CHAPTER 2

LITERATURE REVIEW
2.1 Introduction

There is a good amount of researches carried out on the performances or risk adjusted
returns. This research tried out to highUght the diverse view for the same. The mutual
fund concept came from abroad to India, So initial researches were carried out at the
abroad. The researchers first studied different parameter funds like performance, risk, etc.
There are good researches found in the abroad and then it came into India in 90's. This is
a very new topic for hidians. There is a good amount of researches happen on the mutual
fund as the Indian mutual fund industry is growing like anything. One of the studies of
the international researchers study finds in the Indian mutual fimd industry is the fastest
growing mutual fund industries. The research on the mutual fund industry is not only an
interesting topic for the researchers but it finds interesting to other linked fields with
mutual funds like for managers of various sectors such as finance, banking and
investment institutions as they were looking the growing business in the mutual fund
industry. Some researchers have tried to help the investors with their study to improve the
investment strategy and investor's decision power.

The various studies in the mutual fund industry have been done for different purposes
like study the investor's behavior, research on mutual fund performance, characteristics
of the mutual fimds, impacts of various factors on the mutual fund performance, etc. The
major two studies have been done on the mutual fund industry are the mutual fund
performance and investor's behavior. The subjects revolve around these two major
factors like factors influencing the mutual fimd or equity fund performance, etc. There
are some studies has been done on the subject of performance of mutual fund or their
market timing abilities. The growth of mutual fund industry has been grown
tremendously but the mutual fund performance and fund manager's ability are still
contradictory conclusions over the decade until that the time the fund's performance and
ability to outperform the market is the researcher's favorite subject for the researchers.
Studies on the mutual fund performance and factors related to some researchers to the
mutual funds. Efforts have been made to study some of the study factors, which are
presented in the following paragraphs.

17
2.2 Measuring Tools for Investment Decision

Some researchers have tried to help other researchers by their research study such as
Jensen (1969) with the development of well-known tool Jenson's alpha to measure the
funds out perfonnance over the market. He has tried to help other researchers by
providing the alpha measure for further research while measuring the performance. The
alpha is the tool to measure the outperformance of fund in the market. Presently, alpha is
used by various researchers to measure the fund perfonnance of funds as key
information.

There is another example, as Sharpe (1966) developed the well-known measure Sharpe
ratio to measure the risk-returns of the fund. The Sharpe ratio is very commonly used by
various researchers as a key tool in their research for measuring risk-returns of the funds.
The other researchers have studied various factors affecting the mutual funds like factors
affecting the fund performance, fund's characteristics responsible for the fund
performance, etc. Some researchers have tried to understand the investor's perspective for
the investment like what factors are influencing them to take a specific investment
decision. There are several subjects attached with the fund and factors of the fund that
still need to be understood and a lot of research about the benefits of the investors.

2.3 Fund Manager's Ability

In earlier studies, the researchers have emphasized to study the mutual fund manager's
ability to outperform the fund in the market. Some researches have supported to the fund
manager's ability while some have argued on their ability to outperform the market. They
suggest that the flmd managers do not posses any extra caliber to increase the returns of
the funds.

The researchers like Friend, Brown, Herman and Vickers (1962), Sharpe (1966), and
Jensen (1968) argue on the fund manager's ability to outperform the fund to the market

18
on their ability^. They find some proofs in their studies that the fund managers have failed
to increase the fiand returns. There are some studies suggested that there were some
managers who perform inferior level in the market. There are some cases where the fund
performance was good but the rationale to increase the fund performance was a little bit
different from the fund manager's caliber. They suggested that there are some funds that
outperform the market because of some other factors like a sector specific fund
outperform because of the boon in the sector as IT boom or stocks outperform because of
market support like bullish market. They suggest that managers have failed to pick up the
stocks at the right time which caused them to face the less returns in the bullish market or
more losses in the bearish market. The researchers also found in their study that the
reasons behind the fund performance was several factors rather than their person skills
like sector boom help their portfolio stocks to increase the returns of the funds or bullish
market help them to up their fund returns rather than their stock picking skills on the right
time.

Treynor (1965) and Sharpe (1965) have argued in favor of the ability of fund managers to
increase the fund performance. They have suggested that the fund managers do not
possess any internal private information. They also have suggested that the professionally
managed funds do not beat to risk adjusted index portfolio. In another study, this
statement was also supported by Jenson in his research. Jenson (1968) evaluated the fund
manager's ability for selecting the undervalued securities. He argued the ability of the
fund managers accountable for the mutual fund performance. He examined 115 mutual
fimds from 1945 to 1964 year and find out that the expense adjusted fund returns were
significantly lower than the randomly selected portfolio with the same risk. Some other
researcher's studies have been supported to Jensen such as by Elton, Gruber, Das and
Hlavka (1993), Malkiel (1995) and Carhart (1997).

Market Timing Abilities and Mutual Fund Performance - An Empirical Investigation in Equity Lini<ed
Saving Schemes, (n.d.) In ximb. Retrieved From http://www.ximb.ac.in/ximbJoumal/Publications/Article-
08.pdf, PP4-12

19
2.4 Survivorship Bias and Benclimark Error

There are some other researches on the other factors of the mutual funds like survivorship
bias, benchmark error etc. There is one research in the elimination of survivorship bias by
Carhart (1997), evaluates the mutual fund performance factors and demonstrates that the
common factors those are driving the stock returns are explained the persistence in
mutual fund performance. Elton (1993) has studied the mutual fiind benchmark error. He
finds some different view than Ippolito (1993). He has raised concerns about the
Ippolito's (1993) findings about the benchmark error and later corrects it. Further, in one
of the study Malkiel (1995) studied both benchmark error and survivorship bias. He has
suggested that the market efficiency is contaminated by these factors although while
examining the prior studies he finds that the persistence of mutual fiind performance in
the decade of 1970 does not keep the consistency in the next decade of 1980. Chevalier
and Ellison (1999) try to analyze the impact of personal managerial characteristics on
fimd performance on their sample study data with mixed results to correct for
survivorship bias though the other study also concluded that the survivorship issue argues
that the problem is not severe for examining the funds for the short period. They also
added some unique contributions in the fund characteristics as they derive the list of fund
specific characteristics, which they categorized into four broad categories like cost,
management, growth (risk) and popularity (agility).

2.5 Mutual Fund Factors and Characteristics

There are some researches on the mutual fund factors and characteristics of the mutual
fimds. In one of the study by Wermers (2000) try to enhance the mutual fund returns by
decomposing the mutual fiind returns into the characteristics of holding, stock picking
talent, and the trading costs and expenses. He has concluded that the stock picking talent
enables the mutual fiinds to cover their costs. There are some studies tried to insight on
the mutual fund specific factors like fees expenses are one of the factors affecting to the
mutual fund performance. The Sharpe (1966) is found in his one of the study of
evaluation of the funds that the funds with lower expenses realized better performance.

20
Golec (1996) try to elaborate more insight on the fees expenses of the mutual fund
performance. He suggests that the fees are more associated with the negative excess
returns. Ippolito (1989) finds no relationship between the mutual fund performance and
the fund specific factors like after expenses and turnover and investment fees.
Golec(1996) supports to the relationship between the expenses and fund performance. He
suggests that the expenses are associated with the fund along with the negative returns.

2.6 Fund Performance and Management Style

There are some studies by Grinblatt and Titman, 1992; Brown and Goetzman, 1997;
Lunde et al., 1999; Chevalier and Ellison, 1999; Kothari and Warner, 2001 on the
performance of funds cind management style. There are some studies on the performance
of bond mutual funds Philpot et al., 2000; Blake et al., 1993

2.7 Neural Network and Benchmarking

Some studies on mutual fiind performances by using neural network and benchmarking.
The Benchmarking is the process of comparing one's business processes and performance
metrics in the industry best that means to compare with the best practices from other
industries. There are different types of benchmarking like Finance benchmarking,
Performance benchmarking. Benchmarking from an investor's perspective, etc.

