Reddy Funds

Scope of Mutual Funds has grown enormously over the years.
In the first age

of mutual funds,when the investment management companies started to offer
mutual funds, choices were few. Even though people invested their money in
mutual funds as these funds offered them diversified investment option for the
first time. By investing in these funds they were able to diversify their
investment in common stocks, preferred stocks, bonds and other financial
securities. At the same time they also enjoyed the advantage of liquidity. With
Mutual Funds, they got the scope of easy access to their invested funds on
requirement.
But, in todays world, Scope of Mutual Funds has become so wide, that people
sometimes take long time to decide the mutual fund type, they are going to
invest in. Several Investment Management Companies have emerged over the
years who offer various types of Mutual Funds, each type carrying unique
characteristics and different beneficial features.
To understand the broad scope of Mutual Funds we need to discuss the main
types of Mutual Funds that are normally offered by the Mutual Companies.
PERFORMANCE OF
MUTUAL FUNDS IN
INDIA
2003-2008
BY SHANTANU RAIZADA
2008
A dissertation presented in part consideration for the degree of ‘MA in
Finance
and Investment’.
PERFORMANCE OF MUTUAL FUNDS IN INDIA 2003 - 2008
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ABSTRACT
Many studies have been conducted in the past on the performance of Mutual
Funds in comparison to the market index. These studies may differ in their
time
period, but most of them concluded that on an average the Mutual Funds
failed
to outperform the market thus the Efficient Market Hypothesis holds good.
This
research was based on the performance of 20 open ended equity diversified
growth Mutual Funds for a period of 5 years from April 2003 to March 2008
and
was compared to the BSE 500. Funds were evaluated using Sharpe Ratio,
Treynor
Ratio, Jensen’s alpha etc. The results were quite significant and different from
the
past studies. It was concluded that more than 75% of the funds outperformed
the
market and delivered positive returns.
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ACKNOWLEDGEMENTS
I would like to take this opportunity to thank my supervisor Mr. Scott Goddard
for
his help and support throughout. I am very grateful to him for showing so
much
confidence in me. I would further like to thank my family and friends for their
love
and support.
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Table of Contents
Chapter 1 Introduction
1.1 Concept of Mutual Fund 11
1.2 Types of Mutual Fund 13
1.3 Frequently Used Terms 16
1.4 Advantages of Mutual Funds 17
1.5 Disadvantages of Mutual Funds 19
1.6 Organization of Mutual Fund 20
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Chapter 2 Mutual Funds in India
2.1 History 24
2.2 Future of Mutual Funds in India 27
Chapter 3 Investment Theories
3.1 Modern Portfolio Theory 30
3.2 Capital Asset Pricing Model 33
3.3 Efficient Market Hypothesis 37
Chapter 4 Literary Review
4.1 Performance Measures of Mutual Funds 39
4.1.1 Sharpe’s Measure 39
4.1.2 Jensen’s Measure 41
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4.1.3 Treynor’s Measure 42
4.1.4 Appraisal Ratio 44
4.2 Past Performance of Mutual Funds 45
Chapter 5 Data Description and Methodology
5.1 Sources of Data 50
5.2 Stock Market Index 51
5.3 Net Asset Value 52
5.4 Return 52
5.5 Geometric Mean 53
5.6 Risk 53
5.6.1 Total Risk 53
5.6.2 Systematic Risk 54
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5.6.3 Non Systematic Risk 55
5.7 Sharpe Ratio 56
5.8 Treynor’s Measure 57
5.9 Jensen’s Measure 57
5.1
0
Appraisal Ratio 58
5.1
1
Linear Regression 58
Chapter 6 Analysis and Interpretation of Data
6.1 Beta 65
6.2 Sharpe Ratio 65
6.3 Treynor Ratio 66
6.4 R2 66
6.5 Jensen’s Alpha 66
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6.6 Information Ratio 67
6.7 Limitations of the Study 67
Chapter 7 Conclusion
7.1 Recommendations for Future Research 77
References 78
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Chapter 1
Introduction
The financial world is an extremely complex, growing and changing field. With
millions of investment choices today it’s difficult for an average investor to
begin
investing. Mutual Funds are the most common investment vehicles that allow
investors to achieve greater diversification with minimal investment capital
and
cost. Stock market trading has increased and has become more than an
investment option for many Indians. The Indian economy with its
development
and modernization has created tremendous opportunities for every individual
to
grow and prosper. All this has led to a new phase of development in the
Indian
stock market and has increased the investment opportunities for the common
man as well. India being a favourable destination for expansion in terms of
manufacturing, retail, IT etc has attracted a lot of FDI and attracted even
more
foreign investors to invest in the Indian stock market. With the advancement
in
investment mechanisms it has led to a major change in the attitude of Indian
investors. Savings form an important part of the economy and earlier the
Indian
financial scene represented savings mostly in the form of fixed deposits with
nationalised banks. The situation changed and people started investing more
in
financial markets, though not directly but through the help of Mutual Funds. It
may not be that the Indian market is the safest and best market in the world
but
the rate at which this market is growing provides us with very good returns.
Although a small amount of people do invest directly in the capital market but
the major problem is that of expertise. While investing directly one has to be
smart enough to judge the securities and understand its complexities. This
becomes very difficult for investors with small means to keep a track of the
market and continuously follow up. This is where Mutual Funds play an
important
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role. Outsourcing this job to experts who scrutinize every security and
continuously follow up solves the problem for these small investors.
Mutual Fund is a nothing more than a collection of stocks and/or bonds. It’s a
trust that pools the savings of a number of investors who share a common
financial goal of increasing return and decreasing risk. Mutual Fund is a
company
that brings together a group of people and invests their money in stocks,
bonds
and other securities. These companies are also called Asset Management
Companies (AMC) which is a part of bigger financial institutions like banks
etc.
Trading in stock market has increased substantially and due to that it has led
to
an increase in investment opportunities for the general public. Due to recent
developments India has attracted more and more foreign investors to invest
in its
markets.
The main purpose of this dissertation is to compare the performances of
Mutual
Funds with the stock market index. For this purpose I have selected 20 open
ended equity diversified growth Mutual Funds and collected their monthly
NAV’s
from the time period April 2003 to March 2008. This data is then compared to
the
BSE 500 and results are then drawn. The 20 funds used consist of both top
performing and laggard Mutual Funds thus giving us a concrete sample. This
study applies modern theories of portfolio performance measurement and
evaluates the performance of Mutual Funds during the past 5 years.
1.1 Concept of Mutual Fund
Mutual Fund is a trust that pools money from a group of investors who have a
common financial goal and invest the collected funds into different asset
classes
which match the objectives of the scheme. A Mutual Fund cannot deviate
from its
goal as its objectives are the basis on which it collects funds from investors.
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Every Mutual Fund has a fund manager who uses his skills to ensure a higher
return then what the investor can manage on its own. The returns generated
in
the form of capital appreciation and other incomes in forms of dividends are
distributed to its investors or unit holders in proportion to the number of units
they own of that fund. (www.appuonline.com)
Source-www.kotakmutual.com
The type of Mutual Fund to invest in depends upon the characteristic s of the
investor. Investment strategies would be different for a risk taking investor
and
different for a risk averse investor. Every Mutual Fund has an objective. The
objectives are further broken down into specific goals like growth, income or
stability. Growth means increase in value of the amount invested. Income is
return in form of interest or dividends and stability means protection from
loss
and protection from variability in price change of shares. (Cavanagh)
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1.2 Types of Mutual Funds in India
Broadly Mutual Funds are of three types depending upon their structure and
objectives. These funds can be classified as follows-
• By structure
1) Open- ended schemes.
2) Close-ended schemes.
3) Interval schemes.
• By objectives
1) Growth schemes.
2) Income schemes.
3) Balanced schemes.
4) Money market schemes.
• Others
1) Tax saving schemes.
2) Special schemes
o Index schemes.
o Sector specific schemes.
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Open ended schemes- this type of Mutual Fund is a fund that does not have
a
set number of shares. It is available for subscription all through the year.
These
funds do not have a fixed maturity. It continues to sell shares to investors and
buy’s it back from them whenever investors wish to sell it. Units are bought
and
sold at their current NAV which is declared on a daily basis. The key feature of
such funds is the liquidity factor.
Close ended schemes- this type of Mutual Fund has a set number of shares
issued to the public through a new fund offer. This fund is open for
subscription
only during a specific period of time i.e. the corpus remains unchanged at all
times. Either the investors can invest in the scheme when the initial offering
is
there or buy the units of the scheme through the stock exchange. The units
of
these schemes are traded on the stock exchange like other securities. Buying
and redemption directly from the fund is not allowed. To protect the interest
of
investors, SEBI provides investors with two avenues for liquidationo
These funds are listed on the stock exchange where investors can buy/sell
units amongst each other. The trading is generally done at a discount to
the NAV which is determined weekly.
o These funds may also offer to buy back the units from the unit holders. In
this case the corpus of the fund and its units do not get changed.
Growth schemes- these funds invest for capital appreciation with a time
horizon of 3 to 5 years. They attempt to maximise long term appreciation of
the shares they invest in. These funds generally invest in companies that are
expected to outperform the market in the future or companies which are
experiencing significant growth or revenue. These funds are more volatile as
their managers take more risk thus these are not suited for risk averse
investors.
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Income schemes- these funds invest in those securities which promise a
high return in form of cash dividends or coupon interest so as to maximise
the
recurring income of the investor. To maintain this level the fund managers
avoid investing in risky stocks and concentrate on fixed income securities like
bonds, preferred stocks and blue chip stocks. Although they are less risky
then equities, they are subject to credit risk by the issuer at the time of
payment. To minimize this risk fund managers invest in securities from
issuers
which are rated high by credit rating agencies.
Balanced schemes- these funds include assets like debt securities,
convertible securities, shares etc which are all held in a equal proportion so
as
to provide both income and capital appreciation to the investor. The main
objective of a balanced fund is to reward the investor with a regular income
and capital appreciation at the same time. Such investment strategies ensure
that these funds will manage downturns in the stock market without much
loss. These funds are appropriate for investors who are conservative and
have
a long term horizon.
