortlessly Investing with SIP is easy. Simply give us post-dated cheques or opt for an Auto Debit from your bank account for an amount of your choice (minimum of Rs. 500 and in multiples of Rs. 100 thereof*) and well invest the money every month in a fund of your choice. The plans are completely flexible. You can invest for a minimum of six months, or for as long as
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PERIOD
SIP UNITS : 67.05076 AVERAGE UNIT PRICE=178.968 LUMPSUM: 12000/151.6= 79.155 AVERAGE UNIT PRICE=151.6 YEAR 2008-09: NAV Apr-0 8 May08 Jun-08 Jul-08 Aug-0 8 Sep-0 8 Oct-0 8 Nov-0 8 101.81 1000 9.822411 110.32 1000 9.064375 145.72 1000 6.862429 158.92 1000 6.292316 178.19 169.6 143.72 151.72 1000 1000 1000 1000 5.611987 5.896226 6.958119 6.591306 SIP UNITS
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20 18 16 14 12 NAV 10 8 0 6 4 2 00 Apr May 0 0 8 8 Jun 0 8 Jul 0 8 Aug Sep Oct 0 0 0 8 8 8 PERIOD Nov Dec 0 0 8 8 Jan 0 9 Feb 0 9 Mar 0 9 Series
SIP UNITS : 95.00989 AVERAGE UNIT PRICE=126.3026 LUMPSUM: 12000/178.19= 67.34385 AVERAGE UNIT PRICE=178.19 YEAR 2009-10: NAV Apr-0 9 May09 Jun-0 127.07 169.9 172.81 1000 1000 1000 7.869678 5.885919 5.786702 SIP UNITS
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25 20 15 NAV 10 5 0 Apr May Jun 0 0 0 Jul 0 Aug Sep Oct 0 0 0 PERIODS Nov Dec Jan 0 0 1 Feb Mar 1 1
Series
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In the year 2007-08 when the there is not much change in the opening and ending NAV there is not much difference in the units earned through SIP investment and lump sum investment. There is a constant decrease in the NAV of the fund and there is a noticeable change in the opening and ending NAV for the year 2008-09. This fall in market helps the investors in earning more units as the NAV is continuously going down. As the number of units earned increases as the average unit price of the mutual fund scheme decreases. In 2009-10 there continuous increase in the NAV and hence lump sum investment gives more units compared to SIP investments. Due to low number of units earned the average unit price is more compared to lump sum investment. SIP investments are beneficial to investors in obtaining more units when the market is down. By investing in small amounts but in continuous manner investors can reap benefits of market volatility.SIP investment benefits the investor as small amount of money can be invested in a systematic manner hence not burdening him/her with need to make large investment at one time Hence along with
convenience to the investors it also gives them advantage to reap the benefits of having extra units when the markets are down.
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5. Portfolio Rebalancing
Rebalancing is defined as the periodic adjustment of a portfolio to restore the original asset allocation mix of your mutual fund portfolio. If an investor's investment strategy or risk threshold has changed, he can rebalance his investments so that asset classes in the portfolio align with his new asset allocation plan. It is the process of selling assets that are performing well and buying assets that are underperforming. Portfolio rebalancing is one of the very few ways to generate additional returns for a portfolio without incurring any additional risk. Ex-if there is a portfolio with a 50%stocks / 50% bonds policy asset mix. If stocks return 25% return while bonds produce a 5% return, stocks become overweighed at the end of the year (54% vs. 46%). Rebalancing involves selling 4% in stocks and buying 4% in bonds to bring the asset mix back to the desired 50/50 asset mix.
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One of a very important step before rebalancing is to assign a strategic asset allocation plan appropriate to risk profile, investment goals and time horizon. Rebalancing in volatile market In rising stock markets, people often take on more risk than they're suited for ,as a result of which, they ended up with a larger percentage of stocks in their portfolios than their risk levels warranted, Many even added to their already over weighted positions by buying more and more, assuming the stellar performance trend would continue indefinitely, but when the market began a sharp fall in 2000, their investments were poundedmore than they likely expected and more than if had they rebalanced.
