Thursday, November 10, 2011

Mutual Fund of the Month – HDFC Prudence Fund


Well Folks, this is the first time I am writing an article like this. Starting now, we will be picking out one Top-Rated/Top-Performing Mutual Fund in India and will be analyzing them in detail. To begin with, we are starting with one of the best funds available in India right now, a fund that has been the darling of Investors in India for years.

HDFC Prudence Fund

Details of the fund – HDFC Prudence

Below are the key details of the HDFC Prudence Mutual Fund Plan.

Fund Name HDFC Prudence
Asset Management Company HDFC Mutual Funds
Fund Type/Category Open-Ended/Balanced Fund
Scheme Options Dividend Plan & Growth Plan
Launch Date 16-December-1993
Minimum Investment Rs. 5000 for One time Investments (first time)

Rs. 500 for SIP (Monthly)

Rs. 1500 for SIP (Quarterly)
Fund Manager Mr. Prashant Jain
Entry Load 0%
Exit Load 1% (If Redeemed within 1 year since purchase)
Assets Under Management HDFC Prudence Dividend Plan – 3131.3165 Crores

HDFC Prudence Growth Plan – 3224.85 Crores
Address of Fund House Ramon House, 3rd Floor, 169, Backbay Reclamation, Churchgate, Mumbai
Email Address cliser@hdfcfund.com
Fund Objectives – HDFC Prudence Fund

The investment objective of the Scheme is to provide periodic returns and capital appreciation over a long period of time, from a judicious mix of equity and debt investments, with the aim to prevent/ minimise any capital erosion.

Investment Pattern

The fund aims to have an equity exposure of between 40-75% and debt exposure (Debt & Money Market) of between 25-60%

During times when the interest rates are high, investment in debt would be more attractive versus equities and accordingly the Fund is likely to increase the debt component in the Scheme's portfolio. Similarly in times when the interest rates are low and the equity valuations are cheap, the Scheme is likely to reduce exposure to debt and increase exposure to equities. In addition to debt and equities the scheme will also invest in money market instruments. The exact proportion in money market instruments will be a function of the liquidity needs and the attractiveness of the debt/ equity markets. At times when neither the debt market nor equities are attractive for investment, more resources may be temporarily invested in money market investments to be invested in debt/ equities at a more appropriate time.

The Scheme may also invest upto 25% of net assets of the Scheme in derivatives such as Futures & Options and such other derivative instruments as may be introduced from time to time for the purpose of hedging and portfolio balancing and other uses as may be permitted under the Regulations and Guidelines.

The Fund Manager strives to minimize risks and maximize returns for investors who invest in the fund.

About the Fund Manager

Mr. Prashant Jain has been the fund manager of this fund since June 19th 2003. He is one of the most respected fund managers in the Mutual Fund Industry in India. He is also the Fund Manager for some other funds from the HDFC Mutual Fund Family that have been considered the Industry’s top performers. Some of the top performing funds he manages are:
1. HDFC Top 200 Fund
2. HDFC Equity Fund
3. HDFC Infrastructure Fund

Note: HDFC Top 200 & HDFC Equity have been two of the top performing Equity Diversified Mutual Funds for many years. We will probably take a look at them in subsequent MF Review posts in future.

Asset Allocation % of HDFC Prudence Fund

HDFC Prudence Fund is a Balanced Fund that invests a healthy portion of its assets in Debt and other Fixed Income Instruments. The Asset Allocation % on the various asset categories for this fund is as follows:

Equity – 61.36%
Debt – 20.85%
Others – 14.13% (This includes Equity related products like Derivatives & other Instruments)
Money Market – 2.3%
Cash – 1.35%

Sector Weightage for HDFC Prudence Fund

HDFC Prudence fund invests over 60% of its assets in Equities (shares) and has a diversified asset allocation spanning the various sectors of company’s available. The Sector Weightage (%) for this fund is as follows:

Sector Name Weightage %
Banking & Financial Services 13.89%
Information Technology 8.09%
Manufacturing 6.63%
Oil & Gas 6.23%
Pharmaceuticals 4.86%
Metals & Mining 3.76%
Telecommunication 2.79%
Engineering & Capital Goods 2.46%
Automotive 2.12%
Media & Entertainment 2.04%
Consumer Goods Non-durables 1.80%
Cement & Construction 1.45%
Chemicals 1.39%
Food & Beverages 1.06%
Consumer Goods Durables 0.86%
Others 1.93%

