A comparative study on SBI and HDFC

mutual funds
 INTRODUCTION
What is a Mutual fund?

Mutual fund is an investment company that pools money from shareholders and invests in a
variety of securities, such as stocks, bonds and money market instruments. Most open-end
Mutual funds stand ready to buy back (redeem) its shares at their current net asset value, which
depends on the total market value of the fund's investment portfolio at the time of redemption.
Most open-end Mutual funds continuously offer new shares to investors. Also known as an open-
end investment company, to differentiate it from a closed-end investment company. Mutual funds
invest pooled cash of many investors to meet the fund's stated investment objective. Mutual
funds stand ready to sell and redeem their shares at any time at the fund's current net
asset value: total fund assets divided by shares outstanding.

In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing units to the
investors and investing funds in securities in accordance with objectives as disclosed in offer
document. Investments in securities are spread across a wide cross-section of industries and
sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not
move in the same direction in the same proportion at the same time. Mutual fund issues units to
the investors in accordance with quantum of money invested by them. Investors of Mutual funds
are known as unit holders. The profits or losses are shared by the investors in proportion to their
investments. The Mutual funds normally come out with a number of schemes with different
investment objectives which are launched from time to time. In India, A Mutual fund is required
to be registered with Securities and Exchange Board of India (SEBI) which regulates securities
markets before it can collect funds from the public. In Short, a Mutual fund is a common pool of
money in to which investors with common investment objective place their contributions that are
to be invested in accordance with the stated investment objective of the scheme. The investment
manager would invest the money collected from the investor in to assets that are defined/
permitted by the stated objective of the scheme. For example, an equity fund would invest equity
and equity related instruments and a debt fund would invest in bonds, debentures, gilts etc.
Mutual fund is a 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.

TYPES OF MUTUAL FUND SCHEMES

1. BY STRUCTURE
 Open – Ended Schemes.
 Close – Ended Schemes.
 Interval Schemes.

2. BY INVESTMENT OBJECTIVE
 Growth Schemes.
 Income Schemes.
 Balanced Schemes.

3. OTHER SCHEMES
 Tax Saving Schemes.
 Special Schemes.
 Index Schemes.
 Sector Specific Schemes.

1. OPEN – ENDED SCHEMES

The units offered by these schemes are available for sale and repurchase on any business day at
NAV based prices. Hence, the unit capital of the schemes keeps changing each day. Such
schemes thus offer very high liquidity to investors and are becoming increasingly popular in
India. Please note that an open-ended fund is NOT obliged to keep selling/issuing new units at all
times, and may stop issuing further subscription to new investors. On the other hand, an open-
ended fund rarely denies to its investor the facility to redeem existing units.

2. CLOSED – ENDED SCHEMES

The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of
units. These schemes are launched with an initial public offer (IPO) with a stated maturity period
after which the units are fully redeemed at NAV linked prices. In the interim, investors can buy
or sell units on the stock exchanges where they are listed. Unlike open-ended schemes, the unit
capital in closed-ended schemes usually remains unchanged. After an initial closed period, the
scheme may offer direct repurchase facility to the investors. Closed-ended schemes are usually
more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. This
discount tends towards the NAV closer to the maturity date of the scheme.

3. INTERVAL SCHEMES

These schemes combine the features of open-ended and closed-ended schemes. They may be
traded on the stock exchange or may be open for sale or redemption during pre-determined
intervals at NAV based prices.

4. GROWTH SCHEMES

These schemes, also commonly called Equity Schemes, seek to invest a majority of their funds in
equities and a small portion in money market instruments. Such schemes have the potential to
deliver superior returns over the long term. However, because they invest in equities, these
schemes are exposed to fluctuations in value especially in the short term.

5. INCOME SCHEMES

These schemes, also commonly called Debt Schemes, invest in debt securities such as corporate
bonds, debentures and government securities. The prices of these schemes tend to be more stable
compared with equity schemes and most of the returns to the investors are generated through
dividends or steady capital appreciation. These schemes are ideal for conservative investors or
those not in a position to take higher equity risks, such as retired individuals. However, as
compared to the money market schemes they do have a higher price fluctuation risk and
compared to a Gilt fund they have a higher credit risk.

6. BALANCED SCHEMES

These schemes are commonly known as Hybrid schemes. These schemes invest in both equities
as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the
objective of income and moderate capital appreciation and are ideal for investors with a
conservative, long-term orientation.