Money market schemes- these funds are also known as liquid funds. They
invest in short term interest bearing debt instruments. The major investments
in these funds are of Treasury bills other than that are commercial papers and
certificate of deposits. These securities bear very little risk and are the safest
and the most secure investment. These securities are highly liquid and
provide a great deal of safety.
Tax saving schemes- these funds offer tax rebates to the investor under
specific provisions under Income Tax Act’1961 offered by the government.
These schemes are mainly growth oriented funds and invest in equities. E.g. -
equity linked savings scheme and pension schemes offer tax benefits.
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Index schemes- these funds try to match the performance of a specific
stock
market index. The portfolio of these companies matches those companies
which are a part of some index. They try to reproduce the performance of the
index. These securities invest in the securities in the same percentage as the
index. The NAV’s of such funds move in the same way as the market index.
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Sector specific schemes- these funds concentrate only on one sector and
restrict their investments to that sector only. The exposure is limited to one
sector like information technology, health care, pharmaceuticals,
infrastructure etc. The main idea behind this fund is that it allows the
investors to invest in specific sectors which they think are growing.
1.3 Frequently Used Terms
o Net asset value (NAV) - NAV determines the price paid per share when
buying or the price received when selling a Mutual Fund unit. In the
case of a load fund the purchase price is the NAV per share plus the
load. When selling the price which is received is NAV per share minus
redemption fees.
NAV= Fund Assets – Expenses and
Liabilities
No of shares outstanding
o Sale price- this is the price paid for the purchase of a unit of a Mutual
Fund. It may include a sales load.
o Repurchase price- this is the price at which close ended Mutual Funds
repurchases its units and it may include a back end load.
o Redemption price- this is the price at which open ended Mutual Funds
repurchase their units.
o Sales load- this is a charge collected by the fund when it sells its units
to the investor’s. It’s also called front end load and such schemes are
referred to as load schemes. In other words this is the amount which
one pays while buying the shares in a Mutual Fund. This charge is also
known as “front -end load”, this fee typically goes to the brokers that
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sell the fund’s shares. Front end loads reduce the amount of your
investment. E.g. - if we invest 2,000$ and want to invest it in a fund
with 5% front end load. Then 100$ sales load will be paid on the top
and only the remaining 1,900$ will be invested in the fund.
o Back end load-this is a charge which is collected by the fund when it
buys back its units. This is also known as purchase fee. However this is
different from front end load as this is paid to the fund directly and not
to the broker.
(www.sec.gov)
1.4 Advantages of Mutual Funds
o Diversification of portfolio- Mutual Funds invest in a well diversified
portfolio of securities which helps the investor to hold a wide variety of
stocks which may otherwise may not be possible. An investor with a mere
investment of Rs 5,000 can own shares of a blue chip company; this is only
possible through a Mutual Fund. Thus it enables people with small as well
as large means to invest jointly in the fund. Apart from this a normal
investor applying for a stock of a company may or may not get it. However
if a Mutual Fund applies for the same stock then there’s a sure shot chance
for the fund to get the allotment. Later on these shares are sold to the
promoters of the company thus it creates investor confidence.
o Professional management- Mutual Funds are governed by fund managers
which are professional in their field. They undergo thorough various
researches and have expert knowledge about market timing, stock
selection, risk exposure etc. A common man would not have such
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expertise and would face difficulties. The fund managers have proper
knowledge and teams which have all such information ready.
o Lower transaction cost- investment in mutual find turns out to be cheaper
as compared to direct investing. It is estimated that the Mutual Fund
expenses are 1.5% of the total investment. Thus investing in Mutual Funds
can save a lot of money for the investor in terms of brokerage and
commissions.
o Less risk- people investing in Mutual Funds acquire a diversified portfolio.
The risk level is comparatively low as the risk is hedged.
o Choice of schemes- nowadays there are different Mutual Funds available in
the market. The investor can choose from a wide variety of Mutual Funds
depending upon his attitude towards risk and return.
o Liquidity- there is no fixed time period in a Mutual Fund. The investor can
exit whenever he wants to by selling his share. Thus there is liquidity in
Mutual Funds and as compared to other investment options like fixed
deposits or provident funds.
o Transparency- Mutual Funds are subject to rules and regulations from the
government so that the investors are protected against fraud. The
investment company issues periodic statements so that investors can keep
a proper track. Thus there is transparency in their operations.
o Tax advantage- Mutual Funds are beneficial from the tax point of view as
compared to other investment tools. These funds provide a protection to
investors in the form of tax relief under Section 80 L of the Income Tax Act’
1961. Apart from this there are some other schemes which provide tax
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relief under Section 88, thus this leads to the importance of Mutual Funds
with the investors.
o Increase in FDI- due to increase in Mutual Funds the flow of FDI in the
economy increases and this secures more profitable avenues abroad
through domestic savings by opening up of off shore funds in other foreign
investors.
o Forced saving- all dividends and capital gains earned on the Mutual Fund
are automatically invested back in the fund and are not used up by the
investor. This is a form of forced saving and makes a big difference in the
long run.
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1.5 Disadvantages of Mutual Funds
o Fees and commission- every Mutual Fund charges an administrative fee to
cover their day to day expenses. Apart from this they may also charge a
commission on sales which is referred to as sales load. All these costs are
born by the investor.
o Difficulty in selection- due to a wide variety of Mutual Funds available in
the market it may cause confusion among investors as to which fund is to
be selected. Often this may result in a wrong choice by the investor. Thus
special care and advice needs to be taken in order to select the suitable
fund.
o Management risk- no investment is risk free. Thus when investors invest in
the fund they have to depend upon the managers abilities to get the
desired return. A wrong decision may hamper the growth of the entire
fund. These Mutual Funds are externally managed and have no employees
of their own. There are multiple regulations supervising the Mutual Funds
in India. UTI is governed by its own regulations; the banks are supervised
by the RBI whereas the central government and insurance company are
governed by the central government.
o Less popularity- investment in Mutual Funds in India is treated as a
substitute for fixed deposits. Around 75% of the investors do not prefer to
invest in Mutual Funds unless they are guaranteed a fixed return.
o Lack of Uniformity- although Mutual Funds are formed as trusts and the
roles of sponsors, trustees, AMC etc are clearly defined still the trustees
act as fund managers instead of AMC’s. Apart from this investors are
mostly unaware of information regarding their money invested. Although
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they have a right to know where their money is being invested and even
the Asset Management Companies have an obligation to inform them, still
investors are left deprived of the information.
o Lack of efficiency- the Mutual Funds management is not very efficient in
despatching of certificates, attending to inquiries, repurchasing etc. Thus it
leads to a loss in interest of the investor towards the fund.
(Tripathy 1996)
1.6 Organisation of Mutual Funds
Securities Exchange Board of India (SEBI) regulations 1996 regulates the
structure of Mutual Funds in India. All Mutual Funds in India are created under
the
Indian Trusts Act’1882. This trust is created by a sponsor and the sponsor will
make the initial contribution and appoint trustees to hold the assets of the
trust
for the benefit of the unit holders. These unit holders are the beneficiaries of
this
trust. Further on the trustees appoint Asset Management Company as an
investment manager to manage the assets of the trust. Further on it’s the job
of
the AMC to invite investors with different schemes and lure them to
contribute to
the fund. The AMC is responsible for managing the day to day affairs of the
fund.
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Source-www.mutualfundsindia.com
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From the above the Mutual Fund has the following structure-
• Sponsor.
• Trustee.
• Asset Management Company.
• Custodian.
• Sponsor- as per SEBI guidelines a sponsor is a person who either himself or
in an association with another body establishes a Mutual Fund. The
sponsor creates a public trust, appoints trustees with the approval of SEBI,
creates an AMC under Companies Act’1956 and appoints and registers the
trust as a Mutual Fund with SEBI.
• Trustee- trustees are responsible for managing the trust. They are
responsible to the investors and take care of their interests. They can
either be formed as a Board of Trustees (governed under provisions of
Indian Trust Act’1882) or as a trustee company (governed under provisions
of Indian Trust Act’1882 and Companies Act’1956). The trustees ensure
that the activities of the fund are in accordance with the SEBI
regulations’1996, they ensure that the AMC has proper systems and
procedures in place and due diligence is exercised by the AMC in
appointment of associates and partners. Trustees are responsible for the
activities of the AMC to SEBI and have to furnish a half yearly report
stating the activities of the AMC to SEBI. Trustees are responsible for
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approving of the schemes floated by the AMC’s and ensuring that the net
worth of the AMC’s is in accordance with the SEBI guidelines.
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• Asset Management Company (AMC) - it’s a company registered
under the Companies Act’1956 created by the sponsor for managing
the funds of the trust. A small fee is paid to the AMC for the
management of the fund. AMC’s can be divided into three parts-
1. Bank sponsored.
2. Institutions.
3. Private sector.
However there are many restrictions on the activities of the AMC. An AMC
is restricted to undertake any other business activity other than portfolio
management, management and advisory services to offshore funds etc.
Apart from this the AMC cannot invest in its own schemes unless and until
and until full disclosure has been made earlier.
• Custodian- the custodian is responsible for keeping the securities which
are in material form safe. The custodian is responsible for ensuring that
the delivery of the securities has been done and they are transferred to
the respective Mutual Fund. They are responsible for maintaining the
account of the Mutual Fund and collect and account the dividends or
interest received on the securities held by the fund. They also keep a track
of the various announcements, bonus issue, buy back offers etc.
(Kaushal Shah and Associates)
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This paper is divided into the following chapters-
• Chapter two deals with the overview of Mutual Funds in India. It discusses
the history of Mutual funds in India and the future prospects of the industry
as a whole in India. This chapter mentions the various phases of the
growth of Mutual Fund industry and also discusses the recent trends in the
industry. It further states measures and steps that can be taken to improve
the Mutual Fund industry
• Chapter three would focus on the basic investment theories like the
Modern Portfolio Theory, Capital Asset Pricing Model and the Efficient
Market Hypothesis.
