Anda di halaman 1dari 44

PERFORMANCE

EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

ABSTRACT

Financial system in a country plays a dominant role in assets formation and intermediation,
and contributes substantially in macroeconomic development. In this process of development
mutual funds have emerged as strong financial intermediaries and are playing a very
important role in bringing stability to the financial system and efficiency to resource
allocation.

Mutual funds play a crucial role in an economy by mobilizing savings and investing them in
the capital market, thus establishing a link between savings and the capital market. The
activities of mutual funds have both short-and long-term impact on the savings and capital
markets, and the national economy.

The Indian Mutual fund Industry has witnessed a structural transformation during the past few
years. Therefore it becomes important to examine the performance of the mutual fund in the
changed environment. This research report has evaluate the performance of Indian Mutual
fund equity scheme by using monthly NAV returns of 10 equity Growth funds of 5 years past
data from 1-1-2003 to 30-04-2007. BSE sensex has been used as a proxy for the market
portfolio, while 364 day Treasury bills (T-bills) have been used as a surrogate for risk free
rate of return. The performance of funds has been computed by using Jensen’s ratio. To
evaluate investment performance of mutual funds in terms of risk and return. To examine the
funds sensitivity to the market fluctuations in terms of beta. To appraise investment
performance of mutual funds with risk adjustment the theoretical parameters as suggested by
Sharpe, Treynor and Jensen. To rank the funds according to Jensen’s performance measure.
There is no conclusive evidence which suggests that performance mutual funds superior to the
market. However there is some evidence that some of the funds are performing better than the
market.

R.V. Institute of management 1


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

INTRODUCTION

MUTUAL FUNDS. AN OVERVIEW:

A Mutual Fund is a trust that pools the savings of a number of Investors who share a common
financial goal. The money thus collected is invested by the fund manager indifferent types of
securities depending upon the objective of the scheme. These could range from shares to
debentures to money market Instruments. The income earned through these investments and
the capital appreciations realized by the scheme are shared by its unit holders in proportion to
the number of units held by them. Thus a mutual fund is the most suitable for the common
man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a
relatively low cost. Anybody with an invest able surplus of as little as a few thousand rupees
can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective
and strategy.

A Mutual Fund is the ideal investment vehicle for today’s complex and modern financial
scenario. Markets for Equities, Bonds and other Fixed Income Instruments, real estate,
derivatives and other assets are driven by global events occurring in faraway places. Atypical
individual is unlikely to have the knowledge, skills, inclination and the time to keep track of
events, understand their implications and act speedily. An Individual also finds it difficult to
keep track of ownership of his assets, brokerage, dues and bank transactions etc.

A Mutual Fund is the answer to all these situations. It appoints professionally qualified and
experienced staff that manages each of these functions on full time
basis. The large pool of money collected in the fund allows it to hire such staff at a very low
cost to each investor. In effect, the mutual fund vehicle exploits economies of Scale in all

R.V. Institute of management 2


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

three areas- Research, Investments and Transaction Processing.


While the concept of coming together to invest money collectively is not new, the mutual
funds in their present form are a 20th century Phenomenon. In fact, mutual funds gained
popularity only after the Second World War. Globally there are thousands of mutual funds
with different investment objectives. Today, mutual funds, collectively manage almost as
much as or more money as compared to banks.
A draft offer document is to be prepared at the time of launching the fund. Typically,
it pre-specifies the investment objectives of the fund, the risk associated, the costs involved in
the process and the broad rules for entry into and exit from the fund and other areas of
operation. In India, as in most of the countries, these sponsors need approval from a regulator,
SEBI. SEBI looks at he records of the Sponsor and its financial strength in granting approval
to the fund for commencing operations.
A sponsor then hires an. Asset Management Company. to invest the funds according
to the investment objective. It also hires equity to the custodian of the assets of the fund and
perhaps a third one to handle registry work for the unit holders of the fund. In the Indian
concept, the sponsors promote the AMC also, in which it holds a majority stake. In many
cases a Sponsor can hold a 100% stake in the AMC eg. IL&FS is the sponsor of IL&FS
AMC, which has floated different Mutual fund schemes and also acts as an asset manager or
the funds collected under the schemes.

History of mutual funds in India


The history of mutual funds in India can be broadly divided into 5 important phases.
First Phase: 1963-87 Initial Development phase (Unit Trust of India)

In 1963, UTI was established by an Act of Parliament and given a monopoly. UTI
commenced its operations from July 1964 .The impetus for establishing a formal institution
came from the desire to increase the propensity of the middle and lower groups to save and to

R.V. Institute of management 3


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

invest. UTI came into existence during a period marked by great


political and economic uncertainty in India. The first and still one of the largest schemes,
launched by UTI was Unit Scheme 1964. UTI created a number of products such as monthly
income plans, children’s plans, equity-oriented schemes and offshore funds during this period.
The total asset under management for the year 1987-88 was 6,700crores.

Second Phase: 1987-93 (Entry of Public Sector Funds)


Second phase witnessed the entry of mutual funds sponsored by state owned banks and
financial institutions. With the opening up of the economy, many public sector and financial
institutions were allowed to establish mutual funds. In November 1987 the State Bank of
India established the first non-UTI mutual fund-SBI Mutual Fund. This was followed by
Canbank Mutual Fund (launched in December, 1987), LIC Mutual Fund (1989), and Indian
Bank Mutual Fund (1990) followed by Bank of India Mutual Fund, GIC Mutual Fund and
PNB Mutual Fund. These mutual funds helped enlarge the investor community and the invest
able funds. During this period, investors were shifting away from bank deposits to mutual
funds. Most funds were growth-oriented closed-ended funds. From 1987 to 1992-93, the fund
industry expanded nearly seven times in terms of Assets under Management. The total asset
under management considering both UTI and Public Sector was 47,004.

Third Phase: 1993-96 (Emergence of Private Funds)


A new era in the mutual fund industry began with the permission granted for the entry of
private sector funds in 1993, both Indian and Foreign. Also Government launched a series of
measures aimed at the financial sector as a part of the economic liberalization and reform
process. This included the setting up of the Securities and Exchange Board of India (SEBI) as
a regulatory body for the financial sector including Mutual Funds, which issued the SEBI
Mutual Fund Regulations in January 1993. During the year 1993-94, five private sector
mutual funds launched their schemes followed by six others in 1994-95.

