Performance Evaluation of Mutual Funds Scheme in India - An Empirical Study

2011

Performance Evaluation of Mutual Funds Scheme in India An Empirical Study The performance of mutual funds depends on the performance of securities that make up the portfolio of the mutual fund. Mutual funds pool the money of investors and then invest this pool in the designated securities. Once this is done, the investors must understand that the performance of a particular scheme will depend on the performance of the underlying portfolio. For instance, a scheme has invested funds in equity shares, and the equity market is booming, then t he performance of the scheme would be good. It may be noted that the performance of a scheme is restricted by the underlying portfolio and no scheme can rise faster than the rise in underlying portfolio. Even within a particular category or group of schemes, say income schemes, the performance of all mutual fund schemes under that category would not be same. What is required on the part of investors is to look at each of the schemed and its underlying portfolio. This will help them to know how and where their money is being invested and about the risk indirectly taken by them.

Nishant Patel Stevens Business School, Ahmedabad 3/16/2011

Performance Evaluation of Mutual Funds Scheme in 2011 India

ACKNOWLEDGEMENT Preparing a project is an arduous task, but I was fortunate enough to get support from large number of people to whom I shall always remain grateful and those who have helped me directly or indirectly in completion of the project on

“Performance Evaluation of Mutual Funds Scheme in India – An Empirical Study”. The project has given me an opportunity to learn many aspects. I am very grateful to my guide Professor Deepak Krishnan, for giving me this privilege to work under him and for all his support during the entire duration as well as for his invaluable guidance that helped me to complete my project.

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ACKNOWLEDGEMENT Preparing a project is an arduous task, but I was fortunate enough to get support from large number of people to whom I shall always remain grateful and those who have helped me directly or indirectly in completion of the project on

“Performance Evaluation of Mutual Funds Scheme in India – An Empirical Study”. The project has given me an opportunity to learn many aspects. I am very grateful to my guide Professor Deepak Krishnan, for giving me this privilege to work under him and for all his support during the entire duration as well as for his invaluable guidance that helped me to complete my project.

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I. INTRODUCTION MUTUAL FUND IS a trust the pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized 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 basket of securities at a relatively low cost. The mutual fund industry plays a significant role in the development of the economy as well. Its buoyant growth leads to lower intermediation costs, 

Professor & Head of the Department, Er. Perumal Manimekalai College of Engineer, Department of Management studies, Koneripalli, Hosur, Tamil Nadu, INDIA.



Associate Professor, Alagappa University, Alagappa Institute of Management, Karikudi, Kancheepuram, Tamil Nadu 630003, INDIA Submitted December 2007; Accepted April 2010. More efficient financial markets, increased vibrancy of the capital markets and higher local ownership of financial assets. If retail investment is directed through the mutual fund route, it will lead to greater wealth creation in the long run. Thus, the industry can be one of the causative causa tive factors for a healthy economy. Mutual funds have emerged as an important intermediary in all the capital markets of the world.

The mutual funds play and will will continue to to play an

important role in the growth of the capital market in India. One of the reasons for mutual funds becoming popular in such a short period if that they offer low risk coupled with stability of income and are ideally suited for average and small investors who, otherwise, probably cannot operate in capital market. Growth of 3|Page

Performance Evaluation of Mutual Funds Scheme in 2011 India mutual funds in India, as well as, in all the capital markets of the world is a testimony to the fact that mutual funds provide specialized financial securities to the investors. Mutual funds provide different services to investors for making investment. Making investment in a mutual fund is more convenient as compared to dealing in the capital market. So, a mutual fund is a suitable investment for a common man as it offers an opportunity to invest in a diversified and professionally managed basket of securities at a relatively low cost. The relation between risk and return determines the performance of a mutual fund. As risk is commensurate with return, therefore, providing maximum return on the investment made within the acceptable associated risk level helps in demarcating the better performance from the laggards. So, there is always a tradeoff between risk and return. In the present study these two attributes, viz., risk and return have been considered for detailed analysis.

This study also

presents an empirical analysis of risk adjusted performance evaluation of mutual fund schemes based on the Sharpe, Treynor, Jenson and Fama measures.

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II. Literature Review The review of literature gives a broad outlook of the various research studies made in the past and the details of such studies throw light on the future studies to be made. It also strengthens the theoretical base of the research study. Existing literature, both Indian and foreign are important, since it will throw light on the performance evaluation of mutual fund schemes in India. The deficiencies of the existing studies should help in conducting new studies and updating the relevant literature. The literature on mutual funds has also contributed to the development of various portfolio performance measures. The review of literature helps to identify the research gap in the study on performance evaluation of mutual fund schemes and which has given rise to the present study. The review has been covered the research articles, textbooks and research studies.

2.1 Foreign Literature. Friend and Vickers (1965) while examining portfolio selection and investment performance critically examined the performance of mutual funds against the randomly constructed portfolios. The study concluded that mutual funds on the whole have not performed superior to random portfolios. Treynor and Mazuy (1966) developed a methodology for testing mutual funds historical success in anticipating major turns in the stock market and found no evidence that the funds had successfully out guessed the market. Sharpe (1966) developed a composite measure for performance evaluation and reported superior performance for 11 funds out or 34 during the period 1944-1963. Jensen's (1968) classic study developed an absolute measure of performance based upon the Capital Assets Pricing Model and reported that mutual funds did not appear to achieve abnormal performance when transaction costs were taken 5|Page

Performance Evaluation of Mutual Funds Scheme in 2011 India into a count. Guy (1978) on analyzing the performance of British Investment Trust Industry evaluated the risk-adjusted performance of UK Investment Trust through the application of Sharpe and Jensen measures. The study concluded that no trust had exhibited superior performance, compared to the London Stock Exchange Index. Ippolito (1987) while testing the Efficient Market Theory. concluded that mutual funds offer superior returns. However, expenses and load charges offset them. This characterizes the Efficient Market Hypothesis.

