Anitha HDFC

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INDUSTRY PROFILE

A bank is a financial institution licensed by a government. Its primary activities include

borrowing and lending money. Many other financial activities were allowed over time.

For example banks are important players in financial markets and offer financial services

such as investment funds. In some countries such as Germany, banks have historically

owned major stakes in industrial corporations while in other countries such as the United

States banks are prohibited from owning non-financial companies. In Japan, banks are

usually the nexus of a cross-share holding entity known as the zaibatsu. In France, bank

assurance is prevalent, as most banks offer insurance services (and now real estate

services) to their clients.

The level of government regulation of the banking industry varies widely, with countries

such as Iceland, the United Kingdom and the United States having relatively light

regulation of the banking sector, and countries such as China having relatively heavier

regulation (including stricter regulations regarding the level of reserves).

Origin of the word

The name bank is derived from the Italian word banco "desk/bench", used during the

Renaissance by Florentine bankers, who used to make their transactions above a desk

covered by a green tablecloth. However, there are traces of banking activity even in

ancient times.

In fact, the word traces its origins back to the Ancient Roman Empire, where

moneylenders would set up their stalls in the middle of enclosed courtyards called

macella on a long bench called a bancu, from which the words banco and bank are

derived. As a moneychanger, the merchant at the bancu did not so much invest money as

merely convert the foreign currency into the only legal tender in Romethat of the

Imperial Mint.


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Traditional Banking Activities

Banks act as payment agents by conducting checking or Current Accounts for customers,

paying cheques drawn by customers on the bank, and collecting cheques deposited to

customers' current accounts. Banks also enable customer payments via other payment

methods such as telegraphic transfer, EFTPOS, and ATM.

Banks borrow money by accepting funds deposited on current accounts, by accepting

term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend

money by making advances to customers on current accounts, by making installment

loans, and by investing in marketable debt securities and other forms of money lending.

Banks provide almost all payment services, and a bank account is considered

indispensable by most businesses, individuals and governments. Non-banks that provide

payment services such as remittance companies are not normally considered an adequate

substitute for having a bank account.

Banks borrow most funds from households and non-financial businesses, and lend most

funds to households and non-financial businesses, but non-bank lenders provide a

significant and in many cases adequate substitute for bank loans, and money market

funds, cash management trusts and other non-bank financial institutions in many cases

provide an adequate substitute to banks for lending savings to

Definition

Under English Common Law, a banker is defined as a person who carries on the business

of banking, which is specified as:

Conducting current accounts for his customers

Paying cheques drawn on him, and

Collecting cheques for his customers.


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In most English Common Law jurisdictions there is a Bills of Exchange Act that codifies

the law in relation to negotiable instruments, including cheques, and this Act contains a

statutory definition of the term banker: banker includes a body of persons, whether

incorporated or not, who carry on the business of banking' (Section 2, Interpretation).Although this definition seems circular, it is actually functional, because it ensures that

the legal basis for bank transactions such as cheques do not depend on how the bank is

organised or regulated.

"Banking Business" means the business of receiving money on current or deposit

account, paying and collecting cheques drawn by or paid in by customers, the making of

advances to customers, and includes such other business as the Authority may prescribe

for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).

"Banking Business" means the business of either or both of the following:

1. receiving from the general public money on current, deposit, savings or other

similar account repayable on demand or within less than [3 months] ... or with a

period of call or notice of less than that period;

2. paying or collecting cheques drawn by or paid in by customers

Economic Functions

The economic functions of banks include:

1. Issue of money, in the form of banknotes and current accounts subject to cheque

or payment at the customer's order. These claims on banks can act as money

because they are negotiable and/or repayable on demand, and hence valued at par.

They are effectively transferable by mere delivery, in the case of banknotes, or by

drawing a cheque that the payee may bank or cash.

2. Netting and settlement of payments banks act as both collection and paying

agents for customers, participating in interbank clearing and settlement systems to


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collect, present, be presented with, and pay payment instruments. This enables

banks to economies on reserves held for settlement of payments, since inward and

outward payments offset each other. It also enables the offsetting of payment

flows between geographical areas, reducing the cost of settlement between them.3. credit intermediation banks borrow and lend back-to-back on their own account

as middle men

4. Credit quality improvement banks lend money to ordinary commercial and

personal borrowers (ordinary credit quality), but are high quality borrowers. The

improvement comes from diversification of the bank's assets and capital which

provides a buffer to absorb losses without defaulting on its obligations. However,

banknotes and deposits are generally unsecured; if the bank gets into difficulty and

pledges assets as security, to rise the funding it needs to continue to operate, this

puts the note holders and depositors in an economically subordinated position.

5. Maturity Transformation banks borrow more on demand debt and short term

debt, but provide more long term loans. In other words, they borrow short and lend

long. With a stronger credit quality than most other borrowers, banks can do this

by aggregating issues (e.g. accepting deposits and issuing banknotes) and

redemptions (e.g. withdrawals and redemptions of banknotes), maintaining

reserves of cash, investing in marketable securities that can be readily converted to

cash if needed, and raising replacement funding as needed from various sources

(e.g. wholesale cash markets and securities markets)

Banking in India

Banking in India originated in the last decades of the 18th century. The oldest bank in

existence in India is the State Bank of India, a government-owned bank that traces its

origins back to June 1806 and that is the largest commercial bank in the country. Central

banking is the responsibility of the Reserve Bank of India, which in 1935 formally took

over these responsibilities from the then Imperial Bank of India, relegating it to


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commercial banking functions. After India's independence in 1947, the Reserve Bank

was nationalized and given broader powers. In 1969 the government nationalized the 14

largest commercial banks; the government nationalized the six next largest in 1980.

Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks

(that is with the Government of India holding a stake), 31 private banks (these do not

have government stake; they may be publicly listed and traded on stock exchanges) and

38 foreign banks. They have a combined network of over 53,000 branches and 17,000

ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks

hold over 75 percent of total assets of the banking industry, with the private and foreign

banks holding 18.2% and 6.5% respectively

Early history

Banking in India originated in the last decades of the 18th century. The first banks were

The General Bank of India which started in 1786, and the Bank of Hindustan, both of

which are now defunct. The oldest bank in existence in India is the State Bank of India,

which originated in the Bank of Calcutta in June 1806, which almost immediately

became the Bank of Bengal. This was one of the three presidency banks, the other two

being the Bank of Bombay and the Bank of Madras, all three of which were established

under charters from the British East India Company. For many years the Presidency

banks acted as quasi-central banks, as did their successors. The three banks merged in

1925 to form the Imperial Bank of India, which, upon India's independence, became the

State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 asa consequence of the economic crisis of 1848-49. The Allahabad Bank, established in

1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the

first though. That honor belongs to the Bank of Upper India, which was established in


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1863, and which survived until 1913, when it failed, with some of its assets and liabilities

being transferred to the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the

Confederate States, promoters opened banks to finance trading in Indian cotton. With

large exposure to speculative ventures, most of the banks opened in India during that

period failed. The depositors lost money and lost interest in keeping deposits with banks.

Subsequently, banking in India remained the exclusive domain of Europeans for next

several decades until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoires

d Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in

1862; branches in Madra and Pondichery, then a French colony, followed. HSBC

established itself in Bengal in 1869. Calcutta was the most active trading port in India,

mainly due to the trade of the British Empire, and so became a banking center.