Rebalancing effects Financial Research studied a portfolio of 60% stocks and 40% bonds to see what would happen if no rebalancing took place. As the stock market performed well from 1994 to 1999, the portfolio's 60% stock allocation grew to nearly 80%. This portfolio became over weighted in stocks just in time for the 2000 bear market Without rebalancing, a portfolio in the 1990s became too aggressive
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but the same mix of 60% stocks and 40% bonds, starting in 2000. This time, the stock market was falling. By 2002, the portfolio's allocation had flipped, consisting of 40% stocks and 60% bonds.
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The value of regular rebalancing A regular rebalancing plan helps instill discipline in investing process. In most cases, a rebalanced portfolio had lower risk and similar to slightly higher returns. The chart below shows what happened when we rebalanced a portfolio with a moderate risk profile annually from 1970 through 2006.
Source: The Schwab Center for Financial Research with data from Ibbotson Associates, Inc.
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Rebalancing has proven to be more efficient than a buy and hold strategy over a full market cycle and by rebalancing periodically back to the original weighting of the portfolio, it has also been effective at risk reduction. A buy and hold strategy can be more profitable over the short term as rebalancing sole driving force is to sell off what is up and buy what is down. Because of this it is possible to reduce your position in an asset class that is still on the rise thus reducing your potential for short-term gains. Overall, or more precisely, over a full market cycle of (on average) 5-7 years, rebalancing does add value. By rebalancing we can retain control of the overall risk of a portfolio. In a volatile market, rebalancing could add to fees, but it would also keep the portfolio on target for our goals and in line with our desired level of risk
Advantages of rebalancing 1. It keeps portfolios risk within tolerable limit. 2. It generates stable return. 3. It will instill the discipline essential for investment success. 4. By rebalancing the portfolio, the investor systematically takes profit in these expense asset classes and reinvests the proceeds into the underperforming assets.
Analysis of investments in Equity and Debt and how rebalancing the portfolio will help in -Risk Management - Stability - Maximize returns
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Equity Pros - High returns, Low risk in Long term, High Liquidity Cons - Risky, not suitable for short term investment Debt Pros - Stable and assured returns, Good investment for short term goals Cons - Low returns
Equity + Debt- When we combine Equity and Debt, returns are better than Debt but less than Equity, but at the same time risk is also minimized, and when we apply technique of Portfolio Rebalancing, both risk and returns are well managed.
Each person should concentrate on both returns and risk. Case 1: Equity: Debt goes up. Action: Decrease the Equity part and shift it to Debt so that Equity:Debt is same as earlier. Reason: As our Equity has gone up, we could loose a lot of it if something bad happens; we shift the excess part to Debt so that it is safe and grows at least. Case 2: Equity: Debt Goes Down. Action: Decrease the Debt part and shift it to Equity, so that Equity: Debt is same as earlier. Reason: As out Equity part has decreased, we make sure that it is increased so that we don't loose out on any opportunity. Limitations of this strategy is that, once our equity exposure has gone up, if we rebalance and bring down your Equity Exposure, we will loose
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Case 3: Understanding the Game of Equity and Debt As we know that the markets are unexpected and they can go in any direction, so its better to be safe. Many people are confused that if there equity has done very well then shall they book profits and get out with money and wait for markets to come down so that they can reinvest. Portfolio rebalancing is the same thing but a little different name and methodology, so once you get good profit in something which was risky you transfer some part to non-risk Debt. The rebalancing analysis can be done with the help of an example. Eight sensex levels have been selected starting from 1st January 2007 till 1st June 2010 semiannually. The sensex levels on the below mentioned dates were: Dates 1st January 07 1st July
st