7. TAX SAVING SCHEMES

Investors are being encouraged to invest in equity markets through Equity Linked Savings
Scheme (“ELSS”) by offering them a tax rebate. Units purchased cannot be assigned /
transferred/ pledged / redeemed / switched – out until completion of 3 years from the date of
allotment of the respective Units.

The Scheme is subject to Securities & Exchange Board of India (Mutual Funds) Regulations,
1996 and the notifications issued by the Ministry of Finance (Department of Economic Affairs),
Government of India regarding ELSS.

Subject to such conditions and limitations, as prescribed under Section 88 of the Income-tax Act,
1961.

8. INDEX SCHEMES

The primary purpose of an Index is to serve as a measure of the performance of the market as a
whole, or a specific sector of the market. An Index also serves as a relevant benchmark to
evaluate the performance of mutual funds. Some investors are interested in investing in the
market in general rather than investing in any specific fund. Such investors are happy to receive
the returns posted by the markets. As it is not practical to invest in each and every stock in the
market in proportion to its size, these investors are comfortable investing in a fund that they
believe is a good representative of the entire market. Index Funds are launched and managed for
such investors.

9. SECTOR SPECIFIC SCHEMES.

Sector Specific Schemes generally invests money in some specified sectors for example: “Real
Estate” Specialized real estate funds would invest in real estates directly, or may fund real estate
developers or lend to them directly or buy shares of housing finance companies or may even buy
their securitized assets.
 Pointers to Measure Mutual Fund Performance
MEASURES DESCRIPTION IDEAL RANGE

STANDARD Standard Deviation allows to evaluate the volatility Should be near to it’s mean
DEVIATION of the fund. The standard deviation of a fund return.
measures this risk by measuring the degree to which
the fund fluctuates in relation to its mean return.

BETA Beta > 1 = high risky

Beta is a fairly commonly used measure of risk. It
basically indicates the level of volatility associated Beta = 1 = Avg
with the fund as compared to the benchmark.
Beta <1 = Low Risky

R-SQUARE R- square measures the correlation of a fund’s R-squared values range

movement to that of an index. R-squared describes between 0 and 1, where 0
the level of association between the fund's volatility represents no correlation and
and market risk. 1 represents full correlation.

ALPHA Alpha is the difference between the returns one Alpha is positive = returns of
would expect from a fund, given its beta, and the stock are better then market
return it actually produces. It also measures the returns.
unsystematic risk .
Alpha is negative = returns of
stock are worst then market.

Alpha is zero = returns are

same as market.

SHARPE Sharpe Ratio= Fund return in excess of risk free The higher the Sharpe ratio,
RATIO return/ Standard deviation of Fund. Sharpe ratios the better a funds returns
are ideal for comparing funds that have a mixed relative to the amount of risk
asset classes. taken.
Tax Rules For Mutual Fund Investors*
 Equity Other schemes Divide
schemes nd
incom
e

Short Long Short Long TDS All Equit Liquid Other

Term Term Term Term Schem y Schemes
Schemes
Capit Capit Capital Capital es Sche
al al Gains Gain mes
Gains Gain

Reside 10% NIL AS PER 10% NIL TAX NIL 28.32% 14.16%
nt SLAB FREE
(20% (25% (12.5%
Individ
with +10%surc +10%surcha
ual
indexati harge+ed rge+3%educ
/ HUF on) ucation ation cess)
cess)

Partner 10% NIL 30% 10% NIL TAX NIL 28.32% 22.66%
ship FREE
(20% (25% (20%+10%
Firms
with +10%surc surcharge+3
indexati harge+ed % education
on) ucation cess)
cess)

AOP/B 10% NIL AS PER 10% NIL TAX NIL 28.32% 22.66%
OI SLAB FREE
(20% (25% (20%+10%
with +10%surc surcharge+3
indexati harge+ed % education
on) ucation cess)
cess)

Domes 10% NIL 30% 10% NIL TAX NIL 28.32% 22.66%
tic FREE
(20% (25% (20%+10%
Compa
with +10%surc surcharge+3
nies
indexati harge+ed % education
 HISTORY OF MUTUAL FUND

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. The history of mutual funds in India can
be broadly divided into four distinct phases: -

First Phase – 1964-87

An Act of Parliament established Unit Trust of India (UTI) on 1963. 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.

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 Can
bank 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.

