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Big Name, Big Performance

HDFC Mutual Fund is a leading light of the mutual fund industry with a full spectrum of products. The combination of a number of performing funds and a strong retail brand should help this AMC stay at the top.

If you have ever applied for a housing loan you would be familiar with the name HDFC (Housing Development Finance Corporation). You may also be banking with HDFC Bank, which is promoted by this premier financial institution. You may also be aware of the insurance company HDFC Standard Life. If you have thought of trading on the Internet, HDFC Securities may have been on your list of online brokerages too.

HDFC is definitely a well-known name in financial services. In the mutual fund business too, HDFC has high recall. And why not? The fund house boasts of a number of top performing equity and debt schemes like HDFC Equity, HDFC Prudence and HDFC Income Fund. These schemes are among the most sought-after names in their respective categories.

The Early Days
HDFC Mutual Fund came into existence in August 2000 when extreme volatility was the order of the day. Equity markets were fluctuating wildly as the excesses of a bull market were coming to an end.

On the debt side, the RBI had unexpectedly increased interest rates and this had thrown debt funds into a tailspin. At this time the fund launched its first batch of products-HDFC Growth Fund, HDFC Balanced and HDFC Income Fund. HDFC Liquid came soon after. The strength of the fund's brand was reflected in the Rs 450 crore it garnered in HDFC Income Fund. This remains the largest mobilisation by an income fund in its IPO till date. The fund's equity and balanced scheme also collected decent amounts.

Initially, HDFC Mutual Fund's growth was driven by the income fund. In its first year, HDFC Income had grown to nearly four times its original size. In subsequent years, the fund has doubled every year to reach Rs 5,474 crore by October 2003. This makes it the largest bond scheme in India. Such is the size of this scheme that it alone exceeds the total assets of the eighth largest fund house.

But what is more relevant for investors is the performance. The fund has been an above average performer and found a place in the second quartile of its category both in 2001 and 2002. The fund's year-to-date returns of 7.3 per cent once again place it in the second quartile. Going forward the fund's size could be a positive for it. A larger fund will have greater negotiating power when dealing with issuers of corporate bonds and should be able to get better rates. As funds will have to rely more on corporate bonds (as compared to gilts) to generate returns, this could be a critical advantage for the fund.

HDFC Balanced was off to a good start with a first quartile position in 2001. It just slipped into the second quartile in 2002. HDFC Growth, on the other hand, started on a bad note with an under-average performance in 2001. The fund had a bad experience with technology stocks. A significant exposure to technology shares in its early days cost the fund dearly as these stocks were pounded when the stock markets crashed. After 9/11 it was a case of too little technology as these stocks rallied significantly. When mid-caps rallied in 2002, the fund had a better spell figuring in the second quartile of the category. In 2003, so far HDFC Growth is up a splendid 92.73 per cent and should end the year in the second quartile.

With its first batch of products up and running, HDFC Mutual spent the rest of 2000 expanding its product line up. A liquid fund and an equity linked saving scheme were also launched. So by year-end the fund had set up its core portfolio.

Year 2001 was not as eventful. But because of its strong parent, this fund house has been able to boldly launch schemes. The fund launched a children's fund, around the same time when other established AMCs were launching it, and a gilt fund.

HDFC Mutual also launched its index funds, where it added a twist to the original recipe by having a Sensex Plus option. This fund replicates the index in 80-90 per cent of the portfolio, while having the option of choosing non-index stocks in the remaining part. Thus it could be possible to generate better (or worse) returns than the index, while maintaining the overall quality in the portfolio. On similar lines, the fund kept up with its peers in launching short-term funds and floating rate funds.

By the end of 2002, HDFC Mutual Fund had become the third largest AMC in the country. Just like most other AMCs, most of its assets were in debt. The range of its equity products was limited and the quantum of assets was negligible.

A Major Boost
What does an AMC do when it has a large asset base but not much contribution from equities? Well, it shops around for AMCs, which have a number of well known and performing equity funds.

Zurich India AMC was up for grabs in the last quarter of 2002 with a strong basket of equity funds. The parent company of this top performing fund house was restructuring its operations globally. The asset management business was not on its list of priorities.