The Bank of Bengal, which later became the State Bank of India.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in

1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established

in Lahore in 1895, which has survived to the present and is now one of the largest banks

in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative

period of stability. Around five decades had elapsed since the Indian Mutiny, and the

social, industrial and other infrastructure had improved. Indians had established small

banks, most of which served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange

banks and a number of Indian joint stock banks. All these banks operated in different

segments of the economy. The exchange banks, mostly owned by Europeans,


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concentrated on financing foreign trade. Indian joint stock banks were generally

undercapitalized and lacked the experience and maturity to compete with the presidency

and exchange banks. This segmentation let Lord Curzon to observe, "In respect of

banking it seems we are behind the times. We are like some old fashioned sailing ship,divided by solid wooden bulkheads into separate and cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the

Swedeshi movement. The Swadeshi movement inspired local businessmen and political

figures to found banks of and for the Indian community. A number of banks established

then have survived to the present such as Bank of India, Corporation Bank, Indian Bank,

Bank of Baroda, Canara Bank and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks in

Dakshina Kannada and Udupi district which were unified earlier and known by the name

South Canara ( South Kanara ) district. Four nationalised banks started in this district and

also a leading private sector bank. Hence undivided Dakshina Kannada district is known

as "Cradle of Indian Banking".

From World War I to Independence

The period during the Fist World War (1914-1918) through the end of the Second World

War (1939-1945), and two years thereafter until the Independence of India were

challenging for Indian banking. The years of the First World War were turbulent, and it

took its toll with banks simply collapsing despite the Indian Economy gaining indirect

boost due to war-related economic activities. At least 94 banks in India failed between

1913 and 1918 as indicated in the following table:


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YearsNumber of banks

that failed

Authorized capital

(Rs. Lakhs)

Paid-up Capital

(Rs. Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

Post-Independence

The partition of India in 1947 adversely impacted the economies of Punjab and West

Bengal, paralyzing banking activities for months. India's independence marked the end of

a regime of the Laissez-faire for the Indian banking. The Government of India initiated

measures to play an active role in the economic life of the nation, and the Industrial

Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This

resulted into greater involvement of the state in different segments of the economy

including banking and finance. The major steps to regulate banking included:

In 1948, the Reserve Bank of India, India's central banking authority, was

nationalized, and it became an institution owned by the Government of India.


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In 1949, the Banking Regulation Act was enacted which empowered the Reserve

Bank of India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an

existing bank could be opened without a license from the RBI, and no two bankscould have common directors.

However, despite these provisions, control and regulations, banks in India except the

State Bank of India, continued to be owned and operated by private persons. This

changed with the nationalisation of major banks in India on 19 July, 1969.

Nationalisation

By the 1960s, the Indian banking industry has become an important tool to facilitate the

development of the Indian economy. At the same time, it has emerged as a large

employer, and a debate has ensued about the possibility to nationalise the banking

industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the

GOI in the annual conference of the All India Congress Meeting in a paper entitled

"Stray thoughts on Bank Nationalisation." The paper was received with positive

enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance

and nationalized the 14 largest commercial banks with effect from the midnight of July

19, 1969. Jayaprakash Narayam, a national leader of India, described the step as a

"masterstroke of political sagacity."Within two weeks of the issue of the ordinance, the

Paliament passed the Banking Companies (Acquisition and Transfer of Undertaking)

Bill, and it received the presidential approval on 9 August, 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. Thestated reason for the nationalization was to give the government more control of credit

delivery. With the second dose of nationalization, the GOI controlled around 91% of the

banking business of India. Later on, in the year 1993, the government merged New Bank

of India with Punjab National Bank. It was the only merger between nationalized banks


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and resulted in the reduction of the number of nationalised banks from 20 to 19. After

this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the

average growth rate of the Indian economy.

The nationalised banks were credited by some; including Home minister P.

Chidambaram, to have helped the Indian economy withstand the global financial crisis of

2007-2009.

Liberalisation

In the early 1990s, the then Shri Narsimha Rao government embarked on a policy of

liberalization, licensing a small number of private banks. These came to be known asNew Generation tech-savvy banks, and included Global Trust Bank (the first of such new

generation banks to be set up), which later amalgamated with Oriental Bank of

Commerce, Axis Bank (earlier as UTI Bank), ICICI Bank and HDFC Bank. This move,

along with the rapid growth in the economy of India, revitalized the banking sector in

India, which has seen rapid growth with strong contribution from all the three sectors of

banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the

norms for Foreign Direct Investment, where all Foreign Investors in banks may be given

voting rights which could exceed the present cap of 10%, at present it has gone up to 49%

with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time,

were used to the 4-6-4 method (Borrow at 4%; Lend at 6%;Go home at 4) of functioning.

The new wave ushered in a modern outlook and tech-savvy methods of working for

traditional banks.All this led to the retail boom in India. People not just demanded more

from their banks but also received more.


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Currently (2007), banking in India is generally fairly mature in terms of supply, product

range and reach-even though reach in rural India still remains a challenge for the private

sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks

are considered to have clean, strong and transparent balance sheets relative to other banksin comparable economies in its region. The Reserve Bank of India is an autonomous

body, with minimal pressure from the government. The stated policy of the Bank on the

Indian Rupee is to manage volatility but without any fixed exchange rate-and this has

mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail

banking, mortgages and investment services are expected to be strong. One may also

expect M&A, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake

in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor

has been allowed to hold more than 5% in a private sector bank since the RBI announced

norms in 2005 that any stake exceeding 5% in the private sector banks would need to be

vetted by them.

In recent years critics have charged that the non-government owned banks are too

aggressive in their loan recovery efforts in connection with housing, vehicle and personal

loans. There are press reports that the banks' loan recovery efforts have driven defaulting

borrowers to suicide.


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COMPANY PROFILE

The Housing Development Finance Corporation Limited (HDFC) was amongst the first

to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a

bank in the private sector, as part of the RBI's liberalisation of the Indian Banking

Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank

Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations

as a Scheduled Commercial Bank in January 1995.

HDFC is India's premier housing finance company and enjoys an impeccable track

record in India as well as in international markets. Since its inception in 1977, the

Corporation has maintained a consistent and healthy growth in its operations to remain

the market leader in mortgages. Its outstanding loan portfolio covers well over a million

dwelling units. HDFC has developed significant expertise in retail mortgage loans to

different market segments and also has a large corporate client base for its housing

related credit facilities. With its experience in the financial markets, a strong market

reputation, large shareholder base and unique consumer franchise, HDFC was ideally

positioned to promote a bank in the Indian environment.

HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to

build sound customer franchises across distinct businesses so as to be the preferred

provider of banking services for target retail and wholesale customer segments, and to

achieve healthy growth in profitability, consistent with the bank's risk appetite. The bank

is committed to maintain the highest level of ethical standards, professional integrity,corporate governance and regulatory compliance. HDFC Bank's business philosophy is

based on four core values - Operational Excellence, Customer Focus, Product Leadership

and People.


