MUTUAL FUND COMPARISON AND

ANALYSIS
COMPANY PROFILE

Vision Statement:
 INTRODUCTION

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 present equity shareholding pattern of the AMC is as follows:

Housing Development Finance Corporation Limited was incorporated in

 1977 as the first specialized Mortgage Company in India, its activities
include

housing finance, and property related services (property identification,

valuation etc.), training and consultancy. HDFC Ltd. contributes the 60% of
the paid up equity capital of the AMC.
Standard Life Insurance Limited is a leading Asset management company
with approximately US$ 282 billion of asset under management as on
June 30, 2007. The company operates in UK, Canada, Hong Kong, China,
Korea, Ireland and USA to ensure it is able to form a truly global
investment view. SLI Ltd. contributes the 40% of the paid up equity capital
of the AMC.

The AMC is managing 24 open-ended schemes of the Mutual Fund viz. HDFC
Growth Fund (HGF), HDFC Balanced Fund (HBF), HDFC Income Fund (HIF), HDFC
Liquid Fund (HLF), HDFC Long Term Advantage Fund (HLTAF), HDFC Children's
Gift Fund (HDFC CGF), HDFC Gilt Fund (HGILT), HDFC Short Term Plan (HSTP),
HDFC Index Fund, HDFC Floating Rate Income Fund (HFRIF), HDFC Equity Fund
(HEF), HDFC Top 200 Fund (HT200), HDFC Capital Builder Fund (HCBF), HDFC
Tax Saver (HTS), HDFC Prudence Fund (HPF), HDFC High Interest Fund (HHIF),
HDFC Cash Management Fund (HCMF), HDFC MF Monthly Income Plan (HMIP),
HDFC Core & Satellite Fund (HCSF), HDFC Multiple Yield Fund (HMYF), HDFC
Premier Multi-Cap Fund (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 Series V, HDFC Fixed Maturity Plans - Series VI, HFDC
Fixed Maturity Plans - Series VII and HFDC Fixed Maturity Plans - Series
VIII.
The AMC is also providing portfolio management / advisory services and such
activities are not in conflict with the activities of the Mutual Fund. The AMC has
renewed its registration from SEBI vide Registration No. - PM / INP000000506
dated December 8, 2006 to act as a Portfolio Manager under the SEBI (Portfolio
Managers) Regulations, 1993.
 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

II. History of Mutual Funds

The mutual fund industry in India started in 1963 with the formation of Unit
Trust of India, at the initiative of the Government of India and Reserve Bank of
India. The history of mutual funds in India can be broadly divided into four
distinct phases.

First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was
set up by the Reserve Bank of India and functioned under the Regulatory and
administrative control of the Reserve Bank of India. In 1978 UTI was de-linked
from the RBI and the Industrial Development Bank of India (IDBI) took over the
regulatory and administrative control in place of RBI. The first scheme launched
by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 Crores of
assets under management.

6
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.

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

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

With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of fund families.
Also, 1993 was the year in which the first Mutual Fund Regulations came into
being, under which all mutual funds, except UTI were to be registered and
governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton)
was the first private sector mutual fund registered in July 1993.

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

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

The number of mutual fund houses went on increasing, with many foreign
mutual funds setting up funds in India and also the industry has witnessed
several mergers and acquisitions. As at the end of January 2003, there were 33
mutual funds with total assets of Rs. 1, 21,805 Crores. The Unit Trust of India
with Rs.44, 541 Crores of assets under management was way ahead of other
mutual funds

7
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.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000
Crores of assets under management and with the setting up of a UTI Mutual
Fund, conforming to the SEBI Mutual Fund.

The graph indicates the growth of assets over the years:

8
 Assets of the mutual fund industry touched an all-time high of Rs 639,000 crore
(approximately $136 billion) in May, aided by the spike in the stock market by over 50
per cent in the last one month and fresh inflows in liquid funds, data released by the
Association of Mutual Funds in India (AMFI) shows yesterday.