• Chapter four is divided into 2 parts. The first part states the different
performance measures used like Sharpe’s Ratio, Treynor’s Ratio, Jensen’s
Alpha and Information Ratio. Whereas the second part depicts the past
researches done by scholars on this topic.
• Chapter five deals with the data description and methodology used for the
research. This chapter discusses methods to calculate returns,
performance measures like Sharpe Ratio, Treynor Ratio, Jensen’s Alpha
etc.
• Chapter six deals with the analysis and interpretation of the research. It
interprets the results and findings of the research. Apart from this it also
states the limitations of the research.
• Chapter seven is the conclusion of the dissertation.
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Chapter 2
Mutual Funds in India
2.1 History
The Mutual Fund industry in India was established in 1963 with the formation
of
Unit Trust of India (UTI) with the joint efforts of the Government of India and
the
Reserve Bank of India (RBI). The history of Mutual Funds can be broadly
divided
into four distinct phases.
First phase-1964-1987
UTI was established in 1963 by an act of the Parliament. It was setup by the
RBI
and was governed under the regulatory and administrative control of the RBI.
In
1978 UTI was de-linked from the RBI and the Industrial Development Bank
took
over in place of the RBI. The first scheme launched by the UTI was Unit
Scheme
in 1964. By the end of 1988 UTI had Rs 67 billion worth of assets under its
management.
Second phase-1987-1993
The year 1987 saw the entry of non-UTI, public sector Mutual Funds setup by
public banks like State Bank of India (SBI), Punjab National Bank (PNB), Bank
of
Baroda etc and state owned insurance companies like Life Insurance
Corporation
of India (LIC) and General Insurance Corporation of India (GIC). The first non-
UTI
Mutual Fund was by SBI which was established in June 1987 which was
further
followed by other non-UTI Mutual Funds setup by public banks. By the end of
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1993 the Mutual Fund industry had Rs 470 billion worth of assets under its
management.
Third phase-1993-2003
The year 1993 saw the entry of private sector Mutual Funds which gave the
investors a wider choice of investment opportunities. In this year the Mutual
Fund
regulations was enforced under which all Mutual Funds were to be registered
except UTI. The first private sector Mutual Fund was Kothari Pioneer in July
1993
which later merged with Franklin Templeton. By the end of 2003 the total
assets
under the Mutual Fund industry were Rs 1218.05 billion where as the share of
UTI
was Rs 445.41 billion.
Fourth phase-2003 onwards
UTI was bifurcated into two separate divisions. One is the specified
undertaking
of the UTI which broadly represent the assets under US 64 schemes, assured
return and other schemes. This division operated under the rules and
regulations
framed by the Government of India and do not come under the Mutual Fund
regulations. The other division being the UTI Mutual Fund Ltd which was
sponsored by the private banks and this industry along with other funds is
governed under the SEBI Mutual Fund Regulations 1996. (www.amfiindia.com)
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Source- amfi investor’s guide
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Source- www.amfiindia.com
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2.2 Future of Mutual Funds in India
India is the third largest Asian economy after Japan and China and twelfth
largest in the world. The future of Mutual Funds in India is quite bright. Mutual
Funds are one of the most popular forms of investments as these funds are
diversified, professionally managed and provide liquidity. Investors with small
means can invest in these funds and be part of the market. In the previous
six years the growth rate has been 100%; also there have been many foreign
asset management companies which have ventured into Indian capital
market. The Mutual Fund industry has been expanded to include
commodities.
In the year 2004 the Mutual Fund industry was worth Rs1, 50,537 crores and
it’s expected to grow at a rate of 13.4% over the next 10 years and its
estimated that it will touch Rs 40, 90,000 crores by the end of 2010.
According to Mr UK Sinha chairman of CII Mutual Fund Summit 2008 and
CMD,
UTI Asset Management Company, the Indian Mutual Fund industry has grown
at compounded annual growth rate of 47% between 2003 and 2008 which
comes only next after Russia (97%) and China (67%) during the same time
period.
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Source-BCG analysis
India being a vast country with a large population base, still only 1.6% of the
working population aged between 18 and 59 invest in Mutual Funds. Out of
321 million of this work group the investing population is very small thus it’s
clearly visible that more than 90% of the people have no clue about a Mutual
Fund. In United States of America 43% of the households invest in Mutual
Funds whereas in India only 4% invest in Mutual Funds. If we want Mutual
Fund industry to scale new heights we should develop a proper investor base
and distributor’s guidance. Thus taking advantage of such a base the Mutual
Fund industry has tremendous scope to expand in times to come. India has a
saving rate of over 23% which is highest in the world. We need to channelize
the resources in the right direction. The industry should expand to rural
sectors as well, more emphasis should be laid on B and C class cities, and the
number of Mutual Funds should be increased.
Mutual Funds have become an important part of the Indian Capital Market
and
attract a lot on investment and competition. The following are some
suggestions if followed it would increase the scope of Mutual Funds.
• All Mutual Funds should be governed by a uniform law and it should
come under the jurisdiction of a single body.
• Indian investors have a preconceived notion that every investment in
the market should be like fixed deposits and offer a minimum return.
They should be educated and informed that Mutual Funds are subject
to market risk and cannot offer a minimum return.
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• Mostly only public sector operates in the Mutual Fund market. This
should be opened for private sector as well. This would increase
competition and prove beneficial to the investor.
• Clear demarcation should be made within the structure of the Mutual
Funds i.e. the roles of the trustees, sponsors, AMC’s etc should be well
defined and followed.
• The funds should make true and fair disclosure of all information
pertaining to the investments they make so that the investors are not
misled and they are fully aware of the type of risk they are undertaking.
• Mutual Funds need to develop themselves with the latest technology
and take advantages of computer, telecommunications etc for
providing service to the investors.
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Chapter 3
Investment theories
3.1 Modern portfolio theory
Risk is an inherent part of any investment. No investment is there without
risk.
Risk and return are directly related as return increases risk increases.
Diversification strategy can be used to reduce risk to a great level. One can
invest in different securities of different sectors to reduce the level of risk.
However even extensive diversification cannot eliminate risk. There are
certain
factors which affect all firms this is called market risk. This risk cannot be
eliminated whereas unique risk which is specific to a certain security can be
eliminated through diversification.
Harry Markowitz (1952), a pioneer of portfolio analysis, introduced the
Modern
Portfolio Theory also known as Portfolio Theory or Portfolio Management
Theory
which later paved the way for his noble prize in economics in the year 1990.
His
model was the stepping stone in portfolio management which deals with
identification of the efficient set of portfolios and is often referred to as the
efficient frontier of risky assets. This theory suggested that the standard
deviation or variance and the return are the two most important measures for
the
selection of a portfolio. This theory drew attention to the fact that an investor
can
reduce the standard deviation of a portfolio by choosing stocks which are not
related to each other or do not move exactly together. This theory further
suggests that for any risky level we are only interested in that portfolio which
offers us the maximum return. Before the introduction of MPT investors used
to
select stocks following the rule of Expected Return Maximization which stated
that the optimal portfolio is one that offers the highest return. Markowitz
further
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explained the expected return – variance (E-V) rule and explained the
importance
of diversification of a portfolio. But the main drawback of his theory was that
he
did not suggest the number of securities that a portfolio should hold nor did
he
suggest a method for security analysis. The expected return of the portfolio
can
be calculated with the weighted average of the expected return of individual
securities. The weights assigned to each security or asset is its market value
in
the portfolio to the market value of the total portfolio.
Where,
- The expected return of the portfolio.
- The expected return of stock ‘I’ of the portfolio.
- Weight of stock ‘I’ in the portfolio.
Due to this theory it is possible to differentiate between an efficient portfolio
and
an inefficient portfolio. An efficient portfolio will give higher returns for a
lower
standard deviation whereas an inefficient portfolio will be the opposite.
Page 36 of 91
Source- Class Notes Prof Shahid Ebrahim, University of Nottingham 2008.
The above figure represents the minimum variance frontier of risky assets.
The
variance frontier is a graph of the lowest possible variance that can be
achieved
for a given portfolio expected return. All individual assets lie on the right
hand
side of the efficient frontier thus portfolios which only have those assets
would be
inefficient. Diversifying investments leads to portfolios with higher return and
lower variance. The efficient frontier would be the curved line above the
dotted
line. This is because all portfolios lying on that portion of the frontier would
provide the best risk-return combinations and are the optimal portfolios. Any
portfolio lying below the efficient frontier has a similar portfolio with a higher
return and same variance directly above it. Hence the bottom part of the
frontier
in inefficient.
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3.2 Capital Asset Pricing Model (CAPM)
This model is a set of predictions concerning equilibrium expected returns on
risky assets which reveals the relationship between risk and return of a
security
and gives us a way to calculate the expected return of a security. The base
for
CAPM was laid down by Harry Markowitz in 1952, twelve years later CAPM
was
developed by William Sharpe, John Linter and Jan Mossin. CAPM is based on
certain assumptions which are as follows-
• The number of investors is very large each having wealth which is small
compared to the wealth of all investors. All investors are price takers which
means that they act as if the prices of securities are unaffected by their
own trading. Thus there is perfect competition in the market.
• The time period taken into consideration by the investors is short term.
They are short sighted and ignore everything that might happen after the
end of the stipulated time period. In other words the behaviour of the
investor is myopic in nature.
• The investment is only dedicated to publicly traded financial assets.
Investments in other fields like human capital, social assets like halls,
roads, parks, airports etc are ruled out. Apart from this the investors is free
to borrow or lend any amount of money at a fixed rate of interest.
• Investors are not subject to payment of any taxes on returns or transaction
cost on trading of securities. This is however not possible in reality as
payment of taxes and transaction cost is a legal formality.
• All investors are rational mean variance optimizers in other words they all
use Markowitz portfolio selection model.
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• Al investors analyze the securities in the same way as others and have the
same information which is available to others. This means that for any set
of security prices they all derive the same input list for the model. In other
words all investors have homogenous expectations.