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Capital Structure

As on 31st March, 2009 the authorised share capital of HDFC Bank is Rs. 550

crore. The paid-up capital as on the said date is Rs. 425, 38, 41,090/- (42, 53, 84,109

equity shares of Rs 10/- each). The HDFC Group holds 19.38% of the Bank's equity andabout 17.70 % of the equity is held by the ADS Depository (in respect of the bank's

American Depository Shares (ADS) Issue). 27.69 % of the equity is held by Foreign

Institutional Investors (FIIs) and the Bank has about 5, 48,774 shareholders.

The shares are listed on the Bombay Stock Exchange Limited, and The National

Stock Exchange of India Limited. The Bank's American Depository Shares (ADS) are

listed on the New York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's

Global Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange under

ISIN No US40415F2002.

On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC

Bank was formally approved by Reserve Bank of India to complete the statutory and

regulatory approval process. As per the scheme of amalgamation, shareholders of CBoP

received 1 share of HDFC Bank for every 29 shares of CBoP.

The merged entity will have a strong deposit base of around Rs. 1, 22,000 crore

and net advances of around Rs. 89,000 crore. The balance sheet size of the combined

entity would be over Rs. 1, 63,000 crore. The amalgamation added significant value to

HDFC Bank in terms of increased branch network, geographic reach, and customer base,

and a bigger pool of skilled manpower.

In a milestone transaction in the Indian banking industry, Times Bank Limited

(another new private sector bank promoted by Bennett, Coleman & Co. / Times Group)

was merged with HDFC Bank Ltd., effective February 26, 2000. This was the first

merger of two private banks in the New Generation Private Sector Banks. As per the


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scheme of amalgamation approved by the shareholders of both banks and the Reserve

Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every

5.75 shares of Times Bank.

HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable

network of over 1416 branches spread over 550 cities across India. All branches are

linked on an online real-time basis. Customers in over 500 locations are also serviced

through Telephone Banking. The Bank's expansion plans take into account the need to

have a presence in all major industrial and commercial centres where its corporate

customers are located as well as the need to build a strong retail customer base for both

deposits and loan products. Being a clearing/settlement bank to various leading stock

exchanges, the Bank has branches in the centres where the NSE/BSE has a strong and

active member base.

The Bank also has a network of about over 3382 networked ATMs across these

cities. Moreover, HDFC Bank's ATM network can be accessed by all domestic and

international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American Express

Credit/Charge cardholders.

Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this,

Mr. Capoor was a Deputy Governor of the Reserve Bank of India.

The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25

years and before joining HDFC Bank in 1994 was heading Citibank's operations in

Malaysia.

The Bank's Board of Directors is composed of eminent individuals with a wealth

of experience in public policy, administration, industry and commercial banking. Senior

executives representing HDFC are also on the Board.


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Senior banking professionals with substantial experience in India and abroad head

various businesses and functions and report to the Managing Director. Given the

professional expertise of the management team and the overall focus on recruiting and

retaining the best talent in the industry, the bank believes that its people are a significantcompetitive strength.

HDFC Bank operates in a highly automated environment in terms of information

technology and communication systems. All the bank's branches have online

connectivity, which enables the bank to offer speedy funds transfer facilities to its

customers. Multi-branch access is also provided to retail customers through the branch

network and Automated Teller Machines (ATMs).

The Bank has made substantial efforts and investments in acquiring the best

technology available internationally, to build the infrastructure for a world class bank.

The Bank's business is supported by scalable and robust systems which ensure that our

clients always get the finest services we offer.

The Bank has prioritised its engagement in technology and the internet as one of

its key goals and has already made significant progress in web-enabling its core

businesses. In each of its businesses, the Bank has succeeded in leveraging its market

position, expertise and technology to create a competitive advantage and build market

share.

HDFC Bank offers a wide range of commercial and transactional banking services

and treasury products to wholesale and retail customers. The bank has three key business

segments:


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Wholesale Banking Services

The Bank's target market ranges from large, blue-chip manufacturing companies

in the Indian corporate to small & mid-sized corporate and agri-based businesses. For

these customers, the Bank provides a wide range of commercial and transactionalbanking services, including working capital finance, trade services, transactional services,

cash management, etc. The bank is also a leading provider of structured solutions, which

combine cash management services with vendor and distributor finance for facilitating

superior supply chain management for its corporate customers. Based on its superior

product delivery / service levels and strong customer orientation, the Bank has made

significant inroads into the banking consortia of a number of leading Indian corporate

including multinationals, companies from the domestic business houses and prime public

sector companies. It is recognised as a leading provider of cash management and

transactional banking solutions to corporate customers, mutual funds, stock exchange

members and banks.

Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full

range of financial products and banking services, giving the customer a one-stop window

for all his/her banking requirements. The products are backed by world-class service and

delivered to customers through the growing branch network, as well as through

alternative delivery channels like ATMs, Phone Banking, NetBanking and Mobile

Banking.

The HDFC Bank Preferred program for high net worth individuals, the HDFC

Bank Plus and the Investment Advisory Services programs have been designed keeping

in mind needs of customers who seek distinct financial solutions, information and advice

on various investment avenues. The Bank also has a wide array of retail loan products

including Auto Loans, Loans against marketable securities, Personal Loans and Loans for

Two-wheelers. It is also a leading provider of Depository Participant (DP) services for


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retail customers, providing customers the facility to hold their investments in electronic

form.

HDFC Bank was the first bank in India to launch an International Debit Card inassociation with VISA (VISA Electron) and issues the Mastercard Maestro debit card as

well. The Bank launched its credit card business in late 2001. By March 2009, the bank

had a total card base (debit and credit cards) of over 13 million. The Bank is also one of

the leading players in the merchant acquiring business with over 70,000 Point-of-sale

(POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank

is well positioned as a leader in various net based B2C opportunities including a wide

range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc.

Treasury

Within this business, the bank has three main product areas - Foreign Exchange

and Derivatives, Local Currency Money Market & Debt Securities, and Equities. With

the liberalisation of the financial markets in India, corporates need more sophisticated

risk management information, advice and product structures. These and fine pricing on

various treasury products are provided through the bank's Treasury team. To comply with

statutory reserve requirements, the bank is required to hold 25% of its deposits in

government securities. The Treasury business is responsible for managing the returns and

market risk on this investment portfolio.

Credit Rating

The Bank has its deposit programs rated by two rating agencies - Credit Analysis

& Research Limited (CARE) and Fitch Ratings India Private Limited. The Bank's Fixed

Deposit programme has been rated 'CARE AAA (FD)' [Triple A] by CARE, which

represents instruments considered to be "of the best quality, carrying negligible

investment risk". CARE has also rated the bank's Certificate of Deposit (CD) programme

"PR 1+" which represents "superior capacity for repayment of short term promissory


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obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned

the "AAA ( ind )" rating to the Bank's deposit programme, with the outlook on the rating

as "stable". This rating indicates "highest credit quality" where "protection factors are

very high"

The Bank also has its long term unsecured, subordinated (Tier II) Bonds rated by CARE

and Fitch Ratings India Private Limited and its Tier I perpetual Bonds and Upper Tier II

Bonds rated by CARE and CRISIL Ltd. CARE has assigned the rating of "CARE AAA"

for the subordinated Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the

rating "AAA (ind)" with the outlook on the rating as "stable". CARE has also assigned

"CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II bond issues.

