TH 4361asa

PERFORMANCE EVALUATION OF MUTUAL FUNDS (A STUDY OF
SELECTED MUTUAL FUNDS IN INDIA)
SUBMTTED FOR THE A WARD OF THE DEGREE OF
DOCTOR OF PfflLOSOFHY
IN
MANAGEMENT,
By
Preeti Sehgal
Registration No: 2Kll-NITK-Ph.D.1365H
UNDER THE SUPERVISION OF
Dr. VIKAS CHOUDHARY

Professor & Head
Department of Humanities and Social Sciences,
NIT, Kurultshetra
DEPARTMENT OF HUMANITIES AND SOCIAL SCIENCES
NATIONAL EVSTFTUTE OF TECHNOLOGY
KURUKSHETRA-136119
HARYANA
JANUARY 2016
PM£> 6S%
NATIONAL INSTITUTE OF TECHNOLOGY, KURUKSHETRA
/^.01.14
Date:
, > ; .• in.H.l 1 .T <J .
CERTIFICATE
This is to certify that the thesis entitled. Performance Evaluation of Mutual

Funds (A Study of Selected Mutual Funds in India), being submitted by Ms.
Preeti Sehgal for the award of the degree of Doctor of Philosophy is a record of
bonafide research work carried out by her.
The matter presented in this thesis has not been submitted for the award of any
other degree to any other institute.
DR. VIKAS CHOUDHARY

Professor & Head
Department of Humanities and Social Sciences,
NIT, Kurukshetra
ACKNOWLEDGEMENT
First of all, I pay my obeisance to almighty GOD for providing me the light and
encouragement to take up and handle this thesis.
I would like to express a deep sense of gratitude to my supervisor Dr. Vikas
Choudhary, Professor and Head, Department of Humanities & Social Sciences.
Without his wise counsel and able guidance, it would have been impossible to
complete the thesis,
I am highly grateful to Faculty Members of the Department of Humanities &
Social Sciences for providing me opportunity to carry out the present thesis work.
I would also like to thank the members of Board of Studies, N.I.T, Kurukshetra
for their valuable suggestions and useful comments throughout this research
work.
My thanks are also due to Dr. Krishan Gopal, Librarian in providing references
on the subject and also to other members of non-teaching staff of the department
for their help.
I express my gratitude to my Parents, Parents in-law and sister Sumiti Sehgal,
who motivated me to carry my research to its culmination. This work could not
have been completed without their blessings and encouragement.
Most importantly, I thank my husband Deepak Chawla for his consistent support
and motivation and my daughter Aama who could not get their share of time and
attention during this period.
Finally, I thank one and all whosoever have contributed in this thesis work and
even those who directly and indirectly have been supporting me and standing by
me at all the times.
Preeti Sehgal
Registration No: 2Kll-NITK-Ph.D.1365H
CONTENTS
Page No.
Certificate u
Acknowledgement HI
Contents IV-VI
List of Tables vn
List of Figures Vlll
Abbreviations ix-x
TITLE PAGE NO.
CHAPTER - 1 INTRODUCTION 1-7

1.1 Introduction 1-3
1.2 Concept of Mutual Funds 3-5
1.3 Objectives of the Study 5
1.4 Hypotheses of the Study 5

1.5 Chapter Plan 5-6
1.6 Rationale of the Study 6-7
1.7 Limitations of the Study 7
CHAPTER - 2 HISTORY OF MUTUAL FUNDS 8-20
2.1 Introduction 8
2.2 Origin of Mutual Funds 8-9
2.3 History of Mutual Funds 9-14
2.4 Performance of Mutual Funds during 14-20
Four Phases
CHAPTER - 3 RESEARCH METHODOLOGY 21-35
3.1 Introduction 21
3.1.1 Data Collection 21
3.1.1.1 Sources of Data 21-23
3.1.1.2 Sample Size 23-24
3.1.2 Scope of the Study 24
3.1.3 Analysis of Data 24-35
CHAPTER - 4 REVIEW O F LITERATURE 36-48
4.2 Studies related to different parameters of 37
Mutual Funds
4.2.1 Studies on the basis of Growth of Mutual Funds 37-40
4.2.2 Studies on the basis of Risk and Return Analysis 40-44
of Mutual Funds
4.2.3 Studies on the basis of Selectivity and 44-46
Market Timing Abilities of Mutual Fund
Managers in India
4.3 Conclusion 46-48
4.4 Research Gaps 48
CHAPTER - 5 GROWTH OF MUTUAL FUNDS 49-71
5.1 Introduction 49
5.2 Types of Mutual Fund Schemes 49-54
5.3 Advantages of Mutual Funds 54-56
5.4 Structure of Mutual Funds 56-58
5.5 Regulatory Framework of Mutual Funds 58-60
5.6 Growth of Mutual Funds in India 60-65
5.7 Unit Holding Pattern of Indian Mutual Funds 65-69
Classified into Public and Private Sector
Mutual Funds
5.8 Net Assets of Mutual Funds of India 69-70
5.9 Assets of Mutual Funds- India vs. World 70-71

5.10 Conclusion 71
CHAPTER- 6 EVALUATION OF PERFORMANCE OF 72-98
MUTUAL FUNDS IN INDIA
6.2 Results and Discussion on the basis of Risk
and Return Analysis 73-90
6.2.1 Risk Analysis

6.2.2 Return Analysis
6.2.3 Results and Discussion on the basis of Risk
Adjusted Performance Measures
6.3 Performance of Mutual Funds During Crisis and 90-94
After Crisis
CHAPTER - 7 EVALUATION ON THE BASIS OF 99-105
SELECTIVITY AND MARKET TIMING
ABILITIES OF MUTUAL FUND MANAGERS IN
INDIA
7.1 Introduction 99
7.2 Evaluation on the basis of selectivity and market 99-104
timing abilities of mutual fund managers in India
CHAPTER- 8 FINDINGS AND SUGGESTIONS 106-114
Bibliography 115-133
List of Publications 134-135
Appendices 136-155
List of Tables
S.No Title Page No
Table 2.1 Assets of Mutual Funds- India vs. USA 15
Table 2.2 Share in Worldwide Net Assets of Mutual Funds 17
Table 2.3 Ratio of Assets of Mutual Funds to GDP 18
Table 2.4 Mobilization of Resources by Mutual Funds 19
Table 2.5 Sector-wise Resource Mobilization by Mutual Funds during 20
2010-11
Table 4.1 Review of Literature related to Growth of Mutual Funds 38-39
Table 4.2 Review of Literature related to Risk and Return Analysis of 40-44
Mutual Funds
Table 4.3 Review of Literature related to Selectivity and Market 45-46
Timing Abilities of Mutual Funds in India
Table 5.1 Growth of Mutual Funds in India 61
Table 5.2 Unit Holding Pattern of Public Sector Mutual Funds 65
Table 5.2.1 Unit Holding Pattern of Private Sector Mutual Funds 67
Table 5.2.2 Unit Holding Pattern of Indian Mutual Funds 68
Table 5.3 Assets of Mutual Funds - India 69
Table 5.4 Assets of Mutual Funds - India vs. World 70
Table 6.1 Risk Analysis of Mutual Fund Schemes-Growth Option 76-77
Table 6.2 Average Returns of Selected Mutual Fund Schemes-Growth 80-81
Option
Table 6.3 Sharpe Ratios of Mutual Fund Schemes-Growth Option 86-87
Table 6.4 Treynor Ratios of Mutual Fund Scheme-Growth Option 88-89
Table 6.5 Sharpe Ratios of Mutual Fund Schemes- Growth Option (Before 91-92
Crisis and After Crisis)
Table 7.1 Results of Jenson Measure-Growth Option 101
Table 7.2 Results of Treynor and Mazuy Model-Growth Option 102-103
Table 7.3 Summary of Regression Results of Jenson Model as well as 104
Treynor nd Mazuy
List of Figures
Sr. No. Title Page No.

Figure 1.1 Worldwide Mutual Fund Markets (Percent of total 2
assets, 2008)
Figure 2.1 Mutual Fund Operations Flow Chart 8
Figure 5.1 Structure of Indian Mutual Funds 56
VIII
ABBREVIATIONS
AMC - Asset Management Company
AMFI - Association of Mutual Funds in India
BOB - BankofBaroda
BSE - Bombay Stock Exchange
CAPM - Capital Asset Pricing Model
CSR - Corporate Social Responsibility
DFIs - Development Financial Institutions
ELSS - Equity Linked Saving Schemes
ETF - Exchange Traded Fund
FIIs - Foreign Institution Investors
FoFs - Fund of Funds
GIC - General Insurance Corporation of India
GDP - Gross Domestic Product
ICRA - Investment Information &Credit Rating Agency
IDBI - Industrial Development Bank of India
ICI - Investment Company Institute
Lie - Life Insurance Corporation of India
MIP - Monthly Income Plan
NSE - National Stock Exchange
NAV - Net Asset Value
NFO - New Fund Offer
OR - Odds Ratio
PNB - Punjab National Bank
ix
RBI Reserve Bank of India
SEBI Security Exchange Board of India
SBI State Bank of India
SIP Systematic Investment Plan
T-bills Treasury Bills
TM Treynor & Mazuy Model
U.K. United Kingdom
U.S. United States
UTI Unit Trust of India