2.2. Indian Literature : Barua (1981) made the pioneering attempt in evaluating the performance of master Share Scheme of Unit Trust of India from the Investor point of view. CAPM model was unused to arrive at conclusion and considered that 'Master Share' was a bonanza to the small investors with high return. Shukla (1993) evaluated and compared the performance of Canshare and Mastershare by employing the Sharpe, Jensen and Treynor ratios for the period from January 1988 to June 1991. He concluded that Mastershare had performed better in terms of risk and return than Canshare.

Jaideep and Majumdar, (1994)

evaluated performance of five growth oriented schemes for the period from February 1991 to August 1993. CAPM model was used to evaluate the superior performance of the growth schemes. Shaw and Thomas (1994) evaluated the performance of 11 mutual fund schemes based on market price data. The weekly returns were computed for these schemes since their commencement to April 1994. Jensen and Sharpe measures were used to evaluate the superior performance of the schemes. Tripathy and Sahu (1995) evaluated the performance of a major growth oriented schemes for a period of one year from October 1994 to September 1995. They concluded that mutual fund investment offers tremendous potential for Indian investors. Jayadev (1998) evaluated the performance of mutual fund schemes in terms of risk and return. This study 6|Page

Performance Evaluation of Mutual Funds Scheme in 2011 India proved to be an empirical evidence of Efficient Market Hypothesis in Indian context. This study covered relatively a large number of schemes. Bhayani and Patidar (2006) evaluated the performance of balanced fund scheme in terms of average return. A majority of the sample mutual funds schemes have recorded a superior performance as compared to the benchmarks index. In the case of equity diversified schemes, the performance of schemes have shown better returns and most of the schemes have outperformed the benchmark. The results of gilt fund schemes have outperformed the benchmark. The results of gilt fund schemes indicated that all the schemes earned a slightly higher return in comparison to the market return. Income fund schemes have shown poor performance compared to the market return. The performance of tax planning fund schemes has generated superior return as compared to the market return. The performance of schemes was better in case of returns and has earned returns on lower risk as compared to the market. To sum up the review of literature, it is clear that the research studies both Indian and foreign are used to evaluate the performance of mutual fund schemes.

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III. The study Objective, Methodology and Sample 3.1

Objectives of the Study The main objectives of the study are as under.

-

To evaluate performance of mutual funds in terms of risk and return.

-

To examine funds sensitivity to the market fluctuations in terms of beta.

-

To evaluate risk adjusted performance of selected mutual fund schemes by applying the measures of Sharpe, Treynor, Jensen & Fama.

3.2 Methodology To evaluate the investment performance of sample mutual fund schemes, 23 schemes were chosen as per the priority given by the respondents in Dharmapuri district, Tamil Nadu. Secondary data were used to evaluate the performance of the selected mutual fund schemes. The study is kept limited to only two fund categories namely equity fund and income fund. In this study the Bombay Stock Exchange (BSE) Sensex (100) has been used as a surrogate for market portfolio and the bank interest rate has been used as a surrogate for risk-free rate of return which have been accepted as the market proxy and the risk-free proxy respectively by the researchers as well as practitioners in India. Performance evaluation models such as Sharpe Ratio, Treynor Ratio, Jensen Differential Return Measure, Sharpe Differential Return Measure and Fama's Components of Investment Measure were applied to evaluate the performance of selected schemes.

3.3 Period of the Study The study covers a period of five years (i.e. from April 2002 to March 2007). The secondary data pertaining to the mutual fund investments during the above

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Performance Evaluation of Mutual Funds Scheme in 2011 India period have been collected from the relevant authorized sources for an in-depth analysis.

3.4

Sample Schemes Selected for the Study

For the evaluation of mutual fund schemes, 23 schemes from 11 mutual funds have been selected. The selected schemes are presented in Table I.

Table Name of the Selected Mutual Fund Schemes S.No. Scheme Name

1.

Can Equity Tax Saver

Fund

Asset Management

Period

Category

Company

From To

Equity

Can Bank

Mar.1999 Mar. 2009

Investment Management Services 2.

Franklin India Blue ship

Equity

Fund

Franklin Temploton

Nov.1999 Mar.2007

Asset Management (India) Pvt. Ltd.

3.

Franklin India Prima

Equity

Plus

Franklin Temploton

Sep.1999 Mar.2007


4

Franklin India Prima

Equity

Fund

Franklin Temploton

Sep.1993 Mar.2007


5

HDFC Top 200 Fund

Equity

HDFC Asset

Sep.1996 Mar.2007

Management Co. Ltd. 9|Page

Performance Evaluation of Mutual Funds Scheme in 2011 India 6

Magnum Global Fund

Equity

SBI Funds

Sep.1994 Mar.2007

Management Ltd. 7

Prudential ICICI Tax

Equity

Plan

Prudential ICICI

Sep.1994 Mar.2007

Asset Management Co. Ltd.,

8.

Prudential ICICI Power

Equity

Prudential ICICI

Sep.1999 Mar. 2007

Asset Management Co. Ltd., 9.


Equity

Prudential ICICI

June 1998 Mar.2007

Asset Management Co. Ltd., 10

Reliance Growth Fund

Equity

Reliance Capital

Oct.1995 Mar.2007

Asset Management Ltd., 11.


Equity

Reliance Capital

Oct.1995 Mar.2007

Asset Management Ltd., 12.

Tata Growth Fund

Equity

Tata Asset

Jun.1994 Mar. 2007

Management Ltd. 13.

Tata Growth Fund

Equity

Tata Asset

Mar.2003 Mar.2007

Management Ltd. 14.