CRISIL has assigned the rating "AAA / Stable" for the Bank's Perpetual Debt programme

and Upper Tier II Bond issue. In each of the cases referred to above, the ratings awarded

were the highest assigned by the rating agency for those instruments.

Corporate Governance Rating

The bank was one of the first four companies, which subjected itself to a Corporate

Governance and Value Creation (GVC) rating by the rating agency, The Credit Rating

Information Services of India Limited (CRISIL). The rating provides an independent

assessment of an entity's current performance and an expectation on its "balanced value

creation and corporate governance practices" in future. The bank has been assigned a

'CRISIL GVC Level 1' rating which indicates that the bank's capability with respect to

wealth creation for all its stakeholders while adopting sound corporate governance

practices is the highest.

HDFC Bank began operations in 1995 with a simple mission: to be a "World-

class Indian Bank". We realised that only a single-minded focus on product quality and

service excellence would help us get there. Today, we are proud to say that we are well

on our way towards that goal.

It is extremely gratifying that our efforts towards providing customer convenience have

been appreciated both nationally and internationally.


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Credit Rating

The Bank has its deposit programs rated by two rating agencies - Credit Analysis

& Research Limited (CARE) and Fitch Ratings India Private Limited. The Bank's Fixed

Deposit programme has been rated 'CARE AAA (FD)' [Triple A] by CARE, whichrepresents instruments considered to be "of the best quality, carrying negligible

investment risk". CARE has also rated the bank's Certificate of Deposit (CD) programme

"PR 1+" which represents "superior capacity for repayment of short term promissory

obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned

the "AAA ( ind )" rating to the Bank's deposit programme, with the outlook on the rating

as "stable". This rating indicates "highest credit quality" where "protection factors are

very high"

The Bank also has its long term unsecured, subordinated (Tier II) Bonds rated by

CARE and Fitch Ratings India Private Limited and its Tier I perpetual Bonds and Upper

Tier II Bonds rated by CARE and CRISIL Ltd. CARE has assigned the rating of "CARE

AAA" for the subordinated Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned

the rating "AAA (ind)" with the outlook on the rating as "stable". CARE has also

assigned "CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II bond

issues. CRISIL has assigned the rating "AAA / Stable" for the Bank's Perpetual Debt

programme and Upper Tier II Bond issue. In each of the cases referred to above, the

ratings awarded were the highest assigned by the rating agency for those instruments?


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Awards and Achievements Banking Services

HDFC Bank began operations in 1995 with a simple mission: to be a "World-

class Indian Bank". We realised that only a single-minded focus on product quality and

service excellence would help us get there. Today, we are proud to say that we are wellon our way towards that goal.

It is extremely gratifying that our efforts towards providing customer convenience have

been appreciated both nationally and internationally.

2009

Euromoney Awards 2009 'Best Bank in India'

Economic Times Brand Equity & Nielsen

Research annual survey 2009

Most Trusted Brand - Runner Up

Asia Money 2009 Awards 'Best Domestic Bank in India'

IBA Banking Technology 'Best IT Governance Award - Runner

up'

Global Finance Award 'Best Trade Finance Bank in India for

2009

IDRBT Banking Technology Excellence

Award 2008

'Best IT Governance and Value Delivery'

Asian Banker Excellence in Retail

Financial Services

'Asian Banker Best Retail Bank in India

Award 2009 '
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2008

Finance Asia Country Awards for

Achievement 2008

'Best Bank and Best Cash Management

Bank'CNN-IBN 'Indian of the Year (Business)'

Nasscom IT User Award 2008 'Best IT Adoption in the Banking Sector'

Business India 'Best Bank 2008'

Forbes Asia Fab 50 companies in Asia Pacific

Asian Banker Excellence in Retail

Financial Services

Best Retail Bank 2008

Asiamoney Best local Cash Management Bank

Award voted by Corporate

Microsoft & Indian Express Group Security Strategist Award 2008World Trade Center Award of honour For outstanding contribution to

international trade services.

Business Today-Monitor Group survey One of India's "Most Innovative

Companies"

Financial Express-Ernst & Young Award Best Bank Award in the Private Sector

category

Global HR Excellence Awards - Asia

Pacific HRM Congress:

'Employer Brand of the Year 2007 -2008'

Award - First Runner up, & many moreAsian Banker 'Best Bank' Award

We are aware that all these awards are mere milestones in the continuing, never-ending

journey of providing excellent service to our customers. We are confident, however, that

with your feedback and support, we will be able to maintain and improve our services
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Board of Directors

The Composition of the Board of Directors of the Bank is governed by the

Companies Act, 1956, the Banking Regulation Act, 1949 and the listing requirements ofthe Indian Stock Exchanges where securities issued by the Bank are listed. The Board has

strength of 12 Directors as on March 31, 2008. All Directors other than Mr. Aditya Puri,

Mr. Harish Engineer and Mr. Paresh Sukthankar are non-executive directors. The Bank

has five independent directors and six non-independent directors. The Board consists of

eminent persons with considerable professional expertise and experience in banking,

finance, agriculture, small scale industries and other related fields.

None of the Directors on the Board is a member of more than 10 Committees and

Chairman of more than 5 Committees across all the companies in which he/she is a

Director. All the Directors have made necessary disclosures regarding Committee

positions occupied by them in other companies.

- Mr. Jagdish Capoor, Mr. Keki Mistry, Mrs. Renu Karnad, Mr. Aditya Puri, Mr.

Harish Engineer and Mr. Paresh Sukthankar are non-independent Directors on the Board.

- Mr. Arvind Pande, Mr. Ashim Samanta, Mr. Gautam Divan, Mr. C. M. Vasudev

and Dr. Pandit Palande are independent directors on the Board.

- Mr. Keki Mistry and Mrs. Renu Karnad represent HDFC Limited on the Board

of the Bank.

- The Bank has not entered into any materially significant transactions during the

year, which could have a potential conflict of interest between the Bank and its

promoters, directors, management and/or their relatives, etc. other than the transactions

entered into in the normal course of business. The Senior Management have made

disclosures to the Board confirming that there are no material, financial and/or

commercial transactions between them and the Bank which could have potential conflict

of interest with the Bank at large.


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Mission and Business Strategy

Our mission is to be "a World Class Indian Bank", benchmarking ourselves against

international standards and best practices in terms of product offerings, technology,service levels, risk management and audit & compliance. The objective is to build sound

customer franchises across distinct businesses so as to be a preferred provider of banking

services for target retail and wholesale customer segments, and to achieve a healthy

growth in profitability, consistent with the Bank's risk appetite. We are committed to do

this while ensuring the highest levels of ethical standards, professional integrity,

corporate governance and regulatory compliance.

Our business strategy emphasizes the following :

1. Increase our market share in Indias expanding banking and financial services

industry by following a disciplined growth strategy focusing on quality and not on

quantity and delivering high quality customer service.

2. Leverage our technology platform and open scaleable systems to deliver more

products to more customers and to control operating costs

3. Maintain our current high standards for asset quality through disciplined credit

risk management.

4. Develop innovative products and services that attract our targeted customers and

address inefficiencies in the Indian financial sector.