The country's burgeoning mutual fund industry is expected to see its assets
growing by 29% annually in the next five years. The total assets under
management in the Indian mutual funds industry are estimated to grow at a
compounded annual growth rate (CAGR) of 29 per cent in the next five years,"
the report by global consultancy Celent said. However, the profitability of the
industry is expected to remain at its present level mainly due to increasing cost
incurred to develop distribution channels and falling margins due to greater
competition among fund houses, it said.

III. Regulatory Framework

Securities and Exchange Board of India (SEBI)

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

an Act of Parliament in 1992, the apex regulator of all entities that either raise
funds in the capital markets or invest in capital market securities such as shares
and debentures listed on stock exchanges. Mutual funds have emerged as an
important institutional investor in capital market securities. Hence they come
under the purview of SEBI. SEBI requires all mutual funds to be registered with
them. It issues guidelines for all mutual fund operations including where they
can invest, what investment limits and restrictions must be complied with, how
they should account for income and expenses, how they should make
disclosures of information to the investors and generally act in the interest of
investor protection. To protect the interest of the investors, SEBI formulates
policies and regulates the mutual funds. MF either promoted by public or by

9
private sector entities including one promoted by foreign entities are governed
by these Regulations. SEBI approved Asset Management Company (AMC)
manages the funds by making investments in various types of securities.
Custodian, registered with SEBI, holds the securities of various schemes of the
fund in its custody. According to SEBI Regulations, two thirds of the directors of
Trustee Company or board of trustees must be independent.

Association of Mutual Funds in India (AMFI)

With the increase in mutual fund player in India, a need for mutual fund
association in India was generated to function as a non-profit
organisation

10
The objectives of Association of Mutual Funds in India

The Association of Mutual Funds of India works with 30 registered AMCs of

the country. It has certain defined objectives which juxtaposes the guidelines of
its Board of Directors. The objectives are as follows:

This mutual fund association of India maintains high professional and

ethical standards in all areas of operation of the industry.

It also recommends and promotes the top class business practices and
code of conduct which is followed by members and related people
engaged in the activities of mutual fund and asset management. The
agencies who are by any means connected or involved in the field of
capital markets and financial services also involved in this code of conduct
of the association.

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

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

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

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

implements a program of training and certification for all intermediaries
and other engaged in the mutual fund industry.

AMFI undertakes all India awareness program for investors in order to

promote proper understanding of the concept and working of mutual
funds.

At last but not the least association of mutual fund of India also
disseminate information on Mutual Fund Industry and undertakes studies
 and research either directly or in association with other bodies.

IV. Concept of Mutual Fund

A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is then invested in
capital market instruments such as shares, debentures and other securities. The
income earned through these investments and the capital appreciations realized
are shared by its unit holders in proportion to the number of units owned by
them. Thus a Mutual Fund is the most suitable investment for the common man
as it offers an opportunity to invest in a diversified, professionally managed
basket of securities at a relatively low cost. The flow chart below describes the
working of a mutual fund:

Mutual fund operation flow chart

Mutual funds are considered as one of the best available investments as

compare to others. They are very cost efficient and also easy to invest in, thus
by pooling money together in a mutual fund, investors can purchase stocks or
bonds with much lower trading costs than if they tried to do it on their own. But
the biggest advantage to mutual funds is diversification, by minimizing risk &
maximizing returns.

Organization of a Mutual Fund

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

V. Types of Mutual Fund schemes in INDIA

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial
position, risk tolerance and return expectations.
 Overview of existing schemes existed in mutual fund
category: BY STRUCTURE

Open - Ended Schemes: An open-end fund is one that is available for

subscription all through the year. These do not have a fixed maturity. Investors
can conveniently buy and sell units at Net Asset Value ("NAV") related prices.
The key feature of open-end schemes is liquidity.