R.V. Institute of management 4


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

Fourth Phase: 1996-1999 (SEBI Regulations for Mutual


Funds)
More investor friendly regulatory measures have been taken both by SEBI to protect the
investor and by the Government to enhance investors. returns. A comprehensive set of
regulations for all mutual funds operating in India was introduced with SEBI (Mutual Fund),
1996. These regulations set uniform standards for all funds and will eventually be applied in
full to Unit Trust of India as well, even though UTI is governed by its own UTI Act. In 1999
Union Government Budget took a big step in exempting all mutual funds dividends from
income tax in the hands of investors. 1999 marks the beginning of a new phase in the history
of the mutual fund industry in India, a phase of significant growth in terms of both amounts
mobilized from investors and assets under management.

Fifth Phase: 1999-2002


This phase was marked by very rapid growth in the industry, and significant increase in
market shares of private sector players. Assets crossed Rs. 1,00,000. The tax break offered to
mutual funds in 1999 created arbitrage opportunities for a number of institutional players.
Bond funds and liquid funds registered the highest growth in this period, accounting for
nearly 60% of the assets. UTI.s share of the industry dropped to nearly 50%
.
MEANING & DEFINITIONS OF MUTUAL FUND:
Mutual Funds are financial intermediaries. They are companies set up to receive your
money, and then having received it, make investments with the money Via an AMC. It is an
ideal tool for people who want to invest but don't want to be bothered with deciphering the
numbers and deciding whether the stock is a good buy or not. A mutual fund manager
proceeds to buy a number of stocks from various markets and industries. Depending on the
amount you invest, you own part of the overall fund.
The beauty of mutual funds is that anyone with an invest able surplus of a few
hundred rupees can invest and reap returns as high as those provided by the equity markets or
have a steady and comparatively secure investment as offered by debt instruments.
A Mutual Fund is an investment tool that allows small investors access to a well
diversified portfolio of equities, bonds and other securities. Each shareholder Participates in

R.V. Institute of management 5


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

the gain or loss of the fund. Units are issued and can be
redeemed as needed. The fund's Net Asset Value (NAV) is determined each day.
In simple words, a mutual fund is a trust, which collects the savings from small
investors, invest them in government securities and earn through interest, dividends and
capital gains.
For instance, if one has Rs. 1000 to invest, it may not fetch much on its own. But,
when it is pooled with Rs. 1000 each from a lot of other people, then one could create a big
fund. Large enough to invest in wide varieties of shares and debentures on a commanding
scale and thus, to enjoy the economies of large scale operations.

DEFINITIONS:

The SEBI, 1993 defines a Mutual Fund as .a fund established in the form of a trust by
a sponsor, to raise monies by the trustees through the sale of units to the public, under one or
more schemes, for investing in securities in accordance with these regulations.
According to Weston J. Fred and Brigham, Eugene, unit trusts are: “Corporations
which accept dollars from savers and then use these dollars to buy stocks, long term
bonds and short term debt instruments issued by business or government units; these
corporations pool funds and thus reduce the risk of diversification.”

OPERATION OF THE FUND:

A mutual fund invites the prospective investors to join the fund by offering various
schemes so as to suit to the requirements of categories of investors. The resources of
individual investors are pooled together and the investors are issued units/shares for the
money invested. The amount so collected is invested in capital market instruments like
treasury bills, commercial papers, etc.
For managing the fund, a mutual fund gets an annual fee of 1.25% of funds managed
at the maximum as fixed by SEBI (MF) regulations, 1993 and if the funds exceed Rs. 100
cores , the fee is only 1%. The fee cannot exceed 1%. Off course, regular expenses like
custodial fee, cost of dividend warrants, fee for registration, the asset management fee etc are

R.V. Institute of management 6


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

debited to the respective schemes. These expenses cannot


exceed 3% of the assets in the respective schemes. These expenses cannot exceed 3% of the
assets in the respective schemes each year. The remaining amount is given back to the
investors in full.

The flow chart below describes broadly the working of a mutual fund:

ORGANISATION OF A MUTUAL FUND:


The formation and operations of Mutual Funds in India is solely guided by SEBI
(Mutual Funds) Regulations, 1993, which came into force on 20th January, 1996, through a
Notification on 9th December, 1996. These Regulations make it mandatory for Mutual Funds
to have a three-tier structure of:
1. A Sponsor Institution to promote the Fund.
2. A team of Trustees to oversee the operations and to provide checks for the
efficient, profitable and transparent operations of the fund and
3. An Asset Management Company (AMC) to actually deal with the funds

Sponsoring Institution:

The Company, which sets up the mutual fund, is called the Sponsor. SEBI has laid
down certain criteria to be met by the sponsor. The criterion mainly deals with adequate
experience, good past track record, net worth etc.
 Sponsor appoints the Trustees, Custodian and the AMC with the prior

R.V. Institute of management 7


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

Approval of SEBI, and in accordance with SEBI Regulations.


  Sponsor must have at least 5-year track record of business interest in theFinancial
Markets.

Trustees:

Trustees are the people with long experience and good integrity in the respective
fields carry the crucial responsibility in safeguarding the interests of the investors. For this
purpose, they monitor the operations of the different schemes. They have wide ranging
powers and they can even dismiss AMC with the approval of SEBI.The Indian Trust Act
governs those rules regarding appointment of the Trustees are:
• Appointment of Trustees has to be done with the prior approval of SEBI.
• There must be at least 4 members in the Board of Trustees and at least
2/3rd of the members of the Board of Trustees must be independent.
• Trustees of one Mutual Fund cannot be a Trustee of another Mutual Fund, unless he is
an independent trustee in both cases, and has the approval of both the Boards.
Rights of Trustees:
 Trustees appoint the AMC, in consultation with the sponsor and according
to SEBI Regulations.
 All mutual Fund Schemes floated by the AMC have to be approved by the
Trustees.
 Trustees can seek information from the AMC on the operations and compliance of the
Mutual Fund, with the provisions of the trust Deed, investment management
agreement and the SEBI Regulations.
 Trustees can review and ensure that Net worth of the AMC is according to stipulated
norms and regulations.

