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Has HDFC Top 200 delivered? | July 28, 2008 15:16 IST

Despite having been in existence for a while, index funds have never quite captured the domestic investor's imagination. And the reasons are not hard to see, given that index funds have been outscored by actively managed funds for a better part of their existence.

However, a related investment style i.e. index-plus investing has delivered better results. Index-plus investing combines active and passive investing, thereby attempting to capitalise on the best of both worlds.

Over the years, HDFC [Get Quote] Top 200 Fund has made a name for itself as a proponent of index-plus investing. In this article, we put HTF's investment proposition under the scanner and study its performance.

HTF's investment proposition
Launched in October 1996, HTF is an open-ended diversified equity fund from HDFC Mutual Fund. The fund is benchmarked against the BSE 200 index and invests around 60 per cent of its portfolio in line with the same. HTF largely invests in stocks from the BSE 200 index.

The fund's mandate also permits it to invest in listed companies that would qualify to be in the top 200 by market capitalisation on the BSE, even though they may not be listed on the BSE. By aligning itself to the broad-based BSE 200 index, the fund manager has the liberty to invest in mid cap stocks, while anchoring a larger portion of the portfolio in large cap stocks for stability.

Given that HTF offers a rather unique investment proposition, it doesn't have strictly comparable peers. Hence for the purpose of peer comparison, we have chosen predominantly large cap funds, which invest a smaller portion of their portfolios in mid caps i.e. funds pursuing an investment style similar to the one pursued by HTF.

With 28.6 per cent CAGR over the 3-Yr time frame, HTF is second only to Kotak 30 (29.3 per cent CAGR) in the peer group. The fund (40.0 per cent CAGR) pitches in an impressive showing over the 5-Yr period as well. Since inception in October 1996, the fund's net asset value has risen by 30.1 per cent CAGR. HTF has successfully outscored its benchmark index over the 1-Yr, 3-Yr and 5-Yr time frames respectively.

How HDFC Top 200 fares vis-a-vis peers
Kotak 30 (D) 29.41 -0.729.3 40.6 28.2 8.43 0.17
HDFC Top 200 (G) 128.07 -0.528.6 40.0 30.1 7.40 0.17
HSBC Equity (G) 84.37 2.027.8 42.4 45.7 8.15 0.20
Franklin Prima Plus (G) 147.95 -9.326.0 37.0 22.6 8.05 0.17
Reliance [Get Quote] Vision (G) 190.49 -14.123.7 39.0 25.9 8.54 0.12
ICICI [Get Quote] Prudential Power (G) 79.64 -16.221.9 34.8 16.2 8.19 0.09
BSE 200-6.222.8 32.2
(Source: Credence Analytics. NAV data as on July 23, 2008.)
(Standard Deviation highlights the element of risk associated with the fund. Sharpe Ratio is a measure of the returns offered by the fund vis-�-vis those offered by a risk-free instrument)

Standard Deviation measures the risk that the fund has exposed its investors to. HTF (Standard Deviation 7.40%) towers head and shoulders above the competition. Reliance Vision (8.54 per cent) fares the worst in the peer group.

Risk-adjusted return
Sharpe Ratio measures the returns delivered by the fund, per unit of risk borne. HTF (Sharpe Ratio 0.17) impresses yet again. Among peers, the fund is second only to HSBC Equity (0.20), while ICICI Prudential Power (0.09) fares the worst.

As can be seen in the graph above, Rs 100 invested in HTF 5 years ago (July 2003) would be worth Rs 558 at present. Conversely, an investment in its benchmark index would have yielded only Rs 404.

In a nutshell...
HTF has successfully struck the balance between risk and return. In other words, despite having exposed investors to lower risk levels (vis-�-vis peers), the fund has not compromised on the return front. The fund's impressive showing across parameters over longer time frames, bears testimony to a process-driven investment style.

What should investors do?
Now the question is, should investors consider investing in the fund? That would ideally depend on their risk appetite, investment objective and existing portfolio, among a host of other factors. At Personalfn, we have always maintained that a 'one size fits all' approach doesn't work while investing. An investment avenue that is apt for one investor could be grossly unsuitable for another.

Therefore, investors would do well to consult their investment advisors/financial planners to determine the suitability of HTF in their portfolios.

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