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

which generally ranging from 3 to 15 years. The fund is open for subscription
only during a specified period. Investors can invest in the scheme at the time of
the initial public issue and thereafter they can buy or sell the units of the
scheme on the stock exchanges where they are listed. In order to provide an
exit route to the investors, some close-ended funds give an option of selling
back the units to the Mutual Fund through periodic repurchase at NAV related
prices. SEBI Regulations stipulate that at least one of the two exit routes is
provided to the investor.

Interval Schemes: Interval Schemes are that scheme, which combines the
features of open-ended and close-ended schemes. The units may be traded on
the stock exchange or may be open for sale or redemption during pre-
determined intervals at NAV related prices.

Overview of existing schemes existed in mutual fund

category: BY NATURE

Equity fund: These funds invest a maximum part of their corpus into equities
 holdings. The structure of the fund may vary different for different schemes
and the fund manager’s outlook on different stocks. The Equity Funds are sub-
classified depending upon their investment objective, as follows:

 -Diversified Equity Funds

 -Mid-Cap Funds

 -Sector Specific Funds

 -Tax Savings Funds (ELSS)

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

Debt funds: The objective of these Funds is to invest in debt papers.

Government authorities, private companies, banks and financial institutions are
some of the major issuers of debt papers. By investing in debt instruments,
these funds ensure low risk and provide stable income to the investors.

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

known as Government of India debt papers. These Funds carry zero Default risk
but are associated with Interest Rate risk. These schemes are safer as they
invest in papers backed by Government.

Income Funds: Invest a major portion into various debt instruments such as
bonds, corporate debentures and Government securities.

Monthly income plans ( MIPs): Invests maximum of their total corpus in debt
instruments while they take minimum exposure in equities. It gets benefit of
both equity and debt market. These scheme ranks slightly high on the risk-
return matrix when compared with other debt schemes.

Short Term Plans (STPs): Meant for investment horizon for three to six
months. These funds primarily invest in short term papers like Certificate of
Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also
invested in corporate debentures.

Liquid Funds: Also known as Money Market Schemes, These funds provides
easy liquidity and preservation of capital. These schemes invest in short-term
instruments like Treasury Bills, inter-bank call money market, CPs and CDs.
These funds are meant for short-term cash management of corporate houses
and are meant for an investment horizon of 1day to 3 months. These schemes
rank low on risk-return matrix and are considered to be the safest amongst all
categories of mutual funds.

Balanced funds: They invest in both equities and fixed income securities,
which are in line with pre-defined investment objective of the scheme. These
schemes aim to provide investors with the best of both the worlds. Equity part
provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment
parameter. It means each category of funds is backed by an investment
philosophy, which is pre-defined in the objectives of the fund. The investor can
align his own investment needs with the funds objective and can invest
accordingly

By investment objective:

Growth Schemes: Growth Schemes are also known as equity schemes. The aim
of these schemes is to provide capital appreciation over medium to long term.
These schemes normally invest a major part of their fund in equities and are
willing to bear short-term decline in value for possible future appreciation.

Income Schemes: Income Schemes are also known as debt schemes. The aim
of these schemes is to provide regular and steady income to investors. These
schemes generally invest in fixed income securities such as bonds and corporate
debentures. Capital appreciation in such schemes may be limited.

Balanced Schemes: Balanced Schemes aim to provide both growth and income
by periodically distributing a part of the income and capital gains they earn.
These schemes invest in both shares and fixed income securities, in the
proportion indicated in their offer documents.

Money Market Schemes: Money Market Schemes aim to provide easy

liquidity, preservation of capital and moderate income. These schemes generally
invest in safer, short-term instruments, such as treasury bills, certificates of
deposit, commercial paper and inter-bank call money.

Other schemes

Tax Saving Schemes:

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed
from time to time. Under Sec.80C of the Income Tax Act, contributions made to
any Equity Linked Savings Scheme (ELSS) are eligible for rebate.