CHAPTER 1
INTRODUCTION
1.1 INTRODUCTION
1.2 CONCEPT OF MUTUAL FUNDS
1.3 OBJECTIVES OF THE STUDY
1.4 HYPOTHESES OF THE STUDY
1.5 CHAPTER PLAN
1.6 RATIONALE OF THE STUDY
1.7 LIMITATIONS OF THE STUDY
CHAPTER-1
INTRODUCTION
1.1 INTRODUCTION
Investment is the sacrifice of certain present value for some uncertain future
reward. In other words an investment can be defined as commitment of funds to one or
more assets that will be held over some future time period (Jones, 2007). It entails
arriving at numerous decisions such as type, amount, timing etc. Further, such decision
making has not only to be continuous but rational too. Broadly, an investment decision is
a tradeoff between risk and return. All investment choices are made in accordance with
tiie personal investment ends and in contemplation of an uncertain future. As with any
investment m securities the value of portfolios can go up or down depending on tiie
factors and forces affecting the securities markets such as the performance of individual
companies, changes in the general market conditions, level of interest rates, currency
exchange rates, various market related factors and trading volumes, change in govt,
policies, taxation laws, regulatory requirement, prevailing political and economic
envirorraient and so on. Therefore, investors in securities will reappraise and reevaluate
their various investment commitments from time to time in the light of new information
and changed expectations (Bhalla, 2001).
From the last many years, different investments avenues are available to the
investors such as stocks, bonds, mutual fimds, real estates, insurance, financial
derivatives, precious objects, non-marketable financial asset like bank deposit, post-
ofiEice deposit, provident funds deposits etc. Mutual fimd is one of the important option
that offer good investment opportunities to the investors. Mutual fund is an investment
vehicle that pools the savings of several investors and collectively invests this amount in
variety of securities including equity, bonds, debentures and combination of these.
Therefore, the only way out is to entrust the hard earned money to the professionals who
drive the mutual fimds (Chander and Singh, 2004). Mutual funds serve as link between
the savings of public and the capital markets, as they mobilize savings from investors
and bring them to borrowers in the capital markets. By the very nature of their activities,
and by the virtue of being knowledgeable and informed investors, they influence the
stock market and play an active role in promoting good corporate governance, investor
protection and the health of capital markets. Mutual funds have imparted much needed
liquidity into the financial system and challenged the dominant role of banking and
financial institutions in the capital markets.
The popularity of the mutual fund has increased manifold. In developed fmancial
markets, like the United States (U.S.), mutual funds have ahnost overtaken bank deposits
and assets of insurance fimds. As at the end of year 2006, in the U.S. alone there were
8,120 mutual funds with assets under management of over U.S. $10.4 trillion. The U.S.
mutual fimd market, with a record $ 10.4 trillion in assets under management as of year
2006, is the largest in tiie world, accounting for 48 percent of the $21.8 trillion in mutual
fund assets worldwide. The European mutual fund market with $7.7 trillion m assets
under management at the end of the year 2006 is on the second place in the world. It
accounted for 36% of the mutual fimd assets worldwide. Afiica and Asia/Pacific
manages only 12% with $2.5 trillion assets imder management whereas other American
countries (including Argentina, Brazil, Canada, Chile, Costa Rica and Mexico) manage
only 5% of the mutual fund assets worldwide (Figure 1.1)
FIGURE 1.1
Worldwide Mutual Fund Markets (Percent of total assets, 2008)
U.S. MAO THE W O R t O S lABGCST M O T U A t FUND MARKET