Some researchers like Indro (1999); Morey and Morey (1999); Sirri and Tufano (1998),
have tried to investigate the performance of the mutual funds by using tools such as
neutral networks or benchmarking. D. C. Indro, C. X. Jiang, B. E. Patuwo and G. P.
Zhang (1999) study on utilizing the Artificial Neural Network (ANN) to predict the
performance of equity mutual funds which follows the value, blend and growth
investment styles"'. They have tried to forecast mutual fund's risk adjusted return by
using GRG2 nonlinear optimizer, multilayer perceptron model, and fund specific

'" D. C. Indro, C. X. Jiang, B. E. Patuwo and G. P. Zhang ,"Predicting Mutual Fund Performance using
artificial neural network", www.econpapers.repec.org, PP.373-380

21
operating characteristics. The study finds that the forecasting results generated by
Artificial Neural Network (ANN) are superior to the linear models for fund of all styles.
They also propose that their model outperform the Chiang et al. They use a neural
network approach to predict the performance of growth style funds, in which they
employed heuristic approach of variable selection via neural networks and compared it
with the stepwise selection method of linear regression. They propose that the results
were encouraging with reduced ANN models still outperform the linear models for
growth and blend funds and yield. They find the similar results for value fiinds.

2.8 Integrated and Hybrid Model

Some researchers studied the mutual fiinds and proposed the integrated or hybrid models
for predicting the performance of mutual funds. Tsaih et al. (1998), study some mutual
funds and test for six year period. Tsaih et al. (1998) develop artificial techniques to
implement trading strategies in the S & P 500 index. The testing of this approach
ijuggests that during the testing period their system outperformed the passive buy-and-
hold investment strategy. The hybrid approach facilitates to develop more reliable
intelligent systems than the standalone expert system. The hybrid system offers a method
for an organization to facilitate the knowledge management. The knowledge management
includes best practices, knowledge repositories, communities of practice, etc.

2.9 Fund Expenses and Performance

Lehman cind Modest (1987), Grinblatt and Titman (1989), and Dellva, DeMaskey have
noted that the improper benchmark specification was one of the reasons, causing the
errors in the evaluation of mutual fiinds. DeMaskey and Smith (2001), Malkiel (1995),
Elton et al (1993) and Carhart (1997) is found in their studies that the most of the mutual
fund literatures focused on the mutual fund performance relative to the overall market
rather than concentrating on the mutual fiind specific factors and performance.

22
Hooks (1996) evaluates the load and No-Load funds. The study concludes that over the
year's low expense Load funds perform better than the average expense No-load funds.
The low expense Load funds over the 15-year period outperform the No-load funds.
Dellva and Olson (1998) do not support to this statement. They find in their study that the
fiinds which charges front-end loads, are comparatively lower performer that is they earn
lower risk adjusted returns. There are many studies tried to find the relationship between
the expenses and fund performance. The researchers have tried to analyze the expense
components and find their relationship with the fund performance. Some of them find
positive and some of them find negative impact on the performance of funds. Some
researcher support to the expenses can be a key factor for increasing or decreasing the
performance while some of the researchers conclude that the expenses does dot have any
impact on the performance of funds.

2.10 Fund Load and Expense Ratio

Ferris and Chance (1987) and McLeod and Malhotra (1994) have tried in their research to
analyze the expense fees. They examined the 21-bl fees and finds that this fee is being
responsible to increase the expense ratio of the mutual fund further, on Malhotra and
McLeod (1997) done additional research on the expenses of the mutual funds. They
conclude that the fund expense ratio positively relates to the turnover but negatively
related to fund size and age. Livingston and O'Neal (1996) also try to find out the
relationship between the commissions of the fund load and commissions of the fund and
the expense ratio. They conclude that the commissions of the fund are unrelated to the
load status but they are positively related to the expense ratio of the fund. Latzko (1999)
try to find the relation between the economies of scale and expenses of the fund. He has
evaluated the economies of scale of the fund expenses and documents. He finds that a
rapid decrease in average costs is associated with fund growth up to approximately $3.5
billion in total assets.

23
2.11 Portfolio Turnover

Some mutual fund experts have tried to explore the relationship between the mutual fund
portfolio turnover and performance. The positive influence some experts supports of the
portfolio turnover on the mutual fund performance like Friend, Blume and Crockett
(1970). Friend, Blume and Crockett (1970) also evaluates the mutual fiinds and finds that
there is a slightly positive relationship between the portfolio turnover and mutual fund
performance, but there are some experts find negative impact for portfolio turnover and
total fund expenses on the fund performance. Malkiel (1993, 1995) and Carhart (1997)
conclude from their studies that the portfolio turnover and total expenses negative impact
caused for the mutual fund returns. Wermers (2000) and Grinblatt and Titman (1994)
supports the positive relationship between the portfolio turnover and fiind returns.

2.12 Investor's Behavior

There are some studies on the investor's behavior like Zheng, 1999; Harliss and Peterson,
1998; Goetzmann and Peles, 1997; Alexander et al. 1997, 1998; Bogle, 1992. They try to
understand the investor's decision-making criterion that is on what are the factors
influencing the investors to take the investment decision, which are those factors, which
are influencing them to take the investment decision. One of the research study done by
Alexander et al. (1998) evaluates the responses of the mutual fund investors. The study
found that the employee investors are investing in the employer sponsored pension plans
mutual funds. These are comparatively younger and more interested in the higher return
stock funds rather than investing in the certificate of deposits of money markets, which
comparatively gives less returns than stock fiinds.

The investors who are individually investing in the mutual funds rather than investing
through the employer sponsored mutual funds, are more experienced and having
comparatively better qualification like carrying at least collage degree with at least 55
percent. These investors are less interested in the mutual fund operating expenses as an
important factor while purchasing the mutual funds. There is another team like Nagy and

24
Obenberger, 1994, try to understand the behavior of the investor in financial, and
information technology. They try to integrate these streams to enhance the research of
understanding the investor's behavior and improving in prediction accuracy.

2.13 Evaluation Fund Performance (Year-wise)

Friend, Brown, Herman and Vickers (1962) did the first extensive and systematic study
of mutual funds". The study has considered 152 mutual funds with annual data from
1953 to 1958. The researchers have adjusted their market returns to be compared to the
funds as the performance parameters as the beta was not discovered at that time. The
Friend and Vickers (1965) from the same research group again did the study on the
evaluation of the performance of mutual funds in the year 1965. They have evaluated the
performance of mutual ftmds against the randomly constructed portfolios. The study
concludes that in all mutual funds have not performed superior to random portfolio.

Jack L. Treynor (1965) is one of the famous researchers in the mutual fund industry. The
Treynor's ratio is considered as one of the important ratios to calculate the performance
of the mutual funds. He has developed a methodology for performance evaluation of
mutualfrondthat is referred to as a reward to volatility measure, which is defined as an
average excess return on the portfolio. Treynor has suggested a new predictor of mutual
10

fund performance , one that differs from virtually all those used previously by
incorporating the volatility of afrmd'sreturn in a simple yet meaningful manner.