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
Regulations, and with recent mergers taking place among different private sector funds, the
mutual fund industry has entered its current phase of consolidation and growth. As at the end of
September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421
schemes.
15 Association of Mutual (Funds in India AMFI)
With the Increase in mutual fund players in India, a need for mutual fund association in India was
generated to function as a non-profit organization. Association of Mutual Funds in India (AMFI) was
incorporated on 22nd August, 1995.
AMFI is an apex body of all Asset management Companies (AMC) which has been registered with
SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It
functions under the supervision and guidelines of its Board of Director.
Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a
professional and healthy market with ethical lines enhancing.
The Objectives of Association of Mutual Funds in India.
The Association of Mutual Fund of India with 30 registered AMCs of the country. It has certain
defined objectives with the guidelines of its board of directors. The objectives are as follows.
 The 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 including agencies connected or involved in the field of capital markets and financial
services.
 To interact with the Securities and Exchange Board of India (SEBI) and to represent to SEBI on all
matters concerning the mutual fund industry.
 To represent to the Government, Reserve Bank of India and other bodies on all matters relating to
the Mutual Fund Industry.
 To undertake nationwide investor awareness programme so as to promote proper understanding of
the concept and working of mutual funds.
 To Dessisimate information on Mutual Fund Industry and to undertake studies and research
directly and/or in association with other bodies.
 To regulate conduct of distributors including disciplinary actions (cancellation of ARN) for
violation of code of conduct.
 To protect Interest of Investor / Unit holder.
Net Asset Value (NAV)
The Net Asset Value (NAV) of a mutual fund is the price at which the units of a mutual fund are
bought and sold. It is the market value of the fund after deducting its liabilities. The value of all units
of a mutual fund portfolio are calculated on a daily basis, from this all expenses are then subtracted.
The result is then divided by the total number of units the resultant value is the NAV. NAV is also
sometimes referred to as Net Book Value or book Value.
NAV indicates the market value of the units in a fund. So, it helps an investor keep track of the
performance about the mutual fund. An investor can calculate the actual increase in the value of their
investment by determining the percentage increase in the mutual fund NAV. NAV, therefore, gives
accurate information about the performance about the mutual fund.
Calculation of NAV
Mutual fund assets usually fall under two categories – securities & cash. Securities, here, include
both bonds and stocks. Therefore, the total asset value of a fund will include its stocks, cash and
bonds at market value. Dividends and interest accrued and liquid assets are also included in total
assets
The formula for calculating NAV:
NAV of a mutual funds = (Assets of the fund – Liabilities of the fund)
Number of outstanding units of the fund
The mutual fund itself and/or certain accounting firms calculate the NAV of a mutual fund. Since,
mutual funds depend on stock markets, they are usually declared after the closing hours of the
exchange.
All Mutual Funds are required to publish their NAV at every business day as per SEBI guidelines.
NAV is obtained after subtracting the expense ratio of a fund. This expense ratio is the total of all
expenses made by the mutual fund annually, including the operating expenses and the management
fees, distribution and marketing fees, transfer agent fees, custodian fees and audit fees. 24
Example of calculation of NAV
As an example, assume there are two investors X and Y who have invested in a mutual fund which
decided to issue out units at Rs 1/-
X invests Rs 100/- and Y invests Rs 200/-.
The total corpus of the mutual fund will be Rs 100 + Rs 200 = Rs 300/- and X will get 100 units and
Y will get 200 units.
Now suppose the mutual fund manager invests smartly over a year and makes the investment grow
and the corpus becomes Rs 800/-.
The NAV will be calculated as
NAV of a mutual funds = (Assets of the fund – Liabilities of the fund)
Number of outstanding units of the fund
= [Rs 800/- 0] / 300 = 2.67
= The NAV is 2.67.
= So X’s value of investments will be 100 units * 2.67 = Rs 267/- and
= Y’s value of investments will be 200 units * 2.67 = Rs 534/-.
As per the regulator SEBI’s guidelines, all mutual funds are required to publish the NAV of their
schemes at least once a week and in two leading newspapers.
SBI MUTUAL FUNDS SCHEME

S.No NAME OF SCHEMES CATEGORY Latest NAV 1 Year AUM(Rs CR)

Return(%)
MARCH

1. SBI Balanced Fund - Direct (G) Balanced 131.67 15.3 961.72

2. SBI Arbitrage Oppor. - Direct (G)

3. SBI Gold Fund (G)

4. SBI Gold Fund - Direct (G)

5. SBI Tax Advantage (G)

SBI Balanced Fund - Direct (G)-

Overview

Investment Objective
To provide investors long term capital appreciation along with the liquidity of an open-ended scheme by
investing in a mix of debt and equity. The scheme will invest in a diversified portfolio of equities of high
growth companies and balance the risk through investing the rest in a relatively safe portfolio of debt.