5. Continue to develop products and services that reduce our cost of funds.

6. Focus on high earnings growth with low volatility.


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RESEARCH DESIGN

NEED FOR THE STUDY

In the changing complex business scenario, one has to update

the information and review their present status against competitors. It

is assumed that the investors show more dynamism while investing

money. This study would certainly help both the researcher as well as

the investor to assess the present status of company performance. It

gives more information to researcher about which investment is better

to pool their money. Thus the company can use data, provided by the

researcher in planning and controlling financial efforts in future. The

study is very much needed to prepare comparative charts of various

investment distributions.


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OBJECTIVES OF STUDY

1) The main objective of the study is to find out which mutual fund

scheme is performing well in debt equity fund and hybrid fund

category.

2) To study, why the public concentration has taken paradigm shift

on to stock market, particularly in mutual fund sector.

3) To study the reasons of security seeking people to prefer mutual

funds.

4) To study influencing factor behind the employees are choosing

Equity linked Tax saving scheme rather than paying Income Tax.


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SCOPE OF THE STUDY

The scope of the study is limited. The main objective of the study

is to analyze the performance of mutual funds schemes with special

reference to HDFC Mutual Funds.

The project is aimed to know the portfolio of Debt fund, Equity

fund, and hybrid funds of mutual fund schemes. It is limited to these

three schemes with special reference to HDFC Mutual Funds. This

project will be helpful to the company is measuring the performance of

mutual funds. This study the company can make the demonstration

easy to the investor; to compare various mutual funds and select the

better to invest their money and company may assess risk and return

of money. Only few factors are considered keeping in mind that time

and other constraints. The study would help the researcher and

academician to understand the practical aspects of mutual fund

management.


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RESEARCH METHODOLOGY

The researcher has to decide both the primary and secondary

data which is suitable for Research study.

Primary Data: - The data which are collected for first time by

researcher through observation and interaction with concerned

executives.

Secondary data: - The research study has been based on secondary

data. To gain an overview of the current trends of the Indian Mutual

fund industry and also to identify which scheme is performing better

secondary Data has been an important source and collected from the

Internet, various asset management companys (AMC) fact sheets, etc.


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LIMITATIONS

1. This analysis is limited to certain mutual fund schemes, which are

selected from the AMFI.

2. The data is collected from HDFC Mutual Funds and the data so

collected is analyzed and charts are prepared.

3. The secondary data is collected from different mutual fund

companies broachers, internet and magazines.

4. The data collected is not static. It is fluctuating. So the figures

arrived are not totally dependable for future investments. All

peripheral factors have to be taken into account while investing

in a particular scheme.


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MUTUAL FUND

It is a fund, managed by an investment company with the financial objective of

generating high Rate of Returns. These asset management or investment management

companies collects money from the investors and invests those money in different

Stocks, Bonds and other financial securities in a diversified manner. Before investing

they carry out thorough research and detailed analysis on the market conditions and

market trends of stock and bond prices. These things help the fund managers to speculate

properly in the right direction. The investors, who invest their money in the Mutual fund

of any Investment Management Company, receive an Equity Position in that particularmutual fund. When after certain period of time, whether long term or short term, the

investors sell the Shares of the Mutual Fund, they receive the return according to the

market conditions.

HISTORY:

The definition of a mutual fund is a form of collective investment that pools

money from many investors and invests their money in stocks, bonds, short-term money

market instruments, and/or other securities. In a mutual fund, the fund manager trades the

funds underlying securities, realizing capital gains or losses, and collects the dividend or

interest income. The investment proceeds are then passed along to the individual

investors. The value of a share of the mutual fund, known as the net asset value per share

(NAV), is calculated daily based on the total value of the fund divided by the number of

shares currently issued and outstanding. Legally known as an open-end company under

the Investment Company Act of 1940 (the primary regulatory statute governing

investment companies), a mutual fund is one of three basic types of investment

companies available in the United States. Outside of the United States (with the exception

of Canada, which follows the U.S. model), mutual fund is a generic term for various

types of collective investment vehicle. In the United Kingdom and western Europe


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(including offshore jurisdictions), other forms of collective investment vehicle are

prevalent, including unit trusts, open-ended investment companies (OEICs), SICAVs and

unitized insurance funds.

In Australia the term mutual fund is generally not used; the name managedfund is used instead. However, managed fund is somewhat generic as the definition of

a managed fund in Australia is any vehicle in which investors money is managed by a

third party (NB: usually an investment professional or organization). Most managed

funds are open-ended (i.e., there is no established maximum number of shares that can be

issued); however, this need not be the case. Additionally the Australian government

introduced a compulsory superannuation/pension scheme which, although strictly

speaking a managed fund, is rarely identified by this term and is instead called a

superannuation fund because of its special tax concessions and restrictions on when

money invested in it can be accessed.

The Unit Trust of India with Rs.44, 541 crores of assets under management was

way ahead of other mutual funds. The modern mutual fund was first introduced in

Belgium in 1822. This form of investment soon spread to Great Britain and France.

Mutual funds became popular in the United States in the 1920s and continue to be

popular since the 1930s, especially open-end mutual funds. Mutual funds experienced a

period of tremendous growth after World War II, especially in the 1980s and 1990s.

Mutual funds really captured the publics attention in the 1980s and 90s when mutual

fund investment hit record highs and investors saw incredible returns. However, the idea

of pooling assets for investment purposes has been around for a long time. Here we look

at the evolution of this investment vehicle, from its beginnings in the Belgium in the

eighteenth century to its present status as a growing, international industry with fund

holdings accounting for trillions of dollars in the United States alone.

The Boston Personal Property Trust, formed in 1893, was the first closed-

end fund in the U.S. The creation of the Alexander Fund in Philadelphia, Pennsylvania, in

1907 was an important step in the evolution toward what we know as the modern mutual


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fund. The Alexander Fund featured semi-annual issues and allowed investors to make

withdrawals on demand. A momentous year in the history of the mutual fund, 1928 also

saw the launch of the Wellington Fund, which was the first mutual fund to include stocks

and bonds, as opposed to direct merchant bank style of investments in business and trade.By 1929, there were 19 open-end mutual funds competing with nearly 700 closed-end

funds. With the stock market crash of 1929, the dynamic began to change as highly

leveraged closed-end funds were wiped out and small open-end funds managed to

survive.

GROWTH IN ASSETS UNDER MANAGEMENT

Fund Basics:

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 invested by the fund manager in

different types of securities depending upon the objective of the scheme. These could

range from shares to debentures to money market instruments. The income earned

through these investments and the capital appreciation realized by the scheme is 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 portfolio at a relatively low cost. The

small savings of all the investors are put together to increase the buying power and hire a

professional manager to invest and monitor the money. Anybody with an invisible

surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual

Fund scheme has a defined investment objective and strategy.

STRUCTURE OF A MUTUAL FUND:

A mutual fund is set up in the form of a trust, which has Sponsor, Trustees, Asset

Management Company (AMC) and a Custodian. The trust is established by a sponsor or

more than one sponsor who is like a promoter of a company. The trustees of the mutual


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fund hold its property for the benefit of the unit-holders. The AMC, approved by SEBI,

manages the funds by making investments in various types of securities. The custodian,

who is registered with SEBI, holds the securities of various schemes of the fund in its

custody. The trustees are vested with the general power of superintendence and directionover AMC. They monitor the performance and compliance of SEBI Regulations by the

mutual fund.