Treynor & Mazuy (1966) have done a study of the frind manager's ability for the success
of mutual fimds. They study 57 funds for analyzing the fund manager's performance and
found no statistical evidence that investment manager of any 57 funds were not able to

Nalini Prava Tripathy "Performance- An Empirical Investigation into Equity Linked Saving
Schemes", www.ximb.ac.in, PP.1-12
'" William Sharpe, "Mutual Fund performance", www.stanford.edu, PP.1-20

25
guess the market movements in advance'^. This study suggests that an investor in mutual
funds was very dependent on fluctuations in the general market. The study reveals that
the improvement in rate of return was due to the fund managers' ability to identify under
priced shares in the market. They developed a methodology for testing mutual funds'
historical success in anticipating major turns in the stock market. This study found no
evidence that the funds had successfully outguessed the market. The number of
researches in this area is low in India as compared to other developed nations. A wide
range of technical and quantitative tools has been produced to evaluate and compare the
performance of managed portfolios.

Sharpe (1966) is one of the important researchers in the mutual fiind industry. Sharpe did
the pioneering work on the performance evaluation of mutual funds. He has developed
ratio for the fund's volatility against the benchmark. Sharpe's study considered as a
revolution any study in the evaluation of performance of mutual funds. He has developed
a composite measure first time that considers return and risk combination from the
mutual fund. Shape suggested a variability measure that is average excess return on the
portfolio divided by the standard deviation of the portfolio. He has evaluated the
performance of 34 open-ended mutual funds during the period 1944-63 by the measures
developed by him. He has concluded that the average mutual fiand performance was
inferior to an investment in the DJIA*'*. It was also revealed in his study that good
performance was associated with low expense ratio and only low relationship was
discovered between fund size and performance.

The study by Michael C. Jensen (1967) has considered one of the major turning points for
the mutual fund industry. The study evaluated the ability of the fund managers in
selecting the undervalued securities. Jensen's classic study developed an absolute

' Anand, S. and Murugaiah, V, "Analysis of Components of Investment Performance - An Empirical

Study of Mutual Funds in India", www.ssm.com, paper no. 961999 , pp 1-14
' Anand, S. and Murugaiah, V, "Analysis of Components of Investment Performance - An Empirical
Study of Mutual Funds in India", www.ssrn.com. paper no. 961999 , pp 1-14

26
measure of performance based upon the Capital Asset Pricing Model'^ and has disclosed
reported that mutual ftinds does not appear to achieve abnormal performance when
transaction costs are taken into account. Jensen has derived the methodology of
calculating alpha, which calculates the out performance of the mutual fiind over the
benchmark. This alpha specifies the excess return over the benchmark by considering the
risk (beta) of the mutual fund. This alpha is able to estimate the managers' forecasting
ability contribution for the fund's returns. He selects 115 sample mutual funds for his
study and finds that the mutual fund managers of those funds were not able forecast
security prices well enough to recover research expenses and fees. This study suggests
the manager's ability is not enough to forecast the security prices.

Carlsen (1970) evaluated the risk-adjusted performance and emphasized that the
conclusions drawn from calculations of return depend on the period, type of fund and the
choice of benchmark. Carlsen essentially recalculated the Jensen and Shape results using
annual data for 82 common stock fimds over the 1948-67 periods'^. His results
contradicted both Sharpe and Jensen SEC study (1971) evaluated the risk - adjusted
performance and concluded that some of the funds had outperformed the. Benchmark but
there was no consistency in performance.

E. Fama (1970) has studied the mutual fund manager's ability of selecting the stocks
from the market and their market timing'^. He has suggested that the overall performance
of the managed portfolio be depended upon certain parameters and the performance can
be broken down into several components like those that one of them is the market timing
in the market price movements. These studies emphasize on the market timing ability of
the fiind managers in selecting the securities. Fama has argued that the returns of the fund
are not only fully dependant on the fiind manager's ability of selecting the best securities
at a given level of risk but also some portion of the returns also arise due to the prediction
of selecting the securities with the correct market timing. He suggested that the returns of

'^ Kenourgios, Dimitris and Petropoulos, "The Persistence of Mutual Funds Performance: Evidence from
The U.K. Stocl( JVIarltet", www.ssrn.com. paper no. 869385 , pp. 121-138
Nalini Prava Tripathy "Performance- An Empirical Investigation into Equity Linked Saving Schemes",
ximb.ac.in, PP.1-12
'^ Amitabh Gupta, "Mutual fund in India : A study of investment management", PP.1-217

27
the portfolio could be subdivided into the selection of the security and return for bearing
risk. He developed a methodology for evaluating investment performance of managed
portfolios. The model developed by him is a combination of the concepts from modem
theories of portfolio selection and capital market equilibrium with those of traditional
concepts of what constitutes good portfolio management.

John McDonald (1974) examined the relationship between the fund objectives and their
risks and return attributes. There are some studies tried to reconcile the debate between
the active management and passive management and one of these studies was conducted
by John G. McDonald (1974). This study finds that in a comparison of the market line
with 123 mutual funds between 1960 and 1969'^ there is roughly the same number of
fiinds that outperformed and underperformed the market. There were some funds in the
lower risk group, which possessed higher risk than funds in the most risky group. The
study finds there is no evidence that the fund managers could consistently beat the market
on the risk adjusted return basis. This study concludes that there is no statistically
significant difference in returns that should be expected from active fund management as
compared to passive management.

James R.F. Guy (1978) evaluated the risk-adjusted performance of UK investment trusts
through the application of share and Jensen measures. This study concludes that no trust
had exhibited superior performance compared to the London Stock Exchange Index'^.

The study by Henriksson &Merton (1981) finds that mutual funds on an average do not
exhibit significant market-timing ability^^. The mutual fund managers were not able to
follow an investment strategy that successfully times the return on the market portfolio.
In one another study of Henriksson (1984), it was concluded that concludes there is
strong evidence of the funds market risk exposures change in response to the market
indicated. However, the fund managers were not successful in timing the market.
18
John G Mcdonald "Objectives and Performance of Mutual Funds", jstor.org, PP. 1-311
19
NalinI Prava Tripathy "Performance- An Empirical Investigation into Equity Linked Saving
Schemes", xlmb.ac.in, PP.1-12
"" Roy.Bljanand and Deb,Saikat (2003), "The Conditional Performance of Indian IVIutual Funds- An
Empirical Study", vrow.ssrn.com. paper no.593723 and PP. 1-24

28
Chen and Stockum (1986) study uses a generalized varying parameters regression
procedure to examine mutual fund's selectivity, beta instability, and timing skills
simultaneously^'. They suggested the model to remove the limitations of the Jensen's
measure, and that applied to Indian mutual funds to find out beta instability and their
selectivity and timing skills. The study finds that the fund managers were not able to
exhibit the stock selectivity and timing abilities. The fund managers who invest locally
perform better than the manager's who perform in foreign markets. Some fimd managers
exhibit the negative timing in the market.

Grinblatt and Titman (1989) conclude that some mutual fimds consistently realize
abnormal returns by systematically picking stocks that realize positive excess returns.
They introduce the positive weighting measure and find some timing ability in their
sample. They used eight portfolio benchmarks and showed that growth mutual funds
earn superior gross return funds. They argued, the superior performance of the selected
fiands is not available to investors because of expenses. They have do not explained why
other studies have found negative performance of mutual funds using net returns, nor the
authors have not provided any evidence that performance is persistent.

Richard A. Ippolito (1989) concludes that mutual fiinds on an aggregate offer superior
returns but expenses and load charges offset them^^. He has considered 143 funds for the
study period 1965-1984 and finds the selected fiind had superior performance using
annual returns net of transactions costs and expenses. He has argued in one another study
in Ippolito (1992) by using the same data that investors respond to the most recent three
years of performance and that fund with superior performance attract more investors than
the worst performing fiinds. This study concludes that the market for mutual funds is able
to deliver a high-quality product to investors in the sense that the higher expense funds
provide higher returns.