Scheme details

Fund Type Open-Ended

Investment Plan Growth

Launch date Jan 01, 2013

Benchmark CRISIL Balance Fund

Asset Size Rs 961.72 cr (Avg. AUM for qtr Jan-Mar '18)

Minimum Investment Rs.1000

Last Dividend N.A.

Bonus N.A.
Fund Manager R. Srinivasan / Dinesh Ahuja

SBI BALANCED FUND DIRECT

 Risk Measures (%) Mean Std Dev Sharpe Beta Alpha

Fund 9.51 0.76 0.80 4.60

10.21
VR Balanced 10.77 0.31 - -
6.27
Category 9.11 0.65 0.77 2.99
8.48
Rank within Category 35 23 33 17
21
Number of funds in category 80 80 80 80 80

S.No NAME OF SCHEMES CATEGORY Latest NAV 1 Year AUM(Rs CR)

Return(%)
MARCH

1. HDFC Balanced Fund - Direct (G) Balanced 131.67 15.3 961.72

2. HDFC Arbitrage Fund - Direct (G)

3. HDFC Gold Fund (G)

4. HDFC Gold Fund - Direct (G)

5. HDFC Tax Saver (G)

HDFC Balanced Fund

Overview

Investment Objective
To generate capital appreciation along with current income from a combined portfolio of equity & equity-
related and debt & money market instruments.

Scheme details

Fund Type Open-Ended

Investment Plan Growth

Launch date Sep 11, 2000

Benchmark CRISIL Balance Fund

Asset Size Rs 16,886.60 cr (Avg. AUM for qtr Jan-Mar '18)

Minimum Investment Rs.5000

Last Dividend N.A.

Bonus N.A.
Fund Manager Chirag Setalvad

Risk Measures (%) Mean Std Dev Sharpe Beta Alpha

Fund 10.74 10.43 0.75 0.92 4.73

VR Balanced 6.27 10.77 0.31 - -

Category 8.48 9.11 0.65 0.77 2.99

Rank within Category 14 50 30 54 16
Number of funds in category 80 80 80 80 80

Comparison

1. SBI-BF-The fund maintains a steady-state equity-debt mix. The equity part is

multi-cap, with a higher exposure to mid-cap stocks than that of the peers. The
portfolio over time has featured a 68-70 per cent equity portion, with the rest in
debt. Large caps make up about 50-55 per cent the equity portion. The fund
invests in a mix of both defensives and cyclicals.
HDFC-BF- The aim is to purchase reasonable quality businesses, with the
ability to deliver growth and with good ROE, management quality and business
dynamics, at sensible valuations. While the equity portion is aggressively
managed to make the most of bull markets, the debt portion is conservatively
managed. It features mainly sovereign and money-market allocations, with
marginal corporate exposure
4. SBI-BF-In the debt portion, the fund invests both in G-secs and corporate bonds for higher
accrual income. The corporate exposure does feature some AA minus bonds, though the major
chunk is in AAA and gilts. The fund rebalances on a daily basis and caps cash calls at 7.5 per
cent.
 HDFC-BF- The fund avoids both cash calls and drastic changes in allocation with market swings.
SBI-BF The fund has kept ahead of both the benchmark and the peers over three and five years, beating
the index by 5-6 percentage points and peers by 1-3 percentage points. Trailing one-year returns though
have lagged behind the benchmark and category returns marginally. The fund's long track record
suggests that this fund has been a big outperformer in bull markets but trailed the indices in bear phases,
with the NAV taking a sharp knock in 2008 and 2011. But the change in strategy could help it weather
bear phases better now. This is an aggressive balanced fund meant for risk takers.
HDFC-BF- The fund's three- and five-year returns are 6-7 percentage points ahead of the benchmark and
nearly 3 percentage points better than the category returns. The fund's mid- and small-cap tilt is likely to
have helped performance in this phase, given that large-cap returns have trailed mid-cap returns. But the
fund has toned down the mid-cap allocations in the last couple of years. From more than half of the equity
portion, mid- and small-cap exposure fell to 36 per cent by May 2017. The fund's ten-year record is quite
comparable to pure equity funds. Despite its aggression, the fund has contained downside well in the
bear markets of 2011 and 2008 relative to its peers.