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Working note: 14664.26-13942.24/13942.24*100 = 5.18% 20300.71-14664.26/14664.26 * 100 12961.68 20300.71/20300.71 * 100 9903.46 12961.68/12961.68 * 100 14645.47 9903.46/9903.46*100 17558.53- 14645.47/14645.47 * 100 = 38.44% = -36.15% = -23.59 % = 47.88 % = 19.89% and
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Time period Jan 07- July 07 July 07- Jan 08 Jan 08- July 08 July 08 - Jan 10 Jan 09- July 09 July 09- Jan 10 Jan 10 - Jun 10
Analysis: As we can see clearly from the above table that,Hence if we consistently rebalance our portfolio we get more returns while reducing risk in our portfolio. Working note: (Assumption: tax has been ignored for calculation purposes) For equity: 1 lack is the amount of investment, we are getting 5.18% returns in the first quarter. So it will be 105178.7. Now in the next quarter return is 38.44 %,so the amount will be 105178.7*1.3844=145605.8 Similarly the rest calculations will be; 145605.8*0.6385=92966.98 92966.98*0.7641=71032.96 71032.96*1.4788=105043.9
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For debt @ 9% For 1st quarter: 9%*100000=109000 For 2nd quarter: 9%*109000=118810 For 3rd quarter: 9% 118810=129503 For 4th quarter: 9% 129503=141158 For 5th quarter: 9% 141158=153862 For 6th quarter: 9% 153862=167709 For 7th quarter: 9% 167709=182802 For equity + debt (50:50) of amount 100000 without rebalancing: (118873.6+182802)/2 = 150837.8 For equity + debt (50:50) of amount 100000 with rebalancing: 1st quarter: 50*105178.70= 52589.35 50*109000=54500
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So the total capital now becomes=132490.9 .Now again 53544.68 amount becomes 74127.25and 53544.68 becomes 58363.7disrupting our 50:50 ratio. so we will again rebalance it For 3rd quarter: 50%*132490.9=66245.47 50%*132490.9=66245.47 Calculating return in these two figures. in equity the return is -36.15% and in debt it is 9%. 66245.47*.6385=42296.68 66245.47*1.09 =72207.56
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Analysis Comparing the debt+ equity with and without rebalancing. Calculating CAGR without rebalancing: (150837.8/100000) 12.46% p.a Calculating CAGR with rebalancing: (158668.7/100000) p.a
0.2857 0.2857
- 1
-1
= 14.09 %
So it can be concluded that with the help of rebalancing we are getting 2.26% higher CAGR while reducing the risk and maintaining our desired portfolio allocation.
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that all the related and concerned aspects may not be covered in the project. 2. Only past three year data has been taken in this project which might not give complete scheme performance. 3. Analysis done is limited to the availability of data.
For our study here six schemes have been selected: HDFC EQUITY FUND
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SCHEME PROFILE:
AMC Fund Category Scheme Plan Scheme Type Launch Date Fund Manager Benchmark Assets (RS
HDFC Asset Management Company Ltd. Equity diversified Growth Open Ended January 01, 1995 Mr. Prashant Jain S&P CNX 500 6355.7
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AMC Fund Category Scheme Plan Scheme Type Launch Date Benchmark Fund Manager Assets (RS crore)
ICICI Prudential Asset Management Co. Ltd. Equity diversified Growth Open Ended August 16,2004 S&P CNX Nifty Mr. Sankaren Naren 1088.9
AMC Fund Category Scheme Plan Scheme Type Launch Date Benchmark Fund Manager Assets (RS crore)
UTI Asset Management Co. Ltd. Equity diversified Growth Open Ended July 16,2005 BSE 100 Mr. Harsh Upadhyaya 1432.78
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AMC Fund Category Scheme Plan Scheme Type Launch Date Benchmark Fund Manager Assets (RS crore)
IDFC Asset Management Company Ltd. Equity diversified Growth Open Ended September 28, 2005 BSE 500 Mr. Kenneth Andrade 1443.25
AMC Fund Category Scheme Plan Scheme Type Launch Date Benchmark Fund Manager Assets (RS crore)
RELAINCE Asset Management Co. Ltd. Equity diversified Growth Open Ended June 8,2005 BSE 100 Mr. Arpit Malaviya 2722.39
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AMC Fund Category Scheme Plan Scheme Type Launch Date Benchmark Fund Manager Assets (RS crore)
ICICI Prudential Asset Management Co. Ltd. Equity diversified Growth Open Ended February 15,2005 CNX midcap Mr. S Krishna Kumar 695.139
For all the above schemes returns of the past three years i.e. 2007-10 , have been considered. Similarly returns are taken for the benchmarks of the respective schemes. Calculation of different parameters like average return , beta, standard deviation, sharpe ratio, treynor ratio have been done for all the schemes for all years separately.