R.V. Institute of management 8


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

Asset Management Company:

The AMC actually manages the funds of the various schemes. The AMC employs
a large number of professionals to make investments, carry out research & to do agent and
investor servicing. Infact, the success of any Mutual Fund depends upon the efficiency of this
AMC. The AMC submits a quarterly report on the functioning of the mutual fund to the
trustees who will guide and control the AMC.
The AMC is usually a private limited company, in which the sponsors and their
associations or joint venture partners are shareholders. The AMC has to be registered by SEBI
and should have a minimum Net worth of Rs.10 cores all times. The role of the AMC is to act
as the Investment Manager of the Trust along with the following functions:
• It manages the funds by making investments in accordance with the
provision of the Trust Deed and Regulations
• The AMC shall disclose the basis of calculation of NAV and Repurchase
price of the schemes and disclose the same to the investors.
• Funds shall be invested as per Trust Deed and Regulations.

Restrictions on the AMC.s:

 AMC.s cannot launch a fund scheme without the prior approval of Trustees.
 AMC.s have to provide full details of Employees and Board Members, in
all cases where such investments exceed Rs. 1 lakh.
 AMC.s cannot take up any activity that is in conflict with the activities of the
mutual funds.

Registrars and Transfer Agents:

R.V. Institute of management 9


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

The Registrars and Transfer Agents are responsible for


the investor servicing functions, as they maintain the records of investors in the mutual funds.
They process investor applications, record details provided by the investors on application
forms, send out periodical information on the performance of the Mutual fund; process
dividend pay-out to the investors; incorporate changes in information as communicated by
investors; and keep the investor record up to date, by recording new investors and removing
investors who have withdrawn their funds.

Custodian:

Custodians are responsible for the securities held in the mutual funds portfolio.
They discharge an important back-office function, by ensuring that securities that are bought
are delivered and transferred to the books of mutual funds, and that funds are paid-out when
mutual fund buys securities. They keep the investment account of the mutual fund, and also
collect the dividends and interest payments due on the mutual fund investments. Custodians
also track corporate actions like bonus, issues, right offers, offer for sale, buy back and open
offers for acquisition.

R.V. Institute of management 10


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

ORGANISATION OF A MUTUAL FUND:

There are many entities involved and the diagram below illustrates the
organisational set up of a mutual fund:

Composition of Indian Mutual Fund Industry:


Unit Trust of India
Bank sponsored
Bank of Baroda AMC
Bank of India AMC
Canbank Investment Management Services Ltd.
Punjab National Bank AMC Ltd.
SBI Funds Management Ltd.
Indfund Management Ltd.

Institutions:
General Insurance Corporation AMC
IDBI Principal Asset Management Co.
Jeevan Bima Sahayog Asset Management Co. Ltd.

R.V. Institute of management 11


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

Private Sector:
1. India
Benchmark AMC Ltd.
Cholamandalam AMC Ltd.
Escorts AMC Ltd.
J.M. Capital Management Co. Ltd.
Kotak Mahindra AMC Ltd.
Shriram AMC Ltd.

2. Joint Venture .Predominantly Indian


Birla Sun Life AMC Pvt. Co. Ltd.
DSP Merrill Lynch Investment Mangers (India) ltd.
HDFC AMC Ltd.
Sundaram Newton AMC
Tata TD Waterhouse Asset Management Private Ltd.

3. Joint Ventures .Predominantly Foreign


Alliance Capital Asset Management (India) Pvt. Ltd.
Standard Chartered Asset Management Co. Pvt. Ltd.
ING Investment Management (India) Pvt. Ltd.
JM Asset Management (India) Pvt. Ltd.
Morgan Stanley Investment Management Pvt. Ltd.
Prudential ICICI Management Co. Ltd.
Templeton Asset Management (I) Pvt. Ltd.

R.V. Institute of management 12


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

ROLE OF MUTUAL FUNDS IN THE FINANCIAL MARKET

Indian financial institutions have played a dominant role in assets formation and
intermediation, and contributed substantially in macroeconomic development. In this process
of development Indian mutual funds have emerged as strong financial intermediaries and are
playing a very important role in bringing stability to the financial system and efficiency to
resource allocation.
Mutual funds play a crucial role in an economy by mobilizing saving
and investing them in the capital market, thus establishing a link between
savings and the capital market.
The activities of mutual funds have both short-and long-term impact on the savings
and capital markets, and the national economy. Mutual funds, thus, assist the process of
financial deepening and intermediation. They mobilize funds in the savings market and act as
complementary to banking; at the same time they also compete with banks and other financial
institutions. In the process stock market activities are also significantly influenced by mutual
funds.
There is thus hardly any segment of the financial market, which is not (directly or
indirectly) influenced by the existence and operation of mutual funds. However, the scope and
efficiency of mutual funds are influenced by overall economic fundamentals: the inter
relationship between the financial and real sector, the nature of development of the savings
and capital markets, market structure, institutional arrangements and overall policy regime.

R.V. Institute of management 13


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

Regulatory Aspects of Mutual Fund

Schemes of mutual fund:


 The asset management company shall launch no scheme unless the trustees approve
such scheme and a copy of the offer document has been filed with the board.

 Every mutual fund shall along with the offer document of each scheme pay filing fees.

 The offer document shall contain disclosures which are adequate in order to enable the
investors to make informed investment decision

R.V. Institute of management 14


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

 including the disclosure on maximum investments


proposed to be made by the scheme in the listed securities of the group companies of
the sponsor.

 No one shall issue any form of application for units of a mutual fund unless the form is
accompanied by the memorandum containing such information as may be specified by
the Board.

 Every close ended scheme shall be listed in a recognized stock exchange within six
months from the closure of the subscription.

 The asset management company may at its option repurchase or reissue the
repurchased units of a close-ended scheme.

 A close-ended scheme shall be fully redeemed at the end of the maturity period.
"Unless a majority of the unit holders otherwise decide for its rollover by passing a
resolution".

 The mutual fund and asset management company shall be liable to refund the
application money to the applicants,-
(I) If the mutual fund fails to receive the minimum subscription amount referred to in clause
(a) of sub-regulation.
(ii) If the moneys received from the applicants for units are in excess of subscription as
referred to in clause (b) of sub-regulation (1).

 The asset management company shall issue to the applicant whose application has
been accepted, unit certificates or a statement of accounts specifying the number of
units allotted to the applicant as soon

R.V. Institute of management 15


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

as possible but not later than six weeks from the date of
closure of the initial subscription list and or from the date of receipt of the request
from the unit holders in any open ended scheme.