•' Anand, S. and Murugaiah, V, "Analysis of Components of Investment Performance - An Empirical

Study of Mutual Funds in India", www.ssrn.com. paper no. 961999, pp 1 -14
22
Nalini Prava Tripalhy "Performance- An Empirical Investigation into Equity Linked Saving
Schemes", ximb.ac.ln, PP.1-12

29
Koh, Kok and Hin (1989) has evaluated the investment performance of investment trusts
and unit trusts over the period January 1980 to December 1987 using both parametric and
non-parametric approaches. The study utiUzed data relating to four types of managed
portfolios. The sample funds comprised of (i) four publicly listed companies (ii) thirteen
unit trusts (iii) investment portfolio of a major statutory board in Singapore, and (iv)
theoretical portfolio of the CP fin of Singapore business ^ -a local business publication.
The respondents have reported that the evidence was inconclusive as to the presence of
market timing abilities amongst Singapore fund managers Although the non parametric
tests suggested that there was positive timing ability in both up and down markets, the
opposite i.e. they were collectively unable to match the target risk level with actual
market price movements.

Stanley B Block and Dan W. French (2000) have studied the weight allocated to the
security in the fund and fund value weighted for the security. The study tried to research
on one of the parameters of fund performance that is weight allocation for the security.
The selected actively managed mutual fiinds showed that fiinds tend to be equally
weighted to a greater degree than they are value weighted, implying that investment
performance based solely on a single value-weighted benchmark may not adequately
identify excess performance. They develop metrics for measuring the extent of equal
weighting and value weighting of a portfolio. They have evaluated 506 mutual funds for
the research and showed that the two-index model is better than the single index model.
They identify that the larger set of the funds is not behaving normal performance that is
most of the fund performed in abnormal behavior.

Robert Van der Meer, Auke Plantinga , and Frank Sortino (2001) have tried to highlight
on the Sharpe measure drawback for evaluating the performance of mutual funds. The
common causes for skew ness are the use of options in the portfolio or superior market
timing skills of the portfolio manager. This study examines to what extent the down risks

"' Amitabh Gupta, "Mutual fund in India : A study of investment management", PP.1-217

30
and upside potential ratio can be used to evaluate to distorted return distributions. They
show the relation between the risk preference of the investors and the risk-adjusted
performance measure and conclude that it is difficult to interpret differences in the
outcomes of the risk adjusted performance measure exclusively as differences in
forecasting skills of portfolio managers. They try to find the put options and managers
forecasting skills relation with the Sharpe ratio, but they realize that the Sharpe ratio is
not the satisfactory measure for these attributes. They conclude that the Sharpe ratio to
incorrect conclusions in the case of protective put strategies but on the upside potential
ratio leads to correct conclusions. This leads to conclude them to prefer Upside Potential
ratio as an alternative to the Sharpe ratio for the use of options and forecasting skills.

The study of Laurie Prather, William J. Bertin, and Thomas Henker (2004) highlight
more on the linkages of mutual fund characteristics and performance. They examine the
characteristics of the funds rather than the regular fund returns research. This study work
on the technical analysis of the mutual fimds for the fund specific factors uniquely
categorized in terms of their impact returns. The traditional regression techniques explore
fund characteristics and performance relationships in an attempt to predict fund
performance, while the sample of funds examined is screened for survivor bias in a non-
conventional fashion. They tried to show that the unique categories of fund popularity,
agility, and growth, as well as the standard cost and managerial factors are relevant in
explaining fiind performance. They finally conclude that the results finding after
controlling for survivorship bias and benchmark error, refute the performance persistence
phenomenon.

Ding, Bill and Wermers, Russ R. (2005) study highlights the relation between the fund
performance and governance structure of open-end fiinds. They examine the open-end
funds during the 1985 to 2002 period. The study primary concentrates to analyze the role
of the fund managers in generating portfolio performance, as well as the role of fund
boards, both in the ongoing performance of the fund, and in replacing underperforming
managers. This study finds that the growth fund managers with relatively more
experience and having better track records outperform the peers. They find the evidence

31
of efficiencies in the labor market for fund managers, in that replaced managers
underperfonns their peers, on average. Specifically, the incoming manager outperforms
the replaced manager by one percent per year. They find that poorly performing fund
managers are more likely to be replaced by funds having larger numbers of outside
directors on their boards, indicating that the structure of the board is an important
determinant of governance quality. They also find evidence consistent with manager
entrenchment i.e. Experienced managers perform well only when they manage large
fiands - experienced small fund managers underperforms their less-seasoned counterparts.
They ultimately come close to the argued on the fund governance.

Ross M. Miller (2005) studies the mutual funds and tries to focus on management fees
charged by the mutual funds. The study finds that the mutual fimds are little bit expensive
than what investors are commonly believed or what the funds tries to show to the
investors. The mutual fund management fees are charged on the two categories like
Active management and Passive management. The active management funds are more
expensive than the passive management funds. However, the mutual funds are trying to
combine both in the same case, so that the active management fiands should not seem to
be more expensive. This study derives a method for allocating fiands expenses between
active and passive management and constmcts a simple formula for finding the cost of
active management. This study uses the expense ratio, R-squared relative to a benchmark
index, and the expense ratio for a competitive fund that tracks an index to compute
allocating fiand expenses. This study highlights on some mutual fiinds to distinguish
between their published management fees and Momingstar research team. The large-cap
equity mutual fimd tracked by Momingstar was 7 percent, which was over 6 times than
their published expense ratio 1.15 percent. The Momingstar finds a mean active expense
ratio of their fiinds was 5.2 as compared to the average largest funds was less than 2
percent

Keith Cuthbertson, Dirk Nitzsche and Niall O'Sullivan (2006) evaluate the academic
research on mutual fund performance in the US and UK concentrating particularly on the
literature published over the last 20 years where innovation and data advances have been

32
most marked. The study data put forward about the funds that the 2-5 percent of top
performing UK and US equity mutual funds out of the data funds genuinely outperform
their benchmarks whereas around 20-40 percent of funds have genuinely poor. The study
finds that the primary reason to outperform the fiinds to benchmark were load fees,
expenses, and turnover. There was less significance of the fund manager's skills like
market timing of selecting the securities. The study tries to put highlights on the
switching of the funds from the current funds of the winners funds. The switching of the
fimds lay the extra burden of fees on the investors but they were in the benefits in the
terms of the profits. The study also finds that the past looser funds are remaining looser
funds, so the switching from those funds to the winner funds was beneficial to the
investors. The study finds that the bond fund were performed equally as well as to the
equity funds but the hedge funds performed better than they do funds.

Ajay khorana, Henri Servaes, and Peter Tufano (2006) evaluates the fees charged by
various fimds from the different countries. They select 46,799 funds from the 18
countries to study the fees charged by the funds. The selected ftinds are together
accounted for 86 percent of the world mutual fund industry. They examine the various
fees of fiind like management fees, expense ratio, load charges, etc. charged by the funds
to the investors. The fees and fee structure is changed from country to country depending
upon their regulations. They find that the fund distributed in more counties not only
charge higher fees than the offshore but also the larger funds and complexes funds charge
the lower charges. They also find that the countries with stronger protection charge lower
fees as compare to the other countries.