In March 2003, HDFC AMC took over Zurich India Mutual Fund for about Rs 160 crore. Thus, HDFC acquired a portfolio of top performing equity and balanced schemes.

In the bullish market of 2003, having the Zurich funds has come as a boon. These schemes have been receiving inflows by the truck-load. HDFC Equity, with Rs 876 crore, is now the fourth largest equity fund in the country. HDFC Prudence, with Rs 454 crore, is the largest balanced fund in the country.

All the acquired funds on the equity side have been performing extremely well this year. HDFC Equity and HDFC Top 200 have generated 118 and 116 per cent, respectively, since the beginning of 2003, and are positioned in the first quartile.

HDFC Capital Builder has returns of 107 per cent and stands in the second quartile. HDFC Prudence leads the balanced funds category with year-to-date returns of as much as 85 per cent. The acquisition of these schemes has also enabled HDFC to have a greater percentage of assets under management in equities. On September 2002, 95 per cent of the AMC's assets came from its debt funds and just 5 from equity. By September 2003, the amount of equity increased to 12.75 per cent. The higher percentage of equity also allows the fund to take on a greater retail flavour as most of the investors in equity schemes are individuals, while corporates have a greater preference for bond funds.

After acquiring the schemes of Zurich Mutual Fund, it has also absorbed many of the best practices followed there. Zurich had a universe of companies that were tracked by members of its investment team. The companies would be discussed in weekly presentations. All the research inputs are then combined into a single database. This database acts as a message board for investment ideas and can be accessed by the fund managers.

Recently, the fund house has launched a monthly income plan. This scheme has received a tremendous response from investors and collecting Rs 1,000 crore. This makes HDFC MIP the largest open-ended MIP in the country.

Moreover, this collection is the largest by any retail oriented open-end mutual fund scheme in the past ten years and is a reflection of HDFC's tremendous brand recall and marketing abilities.HDFC MIP is a unique fund that offers a long-term plan and a short-term plan. Under the short-term plan, the equity component will be capped at 15 per cent, just like most other monthly income plans.

In the long-term plan, the equity component will be kept at a much higher level of 25 per cent. As the short-term plan is meant for the more risk-averse investor, the average maturity of the debt instruments here will be on the lower side as compared to the long-term plan.

Technology Improves Service
HDFC Mutual Fund has pioneered the use of ATMs to transact in mutual funds. Investors can make cash withdrawals against specified funds through the ATM network of HDFC Bank or ICICI Bank. The funds available under this facility are HDFC Liquid Fund, HDFC Short-term Plan and HDFC Income.

However, the usage of this facility is limited as it is available only if the investments were made with HDFC Bank as the broker. Thus, even if one is a unit holder of these schemes but the investments were made through some other broker, then the facility cannot be availed. Besides this, the maximum that can be withdrawn on a given day is Rs 5,000 only.

The AMC has continued with Zurich India AMC 's system of Zuricheque (now known as Any Time Cheques). Under this facility, cheques of various denominations are issued in favour of the applicant at the time of investment.

To redeem units all an investor has to do is fill in the date and deposit the cheque in the bank. This facility is available for the debt schemes of the erstwhile Zurich Mutual. Besides this, the AMC offers direct credit facility as well as electronic clearing service. In fact, the fund makes extensive use of direct credit facility. All redemptions and dividend payments to most private sector banks are routed through the direct credit facility. This is now the default option for redemptions and dividend payment.

Another important area where the fund is leveraging the benefits of technology is in the area of investor communications. The fund now puts up its quarterly newsletters on its website (www.hdfcfund.com) instead of dispatching printed copies to investors. In a similar manner, the fund's half-yearly disclosures are not sent to investors when they have already been printed in newspapers. These measures should undoubtedly be helping the fund keep a lid on costs.

Outlook
At present, most fund houses derive a lot of their growth from the presence of large corporates in their debt schemes. But a retail orientation will have to be achieved if this growth is to be sustained.

HDFC Mutual is more attuned to this objective as it has kept the minimum investment limits at the lowest level among all fund houses from day one. With just Rs 500, even the smallest investor can participate in the schemes of this AMC.

The combination of a number of performing funds, and a strong retail brand position should help this AMC stay at the top. Much will depend on how the fund navigates through the coming period of greater volatility in debt schemes.