INVESTMENT OBJECTIVES AND VALUATION POLICIES:

• The money collected under any scheme of a mutual fund shall be invested only in
transferable securities in the money market or in the capital market or in privately
placed debentures or securitized debts.

• Provided that moneys collected under any money market scheme of a mutual fund
shall be invested only in money market instruments in accordance with directions
issued by the Reserve Bank of India
.
• The mutual fund shall not borrow except to meet temporary liquidity needs of the
Mutual funds for the purpose of repurchase, redemption of units or payment of Interest
or dividend to the unit holders.

• The mutual fund shall not advance any loans for any purpose.

• The Net Asset Value of the scheme shall be calculated and published at least in two
daily newspapers at intervals of not exceeding one week.

• The price at which the units may be subscribed or sold and the price at which such
units may at any time be repurchased by the mutual fund shall be made available to
the investors.

R.V. Institute of management 16


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

TYPES OF MUTUAL FUNDS:


Broadly Mutual Funds are classified into:

 Open-ended schemes:
The open-ended schemes do not have a fixed maturity and are open for subscription the whole
year. One can buy and sell units at the NAV related prices to the Mutual funds. These
schemes are normally not listed on the stock exchanges and can be redeemed directly to the
Mutual Fund
.
 Close-ended Schemes:
The closed ended schemes can be bought and sold on the stock exchange subsequent to the
initial subscription through the public offer. One can stay invested in the scheme for a
stipulated period ranging from 2 to 15 years.
Generally, the close-ended schemes are traded at a discount to their NAV in the
stock exchange.

On the basis of investments objective, there are five different types of


Schemes:

 Growth/Equity Scheme :
Majority of the corpus of such a scheme is invested in equities and equity related instruments.
This kind of scheme is for those investors who are not risk averse and are willing to hold on to
their investment for a long period of time,caring little for volatility. In such schemes, dividend
may or may not be declared.

 Income /Debt Scheme:


The Fund Manager of such schemes invests a substantial portion of their fund
in fixed income securities like debentures, bonds and money market instruments. This kind of
scheme is ideal for risk averse investors who are interested in steady income.

R.V. Institute of management 17


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

 Balanced Schemes:
Fund Manager of such funds invests in both equity as well as debt markets in the proportion
as that highlighted in the prospectus. The objective of such a scheme is to provide both
growth and income by distributing a part of the income and capital gains they earn. Such a
scheme is suitable for investors who want long-term returns without taking the entire risk of
the equity market.

 Money Market/Liquid Schemes:


These are schemes with very low risks. They invest in Zero risk or safer, short term
instruments like treasury bills, certificates of deposit, Commercial Paper and inter-bank call
money. The objective of these schemes is to provide liquidity and moderate income and also
preserve the capital.

 Tax Saving Schemes:


The objective of such a scheme is to provide tax benefits to the investors.
Two types of schemes fall under this head.
1. ELSS (Equity Linked Savings Schemes:
A Fund Manager of such a scheme invests primarily in stocks. An important feature of this
scheme is that there is a lock-in period of three years from the date of investment. During this
period unit holders are prohibited from trading, pledging and transferring the units.
Repurchase is permitted only after three years.

R.V. Institute of management 18


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

2. Pension Schemes:
A unit holder in a Pension Scheme can avail of a tax rebate of 20 per cent for
investments up to Rs 60,000 (tax saving of Rs 12,000).

Benefits of investing in Mutual Funds:

 Small investments:
Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide
spectrum of companies with small investments. Such a spread would not have been possible
without their assistance.

 Professional Fund Management:


Professionals having considerable expertise, experience and resources manage the pool of
money collected by a mutual fund. They thoroughly analyze the markets and economy to pick
good investment opportunities.

 Spreading Risk:
An investor with a limited amount of fund might be able to invest in only one or
two stocks / bonds, thus increasing his or her risk. However, a mutual fund will spread its risk
by investing a number of sound stocks or bonds. A fund normally
invests in companies across a wide range of industries, so the risk is diversified at the same
time taking advantage of the position it holds. Also in cases of liquidity crisis where stocks
are sold at a distress, mutual funds have the advantage of the redemption option at the NAVs.

 Transparency and interactivity:


Mutual Funds regularly provide investors with information on the value of their
investments. Mutual Funds also provide complete portfolio disclosure of the investments
made by various schemes and also the proportion invested in each asset type. Mutual Funds
clearly layout their investment strategy to the investor.

R.V. Institute of management 19


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

 Liquidity:

Closed ended funds have their units listed at the stock exchange, thus they can be bought and
sold at their market value. Over and above this the units can be directly redeemed to the
Mutual Fund as and when they announce the repurchase.

 Choice:
The large amounts of Mutual Funds offer the investor a wide variety to choose from. An
investor can pick up a scheme depending upon his risk / return profile.
 Regulations:
All the mutual funds are registered with SEBI and they function within the provisions of strict
regulation designed to protect the interests of the investor.
 Flexibility:
Investors can exchange their units from one scheme to another, which cannot be done in other
kinds of investments. Income units can be exchanged for growth units depending upon the
performance of the funds.
 Potential yields:
The pooling of funds from a large number of customers enables the fund to have large funds
at its disposal. Due to these large funds, mutual funds are able to buy cheaper and sell dearer
than the small & medium investors. Thus, they are able to get better market rates and lower
rates of brokerage. So, they provide better yields to their customers. They also enjoy the
economies of scale and reduce the cost of capital market participation. The transaction costs
of large investments are quite lower than that of small investments. All the profits are passed
on to the investor in the form of dividends and capital appreciation. Mutual funds have a
return ranging from 12-17% p.a.

R.V. Institute of management 20


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

 Renders expertise service at lower costs:


The management of the fund is generally assigned to professionals who are well trained and
have adequate experience in the field of investment. The investment decisions of these
professionals are backed by informed judgment and experience. Thus, investors are assured of
quality services in their best interest. The fee charged by the mutual funds is 1%.

Risks of investment in Mutual Funds:

Mutual funds are not free from risks as the funds so collected are invested in
stock markets, which are volatile in nature and are not risk free. The following risks are
generally involved in mutual funds are

 Market risks:
In general, there are many kinds of risks associated with every kind of investment on shares.
They are called market risks. These market risks can be reduced, but not completely
eliminated even by a good investment management. The prices of shares are subject to wide
price fluctuations depending upon market conditions over which nobody has control. The
various phases of business cycle such as boom, Recession, Slump and Recovery affects the
market conditions to a larger extent

.
 Scheme risks:
There are certain risks inherent in the scheme itself. For instance, in a pure growth scheme,
risks are greater. It is obvious because if one expects more returns as in the case of a growth
scheme, one has to take more risks.