The study by Yao, Tong, Zhao, Jane and Wermers, Russ R (2007) shows the publicly
disclosed mutual fund portfolio holdings have investment value that help in stock
selection process. They find that the value of the stocks depends upon the success of the
fund manager that is the stock selection is approached depend upon the intuition that an
overridden by successful fund managers or underwriting that an unsuccessful managers
signals that the stock is presently under priced. The investment strategies were developed
based on the past performance such as stock signals generated seven percent than the

33
previous year, adjusted for the size, book-to-market, and momentum characteristics of the
stocks. The study tried to highlight on the portfolio of the fund and the fund manager's
skills. The selection of the security is linked to various factors like market news,
fundamental of the company, value stocks like growth of the stocks, etc. The stock
selection of the mutual funds, increase or decrease in the value of the funds, so the fund
manager selects the fund according the fund objective but making the right selection is
the skill of the fund manager. This study evaluates some fund and outcome concluded
that some managers have superior stock selection skills with strong skills persist.

The study of Stephen Engstorm (2007) has tried to find out the preferences and
characteristics of the investors. He has examined various types of characteristics like
women, men, individuals, with higher education, etc. He has disclosed that the
requirement of individuals is changing according to the characteristics such as the women
more prefer to invest in the low fee fiinds whereas individuals with higher education and
more experience of financial markets invest with higher-fee funds. They also find that the
men prefer to chase the returns than the women investors.

Huang, Jeimifer C. and Guedj, Ilan (2009) have studied the Exchange Traded Funds
(ETF) are really replacing the index funds. They examine the various fiands and develop
an equilibrium model to investigate to compare the efficiencies between the Exchange
Traded Funds (ETF) and Open-Ended Mutual Fund (OEF). They find that while flow-
induced trading is costly to all OEF investors, it is beneficial to those who cause the flow
- it is simply a zero-sum game. The Open-Ended Mutual Fund (OEF) is providing the
insurance to the investors with liquidity stocks and that is the reason it is more beneficial
for risk adverse investors. They find that the liquidity insurance can cause some hazard
issues like excessive trading which can hamper the Open-Ended Mutual Fund (OEF)
performance. They also find that investors prefer to invest in the Open-Ended Mutual
Fund (OEF) due to the high liquidity needs of the investors. They found that the flow
induced trading cost in the Open-Ended Mutual Fund (OEF) depends on the aggregate
liquidity need and not on the individual need. Hence, Open-Ended Mutual Fund (OEF) is
still feasible. They have concluded from this is the Open-Ended Mutual Fund (OEF) is

34
not dominated by the Exchange Traded Fund (ETF). They have uhimately concluded
from the study that the Exchange Traded Fund (ETF) are better suited for narrower and
less liquid underlying indexes, and for investors with longer investment horizons

Huang, Jennifer C, Sialm, Clemens and Zhang, Hanjiang (2009) have studied the risk
shifting levels significantly of the mutual funds over the time. They have tried to find out
the consequences of the shifting of risk levels of the mutual funds. The study finds that
there are various factors of the shifting of risk levels of the mutual funds like ill-
motivated trades of fund managers to increase their personal compensation and
sometimes they need to change their risks of the funds because of to take advantage of
the stock selection and time abilities. They find that the funds increase the risk perform
worse than the funds that keep stable the risk level over the time.

Martijn Cremers , Antti Petajisto (2009) have evaluated the Active share for domestic
equity mutual ftmds from 1980 to 2003. They have introduced a new measure of active
portfolio management. They tried to find out that Active share performance against the
benchmark. The study finds that the Active Share (which represents the share of portfolio
holdings that differ from the benchmark index holdings) outperforms their benchmarks.
They tried to relate the Active Share to fund characteristics such as size, expenses, and
turnover in the cross-section. The study finds that the selected Active Share predicts fund
performance that means the funds with the highest Active Share significantly outperform
their benchmarks, both before and after expenses, and they exhibit strong perfonnance
persistence. The study also finds that the Non-index funds with the lowest Active Share
underperform their benclimarks. The study concludes that the highest Active Share
outperforms the benchmark and the ftinds that were holding the lowest Active shares
were underperform the benchmark.

2.14 Selective Indian Studies

The mutual fijnd in India started in 1963 with the initiafive taken by RBI and
Government of India. There are five phases, have been seen by the mutual fund industry

V -.V/A: ' •
1;--' i,!*5i/> '_• ,
till the date. The four-and-half decade's old Indian mutual fund industry has a strong
significant growth. UTI had a monopoly in the first phase but later due to the entry of
public and private sector mutual funds, the industry grown phenomenally. The Indian
mutual fund industry is still far behind as compare to the global mutual ftmd industry.
The strong growth in Asset under Management (AUM) attracted too many international
asset managers to setup the funds in the Indian markets. This was the good sign of the
future growth and investor's confidence in the Indian mutual fund industry. The literature
survey reveals that there is still further scope for advanced research in this area. The
present study attempts to evaluate the performance of mutual funds in India.

Sarkar (1991)^"* has studied the Sharpe (1966) and Treynor (1965) methodology on
various funds. He has claimed that they both have used different approaches as Sharpe
used standard deviation and Treynor used beta of the fund to measure the risk-adjusted
returns of the funds though they are similar in the ranking fashion of the mutual funds.
ObaiduUah and Sridhar [1991] have evaluated the performance of two major growth
oriented mutual fund schemes Mastershare and Canshare. They concluded that both of
these funds provided abnormal returns Mastershare outperformed on the total risk
adjusted basis while wile Canshare did on a market risk adjusted basis.

Barua and Varma (1991)^^ have evaluated the performance of master share (1987-1991)
using the CAPM approach. The study had used ET Index as a proxy for market behavior.
The risk-adjusted performance is measured by using Sharpe, Jensen and Treynor
measures. The study concludes that the fund performed better than the market but the
fund did not do well when compared to CML. Ajay Shah and Susan Thomas (1994)^^
have undertaken the performance evaluation of 11 mutual fiind schemes and concluded
that except one scheme other schemes earned inferior returns than the market in general.

"•* Amitabh Gupta, "Mutual fund in India : A study of investment management", PP. 1-217
25
Nalini Prava Tripathy "Performance- An Empirical Investigation into Equity Linked Saving
Schemes", www.ximb.ac.in. PP.1-12
"^ Dr. Rao, Narayan "Performance Evaluation of Indian Mutual Funds", www.ssrn.com. paper no.433100,
PP. 1-24

36
Shukla and Singh [1994]" tested the proposition whether portfolio manager's
professional education resulted in superior performance. They reported that equity mutual
fund managed by professionally qualified managers were riskier but better diversified
than those managed by others. The study also pointed out that these ftind managers
outperformed others as group though the difference in performance was not found to be
statistically significant. Adhikari and Bhosale [1994] evaluated the relative performance
of eleven grovtlh schemes in terms of various performance measures during February
1992 to May 1994 utilizing monthly NAV data. They are of the opinion that some of the
sample schemes outperformed the relevant benchmark portfolio.

Kale and Uma [1995]^* have evaluated the performance of 77 mutual fund schemes
managed by eight mutual funds. The rates of return were compared with the return on the
BSE National Index over the sample period for assessing the performance of the schemes
vis-a-vis the market. The study also examined the accounting and disclosure policies
followed by the sample funds.

Kaura and Jayadev (1995)^^ also have evaluated the performance of growth-oriented
scheme by using Jensen, Treynor and Sharp measures found that the schemes have not
performed well. The study focuses on evolution of mutual fund schemes in the risk return
fi-amework and also covers investment policy, regulation and pricing of mutual funds. It
is the first and foremost comprehensive study on mutual funds. Risk adjusted
performance evaluation of mutual funds is being done by applying Sharpe, Jensen, trey
nor ratios. The study also evaluates the performance of the fund managers in the selection
of scripts.