SCHEMES HDFC EQUITY FUND ICICI PRUDENTIAL DISCOVERY FUND UTI OPPORTUNITIES FUND
2007-08 2008-09 2009-10 1.72 1.11 3.27 (2.56) (2.86) (1.83) 5.95 7.50 4.14
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The table above average monthly returns of the mutual fund schemes for 2007-08, 2008-09 and 2009-10. During the period of analysis, it was in the year 2009- 10, that the funds have yielded the maximum return. Among them, the top return was provided by ICICI Prudential Discovery Fund with a value of 7.5%. The lowest return giving fund for the year was UTI Opportunities Fund and the value was 4.14%. Performance in the year 2008-09 was the least in all the three years. Least returns this year was from Sundaram BNP Paribas SMILE REG-G fund with the returns being -3.86% and highest were of UTI Opportunities Fund with returns of -1.83%. Low returns in this year were because of recession that hit the market. In the year 2007-08 highest returns were given by Reliance RSF Fund with returns being 4.38% and lowest returns were 1.11% of ICICI Prudential Discovery Fund.
STANDARD DEVIATION SCHEMES HDFC EQUITY FUND ICICI PRUDENTIAL DISCOVERY FUND 2007-08 0.08 0.09 2008-09 0.12 0.12 2009-10 0.10 0.09
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Standard Deviation of a fund depicts, that how much the returns of the fund have deviated from the mean level. The higher the value of standard deviation, the greater will be the volatility in the fund's returns. In 2007-08 ,standard deviation of 10% was highest among all for Reliance RSF Fund and Sundaram BNP Paribas SMILE REG-G meaning that the fund's return fluctuated in either direction (up or down) by 10% from its average return ,whereas HDFC Equity fund showed minimum deviation of 8%.
In the year 2008-09 Sundaram BNP Paribas SMILE REG-G showed the maximum
volatility by having standard deviation of 13%. UTI Opportunities Fund had the minimum standard deviation of 10%
For the year 2009-10 Reliance RSF Fund was the most volatile fund with standard
deviation of 12%. IDFC Premier Equity Plan A had the least value of 7%
BETA
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Beta measures the non- diversifiable risk of a portfolio. Normally, the value of beta lies somewhere between 0.4 and 1.9. In this case, the sample involves only equity diversified schemes. Therefore, the beta lies at a range from 0.71 to 1.10. During the financial year 2007- 08, Reliance RSF Fund was considered as the highest risky fund as it was having highest beta value of 0.99. The lowest risky fund was ICICI Prudential Discovery Fund with a beta of 0.84. In the year 2008- 09, high risky fund was Reliance RSF Fund and the value was 1. The low risky fund for this financial year was UTI Opportunities Fund and the value was 0.82. The high risky fund for the financial year 2009- 10 was Sundaram BNP Paribas SMILE REG-G Fund with the Beta value of 1.1 next was Relaince RSF Fund with beta of 1.02.Low risk fund for this year was IDFC Equity Plan A with beta value of 0.71.
SHARPE RATIO
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SCHEMES HDFC EQUITY FUND ICICI PRUDENTIAL DISCOVERY FUND UTI OPPUTTUNITIES FUND IDFC PREMIER EQUITY PLAN A RELIANCE RSF FUND SUNDARAM BNP PARIBAS S.M.I.L.E REG-G
The above table shows the Sharpe ratio of various schemes for the financial years 2007-08, 2008-09 and 2009- 10. Sharpe ratio is a measure of the excess return per unit of risk in an investment asset of a trading strategy. The Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk taken. The selected mutual fund schemes showed the best risk adjusted performance during the financial year 200910. Among them, IDFC Equity Plan A was considered as the best one with a ratio of 14.63. The least performance was shown by UTI Opportunities Fund which has a ratio of 9.94. The performance of all selected mutual fund schemes was really low during the financial year 2008- 09. Funds were even having negative Sharpe ratio. The lowest risk adjusted performance was shown by Reliance RSF Fund and the value was -3.64. UTI Opportunities Fund which showed the risk adjusted performance with a Sharpe ratio of -3.23 which was best among all. In the year 2007-08, IDFC Premier Equity Plan A is the fund which has shown the
maximum Sharpe ratio of 6.11. It means that the fund has provided the maximum risk adjusted return as compared to other funds. The fund having the least Sharpe value is ICICI Prudential Discovery Fund with a value of 0.63.