R.V. Institute of management 21


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

 Investment risk:
Whether the mutual fund makes money in shares or loses depends upon the investment
expertise of the Asset Management Company (AMC). If the investment advice goes wrong,
the fund has to suffer a lot. The investment expertise of various funds are different and it is
reflected on the returns, which
they offer to the investors.

 Business Risk:
The corpus of a mutual fund might have been invested in a company’s shares. If the business
of that company suffers any set back, it cannot declare any dividend. It may even go to the
extent of winding up its business. Though the mutual funds can withstand such a risk, its
income paying capacity is affected.

 Political risks:
Every government brings new economic ideologies and policies. It is often said that many
economic decisions are politically motivated. Change of government brings in the risk of
uncertainty, which every player in the finance service industry has to face.

R.V. Institute of management 22


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

MAJOR MUTUAL FUND COMPANIES IN INDIA

Birla Sun Life Mutual Fund


Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life
Financial. Sun Life Financial is a global organization evolved in 1871 and is being
represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from
India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment.
Recently it crossed AUM of Rs. 10,000 cr.

HDFC Mutual Fund


HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely Housing
Development Finance Corporation Limited and Standard Life Investments Limited.

HSBC Mutual Fund


HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital
Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as
the Trustee Company of HSBC Mutual Fund.

Prudential ICICI Mutual Fund


The mutual fund of ICICI is a joint venture with Prudential Plc. Of America, one of the
largest life insurance companies in the USA. Prudential ICICI Mutual fund was setup on 13th
of October 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee Company
formed is Prudential ICICI Asset Management Company Limited incorporated on 22nd of
June 1993.

Sahara Mutual Fund

R.V. Institute of management 23


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

Sahara Mutual Fund was setup on July 18, 1996 with Sahara
India Financial Corporation Ltd. as the sponsor. Sahara Asset Management Company Private
Limited incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The
paid up capital of the AMC stands at Rs.25.8 cr.

Tata Mutual Fund


Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The
sponsors for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The
investment manager is Tata Asset Management limited and its Tata Trustee Company Pvt.
Limited. Tata Asset Management Limited is one of the fastest in the country with more than
Rs. 7,703 cr. (as on April, 30 2005) of AUM.

Kotak Mahindra Mutual Fund


Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of
KMBL. It is presently having more than 1,99,818 investors in its various schemes. KMAMC
started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes
catering to investors with varying risk - return profiles. It was the first company to launch
dedicated gilt scheme investing only in government securities.

Franklin Templeton India Mutual Fund


The group, Franklin Templeton Investments is a California (USA) based company
with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial
services in the world. Investors can buy or sell the mutual fund through their financial advisor
or through mail or through their website. They have Open-End Diversified Equity Scheme,
Open-End Sector Equity Schemes, Open-End Hybrid schemes, Open-End Tax Savings
Schemes,

Open-End Income and Liquid Schemes, Closed-End Income Schemes and Open-End Fund Of
Funds Schemes to offer.

R.V. Institute of management 24


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

Morgan Stanley India Mutual Fund


Morgan Stanley is a worldwide financial services company and it is leading in the
market of securities, investment management and credit services. Morgan Stanley
Investment Management (MSIM) was established in the year
1975. It provides customized asset management services and products to governments,
corporations, pension funds and non-profit organization. Its services are also extended to high
net worth individuals and retail investors. In India it is known as Morgan Stanley Investment
Management Private Limited (MSIM) and its AMC is Morgan Stanley Mutual Fund
(MSMF). This is the first close-end diversified equity scheme serving the needs of Indian
retail investors focusing on a long-term capital appreciation.

Canbank Mutual Fund


Canbank Mutual Fund was setup on Dec 19, 1987 with Canara Bank acting as the
sponsor. Canbank Investment Management Services Ltd. incorporated on March 02, 1993 is
the AMC. The corporate office of the AMC is in Mumbai.

LIC Mutual Fund


Life Insurance Corporation of India setup LIC Mutual Funds on 19th June 1989. It
contributed Rs. 2 cr. towards the corpus of the fund. LIC Mutual Fund was constituted as a
trust in accordance with the provisions of the Indian Trust Act 1882. The company started its
business on 29th April 1994. The trustees of LIC Mutual Fund have appointed Jeevan Bima
Sahyog Asset Management Company Ltd. as the investment managers for LIC Mutual fund.

R.V. Institute of management 25


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

BACKGROUND OF THE STUDY

Industry and commerce so as to bring about the integration of the Indian economy
with the global economy. With the growth of the economy and the capital market in India, the
size investor has also increased rapidly. Thus The Government of India introduced economic
reforms in the field of trade involvement of mutual funds in the transformation Indian
economy has made it urgent to view their services not only as financial intermediary but also
as pace setter as they are playing a significant role in spreading equity culture. In this context
close monitoring and evaluation of mutual funds has become essential for fund managers to
make this instrument as the strongest and most preferred instrument in Indian capital market
in the coming years.

It has been established that the single most important factor that has a strong bearing on
investor’s interest and growth of mutual fund industry is its superior financial performance.
The financial performance may be defined in terms of .rates of return., .risk-adjusted returns.
or .benchmark comparison.. .Jensen’s alpha. is another widely used measure of portfolio
performance: It indicates the abilities of fund managers to identify and select superior stocks
for the portfolio. This constitutes the subject matter of the present study.

In India, very little work has been done to investigate fund managers forecasting
abilities. Active fund managers are expected to reward higher return. If the fund manager
feels that market on the whole overvalued, then he would get out of the market. Hence the
present study has the objective of finding out the necessary facts which can benefit the
investors and fund managers. This paper evaluates the performance evaluation of mutual fund
in the framework of risk and return.