Madhusudhan V Jambodekar (1996)^*' conducted a study to assess the awareness of MFs

among investors, to identify the information sources influencing the buying decision and

"' Amitabh Gupta, "Mutual fund in India : A study of Investment management", PP. 1-217
"* Amitabh Gupta, "Mutual fund in India : A study of investment management", PP.1-217
29
Nalini Prava Tripathy "Performance- An Empirical Investigation into Equity Linked Saving
Schemes", www.ximb.ac.in. PP.1-12
^° Ranganatlian, Kavitha, "A Study of Fund Selection Behaviour of Individual Investors Towards Mutual
Funds - with Reference to Mumbai City", www.ssrn.com, paper no. 876874, PP.1-121

37
the factors influencing the choice of a particular fund. The study reveals among other
things that Income Schemes and Open Ended Schemes are more preferred than Growth
Schemes and Close Ended Schemes during the then prevailing market conditions.
Investors look for safety of Principal, Liquidity and Capital appreciation in the order of
importance; Newspapers and Magazines are the first source of information through which
investors get to know about MFs/Schemes and investor service is a major differentiating
factor in the selection of Mutual Fund Schemes

M Jayadev (1996)'" evaluated the performance of 62 mutual fund schemes using NAV
data for the period between 1987 and 1995. He reported superior performance for bulk
(30 out of 44) of the sample schemes when total risk was considered. However, in terms
of systematic risk only 24 out of 44 schemes outperformed the benchmark portfolio. He
also observed that Indian mutual fiinds were not properly diversified. Further, in terms of
Fama's measure, he did not find selectivity ability of the fund manager.

Sahadevan K.G and ThiripalRaju M (1997) obviate the necessity to wade through the
numerous sources generated for the last 30 years, and provide a unique source for a
critical analysis of the mutual fund regulation. They provide the comprehensive picture of
mutual funds regulation in India vis-a-vis the United States and the United Kingdom, and
also the statistics relating to the performance of many mutual funds, both public and
private sectors. They examine the regulatory models of various countries and suggest that
the SEBI qualify some institutional buyers including mutual funds for resale of privately
placed equity^^. The duo studies the regulators and urges to take appropriate steps to
remove obstacles in facilitating revitalizing private placement market in India.

Gupta and Sehgal [1998] are quite comprehensively evaluated the investment
performance of 80 mutual flmd schemes in the Indian market over a four-year period

^' Anand, S. and Murugaiah, V, "Analysis of Components of Investment Performance - An Empirical

Study of Mutual Funds In India", www.ssrn.com. paperno. 961999, pp 1-14
32
Y Subba Reddy, "Seasoned Capital Offerings: Earnings Management and Long-Run Operating
Performance of Indian Firms", www.ssm.com. paper no. 624401, pp 1-58

38
1992-96^^. In addition, the researchers have tested several related propositions regarding
fund diversification, consistency of performance parameter stationary over time
performance in relation to fiind objectives and risk return relationship. They have
reported that the mutual fiand industry had performed reasonably well during the study
period. However, they have pointed out lack of adequate portfolio diversification. It has
also observed that there has been an evidence to support consistency of performance.
They however reported that parameters are not stationary overtime. Finally, a significant
and positive risk return relationship was documented by the study when standard
deviation was used as a risk measure.

Rao and Venkateswaralu [1998] have examined the market timing abilities of fund
managers of UTI by using its nine closed ended schemes. The data set comprised of daily
closing prices of the schemes from their respective listing dates to march 1998. They
employed both Treynor Mazuy and Henriksson Merton models and observed that UTI's
fund managers were not able to time the market in general. S. A. Dave (1998) discussed
the performance of the mutual fund industry and then reviewed the performance of
individual funds. Susan Thomas (1998) studied the performance of Mastershare and
MSGF for the period 1994-95 by using market prices and NAV respectively. She used
Jenson measure for evaluating performance appraisal. Vivek Kulkami (1998) in his
article has provided basic answers to the questions related to the performance evaluation.
The article explains a framework for good performance evaluation, criteria for selection
of benchmark, methodology of CRISIL's in measuring risk in evaluating portfolio
performance and influence of fiind management fees in a performance evaluation etc.
Julie Hudson (1998) through her article provides an idea about the selection of
benchmark, using of Sharpe and Treynor's measure for evaluation of portfolio
performance, method of calculation of tracking error etc. The study concludes that the
most important need for the progress of the mutual fund industry in India is a well-
established reporting standard.

" Amitabh Gupta, "Mutual fund in India : A study of investment management", PP.1-217

39
Gupta & Sehgal (2000)^'* are of the opinion that the Mutual Fund Industry had perfomied
reasonably well during their period of study. Amitabh Gupta (2000) has examined the
market timing abilities of Indian fund managers by using weekly NAV data for 73 mutual
fund schemes from 1994 to 1999. He found that the results do not support the hypothesis
that managers of closed ended schemes can time the market easily.

Chakrabarti and Ha^'sha Rungta (2000)'^ in their study have attempted to identify and
evaluate the performance of mutual funds with a focus on private sector equity funds. It
studies the risk-return characteristics of selected major equity-based private mutual fund
companies. The inference of the study reveals that there is no one-to-one correspondence
between performance by return and performance by risk-adjusted returns.

M S Narasimhan and S Vijayalakshmi (2001)^'', have made an empirical evaluation of

diversification and timing performance of 76 mutual fund schemes of around 25 fund
houses. The study employed two alternative methods to examine this issue. In the first
method, the portfolio return and risk with the correlation between the stocks in the
portfolio of each scheme can be computed and compared with each other. The second
method examined the correlation between the frequently appearing stocks in the
portfolio. The study when compared the average returns, standard deviation and co-
efficient of variation of these stocks, it is found that in almost all cases the risk level is
high compared to the returns. The study has also examined the fund manager's ability to
identify and invest in stocks that are expected to perform both current as well as in the
near future. These portfolios of funds are compared with the top 100 performers of the
relevant period for this purpose. The results show that there is a general shift in the
investment strategy of holding a diversified portfolio and in optimizing the risk-return of
investments to invest in predictive winners of the period.

'^ Amitabh Gupta, "Mutual fund in India : A study of investment management", PP.1-217
^^ Anand, S. and Murugaiah, V, "Analysis of Components of Investment Performance - An Empirical
Study of Mutual Funds In India", www.ssrn.com. paper no. 961999, pp 1-14
^' Anand, S. and Murugaiah, V, "Analysis of Components of Investment Performance - An Empirical
Study of Mutual Funtis in India'", www.ssrn.com. paper no. 961999, pp 1 -14

40
M S Turan, Dr. B S Bodla and Sh. Sushil Kumar Mehta (2001)" have analyzed the
performance of 54 listed schemes of mutual funds based on weekly data on NAV. For
this purpose, besides risk and return analysis, the risk adjusted performance measures
have been employed. The study reveals that a considerable low level of risk is associated
with the selected schemes, irrespective of the sector concerned.

The study made by L. C. Gupta and Utpal K. Choudhury (2001)^* have made an effort to
analyze the perception and attitude of investors towards mutual funds. The study exposes
the myth of investors' loyalty and malpractices of mutual fiinds. The mutual fund
industries' low and declining share in the mobilization of saving is an indicative of lower
image of its products. Finally, they failed to create real value for investors. One of the
valuable findings of the research indicates that the Indian mutual fund industry has
changed firom monolithic to an extremely competitive structure, where many players are
involved. Despite the entry of three-dozen new mutual fund organizations, the UTI has
not only been named the best but also at the same time study highlights the crisis, which
UTI, the oldest financial institution, experienced due to substantial net outflows i.e.
redemption and repurchases exceeded sales. They have studied and analysed the
investor's reactions against the US-64. The investors have quite good faith on US-64 and
that is why only 20 percent investors sold out the NAV after the news crisis.