Index Schemes:

Index schemes attempt to replicate the performance of a particular index such

as the BSE Sensex or the Nifty 50. The portfolio of these schemes will consist of
only those stocks that constitute the index. The percentage of each stock to the
total holding will be identical to the stocks index weightage. And hence, the
returns from such schemes would be more or less equivalent to those of the
Index.

Sector Specific Schemes:

These are the funds/schemes which invest in the securities of only those sectors
 or industries as specified in the offer documents. Ex- Pharmaceuticals, Software,
Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in
these funds are dependent on the performance of the respective
sectors/industries. While these funds may give higher returns, they are more
risky compared to diversified funds. Investors need to keep a watch on the
performance of those sectors/industries and must exit at an appropriate time.

VI. Advantages of Mutual Funds

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

investment. Spreading investments across a range of securities can help to
reduce risk. A stock mutual fund, for example, invests in many stocks .This
minimizes the risk attributed to a concentrated position. If a few securities in
the mutual fund lose value or become worthless, the loss maybe offset by other
securities that appreciate in value. Further diversification can be achieved by
investing in multiple funds which invest in different sectors.

Professional Management- Mutual funds are managed and supervised by

investment professional. These managers decide what securities the fund will
buy and sell. This eliminates the investor of the difficult task of trying to time
the market.

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

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

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

Low cost- Mutual fund expenses are often no more than 1.5 percent of our
investment. Expenses for Index Funds are less than that, because index funds
 are not actively managed. Instead, they automatically buy stock in companies that
are listed on a specific index

Transparency- The mutual fund offer document provides all the information
about the fund and the scheme. This document is also called as the prospectus
or the fund offer document, and is very detailed and contains most of the
relevant information that an investor would need.

Choice of schemes – there are different schemes which an investor can

choose from according to his investment goals and risk appetite.

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

VII. Terms used in Mutual Fund

Asset Management Company (AMC)

An AMC is the legal entity formed by the sponsor to run a mutual fund. The
AMC is usually a private limited company in which the sponsors and their
associates or joint venture partners are the shareholders. The trustees sign an
investment agreement with the AMC, which spells out the functions of the AMC.
It is the AMC that employs fund managers and analysts, and other personnel. It
is the AMC that handles all operational matters of a mutual fund – from
launching schemes to managing them to interacting with investors.

Fund Offer document

The mutual fund is required to file with SEBI a detailed information
memorandum, in a prescribed format that provides all the information about the
fund and the scheme. This document is also called as the prospectus or the fund
offer document, and is very detailed and contains most of the relevant
information that an investor would need
Trust
The Mutual Fund is constituted as a Trust in accordance with the provisions of
the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under
the Indian Registration Act, 1908. The Trust appoints the Trustees who are
responsible to the investors of the fund.

Trustees
Trustees are like internal regulators in a mutual fund, and their job is to protect
the interests of the unit holders. Trustees are appointed by the sponsors, and
can be either individuals or corporate bodies. In order to ensure they are
impartial and fair, SEBI rules mandate that at least two-thirds of the trustees be
independent, i.e., not have any association with the sponsor.
Trustees appoint the AMC, which subsequently, seeks their approval for the
work it does, and reports periodically to them on how the business being run.

Custodian
A custodian handles the investment back office of a mutual fund. Its
responsibilities include receipt and delivery of securities, collection of income,
distribution of dividends and segregation of assets between the schemes. It also
track corporate actions like bonus issues, right offers, offer for sale, buy back
and open offers for acquisition. The sponsor of a mutual fund cannot act as a
custodian to the fund. This condition, formulated in the interest of investors,
ensures that the assets of a mutual fund are not in the hands of its sponsor. For
example, Deutsche Bank is a custodian, but it cannot service Deutsche Mutual
Fund, its mutual fund arm.

NAV
Net Asset Value is the market value of the assets of the scheme minus its
liabilities. The per unit NAV is the net asset value of the scheme divided by the
number of units outstanding on the Valuation Date.The NAV is usually
calculated on a daily basis. In terms of corporate valuations, the book values of
assets less liability.

