Mutual Fund Performance: An

empirical study

Investment Analysis & Portfolio Management

PGP31 | 2015-2017
Instructor: Prof. M. Karmakar

Submitted by:
Group 5 | Section B
Souvik Ghosh
Supreet Narang
Soumya Gupta
Ameya Thakur
Deepika Yadav
Harvinder Kaur
Charmy Panigrahi

PGP31237
PGP31238
PGP31236
PGP31242
PGP31318
PGP31323
PGP31315

Date: December 19, 2016

Industry highlights
The Mutual Fund industry in India has hit an all-time high in terms of average
assets under management (AUM) with the figure exceeding Rs.16.11 trillion in
the second quarter of the financial year. AMFI (Association for Mutual Funds in
India) which is the nodal association of mutual funds across India has released
these numbers. The net increase in the AUM across the industry was a record
Rs.1.70 trillion or 11.78% over the previous quarter. The increase was
predominantly led by a rise in equity assets and short-maturity debt funds.

Source: CRISIL Database

Top 3
1.
2.
3.

Mutual Funds based on Assets Under Management

ICICI Prudential Mutual Fund: Rs.2.16 trillion
HDFC Mutual Fund: Rs.2.13 trillion
Reliance Mutual Fund: Rs.1.83 trillion

Key Regulatory changes

The Securities and Exchange Board of India (SEBI) said distribution commissions
will soon be capped at 5% to prevent wrong selling of mutual fund products. It
has also asked mutual funds (MFs) to disclose absolute commission paid to
agents from October 1. SEBI said brokerage and transaction costs levied on
mutual fund schemes should be within the stipulated total expense ratio limit.

Source: AMFI

EQUITY FUNDS
An equity fund is a mutual fund that invests principally in stocks. It can be
actively or passively (index fund) managed. Equity funds are also known as
stock funds. Stock mutual funds are principally categorized according to
company size, the investment style of the holdings in the portfolio and
geography. The size of an equity fund is determined by a market capitalization,
while the investment style, reflected in the fund's stock holdings is also used to
categorize equity mutual funds. Some specialty equity funds target business
sectors, such as health care, commodities and real estate.
Equities are generally considered the riskier asset class over both bonds and
cash, but historical returns have been higher as well. A well-diversified portfolio
of all stocks can protect against individual company risk or even sector risk, but
market risks will still exist that can affect the equities asset class. All-stock
portfolios will perform best when the underlying economy is growing (as
measured by GDP) and inflation is low to moderate, as inflation diminishes the
future cash flows of equities.
The price of the equity fund is based on the fund's net asset value (NAV) less its
liabilities. A more diversified fund means that there is less negative effect of an
individual stock's adverse price movement on the overall portfolio and on the
share price of the equity fund.
Following subcategories are explained further:
a) Large cap-oriented equity funds
Schemes that have at least 75% exposure to CRISIL defined large cap stocks
(top 100 stocks based on daily average market capitalization on the National
Stock Exchange) in the preceding 36 months split into four blocks of nine
months each. The 75% exposure in these stocks must be available for a
minimum of six out of nine months in each block. Exposure to Nifty futures is
considered as large cap exposure.
b) Small and mid-cap-oriented equity funds
Schemes that have less than 45% exposure to CRISIL defined large cap stocks
for the preceding 36 months as per the above methodology. Second level test
for large-cap and small & midcap funds
Funds failing to meet the criteria of large cap or small & midcap category in
only 1 out of 4 buckets will be further evaluated.
Average exposure in large cap stocks will be computed with top 110 stocks
(as per market cap) for that bucket. If average exposure to large cap stocks is
greater than or equal to 75%, the fund will be classified as a large Cap fund. For
small & mid cap average exposure in large cap stocks will be computed with top
100 stocks (as per market cap) for that bucket and if the exposure is less than
or equal to 45%, the fund will be classified as a small & mid cap fund.
c) Thematic infrastructure funds
Schemes that follow an investment objective to invest in infrastructure related
sectors. CRISIL-defined infrastructure sectors are energy, construction, industrial
capital goods, industrial manufacturing, metals, cement & cement products,
services and telecom.

d) ELSS
Schemes that invest in equity and equity-related instruments, and are aimed to
enable investors to avail tax deduction under Section 80 C of the Income Tax Act
are considered.
e) Diversified equity funds
All remaining eligible equity schemes are ranked under this category.

f) Index funds
Schemes launched with an objective to generate returns that are commensurate
with the performance of their benchmarks Total Return Index (TRI), subject to
tracking errors are considered. Open-ended exchange traded funds (ETFs) are
also included.

DEBT MUTUAL FUNDS

Debt mutual fund is a type of mutual fund that is designed especially for the low risk
investor whose main aim is capital appreciation coupled with decent returns on investment.
These are for investors who prefer funds with lesser volatility and want a regular income.
Debt funds can give:
Capital Appreciation
Regular Income
1. Long term income fund: Schemes that predominantly invest in long term corporate
debt papers and government securities (G-Secs) are considered. These schemes also
invest in short term and money market securities.