Amitabh Gupta (2002)^^ has examined the growth, regulatory framework and
performance evaluation of Indian mutual fiinds and reported their poor performance. The
study tried to figure out the selected fund for the study were outperforming the
benchmark. The study used the Sensex, as a benchmark. The fund selected was equity
funds. The selected schemes were evaluated with respect to the broad based BSE
National Index to find out whether the schemes were able to beat the market. It also
examined whether the returns were commensurate with the risk undertaken by the fund
managers. It used three risk-adjusted perfomiances. The study also tested the market

^^ Anand, S. and Murugaiah, V, "Analysis of Components of Investment Performance - An Empirical

Study of Mutual Funds In India", www.ssrn.com. paper no. 961999, pp 1-14
^^www.tribuneindia.com, an article called "How good are mutual funds" by Kamlesh Khosala,
^' Amitabh Gupta, "Mutual fund in India : A study of investment management", PP.1-217

41
timing abilities of the fund managers. The resuUs indicate that 38 schemes (52 percent)
earned higher returns in comparison to the market return while the remaining 35 schemes
(48 percent) generated lower returns than that of the market. The results are related to
market timing abilities of fUnd managers in terms of both the two models, Treynor
Mazuy and Henriksson Merton, do not lend support to the hypothesis that the Indian fund
managers are able to time the market correctly.

Biswadeep Mishra (2002), attempts to evaluate the timing and selectivity skills of mutual
funds. It also tries to test the non-stationary of mutual fund betas and finds out the causes
of non-stationary beta.

Mishra (2002) has measured mutual fiind performance using lower partial moment. In
this paper, measures of evaluating portfolio performance based on lower partial moment
are developed. Risk from the lower partial moment is measured by taking into account
only those states in which return is below a pre-specified "target rate" like risk-free rate.

The study of K. Pendaraki (2002), deals with the construction of mutual fund portfolios,
and developed a multi-criteria methodology for using it to the Greek market of equity
mutual fluids. The methodology is based on the combination of discrete and continuous
multi-criteria decision aid methods for mutual fund selection and composition. UTADIS
multi-criteria decision aid method is employed in order to develop mutual fund's
performance models. Goal programming model is employed to determine proportion of
selected mutual funds in the final portfolios.

Ramesh Chander (2002), in his study appraised the performance of mutual fiinds in India
as suggested by Shaipe, Treynor and Jenson. The study also has examined the portfolio
management practices of mutual fund managers with respect to portfolio construction,
portfolio management, portfolio evaluation and disclosure practices. The studies have
been commissioned and conducted to investigate the ex-post performance of mutual
funds over the world. Results of these studies have produced evidence to support the

42
hypothesis that mutual fund returns have been inferior to those of the broader benchmark
market portfolio.

Considering various aspects of mutual fiinds it can considered that these ftinds are still
flooded with the hard-earned money of the investors. This is precisely what has prompted
and tempted the author to undertake the study under consideration. After due conception
and reviewing various studies and researches made so far, the present study deals with on
risk-return examination of mutual funds with a view to investigate mutual fund
performance in terms of theoretical performance evaluation models developed by Sharpe,
Treynor and Jensen. Going deeper into detail, it makes a comprehensive analysis of
portfolio performance to attribute it to various activities of fiind managers such as stock
selectivity, market timing, risk bearing and diversification. In addition, it also examines
the contemporary portfolio management practices with regard to portfolio construction,
portfolio management, portfolio performance evaluation, investors' services and
disclosure practices.

An interesting study by Narayan Rao Sapar and Ravindran Madava (2003), reveals the
performance evaluation of Indian mutual funds in a bear market carried out through the
relative performance index, risk-return analysis, Treynor's ratio, Sharp's ratio. Sharp's
measure, Jensen's measure, and Fama's measure. The data used is monthly closing NAVs.
The source of data is website of the Association of Mutual Funds in India (AMFI). The
study period is September 98-April 02 (bear period). They started with a sample of 269
open-ended schemes (out of total schemes of 433) for computing relative performance
index. Then after excluding the funds whose returns are less than risk-free returns, 58
schemes were used for fiirther analysis. During the study period Mean monthly,
(logarithmic) return and risk of the sample mutual fiind schemes were found 0.59 percent
and 7.10 percent compared to similar statistics of 0.14 percent and 8.57 percent of the
market portfolio. The results of performance measures suggest that most of the mutual
fund schemes in the sample of 58 were able to satisfy the investor's expectations by
giving excess returns over expected returns based on both premiums for systematic risk
and total risk

43
Kshama Femandes(2003), has evaluated index fund implementation in India. In this
paper, tracking error of index funds in India is measured .The consistency and level of
tracking errors obtained by some well-run index fund suggests that it is possible to attain
low levels of tracking error under Indian conditions. At the same time, there do seem to
be periods where certain index funds appear to depart from the discipline of indexation.

n Sadhak (2003), the first study to emanate from India of mutual funds as important
financial intermediaries and asset allocate. The study critically examines the recent
growth and performance of mutual funds in India. While identifying the constraints in
their development. Dr Sadhak addresses the major structural, regulatory and operational
issues pertaining to Indian mutual funds, keeping in mind the changing perceptions of
investors and the emerging market structure. Given the growing globalization of Indian
fmancizil markets and their integration with world markets, he also outlines the
conceptual framework and established operational practices of mutual funds in developed
countries such as the USA, UK and Japan. In the process, he provides valuable data
relating to mutual fimds in these countries and in India. As a whole focuses on strategic
directions for mutual funds with regard to marketing and investment to enable them to
cope with the emerging challenges in the fast-changing savings and capital markets in
India.

An empirical study was conducted by Bijan Roy (2004) on the conditional performance
of Indian mutual funds. This paper uses a technique called conditional performance
evaluation on a sample of eighty-nine Indian mutual fund schemes .This paper measures
the performance of various mutual fiinds with both unconditional and conditional forms
of CAPM, Treynor-Mazuy model and Henriksson-Merton model. The effect of
incorporating lagged information variables in the evaluation of mutual fund managers'
performance has been examined in the Indian context. The results suggest that the use of
conditioning lagged information variables improves the performance of mutual fiind
schemes, causing alphas to shift towards the right and reducing the number of negative
timing coefficients.

44
Gregoriou, Greg N. (2006), studied the growing demand for mutual funds to understand
that how their performance is compared with the other fiands at international level. He has
focused on the changes in some countries regarding the new paradigm of international
investing through mutual funds. This is an indispensable collection of original papers on
the mutual fiind industry focusing on various European countries, the U.S. and New
Zealand. Performance has been assessed by using a fresh approach, innovative techniques
and various models. This study allows gaining a perspective and understanding of mutual
fiinds at international level.

The work done by Gregoriou, Greg N. (2006), is on diversification and portfolio

management of Mutual Funds. He addresses the important issue of diversification in an
age where it is vital to reduce volatility on investments. Properly applied portfolio
management can lead to greater gains. He tried to guide the investors through
international portfolio diversification, make clear how to help improve the efficiency of
their investments, and explain how international diversification reduces the risk of an
investment portfolio. His study educates investors about how international mutual fiinds
enhance the performance of their portfolio. He has tried to analyze the factors which are
most essential to investors, and find that both financial factors and behavioral arguments
must be considered.

Sharad Panwar and R. Madhumathi (2006), have used sample of public sector sponsored
& private-sector sponsored mutual funds of varied net assets to investigate the differences
in characteristics of assets held, portfolio diversification, and variable effects of
diversification on investment performance for the period May, 2002 to May, 2005. The
study found that public-sector sponsored funds do not differ significantly from private-
sector sponsored firnds in terms of mean returns. However, there is a significant
difference between public-sector sponsored mutual funds and private sector sponsored
mutual funds in terms of average standard deviation, average variance and the average
coefficient of variation (GOV).