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( f f e t J ' i t A t i , i v T i t t ©• niMCJ
s^ Hm
11*^ Ot**« ^/Tn-no* WHM
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-vv H>«'>SK<^Js
i Tot>i w « « U w a d r m u t t t i l fwwl s t M t s : $ 1 « . 0 bilOon T o U i U ^ . anutiMl » imtî t%*rt*: S9.fr b i l l K m
Jc , . « V<»«J V » - f C,-«.» - » •«[-•.»» £ i » i « « 9 « f - - » . •wAl5«TV<a- J#-<«—f A <J. »• «> rt-ft-**--^jrk.:'»-,f. lij^x
Total World Mutual Fund Assets: $ 19.0 triUion Total U.S Mutual Fund Assets: S 9.6
trillion
Initially Unit Trust of India (UTI) which was established in 1964 gave buth to
mutual fimd industry m India. Public sector and financial institutions began to establish
mutual fimds m 1987. The private sector and foreign institutions were allowed to set up
mutual funds since 1993. As at the end of December 2006, there were 30 funds, which
were managing assets worth Rs. 32, 35, 970 million.
Money market funds accounted for 40 percent of U.S. mutual fund assets at the
end of year 2008. The total composition of mutual funds made up 39 percent of U.S.
mutual fund assets, the smallest share since 1994. In 2008, domestic stock funds—those
that invest primarily in shares of U.S. corporations— held 30 percent of total industry
assets, international stock funds—those that invest primarily in foreign corporations—
accounted for another 9 percent. Bond funds (16 percent) and hybrid funds (5 percent)
held the remainder of total U.S. mutual fund assets. Approximately 600 sponsors
managed mutual fund assets in the United States in 2008. Long-run competitive
dynamics have prevented any single firm or group of firms from dominating the market.
For example, of the largest 25 fund houses in 1985, only 10 remained in this top group in
2008. Another measure is the Herfindahl-Hirschman index, which weighs both the
number and relative size of firms in the industry to measure competition. Index numbers
below 1,000 indicate that an industry is not concentrated. The mutual fund industry has a
Herfindahl-Hirschman index number of 433 as of December 2008.
In the past decade, however, the percentage of industry assets at larger fund
complexes has increased. This is partially due to the acquisition of smaller fund
complexes by larger ones. The share of assets managed by the leading 25 firms increased
to 75 percent in 2008 from 68 percent in 2000. In addition, the share of assets managed
by the largest 10 firms in 2008 was 53 percent, up from the 44 percent share managed by
the largest 10 firms in 2000. Nevertheless, the composition of fund complexes within
these groups has changed significantly over the period from 2000 to 2008. Strong
inflows to money market funds, which are fewer in number and have fewer fund
sponsors than long-term mutual funds, helped push several fund complexes that
specialize in money market funds into the largest groups.
1.2 CONCEPT OF MUTUAL FUND
Mutual fund works like a special organization that helps in investment. It works
like an investment company that permits investors to collect their savings jointly with the
objective of earning excellent results. These investment companies diversify the
investor's money and helps in minimizing risk and maximizing returns. The savings
collected is typically invested in stocks, bonds, money market instruments, mutual funds
and in commodities. A fund manager is appointed by every mutual fund company that
buys and sells the fiind's investment. When an investor invests in mutual funds, it means
the investor buys units and thus becomes shareholder or unit holder. The profits and
losses are distributed by investors on pro-rata basis. Time to time mutual fund schemes
are being launched in the market according the needs of investors. Thus, mutual funds
are deemed to be the best option of savings for a common man.
As deHned by Association of Mutual Funds in India (AMFI),
"A mutual fund is a trust that pools die savings of a number of investors who
share common financial goal. Anybody with an investible surplus of as little as a few
thousand rupees can invest in mutual funds. This investor buys units of a particular
mutual fund scheme that has a defined investment objective and strategy".
According to the Securities and Exchange Board of India (SEBI) (Mutual Funds)
Regulations 1993,
"Mutual funds means a fund established in the form of a trust by a sponsor to
raise monies by the trustees through sale of units to public under one or more schemes
for investing in securities in accordance with these regulations".
According to the SEBI (Mutual Funds) Regulations 1996,
"Mutual fund means a fund established in the form of a trust to raise monies
through the sale of units to the public or a section of the public under one or more
schemes for investing in securities, including money market instruments [or gold or gold
related instruments]".
As per Mutual Fund Book (published by Investment Company Institute of the
U.S.),
"A mutual fund is a financial service organization that receives money from
shareholders, invests it, earns returns on it, attempts to make it grow and agrees to pay
the shareholder cash on demand for the current value of his investment".
A mutual fund is a non-depository financial intermediary. Mutual funds are
mobilized of savings, particularly from small and household sectors, for investments in
capital and money market. Basically, these institutions are professional fund managers,
managing funds of individuals and institutions that may not have such degree of
expertise or may not have sufficient time to cope up with the complexities of different
investment avenues, legal provisions associated therewith and vagaries and vicissitudes
mutual funds since 1993. As at the end of December 2006, there were 30 funds, which
were managing assets worth Rs. 32, 35, 970 million.
Money market funds accounted for 40 percent of U.S. mutual fund assets at the
end of year 2008. The total composition of mutual funds made up 39 percent of U.S.
mutual fund assets, the smallest share since 1994. In 2008, domestic stock funds—those
that invest primarily in shares of U.S. corporations— held 30 percent of total industry
assets, international stock funds—those that invest primarily in foreign corporations—
accounted for another 9 percent. Bond funds (16 percent) and hybrid funds (5 percent)
held the remainder of total U.S. mutual fund assets. Approximately 600 sponsors
managed mutual fund assets in the United States in 2008. Long-run competitive
dynamics have prevented any single firm or group of firms from dominating the market.
For example, of the largest 25 fund houses in 1985, only 10 remained in this top group in
2008. Another measure is the Herfindahl-Hirschman index, which weighs both the
number and relative size of firms in the industry to measure competition. Index numbers
below 1,000 indicate that an industry is not concentrated. The mutual fund industry has a
Herfindahl-Hirschman index number of 433 as of December 2008.
In the past decade, however, the percentage of industry assets at larger fund
complexes has increased. This is partially due to the acquisition of smaller fund
complexes by larger ones. The share of assets managed by the leading 25 firms increased
to 75 percent in 2008 from 68 percent in 2000. In addition, the share of assets managed
by the largest 10 firms in 2008 was 53 percent, up from the 44 percent share managed by
the largest 10 firms in 2000. Nevertheless, the composition of fund complexes within
these groups has changed significantly over the period from 2000 to 2008. Strong
inflows to money market funds, which are fewer in number and have fewer fund
sponsors than long-term mutual funds, helped push several fund complexes that
specialize in money market funds into the largest groups.
1.2 CONCEPT OF MUTUAL FUND
objective of earning excellent results. These investment companies diversify the
collected is typically invested in stocks, bonds, money market instruments, mutual funds
and in commodities. A fund manager is appointed by every mutual fund company that
buys and sells the fund's investment. When an investor invests in mutual funds, it means
the investor buys units and thus becomes shareholder or unit holder. The profits and
losses are distributed by investors on pro-rata basis. Time to time mutual fund schemes
are being launched in the market according the needs of investors. Thus, mutual funds
are deemed to be the best option of savings for a common man.
As deflned by Association of Mutual Funds in India (AMFI),
"A mutual fund is a trust that pools the savings of a number of investors who
share common financial goal. Anybody with an investible surplus of as little as a few
thousand rupees can invest in mutual funds. This investor buys units of a particular
mutual fund scheme that has a defined investment objective and strategy".
According to the Securities and Exchange Board of India (SEBI) (Mutual Funds)
Regulations 1993,
"Mutual funds means a fund established in the form of a trust by a sponsor to
raise monies by the trustees through sale of units to public under one or more schemes
for investing in securities in accordance with these regulations".
According to the SEBI (Mutual Funds) Regulations 1996,
"Mutual fund means a fund established in the form of a trust to raise monies
through the sale of units to the public or a section of the public under one or more
schemes for investing in securities, including money market instruments [or gold or gold
related instruments]".
As per Mutual Fund Book (published by Investment Company Institute of the
U.S.),
"A mutual fund is a financial service organization that receives money from
shareholders, invests it, earns returns on it, attempts to make it grow and agrees to pay
the shareholder cash on demand for the current value of his investment".
A mutual fund is a non-depository financial intermediary. Mutual funds are
mobilized of savings, particularly from small and household sectors, for investments in
capital and money market. Basically, these institutions are professional fund managers,
managing funds of individuals and institutions that may not have such degree of
expertise or may not have sufficient time to cope up with the complexities of different
investment avenues, legal provisions associated therewith and vagaries and vicissitudes
of financial markets. Thus, mutual funds are investments intermediaries which pools
investor's funds to acquire individual investment and pass on the returns thereof to fund
investors.
1.3 OBJECTIVES OF THE STUDY
> To examine the Growth of mutual funds in India.
> To study the Performance of selected mutual funds in India.
> To evaluate the Performance of selected mutual funds on the basis of
selectivity and market timing abilities of fund managers in India.
1.4 HYPOTHESIS OF THE STUDY
1. There is significant difference between the returns of selected Indian
Equity Mutual funds.
2. There is no significant difference between the returns of selected Indian
Equity Mutual funds.
1.5 CHAPTER PLAN
Chapter 1: Introduction
This chapter covers the introduction of mutual funds with regard to its origin and
it also consists of history of mutual funds. It also includes research objectives and
hypothesis to test the significance of performance of selected mutual funds in India. This
chapter is also concerned with defining the research problem and statistical tools applied
for studying the performance analysis of mutual funds. It also focuses on the rationale of
study and the models considered for evaluating the performance of mutual funds.
Chapter 2: Review of Literature
This chapter covers the studies related to Growth of mutual funds and Risk and
Return analysis of mutual funds. It also includes studies related to selectivity and market
timing abilities of mutual fund managers. Thus, review of literature has been studied
from conceptual and practical models used in performance analysis of mutual funds. The
various gaps have also been identified, in order to make the present study worthy of
investigation.
Chapter 3; Growth of Mutual Funds
This chapter is devoted to study the growth of mutual funds till now. It covers
different types of mutual funds, advantages and structure of mutual funds. The chapter
also covers the regulatory framework of mutual funds and also explains the growth of
mutual funds in holding pattern of Indian mutual funds classified into Public Sector and
Private Sector mutual funds.
Chapter 4: Evaluation of Performance of Mutual Funds in India
This chapter evaluated the performance of mutual funds on the basis of risk and
return analysis by using various statistical tools namely Standard deviation, Beta and
Coefficient of determination. The chapter further covers risk adjusted measures like
Sharpe and Treynor ratios. The present study also investigates performance of mutual
funds on the basis of selectivity and market timing abilities of mutual fund managers by
using Jenson Measure and Treynor and Mazuay Model. The study also focuses on
Average returns of mutual funds for calculating the performance of mutual funds.
Chapter 5: Findings and Suggestions
This chapter consists of conclusions on the basis of results of risk and return
analysis of mutual funds and selectivity and market timing abilities of mutual fund
managers. The chapter also includes the recommendations for policy makers that can be
useful for investors in long run.
1.6 RATIONALE OF THE STUDY
Mutual funds in India have gained immense popularity in terms of schemes and
assets under management during the last decade. However, the retail investors are facing
problems in selecting funds from the plethora of schemes existing in the Indian mutual
fund industry. Due to this, more and more investors are willing to take the assistance of
professional fund managers from managing their savings.
During recent years, several new and innovative instruments in the mutual fund
industry have been introduced by the SEBI with a view to attract more and more
customers. The increased complexity in the capital markets due to the emergence of new
instruments requires real expertise for direct participation in the mutual fund market.
This has also increased the competition in the mutual fund market and forces the fund
managers to continuously evaluate the performance of mutual funds so as to get an idea
about what kind of mutual fund schemes siiow superior performance and continue to
survive in the market. Further, investors generally invest in mutual funds by considering
capital appreciation, better liquidity, tax efficiency and superior past performance at a
given risk level.
The present study would help the mutual fund companies, inventors, and
researchers to get an idea of the performance of different mutual funds in India. From an
academic perspective, the goal of identifying superior fund mangers is interesting as it
encourages development and application of new models and theories and thus making
significant contribution to the body of knowledge of investment management (Sapar and
Madava, 2003 and Rao, 2006).
In India, most of the researchers have made efforts to evaluate the performance of
mutual funds in terms of risk and return analysis and also explored the areas of
selectivity and market timing abilities of the fund managers. But, till date less attention
has been devoted to the evaluation of whether past performance of mutual funds persists
in future. However, in recent years, the studies like Roy and Deb (2004) and Sehgal and
Jhanwar (2007) have made efforts to study the performance persistence of mutual funds.
The performance persistence phenomenon is a useful indicator for investors to decide
which funds to select and to avoid for investment. The previous track record of a mutual
fund manager contains useful information about future performance (Brown and
Goetzmann, 1995). Therefore, this study proposes to bridge the gap by studying the
performance of mutual funds, stock selection and market abilities of fund managers, and
performance persistence of mutual funds in India. An attempt has been made to address
all these issues in detail by using rigorous methodologies.
1.7 LIMITATIONS OF THE STUDY
Inspite of all efforts to be precise, errors are still unavoidable. Certain limitations
of the study remain:
1. The period of the study has been limited to recent ten years i.e. April 1, 2000 to
March 31, 2011. The reason for limiting the said period is that the benchmarks
for ELSS funds and Balanced funds were not available prior to 30* March, 2000
and also the required data was easily available for this period.
2. Only those schemes have been considered for the study which invests some
percentage of its corpus in equities and have capital appreciation as their primary
or secondary objectives through investment in equity. The gilt schemes, money
market schemes and income schemes have been excluded from the study. Only
open-ended (growth) mutual fund schemes have been considered for the study.
3. The schemes which have been redeemed during the said period or have closed
down their business due to poor performance or have been merged with the
existing schemes were not considered for tiie purpose of the study. Hence, the
sample contains only surviving schemes and the results based on these schemes
might have a survivorship bias, which may show the relative performances of
mutual fund schemes upward.
CHAPTER 2
HISTORY OF MUTUAL FUNDS
2.1 INTRODUCTION
2.2 ORIGIN OF MUTUAL FUNDS
2.3 HISTORY OF MUTUAL FUNDS
2.4 PERFORMANCE OF MUTUAL FUNDS DURING
FOUR PHASES
CHAPTER-2
ORIGIN AND HISTORY OF MUTUAL FUNDS
2.1 INTRODUCTION
A mutual fund is a trust that pools the savings of a number of investors who share
a common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realized is shared by its unit holders in
proportion to the number of units owned by them. The mutual fimd industry in India was
started in the year 1963 with the formation of Unit Trust of India. This industry was
privatized in the year 1993. The wide variety of schemes floated by these mutual fimd
companies gave a number of investment choices for the investors.
2.2 ORIGIN OF MUTUAL FUNDS
Mutual fimd is a concept of the west. The idea of mutual fund had its formal
origin in Belgium (Societe 'Generale' de Belgique, 1822) as an investment company to
finance investments in national industries witii high associated risks. First mutual fimd
was setup in United Kingdom (U.K.) in 1868, named 'Foreign and Colonial Government
Trust'. This trust was established to spread risks for investors over large number of
securities. At the initial stage, there were little regulation thus, many evil practices
emerged. Over a period of time, however such institutions, which are following more
conservative practices, won public confidence.
Figure 2.1
Mutual Fund Operations Flow Chart
fljii :ZM<A«iai iHutas) ®0iaajis]D -iîâcs (saoja'"/
INVESTORS
RETURNS O
Invest in
SECURITIES
Source: www.amfindia.com
hi U.S. the idea took root in the beginning of the 20*^ century and the first open-
end investment company was formed in 1924. Massachusetts Investors Trust, State
Street Investment Coiporation, and U.S & Foreign Securities Corporations also formed
in 1924. A major setback to U.S mutual funds was stock market crash of 1929. The
enactment of the Seciuities and Exchange Commission (SEC) in 1993 and the
Investment Company Act in 1940 led to the revival and regulation of mutualftmdsin the
U.S (Chander, 1999). Post World War-II period gave a boost to mutual fund culture in
U.S. as people not having the knowledge of how to invest on their own and with the
expectation to reap the benefit of economic growth flocked to mutual funds. At the end
of year 2006, about 8120 mutual fimds in U.S. have assets xinder managonent of worth
10.4 trillion dollars. In Canada during 1920's many close-ended investment companies
were organized. These are generally known as investment trusts. The first mutualfimdin
Canada to issue its share to general pubhc was the Canadian Investment Fund in 1932.
The two other fiinds established in 1930 were: Commonwealth International
Corporation Limited and Corporate Investors Limited. These three funds are now
amongst the giants of mutual funds in Canada. Consequently, too many other mutual
fimds came out in Europe, Latin America and the Far East. Due to strong economies,
high development and capital markets of these countries, the mutual funds had shown
outstanding results. Other countries namely Hong Kong, Thailand, Korea and Singapore
have also participated in field of mutual funds. The concept of off-shore mutual funds is
emerging in Mauritius and Netherlands and t h ^ are considered as tax heavens. Day by
day, the culture of investment in mutual funds is increasing both at national and global
level.
2.3 HISTORY OF MUTUAL FUNDS
In India, mutual fund concept took root only in sixties after a century old history
elsewhere in the world. The idea of mutual fund in India was bom out of the far sighted
vision of Sri T. T. Krishnamachari, the former Finance Minister. The mutual fund
industry in India started in 1963 with the formation of UTI, at the initiative of tlie
Government of India and the Reserve Bank of India (RBI). In early 1990s, Government
of India allowed pubhc sector banks and institutions to set up mutual funds. In the year
1992, the SEBI Act was passed. The SEBI is entrusted with mainly three statutory
objectives: (a) to protect the interests of investors in securities, (b) to protect
development of the securities market, and (c) to regulate the securities market (Chopra,
2006). As far as mutual funds are concerned, the SEBI formulates policies and regulates
the mutual funds to protect the interests of the investors. The SEBI notified first mutual
fund regulations in 1993. Thereafter, mutual funds sponsored by private sector entities
were allowed to enter the capital market. The regulations were revised in 1996 and have
been amended thereafter from time to time. Thus, the history and growth of mutual funds
in India can be broadly divided under two periods comprising four phases as discussed
below:
1. Pre 1993 Regulation Period
a. First Phase- 1964-87 (Monopoly of UTI)
b. Second Phase- 1987-93 (Entry of Public sector funds)
2. Post 1993 Regulation Period
a. Third Phase- 1993-2003 (Entry of Private sector funds)
b. Fourth Phase- since February 2003 to till date
1. Pre-1993 Regulation Period
The SEBI came out with regulations which provided level playing field to public
and private sector mutual funds on 20* January 1993. The period between 1964 and
1993 was very crucial and actually laid a strong foundation for popularizing mutual fund
philosophy. So, this Pre 1993 regulation period has been divided two phases as discussed
below:
a. First Phase-1964-87 (Monopoly of UTI)
An Act of Parliament established UTI in 1963. It was set up by the RBI and
functioned under the regulatory and administrative control of the RBI. In 1978, UTI was
de-linked from RBI and the Industrial Development Bank of India (IDBI) took over the
regulatory and administrative control in place of RBI. The first scheme launched by UTI
was an open-ended Unit Scheme'64 in June 1964. After Unit Scheme'64, UTI
introduced seven more schemes between 1971 and 1987 which targeted different
segments of the investor community. The assets under management had increased from
Rs 246.7 million in 1964-65 to Rs. 45, 636.8 million in 1986-87.
b. Second Phase-1987-1993 (Entry of Public Sector Funds)
The monopoly of UTI ended in 1987 when Government of India by amending
Banking Regulations Act permitted commercial banks in public sector to set up
subsidiaries operating as trusts to perform the functions of mutual funds. State Bank of
10
India (SBI) Mutual fund was the first non-UTI mutual fund established in June 1987
followed by Canbank Mutual Fund (Dec 1987), Punjab National Bank (PNB) Mutual
Fund (Aug 1989), Indian Bank Mutual Fund (Nov 1989), Bank of India Mutual Fund
(June 1990), Bank of Baroda (BOB) Mutual Fund (Oct 1992). Life hisurance
Corporation of India (LIC) established its mutual fund in June 1989 while General
Insurance Corporation of India (GIC) had set up its mutual fund in Dec. 1990. These
mutual funds helped enlarge the investor community and the investible funds. From 1987
to 1992-93, the fund industry expanded nearly seven times in terms of asset under
management, as amount mobilized was Rs. 1,30,210 million and assets under
management was Rs. 4,70,040 million (in 1992-93).
Surprisingly, there were no rules or guidelines at that time when these institutions
appeared in the market with various products. However, these institutions started
offering assured returns on the mutual fund schemes and soon this created a race among
the mutual funds to surpass each other in offering assured returns. With this trend the
average investor started perceiving mutual funds as an alternative to bank deposits. This
led to intervention by the RBI and it issued the first set of guidelines for the orderly
functioning of the mutual funds in July 1989. The important aspects of the RBI
guidelines were constitution and management of the fund, investment objectives and
policies, prudential exposure ceiling limits, pricing policy, income distribution, statement
of accounts and disclosures. However, these guidelines were applicable only to mutual
funds established by public sector banks and not to others.
In March 1991, the Government of India handed over the function of regulating
the mutual funds to the SEBI. The SEBI directed all the existing mutual funds to make
disclosures in two sets-one for the investors and another for the SEBI. In October 1991,
the SEBI issued guidelines for the formation of Assets Management Company (AMC). A
two-tier structure was developed for mutual funds i.e. the Trust and AMC.
In February 1992, on the recommendation of Dave Committee, the Government
of India announced a comprehensive set of guidelines for the operation of all mutual
funds in order to safeguard the interest of the investors and to encourage a healthy
growth of the capital markets. Further, the government also decided to extend the
business of mutual funds to the private sector.
11
In February 1992, the Union Finance Minister allowed the private sector to float
mutual funds as promised by him in his 1991-92 budget speech. Consequently, the SEBI
issued guidelines for establishing private sector mutual funds. Despite these guidelines,
the SEBI observed that mutual funds were involved in a big way in securities scam,
which came to light in April 1992. During investigations of the functioning of mutual
funds, the SEBI noticed various irregularities like too much reliance on brokers,
subscription to scheme after closure, borrowing by mutual funds, incomplete records,
non-delivery of scrips, etc. Thus, to protect investors' interest, SEBI brought out the
SEBI (Mutual Funds) Regulation 1993 to improve upon deficiencies of 1992 guidelines
(Bansal, 2001).
2. Post 1993 Regulation Period
As mentioned earlier, the Government of India introduced several economic