These assumptions ignore many of the real world complexities; if they are
met
then this model can be used to gain powerful insights into the nature or
equilibrium in security markets. The following implications would be
explained-
• All investors would hold a similar portfolio of risky assets as compared to
the market portfolio. The proportion of each stock in the market portfolio
equals the market value of the stock divided by the total market value of
all stocks.
• The market portfolio will lie on the efficient frontier but that point will also
be the tangency point to the capital allocation line (CAL) which is specific
for every investor. Due to this the capital market line (CML) which starts
from the risk free rate to the market portfolio would be the most suitable
CAL.
• The risk premium on the market portfolio will be proportional to its risk and
the degree of risk aversion of the representative investor.
• The risk premium on individual assets will be proportional to the risk
premium on the market portfolio and the beta coefficient (β) of the asset
relative to the market portfolio.
Beta measures the systematic risk which the investor undertakes when he
holds
the market portfolio. Beta measures the extent to which the stock and the
market move together. It explains the sensitivity of the portfolio to the
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movement of the market or the index. During bull markets an investor would
hold
stocks of high beta and during a bull run a portfolio of low beta would be
preferred. The market portfolio will have a beta of 1.
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The risk premium on the individual securities is-
Thus from the above two we get-
Where,
- The risk free rate of interest.
- The expected mean return of market portfolio.
- Covariance of the return between asset and the market
portfolio.
- The expected return on the asset.
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The expected return-beta relationship can be explained graphically by the
securities market line (SML). It’s useful to compare SML with CML as CML
graphs risk premiums of efficient portfolios whereas SML graphs individual
asset risk premiums. SML provides a benchmark for the evaluation of
investment performance. We can use SML to assess the fair expected return
on a risky asset. If a stock is perceived to be a good buy it will plot above the
SML. Whereas overpriced stocks plot below the SML. The difference between
the fair and actually expected rates of return is called the alpha. In an
efficient stock market all prices lie on the SML thus in such a case where
securities are priced accurately alpha is always zero.
Source- www.investopedia.com
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3.3 Efficient Market Hypothesis
The movement of stock prices do not reflect any pattern, in other words there
movement is random. The efficient market hypothesis evolved in the 1960’s
from
the Ph.D. dissertation of Eugen Fama. This theory suggests that the financial
markets are efficient and reflect all available information in their stock prices.
The new information which becomes available is immediately impounded into
the
stock price and reflects all information and beliefs of investors in the prices of
the
securities. The new information is quickly adjusted in the price. Most
investors
buy and sell securities under the assumption that the market prices of the
securities are efficient and reflect all available information. Investors believe
the
market is efficient thus the price of the security is correct not under or
overvalued. This means that if the markets are efficient and the market
prices
reflect all information than trading of securities would rather be a game of
chance than skill. This means that in case of Mutual Funds the managers get
no
reward to beat the market since the market prices already reflect all
information.
There are three versions of the efficient market hypothesis: the weak form,
the
semi strong form and the strong form hypothesis. Each of the three market
forms
differ in terms of their assumptions, characteristics and nature about the kind
of
information which is available to them and how it is reflected in the market
prices.
Weak form hypothesis states that the stock prices already reflect all
information
which is available which can be derived by examining history of stock prices,
trading volume etc. all such information is readily available and everyone has
access to it. Thus it states that if such data could give reliable signals about
the
future performance of the stock prices then by now all investors already
would
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have an idea to exploit them. In due course of time such signals lose their
value
as they become known to everyone.
Semi strong form hypothesis states that all publicly available information
regarding a particular firm must be already reflected in the stock price. This
data
may include past prices, company’s financial details, management details,
trading volume, future prospects etc. similarly if investors have access to
such
information then it would be already reflected in the stock prices. This form of
market makes useless for investors to search for inefficiently priced shares by
analysing unpublished information. This form of market also states that
fundamental analysis techniques will not be able to produce excess returns,
thus
such analysis can only be used for analysis of new information.
Strong form hypothesis states that the stock prices reflect all information
which is
related to the company. This information includes publicly available
information
as well as information known only to insiders. This form suggests that stock
prices quickly adjust itself to information available whether public or private.
Therefore no investors have an edge over the other in terms of information as
all
information is already reflected. However insider trading is banned in India by
SEBI thus this form of market is impossible.
(Brealey and Myers, 2000)
(Bodie et al, 2005)
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Chapter 4
Literary Review
4.1 Performance Measures of Mutual Funds
4.1.1 Sharpe’s Measure
Sharpe’s Measure or Sharpe’s Ratio is a measure of the excess return per unit
of
risk in an investment strategy. It was developed by William Forsyth Sharpe in
the
year 1966. This ratio is designed to measure the expected return per unit for
a
zero investment strategy. The difference between the results of the two
strategies represents the results. Sharpe ratio is useless in cases where there
is
only one investment. As Sharpe ratio deals with prediction of future returns
therefore ex post Sharpe ratio has to be taken. William Sharpe also referred
this
as the reward to variability ratio.
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Where,
- Return on the fund in period t.
- Return on the benchmark portfolio in period t.
- Average value of over historic period from t=1 to T.
- Standard deviation over time period.
- Ex-post Sharpe ratio.
(Sharpe 1994)
This ratio is used to measure or rank the performance of portfolio or Mutual
Funds. This is also used to calculate the return which an investor earns in
respect
to the level of risk he undertakes. Sharpe ratio is used to compare two assets
which have the same benchmark, and then in such a case the asset with the
highest Sharpe ratio gives more return for the same level of risk. Sharpe
evaluated the performance of 34 open ended Mutual Funds between the
period
1954-63 and found out that there was considerable variation in the R/V ratio.
This
was attributed to the fact that there were a lot of expenditures by many
funds
also it could be that funds differ in their management styles. These funds
were
compared with Dow- Jones industrial average. (Sharpe 1966).
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4.1.2 Jensen’s Measure
Jensen (1968) pointed out two techniques of portfolio evaluation-
• The ability of the portfolio manager to increase returns on the portfolio
through prediction of future security prices.
• The ability of the manager to reduce risk which is born by investors.
Earlier measures like that of Treynor and Sharpe ranked the portfolios on a
risk
adjusted basis whereas Jensen constructed a measure of absolute
performance
on risk and through which performance of different funds could be compared.
Comparing different funds enabled the determining of the portfolios
manager’s
skill whether he is able to earn higher returns through prediction of stock
prices
or not. Security market line (SML) also explains the concept of Jensen’s alpha,
SML in CAPM is used to determine the expected return for a given beta. The
exante
SML represents different expectations of different investors for different risk
bearing investments. Whereas the ex-post Security Market Line represents
the
behaviour of actual returns. The average return of a fund performing well be
higher as compared to the return predicted by the SML similarly it will be
much
lower then what will be predicted by the SML. Jensen’s alpha measures the
performance of a portfolio by this deviation from the SML.
Where,
- Expected return on portfolio.
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- Risk free rate.
- Beta of the portfolio.
-Market rate of return.
- Error term.
As per CAPM alpha should be zero because the efficient market hypothesis
holds
good. Despite the fact that the EMH holds good many managers generate
positive alphas. This is because they have some information which is only
available to them or maybe they have better skills as compared to other
managers. These managers tend to take more risk as compared to other
portfolios. Jensen in his study compared the performance of 115 Mutual Funds
1945 – 1964. He established that the Mutual Funds on an average did not
outperform the market they did not predict future stock prices and no
individual
fund was able to do better than that was expected. These funds were not
successful enough to even recover the management expenses, brokerage
expenses etc.
4.1.3 Treynor’s Measure
Treynor (1965) developed a measure to evaluate the performance of Mutual
Funds. He analysed that the major problem in portfolio evaluation was risk
measurement. He introduced the concept of characteristic line to define the
relationship between portfolio return and benchmark return over a period of
time.
This line is a simple linear regression of the portfolios returns on the returns
of
the benchmark. The slope of this line measured the volatility of the funds
return
in relation to the benchmark return. When the graph was plotted not all
points
lied on the characteristic line this meant that the risk cannot be entirely
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attributed to the market apart from that there are also risks associated to
particular securities held in the portfolio. If there are large deviations from the
market line then this indicated that diversification was not adequate enough
whereas greater the correlation of the portfolio the more diversified the
portfolio
was. Treynor’s measure was aimed at developing a measure of performance
that
could be used for all investors. Risk averse investors would prefer lines with
larger slopes and vice versa.Ex-post SML was used as a benchmark for
performance evaluation of portfolios.
Where,
- Treynor ratio
-Risk free return
-Beta of the portfolio.
- Portfolio return.
Treynor’s measure provides an important guideline for investors and
managers.
Higher the value of the ratio more is the slope of SML and thus the fund is
well
suited for all investors irrespective of their risk preferences. The value of the
ratio
can be negative in spite of the portfolio having a positive beta but a return
below
the risk less rate would mean a poor fund management. Thus ranking of the
portfolios is not affected by changes in risk less return.
Treynor’s measure is very similar to Sharpe’s Ratio. However the only
difference
being that Treynor’s measure relies on beta of the portfolio whereas Sharpe’s
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measure uses standard deviation as the measure of risk. Sharpe’s measure
evaluates the performance of the portfolio on the basis of returns as well as
the
diversification of the portfolio. If the portfolio is fully diversified leaving no
scope
for unsystematic risk then both the measures will give the same result.
However
if the manager invests more in high return securities then that fund may have
a
higher rank as per Treynor’s measure as compared to Sharpe’s measure.
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4.1.4 Appraisal Ratio
Appraisal ratio or information ratio was first introduced by Treynor and Black
(1973). It’s a ratio used to measure the quality of a fund’s investment picking
ability. The alpha of the portfolio is divided by the non-systematic risk of the
portfolio in other words this measure divides the alpha by its diversifiable
risk.
This ratio attempts to measure not just the excess return to a benchmark but
also how consistent the performance is. This ratio measures the consistency
of
the manager’s performance against a benchmark. This ratio is a measure of
volatility- adjusted return.