R.V. Institute of management 26


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

LITERATURE REVIEW

An Empirical Analysis on Performance Evaluation of Mutual Funds in India (Nalini


Prava Tripathy)

The Government of India introduced economic reforms in the field of trade industry
and commerce so as to bring about the integration of the Indian economy with the global
economy. With the growth of the economy and the capital market in India, the size investor
has also increased rapidly. Thus the involvement of mutual funds in the transformation Indian
economy has made it urgent to view their services not only as financial intermediary but also
as pace setter as they are playing a significant role in spreading equity culture. In this context
close monitoring and evaluation of mutual funds has become essential for fund managers to
make this instrument as the strongest and most preferred instrument in Indian capital market
in the coming years.
In India, very little work has been done to investigate fund managers forecasting
abilities. Active fund managers are expected to reward higher return. If the fund manager
feels that market on the whole overvalued, then he would get out of the market. Hence the
present study has the objective of finding out the necessary facts which can benefit the
investors and fund managers. This paper evaluates the performance of mutual fund schemes
in the framework of risk and return.
The study tests the following hypothesis in respect of performance evaluation of the
Indian mutual funds.The sample mutual funds is earning higher returns than the market
portfolio returns in terms of risk. The sample mutual funds are offering the advantages of
diversification and superior returns due to selectivity to their investors. The investment
objectives of the mutual fund schemes are related to their systematic risk and total variability.

Generally investors invest in mutual fund by considering capital appreciation,


better liquidity less risk and tax liability. So, the study makes a comprehensive evaluation of
equity linked schemes. For the purpose of the study, schemes have been taken from 1994-95

R.V. Institute of management 27


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

to 2001-02. A total of 31 schemes offer are selected bank mutual


funds have taken for study. The risk is calculated on the basis of month end Net Asset Values.
Further, BSE national index was assessed as market index or benchmark. The
returns are computed on the basis of the Net Asset Values of the different schemes and returns
in the market index are computed on the basis of the BSE National Index on the respective
date.
The performance sample mutual fund scheme has been evaluated by using the six
performance measures. A brief description of these measures as rate of Return measure,
Treynor measure, Sharpe measure, Jensen measure, Sharpe differential return, Fama.s
Decomposition measure.
According to the modern portfolio policy, the risk and return are to be in the linear
form. So the risk and return are expected to be in tandem with the investment policy. As the
tax planning schemes are expected to earn higher returns with higher risk. So, it is highly
essential to examine if the risk characteristics of these schemes are consistent with their stated
objectives. The risk return analysis indicates that some of the schemes are not in con format
with their stated objectives. The stated objections of the funds with their average betas and
average total risk.
This paper has examined the investment performance of Indian mutual funds in
terms of six performance measures. The empirical results reported here do not lend support to
the hypothesis taken in the study. . All other schemes do not demonstrate this relationship. On
the whole, 13 schemes have an alone average beta which indicates that mutual fund returns
are highly volatile. About 10 schemes have outperformed both in terms of Treynor measure
and Sharpe measure. However, four schemes exhibited superior performance in terms of
systematic risk but did not do so in respect of total risk.

The analysis made by the application of fama.s measure indicates that the return out of
diversification is very less. All other schemes show lack of net selectivity and diversification.
So, it was found that proper balance between selectivity and diversification is not maintained.
This is due to fund managers acumen of selectivity and poor investment planning of the fund.

R.V. Institute of management 28


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

Performance Evaluation of Select Indian Mutual Fund


Schemes (O P Gupta and Amitabh Gupta)

During the past one and a half decade, the Indian mutual fund industry has witnessed
a major structural transformation and growth as result of policy initiatives taken by the
Government of India to break the monolithic structure of the Industry. Therefore, it becomes
important to examine the performance of the industry in the changed environment. This paper
aims at evaluating the investment performance of select Indian mutual fund schemes during
the recent four years period.
He has used a sample of 57 equity funds including 10 tax planning funds to study
their investment performance. The choice of the sample is largely based on the availability of
the necessary data. Weekly returns, based on Net Asset Values, have been used for
performance evaluation. The study period is a recent four year period from April 1, 1999 to
March 31, 2003. It is during this period that a major structural change has taken place in the
Indian mutual fund industry. The study has used the weekly yields on91 day Treasury bills as
a surrogate for the risk free rate of return. The value data collected from Value Research India
Pvt. Ltd., while Treasury bill data has been collected from PNB Gilts ltd.
The study tests the following hypotheses in respect of performance evaluation of
mutual fund schemes: The investment performance of schemes is superior to the relevant
benchmark portfolio. The mutual fund schemes are well diversified. There is a relationship
between investment objectives of the schemes and their risk characteristics. We have utilized
the following six measures to evaluate performance; Rate of Return, Sharpe Ratio, Treynor
Ratio, Jensen Differential Return Measure, Sharpe Differential Return Measure. We have
computed the weekly returns for each of the sample. Weekly returns for the market index viz.
This paper has aimed at testing the investment performance of select Indian mutual
funds during a recent four year period from April 1, 1999 to March 31, 2003. Using weekly
returns, based on NAVs for 57 funds, the results reported here indicate that, in general, fund
managers have not outperformed the relevant benchmark during the study period. After
measuring in Sharpe, Treynor, Jenson measures only three funds reflect superior performance.
In terms of Fama.s components of Investment performance, all the funds suffered negative
performance on account of risk bearing activity of their fund managers. Only one fund earned

R.V. Institute of management 29


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

a positive return on diversification. Though 30 funds showed


some net selectivity skills. It appears that Indian fund managers do not appear to possess sock
selection skills.
Thus, on the whole, it can be concluded that there is no conclusive evidence, which
suggests that performance of mutual funds is superior to the market during the study period.
However, there is some evidence that the sample funds are not adequately diversified.
However, the diversification level seems to have changed over time. In addition, the average
beta for the funds has increased over time. Overall the results reported here are similar to the
ones reported earlier for the Indian Market

Empirical Investigation on the Indian Managers Stock Selection Abilities (Ramesh


Chander)

Investment decision making encompasses a variety of activities such as stock


selection, market timing, diversification and risk bearing. Stock selection and market timing
are prime activities that contribute widely in the return generation process while
diversification and risk bearing supplement as

subsidiary activities. Professional managers are heftily paid for a judious amalgam of these
performances. Investment performance on the stock selection pertains to successful micro
forecasting for company specific events. It refers to the managers ability to identify under or
over valued securities. Such performance attribution may be constructed as an indicator of the
investment decision making quality. It may even delineate the superior ex post investment
performance.
Study of investment manager.s stock selection skills is very important as it enables
the fund managers to understand how they have fared in achieving desired return targets and
how much risk has been controlled in the process. Second it enables the investors to assess
how well the fund manager has achieved these targets in comparison with other managers or
with some benchmark indices. In this sense it may even be viewed as a feedback mechanism
for improving investment mangers forecasting skills.