reforms including the financial sector reforms in the year 1991. A range of reforms had
also been undertaken in mutual funds as well. With the ushering in of financial sector
reforms and Narasimham Committee (1991) recommendations, the SEBI allowed private
bodies to launch mutual fund schemes. Narasimham Committee (1991) in their report on
financial sector reforms made the following recommendations (Mohanty, 2006):
• Creation of an appropriate regulatory framework to promote sound, orderly and
competitive growth of mutual fund business.
• Creation of proper legal framework to govern the establishment and operation of
mutual funds.
• Equal treatment between various mutual funds including the UTI in the area of
tax concessions.
With the setting up of private sector mutual funds, an era of competition began in
the Indian mutual fund industry. The post 1993 regulation period can be studied under
the following heads:
a. Third Phase-1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice. Also, 1993 was the year
in which the first mutual fund regulations came into being, under which all mutual funds,
except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now
merged with Franklin Templeton) was the first private sector mutual fund registered in
12
July 1993. Introduction of private sector mutual funds also opened a way for foreign
asset management companies to set up joint ventures to manage some of domestic
mutual funds. The period of rapid expansion of mutual fund was also marked by initially
a gradual and then rapid decline in stock prices. The market conditions resulted in an
erosion of NAVs. The discount on the prices of quoted schemes to NAVs widened.
Investor's confidence suffered and investor perception of mutual fund became poor.
Moreover, there were tremendous changes in financial markets which also influenced the
mutual funds. On sight inspections and close monitoring of mutual funds by the SEBI
brought to light several abuses, common violations of regulations and unhealthy business
relations. In this light, regulations promulgated in 1993 proved to be ineffective.
Responding to these concerns the mutual fund division of the SEBI undertook the
Mutual Fund 2000 study. To develop mutual funds into vibrant and effective investment
vehicle, the study made far reaching recommendations. After extensive debate on these
recommendations, the SEBI came out with new recommendations i.e. the SEBI (Mutual
Funds) Regulations 1996 to replace regulations of 1993 (Bansal, 2001).
The principal regulations, the SEBI (Mutual Funds) Regulations, 1996 were issued
under S.O. No. 865 (E) dated December 6, 1996 published in the Gazette of India, Part
II, Section 3 (II), dated December 9, 1996. The industry functions under the SEBI
(Mutual Fund) Regulations 1996. These guidelines were further amended from time to
time. These regulations set uniform standards for all funds and applied in full to Unit
Trust of India as well, even though UTI is governed by its own UTI Act. In fact, UTI has
been voluntarily adopting the SEBI guidelines for most of its schemes. Similarly, the
1999 Union Government Budget took a big step in exempting all mutual fund dividends
from income tax in the hands of investors. Both the SEBI (Mutual Fund) Regulations
1996 and the Union Budget of 1999 have had a far-reaching impact on the fund industry
and investors (AMFI Mutual Fund Test Workbook, 2001).
The year 1999 marked the beginning of new phase in the history of the mutual fund
industry in India in terms of both amounts mobilized from investors and assets under
management. The gross amount mobilized increased from Rs. 2, 13,770 million in 1998-
99 to Rs. 5, 97,480 million in 1999-2000 and assets under management also increased
from Rs. 6, 84,720 million in 1998-99 to Rs. 11, 30,050 million in 1999-2000 (AMFI
Mutual Fund Test Workbook, 2001). The number of mutual fund houses also increased
13
with many foreign mutual funds setting up funds in India and also, the industry
witnessed several mergers and acquisitions. At the end of January 2003, there were 33
mutual funds with total assets of Rs. 12, 18,050 million. The UTI with Rs. 4, 45,410
million of assets under management was the largest.
b. Fourth Phase- since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI
was bifurcated into two separate entities. One of the specified undertaking of the Unit
Trust of India with assets under management of Rs. 2,98,350 million as on January 2003.
The Unit Trust of India is functioning under an administrator and under the rules framed
by the Government of India and does not come under the purview of the mutual fund
regulations.
The second is the UTI Mutual Fund Ltd., sponsored by the SBI, PNB, BOB and
Lie. It is registered with the SEBI and functions under the mutual fund regulations. With
this, the mutual fund industry entered the phase of consolidation and growth. As on
March 2006, there were 29 funds with managing assets worth Rs. 23, 18620 million
under 592 schemes.
2.4 PERFORMANCE OF MUTUAL FUNDS DURING FOUR PHASES (1964-
2011)
Though mutual funds were in operation in most of the developed countries in
40's and 50's, it was only in 1964 when in India, first mutual fund. Unit Trust of India
(UTI) was established. It remained, the only mutual fund player in the country till 1987.
It was established by the Indian Government with a view to augment small savings in the
country and to channelize these savings to the capital markets. The first and still very
popular product launched by UTI was Unit-64. 1987 onwards, other public sector
institutions like banks, insurance companies and financial institutions started establishing
mutual funds. In the era of Liberalization, Privatization and Globalization (LPG), the
Government of India allowed the private sector to enter the mutual fund industry in order
to avail the benefits of mutual funds at a large scale in 1993. This also signalled the
intensification of the competition. Private sector funds were having certain operational
advantages such as the management by experienced foreign asset management
companies, access to latest technology and infrastructure already developed by the public
sector. The performance of mutual funds during four phases shows that how mutual
14
funds fared during these phases is divided into few parts i.e. Net assets of mutual funds
(India V/s USA), Share of Indian mutual funds in World Assets, Fund Assets to Gross
Domestic Product (India V/s USA), Mobilization of Resources by Mutual Funds and
Sector-wise Resource Mobilization:
2.4.1 Net Assets of Mutual Funds: India vs. USA
Since the inception of mutual fund in India i.e. 1964, the number of mutual funds
and number of schemes have increase manifold. After the entry of private sector mutual
funds in India, there has been tremendous growth in mutual fund schemes and also assets
under management which resulted in more investors being added and more investments
were channelized towards mutual funds. So the net assets of mutual funds of India
increased tremendously in comparison to USA's net assets. The pace of USA's net assets
increases year by year at faster rate as compared with net assets of India. In the table 2.1
below, the net assets of India have been compared with USA:
Table 2.1
Assets of Mutual Funds- India vs. USA
Year India United States of America
Total Assets Growth of Assets (%) Total Assets Growth of Assets (%)
(Bn. Dollar) (Bn. Dollar)
1997-98 9.35 - 4468 -
1998-99 8.69 (7.14) 5525 23.66
1999-00 13.07 50.43 6846 23.91
2000-01 13.49 3.25 6965 1.74
2001-02 15.28 13.30 6975 0.14
2002-03 20.36 33.24 6390 (8.39)
2003-04 29.80 46.34 7414 16.03
2004-05 32.85 10.22 8106 9.33
2005-06 40.55 23.44 8905 9.86
2006-07 58.22 43.59 10414 16.95
2007-08 108.58 86.51 12021 15.43
2008-09 62.81 (42.13) 9603 (20.11)
2009-10 130.28 107.41 11120 15.81
2010-11 111.42 (14.57) 11821 6.30
Source: Compiled from Investment Company Institute (ICI) Fact Books
15
Table 2.1 shows that the mutual fund assets are increasing at a good pace globally
and India is not an exception. Beginning from the year 1997, Indian mutual funds were
having total assets worth $9.35 bn. Since then, the assets are increasing every year with
an exception of the year 1998, 2008 and 2011 when the assets reduced to $8.69bn,
$62.81bn and $111.42bn. Since 2001, the growth rate of assets of Indian mutual has been
really impressive particularly in 2009-10 when growth rate has been recorded at the
maximum of $130.28bn. Needless to say, Indian mutual fund industry is growing by all
bounds.
Similar is the case of US Mutual Funds. Beginning from $4468 bn in 1997, the
assets of mutual funds were growing at a reasonable rate in 1999 i.e. $6846 bn.
Thereafter, a recessionary move took place for US mutual funds. The total mutual fund
assets were $6390 bn. By the end of 2002, mutual funds were found to be registering
negative growth. Since then, the US mutual funds are on a rapid growth track. The
mutual fund assets have been recorded at $12021bn in 2007-08. By the end of 2007,
mutual funds registered a positive growth rate of more than 15% over the previous year.
Hence, at the end of the 2010-11, US mutual fund industry was growing at a good pace
after facing a recessionary trend.
2.4.2 Share in World Assets
Table 2.2 presents the comparative share of Indian and US mutual funds in the
worldwide net assets of mutual funds. Clearly, the worldwide mutual fund industry has
been dominated by US mutual funds. However, the share of US mutual fund has been
gradually decreasing. By the end of 1997, mutual fUnds were having 61.28% share in
worldwide net assets of mutual funds up to 2001, the share was almost constant with
minor variations. However, after year 2001, other countries were doing well in the area
of mutual funds and the share of US mutual funds is constantly decreasing. By the end of
2007, the share of US mutual funds in worldwide mutual fund industry has reduced to
45.88%. It indicates that other countries are now having a rapid growth in mutual funds.
16
Table 2.2
Share in Worldwide Net Assets of Mutual Funds
Year India (% Share) Net Change USA(% Share) Net Change
1997-98 0.12 - 61.28 -
1998-99 0.09 (0.03) 57.59 (3.69)
1999-00 0.11 0.02 58.20 0.61
2000-01 0.13 0.02 58.67 0.47
2001-02 0.13 0.00 59.84 1.17
2002-03 0.18 0.05 56.43 (3.41)
2003-04 0.21 0.03 52.78 (3.65)
2004-05 0.21 0.00 50.19 (2.59)
2005-06 0.23 0.02 50.11 (0.08)
2006-07 0.27 0.04 47.85 (2.26)
2007-08 0.41 0.14 45.88 (1.97)
2008-09 0.48 0.07 46.28 0.40
2009-10 1.16 0.68 50.02 3.74
2010-11 1.27 (0.11) 51.03 1.01