Where,
AR- Appraisal ratio
- Jensen’s alpha of the portfolio.
- Diversifiable risk.
Information Ratio is very similar to Sharpe’s Ratio. However both of these
ratios
have a fundamental difference. Sharpe ratio compares the excess return of
an
asset against the risk free asset like that of a T-bill whereas Information Ratio
compares active return to the most relevant benchmark. Both these ratios
are
same only when the benchmark is constant risk free asset like cash.
(Pomerantz).
The Information ratio is best used as a ranking criterion for Mutual Funds.
Information ratio technically is excess returns divided by tracking error. In
other
words Information ratio is residual return divided by residual risk or alpha
divided
by residual risk. The higher the ratio the better it is.
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(www.financial counsel.com)
Page 52 of 91
4.2 Past Performances of Mutual Funds
Jensen (1968) in his paper “The Performance of Mutual Funds in the Period
1945-1964” analysed the performance of 115 open end Mutual Funds.
Jensen’s
alpha was used as the performance measurement tool. It was found out that
alpha calculated net of assets was -.011 which meant that the average funds
earned about 1.1% lower per year then they should have earned given their
level
of risk. The distribution was skewed as 76 out of the total funds had less than
zero alpha and only 30 had more than 0 alpha. It was further concluded that
the
Mutual Funds were not being able to predict security prices good enough to
outperform the market. Also no individual fund was able to do better than
expectation. The funds were not successful and could not even recoup their
expenses.
McDonald in his paper “Objectives and Performance of Mutual Funds, 1960-
1969”
measure and evaluated the risk and return of 123 American Mutual Funds
between the periods 1960 to 1969. He based his research on 5 questions. It
was
found out that in terms of Treynor’s return to beta ratio 67 out of 123 funds
exceeded the stock market ratio, similarly more than one half of the funds
gave
positive Jensen’s Ratio. Sharpe’s measure was less than the markets in case
of
84 funds. Whereas nearly half of the funds gave positive alpha’s.
In a study by Kim T. in the paper “An Assessment of the Performance of
Mutual
Fund Management: 1969- 1975”, the author evaluated the quarterly
performance
of 138 Mutual Funds from the time period 1969 to 1975. The main objective
was
to evaluate the investment performance of these funds using return
performance
of three index benchmark portfolios. It was concluded that the 138 Mutual
Funds
rather performed poorly. Most of the funds specially ones with high risk were
the
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biggest losers. Thus it was confirmed that the efficient market hypothesis is
consistent with the market.
Carlson in his paper “Aggregate Performance of Mutual Funds, 1948-1967”
analysed the performance of 82 diversified Mutual Funds and compared it
with
the market index. He used a modified version of Tobin-Sharpe-Linter CAPM
and
indices were constructed for three types of Mutual Funds, further on each of
the
index was then compared to the three most popular indices. The major
finding of
the study was that the issue of whether the Mutual Fund outperforms the
market
or not depends upon the time period and the benchmark selected. Past
performance of stocks showed no predictable future value.
Grinblatt and titman (1989) in their paper “Mutual Fund Performance: An
Analysis
of Quarterly Portfolio Holdings” analysed the performance of 279 Mutual
Funds
from the time period 31st December 1974 to 31st December 1984.
Grinblatt and titman (1994) in their paper “A Study of Monthly Mutual Fund
Returns and Performance Evaluation Techniques” evaluated the performance
of
279 Mutual Funds and 109 passive portfolios using different benchmarks. In
this
paper they contrast the Jensen’s measure, the positive weighting measure
developed by them earlier and the timing ability developed by Treynor and
Mazuy. Their study revealed that the measures generally give same
inferences
when using the same benchmark and the results may vary even for the same
measure when using different benchmarks. The study revealed that the
performance sensitivity depends greatly on the benchmark selection.
Secondly it
compared the Jensen’s measure with two new measures that were developed
to
overcome time related problem associated with Jensen’s measure. Lastly it
analysed whether fund performance is related to its attributes or not.
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Daniel et al (1997) in their paper “Measuring Mutual Fund performance with
characteristic-based benchmarks” evaluated the performance of roughly
2500
equity Mutual Funds on a quarterly basis during the time period 31st
December
1974 to 31st December 1994. This article introduced a character based
benchmark that is designed to measure whether Mutual Funds pick stocks
that
outperform the market or not. As per the results of the data on an average
the
Mutual Funds did succeed in picking such stocks. But the difference by which
the
Mutual Fund beats the market is very small and only covers the expenses.
Further on the average fund outperformed the market nine out of ten times
between 1975 and 1984 with a yearly average of 2.8% and six out of ten
times
between 1985 and 1994 with a yearly average of 1.3%.
Rao and Ravindran in their paper “Performance Evaluation of Indian Mutual
Funds” evaluated the performance of Indian Mutual Funds in a bear market
through relative performance index, risk return analysis, Treynor’s ratio,
Sharpe
ratio, Jensen’s alpha and Fama’s measure. They considered the closing NAV’s
of
268 open ended Mutual Funds which were further reduced to 58 due to
returns
being less than risk free returns. The time period for the study was
September
1998 to April 2002. The main idea behind the research was to find returns
which
were provided by the individual schemes and their corresponding risk levels
as
compared to the market and the risk free rate. The main objective was to
evaluate the performance of funds during the bear market using different
measures. It was concluded that the Treynor ratio for 38 out of 58 funds were
positive whereas in the case of Sharpe ratio 30 funds were positive. More
than
half of the funds had positive Jensen’s measure whereas only 30 provided
excess
returns over risk free rates this was however due to low CAPM returns.
According
to RPI analysis, out of the 269 schemes under study 49 were under
performers,
102 were par performers and 118 outperformed the market. Medium term
debt
Page 55 of 91
funds were considered best investment options as compared to others. The
results of the research suggest that most of the Mutual Fund schemes out of
the
sample of 58 schemes were able to satisfy investor’s expectations by giving
excess returns over expected returns based on premium for systematic and
total
risk.
Jayadev(1996) in his paper “Mutual Fund Performance: An Analysis of Monthly
Returns” evaluated the performance of two growth oriented Mutual Funds on
the
basis of their monthly returns and compared it to the benchmark returns.
Mastergain and Magnum express were the two funds which were compared to
the benchmark return. This paper basically attempted to answer whether
growth
funds earn higher return than the benchmark return in terms of risk and
whether
growth funds offer the advantages of diversification market timing and
selectivity
of securities for their investors. For this purpose the author employed
performance measures like Jensen’s alpha, Treynor’s ratio and Sharpe’s ratio,
regression, selectivity etc. It was concluded that the two growth funds did not
perform better than their benchmark indicators. The two funds were found to
be
poor in earning better returns and selecting underpriced securities. The funds
failed to perform better than the market portfolio and are not capable of
offering
the advantages of diversification and professionalism to the investors.
Deb et al in their paper” Performance of India Equity Mutual Funds vis-a-vis
their
Style Benchmarks; An Empirical Exploration” did a return based analysis of
equity
Mutual Funds in India and compared their relative performance to the
benchmarks. The author in this paper did a style analysis using Sharpe’s
RBSA
approach. The time period taken in consideration was January 2000 to June
2005
and ninety six equity Mutual Funds were considered and compared to their
benchmarks. According to the analysis it was concluded that the Indian
managers
were not able to beat their benchmarks.
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Anand et al in their paper “Analysis of Components of Investment
Performance-
An Empirical Study of Mutual Funds in India” analysed the performance of
113
selected schemes for the time period April 1999 to March 2003. The main
objectives of the study were to examine the degree of correlation that exists
between the fund and market return, to understand the impact of fund
characteristics of the performance and to evaluate the diversification and
selectivity of fund managers. The BSE index was considered as the
benchmark
for evaluation. It was concluded that majority of the schemes showed
underperformance in comparison to the risk free rate. This implied that the
Mutual Funds did not compensate the investors for the additional risk they
undertook. The fund managers were not capable of generating excess returns
as
compared to the expected return. The study concludes that the fund
manager’s
diversification strategy has not provided any additional return which
compensates the investor’s for the diversifiable risk. Thus it can be inferred
that
the forecasting skill and stock selectivity skills of fund managers was lacking
during the sample period.
Rao in his paper “Investments Styles and Performance of Equity Mutual Funds
in
India” analysed the performance of open ended equity Mutual Funds for the
period April 2005 to March 2006. It was concluded that only four growth and
one
dividend plan out of the total 42 plans studied could out beat the market,
whereas the rest did not perform well enough.
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Chapter 5
Data Description and Methodology
The study takes into account the performance of Mutual Funds as against the
stock market index. For this study we take the time period April 2003 to
March
2008 and select 20 open ended equity diversified growth Mutual Funds. The
data
is collected on a monthly basis and is compared to the movement of the BSE
500.
The closing NAV’s is collected and similarly the closing BSE 500 index is
collected
on a monthly basis. Out of the 20 Mutual Funds selected for the research 10
are
top performing whereas the other 10 are laggard funds. Thus the sample
which
we have consists of both top performing and worst performing funds. This
gives
us uniformity in our data selection and gives us a more representative sample
of
the market. The funds which are selected are growth funds and dividends are
not
paid out in these funds, but they are included in the NAV’s of these funds.
Compared to dividend funds the returns on these funds are similar. The only
difference is that in case of dividend funds the dividend is paid out and has to
be
added to the NAV as and when declared. Thus these growth funds are already
adjusted according to the amount of dividend.
5.1 Sources of Data
The data for the study is widely available on the net on the following sites-
• www.indiainfoline.com
• www.amfiindia.com
• www.moneycontrol.com
• www.utimf.com
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• www.tatamutualfund.com
• www.sharekhan.com .
• www.reliancemutualfund.com
• www.franklintempleton.com
• www.icicidirect.com
The risk free rate which is used for the research is the interbank rate of the
Reserve Bank of India (RBI). This rate can be obtained from the website of RBI
i.e.
www.rbi.org.in.