Top Stocks in HDFC Prudence Fund's Portfolio

HDFC Prudence Fund invests in a number of large-cap and blue-chip company stocks. Some of the top stock holdings of this fund are as follows:

Stock Name Weightage (As a % of their Overall Assets)
State Bank of India 4.16%
Infosys 4%
TATA Consultancy Services (TCS) 3.35%
ICICI Bank 3.21%
Page Industries 3.01%
Bharti Airtel 2.79%
Bank of Baroda 2.38%
TATA Motors 2.12%
TATA Steel 2.08
Coal India Ltd 1.68%
Crompton Greaves 1.49%
Jaiprakash Associates 1.45%
Cipla 1.40%
Pidilite Industries 1.39%
Reliance Industries 1.37%
Oil India Ltd 1.37%
Bharat Petroleum Corporation 1.20%
Axis Bank 1.18%
LIC Housing Finance 1.18%
Ipca Laboratories 1.13%
Zydus Wellness 1.08%
Zee Entertainment 1.06%
Procter & Gamble 1.06%
Info Edge India 1.01%
HT Media 0.98%
This is not the full/consolidated stock holdings of HDFC Prudence Fund. Only the top 25 stock holdings that are held by HDFC Prudence Fund are available here.

Debt Holdings of HDFC Prudence Fund

As you might have seen in the Asset Allocation section, the HDFC Prudence Fund invests a healthy 20% of their assets in Debt Instruments. As you might already know, debt instruments are bonds and other debt obligations that are held by HDFC Prudence and will have to be paid-back by the debt issuer at maturity. The Top Debt Holdings of HDFC Prudence Fund are as follows:

Debt Category Weightage (As a % of their Overall Assets)
Government of India Bonds 9.76%
Other Bonds 11.10%
About the Government of India Securities Owned by HDFC Prudence Fund

The Government of India Securities held by HDFC Prudence are long term bonds issued by the Government of India and have a Maturity period starting from 2015 upto 2027. When these bonds mature, the fund will re-invest an equivalent amount in other debt instruments per the Fund Managers discretion.

About the Other Bonds held by HDFC Prudence:

The Other Bonds & Debt Obligations held by HDFC Prudence are from some of the most credit worthy bond issuers in India. The major issuers of bonds held by HDFC Prudence are:

1. National Bank for Agriculture & Rural Development
2. State Bank of India
3. Indian Railways Finance Corporation
4. LIC Housing Finance Corporation
5. Power Finance Corporation
6. The TATA Power Company
7. Rural Electrification Corporation
8. Punjab National Bank
9. State Bank of Indore
10. HDFC
11. Infrastructure Finance Development Corporation
12. TATA Motors
13. State Bank of Bikaner & Jaipur
14. ICICI Bank Limited
15. State Bank of Patiala &
16. Jet Airways India Ltd

All of these Bond Issuers are rated ‘AAA’ by CRISIL and are of the highest creditworthiness.

Money Market Instruments held by HDFC Prudence

As you might have seen in the Asset Allocation section, HDFC Prudence fund invests around 2% of its assets in Money Market Securities. These Money Market Securities are issued by the following entities:
1. State Bank of Patiala
2. Punjab National Bank

These entities are rated as ‘A1+’ by CRISIL and are of very high creditworthiness.

NAV Movement:

NAV Stands for Net Asset Value. You can learn more about how a Mutual Fund works and how the NAV is calculated by Clicking Here

HDFC Prudence Fund – Dividend Scheme

1. NAV As on January 2009 – Rs. 19.29
2. NAV As on June 2009 – Rs. 23.728
3. NAV As on January 2010 – Rs. 30.14
4. NAV As on June 2010 – Rs. 28.734
5. NAV As on January 2011 – Rs. 33.811
6. NAV As on June 2011 – Rs. 29.216
7. NAV As on September 2011 – Rs. 27.902
8. NAV As on October 2011 – Rs. 27.613
9. NAV As on November 2011 – Rs. 28.223