India is one of such countries, with a growing phase of mutual funds. Begiiming
from a meager share of 0.09% in worldwide net assets of mutual funds, it has witnessed
a constantly increasing share in worldwide net assets. By the end of year 2007, the share
of Indian mutual funds has increased to 0.41%. In 2008-09, again the share of Indian
mutual funds increased from 0.48 to 1.27 till 2010-11 due to the constant efforts of our
fund managers. However, Indian mutual funds are still, far away from the US mutual
17
funds assets base. India still needs to grow more in the area of mutual funds to compete
with mutual fund giants worldwide, like USA.
2.4.3 Fund Assets to Gross Domestic Product (GDP)
Table 2.3 depicts that share of Indian mutual funds assets to GDP was highly
fluctuating from 1998-99 to 2004-05. hiitially, it increased to 6.5% in 1999, and then it
reduced to 3.5% in 2002-03. Thereafter, it is constantly increasing. However, a
tremendous growth rate has been witnessed in Indian mutual funds in two years i.e.
2006-07 and 2007-08. The share of mutual fund assets to GDP has increased to 12.53%
in 2006-07 and 18.55% in 2007-08 which gives a positive indication for mutual fund
industry in India.
Table 2.3
Ratio of Assets of Mutual funds to GDP
Year India (% Share) USA (% Share)
1998-99 4.51 74.0
1999-00 6.52 73.9
2000-01 5.05 70.9
2001-02 5.05 68.9
2002-03 3.53 60.9
2003-04 5.54 67.4
. 2004-05 5.54 69.1
2005-06 6.26 50.6
2006-07 12.53 51.6
2007-08 18.55 56.9
2008-09 17.22 49.4
2009-10 19.34 53.3
18
In case of USA, figures show that mutual fund assets are having a significant
value to the country's GDP. However, there has been a fluctuating trend in the ratio of
funds assets to GDP. Starting from 74% in 1998-99, the ratio decreased to 60.9% by the
end of 2002-03. For the next two years, it increased to 69.1%. Finally, it has been 56.9%
in 2007-08. By and large, the ratio of assets of mutual funds to GDP has been decreasing
for US Mutual Funds. But after financial meltdown, it again decreased to 17.22% for
India and 49.4% for USA. However, it again increased to 2% in India and 3% in case of
USA.
2.4.4 Mobilization of Resources by Mutual Funds till 2010-11
To mobilize the individual investments together in capital markets, the role of
Mutual Fund industry is increasing day by day.
Table 2.4
Mobilization of Resources by Mutual Funds (crores)
Period Gross Redemption Net Inflow Assets at the end of
Mobilization period
(Crores) (Crores) (Crores) (Crores)
I 2 3 4 5
1999-00 61,241 42.271 18.970 1,07,946
2000-01 92.957 83,829 9,128 90,587
2001-02 1,64.523 1,57,348 7,175 1,00,594
2002-03 3,14,706 3.10,510 4.196 1.09,299

2003-04 5,90,190 5,43,381 46,808 1,39,616
2004-05 8,39,708 8,37,508 2,200 1,49,600
2005-06 10,98,149 10,45,370 52,779 2,31,862
2006-07 19.38,493 18,44.508 93,985 3,26,292
2007-08 44,64.376 43,10,575 1,53,802 5,05.152
2008-09 54,26,353 54.54,650 -28,296 4,17,300
2009-10 1,00,19,022 99,35,942 83,080 6,31,978
2010-11 88,59,515 89,08,921 -49,406 5,92.250
Source: Annual Report of SEBI June, 2011
19
In 2010-11, the total mobilization of resources stood at Rs. 88,59,515 Crores as
compared to Rs. 1,00,19,022 Crores during 2009-10. The data showed a decrease of 11.6
percent in gross mobilization of recourses (Table 2.4). The redemption rate also
diminished by 10.3 percent i.e., 89,08,921 Crores in 2010-11 from 99,35,942 Crores in
2009-10. The net outflow of Rs. 49,406 Crores was recorded in 2010-11 and the net
inflow was at Rs. 83, 080 Crores in the year 2009-10. At the end of March, 2011, the
assets under management were recorded at Rs. 5,92,250 Crores as compared to March,
2010, when it were Rs 6,31,978 Crores which showed a decrease of 6.3 percent.
Table 2.5
Sector-wise Resource Mobilization by Mutual Funds during 2010-11 (Crore)
Particulars Private Sector Mf's Public Sector MF.s UTI MF Grand
Open- Close- Interval Total Open- Close- Interval Total Open- Close- Interval Total Total
ended ended ended ended ended ended
1 2 3 4 S 6 7 8 9 10 11 12 13 14
Mobilization 67.fil,SS8 1.I2,:55 48,781 69.22.<-)24 11..34,871 13,976 3.887 11.52.733 7,68.968 2,M3 12.247 7,84,176 88,59,515
of Funds
(Tfl.ftJ.lKfl) 122.646) (12.651) (76.98.493) 114,36.638) (1,477) (-573) (14.38.6S8) (8,76,539) (5,913) (3.884) (8,81„S51 (l.(K), 19.023)
Repurchases/ 68.-l8.705 •46.801 .16,634 69.42.1.19 11.56.064 6,395 3.830 1.66.288 7,84,176 4,021 12.296 8,00,493 89.08,921
Redemption
(75.M,VM) 1,'54.6431 (:.9W) (76.43.-5.55) (14.21.798) (4.142) (249) (14.26.189) (8,62.024) (2,898) (1.276) (8,66,198) (99,35,942)
Net Inflow / -8M16 65.454 2.147 -19,215 -21.193 7,581 57 -13,555 •15.209 -1.377 -50 -16.6.36 -49,406
Outflow of
Funds
(77.27:) (•3I.W7) i 9.6.W) (54,928) (14.840) (-2.665) (324) (12,499) (14.515) (-1.470) (2,608) (15.653) (83.080)
Source: Annual Report of SEBI June, 2011
In the Table 2.5 the sector-wise resource mobilization of private sector mutual funds was
found to be superior over public sector and UTI mutual funds at the end of 2010-11. The
net out flow of private sector mutual funds stood at Rs. 19,215 Crores in 2010-11 in
comparison to the inflows of Rs. 54,928 Crores for the year ended 2009-10. The net out
flow of public sector mutual funds and UTI mutual funds was recorded at Rs. 13,555
Crores and 16,636 Crores in comparison to net inflow of 12,499 Crores and 15,653
Crores in 2009-10 respectively. The total gross resources of open-ended schemes was
Rs. 86,65,727 Crores in 2010-11. In the total gross resources, seventy eight percent was
occupied by the private sector mutual funds, thirteen percent by public sector funds and
nine percent by UTI mutual funds. Similarly, the total gross resources of close-ended
schemes was at 1,28,874 Crores in 2010-11. In the total gross resources, eighty seven
percent was occupied by the private sector mutual funds, eleven percent by public sector
funds and two percent by UTI mutual funds.
20
CHAPTER 3
RESEARCH METHODOLOGY
3.1 INTRODUCTION
3.1.1 DATA COLLECTION
3.1.L1 SOURCES OF DATA
3.1.1.2 SAMPLE SIZE
3.1.2 SCOPE OT THE STUDY
3.1.3 ANALYSIS OF DATA
CHAPTER- 3
RESEARCH METHODOLOGY
3.1 INTRODUCTION
This section presents the research methodology followed to evaluate the
performance and selectivity of mutual funds as well as market timing abilities of fund
manager in hidia. The section has been divided into three sub-sections and discusses the
aspects relating to the collection of the data, scope of the study and analysis of data.
3.1.1 DATA COLLECTION
The data collection is divided into two sub parts:
> Sources of Data
> Sample Size
3.1.1.1 Sources of Data
To gain an overview of the current performance trends of the Indian mutual fund
industry, secondary data have been used and collected from the fact sheets, newspapers,
journals, books and periodicals. The data were also collected from various websites of
AMCs, AMFI, value research online, moneycontrol.com etc. The NAVs of the sample
mutual fund schemes have been collected on monthly basis.
With a view to evaluate the performance of a mutual fund, there is a need of a
relevant benchmark. The stock market index has been used as a benchmark for
evaluating the performance of a mutual fund. That index facilitates benchmarking of
returns to understand whether a fund is outperforming or underperforming the market
(Khedekar, 2007). No single benchmark is suitable for evaluating the performance of
different funds with different investment objectives and benchmark should reflect the
investment objectives and philosophy of the portfolio being evaluated (Jones, 2007 and
Ansell et al., 2003). Therefore, in the present study, the selection of benchmark was done
after giving due consideration to investment objectives. The objective of growth/equity
schemes is to provide capital appreciation by investing majority r>f funds in equities.
Further, ELSS also invests primarily in stocks. Therefore, BSE Sensex has been used as
a benchmark for performance evaluation of growth/equity scheme and ELSS. BSE
Sensex, is the benchmark of the country's premier stock market. The data with regards to
the benchmark indices like BSE Sensex has been collected from the website of Bombay
Stock Exchange. It is recognized worldwide, constructed scientifically after review
21
methodology. Originally, Full Market Capitalization method was used to calculate the
index but now Free Float Market Capitalization method is used as this method is
considered to be the best method for calculation of index globally. Famous index namely
MSCI, FTSE, STOXX, S&P and Dow Jones have also used this free float methodology
in their calculations. Following are the reasons of choosing BSE Sensex as benchmark
for equity funds: *
> BSE Sensex is regarded as the best index among hidian stock market and that's
why it is accepted by Indian investors.
> It helps in getting the data for longer time period, as it provides the data from
1979. From so many years BSE Sensex has become one of the well known
indexes in India.
> From nineties onwards, the equity market has grown with high pace in India.
> It is the most preferred indicator in the securities market and is unanimously
being considered as a barometer of economic activities.
Many other indices are also used worldwide namely Commodity Price Index,
Dow Jones-UBS Commodity Index, S&P Goldman Sachs Commodity Index, Bache
Commodity Index, Rogers International Commodity Index and Merrill Lynch
Commodity Index extra. Commodity indices are an effective and efficient means for
gaining access to the benefits of commodities. A commodity index is a grouping of
commodity futures contracts diat are rolled. Commodity indices provide returns
comparable to passive long positions in listed futures contracts. Commodity indices
attempt to replicate the returns available to holding long positions in agricultural
products includes rice, wheat and sugar, metal products like gold, silver and copper and
livestock like hogs, live cattle and feeder cattle etc. The value of these indices fluctuates
on the basis of underlying commodities. And the value of these indices can be traded on
exchange in almost same way as stock index futures. There are other varieties of
investment vehicles available for investing in the commodity sector. These products
include Exchange-Traded Products i.e. both ETFs and ETNs. Commodity ETPs have an
advantage over mutual funds, managed funds, and hedge funds by virtue of lower
expense fees. Commodity index ETPs are relatively simple to operate since they
passively track a commodity index and require no subjective judgment or investment
analysis. But in the present study, BSE Sensex is used being an all equity benchmark is
22
based on blue-chip equities of high profile companies, which yields regular return in the
form of dividend and also has good potential for capital appreciation (Chander, 1999). It
is broadly used in both domestic and international markets. Any individual can easily
recognize the booms and busts of Indian equity market with the help of BSE Sensex.
Further, the monthly yields on 91-day treasury bills of Government of India have
been used as a surrogate for risk free rate because the documented and referred literature
used as a surrogate for risk free rate and is in favor of return on 91-day treasury bills.
3.1.1.2 Sample Size
The study uses a sample of 5 mutual fund categories with 20 schemes of growth
option comprising of 4 mutual funds in each category. The categories of mutual funds
were divided into Large Cap Funds, Diversified Funds, ELSS funds. Debt Funds and
Balanced Funds. The following criteria were considered while selecting the sample:
a. Only those mutual fund schemes that were launched after December 1996 have
been considered. The reason is that the SEBI came out with new set of
regulations i.e. the SEBI (Mutual Fund) Regulations 1996 in December 1996.
These regulations were an attempt to remove many of the restrictions and
rigidities, found in the earlier regulations. Moreover, these guidelines brought
into its fold new provisions with regards to disclosures, transparency and
obligation on the part of mutual funds, asset management companies, trustees
and key personnel associated with them. These regulations were drafted in
consultation with the fund industry participants. The involvement of the mutual
fund players in framing the regulation not only resulted in brighter commitment
to the regulation by the industry but also, more importantly, reflected the ground
realities. These guidelines have been amended form time to time.
b. Only open-ended mutual fund schemes have been considered because they enjoy
several advantages over the close-ended funds. Some of the advantages of open
ended basis are:
• The funds are sold and redeemed everyday or continuously on an ongoing
basis.
• The investors can liberally purchase and sell mutual funds without any
restrictions,
• These funds are available for subscription all through the year.
23
• These funds do not have fixed maturity.
• These funds offer high liquidity.
3.1.2 SCOPE OF THE STUDY
The study has been conducted over a period of ten years i.e. from April 1, 2000
to March 31, 2011. The NAVs of the sample mutual fund schemes have been collected
on monthly basis over a period of ten years. A study conducted by Buses (2000)
indicated that daily estimates were more precise relative to monthly estimates. However,
since the daily NAVs of some of the mutual funds were not available, so monthly NAVs
have been considered for the study. Some of the popular empirical studies on the mutual
fund performance have been conducted by taking monthly returns only (see McDonald,
1974, Elaton et al., 1996, Lehmann and Modest 1987, Lee and Rahman, 1990, and
Kothari and Warner, 2001).
3.1.3 ANALYSIS OF DATA