A typical mutual fund structure in India can be graphically represented as follows

SPONSOR:

Sponsor is the person who acting alone or in combination with another body

corporate establishes a mutual fund. Sponsor must contribute at least 40% of the net

worth of the investment Managed and meet the eligibility criteria prescribed under the

Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

The Sponsor is not responsible or liable for any loss or shortfall resulting from the

operation of the Schemes beyond the initial contribution made by it towards setting up of

the Mutual Fund. The Sponsor (or) any of its directors or the principal officer employed


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the SEBI and is required to fulfill specified eligibility criteria. Additionally, a custodian

in which the sponsor or its associates holds 50% or more of the voting rights of the share

capital of the custodian or where 50% or more of the directors of the custodian represent

the interest of the sponsor or its associates cannot act as custodian for a mutual fundconstituted by the same sponsor or any of its associate or subsidiary company.

TRANSFER AGENTS:

Transfer agents are responsible for issuing and redeeming units of the mutual fund

and provide other related services such as preparation of transfer documents and updating

investor records. A fund may choose to carry out this activity in-house and charge the

scheme for the service at a competitive market rate. Where an outside Transfer Agent is

used, the fund investor will find the agent to be an important interface to deal with, since

all of the investor services that a fund provides (besides the investment management) are

going to be dependent on the transfer agent.

DISTRIBUTORS:

Mutual funds operate as collective investment vehicles, on the principle of

accumulating funds from a large number of investors and then investing on a big scale.

For a fund to sell units across a wide retail base of individual investors, an established

network of distribution agents is essential.

(AMCs usually appoint Distributors or Brokers, who sell units on behalf of the

fund. Some funds even require that all transactions be routed through such brokers. A

sponsor or an associate (or in some cases, an employee) may act as a distributor for the

AMC with which he or she is associated, only if adequate disclosure of such involvement

and the brokerage/commission paid is made to unit-holders.

A broker usually acts on behalf of several mutual funds simultaneously and may

have several sub-brokers under him for the purpose of distribution of units.

In India, besides brokers, independent individuals are appointed as agents for

the purpose of selling the fund schemes to investors. These agents are not brokers in a


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including agencies connected or involved in the field of capital Markets &

financial Services.

To promote high standards of commercial honor & encourage & promote among

members & others the observance of securities laws including regulations &directives issued by Securities & Exchange Board of India (SEBI) & function in

the best of interest of the investing public.

To help in setting up professional standards for providing efficient services &

establishing standard practices for Mutual Fund & Asset Management activities.

To bring about better co-ordination in the field of Mutual Funds & Asset

Management Industry.

To promote & develop sound, progressive & dynamic principles, practices &

conventions in the activities of Mutual Fund & Asset Management.

To render assistance & provide common services & utilities to the persons

engaged in the field of Mutual Funds & Asset Management.

How to Invest In Mutual Funds:

Step one Identify your investment needs:

Your financial goals will vary, based on your age, lifestyle, financial independence,

family commitments, level of income and expenses among many other factors. Therefore,

the first step is to assess your needs. Begin by asking yourself these questions.

1. What are my investment objectives and needs?

Probable Answer: I need regular income or need to buy a home or finance a

wedding or educate my children or a combination of all these needs.


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2. How much risk am I willing to take?

Probable Answer: I can only take a minimum amount of risk or I am willing to

accept the fact that my investment value may fluctuate or that there may be a short-

term loss in order to achieve a long-term potential gain.

3. What are my cash flow requirements?

Probable Answer: I need a regular cash flow or need a lump sum amount to meet a

specific need after a certain period or dont require a current cash flow but I want to build

my assets for the future.

By going through such an exercise, you will know what you want out of

your investment and can set the foundation for a sound mutual fund investment strategy

Step Two Choose the right mutual fund:

Once you have a clear strategy in mind, you now have to choose which mutual

fund and scheme you want to invest in. The offer document of the scheme tells you its

objectives and provides supplementary details like the track record of other schemes

managed by the same fund manager. Some factors to evaluate before choosing a

particular mutual fund are:

The track record of performance over the last few years in relation to the

appropriate yardstick and similar funds in the same category.

How well the mutual fund is organized to provide efficient, prompt and

personalized service.

Degree of transparency as a reflected in frequency and quality of their

communications.


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Step Three Select the ideal mix of schemes:

Investing in just one mutual fund scheme may not meet all your investment needs.

You may consider investing in a combination of schemes to achieve your specific goals.

The following charts could prove useful in selecting a combination of schemes

that satisfy your needs.

Aggressive Plan:

This plan may suit-

Investors in their prime earning years and willing to take more risk.

Investors seeking growth over a long-term.

Moderate Plan:

This plan may suit-

Investors seeking income and moderate growth.

Investors looking for growth and stability with moderate risk.

Conservative Plan:

This plan may suit-

Retired and other investors who need to preserve capital and earn regular

income.

Step Four Invest regularly:

For most of us, the approach that works best is to invest a fixed amount at specific

intervals, say every month. By investing a fixed sum each month, you buy fewer units

when the price is higher and more units when the price is low, thus bringing down your

average cost per unit. This is called rupee cost averaging and is a disciplined investment


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strategy followed by investors all over the world. With many open-ended schemes

offering systematic investment plane, this regular investing habit is made easy for you.

Step Five Keep your taxes in mind:If you are in a high tax bracket and have utilized fully the exemptions under

Section 80L of the Income Tax Act, investing in growth funds that do not pay dividends

might be more tax efficient and improve your post-tax return.

If you are in a low tax bracket and have not utilized fully the exemption available

under Section 80L, selecting funds paying regular income could be more tax efficient.

Further, there are other benefits available for investment in mutual funds under the

provisions of the prevailing tax laws. You may therefore consult your tax adviser or

Chartered Accountant for specific advice.

Step Six The final step:

All you need to do now is to get in touch with a mutual fund or your agent/broker

and start investing. Reap the rewards in the years to come. Mutual funds are suitable for

every kind of investor-whether starting a career or retiring, conservative or risk taking,

growth oriented or income seeking.

ROLE OF MUTUAL FUND

Mutual Funds & Financial Market:

In the process of development Indian mutual funds have emerged as strong

financial intermediaries & are playing a very important role in bringing stability to the

financial system & efficiency to resource allocation. Mutual Funds have opened new

vistas to investors & imparted a much-needed liquidity to the system. In the process they

have challenged the hitherto role of commercial banks in the financial market & national

economy.


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Mutual Fund & Capital Market:

The active involvement of Mutual Funds in promoting economic development can

be seen not only in terms of their participation in the savings market but also in their

dominant presence in the money & capital market. A developed financial market iscritical to overall economic development, & Mutual Funds play an active role in

promoting a healthy capital market. The asset holding pattern of mutual funds in the USA

indicates the dominant role of Mutual Funds in the capital market & money market.

Moreover, they have also rendered critical support to securities mortgage loans &

municipal bond market in the USA. In the USA, Mutual Funds provide very active

support to the secondary market in terms of purchase of securities.