45
The study also found that there is a statistical difference between sponsorship classes in
terms of ESDAR (excess standard deviation adjusted returns) as a performance measure.
When residual variance (RV) is used as the measure of mutual fund portfolio
diversification characteristic, there is a statistical difference between public-sector
sponsored mutual funds and private sector sponsored mutual funds for the study period.
The model built for testing the impact of diversification on fund performance and found a
statistical difference between sponsorship clashes when residual variance is used as a
measure of portfolio diversification and excess standard deviation adjusted returns as a
performance measure. RV, however, has a direct impact on the Shcirpe fund performance
measure.

The study undertaken by S. Anand and V. Murugaiah (2006), has tried to examine the
components and sources of investment performance in order to attribute it to specific
activities of Indian fiind managers. It has also attempts to identify a part of observed
return, which is due to the ability to pick up the best securities at a given level of risk. For
this purpose, Fama's methodology has been adopted here. The study covers the period
between April 1999 and March 2003 and evaluates the performance of mutual funds
based on 113 selected schemes having exposure more than 90 percent of the corpus of
equity stocks of 25 fimd houses. The empirical results have revealed the fact that the
mutual funds were not able to compensate the investors for the additional risk that they
have taken by investing in the mutual funds. The study has come to the conclusion
concludes that the influence of market factor was more severe during negative
performance of the fiinds while the impact of selectivity skills of fund managers was
more than the other factors on the fimd performance in times of generating positive
returns by the funds. It can also be observed from the study that selectivity, expected
market risk and market return factors have shown a closer correlation with the fimd
return.

D.N. Rao (2006), The study classified the 419 open-ended equity mutual fiind schemes
into six distinct investment styles, analyzed the financial performance of select open-
ended equity mutual fund schemes for the period 1st April 2005 - 31st March 2006

46
pertaining to the two dominant investment styles and tested the hypothesis whether the
differences in performance are statistically significant. The variables chosen for
analyzing financial performance are monthly-compounded mean return, risk per unit
return and Sharpe ratio.

A comparison of the financial performance of the 21 Open-ended Equity growth plans

and 21 Open-ended Equity dividend plans was made in terms of the chosen variant. The
analysis indicated that Growth plans have generated higher returns than that of Dividend
plans but at a higher risk. Further, 17 Growth plans have generated higher returns than
that of corresponding Dividend plans offered by the same Asset Management Companies
(AMC) and only one Dividend plan could generate a higher return than its corresponding
Growth plan. However, three Growth plans and the corresponding Dividend plans had the
same returns. Out of the 21 Growth plans, 4 Growth plans had higher Coefficient of
Variation (Risk per imit Return) than the corresponding Dividend plans and 13 Dividend
plans had higher Coefficient of Variation (Risk per unit Return) than the corresponding
Growth plans offered by the AMC. Three Growth plans and three Dividend plans had an
almost equal Risk per unit return.

A comparison of the Sharpe ratios of Growth plans and the corresponding Dividend plans
indicated that 18 Growth plans out of 21 (approximately 90 percent) had better risk
adjusted excess returns highlighting the fact that Growth plans are likely to reward the
investors more for the extra risk they are assuming. Pearson's correlation coefficient
between the returns of the two plans was found to be moderate (0.5290) and F-test (1-
tailed test) indicated a low probability (0.3753) of the variability of the returns of the two
plans. Further, Student's t-test (1-tailed test) led to the rejection of Null Hypothesis and
acceptance of Alternate Hypothesis at confidence levels ranging fi-om 0.40 to 0.0005
implying that Equity Growth fiinds provide higher returns than that of Equity Dividend
fund and the differences were statistically significant.

H.J. Sondhi and P.K. Jain (2007), This study analyses the financial performance of 36
diversified equity mutual funds in India, in terms of rates of return, compared with risk

47
free return, benchmark comparison and risk adjusted returns of diversified equity funds.
The financial performance is a result of sound investment practices of the Asset
Management Companies. Stock selectivity abilities of the fund managers and timing
skills play an important role in bringing about superior performance. The study analyses
these aspects and attempts to isolate factors responsible for significant differences in
performance of sample funds. Fund size, ownership pattern of AMC and type of fund
(Open or close ended) are the main factors considered in this study.

Mohit Gupta and Navdeep Aggarwal ( 2007 ), While the global mutual fiind industry
continues to grow by leaps and bounds, the research on mutual funds has been confined
to only a few developed markets, with USA is always getting a special attention.
Although emerging markets such as India have attracted the attention of investors all over
the world, they have remained devoid of much systematic research, especially in the area
of mutual funds. In an effort to plug this gap, this study sought to check the performance
of mutual fiind's operation in India. In this regard, the quarterly return performance of all
the equity-diversified mutual funds during the period from January 2002 to December
2006 was tested. Analysis was carried out with the help of the Capital Asset Pricing
Model (CAPM) and Fama-French Model. Amidst contrasting findings from the
application of the two models, the study calls for fijrther research and insights into the
interplay between the performance determinant factor portfolios and their effect on
mutual fund returns.

Sanjay Sehgal and Manoj Jhanwar (2007), attempt to examine if there is any short-term
persistence in mutual fund performance in the Indian context. They find no evidence that
confirms persistence using monthly data. Using daily data, the study observes that to fund
schemes sorted on prior period four-factor abnormal returns, the winners' portfolio does
provide gross abnormal returns of 10 percent per annum on post-formation basis. The
economic feasibility of zero-investment trading strategies that involve buying past
winners and selling past losers is however in doubt. This is owing to the fact that these
strategies generate low gross returns and that the winners' portfolio involves higher
investment costs than losers portfolios, thus destroying a major portion of extra-normal

48
returns. Our empirical findings are consistent with the efficient market hypothesis and
have impHcations for hedge funds and other managed portfoHos that rely on innovative
investment styles, including the fund of funds trading strategies that implicitly assume the
short-term persistence.

Soumya Guha Deb, Ashok Banerjee, and B.B. Chakrabarti (2007), studied a return based
style analysis of equity mutual fiinds in India by using quadratic optimization of an Asset
Class Factor Model, which was proposed by William Sharpe. They found the 'style
benchmarks' of each of our samples of equity funds as optimum exposure to eleven
passive asset class indexes. They also analyzed the relative performance of the fiinds with
respect to their style benchmarks. The study results show that the funds have not been
able to beat their style benchmarks on the average.

Subbiah Somasundaram (2008), this study examines the relative performance of actively
managed equity funds and the passively managed index funds. Long standing debate
exists between the active and passive management in the finance literature. This paper
utilizes the unconditional and conditional variants to evaluate the performance of a
sample of 91 funds during the period 2003 to 2007. The broad based S&P CNX 500 is
used as a benchmark in this study. The study uses multi beta (Style-Size), lagged vector
variables (T-Bills, Term Structure Yield Spread). Using these stocks picking and market
timing, ability was evaluated in the Indian context. Finally, the efficiency of passive
funds was examined. The results show active funds with positive risk adjusted excess
return postage fees (excludes loads) but not significantly large enough at 1 percent and 5
percent. Results show fund Manager's positive stock selection ability but negative market
timing skill. The study found the market co-efficient and alpha negatively correlated.
Passive funds are affected by cost rather than tracking error. Finally, the use of lagged
vector variables in the dynamic conditional model has a great impact on the performance
results compared to the traditional techniques. Concerning the above highlighted factors,
this study results were not only consistent with the past findings but also contradicts the
efficient market hypothesis.

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