The NAV is usually below the market price because the current value of the
fund’s assets is higher than the historical financial statements used in the NAV
calculation.

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

- Liabilities - Accrued Expenses
NAV =
--------------------------------------------------------------------------
--
--------------------
No. of units outstanding

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.
Sale price

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

Repurchase Price:

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

Redemption Price

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

Sales load

Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’
load. Schemes that do not charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’ Load

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

CAGR (compounded annual growth rate)

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

The compound annual growth rate is calculated by taking the nth root of the

total percentage growth rate, where n is the number of years in the period being
considered.

VIII. Fund Management

Actively managed funds:

Mutual Fund managers are professionals. They are considered professionals
because of their knowledge and experience. Managers are hired to actively
manage mutual fund portfolios. Instead of seeking to track market performance,
active fund management tries to beat it. To do this, fund managers "actively"
buy and sell individual securities. For an actively managed fund, the
corresponding index can be used as a performance benchmark.

Is an active fund a better investment because it is trying to outperform the

market? Not necessarily. While there is the potential for higher returns with
active funds, they are more unpredictable and more risky. From 1990 through
1999, on average, 76% of large cap actively managed stock funds actually
underperformed the S&P
500. (Source - Schwab Center for Investment Research)

Actively managed fund styles:

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

Fund Styles:

Value: The manager invests in stocks believed to be currently undervalued

by the market.
Growth: The manager selects stocks they believe have a strong potential
for beating the market.
Blend: The manager looks for a combination of both growth and value
stocks.

To determine the style of a mutual fund, consult the prospectus as well as other
sources that review mutual funds. Don't be surprised if the information
conflicts. Although a prospectus may state a specific fund style, the style may
change. Value stocks held in the portfolio over a period of time may become
growth stocks and vice versa. Other research may give a more current and
accurate account of the style of the fund.

Passively Managed Funds:

Passively managed mutual funds are an easily understood, relatively safe

approach to investing in broad segments of the market. They are used by less
experienced investors as well as sophisticated institutional investors with large
portfolios. Indexing has been called investing on autopilot. The metaphor is an
appropriate one as managed funds can be viewed as having a pilot at the
controls. When it comes to flying an airplane, both approaches are widely used.
a high percentage of investment professionals, find index investing compelling
for the following reasons:

Management quality. The passive nature of indexing eliminates any

concerns about human error or management tenure.
Low portfolio turnover. Less buying and selling of securities means
lower costs and fewer tax consequences.
Low operational expenses. Indexing is considerably less expensive
than active fund management.
Asset bloat. Portfolio size is not a concern with index funds.
Performance. It is a matter of record that index funds have outperformed
the majority of managed funds over a variety of time periods.

You make money from your mutual fund investment when:

The fund earns income on its investments, and distributes it to you in the
form of dividends.
The fund produces capital gains by selling securities at a profit, and
distributes those gains to you.
You sell your shares of the fund at a higher price than you paid for them
IX. Risk

Every type of investment, including mutual funds, involves risk. Risk refers to
the possibility that you will lose money (both principal and any earnings) or fail
to make money on an investment. A fund's investment objective and its
holdings are influential factors in determining how risky a fund is. Reading the
prospectus will help you to understand the risk associated with that particular
fund.

Generally speaking, risk and potential return are related. This is the risk/return
trade-off. Higher risks are usually taken with the expectation of higher returns
at the cost of increased volatility. While a fund with higher risk has the
potential for higher return, it also has the greater potential for losses or
negative returns. The school of thought when investing in mutual funds
suggests that the longer your investment time horizon is the less affected you
should be by short-term volatility. Therefore, the shorter your investment time
horizon, the more concerned you should be with short-term volatility and
higher risk.