Investors preferences pattern in India has undergone a tremendous change during

recent times, along with the changes in the share of financial assets in the total annual

savings. Indian investors have moved towards more liquid & growth oriented trade able

instruments likes shares/debentures & units of Mutual Funds. The shift is asset holding

pattern of investors has been significantly influenced by the equity & unit culture

while the holders of company shares & debentures are concentrated in the urban areas,

small/medium investors in the semi-urban & rural areas are tending towards Mutual

Funds. Mutual Funds in India have certainly created awareness among investors about

equity oriented investments & its benefits.


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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 marketinstruments such as shares, debentures and other securities. The income earned through

these investments and the capital appreciation 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 broadly the working of a mutual fund:


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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 andsectors 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. 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.

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset

Management Company (AMC) and custodian. The trust is established by a sponsor or

more than one sponsor who is like promoter of a company. The trustees of the mutual

fund hold its property for the benefit of the unit holders. Asset Management Company

(AMC) approved by SEBI manages the funds by making investments in various types of

securities. Custodian, who is registered with SEBI, holds the securities of various

schemes of the fund in its custody. The trustees are vested with the general power of

superintendence and direction over AMC. They monitor the performance and compliance

of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee

company or board of trustees must be independent i.e. they should not be associated with

the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds

are required to be registered with SEBI before they launch any scheme.


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BENEFITS OF MUTUAL FUNDS:

Professional Management:Qualified investment professionals who to maximize returns and minimize risk

monitor investors money. When you buy in to a mutual fund, you are handing your

money to an investment professional that has experience in making investment decisions.

It is the fund managers job (a) find the best securities for the fund, given the funds

stated investment objectives; and (b) keep track of investments and changes in market

conditions and adjust the mix of portfolio, as and when required.

Portfolio Diversification:

It is a nuclear weapon in your arsenal for your fight against risk. It simply means

that you must spread your investment across different securities (stocks, bonds, money

market instruments, real estate etc.) and different sectors (auto, textile, information

technology etc.). This kind of diversification may add to the stability of your returns. For

example during one period of time equities might underperform but bonds and money

market instruments might do well enough to offset the effect of a slump in the equity

markets. Similarly the information technology sector might be faring poorly but the auto

and textile sectors might do well and may protect your principal investment as well as

help you meet your return objectives.

Diversification of Risk:

When an investor invests directly, all the risk of the potential loss is his own,

whether he places a deposit with a company or a bank, or buys a share or debenture on

his own or in any other form. While investing in a pool of funds shared with other

investors, the potential losses are also shared with other investors. This risk reduction is

one of the most important benefits of a collective investment vehicle like the mutual

fund.


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Convenient Administration:

Investing in a Mutual Fund reduces paperwork and helps to avoid many problems

such as bad deliveries, delayed payments and unnecessary follow up with brokers andcompanies. Mutual Funds save time and make investing easy and convenient.

Return Potential:

Over a medium to long-term, Mutual Funds have the potential to provide a higher

return as they invest in a diversified basket of selected securities.

Affordability and Low Costs:

A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending

upon the investment objective of the scheme. An investor can buy in to portfolio of

equities, which would otherwise be extremely expensive. Each unit holder thus gets an

exposure to such portfolios with an investment as modest Rs.500. this amount today

would get you less than quarter of an Infosys share! Thus it would be affordable for an

investor to build a portfolio of investment through a mutual fund rather than investing

directly in the stock market.

Mutual Funds are a relatively less expensive way to invest compared to directly

investing in the capital markets because the benefits of scale in brokerage, custodial and

other fees translate into lower costs for investors.

Liquidity:

In open-ended schemes, Investors can get their money back promptly at net asset

value related prices from the Mutual Fund itself. With close-ended schemes, they can sell

their units on a stock exchange at the prevailing market price or avail of the facility of

direct repurchase at NAV related prices which some close-ended and interval schemes

offer periodically.


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Transparency:

Investors get regular information on the value of their investment in addition to

disclosure on the specific investments made by the scheme, the proportion invested in

each class of assets and the fund managers investment strategy and outlook. This level oftransparency were the investor himself sees the underlying assets bought with his money

is unmatched by any other financial instrument. Thus the investor is in the know of the

quality of portfolio and can invest further or redeem depending on the kind of portfolio

that has been constructed by the investment manager.

Flexibility:

Through features such as regular investment plans, regular withdrawal plans and

dividend reinvestment plans, Investors can systematically invest or withdraw funds

according to their needs and convenience.

Choice of Schemes:

Mutual funds offer a tremendous variety of schemes. This variety is beneficial in

two ways, first it offers different types of schemes to with different needs and risk

appetites: secondly, it offers an opportunity to an investor to invest sums across a variety

of schemes, both debt and equity. For example an investor can invest his money in a

growth fund (equity scheme) and income fund (debt scheme) depending on his risk

appetite and thus create a balanced portfolio easily or just buy a balanced scheme.

Tax Benefits:

In general, investors pay tax on a year-to year basis. So if they were to an income

and then re-invest the income, what they would re-invest is the amount that is available

after paying tax. Mutual fund schemes, on the other hand, do not pay a tax on their

income. So the same earning in a mutual fund scheme could facilitate a higher re-

investment.


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the foundation of your investment program or as a supplement, Mutual Fund schemes can

help you meet your financial goals.

By Structure Schemes can be classified into 3 types

OPEN-ENDED SCHEMES:

These do not have a fixed maturity. Investors deal directly with the Mutual Fund

for their investments and redemptions. The key feature is liquidity. They can

conveniently buy and sell their units at Net Asset Value (NAV) related prices.

CLOSE-ENDED SCHEMES:

Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are

called close-ended schemes. Investors can invest directly in the scheme at the time of the

initial issue and thereafter they can buy or sell the units of the scheme on the stock

exchanges where they are listed. The market price at the stock exchange could vary from

the schemes NAV on account of demand and supply situation, unit holders expectations

and other market factors. One of the characteristics of the close-ended schemes is that

they are generally traded at a discount to NAV; but closer to maturity, the discount

narrows. Some close-ended schemes give them an additional option of selling their units

directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI

Regulations ensure that at least one of the two exit routes is provided to the investor.

INTERVAL SCHEMES:

These combine the features of open-ended and close- ended schemes. They may

be traded on the stock exchange or may be open for sale or redemption during

predetermined intervals at NAV related prices.


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BY INVESTMENT OBJECTIVE:

Growth/Equity Schemes:

Aim to provide capital appreciation over the medium to long term. These schemesnormally invest a majority of their funds in equities and are willing to bear short-term

decline in value for possible future appreciation. These schemes are not for investors

seeking regular income or needing their money back in the short-term.

Income Schemes:

Aim 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:

Aim to provide both growth and income by periodically distributing a part of the

income and capital gains they earn. They invest in both shares and fixed income

securities in the proportion indicated in their offer documents. In a rising stock market,

the NAV of these schemes may not normally keep pace, or fall equally when the market

falls.

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 interbank call money. Returns on these

schemes may fluctuate, depending upon the interest rates prevailing in the market.