5.2 Stock Market Index
In order to correctly measure the performance of Mutual Funds it’s very
essential
to have a benchmark which is best suited. In our case we consider the
benchmark as BSE 500. Bombay stock exchange (BSE) is the oldest stock
exchange with a rich heritage and was established in 1875 as “The Native
Share
& Stock Broker’s Association”. It received permanent recognition from the
Government of India in 1956 under the Securities Contract Act 1956. In
February 1999 BSE constructed a new index called the BSE 500 consisting of
500
scripts and launched it in August 1999. This index broadly represents 93% of
the
total market capitalization and covers all major 20 sectors of the economy.
This
index was initially calculated on the basis of “Full Market Capitalization”
methodology but was shifted to Free Float methodology from September
2003.
All over the world major indices like MSCI, FTSE, S&P, Dow Jones etc are
calculated by the same way as BSE 500. BSE is the world’s number one
exchange
in terms of the number of listed companies and the world’s fifth in terms of
transactions.
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(www.bseindia.com)
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5.3 Net Asset Value (NAV)
Net asset value of a company is the total assets minus the liabilities. It’s the
cumulative market value of the assets net of its liabilities the fund holds. This
is
the value the shareholders or unit holders will get if the fund is liquidated. For
e.g.- if a company has assets worth $200 million and liabilities worth $20
million
then its net asset value would be $200 million minus $20 million which is
$180
million. The NAV of an investment company fluctuates daily as its value of
assets
and liabilities change daily. The NAV is generally mentioned in terms of per
unit
which is calculated by dividing the total NAV by the number of units.
In our research we consider only the closing NAV of the funds for each month.
In
case of Mutual Funds NAV’s are most important to investors as it’s from NAV
that
the price per unit of a fund is calculated. For the purpose of our research we
have
only considered growth funds. Although in terms of returns they are similar to
dividend funds but we have only considered the growth funds. In case of
dividend
funds the dividend is incorporated in the fund as we take the closing NAV.
Both of
these funds appeal differently to different investors. Growth funds provide
investors with capital gains whereas dividend funds provide investors with a
continuous income.
5.4 Return
The NAV taken is the closing NAV of every month for each Mutual Fund. For
each
Mutual Fund under study the monthly returns are calculated as follows-
R= ln (closing NAV/ starting NAV)
The market returns are calculated on a similar basis.
R=ln (closing index/ starting index)
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5.5 Geometric Mean
GM or Geometric Mean is a kind of average of a set of numbers of only a
positive
set of numbers. It summarizes the rate of return over a historical period. This
type of mean is used when evaluation of past performance needs to be done
and
there is a long period of time. This is calculated by multiplying all numbers
(call
the number of numbers as n) and then taking the nth root of the total.
(www.easycalculation.com)
Where,
Rg- geometric mean
R1, r2 ...rt –rate of returns for t time period for n periods.
5.6 Risk
5.6.1 Total Risk
Standard deviation is the measure of total risk. It is also known as volatility.
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Where,
- Standard deviation.
- Number of weeks in the time period.
- Return on portfolio.
- Average monthly return.
5.6.2 Systematic Risk
Systematic risk is that risk which remains even after extensive diversification.
This risk is attributable to market risk sources which affect all securities. This
risk
cannot be eliminated. Beta is the measure of systematic risk. This risk is also
called non- diversifiable risk. High values of beta indicate high sensitivity of
fund
returns as compared to market returns. Whereas lower beta values indicate
low
sensitivity. During a bull phase high beta values are preferred whereas during
bear phase low beta values are preferred.
But the formulae used is
Where
- Return on portfolio.
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-Alpha.
- Beta.
-Market return.
- Error term.
5.6.3 Non Systematic Risk
This is also known as diversifiable risk and is industry specific. It can be
eliminated by diversification. The extent of diversification can be measured
by
the value of coefficient of determination i.e. r2 . A low value of r2 indicates that
the fund can diversify more and still has scope for diversification. The value
of
r2 is obtained by regression
Unsystematic risk= total risk – systematic risk
Where,
- Total risk.
- Beta square.
- Market risk.
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Source- Ross et al 2006.
5.7 Sharpe Ratio
Sharpe ratio or reward to variability ratio developed by William Forsyth
Sharpe
is the measure of excess return to volatility or excess return to the risk free
assets as compared to the total portfolio. Sharpe assumed that the investor
only holds one portfolio and does not diversify his risk thus he must get a
premium for this. Sharpe’s ratio is considered better as compared to
Treynor’s
measure as it considers whether investors are rewarded reasonably well for
the risk they take as compared to the market or not. A fund having a high
unique risk may outperform the benchmark in Treynor’s measure but
underperform in Sharpe’s ratio. However Sharpe’s ratio is based on capital
market line, which only takes in to account efficient portfolios and ignores
inefficient portfolios; hence for this purpose we only take efficient portfolios.
For our research purpose the Sharpe ratio for the benchmark and the market
is calculated and compared whether the funds outperform the benchmark or
not.
Page 66 of 91
5.8 Treynor’s Measure
Treynor ratio compares the return earned in excess of what could have been
earned on a risk free investment. It measures the excess return to the
systematic risk in other words reward to variability ratio or Treynor’s measure
indicates the risk premium per unit of systematic risk. Beta for the market is
always 1, thus Tp for the market is Rm – Rf . If the Tp of the portfolio is greater
than that of the market then the scheme has outperformed the market.
However this measure can only be applied to positive beta’s only during the
bull phase of the market. If applied during the bear phase then the results
can
be misled as the schemes will have negative betas. Other than this Treynor’s
measure ignores the reward for non-systematic risk.
5.9 Jensen’s Measure
This is also known as Jensen’s alpha and is used to determine the excess
return of a security over other securities expected return. It measures the
absolute performance of the portfolio and considers only the systematic risk.
This was developed by Michael Jensen in 1970’s and the main feature of this
model is that it helps to assess the ability of the fund manager. A positive
Jensen’s alpha would indicate that the fund has a higher return over the
CAPM
and lies above the security market line whereas a negative would represent
the opposite.
Page 67 of 91
5.10 Appraisal Ratio
This ratio is also known as Information Ratio. It is used to measure the
abnormal returns per unit of risk that could be diversified by the portfolio. It
analyses the performance of Mutual Funds and is obtained by dividing the
active return by the tracking error.
5.11 Linear Regression
The linear regression is run for Rp-Rf vs. Rm-Rf and the value of R2 is
calculated.R2 is the coefficient obtained by running regression which
determines the extent to which a portfolio is diversified and whether further
diversification is possible or not. A low R2 means that there is scope for
diversification whereas a high R2 would mean that the fund is properly
diversified. R2 also determines the correlation between the fund and the
market returns.
Page 68 of 91
Chapter 6
Analysis and Interpretation of Data
The study focused on the performances of 20 open ended equity diversified
growth Mutual Funds and compared their monthly NAV’s to the market index.
The study was conducted from April 2003 to March 2008. The following are
the results of the research.
Sl.No
.
Fund Name
1 Franklin India Blue Chip (G)
2 HSBC Equity Fund G
3 Tata Growth Fund
4 Reliance Vision Fund Growth
5 Reliance Growth Fund
6 Birla Sun Life Advantage Mutual Fund
7 Birla Sun Life Mid Cap (G)
8 DBS Chola Fund (G)
9 JM Equity Fund
10 DSP ML Top 100 Equity Fund
Page 69 of 91
11 Franklin India Prima Plus
12 HDFC Growth Fund
13 HDFC Top 200 Fund
14 ICICI Prudential Power Fund (G)
15 ICICI Prudential FMCG Fund (G)
16 Kotak Tech Fund (G)
17 Sahara Growth Fund
18 Tata Pure Equity Mutual Fund
19 Sundaram BNP Paribas Select Midcap Fund
20 Tata Equity Opportunities Fund
Page 70 of 91
Sl.No
.
Fund Name Alpha Beta R2
1 Franklin India Blue Chip (G) .005217 .88 .944
2 HSBC Equity Fund G .00954 .899 .906
3 Tata Growth Fund .00279 .91 .804
4 Reliance Vision Fund Growth .00647 .93 .913
5 Reliance Growth Fund .012954 .95 .862
6 Birla Sun Life Advantage Mutual Fund .000983 .94 .933
7 Birla Sun Life Mid Cap (G) .0093356 .853 .817
8 DBS Chola Fund (G) -.01813 .950 .397
9 JM Equity Fund .001264 .915 .891
10 DSP ML Top 100 Equity Fund .00662376 .906 .946
11 Franklin India Prima Plus .0078741 .828 .920
12 HDFC Growth Fund .0074972 .891 .932
13 HDFC Top 200 Fund .0068749 .886 .960
Page 71 of 91
14 ICICI Prudential Power Fund (G) .00493 .920 .928
15 ICICI Prudential FMCG Fund (G) .009265 .698 .627
16 Kotak Tech Fund (G) -.00501 .643 .449
17 Sahara Growth Fund .0047796 .873 .914
18 Tata Pure Equity Mutual Fund .0080492 .922 .926
19 Sundaram BNP Paribas Select Midcap
Fund
-.0288497 1.057 .385
20 Tata Equity Opportunities Fund -.0150417
6
1.054 .583
Average .0018707 .89525 .8018
Minimum -.028849 .643 .385
Maximum .012954 1.057 .960
Page 72 of 91
Page 73 of 91
Sl.No
.