R.V. Institute of management 30


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

The study under performance outcomes obtained in this


regard shall be analyzed across fund characteristics such as, nature, investment objectives and
sponsorship categories to identify any performance bias in regard thereto. Taking these
objectives into consideration, the present study test the following null hypotheses. Investment
managers lack superior stock selection abilities. Managers. Stock selection performance is
maintained across the measurement criteria. Stock selection performance is not influenced by
the fund characteristics. Stock selection performance is not influence by the choice of
benchmark indices. The study under consideration is based on the performance outcomes
obtained for 80 samples for the five year period.
Monthly investment returns derived above are further annualized through
geometric averaging. The yield on the 91 day treasury bills issued by Government of India
has been used as surrogate for risk less return. Jensen and Fama is used for measuring the
performance of stock selectivity.

Managers stock selection performance obtained in relation to the fund


characteristics viz., nature, size investment objectives and sponsorship as well as benchmark
indices such as BSE Sensex, BSE-100, CNX Nifty 50.
Performance persistence is another vital dimension widely acknowledged and
investigated world over better comprehend portfolio performance evaluation. The information
inputs reported that to the absence of persistence of the stock selection performance for the
sample investment schemes, as the sample funds having registered average positive
performance in the period first came to realize negative performance in the subsequent period
second. Similar tendencies wer obtained for the sample funds across all the quartiles. The
results are equally robust for the positive persistence as well as for the negative persistence.
Investment performance depends on the stock selection and pertains to the
successful micro forecasting for company specific events. It refers to the managers ability to
identify under or over valued securities. Such a performance attribution may be construed as
an indicator of the investment decision making quality as it delineates the superior investment
performance from that attributed to pure chance or luck.

R.V. Institute of management 31


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

This study examined the stock selection abilities across


fund characteristics as well as the performance persistence. The results reported in the study
have wider implications for the investment decision making in the sense that signify the vital
relevance of stock selection ability in the return generation process. The absence of
performance persistence signifies that past performance is in no way implicated for the future.
The outcomes thus obtained also have ramifications for the efficient market theory and
rational expectations in the performance.

An Empirical Analysis of Performance Evaluation of Mutual Fund schemes in


India(Sanjay j Bhayani and Vishal G Patidar)

Mutual funds play a vital role in mobilization of resources and their effective
allocation. These funds play a significant role in financial intermediation, development capital
markets and growth of the financial sector as a whole. The active involvement of mutual
funds in economic development can be seen by their dominant presence in the money and
capital market. The present study distinguishes itself from standard mutual fund literature by
making several unique contributions. First, it finds the trends of the mutual fund industry in
India second it uses risk return method to evaluate the various funds and schemes outperform
the market with the same level of risk or not.

The major objectives of the study are; To evaluate investment performance of


mutual funds in terms of risk and return. To examine the funds sensitivity to the market
fluctuations in terms of beta. To find out the financial performance of mutual fund schemes.
To appraise investment performance of mutual funds with risk adjustment the theoretical
parameters as suggested by Sharpe, Treynor and Jensen. The period of study was 5 years. The
sample consists of top performer schemes and funds of mutual fund companies in India based
on average return during the last five years.

R.V. Institute of management 32


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

The main purpose of this analysis is to evaluate whether an organization uses its
resources effectively and efficiently or not. The overall objective of a business is to earn
satisfactory return on the funds invested in it consistent with maintaining sound financial
position. Performance of mutual fund schemes has been evaluated by using the following
measures; Risk, Standard Deviation, Beta, Jensen Alpha, Sharpe Ratio and Treynor Index.

The results indicate that all the schemes have earned better return in comparison to the
market returns. Most of the schemes have beta less than one, there by implying that these
schemes tended to hold portfolios that were less risky than the market portfolio.

Higher positive value of alpha indicates its better performance. The analysis of the
alpha of all schemes as being positive, there by indicating superior performance of these
funds.

The performances of Balanced Fund schemes have been evaluated in terms of average
return. A majority of the sample mutual fund schemes have a recorded superior performance
as compared to the benchmark 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 indicated that all the schemes earned a slightly
higher return in comparison to the market return. The performances of Tax Planning Fund
Schemes have generated superior return as compared to the market. The performance of
schemes was better in case of returns and has earned returns on lower risk as compared to the
market

R.V. Institute of management 33


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

RESEARCH METHODOLOGY

PROBLEM STATEMENT
In India, very little work has been done to investigate fund managers forecasting
abilities. Active fund managers are expected to reward higher return. If the fund manager
feels that market on the whole overvalued, then he would get out of the market. Hence the
present study has the objective of finding out. The performance of mutual fund schemes in the
framework of risk and return.

OBJECTIVES OF THE STUDY

The present study has been undertaken to meet the following specific objectives,
 To evaluate investment performance of mutual funds in terms of risk and return.

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

 To appraise investment performance of mutual funds with risk adjustment the
theoretical parameters as suggested by Jensen.

 To rank the funds according to Jensen’s performance measure.

R.V. Institute of management 34


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

LIMITATIONS

 The study is confined to only to ten asset management companies.

 The study considers only for growth funds.

 The ranks are assigned on the basis of only five measures & data is considered for
three years.

 The historical data was not easily available.

 Findings of this study may change due to time constraint.

 The study is mainly limited to 10 equity diversified funds for a period of three years
starting from January-03 to April-07

STUDY DESIGN

The type of research being followed here is the Empirical Research. The objective
of this research work is to test the stock selective ability of equity fund manager & evaluate
the performance based on their return. It is a Secondary Research as the data or information
required is collected through secondary sources. It is a Quantitative Research as the study
involves a collection of secondary data of ten equity mutual funds of different asset
management companies for a term of 5 years and applying statistical tools to get the results.
The time frame of the research is the past 5 years and hence the

R.V. Institute of management 35


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

information between the time periods January 2003 to April


2007 is relevant for the purpose of the study.

STUDY TYPE

This research is an Empirical Research which is carried out on the Ten equity fund
schemes of different asset management companies.