2. Long term gilt funds: Schemes with an exposure in excess of 98% over the past
three years to the following are considered for ranking:
a.

Central and state government securities

b.

Cash and cash equivalents such as collateralised borrowing and lending

obligations (CBLOs), reverse repo, net receivables, etc.

3. Short term income funds: Schemes that predominantly invest in short term
corporate debt papers, certificates of deposit (CDs), money market instruments and

G-Secs are considered.

4. Credit Opportunities funds: Schemes that predominately invest in sub-AAA rated

securities and have a residual maturity of greater than six months are considered.
5. Liquid funds: Schemes whose portfolio constitutes money market instruments and
short-term debt instruments with a residual maturity of up to 91 days are considered.

6. Ultra short-term debt funds: Schemes named as ultra short-term debt schemes are
considered. Those without such nomenclature will be considered only if the AMC
assures their positioning as ultra short-term debt scheme and also their risk-return
characteristics need to be in line with category peers.

Current Scenario
The returns from Debt funds are mainly dependent on the interest rate scenario that is
prevailing in the economy. If interest rates are in downward trend, most of the long-term or
dynamic debt mutual funds can give better returns than bank fixed deposits.
It is wise to invest in debt funds at a time when interest rates are poised to fall soon.
The debt funds give you 8-9 per cent returns and the investment will be giving a huge
amount of capital appreciation.
Debt Mutual Funds according to CRISIL Rankings

Debt Mutual Funds

3,500.00
3,000.00
2,500.00
2,000.00
1,500.00
1,000.00
500.00
0.00

18
16
14
12
10
8
6
4
2
0

AUM (Rs. cr.) Oct-16

NAV

5yr Returns

1yr Returns

HYBRID MUTUAL FUNDS

A hybrid mutual fund is a portfolio made up of a mix of stocks, bonds and cash. Hybrid
funds can be broken down into domestic or international hybrid categories and can be
more aggressive (higher equity component) or conservative (higher-fixed income
component) depending upon the funds prospectus.
A balanced fund combines a stock component, a bond component and sometimes
a money market component in a single portfolio. Generally, these hybrid funds stick to a
relatively fixed mix of stocks and bonds that reflects either a moderate, or higher equity,
component, or conservative, or higher fixed-income, component orientation.
An asset allocation fund is a mutual fund that provides investors with a portfolio of a
fixed or variable mix of the three main asset classes - stocks, bonds and cash
equivalents - in a variety of securities. Some asset allocation funds maintain a specific
proportion of asset classes over time, while others vary the proportional composition in
response to changes in the economy and investment markets. The funds portfolio may
be periodically rebalanced to bring the funds asset allocation more in line
with prospectus objectives. They are created for investors looking for a balance between
capital appreciation, safety, and income and hold a broad appeal because they provide a
comfortable way of getting exposure to stocks.
Why hybrid funds are popular among investors

Hybrid funds are safer than equity funds and there are a huge variety of choices suited
to different risk appetites. They are cost effective; the average hybrid fund expense ratio
is 125 basis points but can vary between 64 basis points upwards to 198 basis points (as
of 2013). Comparatively, equity funds have an average MER of 137 basis points, and
bond funds have an average of 100 basis points. As seen, they are one of the most cost
effective options (lower than equity funds but slightly higher than bond funds).
Moreover, hybrid funds offer the benefits of both stocks and bonds. Many companies
market their funds as complete portfolio solution and have names such as balanced,
income, growth and target dates. Because of this, its very simple and convenient to
gain exposure to both equities and bonds in one investment.

Issues with hybrid funds

Some hybrid funds charge more in fees than both bond funds and equity funds. For
these funds, the investor is essentially paying a fund company for the privilege of
mixing stocks and bonds in a single fund.
In some funds, fund managers, while professionals, are restricted in their allocations as
stated in the fund prospectus. Because of this limitation, they cant always react quickly
to market conditions.
Lastly, one size does not fit all. Hybrid funds give the best of both stocks and bonds, but
if an investor is overly conservative, or overly aggressive in risk tolerance, a hybrid
mutual fund may not be the most ideal investment.

Benefits
Hybrid mutual funds have outperformed bank deposits by a wide margin, considering
most savings accounts pay less than 1% interest. They have also outperformed most
fixed income investments, with 30-year Treasury bonds hovering around 2% as of
October 2015. Diversification is widely known as a great way to invest, and hybrid
mutual funds truly live up to that name, being diversified across multiple asset classes
and with multiple investments within those asset classes.
We look at the performance of various hybrid mutual funds in India:

Source: IIFL

Comparative snapshot
Individual investors now hold a lower share of industrys assets, i.e. 44.6% in
November 2016, compared with 45.8% in November 2015. Institutional
investors account for 55.4% of the assets, of which corporates are 85.4%. The
rest are Indian and foreign institutions and banks. Thus even though there is an
increase in the total Assets Under Management for Mutual Funds, most of that
increase is coming from institutional investors rather than individuals.

Source: AMFI

A comparison across various Mutual Fund schemes give us an idea of the distribution of
assets for institutional investor against individual investors. In equity oriented schemes
Individual investors have majority of the investment with an 84% share of the assets.