Defining Mutual fund risk

Different mutual fund categories as previously defined have inherently different

risk characteristics and should not be compared side by side. A bond fund with
below-average risk, for example, should not be compared to a stock fund with
below average risk. Even though both funds have low risk for their respective
categories, stock funds overall have a higher risk/return potential than bond
funds.

Of all the asset classes, cash investments (i.e. money markets) offer the greatest
price stability but have yielded the lowest long-term returns. Bonds typically
experience more short-term price swings, and in turn have generated higher
long-term returns. However, stocks historically have been subject to the greatest
short-term price fluctuations—and have provided the highest long-term returns.
Investors looking for a fund which incorporates all asset classes may consider a
balanced or hybrid mutual fund These funds can be very conservative or very
aggressive. Asset allocation portfolios are mutual funds that invest in other
mutual funds with different asset classes. At the discretion of the manager(s),
securities are bought, sold, and shifted between funds with different asset
classes according to market conditions.

Mutual funds face risks based on the investments they hold. For example, a
bond fund faces interest rate risk and income risk. Bond values are inversely
related to interest rates. If interest rates go up, bond values will go down and
vice versa. Bond income is also affected by the change in interest rates.
Bond yields are directly related to interest rates falling as interest rates fall and
rising as interest rise. Income risk is greater for a short-term bond fund than for
a long-term bond fund.

Similarly, a sector stock fund (which invests in a single industry, such as

telecommunications) is at risk that its price will decline due to developments in
its industry. A stock fund that invests across many industries is more sheltered
from this risk defined as industry risk.

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

Call Risk. The possibility that falling interest rates will cause a bond issuer
to redeem—or call—its high-yielding bond before the bond's maturity date
Country Risk. The possibility that political events (a war, national
elections), financial problems (rising inflation, government default), or
natural disasters (an earthquake, a poor harvest) will weaken a country's
economy and cause investments in that country to decline.
 Credit Risk. The possibility that a bond issuer will fail to repay interest
and principal in a timely manner. Also called default risk.
Currency Risk. The possibility that returns could be reduced for
Americans investing in foreign securities because of a rise in the value of
the U.S. dollar against foreign currencies. Also called exchange-rate risk.
Income Risk. The possibility that a fixed-income fund's dividends will
decline as a result of falling overall interest rates.
Industry Risk. The possibility that a group of stocks in a single industry
will decline in price due to developments in that industry.

X. Basis Of Comparison Of Various Schemes Of

Mutual Funds

Beta
Beta measures the sensitivity of the stock to the market. For example if
beta=1.5; it means the stock price will change by 1.5% for every 1% change in
Sensex. It is also used to measure the systematic risk. Systematic risk means
risks which are external to the organization like competition, government
policies. They are non-diversifiable risks.
Beta is calculated using regression analysis, Beta can also be defined as the
tendency of a security's returns to respond to swings in the market. A beta of 1
indicates that the security's price will move 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>1 then aggressive

stocks If beta<1 then
defensive stocks If beta=1
then neutral
So, it’s a measure of the volatility, or systematic risk, of a security or a portfolio
in comparison to the market as a whole.
Many utilities stocks have a beta of less than 1. Conversely, most hi-tech
NASDAQ-based stocks have a beta greater than 1, offering the possibility of a
higher rate of return but also posing more risk.

Alpha

Alpha takes the volatility in price of a mutual fund and compares its risk adjusted
performance to a benchmark index. The excess return of the fund relative to the
returns of benchmark index is a fundamental ALPHA. It is calculated as a return
which is earned in excess of the return generated by CAPM. Alpha is often
considered to represent the value that a portfolio manager adds to or subtracts
from a fund's return. A positive alpha of 1.0 means the fund has outperformed its
benchmark index by 1%. Correspondingly, a similar negative alpha would
indicate underperformanceof 1%. . If a CAPM analysis estimates that a
portfolio should earn 35% return based on the risk of the portfolio but the
portfolio actually earns 40%, the portfolio's alpha would be 5%. This 5% is the
excess return over what was predicted in the CAPM model. This 5% is ALPHA.