Evaluating performance of mutual funds is important both for investors as well as
portfolio managers. Such an evaluation enables the investor to check his returns on
portfolio and performance of fund/portfolio manager. An investor can easily access that
how much risk he/she has assumed in his/her portfolios. Through evaluation, it enables
the investor to appraise the comparative performance of a fund. Similarly fund managers
would be able to know their performance over time and also in comparison with other
fund managers. It also provides a mechanism for identifying strengths and weakness of
fund mangers in the investment process, thereby enabling them to take steps for
corrective actions (Gupta and Gupta, 2004). To analyze whether Mutual Funds under-
perform or over-perform the market index, the following methodology divided into two
parts as given below:
3.1.3.1 RISK AND RETURN ANALYSIS
Risk and Return analysis both go hand in hand in measuring the performance of
mutual funds. Risk measurement is very important tool to judge the performance of
mutual funds. Return analysis also plays an important role in confirming the performance
of mutual funds. Risk measurement is divided into two parts:
24
3.1.3.1.1 Risk Analysis
The rate of return measure described above is based on gross return and it does
not take into account the risk component of the concerned portfolio. Investors are
interested not only in funds' returns but also in risks taken to achieve those returns. One
can think of risk as the uncertainty of the expected return, and the uncertainty is
generally equated with variability. Investors demand and receive higher returns with
increased variability. The performance of any asset should be evaluated according to
both rate of return and risk (Rugg, 1991). Thus, it is vital that returns must be adjusted
for risk. Broadly, there are three popular measures of risk that can be used in
performance evaluation - one is total risk (standard deviation), second is systematic or
non-diversifiable risk (beta) and third is coefficient of determination. The former can be
measured by beta.
> Standard Deviation or Total risk of Portfolio
Standard deviation measures the variation in individual returns from average
expected return over a certain period. In addition, while average may be acceptable but
year-to-year swings in performance may not be acceptable to an investor. The factors
which affect the variability of the performance of investment are: the kind of stocks in
the portfolio, the degree to which a fund diversifies, the degree to which a manager uses
leverage, or borrowing in an effort to enhance performance and the extent to which the
manager tries to time the market. It is represented by sigma (a) and is defined as the
square root of the mean of the squares of deviations of individual returns taken from the
average return. It has been calculated as-
ap={^l(Rpt-Rp)'}^
Where,
ap is total risk (or standard deviation) of the mutual fund schemes (portfolio)
Rpt is the return of the sampled mutual fund scheme.
Rp is the average return on the mutual fund scheme.
n is the number of period under study
Similarly, the total risk of the benchmark portfolios has been computed.
25
> Systematic Risk or Beta (p)
Systematic risk is that component of total portfolio risk which is not controlled
through the process of diversification. Beta shows how the price of a security responds to
market forces, hi effect, the more responsive the price of a security is to changes in the
market, the higher will be its beta. Beta is calculated by relating the returns on the
security with the returns for the market. Beta coefficients compare the variability of
fund's return to the market as a whole. It is a relative measure. By convention, the beta
of the market is considered to bel.O. Mutual Fund can be volatile, more volatile or less
volatile. If a fund has below market beta of 0.86, it can be said that fund has 86 percent
of the volatility of the market i.e., relative to the market index it would capture only 86
percent of the gain in the uptrend and decline by 86 percent of the drop in the index
when the markets are down. In order to obtain the systematic risk (Beta) of the portfolio,
CAPM version of market model has been applied.
The estimable form of CAPM is:
Rpt= «p+ PpRmt + £p
Where,
Rpt is the return on the mutual fund scheme for time t
Rmt is the return on the market index for time t
ap is the intercept term
Pp is a measure of sensitivity or the slope coefficient
sp is the error term
> Coefficient of Determination (R ^)

The R ^ is a measure of a security's diversification in relation to the market. The
closer the R " is to 1.00, the more completely diversified the portfolio. R ^ ranging from 1
to 100, gives an idea about how well a fund's performance correlates with that of the
benchmark. An R ^ of 0 means that a fund's returns have no correlation with the market
and an R* of 1.00 indicates that a fund's returns are completely in sync with the
benchmark (Contas and Shim, 2006). This coefficient helps in calculating the level of
26
market index which shows the deviation in performance of mutual funds. The coefficient
of determination R2 is another measure of how well the least squares equation:
y^ = bO + blx
Performs as a predictor of y
Km)
Where,
L(0) is the likelihood of the model with only the intercept,
m
is the likelihood of the estimated model (i.e., the model with a given set of
parameter estimates) and n is the sample size.
3.1.3.1.2 Risk Adjusted Performance Measures
Two risks measures, namely the standard deviation and the systematic risk or
beta, have been used to adjust mutual fund returns to obtain measures of risk-adjusted
performance. Sharpe (1966) and Treynor (1965) ratios, the popular risk adjusted
performance measures have been employed to evaluate the performance of mutual funds.
> Sharpe Ratio
The most commonly used measure of risk-adjusted performance is the Sharpe
ratio (Sharpe 1966), which measures the fund's excess return per unit of its total risk.
This ratio was introduced by William F Sharpe in 1966. Sharpe ratio shows the
relationship between the portfolio's additional return over risk-free return and total risk
of the portfolio. On the basis of standard deviation, Sharpe ratio is calculated. This ratio
is called as reward to variability ratio (RVARp). The Sharpe ratios for the sample mutual
fund schemes as well as benchmark portfolios have been computed by using the
following equations:
»p-—-
Where,
Sp stands for Sharpe ratio of the mutual fund schemes
Rp stands for average return on portfolio
27
R, stands for average risk-free rate of return
o-p stands for total risk or standard deviation of the returns of portfolio.
The benchmark comparison with this measure of performance is
Where,
R^ stands for average return on the market or benchmark portfolio
o^ stands for the total risk on market
Logically, higher the Sharpe ratio compared with benchmark, better the fund's
performance in the market. And in the same way, lower the Sharpe ratio compared with
benchmark, worse the fund's performance in the market. It means Sharpe ratio is
positively related to performance of the fund. Thus, the Sharpe ratio measures the risk
premium of the portfolio (where the risk premium is the excess return required by
investors for the assumption of risk) relative to the total amount of risk in the portfolio
(Fisher and Jordan, 2004).
> Treynor Ratio
Jack L. Treynor gave this measure in 1965. It is expressed as a ratio of returns to