UTI-Growth and Value

Equity

Fund

UTI Asset

Oct.1999 Mar.2007

Management Company Ltd.,

15.

UTI Equity Tax Saving

Equity

Plan

UTI Asset

Dec.1999 Mar.2007

Management Company Ltd.,

16.

Birla Income plus Retail

Income

Birla Sun life Asset

Oct.1995 Mar.2007 10 | P a g e

Performance Evaluation of Mutual Funds Scheme in 2011 India Management Co.Ltd. 17.

Kotak Bond Regular

Income

Plan

Kotak Mahindra

Nov.1999 Mar.2007

Asset Management Co.Ltd.

18.

Prudential ICICI Income

Income

Predential ICICI

Jun.1998 mar.2007

Asset Management Co.Ltd. 19.

Reliance income Fund

Income

Reliance Capital

DEc.1997 Mar.2007

Asset Management Co.Ltd. 20.

Sundaram Bond Saver

Income

Sundaram BNP

Nov.1997 Mar.2007

Paribas AMC Ltd. 21.

Tata Income Fund

Income

Tata Asset

Apr.1997 Mar.2007

Management Ltd. 22.

UTI- Bond Fund

Income

UTI Asset

Jun.1998 Mar.2007

Management Co.Ltd. 23.

UTI Bond Advantage Fund LTP

Income

UTI Asset

Jul.1999 Mar.2007

Management Company Ltd.

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IV Empirical Analysis 4.1

Average Annual Risk and Return of Selected Equity Schemes

The rates of return for all the fifteen schemes were calculated on the basis of average monthly net asset values. The dividend payments were included for determining the net asset based annual returns. The year wise average returns were calculated and provided in Table II for all the fifteen schemes. S.N

Scheme Name

Average

Total

o

1.

2.

3.

4

5

6

7

8.

9.

10


Franklin India Blue ship Fund

Franklin India Prima Plus

Franklin India Prima Fund

HDFC Top 200 Fund

Magnum Global Fund

Prudential ICICI Tax Plan


ICIC Prudential Growth Plan


2002-

2003

2004-

2005

2006

Total

03

-04

05

-06

-07

Average

1.29

3.69

1.33

3.18

1.11

1.20

Risk

4.26

4.83

6.71

8.17

9.73

7.15

Average

0.09

7.43

1.85

4.40

1.19

3.04

Risk

3.74

5.12

5.39

4.09

7.40

5.78

Average

0.35

6.84

2.24

4.56

1.76

3.07

Risk

3.29

4.42

4.84

3.84

7.79

5.52

Average

0.49

8.22

4.26

4.24

0.00

3.49

Risk

3.65

8.05

5.41

3.35

8.46

6.70

Average

0.14

7.46

2.68

4.74

1.02

3.26

Risk

3.42

5.70

5.64

3.52

6.90

5.71

Average

1.09

4.24

4.29

5.85

1.84

3.10

Risk

3.69

8.63

6.01

4.58

8.94

6.95

Average

1.07

7.05

5.55

4.63

0.48

3.40

Risk

3.78

8.41

6.43

4.40

10.38

7.58

Average

0.55

6.98

2.41

4.96

1.41

3.31

Risk

4.44

5.13

5.46

4.46

7.49

5.85

Average

0.75

6.11

1.93

4.58

1.26

2.68

Risk

4.04

5.13

6.12

4.05

7.23

5.82

Average

1.19

8.32

4.35

5.13

1.55

4.16

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11.

12.

13.

14.

15.

Risk

4.90

6.13

6.02

3.78

8.11

6.34

Average

2.56

7.61

3.02

4.41

1.25

3.79

Risk

5.67

5.99

5.92

3.27

7.69

6.09

Average

0.21

6.11

3.55

3.61

0.87

2.84

Risk

3.11

5.44

6.52

4.74

8.50

6.19

Tata Equity Opportunities

Average

0.31

3.52

1.77

3.28

1.24

1.43

Fund

Risk

3.91

7.41

5.50

3.91

8.74

6.32

UTI-Growth and Value Fund

Average

0.23

7.66

2.10

3.68

0.44

2.87

Risk

3.87

5.85

5.58

3.56

7.63

6.00

Average

0.27

3.85

1.38

3.96

0.11

1.90

Risk

3.01

7.35

4.68

4.04

7.76

5.79

Reliance Vision Fund

Tata Growth Fund

UTI Equity Tax Saving Plan

The overall annual average risk and return were calculated from the five years data presented in the same table for all the fifteen schemes. all the fifteen schemes had yielded positive return. The overall maximum return was from Reliance Growth Fund which was followed by Reliance Vision Fund. The overall minimum return was from Can Equity Tax Saver. Prudential ICICI Tax Plan was having the highest risk and Franklin India Prima Plus was having the lowest risk.

4.2

Average Annual Risk And Returns of Selected income scheme

The rates of return for all the eight schemes were calculated on the basis of average monthly net asset values. The dividend payments were included for determining the net asset based annual return. The year wise average returns were calculated and provided in Table – III for all the eight schemes.

