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A Flying Start

HSBC Mutual has had a quick start, both in terms of performance as well as asset collection. It has grown to become the fourteenth largest fund house in India as on February 2004.

HSBC Mutual Fund's trajectory since its launch has been more like that of a rocket-in just over a year it has grown to become the 14th largest mutual fund in the country. How has it achieved this and how does it plan to move ahead? A closer look.

Background
HSBC AMC (India) Private Limited is sponsored by HSBC Capital Markets (India) Private Limited. Both the fund and its sponsor are a part of the HSBC Group, which is one of the world's largest banking and financial services organisation.

HSBC AMC commenced operations in India with the launch of a set of core products in December 2002. These were an equity fund, a medium-term debt fund, a short-term debt fund and a cash fund. All the debt products had institutional and retail variants. The strength of the HSBC brand could be seen from the fact that the AMC collected Rs 806 crore during its launch. Thus, the AMC started off as the 20th largest fund house out of the 30 that were then operating in the country. One interesting thing here was that its retail debt product collected more (Rs 350 crore) than the institutional one (Rs 312 crore). This highlights the fact that HSBC's retail reach is strong.

Products and Performance
In a short span of one-year, this AMC has had a decent run. It would however be premature to use this performance as a base to judge the individual schemes. HSBC Equity has found a place in the first quartile of its category in 2003, its first full calendar year. In fact, returns of 160.25 per cent made it the second best diversified equity fund in 2003. Though the fund has performed consistently throughout the year, much of the boost came from the last quarter of the year when the fund increased its mid-cap exposure to above 40 per cent of the portfolio.

HSBC Income Fund has also had a ballistic start. It was the third best performing fund out of 41 funds in the medium-term debt category. This was achieved by keeping maturity in the range of 6-7 years, which was on the higher side of the category. This has, however, come down a bit in recent months.

A look at the AMC's debt products through the prism of expenses shows that its medium-term debt fund and the short-term debt fund are among the most expensive funds in the category. This is to be expected as the AMC has just started operations and new funds typically charge more. The next series of launches from HSBC came in the third quarter of 2003. The fund house launched variants of its institutional plans. A short-term fund as well as long-term gilt fund were also launched.

With equity markets on a roll, the AMC is launching an opportunities fund and a monthly income plan (MIP). HSBC India Opportunities Fund will be an open-end equity fund, which will invest in a wide variety of stocks. The allocation will be spread across a range of large, mid- and small-cap stocks. The main focus will be on the mid-cap companies, which have the potential to become large-caps over time. Though the fund will basically invest in equities, it may move some portion of its assets (up to 50 per cent) into debt and money market instruments, in case equity markets tank.

HSBC MIP will have two plans-Regular Plan and Savings Plan. Though both plans will largely invest in debt and money market instruments, it's the difference in equity allocation that separates the two plans. Under the Regular Plan, the equity exposure is limited to 15 per cent of the total assets. On the other hand, the Savings Plan will be more aggressive-its equity exposure can go up to 25 per cent of the total assets. With both these fund launches, the total number of funds managed by HSBC Mutual Fund will go up to 13.

Investment Philosophy and Risk Control
According to CEO Sanjay Prakash, HSBC AMC is a business cycle relative value investor. This means that the AMC does not follow a pure value or growth style of investing. Instead the fund will modify its approach based on the existing economic conditions. Through this approach, HSBC Mutual tries to interpret the standing of companies in different parts of the business cycle and where relative value exists in the market. The fund believes that markets are often inefficient and this calls for active management. Asset allocation is looked from a global perspective while stock selection is carried out keeping local conditions in mind.

Risk control measures in HSBC Equity Fund stipulate that stocks outside the benchmark BSE 200 Index should not exceed 10 per cent of the portfolio. At the same time, all the stocks in the portfolio which account for more than 5 per cent of NAV should not cumulatively account for more than 50 per cent of the portfolio. For the Opportunities Fund this is set so that all holdings above 6 per cent should not exceed 60 per cent of the portfolio.

On the income side, the fund follows a top down process. Under this, the fund seeks to monitor two parameters-duration and credit percentage. This process also factors in global and local interest rate conditions to arrive at security selection.

Outlook
It is still early days for HSBC AMC. How the AMC's equity schemes perform in not so bullish times and how its debt scheme will manage increasing interest rates is an open question. Keep watching this space for more on HSBC AMC.

Strategy Note
Sanjay Prakash
CEO
HSBC Mutual Fund

On Managing Debt Funds
Our investment philosophy and process takes account of interest rate trends and volatility. HSBC's investment process takes cognizance of economic, external, valuation and bond market factors to arrive at duration and credit percentage calls. The process is dynamic and reflects the volatility and opportunities that the market presents. The risk management parameters ensure that a balanced view on the market is taken. Managing volatility could translate in booking profits to protect value, as rallies would be shorter in nature. Investing in floating rate instruments linked to G-sec benchmarks and active use of interest rate swaps would provide hedges against increasing rates provided funds could use them.

On Introducing New Funds
The focus is to provide customers with a variety of investment solutions. Customers will therefore have a choice of simple yet suitable products that suite their risk return profile. We do plan to launch a Floating Rate Fund in Q2CY04. We do not intend to launch an Index Fund or Balanced fund as yet.

The future of HSBC MF in India
Given our long history and credibility in India, we are confident of establishing ourselves as a leading player. The key challenge for us is to deliver relevant products, solid investment performance and consistent service. If we are successful in this, we will be one of the top preferred destinations for anyone looking to invest in mutual funds.