systematic risk (beta). This model measures the relationship between fund's additional
return over risk free return wherein market risk is measured by beta. This is called as
reward to volatility measure (RVOLp). The Treynor ratios for the sample mutual fund
schemes as well as benchmark portfolios have been computed by using the following
equations:
_, _Rp-R/
"" h
Where,
Tp stands for Treynor ratio of the mutual fund schemes.
R. is the average return on portfolio
R, is the average risk-free rate of return
p stands for sensitivity of fund return to market return
28
The benchmark comparison with this measure of performance is measured by:
Where,
Tm stands for Treynor ratio of the benchmark portfolio
R^ is the average return on the market
P is the market beta which is equal to 1.0
Logically, higher the Treynor ratio compared with benchmark, better the fund's
performance in the market. And in the same way, lower the Treynor ratio compared with
benchmark, worse the fund's performance in the market. It means Treynor ratio has
direct impact on fund's performance.
> Treynor versus Sharpe Ratio
The Sharpe ratio uses the standard deviation of return as the measure of total risk,
whereas the Treynor ratio uses beta (systematic risk). The Sharpe ratio, therefore,
evaluates the portfolio manager on the basis of both rate of return performance and
diversification. For a completely diversified portfolio, one without any unsystematic risk,
the two measures give identical rankings because the total variance of completely
diversified portfolio is its systematic variance. Alternatively, a poorly diversified
portfolio could have a high ranking on the basis of the Treynor Ratio but a much lower
ranking on the basis of the Sharpe ratio.
> Sortino versus Sharpe Ratio
Alternative risk-adjusted return methodologies have emerged over the years,
including the Sortino Ratio and Roy's safety first Ratio. Roy's Safety First ratio is little
bit same like Sharpe Ratio. In this method, the portfolios performance is compared target
return. For the maintenance of certain standard of living, the target return is suggested by
the investor or the target return can be another benchmark. Roy's Safety First ratio is
also known as safety-first rule. It means that the fund manager must do possible efforts
in order to guarantee the minimum portfolio return. Again Sortino ratio is same as Roy's
safety-first ratio. In Sortino ratio, only the downside volatility is used for the calculation
of performance evaluation of mutual funds. Downside volatility means only negative
returns are preferred. Sharpe ratio and Roy's safety-first ratios preferred both upward and
downward variation. Sortino Ratio is modification of the Sharpe ratio that differentiates
29
harmful volatility from general volatility by taking into account the standard deviation of
negative asset returns, called downside deviation. The Sortino ratio subtracts the risk-free
rate of return from the portfolio's return, and then divides that by the downside
deviation. Generally investors neglect the positive volatility, concentrate on the volatility
or the risk of negative returns. If one measures risk over large periods, the Sortino ratio is
not effective in this scenario as volatility of returns is low due to insufficient data. And
on the other side Sortino ratio is effective in comparing high volatile portfolios over
shorter periods of time. Sortino ratio is one method of calculating risk adjusted returns.
Best suits for the investors comparing portfolio's based on the downside volatility.
Practically one can't ignore the upside volatility completely. The returns from the upside
volatility is achieved by taking additional risks. So risk is a two way, when the risk leads
to upside outperformance on the other side it may lead to downside underperformance
also. Mutual funds work on two major premises. The first premise is diversification and
the second is professional management. Both of them help fund houses reduce risk
induced by investing in individual assets. While mutual funds have been able to diversify
the risk of individual assets, they also expose investors to risk.
The Sharpe ratio is an easy and convenient way to calculate the risk and return
for a particular portfolio. However, the equation is so simple, it does not take into
account a variety of factors. Many of the more complicating equations require a number
of complicating details to compute the return and risk of an investment. The Treynor
ratio is similar to the Sharpe ratio. In both cases the measure of return is the excess over
the risk-free investment. The Treynor ratio is useful in determining how a particular
investment contributes to a diversified portfolio. The higher the Sharpe /Tre5mor ratio,
the better it is.
However, Sortino ratio is used for measuring the performance of mutual funds for
shorter duration. But in present study, research is carried out for more than ten years. So
the Sharpe ratio, trejoior ratio and other methods were used in evaluating the
performance of mutual funds.
30
3.1.3.1.3 Analysis of Stock Selection and Market Timing Ability of Mutual Fund
Managers in India
The measurement of the investment performance of fund managers is a perennial
issue for potential and committed investors. The performance of fund managers
influences the manner in which investors place their wealth. It is customary to analyze
portfolio performance into main components, market timing and security selection. Fama
(1972) suggested that portfolio managers' forecasting skills could be partitioned into two
distinct components: forecasts of price movements of selected individuals stocks (also
called micro-forecasting, security analysis, or stock picking), and forecast of price
movements of the general stock market as a whole (also called macro forecasting or
market timing).
Micro forecasting or stock selection involves the identification of individual

stocks that are under or overvalued relative to equities in general. Within the
specification of the CAPM, a micro forecaster attempts to identify securities whose
expected returns lie significantly off the non-systematic or security specific component
of security return. On the other hand, macro forecastmg or market timings refer to
forecasts of future realizations of the market portfolio. A micro forecaster attempts to
capitalize on any expectation one may have regarding the behavior of the market return
in the next period. If the market return is expected to be up, one may increase the return
on their portfolio by increasing their retum. On the other hand, if the market return is
expected to be down, one may reduce the losses on the portfolio by reducing the risk
level of the portfolio. May be the situation of the market becomes more risky or less
risky, but definitely fund managers can judge the situation of capital market. It helps in
their selection criteria of choosing mutual funds.
In the pure form, market timing involves shifting funds between a market index
portfolio and a safe asset (such as treasury bills, money market funds or cash) depending
on whether the market as a whole is expected to outperform the safe asset. Managers
who forecast a declining market can position a portfolio properly by increasing the cash
percentage of the portfolio or by decreasing the beta of the equity portion of the
portfolio.
Conversely a forecast of a rising market would call for reduction in the cash
position or an increase in the beta of the equity portion of the portfolio (Sorros, 2001).
31
Thus, market timing is defined as the strategy of changing a fund's allocation between
stocks and cash to capture gains in up markets and to avoid losses in down markets
(Dellva et al., 2001).
Various methodologies have been suggested in the financial literature to test the
selectivity and market timing abilities of the fund managers. However, two models of
selectivity and market timing have been empirically examined in this study i.e. the
Jensen measure and Treynor & Mazuy model. These two models have been extensively
used in literature to test the selectivity and market timing abilities of the fund managers
(see Lhabitant, 1995, 2001, Christensen, 2005, Peng, 2004, Irissappane etal., 2000 and
Gupta, 2002).
> Jensen Measure
It is a regression of excess fund return with excess market return given by
Michael C. Jensen in 1968. It measures the portfolio manager's predictive ability to
achieve higher return than expected for the given riskiness. The basic model has been
expressed as:
Rpt-Rft=«p + Pp + (RmfRft) + Spt

Where,
Rpt= Return on a portfolio in month t
Rft= Risk free return in month t
Rnit= Return on the market portfolio in month t
aP = Alpha, the intercept of the of regression equation. It measures the stock
selection ability.
PP = Beta coefficient of the portfolio. It is a measure of systematic risk.
Ept = error term
The intercept of the equation provides Jensen's measure of performance. The
measure is derived from CAPM. This involves rurming a regression with excess return o
security and that on the market acting as dependent and independent variables
respectively, where excess return is computed with reference to return on a risk free
return. Jensen's alpha (a) has been used to measure the stock selection ability of the
mutual fund managers. A statistically significant positive value of alpha would imply a
superior manager. Superior performance could arise from security selection skills, and
/or from good market timing. However, the above specification assumes that the
32
systematic risk exposition is constant overtime (as Pp is fixed) and exclusively
concentrates on the security selection skills or lack thereof. Thus, a positive and
significant value of alpha p indicates superior micro-forecasting abilities while a negative
value evidences wrong micro-forecasting abilities (or too many expenses to achieve
micro-forecasting). However, if the portfolio is actively managed, the portfolio b will
change overtime, and then equation (1) will be mis-specified. Empirical studies (like
Grant, 1977, Lee and Rahman, 1990 and NS Heneikaaon, 1984) showed how market
timing actions would affect the results of empirical tests that focus only on micro -
forecasting skills, and also showed that market timing ability would cause the regression
estimate of alpha p in equation (1) to be downward biased, i.e., the estimated value of
selectivity is lower when timing is ignored than when timing is accounted for. Thus, it is
important that fund managers be evaluated by both selectivity and market timing skills.
Accordingly, it is necessary to measure market timing and selectivity simultaneously.
Further as demonstrated by Grinblatt and Titman (1989), Jensen alpha measure is not
distorted if the fund manager is not a market timer. To consider the effect of both
selectivity and market timing, the following model developed by Treynor & Mazuy
(1966) has been employed.
> Treynor and Mazuy Model
TM (1966) have suggested that in order to detect the market timing abilities of
fund managers one should add a quadratic term (squared term) to the excess return
version of the linear relationship model as under:
Rpt-Rft=ap+ pp + (Rmt-Rft) + Yp (Rmt-Rft) ^+£pt