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Table III Average Annual Risk and Returns of selected Income Scheme Scheme Name

2002-03 2003-

Period 2004- 2005-06

Birla income Plus- Average Retail Risk

0.92 1.32

0.78 -0.03 0.28 0.83, 0.79 0.23

Kotak Bond Plan Prudential ICICI Income Reliance Income Fund Sundaram Bond

0.9 1.33 0.86 1.3 0.83 1.39 1.0

0.83 0.81 0.75 0.78 0.81 0.75 0.74

Saver ata Income Fund UTI-Bond Fund

Risk Average Risk Avera e Risk Average

Risk Avera e Risk Avera e Risk UT I -Bond Avera e Advanta e Fund-LTP Risk

1.37, 0.61 1.2 0.81 0.91 0.92 1.5

0.19 0.82 0.04 0.73 0.25 0.82 -0.02

20060.4 0.34

0.37 "0.54. 0.23 0.28 0.27 0.44 0.32 0.61 0.37 0.42 0.28 0.39 0.19 0.34

0.77 0.92 0.23 -3.85 6.71 0.76 11.19 17.54 1.57 0.6 0.17 0.63 0.56 0.82 0.6 0.8 0.05 0.33 0.86 0.86 0.29

0.19 0.38 0.17 0.4 0.26 0.4 0.16

Total 0.46 0.84 0.56. 0.81 0.47 0.83 0.53 0.82 0.44 0.87 0.93 9.72 0.52 0.68 0.49 0.89

The overall annual average risk and return were calculated from the five year data and presented in the same table for all the eight schemes. All the schemes had yielded positive returns and risk were from Tata Income Fund There were not many differences among the schemes on the basis of overall annual average risk and returns. 4.3

Risk and Return of Mutual Fund with Benchmark Portfolios. To have a meaningful evaluation of the investment performance of mutual fund

schemes their average return and risk are to be compared with the average return and risk are to be compared with the average return and risk of the benchmark portfolio. The average return and risk for both the selected mutual fund schemes and the benchmark portfolio are computed and presented in Table IV Fund Beta (Systematic risk) and value for Beta are also computed and presented in the same table.

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Performance Evaluation of Mutual Funds Scheme in 2011 India Table IV present return and risk of mutual fund schemes together with returns and risk of benchmark portfolio and risk-free return. Normally, the funds are expected to earn more than risk- free return. But, out of 23 schemes, 4 schemes had not earned ever more than risk –free return. all the 15 equity schemes had earned more than risk free return. Out of 23 schemes had not earned even more than the risk free return. Out of 23 schemes, 11 schemes had not earned more than the market return. Out of 23 schemes, 14 schemes had more risk than market risk. Out of 15 equity schemes, only one scheme namely Franklin India Prima Plus had less risk than market risk. All the schemes from income fund had less risk than market risk out of 15 equity schemes, only one schemes ICICI Prudential Tax Plan had high systematic risk and the remaining fourteen schemes were reflected a moderate amount of systematic risk. Among the 8 Income schemes, Tata, Income Fund reflected a negative systematic risk. It can be concluded that he return and risk are not always in conformity with the stated objectively and the systematic risk free return and average market risk for all the twenty three schemes were same with 0.506 and 5.485 respectively.

S

Schemes

No

Average

Average

Average

Fund

Market

Fund

Risk

Portfolio

Market

Portfolio

Risk

Bet

Free

Return

Return

Risk

beta

Sig

**

Return

Equity Schemes 1


0.506

1.200

2.446

7.086

5.485

0.991

9.031

2

Franklin India Blue Chip

0.506

3.041

2.446

5.734

5.485

1.957

17.177

**

Fund 3


0.506

3.067

2.446

5.469

5.485

0.913

17.222

**

4

Franklin

0.506

3.493

2.446

6.647

5.485

0.973

10.169

**

India

Prima

Fund 5

HDFC Top 200 Fund

0.506

3.259

2.446

5.664

5.485

0.943

16.907

**

6

Magnum Global Fund

0.506

3.095

2.446

6.889

5.485

0.911

7.963

**

7

ICICI Prudential Tax Plan

0.506

3.402

2.446

7.511

5.485

1.172

12.509

**

8

ICICI Prudential Power

0.506

3.307

2.446

5.796

5.485

0.950

15.486

**

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ICICI Prudential Growth

0.506

2.681

2.446

5.771

5.485

0.966

17.492

**

10


0.506

4.155

2.446

6.285

5.485

0.965

11.794

**

11

Reliance

0.506

3.792

2.446

6.037

5.485

0.924

11.672

**

Vision Fund 12

Tata Growth Fund

0.506

2.839

2.446

6.139

5.485

0.979

0.766

ns

13

Tata Equity Opportunities

0.506

1.432

2.446

6.262

5.485

0.817

7.729

**

Growth & Value

0.506

2.866

2.446

5.945

5.485

0.976

15.598

**

UTI Equity Tax Saving

0.506

1.897

2.446

5.742

5.485

0.882

11.788

**

fund 14

UTI Fund

15

Plan Income (Debt) Scheme

16

Birla Income Plus

0.506

0.464

2.446

0.831

5.485

0.015

0.751

ns

17

Kotak Bond Regular Plan

0.506

0.559

2.446

0.805

5.485

0.022

1.124

**

18

ICICI Prudential Income

0.506

0.467

2.446

0.822

5.485

0.023

1.166

ns

19

Reliance Income Fund

0.506

0.531

2.446

0.811

5.485

0.029

1.490

ns

20

Sundaram bond Saver

0.506

0.442

2.446

0.861

5.485

0.012

0.571

ns

21

Tata Income Fund

0.506

0.927

2.446

9.640

5.485

0.323

1.413

ns

22

UTI Bond Fund

0.506

0.517

2.446

0.672

5.485

0.019

1.198

ns

23

Unit Bond Advantage

0.506

0.493

2.446

0.878

5.485

0.017

0.821

ns

Note ** Significant at 1 Percent Level * Significant at 5 percent level

Source : Computed from information in Table III and Table IV

4.4

Unique Risk and Diversification The object of diversification is to earn superior returns by reduction of risk. To

analyze whether the sample mutual fund schemes are adequately diversified or not, the value of diversification for each schemes is computed and unique risk or unsystematic risk are also computed and presented in Table V.