Tax Saving Schemes:

These schemes offer tax rebates to the investors under tax laws as prescribed from

time to time. This is made possible because the Government offers tax incentives for


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investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS)

and Pension Schemes. Recent amendments to the Income Tax Act provide further

opportunities to investors to save capital gains by investing in Mutual Funds. The details

of such tax savings are provided in the relevant offer documents.

Special Schemes:

This category includes index schemes that attempt to replicate the performance of

a particular index, such as the BSE Sensex or the NSE 50, or industry specific schemes

(which invest in specific industries) or Sectoral schemes (which invest exclusively in

segments such as A Group shares or initial public offerings). Index fund schemes are

ideal for investors who are satisfied with a return approximately equal to that of an index.

Sectoral fund schemes are ideal for investors who have already decided to invest in a

particular sector or segment. Keeping in mind that any one scheme may not meet all the

investors requirements for all time

RISKS OF INVESTING IN MUTUAL FUNDS:

Risk:

Every type of investment, including mutual funds, involves risk. Risks refer to the

possibility that you will lose money (both principal and any earnings) or fail to make

money on an investment.

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

redeemor callits high-yielding bond before the bonds maturity date.

Country Risk: The possibility that political events (a war, national elections),

financial problems (rising inflation, government default), or natural disasters (an


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earthquake, a poor harvest) will weaken a countrys 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 as exchange-rate risk.

Income Risk: The possibility that a fixed-income funds dividends will declines 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.

Inflation Risk: The possibility that increases in the cost of living will reduce or

eliminate a funds real inflation-adjusted returns.

Interest Rate Risk: The possibility that a bond fund will decline in value because

of an increase in interest rates.

NET ASSET VALUE

Mutual funds most relevant disclosure for investors is NAV.Net asset value is the

mirror, depicting the worth of investment made per unit. NAV is the most sought after

criterion for making decision. The NAV of scheme is an indicator of capital appreciation

of the funds under the scheme as on the date of the NAV.

Definition of NAV:

Net Asset Value, or NAV, is the sum total of the market value of all the shares

held in the portfolio including cash, less the liabilities, divided by the total number of

units outstanding. Thus, NAV of a mutual fund unit is nothing but the book value.


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NAV vs. Price of an equity share:

In case of companies, the price of its share is as quoted on the

stock exchange, which apart from the fundamentals is also dependent on the perceptionof the companys future performance and the demand-supply scenario. And hence the

market price is generally different from its book value.

There is no concept as market value for the MF unit. Therefore,

when we buy MF units at NAV, we are buying at book value. And since we are buying at

book value, we are paying the right price of the assets whether it is Rs 10 or Rs.100.There

is no such thing as a higher or lower price.

NAV and its impact on the returns:

We feel that a MF with lower NAV will give better returns. This

again is due to the wrong perception about NAV. The NAV is calculated by dividing the

aggregate value of the net assets of the scheme by the number of outstanding units under

the scheme. The NAV represent the value of the asset held by the fund, valued

appropriately, by the liabilities and expenses incurred for the management of the scheme

including expenses to cover the duties, taxes and other expenses to cover the deemed

realization of the investment.

NAV formula given by SEBI for calculation is =U

OM )( +

M=Market value of securities/investment trade

O=other asset.

L=Total liabilities

U=Number of units outstanding


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The other formula for calculation of NAV on daily basis is:-

gOutstandinUnitssFund'ofNumber

sLiabilitie-AssetsofValueMarketTotalNAV =

There is hardly any difference in NAV computation of an open-ended or close-

ended scheme.NAV can be calculated on total basis as well as per unit basis.

Valuation system for NAV:

To say the appropriate valuation system for assets is critical one. The listed

securities are valued by some funds as per the closing prices at the stock exchange. Care

is taken to see that in the case of thinly traded shares or newly listed the valuation is fair.

The fixed income securities are valued at cost or on the basis of current yields and

maturity value of comparable instruments. The accrued interest is added in case of these

securities. All the other assets capable of being valued as above are value at book value.

The NAV incorporates both the realized as well as unrealized capital appreciation.

The realized capital joins the income stream. As unrealized capital appreciation is

dependent upon the market prices, in case of listed securities the NAV could also mob up

or down depending upon the market process for underlying securities.Thus, other things being the same, schemes having a regular distribution income

by dividends would have a lower NAV than schemes which accumulate the income and

do not make annual periodic payments. The longer a scheme has run, the more time it

would have to plough back profit an build up reserves and is likely to have a higher NAV

than a recent scheme. Performance of a scheme is reflected is its NAV and not in its

market quote at a given time.

It is also necessary to appreciate that NAV changes when any investment ordisinvestment takes place. Similarly, when dividends and bonus are declared, the scheme

has to resort to premature booking of profits and realize capital appreciation.


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In close ended schemes although investor is free to transact in Stock Exchange his

nits, but what he expects is value near to NAV of the unit. Buying and selling forces

matter a lot. An investor when sells his unit feels satisfies if he realizes value nearer to

NAV. But if realization to seller is below the buyer of unit is at an advantage especially ifhe wishes to retain the units up till redemption of the scheme.

As mentioned fund portfolio is diversified, NAV of a fund is less vulnerable as

compared to change in price of share on account of any development in the share market.

Further, except the growth funds, other fund NAV does no increase as much as

share prices may increase. The percentage of the premium or discount over the NAV

shows how fancied mutual funds are in the market; investors in the mutual funds may be

lost out because the units of various schemes may trade either below par or because the

market price is very low.

Pricing of units and NAV:

SEBI regulations permit mutual funds to provide for the price at which the units

may be subscribed or sold to the independent participants, once initial public offer is

over, in the scheme and the price at which such units may at any time be repurchased by

the mutual fund. Depending upon NAV, the prices may be termed as offer price or

purchase price and bid price, or sale price respectively.

The load is adjusted to NAV to calculate the offer price and bid price. To

calculate these prices there can be many alternatives.

Offer price = NAV per unit + Load Charges

Bid price = NAV per unit Realization

Calculation of sales load cumulative discount:


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With respect to any subsequent purchase of units made by any investor, the sales

load applicable to such subsequent purchase may be based on the aggregate amount of

units held by such investor, including the amount of the subsequent purchase. Thus, for

determining the sales load payable, the following will be aggregated:-

(a) The amount of the investors subsequent purchase &

(b) The aggregate NAV of all units held by the investor.

Is NAV Not Ascertainable or Not Available Value:

Many reasons can be subscribed to such a state of affair but certainly one reason

has been non-reliability or non-validity of NAV as the indicator or worth of mutual

fund scheme. Thus the depicted worth has always been doubled. The reason is ask of uni

forming in valuing assets. The problem is that there are so many accounting practices in

vague, and which are all legally acceptable, thus the NAV of the same mutual fund may

be higher or lower depending upon the amounting pattern utilized.

The major variation is in NAV on account of the factors like value of assets,

whether these are quoted or unquoted, whether these are convertible debenture or money

market instruments. Moreover, should the issue cost of scheme or for that matter front

end fee is to be amortized over the period of fund or to be written off at the start. Further,

what happens when mutual funds do not adopt a valuation policy consistently? All these

queries make NAV a doubtful signed for small investors. Not only valuation method but

even accounting for income & expenses also influence the NAV.

What m

Anitha HDFC

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