HDFC Prudence Fund – Growth Scheme

1. NAV As on January 2009 – Rs. 95.504
2. NAV As on June 2009 – Rs. 134.357
3. NAV As on January 2010 – Rs. 174.258
4. NAV As on June 2010 – Rs. 187.067
5. NAV As on January 2011 – Rs. 220.119
6. NAV As on June 2011 – Rs. 214.327
7. NAV As on September 2011 – Rs. 204.684
8. NAV As on October 2011 – Rs. 202.561
9. NAV As on November 2011 – Rs. 207.038

Net Returns:

The HDFC Prudence Fund has outperformed almost all of its peers in the Equity-Balanced Fund Category over the past 5 years. Even during extreme turbulent times in the Indian stock markets over the past 2-3 years, the fund has posted only marginal losses and has always rebounded to meet customer satisfaction. The Net Returns over the past 5 year time period is as follows:

Time Period Returns %
1 Month 2.1%
3 Months -2.8%
6 Months -3.3%
1 Year -10.4%
2 Years 11.1%
3 Years 29%
5 Years 13.5%
A point to note here is that, even though the NAV Movement may seem higher on the Growth Scheme when compared to the Dividend Option. That is because, the Dividend Scheme pays a periodic dividend (Usually once ever year) and hence the net returns inclusive of dividends earned in the Dividend Scheme will be comparable to the Growth Scheme. Don’t worry, the Dividend history is available in the next section.

Dividend History – HDFC Prudence – Dividend Plan

Dividend Date Dividend Amount (Per Unit Held)
6-Aug-1999 Rs. 2
29-Nov-1999 Rs. 2
7-Apr-2000 Rs. 1.5
09-Mar-2001 Rs. 0.9
15-Mar-2002 Rs. 1
15-Jul-2003 Rs. 2
26-Dec-2003 Rs. 3
15-Mar-2004 Rs. 1.5
18-Mar-2005 Rs. 5
03-Mar-2006 Rs. 5
21-Feb-2007 Rs. 5
21-Feb-2008 Rs. 5
19-Mar-2009 Rs. 2.5
18-Mar-2010 3.5
17-Mar-2011 3.5
Sample Returns Comparison – HDFC Prudence Dividend Plan & Growth Plan

Date of Investment: 01-Jan-2009
Amount Invested: Rs. 25,000 (Each in Dividend & Growth Plan)
No. of Units: 261.769 (Growth) & 1296 (Dividend)
Current Value of Investments: Rs. 54,196 (Growth) and Rs. 36,577 (Dividend)

Dividend Earned in Dividend Scheme:

1. On 19-March-2009 @ Rs. 2.5 per unit = Rs. 3,240/-
2. On 18-March-2010 @ Rs. 3.5 per unit = Rs. 4,536/-
3. On 17-March-2011 @ Rs. 3.5 per unit = Rs. 4,536/-

Net Dividend Earned = Rs. 12,312/-

Net Value of Investments in Dividend Plan (Including Dividends) = Rs. 48,889/-

Though the Net value of Investments in the Dividend Plan is Rs. 5,307/- less than the Growth Plan, if you consider the fact that you could’ve invested this amount in any decent investment that earns at least 8% returns (like a Bank FD) then the net worth of the Dividend would be Rs. 13,996/- which means the net value of investments in Dividend Plan would be = Rs. 50573.8/-

Why Such Value Adjustment?

You might be wondering, why I did such an elaborate calculation to compare the returns. This is because, some people might think that the Growth Plan is better by just looking at the net worth of the Investments but the fact it, that method is incorrect. We cannot do such an assumption because of the following reasons:
a. You are getting a regular cash inflow (though small, it is around 13-18% of your net investment every year) which is superb in terms of just the returns
b. Your capital is intact and has grown on an average of around 15% year on year over the past 3 years which again us superb in terms of just the returns

Note:
1. The AUM numbers are as of 30-Sep-2011. Fund houses release AUM numbers only once every quarter and the next release will be only by end of December 2011.
2. The Sector Weightages, Asset Allocation% etc are as of end of October 2011. These details are released only once every month by the fund house.

Important Disclaimer:

Past Performance May or May Not be Sustained in Future. The Fund House does not Guarantee any returns. As with all equity market related investments, the value of the investment will move in accordance with the stock market and may go up or down depending on the world economic situation. Investors are advised to exercise caution before investing in the above mentioned fund. The Author does not endorse or recommend this fund to investors. The purpose of this article is just a Fund Review and should not be treated as Investment Advise.

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