Fund Name Sharpe
Ratio
Treynor
Ratio
Informati
on
Ratio
1 Franklin India Blue Chip (G) .341 .027 18.946
2 HSBC Equity Fund G .393 .031 19.359
3 Tata Growth Fund .282 .024 2.2992
4 Reliance Vision Fund Growth .348 .028 13.0396
5 Reliance Growth Fund .420 .034 15.16119
6 Birla Sun Life Advantage Mutual
Fund
.278 .022 2.59562
7 Birla Sun Life Mid Cap (G) .377 .0320 9.6647
8 DBS Chola Fund (G) .01694 .00206 -2.23983
9 JM Equity Fund .276 .022 2.085447
10 DSP ML Top 100 Equity Fund .359 .028 23.78306
11 Franklin India Prima Plus .382 .030 22.33381
12 HDFC Growth Fund .371 .029 21.98926
13 HDFC Top 200 Fund .334 .026 35.57288
14 ICICI Prudential Power Fund (G) .332 .02652 12.79633
15 ICICI Prudential FMCG Fund (G) .354 .03442 5.40843
16 Kotak Tech Fund (GPa)ge 74 of 91.116 .01335 -1.66755
Average .285185 .02321 11.3271
Minimum -.049 -.006 -2.73471
Maximum .420 .03442 35.57288
Page 75 of 91
6.1 Beta
Beta measures the level of systematic risk in the portfolio. In our research we
compare the beta of the portfolio to the market index i.e. BSE 500. The beta
of the market portfolio is assumed to be 1. The beta in our research ranges
from .643 to 1.057 which is shown above. However only two Mutual Funds
have beta greater than the market beta which shows that these funds bear
more risk as compared to the market. The average beta of the funds is
.89525
which is close but less than one. Thus it can be stated that the funds are less
risky than the market and the fund manager would hold these portfolios and
beat the market.
6.2 Sharpe Ratio
Sharpe ratio is calculated to compare between funds as which funds perform
better compared to others in terms of total risk. The ratios for different funds
are given above. The Sharpe ratio of the funds in this research ranges
between -.049 and .420. This means that out of the 20 funds undertaken for
research only one fund had a negative Sharpe ratio, in other words this fund
has performed the worst and is not capable of giving better returns as
compared to the risk free rate. Whereas the fund with the highest Sharpe
ratio
gives the maximum return and has outperformed the other funds. The Sharpe
ratio for the market index is .2751420 which is less than the average of all
the
funds which is .285185. Other than this 16 funds have a Sharpe ratio greater
than that of the market whereas only 4 funds have a Sharpe ratio less than
the markets. Thus it can be concluded from the above that the Mutual Funds
in India have the capability to outperform the market and get better returns
as compared to the market.
Page 76 of 91
6.3 Treynor Ratio
Treynor ratio measures the funds risk adjusted return per unit of market risk.
A higher Treynor ratio would indicate better risk adjusted performance. The
Treynor ratio for the research is given above. The range of the ratio of the
funds is from -.0064 to .03442. This means that only one fund has a negative
Treynor ratio whereas 19 of the total 20 funds have positive Treynor ratio.
This means that all these funds having positive Treynor ratio are capable of
earning a higher return than the risk free rate. The average of the Treynor
ratio for the funds is .02321 which is higher in comparison to the market
index
ratio which is .0201. This clearly states that the Mutual Funds have
outperformed the market portfolio. Apart from this 16 of the total 20 funds
under this research have a greater Treynor ration as compared to the market
ratio and only 4 Mutual Funds have a Treynor ratio which is less than the
market ratio. Thus it’s clear that the Mutual Funds have outperformed the
market index.
6.4 R 2
If R2 is above 70% then the model is supposed to be fit. R2 is the percentage
of
variation in the dependent variable explained by the independent variable. R2
in our sample ranges from .385 to .960 with an overall average of .8018. This
means that 80.18% of funds observations are explained by the market
premium. In our observations 15 out of 20 funds have a R2 above 70%. If R2 is
less than 70% than further diversification is possible and the fund manager
should diversify the fund more as that would get him better returns for the
fund.
6.5 Jensen’s Alpha
Page 77 of 91
Jensen’s alpha is used to measure the abnormal performance of Mutual
Funds.
Jensen’s alpha indicates security selectivity and the judgement of the fund
manager. This implies that with a random selection buy and hold policy the
performance should give an alpha of 0. The values of alpha’s in our research
range from -.0288497 to .012954 and the average being .0018707. This
indicates that all the funds on an average earned .18% per year more than
the expectation with a given level of systematic risk. Out of the 20 funds
under the research only 4 had negative alphas whereas all other 16 funds
had
positive alphas. This shows that a majority of the fund managers are able to
generate positive abnormal returns and profits for their respective funds.
6.6 Information Ratio
The information ratio ranges from -2.72471 to 35.5728 where the average is
11.3271. There are only 4 funds with negative information ratio which is only
due to negative alphas. As the unsystematic risk for many funds is low thus
alpha when divided by this risk would give higher values. Funds which have
lower Information Ratios is due to lower values of alpha. The higher the ratio
the better it is.
6.7 Limitations of the Study
• The data collected is through online sites which in turn are supplied by
members. There is no uniform rule in the data collection and its
computation.
Page 78 of 91
• This study excludes the effect of entry and exit loads of the Mutual
Funds. The transaction costs and other expenses like research
expenses, management expenses etc are not taken into account. This
could reduce the rate of return of the fund which is earned by the
investor. All the data used is gross of expenses and the return
calculated is higher than the actual, thus there is a difference.
• Survivorship bias- survivorship bias affects almost every Mutual Fund
performance and mostly all datasets include only those funds which are
currently in operation and available for investment. Survivorship bias
leads to an overestimation of performance of a fund’s portfolio. In
Mutual Fund industry survivorship bias is referred to as ‘Fund
Disappearance’ or ‘Fund Attrition’. Funds that disappear tend to do so
because of poor performance, these funds are not dissolved but are
usually merged with some other fund. These unhealthy funds still have
the capability to earn fees to the organization this they are merged not
dissolved also this step maintains the institutions image as the funds
are not listed and not published.
Most of the past studies did not take in to account the issue of
survivorship bias. Those studies only focused on the funds which
continuously existed over a period of time for which the performance
was evaluated. The other funds simply were not taken as a part of the
research. Studies by Sharpe, Jensen, and Treynor all did not consider
the issue of survivorship bias. However the issue of survivorship bias
persists due to the availability of data. The data which is available is
only there for funds which are in existence and currently traded. As for
my research the data collected was from April 2003 to March 2008 and
Page 79 of 91
the data was collected online, thus this data only represents funds
which were actively traded during that time period. (Elton et al, 1996).
• Window dressing- at the time of declaration of results the fund managers
change the composition of their funds and portfolio’s to make it look more
attractive.
• Tax reliefs- returns from Mutual Funds may be in the form of capital gains
or dividends. The tax implications in India are different for different types
of returns. As every investor has different needs thus the tax treatment
also depends upon the type of benefits derived from these funds. This
research does not take into account such advantages.
• Expense ratio- expense ratio states how much one pays a fund in
percentage term annually to manage the money. The fund’s NAV’s are
reported net of fees and expenses. Thus it’s very important to know how
much the fund is deducting. A major part of the expense ratio is the
management and advisory fees. The AMC generates profits from the
management fees. A good performing fund may charge a high
management fees, thus it’s very important to choose the right fund which
maintains a balance.
• The Mutual Funds undertaken for the research are growth funds which
have dividend reinvested in them. However the benchmark index i.e. BSE
500 does not account for the dividend factor. This is due to the fact that
the average dividend yield for the market is not available. Thus the market
index does not include the dividend factor.
Page 80 of 91
Franklin India Blue Chip (G)
Month NAV Return Rf
rate
BSE
500
Return Rp-Rf Rm-Rf
March 03 22.42 1071.45
April 03 22.86 0.019435241 6% 1068.03 -0.003197041 0.014447699 -0.008184583
May 03 25.63 0.114374882 6% 1235.76 0.145870335 0.10938734 0.140882794
June 03 28.44 0.104033065 6% 1373.56 0.105719744 0.099045523 0.100732203
July 03 30.73 0.077442771 6% 1439.3 0.046750975 0.07245523 0.041763433
August 03 35 0.130108685 6% 1687.35 0.159002367 0.125121144 0.154014825
September 03 36.59 0.044426918 6% 1748.43 0.035558991 0.039439376
0.03057145
October 03 41.12 0.116719642 6% 1877.14 0.0710311 0.111732101 0.066043558
November 03 43.35 0.052812082 6% 1991.74 0.059259287 0.047824541
0.054271745
December 03 51.42 0.170720499 6% 2366.36 0.172344281 0.165732957
0.167356739
January 04 51.62 0.003881992 6% 2246.83 -0.051832576 -0.001105549
-0.056820117
February 04 52.57 0.018236421 6% 2228.41 -0.008232007 0.013248879
-0.013219549
March 04 52.52 -0.000951565 6% 2243.6 0.006793392 -0.005939107 0.00180585
April 04 54 0.027789997 6% 2321.25 0.034024115 0.022802456 0.029036574
May 04 45.25 -0.176781376 6% 1891.75 -0.204603507 -0.181768918 -0.209591049
June 04 47.04 0.038795633 6% 1923.78 0.016789674 0.033808092 0.011802132
July 04 49.64 0.053798657 6% 2081.26 0.078681479 0.048811115 0.073693937
August 04 50.54 0.017968142 6% 2125.65 0.021104158 0.0129806 0.016116617
September 04 53.56 0.058037419 6% 2276.87 0.068724055 0.053049877
0.063736513
October 04 53.16 -0.007496287 6% 2319.3 0.018463723 -0.012483828
0.013476182
November 04 59.39 0.110819628 6% 2548.36 0.094184599 0.105832087
0.089197057
December 04 64.07 0.075850374 6% 2779.65 0.086875005 0.070862832
0.081887464
January 05 63.12 -0.014938559 6% 2726.49 -0.019309953 -0.019926101
-0.024297494
February 05 65.67 0.039604524 6% 2825.65 0.035723359 0.034616982
0.030735817
March 05 62.78 -0.045005649 6% 2734.66 -0.032731313 -0.04999319
-0.037718854
April 05 59.61 -0.051813206 6% 2610.5 -0.04646534 -0.056800748 -0.051452881