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TREYNOR RATIO SCHEMES HDFC EQUITY FUND ICICI PRUDENTIAL DISCOVERY FUND UTI OPPORTUNITIES FUND IDFC PREMIER EQUITY PLAN A RELAINCE RSF FUND SUNDARAM BNP PARIBAS S.M.I.L.E REG-G 2007-08 0.19 0.07 0.37 0.60 0.53 0.37 2008-09 (0.43) (0.32) (0.38) (0.46) (0.43) (0.47) 2009-10 1.26 1.73 0.99 1.46 1.01 1.11
Treynors ratio measures the funds performance in relation to the markets performance. The table shows the Treynors ratio of selected mutual fund schemes for three financial years 2007-08,2008-09 and 2009-10. .It was during the financial year 2009- 10, that the funds showed the highest performance among the three years of analysis. All the funds were having its highest Treynor ratio during this financial year. Among them, the top performing fund was ICICI Prudential Discovery Fund. The value was 1.73. The lowest performance was shown by UTI Opportunities Fund. The value was 0.99. The financial year 2008- 09 was a low performance year for almost all mutual fund schemes. The returns reduced significantly as compared to previous financial year. Some schemes showed even a negative Treynors ratio. ICICI Prudential Discovery Fund is the fund which showed the maximum Treynors ratio during this financial year. The value was -0.32 and the least performing fund was SUNDARAM BNP Paribas SMILE REG- G Fund. Its value was -0.47. In the year 2007-08, IDFC Equity Plan A Fund is having the maximum Treynors ratio of 0.60. It means that the scheme has a better risk adjustedperformance as compared to other schemes. The scheme having the lowest Treynor ratio is ICICI Prudential Discovery Fund. The ratio is 0.07. This shows that the fund is having a low risk adjusted performance.
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JENSEN ALPHA
SCHEMES HDFC EQUITY FUND ICICI PRUDENTIAL DISCOVERY FUND UTI OPPORTUNITIES FUND IDFC PREMIER EQUITY PLAN A RELAINCE RSF FUND SUNDARAM BNP PARIBAS S.M.I.L.E REG-G
Jensens performance index is used as a measure of absolute performance of the portfolio. The above table shows the Jensens alpha measure for the financial years2007-08, 2008-09 and 2009- 10. In the year 2007-08, the highest risk- adjusted performance is shown by IDFC Premier Equity Plan A with a value of 0.0693. The lowest risk- adjusted performance was shown by ICICI Prudential Discovery Fund and the value was -0.0207. During the financial year 2008- 09, the least value was shown by Relaince RSF Fund and the value was -0.0342. The highest risk adjusted performance for this financial year was shown by IDFC Premier Equity Plan A and the value was 0.0097. For the year 2009-10, the highest Jensens measure is for ICICI Prudential Discovery Fund and the value is 0.0377. The lowest value is for UTI Opportunities Fund and it is -0.0111.
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M^2(M SQUARE)
SCHEMES HDFC EQUITY FUND ICICI PRUDENTIAL DISCOVERY FUND UTI OPPORTUNITIES FUND IDFC PREMIER EQUITY PLAN A RELIANCE RSF FUND SUNDARAM BNP PARIBAS S.M.I.L.E REG-G
The M-squared is a performance measurement using return per unit of total risk as measured by the standard deviation. The table above shows that in the year 2007-08 IDFC Premier Equity Plan A fund scored high on it with a value of 0.5952 and ICICI Prudential Discovery Fund showed least value with 0.10. In 2008-09 all the funds showed negative performance as the markets were down too. Among all UTI Opportunities Fund showed best performance with value of -0.3225 and IDFC Equity Plan A gave the minimum value of -0.4399. For the year 2009-10 IFDC Premier Equity Plan A Fund showed highest values of 1.5624 among all the funds. And UTI Opportunities Fund had the minimum values of 0.98.
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SCHEMES HDFC EQUITY FUND ICICI PRUDENTIAL DISCOVERY FUND UTI OPPORTUNITIES FUND IDFC PREMIER EQUITY PLAN A RELAINCE RSF FUND SUNDARAM BNP PARIBAS S.M.I.L.E REG-G
The above table shows the leverage factor of various schemes for the financial years 2007-08, 2008-09 and 2009- 10. In 2007-08 leverage factor is highest for HDFC Equity fund this means that it has low fund standard deviation compared to market standard deviation and hence investor should consider levering this fund by investing more in it. Similarly for IDFC Premier Equity plan A in 2008-09 and 2009-10 investor should consider to invest more as they are having leverage factor more than one. For year 2007-08, Reliance RSF Fund has the lowest Leverage factor and also less than one means fund standard deviation is more than market standard deviation and hence investor should consider unlevering this fund by selling of part of holding in the fund . Similarly for Sundaram BNP Paribas SMILE REG- G fund in 2008-09 and ICICI Prudential Discovery Fund in 2009-10 investor should take similar steps as there leverage factor is less than one.