STUDY POPULATION, SAMPLE, SAMPLING FRAME

The study population is the whole of the Indian Equity funds. But it is infeasible to
incorporate all of the Equity funds for the research mainly due to two reasons:
 Large Volumes of Data: There are a very large number of equity funds with
huge volume of data.
 Time Constraint: The time duration of the research is from April 2007 to April 2007.
Hence to overcome these problems, a sample of equity funds was selected from equity
mutual funds.

DATA GATHERING PROCEDURES

The major data relevant for this research is secondary data which has
been collected from different means.

DATA COLLECTION

NAV: The monthly NAV data of various mutual funds are collected from
www.amfiindia.com and WWW.INDIAINFOLINE.COM.

MARKET INDEX: The monthly BSE sensex data are collected from www.bseindia.com.

R.V. Institute of management 36


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

RATE OF RETURN OF 364 DAYS T-BILL:

The weighted average return of 364 days T-Bill is taken for risk free return. The data are
collected from www.rbi.org.in (which has been extracted from various directories of statistics
of Reserve Bank of India).

DATA

The various mathematical, statistical and logical operations performed on the data
obtained from the www.amfiindia.com are as follows:
 Mean
 Standard Deviation
 Calculation of yearly Highs and Lows by using MAX and MIN
functions in the spreadsheet.
These were some of the tools and techniques applied on the data, collected for the ten
equity funds in order to use the data as different variables in the research. All of these
operations have been done using the Microsoft Excel and the SPSS for windows software.

TREYNORS MODEL
:
Developed by Jack Treynor, this performance measure evaluates funds basis of
Treynor's Index. This Index is a ratio of return generated by the fund over and above risk free
rate of return during a given period and systematic risk associated with it (beta). Treynor
(1965) was the first researcher developing a composite measure of portfolio performance. He
measures portfolio risk with beta, and calculates portfolio’s market risk premium relative to
its beta:

R.V. Institute of management 37


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

Ti = Treynor.s performance index


Rp = Portfolio.s actual return during a specified time period
Rf = Risk-free rate of return during the same period
âp = beta of the portfolio

SHARPE.S MODEL

Sharpe (1966) developed a composite index which is very similar to the


Treynor measure, the only difference being the use of standard deviation, instead of beta, to
measure the portfolio risk, in other words except it uses the total risk of the portfolio rather
than just the systematic risk:

Where:
Si = Sharpe performance index
óp = Portfolio standard deviation
This formula suggests that Sharpe prefers to compare portfolios to the capital market line
(CML) rather than the security market line (SML). Sharpe index,

therefore, evaluates funds performance based on both rate of return and diversification
(Sharpe 1967). For a completely diversified portfolio Treynors and Sharpe indices would give
identical ranking.
R.V. Institute of management 38
PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

R.V. Institute of management 39


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

Interpretation of Jensen’s measures:

Thus the result suggests that these funds are not completely diversified, because a
completely diversified fund or portfolio would have given the similar ranking for composite
performance measurement of Jensen. A poorly diversified portfolio will have a higher ranking
under the Treynor measure than for the Sharpe measure. The funds which constitute this
category are- Franklin India, HDFC and TATA.

Based on the analysis of these 10 funds, majority of the mutual funds are poorly
diversified. This means there is still some degree of unsystematic risk that one can get rid of
by diversification. This also leads us to another conclusion that majority of these funds will
land on Markowitz efficient portfolio curve. The efficient frontier consists of those portfolios
which maximizes expected return given the portfolio risk (variance of portfolio returns).The
full potential of these funds is not exploited and there is still room for improvement.

R.V. Institute of management 40


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

SUMMARY OF FINDINGS

 From the research it is found that most of the returns of equity fund is above the
market index BSE Sensex. Over the period of three years, out of 10 equity funds
Reliance fund shows the highest return of 0.6643,followed by H.D.F.C,
Templeton, Sundaram, TATA , J.M., CANBANK, LIC, SBI, BIRLA and BSE200
has given a return of 0.3937.

 Out of 10 equity funds RELIANCE shows the highest monthly return of 66.43%
compared to others.

 Beta is defined as the measure of risk. H.D.F.C. tops with a beta of .093
compared to other funds and Franklin with the least beta of 0.67.

 KOTAK shows the highest standard deviation of 0.073 followed by others and
Franklin with the lowest standard deviation of 0.057.

 Systematic risk in Franklin mutual fund is more compare to other funds.

 The alpha values varied widely, the highest being HDFC and the lowest Kotak.

 Return per unit of unsystematic risk sundram as the highest systematic risk compared
to other funds and Tata mutual fund as the lowest unsystematic risk.

R.V. Institute of management 41


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

CONCLUSION SUMMARY:

It is examined that investment performance of Indian Mutual funds in terms of


performance measure, some funds shows conformity with the linear relationship of return and
risk. Some funds do not demonstrate this relationship. However some funds exhibited
superior performance in terms of systematic risk but did not do so in respect of total risk.
According to Jensen measure funds have positive alpha values indicating superior
performance of the scheme.
The alpha values varied widely, the highest being JM and the lowest HDFC. Such
large variation of alpha values show that stock selection abilities of fund manager vary for
different mutual funds. Positive alpha values of mutual fund may be a result of adopting better
forecast techniques by the fund managers; they seem to have been able to pick up undervalued
stocks enabling them to post better performance during the period under consideration.
For the same reason, it becomes increasingly necessary to periodically monitor and
evaluate performance as objectively as can. More importantly, such evaluation should provide
meaningful feedback for improving the quality of the investment management process on a
continuing basis. In particular, it should help in articulating the investment objectives with
greater clarity, sharpening the investment strategy and refining the methods of security
selection. Value of experience that matters.

R.V. Institute of management 42


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

BIBLIOGRAPHY:

WEBSITES

 www.amfiindia.com

 www.bseindia.com

 www.rbi.org.in

 www.investopedia.com

 www.google.com

 www.valuepro.net

BOOKS

 INVESTMENT MANAGEMENT ,SECURITY ANALYSIS AND PORTFOLIO


MANAGEMENT BY V.K.BHALLA

R.V. Institute of management 43


PERFORMANCE
EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

 STATISTICS FOR MANAGEMENT BY LEVIN &


RUBIN

JOURNAL

 THE ICFAI JOURNAL OF FINANCE.

 VALUE RESEARCH ONLINE

R.V. Institute of management 44