May 05 64.30 0.075736286 6% 2829.2 0.080452212 0.070748745 0.075464671
June 05 67.20 0.044113616 6% 2928.31 0.034431479 0.039126075 0.029443937
July 05 73.08 0.083881484 6% 3124.78 0.064938416 0.078893942 0.059950874
August 05 76.89 0.050821098 6% 3273 0.046343115 0.045833556 0.041355573
September 05 82.85 0.074655915 6% 3521.83 0.073273745 0.069668373
0.068286204
October 05 75.99 -0.086429991 6% 3198.69 -0.09623939 -0.091417533
-0.101226931
November 05 85.74 0.120717708 6% 3568.37 0.109367558 0.115730167
0.104380016
December 05 90.48 0.053809371 6% 3795.96 0.061828434 0.048821829
0.056840893
January 06 96.67 0.066174285 6% 4004.96 0.05359625 0.061186743 0.048608708
February 06 101.88 0.052492534 6% 4130.07 0.030760763 0.047504992
0.025773222
March 06 111.88 0.093631218 6% 4516.73 0.089493925 0.088643677
0.084506383
April 06 117.36 0.047819266 6% 4829.73 0.067002285 0.042831724 0.062014743
May 06 101.99 -0.140371365 6% 4157.93 -0.149773211 -0.145358906
-0.154760753
June 06 100.38 -0.015911785 6% 4029.97 -0.031258423 -0.020899327
-0.036245964
Page 81 of 91
July 06 101.54 0.011489825 6% 4029.43 -0.000134005 0.006502284 -0.005121547
August 06 110.83 0.087544686 6% 4423.88 0.093392212 0.082557145
0.088404671
September 06 117.41 0.057674587 6% 4739.67 0.068950374 0.052687045
0.063962832
October 06 124.02 0.05477076 6% 4957.37 0.044907845 0.049783219
0.039920304
November 06 128.99 0.039292039 6% 5227.73 0.053101791 0.034304498
0.04811425
December 06 131.67 0.02056391 6% 5270.76 0.008197415 0.015576369
0.003209874
January 07 134.23 0.019255954 6% 5408.71 0.025836052 0.014268413
0.020848511
February 07 122.35 -0.092668957 6% 4938.08 -0.091034025 -0.097656498
-0.096021567
March 07 120.86 -0.012252939 6% 4955.39 0.003499281 -0.01724048 -0.00148826
April 07 131.46 0.084069772 6% 5311.03 0.069309917 0.07908223 0.064322376
May 07 139.78 0.061367135 6% 5646.9 0.061320932 0.056379594 0.05633339
June 07 142.43 0.018780893 6% 5781.37 0.023533957 0.013793351 0.018546415
July 07 151.08 0.058958847 6% 6063.2 0.047597035 0.053971305 0.042609493
August 07 148.18 -0.019381747 6% 5950.11 -0.018828007 -0.024369288
-0.023815548
September 07 165.00 0.107517723 6% 6773.54 0.129614139 0.102530181
0.124626597
October 07 184.31 0.110673649 6% 7785.22 0.139203219 0.105686107
0.134215677
November 07 183.88 -0.002335752 6% 7865.98 0.010320067 -0.007323293
0.005332526
December 07 194.09 0.054038598 6% 8592.43 0.088334452 0.049051057
0.08334691
January 08 166.64 -0.152486172 6% 7160.03 -0.182367412 -0.157473714
-0.187354954
February 08 163.59 -0.018472499 6% 7108.12 -0.007276378 -0.023460041
-0.01226392
March 08 147.11 -0.106182691 6% 6157.27 -0.143604295 -0.111170233
-0.148591837
Page 82 of 91
The results of the above fund are as follows-
Standard deviation of
Fund-.069940351
Geo Mean Fund-.028898861
Geo Mean Index- .026144797 Co Variance-.005137466
Variance Index-.005912955 Beta-.883575486
Non Systematic Risk-.000275375 Standard Deviation
Index-.076895741
Sharpe Ratio-.341881605 Geo Mean Risk Free
Asset-.004987542
Treynor Ratio-.02706200 Jensen’s alpha-.005217288
Variance Fund-.004891653 R2-.944
Ep-.01674 Information Ratio-18.94608845
Page 83 of 91
In the above example the comparison between Franklin India Blue Chip (G)
and
the BSE500 has been shown. The closing NAV’s of the fund is compared with
the
market index return for the time period April 2003 to March 2008. The data
for
the fund was collected from www.indiainfoline.com and the market index was
collected from www.bseindia.com . The risk free rate used is the interbank
rate of
the RBI. Performance measures like Sharpe ratio, Jensen’s alpha, Treynor
ratios
etc are calculated using excel and SPSS. All other funds were worked upon in
the
same way as above. The results of the other funds have been included in the
table given above.
Page 84 of 91
Chapter 7
Conclusion
The Indian Mutual Fund industry has grown and is growing at a tremendous
pace. All this is due to the fact that the whole Indian economy is booming in
all sectors. This study was conducted to understand the Mutual Fund industry,
similar studies have been conducted in the past but none such study has
been
conducted as this study is relatively new. This study measured the
performances of various funds through their NAV’s and compared it to the
market sensex. The performance comparison was made through various risk
adjusted performance measures like Sharpe ratio, Treynor ratio and Jensen’s
alpha. All these measures are the results of previous studies by these
scholars. This study not only focused on the comparison of the Mutual Fund
performance with the market but it also explained other aspects relating to
the Mutual Funds.
The performance of Mutual Funds and the market have attracted a lot of
attention and has been a topic of research all along. Researchers like Sharpe
(1966) and Jensen (1968) conducted similar researches and concluded that
the market is efficient and the Mutual Funds cannot outperform the market
nor can the market outperform the Mutual Funds. This research focused on
the performance of 20 open ended equity diversified Mutual Funds from the
period April 2003 to March 2008 and compared the monthly NAV’s with the
benchmark index i.e. BSE 500. The result of this research is inconsistent with
the efficient market hypothesis which states that the Mutual Funds do not
outperform the market and there is no reward for managers in seeking to
beat
Page 85 of 91
the market. Efficient market hypothesis indicate that all information is
reflected in the prices of the securities and no one can achieve higher returns
than the market. Thus we can say that in Indian stock market the efficient
market hypothesis does not hold good and the markets are not efficient. The
fund managers have better skills and can generate higher returns for their
funds. These managers have access to information which otherwise is not
readily available. Institutional investors and fund managers take advantage of
this inefficiency and generate higher returns for their funds and generate
abnormal profits for the investor.
The research conducted has given results which are contrary to previous
studies. According to Anand et al the Mutual Funds underperformed the
market and the managers were not skilled enough to provide for better
returns than the expected returns. In our study the Mutual Funds have
outperformed the market and the managers are skilled enough to diversify
the fund portfolio and beat the market. Similarly the results of the studies
conducted by Deb et al, Rao and Jayadev are all contrary to this research. As
all the above mentioned studies concluded that the Indian Mutual Funds did
not beat the market, the fund managers were not skilled enough and the
investors did not gain the advantage of diversification and professionalism
which these funds offer. Comparing this to my research majority of the funds
have outperformed the market index and have low levels of risk and high
returns as compared to the BSE 500. Only the research conducted by Rao and
Ravindran gives similar results as this research. Both of these researches
provide that the Mutual Funds are able to satisfy investor’s expectations by
giving excess returns over expected returns.
Page 86 of 91
7.1 Recommendations for Future Research
For further research one can employ various other models on the same data
set that would provide us with better results and an in depth analysis. Due to
time constraints my research just focused on the funds which copy BSE
Sensex
and benchmark their portfolio to the Sensex’s portfolio. However for a more
detailed analysis of the Indian Mutual Fund market one could focus on other
index’s like Nifty, Crisil etc. Portfolio risk through measure of Value at Risk
(VAR) can also be tested for differences in Mutual Fund classes
Page 87 of 91
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• Sharpe W. (1966), “Mutual Fund Performance”, Journal of Business, Vol.
39, Pg 119-138.
• Tripathy Prava N. (March 1996), Mutual Fund in India: A Financial Service in
Capital Market, Finance India, Vol. 10, No 1, Pg 85-91.
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Websites-
• www.amfiindia.com
• www.appuonline.com
• www.mutualfundsindia.com
• www.investopedia.com
• www.bseindia.com
• www.indiainfoline.com
• www.easycalculation.com
• www.moneycontrol.com
• www.utimf.com
• www.sharekhan.com
• www.tatamutualfund.com
• www.relaincemutualfund.com
• www.franklintempleton.cpm
• www.icicidirect.com
• www.kotakmutual.com
• www.rbi.org.in
• www.sec.gov
• www.financialcounsel.com
Page 91 of 91
portfolio
A group of investments. The more diversified the investments in a portfolio, the more likely the
investor is to earn the same return as the market
DEFINITION: The process of managing the assets of a mutual fund, including choosing
and monitoring appropriate investments and allocating funds accordingly
a mutual fund
The definition of a mutual fund is a form of collective investment that pools

money from many investors and invests their money in stocks, bonds, short-
term money market instruments, and/or other securities. In a mutual fund,
the fund manager trades the fund's underlying securities, realizing capital
gains or losses, and collects the dividend or interest income. The investment
proceeds are then passed along to the individual investors. The value of a
share of the mutual fund, known as the net asset value per share (NAV), is
calculated daily based on the total value of the fund divided by the number of
shares currently issued and outstanding.
Regulated by the Investment Company Act of 1940, mutual funds are open-ended
investment companies that pool investors' money into a fund operated by a portfolio
manager. This manager then turns around and invests this large pool of shareholder
money in a portfolio of various assets, or combinations of assets. This may include
investments in stocks, bonds, options, futures, currencies, treasuries and money market
securities. Depending on the stated objective of the fund, each will vary in regard to
content and risk.
Mutual Fund Definition

An investment mediator that accumulates the money of a group of
investors for the purpose of a more efficient achievement of a
predetermined investment objective is called a mutual fund. The
management of the pooled resources is called a fund manager, who is
responsible for the buying of particular securities such as stocks and
bonds. The investment in a mutual fund turns you into a fund
shareholder.

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Scope of Mutual Funds has grown enormously over the years.

In the first age

The definition of a mutual fund is a form of collective investment that pools

Mutual Fund Definition

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