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8. Rankings
Treynor
IDFC PREMIER EQUITY PLAN A RELIANCE RSF FUND SUNDARAM BNP PARIBAS S.M.I.L.E REG-G
Jensen
IDFC PREMIER EQUITY PLAN A RELIANCE RSF FUND SUNDARAM BNP PARIBAS S.M.I.L.E REG-G
M2
IDFC PREMIER EQUITY PLAN A RELIANCE RSF FUND UTI OPPORTUNITIES FUND
Leverage Factor
HDFC EQUITY FUND UTI OPPORTUNITIES FUND
1 2
During the financial year 2007- 08, Treynors ratio, Sharpe, Jensens and M-Squared measure rate IDFC Premier Equity Plan A as the best one, whereas, HDFC Equity Fund got the best rating in case of Leverage Factor. Thus, the best picks of financial year 2007- 08 include HDFC Equity Fund, IDFC Equity Plan A , Reliance RSF Fund , UTI Opportunities Fund . 2008-09
Rank
Sharpe
Treynor
Jensen
M2
Leverage Factor
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IDFC PREMIER EQUITY PLAN A UTI OPPUTTUNITIES FUND SUNDARAM BNP PARIBAS S.M.I.L.E REG-G
In the year 2008-09 according to Jensen Alpha and Leverage Factor IDFC Equity Plan A was the best performing fund whereas on the basis of M-Squared and Sharpe ratio UTI OpportunitiesFund was the best in performance . ICICI Prudential Discovery Fund did best on M-Squared . Amongst the top three ranked fund were Sundaram BNP Paribas SMILE REG and HDFC Equity Fund . 2009-10
Rank
Sharpe
Treynor
ICICI PRUDENTIAL DISCOVERY FUND IDFC PREMIER EQUITY PLAN A HDFC EQUITY FUND
Jensen
ICICI PRUDENTIAL DISCOVERY FUND
M2
IDFC PREMIER EQUITY PLAN A ICICI PRUDENTIAL DISCOVERY FUND HDFC EQUITY FUND
Leverage Factor
2 3
IDFC PREMIER EQUITY PLAN A ICICI PRUDENTIAL DISCOVERY FUND HDFC EQUITY FUND
IDFC PREMIER EQUITY PLAN A UTI OPPORTUNITIES FUND HDFC EQUITY FUND
In the year 2009-10, ICICI Prudential Discovery Fund performed well on Treynor Ratio and Jensen Alpha whereas IDFC Premier Equity Plan A performed well on Sharpe Ratio,M-Squared and Leverage Factor. HDFC Equity Fund, Reliance RSF Fund, UTI Opportunities fund were other funds that were also in the top three performing funds.
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9. Conclusion
In this study the performance of various mutual fund schemes in the equity diversified segment was considered. Analysis was based on the risk and returns of various schemes. On analysis, it was revealed that there is a certain amount of risk involved, while investing in equity diversified schemes, as the beta values of schemes falls within a range of 0.71 and 1.10. The study also revealed the fact that almost all the equity diversified schemes were affected in the year 2008-09 when recession had hit the market. Values for average returns, Sharpe and Treynor were lowest. Whereas in the year 2009-10 when the market were recovering and
investors were again showing faith in the market schemes showed good risk adjusted performance, as most of the schemes were having positive values in case of the performance measures. Schemes like IDFC Equity Plan A and HDFC Equity Fund were the top performing schemes in different parameters for 2007-08. In 2008-09 UTI Opportunities Fund, IDFC Equity Plan A and ICICI Prudential Discovery Fund were the best of all and in 2009-10 IDFC Equity Plan A and ICICI Prudential Discovery Fund performed the best.
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References
1. Naresh Malhotra, Research Methodology 2. Reilly/Brown, Investment Analysis and Portfolio Management. 3. www.valueresearchonline.com 4. www.moneycontrol.com 5. www.nseindia.com 6. www.bseindia.com 7. www.hdfcfund.com.
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