Sharpe Ratio
A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted
performance. It is calculated by subtracting the risk-free rate from the rate of
return for a portfolio and dividing the result by the standard deviation of the
portfolio returns.
The Sharpe ratio tells us whether the returns of a portfolio are because of smart
investment decisions or a result of excess risk. This measurement is very useful
because although one portfolio or fund can reap higher returns than its peers, it
is only a good investment if those higher returns do not come with too much
additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted
performance has been.

Treynor Ratio
The treynor ratio, named after Jack Treynor, is similar to the Sharpe ratio,
except that the risk measure used is Beta instead of standard deviation. This
ratio thus measures reward to volatility.

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

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

Since Treynor Ratio uses Beta as a risk measure, it evaluates excess returns only
with respect to systematic (or market) risk. It will therefore be more appropriate
for diversified schemes, where the non-systematic risks have been eliminated.
Generally, large institutional investors have the requisite funds to maintain such
highly diversified portfolios.

Also since Beta is based on capital asset pricing model, which is empirically
tested for equity, Treynor Ratio would be inappropriate for debt schemes.

M- SQUARED

Modigliani and Modigliani recognized that average investors did not find the
Sharpe ratio intuitive and addressed this shortcoming by multiplying the Sharpe
ratio by the standard deviation of the excess returns on a broad market index,
such as the S&P 500 or the Wilshire 5000, for the same time period. This yields
the risk-adjusted excess return. This, too, is a significant and useful statistic, as
it measures the return in excess of the risk-free rate, which is the basis from
which all risky investments should be measured.
M–Squared= [ (Ri – Rf)/ Sd. Inv] * Sd. Mkt
+Rf
OR
M–Squared= Sharpe Ratio* Sd. Mkt + Rf

Ri = Return from the

investment Rf = Risk free
return

Sd. Inv= Standard Deviation Investment

Sd. Mkt= Standard Deviation Market

Leverage Factor:

It reports the comparison of the total risk in the fund with the total risk in the
market portfolio and can be used in making investment decisions. It is
calculated by dividing market standard deviation by the fund standard deviation.

Li = Standard deviation of the market

Standard deviation of the fund

for example a leverage factor greater than one implies that standard deviation
of the fund is less than standard deviation of the market index, and that the
investor should consider levering the fund by borrowing money and invest in
that particular fund. while this would tend to increase the risk of investment
 somewhat ,there would be an greater than proportional increase in returns. On
the other hand leverage factor less than one implies that the risk of fund is
greater than risk of market index and the investor should consider unlevering
the fund by selling of the part of the holding in the fund and investing the
proceeds I a risk free security, such as treasury bill in this way returns on the
investment reduce somewhat, there would be an greater than proportional
reduction in risk.

Standard Deviation:
A measure of the dispersion of a set of data from its mean. The more spread
apart the data is, the higher the deviation. Standard deviation is applied to the
annual rate of return of an investment to measure the investment's volatility
(risk).

A volatile stock would have a high standard deviation. The standard deviation
tells us how much the return on the fund is deviating from the expected normal
returns.

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

XI. How To Pick The Right Mutual Fund

Identifying Goals and Risk Tolerance

Before acquiring shares in any fund, an investor must first identify his or her
goals and desires for the money being invested. Are long-term capital gains
desired, or is a current income preferred? Will the money be used to pay for
college expenses, or to supplement a retirement that is decades away. One
should consider the issue of risk tolerance. Is the investor able to afford and
mentally accept dramatic swings in portfolio value? Or, is a more conservative
investment warranted? Identifying risk tolerance is as important as identifying a
goal. Finally, the time horizon must be addressed. Investors must think about
how long they can afford to tie up their money, or if they anticipate any liquidity
concerns in the near future. Ideally, mutual fund holders should have an
investment horizon with at least five years or more.