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Performance Evaluation of Mutual Funds Scheme in 2011 India Table V. presented information regarding the unique risk (diversifiable risk or non- market risk) of mutual fund and the extent of diversification of sample schemes. It will be seen that the average unique risk of the equity sample schemes is 3.219

and

income sample is 1.888 per month while the average diversification of the equity sample schemes was 0.724 and income sample schemes was 0.029. Out of the 15 equity schemes, 8, schemes, only one schemes namely Tata Income Fund showed higher than the average unique risk. Hence, it Can be concluded that the mutual fund schemes risks are not adequately diversified.

S

Schemes

Extent of Diversification (R 2)

No

Unique Risk (Unsystematic Risk)

Equity Schemes 1


0.589

4.538

2

Franklin India Blue Chip Fund

0.838

2.296

3


0.839

2.189

4


0.645

3.941

5

HDFC Top 200 Fund

0.834

2.292

6

Magnum Global Fund

0.527

4.736

7


0.733

3.859

8


0.808

2.531

9


0.843

2.281

10


0.709

3.373

11

Reliance

0.705

3.270

Vision Fund 12

Tata Growth Fund

0.766

2.960

13

Tata Equity Opportunities fund

0.512

4.367

14

UTI Growth & Value Fund

0.810

2.573

15


0.709

3.093

Average

0.724

3.219

Income (Debt) Scheme

1

Birla Income Plus

0.506

0.827

2


0.506

0.796

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0.506

0.813

4


0.506

0.796

5

Sundaram bond Saver

0.506

0.858

6

Tata Income Fund

0.506

9.478

7

UTI Bond Fund

0.506

0.664

8

Unit Bond Advantage

0.506

0.873

Average

0.029

1.888

Source : Computed from information in table IV 4.5

Risk Returns Grid of Mutual Fund Scheme

In order to undertake further analysis, sample schemes have been classified into the following four categories on the basis of their return and risk characteristic and they are presented in the following figure.

High

Equity Scheme

Return Franklin India Prima Plus

1.


2.


3.

HDFC Top 200 Fund

4.

Magnum Global Fund

5.


6.


7.


8.


9.

Reliance

10. Vision Fund 11. Tata Growth Fund 12. Tata Equity Opportunities fund 13. UTI Growth & Value Fund

APp>AR m SDp>SDm 1 AP>AR m>SDp
Income Schemes

Return All the I Income Schemes AP>AR m>SDp
Equity Schemes

1. Can Equity Tax Saver 2. Tat Equity Opportunities fund 3. UTI Equity Tax Saving Plan

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Performance Evaluation of Mutual Funds Scheme in 2011 India APp>AR m SDp>SDm 1

Note : AR p – Average Return on Mutual Fund Portfolio AR m – Average Return on Market Portfolio SDp – Risk of Mutual Fund Portfolio SDm – Risk of Market Portfolio Figure – 1 Risk Return Grid of Mutual Fund Schemes Quadrant – I (High Return and High Risk) : An analysis of the data indicated that oput of the total 23 schemes, 11 schemes fall in the first quadrant. All the 11 schemes are equity schemes. In terms of risk –return relationship, one would expect the equity schemes should fall in this first quadrant. The results show that these schemes have taken higher risk and returns. The topper in this category is Reliance Growth Fund with 415.5 percent of return. Quadrant – II (High Return and Low Risk) The result show that out of the total 23 schemes, only one equity scheme had earned higher returns in comparison to the of the market but have, in fact assumed lower risk than market risk. Quadrant – III (Low Return and Low Risk) This Category includes all those schemes whose average return and less than the average market return and their standard deviations are also lower than that of the market. The result indicates that out of the 23 schemes, all the 8 income schemes fall in this quadrant. Quadrant – IV (Low return and High Risk) This quadrant Included only three schemes, all of them are equity schemes. These Schemes had earned a very lesser return during the study period but have assumed higher risk than the market. Indeed, they are the poorest performers, as they have not generated even the average returns. 19 | P a g e

Performance Evaluation of Mutual Funds Scheme in 2011 India 4.6

Risk – Adjusted Performance of Selected Mutual Fund Schemes.

Having established the risk and the return associated with the sample schemes and the market indices, the next step is to evaluate the risk – adjusted performance of selected mutual fund schemes by using the following five performance measures. 

Sharpe Ratio,



Treynor Ratio,



Jensen Differential Return Measure, and



Sharpe Differential Return Measure and



Eama’s components of Investment Performance

A brief description of the five performance evaluation measures is given below. 4.6.1 Application of Share Ratio to Evaluate the Performance of Selected Schemes. To evaluate the risk – adjusted performance of sample mutual fund schemes the Sharpe ratio, both for the mutual fund schemes and for the benchmark portfolio (i.e. BSE Sensex 100) are computed and presented in Table VI Table VI Sharpe Ratio of Mutual Fund Schemes S

Schemes

No

Sharp

Sharp

(Fund)

(Index)

Equity Schemes 1


0.767

0.589

2


0.442

0.354

3


0.468

0.354

4


0.449

0.354

5

HDFC Top 200 Fund

0.486

0.354

6

Magnum Global Fund

0.376

0.354

7


0.386

0.354

8


0.483

0.354

9


0.377

10


0.581

0.354

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Reliance

0.544

0.354

Vision Fund 12

Tata Growth Fund

0.380

0.354

13


0.148

0.354

14


0.397

0.354

15


0.242

0.354


16

Birla Income Plus

-0.051

0.354

17


0.066

0.354

18


-0.048

0.354

19


0.031

0.354

20

Sundaram bond Saver

-0.075

0.354

21

Tata Income Fund

0.044

0.354

22

UTI Bond Fund

0.016

0.354

23

Unit Bond Advantage ```

-0.015

0.354

Source : Computed from information in table IV

Table VI present the Sharpe ratios for the sample schemes and for the benchmark portfolios. Out of the 23 Schemes had better Sharpe ratios in comparison to the relevant benchmark portfolios. Reliance vision is the top performer in the equity schemes. All the 8 income Schemes had less Sharpe ratio in comparison with relevant benchmark portfolio. Out of 15 equity schemes, two of them have performed less in comparison with their relevant benchmark portfolios. All the income schemes have performed less in comparison with their relevant benchmark portfolios. Though Can Equity Tax Saver scheme had better Sharpe ration than the relevant benchmark portfolio, which fell in the forth quadrant. 4.6.2 Application of Treynor Ratio to Evaluate the Performance of Selected Schemes. Treynor ratio or measure evaluates the performance of the sample schemes with respect to systematic risk. Table VII present Treynor rations of the Schemes and benchmark portfolios. Table VII 21 | P a g e

Performance Evaluation of Mutual Funds Scheme in 2011 India Treynor Ratios of Selected Mutual Fund Schemes S

Schemes

No

Treynor’s Ratio

Treynor’s Ratio

(Fund)

(Index)

Equity Schemes 1


0.700

1.940

2


2.649

1.940

3


2.803

1.940

4


3.069

1.940

5

HDFC Top 200 Fund

2.919

1.940

6

Magnum Global Fund

2.841

1.940

7


2.470

1.940

8


2.949

1.940

9


2.251

1.940

10


3.781

1.940

11

Reliance

3.555

1.940

Vision Fund 12

Tata Growth Fund

2.382

1.940

13


1.134

1.940

14


2.418

1.940

15


1.578

1.940


16

Birla Income Plus

-2.820

1.940

17


2.449

1.940

18


-1.713

1.940

19


0.882

1.940

20

Sundaram bond Saver

-5.430

1.940

21

Tata Income Fund

-1.300

1.940

22

UTI Bond Fund

0.556

1.940

23


-0.756

1.940

Table Vii presents the Treynor ratios for the selected schemes as well as for the benchmark portfolio, which fell in the fourth quadrant. 4.6.2 Application of Treynor Ratio to Evaluate the Performance of Selected Schemes. 22 | P a g e

Performance Evaluation of Mutual Funds Scheme in 2011 India Treynor ratio or measure evaluates the selected schemes as well as for the benchmark portfolios. Table Vii present the Treynor ratios for the selected schemes as well as for the benchmark portfolios. It can be seen that out of the 23 schemes, 10 schemes, had outperformed the benchmark in terms of volatility. Reliance Growth Fund is the top performer of the equity schemes. Interestingly, among the 10 schemes, 9\ schemes outperformed in respect of Sharpe ratio too. The only scheme namely Can Equity Tax Server had offered more return than benchmark in respect of Sharpe ratio. The result pertaining to Share and Treynor ratio reflect some conflict in performance ranking. The reason for such a conflict arises due to the fact that Sharpe ratio takes into accounts the total risk of the portfolio whereas the Treynor ratio considers only the systematic or the market risk. Thus it is possible that a portfolio might have outperformed the market in terms of Treynor ratio whereas in terms of Sharpe ratio it did not. The Reason for this difference is that the portfolio under consideration may have a relatively larger amount of unique risk. The presence of unique risk in the portfolio does not affect the Treynor ratio whereas it would affect the Sharpe ratio. Therefore in order to detect any conflict in performance ranking, the sample schemes have been ranked in terms of Sharpe and Treynor ratios. 4.6.3 Application of Jensen Measure to Evaluate the Performance of selected Scheme. The Jensen measure has given a different dimension to the portfolio performance. In the Jensen measure, Alpha values are computed which indicates the additional return of the portfolio i.e. the difference between the expected return and actual return and actual return. Jensen’s alphas, beta and expected return value are given in Table VIII

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Table VIII Jensen Measures of Selected Mutual Fund Schemes S

Schemes

Jenson’s A

Jenson’ B

No

Expected Return

Equity Schemes 1


-1.232

0.992

3.013

2


0.676

0.958

2.535

3


0.787

0.914

2.441

4


1.093

0.976

2.857

5

HDFC Top 200 Fund

0.920

0.945

2.510

6

Magnum Global Fund

0.819

0.912

2.943

7


0.617

1.175

3.163

8


0.956

0.951

2.556

9


0.300

0.967

2.548

10


1.773

0.967

2.729

11

Reliance

1.490

0.926

2.642

Vision Fund 12

Tata Growth Fund

0.430

0.981

2.678

13


-0.663

0.819

2.721

14


0.464

0.977

2.609

15


-0.321

0.882

2.537


16

Birla Income Plus

-0.075

0.017

0.539

17


0.007

0.024

0.791

18


-0.087

0.025

0.797

19


-0.034

0.031

0.793

20

Sundaram bond Saver

-0.091

0.014

0.811 24 | P a g e


Tata Income Fund

1.039

-0.319

3.916

22

UTI Bond Fund

-0.031

0.021

0.744

23


-0.051

0.020

0.817

Table VIII present the Jensen measures of the mutual fund schemes. Out of the total 23 schemes, alpha values for 14 schemes were positive thereby indicating superior performance. IN other words, these schemes had generated returns in excess of equilibrium return. The value of alphas is an absolute, which indicates differential return of the portfolio between equilibrium return and actual return. It is noted that the equilibrium return of a fund is the return that it is expected to earn with the given level of systematic or market risk. The additional return earned by the fund manager over equilibrium return can be attributed to his ability to select the securities. The result indicates alpha values for only three schemes viz.