Style and Fund Type

If the investor intends to use the money in the fund for a longer term need and
is willing to assume a fair amount of risk and volatility, then the style/objective
he or she may be suited for is a fund. These types of funds typically hold a high
percentage of their assets in common stocks, and are therefore considered to be
volatile in nature. Conversely, if the investor is in need of current income, he or
she should acquire shares in an income fund. Government and corporate debt
are the two of the more common holdings in an income fund. There are times
when an investor has a longer term need, but is unwilling or unable to assume
substantial risk. In this case, a balanced fund, which invests in both stocks and
bonds, may be the best alternative.

Charges and Fees

Mutual funds make their money by charging fees to the investor. It is important
to gain an understanding of the different types of fees that you may face when
purchasing an investment. Some funds charge a sales fee known as a load fee,
which will either be charged upon initial investment or upon sale of the
investment. A front-end load/fee is paid out of the initial investment made by
the investor while a back-end load/fee is charged when an investor sells his or
her investment, usually prior to a set time period. To avoid these sales fees,
look for no-load funds, which don't charge a front- or back-end load/fee.
However, one should be aware of the other fees in a no-load fund, such as the
management expense ratio and other administration fees,as they may be very
high. The investor should look for the management expense ratio. The ratio is
simply the total percentage of fund assets that are being charged to cover fund
expenses. The higher the ratio, the lower the investor's return will be at the end
of the year.

Evaluating Managers/Past Results

Investors should research a fund's past results. The following is a list of
questions that perspective investors should ask themselves when reviewing the
historical record:

Did the fund manager deliver results that were consistent with general
market returns?
Was the fund more volatile than the big indexes (it means did its returns
vary dramatically throughout the year)?

This information is important because it will give the investor insight into how
the portfolio manager performs under certain conditions, as well as what
historically has been the trend in terms of turnover and return. Prior to buying
into a fund, one must review the investment company's literature to look for
information about anticipated trends in the market in the years ahead.

Size of the Fund

Although, the size of a fund does not hinder its ability to meet its investment
objectives. However, there are times when a fund can get too big. For example -
Fidelity's Magellan Fund. Back in 1999 the fund topped $100 billion in assets,
and for the first time, it was forced to change its investment process to
accommodate the large daily (money) inflows. Instead of being nimble and
buying small and mid cap stocks, it shifted its focus primarily toward larger
capitalization growth stocks. As a result, its performance has suffered.

Fund Transactional Activity

Portfolio Turnover
Measure of how frequently assets within a fund are bought and sold by the
managers. Portfolio turnover is calculated by taking either the total amount of
new securities purchased or the amount of securities sold -whichever is less -
over a particular period, divided by the total net asset value (NAV) of the fund.
The measurement is usually reported for a 12-month time period

Fund Performance Metrics

Historical Performance
The investor should see the past returns of the fund and should compare it
with the peer group fund.
Whatever the objective, the mutual fund is an excellent medium to accumulate
financial assets and grow them over time to achieve any of these goals
 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. The study is highly beneficial to the
investors as it gives them chance to compare and analyze different scheme. Thus, the it helps the
investors of all classes, in seeing how the different five star rated funds stand in comparison with
each other.

Along with this we are also able to see that in the difference between Systematic and Lump sum
investment. We found out that if markets are down then then SIP helps us in securing more
units. In todays time when market movements cannot be predicted investors tend to go for SIP
as it does help them take advantage of the low market rates. Also it removes the burden of
investing large amount of money at one time.

Further the effects of rebalancing showed that the returns that were earned when rebalancing
was done was higher compared to the returns that were earned without rebalancing. Hence
setting rules for rebalancing your mutual fund portfolio and adhering to those rules will ensure
that you sell high and buy low in the process of maintaining the desired composition. One need
to decide up front how often he/she will rebalance their portfolio. One should plan on doing it at
least once a year and possibly quarterly. Also, one should set target ranges and rebalance any
funds as soon as they blow through the upper or lower end of their range.

35