Franklin India

Prima fund, Reliance Growth Fund and Reliance Vision Fund were found to be statistically significant, thereby implying that these three schemes have generated above normal returns. In order to test whether the mutual funds schemes are offering superior risk – adjusted return or not under Jensen alpha measure, the following null hypothesis was formulated. Hypothesis HO : Mutual Fund does not offer superior risk – adjusted returns. A positive and significant alpha will mean that the schemes provide superior risk adjusted returns. The result of the study reveals that out of the 23 schemes, only 3 schemes are having positive and significant alphas values. Hence, the hypothesis is accepted. 4.6.4 Application of Sharpe differential Return measure to Evaluate the performance of Selected Schemes.

25 | P a g e

Performance Evaluation of Mutual Funds Scheme in 2011 India To analyze the manager’s ability in selecting stocks and his ability to provide diversification, Sharpe uses the differential return measure. For this, the value of expected return and actual return are calculated and presented in Table IX Table IX Sharpe Differential Return of Selected Mutual Fund Scheme S

Schemes

Expected Return

Actual Return

No

Differential Return

Equity Schemes 1


3.013

1.201

-1.813

2


2.535

3.041

0.505

3


2.441

3.071

0.629

4


2.857

3.491

0.633

5

HDFC Top 200 Fund

2.510

3.26

0.750

6

Magnum Global Fund

2.943

3.10

0.157

7


3.163

3.40

0.237

8


2.556

3.310

0.754

9


2.548

2.68

0.132

10


2.729

4.16

1.431

11

Reliance

2.642

3.79

1.148

Vision Fund 12

Tata Growth Fund

2.678

2.84

0.162

13


2.721

1.43

-1.291

14


2.609

2.87

0.261

15


2.537

1.900

-0.637


16

Birla Income Plus

0.539

0.46

-0.079

17


0.791

0.56

0.231

18


0.797

0.47

0.327

19


0.793

0.53

0.263 26 | P a g e


Sundaram bond Saver

0.811

0.44

0.371

21

Tata Income Fund

3.916

0.93

2.986

22

UTI Bond Fund

0.744

0.52

0.224

23


0.817

0.49

0.327

Source : Computed from information in Table IV Table IX present information pertaining to Sharpe’s differential return for mutual fund schemes. Out of the 23 schemes, 12 schemes reflected positive differential returns, thereby indicating superior performance. The top two performances are Reliance Growth Fund and Reliance vision Fund. The remaining 09 schemes showed negative differential returns indicating that they could not generate return commensurate with the risk they assumed. A comparison of Share differential returns and Jensen alpha indicates the impact of selectivity and diversification on the fund’s returns. As revealed earlier, the Indian mutual funds are not adequately diversified. The analysis is further extended to pinpoint the reasons for good or bad performance which also identifies the areas for correction. This is fulfilled by Fama’s decomposition measures. 4.6.5 Application of Fama’s components to evaluate the performance of selected schemes. In order to analyze the selected schemes’ returns under Fama’s components of investment performance the returns are grouped into four components for the sample mutual fund schemes are computed and presented in Table X Table X Fama’s Break -up of selected Mutual Fund Scheme S

Schemes

No

Diversifiable

Impact of Beta

Risk (D.R.)

Imperfect

Net

Diversification

Selectivity

Equity Schemes 1


0.300

1.926

0.581

-1.813

2


0.087

1.859

0.169

0.507

27 | P a g e



0.083

1.773

0.161

0.626

4


0.236

1.894

0.457

0.635

5

HDFC Top 200 Fund

0.088

1.833

0.171

0.749

6

Magnum Global Fund

0.344

1.770

0.667

0.153

7


0.195

2.279

0.378

0.239

8


0.106

1.845

0.205

0.751

9


0.085

1.876

0.166

0.134

10


0.179

1.876

0.347

1.426

11

Reliance

0.175

1.796

0.340

1.150

Vision Fund 12

Tata Growth Fund

0.139

1.903

0.269

0.161

13


0.323

1.589

0.627

-1.289

14


0.107

1.896

0.207

0.257

15


0.164

1.712

0.319

-0.640


16

Birla Income Plus

0.539

0.46

-0.079

-0.336

17


0.791

0.56

0.231

-0.232

18


0.797

0.47

0.327

-0.330

19


0.793

0.53

0.263

-0.262

20

Sundaram bond Saver

0.811

0.44

0.371

-0.369

21

Tata Income Fund

3.916

0.93

2.986

-2.990

22

UTI Bond Fund

0.744

0.52

0.224

-0.227

23


0.817

0.49

0.327

-0.323

Source : Computed from information in Table IV Table X presents information pertaining to Fama's components of performance for the mutual fund schemes. Note that the overall performance has been broken down into various components such as diversifiable risk, impact of beta, imperfect diversification and net selectivity. The above table shows that except the only one income scheme namely Tata Income Fund, the remaining 22 schemes had provided positive performance on account of risk bearing activity of fund managers.

28 | P a g e

Performance Evaluation of Mutual Funds Scheme in 2011 India However, all the 23 schemes had provided positive performance in terms of diversifiable risk and imperfect diversification. The only scheme namely Tata Income Fund had provided highest value (4.028) of imperfect diversification. After accounting for diversification, the residual performance on selectivity is attributed to net selectivity and it will be equal or less than that on selectivity. A positive net selectivity will indicate superior performance. However, in case net selectivity is negative then it would mean that fund managers have taken diversifiable risk that has been compensated by extra returns. It can be seen from the same table 10 that only 12 schemes appeared to have superior stock selection ability as the selectivity measure was found to be positive. The two top performers with regard to selectivity were Reliance Growth Fund and Reliance Vision Fund. V. Conclusion The risk and return of mutual fund schemes were not in conformity with their stated investment objectives. Further, sample schemes were not found to be adequately diversified. It can be stated that 13 schemes out of 23 schemes selected had superior performance than the benchmark portfolio in terms of Sharpe ratio, 13 schemes had superior performance in terms of Treynor ratio (Systematic Risk), and 14 schemes had superior performance according to Jensen measure. 12 schemes reflected positive differential returns, thereby indicating superior performance in respect of Sharpe differential return measure and 12 schemes appeared to have superior stock selection ability as the selectivity measure was found to be positive in respect of Fama's components of investment performance. The funds were able to earn higher returns due to selectivity. But the proper balance between selectivity and diversification was not maintained. The analysis made by the application of Fama's measure indicates that the returns out of diversification were less. Thus the Indian mutual funds are not properly diversified. Even though the Dharmapuri District is the most backward in terms of economics as well as education, the mutual funds investors in the district are having an average 29 | P a g e

Performance Evaluation of Mutual Funds Scheme in 2011 India awareness on various mutual fund schemes and their risk and returns. Lack of deeper distribution networks and channels, domination of the banking sector, impact of global developments, operational hassles, lack of investment advisors are the major challenges that are being faced by the Indian mutual fund industry. In spite of the above bottlenecks, the mutual fund industry is having a good prospect in our country. The factors such as support from SEBI, declining bank deposits' interest rate in the recent past, opening of the market to the foreign investors, the entry of large domestic institutional investors, increased focus on product innovation, security and liquidity, tax concession would go a long way in making mutual funds an increasingly popular, lucrative and cost efficient vehicle for investment. If mutual funds ensure, creating awareness among retail investors, controlling operational costs, deeper penetration in the rural areas, curbing unethical practices, spreading the mutual fund culture, maintaining transparency and flexibility and creating a good rapport with the investors, their future will be very bright.

30 | P a g e


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Performance Evaluation of Mutual Funds Scheme in 2011 India Chakarbarti, Anjan and Rungta, (2000), "Mutual Fund Industry in India - in-depth Look into Problems of Credibility, Risk and Brand", The ICFAI Journal of Applied Finance Vol. 6., April 2000. Chander, Subhaand and Jospal Singh, (2004), "Performance of Mutual Funds in India - An Empirical Evidence", Applied Finance, June 2004. Chandra, Prasanna, (2005), "The Investment Game : How to Win", Tata McGraw Hill Publishing House, Delhi, 2005. Fischer, Donald E. and Ronald J.Jordan, (2006), "SecurityAnalysis and Portfolio Management", Prentice- Hall of India Pvt. Ltd, Delhi; 2006. Fredman, Albert J. and Russ Wiles, (2005), "How Mutual Fund Works", Prentice Hall of India Pvt. Ltd., 2005. Gupta, Amitabh, (2000), "Market Timing Abilities of Indian Mutual Fund Managers An Empirical Study", Journal of Applied Finance, Vol..6., No. April 2000. Gupta, L.C., (1987), "Shareholders Survey of Geographic Distribution", Manas Publication, Delhi 1987. Gupta, L.C., (1993), "Mutual Funds and Asset Preference - Household Investors Survey, 2 nd Round", Society for Capital Market Research and Development, 1993 Gupta, L.C., (2000), "Stock Exchange Trading Agenda for Reform", Society for Capital Market Research and Development, De/hi, 2000. Gupta, L.C., (2001), "Indian Share Owners", Society for Capital Market Research and Development, Delhi, 2001. Gupta, Ramesh, (1999), "Mutual Funds-The Case for Assured Returns", Chartered Accountant, March 1999. Jaya, Dev. M, (1998), "Performance Evaluations of Portfolio Managers - An Empirical Evidence of Indian Mutual Funds", Applied Finance, VoL 5, No. 2, July 1998. Jayakar, Roshini, (1998), "Life After Death for Mutual Funds", Business Today, December 7 1998. 32 | P a g e

Performance Evaluation of Mutual Funds Scheme in 2011 India Kothari, C.R., (2006), "Research Methodology", New Age International Publishers, Delhi, 2006.. Krishrtamurthi, S., (1996), "Mutual Funds in India", Institute of Cost and Works Accountant of India, Kolkatta, 1996. Kumar, Dhirendra, (2001), "Mutual Fund in 12K: Years of Ladders and Snakes", ICFAI Reader, Febraury 2001. Mathumathi, R., (1998), "Risk Perception of Investors", Indian Institute of Capital Market, 1998. Rajarajan,V., (1999), "Stages in _Life Cycle and Investment Pattern", Finance India Vol.13. No. 2, June 1999. Ramachandran .G. and G. Subramartiyan, (2001), "Crushed by Mistrust", Portfolio Organizer, August 2001. Rao, K.V, and K.Vengateshwarlu, "Performance Evaluation of Mutual Fund- The Case Study of Unit Trust of India" , UTI Institute of Capital Market Rustagi, R.P., (2005), "Investment Management", Sultan Chand & Sons, Delhi, 2005. Sahadevan, K.G. and Thirupalraju.M., (1997), "Mutual Funds-Data, Interpretation and Analysis", Prentice- Hall of India Pvt Ltd., Delhi,1997. Sekaran, Uma, (2003), "Research Methods for Business", John Wiley & Sons, inc., Singapore, 2003. Sethu .G, (1999), "The Mutual Fund Puzzle", UTI Institute of Capital Market, Mumbai 1999. Shah, Prashant, (2006), "Mutual Funds -A Win Option", Portfolio Organizer, April 2006. Shanmugaraja, R. and Muthuswamy.P., (1998), "Decision Making Process of Individual Investors", Indian Institute of Capital Market, 1998. Sharpe, William F., (1998), "Morning Star's Risk Adjusted Ratings", Association for Investments Management and Research, Vol. 54, No. 2, July-August 1998. 33 | P a g e

Performance Evaluation of Mutual Funds Scheme in India - An Empirical Study

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