Where a, P and y are the parameters of the model.
The parameters in the above model could be estimated by using standard
regression methodology. TM has argued that a market forecaster will hold a greater
proportion of the market portfolio when the return on the market is high and vice versa.
Thus, a statistically significant positive value of yp (Gamma coefficient of the portfolio)
would imply that the mutual fund manager possesses market timing skills. A negative
value for yp is interpreted as a lack of ability of fund managers to time the market
correctly. An insignificant value for yp can be interpreted as a lack of timing ability. If
Alpha p is positive and significantly different from zero, then stock selection skills of the
fund managers is identified, as in the security market line model. Admati et al. (1986)
33
show that this simple quadratic regression model is valid measure of market timing
performance and can be used to identify fully the quality of timing information and to
detect the existence of selectivity information.
The rationale behind the TM formulation is that when a fund manager is not
engaged in market timing and concentrates only on stock selection, the average beta of
the fund return against market return would be a straight line, thus, depicting a linear
relationship. However, if the fund manager has changed the beta or cash position of the
portfolio overtime, but has been unsuccessful in properly assessing the direction of the
market the plotting would still show a linear relationship. The unsuccessful market
timing activity of the fund manager would merely introduce an additional scatter to the
plots around the fitted relationship. TM further argue that in case the fund manager was
able to successfully assess the market direction and change the portfolio beta
accordingly, one would observe a higher than normal beta. The fund in that situation is
doing better than otherwise. Analogously, when the market declines, the fund has a
lower than normal beta and it declines less than it would otherwise. In such situations the
plots of the fund returns against the market returns would lie above the linear
relationship and thus, would give a curvature to the scatter of points. Hence, this
provides the justification for adding a squared term to the usual linear model (Gupta,
2002).
3.1.3.2 Return Analysis
The retunes for each of the sample mutual fund schemes have been computed by
using the following equations (Bollen and Busse, 2001 and Fisher and Jorden, 2004):
Where,
Rpt is the return of the sample mutual fund schemes (portfolio) on the basis of
NAV for't' period.
NAVp,t-i is the net asset value of fund 'p' in period 't-l',
NAV p,t is the net asset value of fund 'p' in period 't',
Dp^t are the ex-divident of fund 'p' in period 't'.
34
't' and 't-l' indicates present month-end and previous month-end NAVs
respectively.
The NAVs are adjusted for dividends, assuming dividends are reinvested at the
ex-dividend date. Further, bonus adjustments have also been made if any. A few mutual
fund schemes are capitalizing the reserves by issue of bonus shares. If 'p' bonus shares
are issue for 'q' share held (bonus ratio p:q), then the bonus adjustment factor would be
(p-i-q/q). Therefore, while computing the returns for mutual fund schemes, the dividend
rate is to adjusted by multiplying with p+q/q (laydev, 1998).
> Average Return
Average rate of return is obtained by taking the simple mean of monthly returns.
Where,
Rp is the average return on the manual fund scheme.
To express it on annual basis, average return on the mutual fund schemes (i.e
Rp) is multiplied by 12.
Simply the monthly return, time weighted (holding period) returns and
average returns for the market index have been computed.
In the subsequent analysis, the simple average return has been extensively
used since it is amenable to rigorous mathematical tests as compared to time
weighted return (Chander, 1999).
35
CHAPTER 4
REVIEW OF LITERATURE
4.1 INTRODUCTION
4.2 STUDIES RELATED TO DIFFERENT
PARAMETERS OF MUTUAL FUNDS
4.2.1 STUDIES ON THE BASIS OF GROWTH OF
MUTUAL FUNDS
4.2.2 STUDIES ON THE BASIS OF RISK AND
RETURN ANALYSIS OF MUTUAL FUNDS
4.2.3 STUDIES ON THE BASIS OF
ABILITIES OF MUTUAL FUND
MANAGERS IN INDIA.
4.3 CONCLUSION
4.4 RESEARCH GAPS
CHAPTER- 4
REVIEW OF LITERATURE
4.1 INTRODUCTION
Review of Literature is a systematic method for identifying, evaluating and
interpreting the work of researchers, scholars and practitioners in a chosen field.
Literature review requires the selection of available documents (both published and
unpublished) on the topic, which contain information, ideas, data and evidence written
from a particular standpoint to fulfill certain aims or express certain views on the nature
of the topic and how it is to be investigated, and also the effective evaluation of these
documents in relation to the research being proposed.
A literature review is a body of text that determines the aims to review the critical
points of current knowledge including substantive findings as well as theoretical and
methodological contributions to a particular topic. Literature reviews are secondary
sources, and as such, do not report any new or original experimental work. Also, a
literature review can be interpreted as a review of an abstract accomplishment. Most
often associated with academic-oriented literature, such as a thesis, a literature review
usually precedes a research proposal and results section. Its main goal is to situate the
current study within the body of literature and to provide context for the particular
reader. A literature review is an evaluative report of studies found in the literature related
to your selected area. The review should describe, summarize, evaluate and clarify this
literature. It should give a theoretical basis for the research and help you determine the
nature of your own research.
A literature review goes beyond the search for information and includes the
identification and articulation of relationships between the literature and your field of
research. While the form of the literature review may vary with different types of studies,
the basic purposes remain constant. As it provides a context for the research, justifies the
research, ensures the research hasn't been done before (or that it is not just a "replication
study"), shows where the research fits into the existing body of knowledge, enables the
researcher to learn from previous theory on the subject, illustrates how the subject has
been studied previously, highlights flaws in previous research, outline gaps in previous
research, shows that the work is adding to the understanding and knowledge of the field
and helps refine, refocus or even change the topic. While the interaction between the
research question and the relevant literature is foreshadowed throughout the review, it
36
usually is written at the very end. The interaction itself is a learning process that gives
researchers new insight into their area of research.
Review of the literature plays an important role in any research and it considers the
importance of mutual funds that several academicians have tried to study the
performance of various mutual funds. Literature on mutual fiind performance evaluation
is enormous. A large number of studies on the growth and financial performance of
mutual funds have been carried out during the past in the developed and developing
countries. Brief reviews of the following research works reveal the wealth of
contributions towards the performance evaluation of mutual fund, market timing and
stock selection abilities of fund managers. The effective research cannot be accomplished
without critically studying what already exists in the form of literature and particular
studies. A plethora of western and Indian empirical studies have been conducted on
mutual funds. However, some of the most relevant and important ones have been
reviewed and discussed in this section. This helps to formulate hypothesis and a
framework for further investigation. In this research, the survey of literature has been
divided into three parts namely:
> Studies on the basis of Growth of Mutual Funds.
> Studies on the basis of Risk and Return Analysis of Mutual Funds.
> Studies on the basis of Selectivity and Market Timing Abilities of Mutual
Fund Managers in India.
4.2 STUDIES RELATED TO DIFFERENT PARAMETERS OF MUTUAL
FUNDS
The literature review comprises of studies based on different parameters of
mutual funds i.e on the basis of growth of mutual funds, on the basis of risk and return
analysis of mutual funds and on the basis of selectivity and market timing abilities of
mutual fund managers.
4.2.1 STUDY ON THE BASIS OF GROWTH OF MUTUAL FUNDS
Mutual fund industry today is one of the most preferred investment avenues in
India. Financial services industry has undergone a rapid evolution over a period of time.
Financial markets have experienced a variety of phases in the past several decades.
Through globalization, liberalization and the expansion of the internet, the modem day
mutual fund industry grows at a fast space. Mutual funds have started with a simple idea
and grown into multi-trillion dollar industry today. So its important to study the literature
related to the growth of mutual funds.
37
TABLE 4.1
Review of Literature related to Growth of Mutual Funds
S.No Author(s) Name Year Name of Research Model Used Findings & Conclusion
Paper
1 Jayadev, M 1996 Mutual Fund Used Sharpe, The author concluded that the ch(
Performance: An Treynor and Jenson growth oriented funds did not perf
Analysis of Monthly Measure better in terms of total risk and the ft
Returns were not offering advantages
diversification & professionalism to
investors.
2 Rao, D.N 2006 Investment Styles Used Sharpe The author concluded that four mu
and Performance of Measure and Return funds of growth option and one mu
Equity Mutual based on Yield fund of dividend option generated hi|
Funds in India returns than the market benchmark.
3 Singh Jaspal & 2006 Investors' Survey on Investors The authors concluded that investmer
Chander Subhash Preference for gold was considered the first favored f
Investment in of investment than in NSC and post o1
Mutual Funds: An schemes.
Empirical Evidence
4 Rao & Mishra 2007 Mutual Fund: A Survey on different The authors concluded that despite
Resource Mobilizer types of Investors problems, the recent changes in the mu
in Financial Market fund industry in India had really sho
amazing growth.
5 Guha, Deb., 2007 Performance of Used Return Based The authors concluded that investors r
Banerjee, A. & Indian Equity Style Analysis and know the style benchmark of the fij
Chakrabarti, B.B Mutual Funds Vis-A Sharpe Measure chosen for getting an idea of the ac
Vis Their Style management skill of the managers. It
Benchmarks: An also found that the selected fiinds were
Empirical able to beat their style benchmarks.
Exploration
6 Lakshmi, N., Deo, 2008 Performance of the Used Auto and The authors concluded that the san
Malabika & Indian Mutual Rank Correlation, schemes outjjerformed the market in te
Murugesan, B Funds: A Study with CAPM Model, of absolute returns and the present
Special reference to Sharpe, Jenson & asset value of the entire sample sche
Growth Schemes Treynor Measure were positively and significa
correlated as compared to past net a
value.
7 Debasish, S.S 2009 Investigating Used Mean, The study showed that Fran
Performance of Coefficient of Templeton and UTI mutual fund were
Equity-based determination, performers and Biria Sun Life, HDFC
Mutual Fund Sharpe, Treynor & Lie mutual funds showed poor bel
Schemes in Indian Jenson Measure average performance against the i
Scenario return relationship models.
8 Khurana, Ashok & 2010 Hybrid Mutual Calculated Mean. The authors concluded that all the ft
Parjwani, Kavita Funds: An Analysis Standard Deviation, except one outperformed the Benchn
Beta, Sharpe & in terms of compounded annual
Treynor Ratio growth rate.
9 Sudhakar, A. & 2010 Past, Present and The authors concluded that 52 per
Kumar, S.K Future in India: Used Chi-Square investors were willing to take mode
Investors' Test & Direct risk and 33 percent were willing to
Perception Personal Interviews. low risk and least investors prefe
balanced funds. The authors sugge
more awareness programs should
arranged for common man.
10 Agganval, R. & 2010 Critical Analysis of Used Sharpe, The results obtained by the applicatio
Mukhtar, W Stock Selection Treynor, Sharpe Optimization Technique sho
Strategies of Growth Information, the improper design of few well kn
Mutual Funds in Specific Ratio & portfolios. The authors suggested
India Jenson Measure investors should prefer the performanc
hired managers.
11 Bawa, S. & Brar, S. 2011 Performance Used Sharpe, The research showed that private se
Evaluation of Treynor Ratio & growth schemes have higher returns. /
Growth Schemes of Risk adjusted public sector growth schemes were
Mutual Funds in compounded annual most risk prone towards the ma
38
India - A Public growth rate variations. So public sector growth
Private Comparison schemes have advantages over private
sector growth schemes.
12 Gupta, Chawla & 2011 An Analysis of Used Z-Test and The authors concluded that majority of
Harkawat Investor's Chi-Square Test investors have awareness about mutual
Perception funds and were willing to invest in mutual
Regarding Mutual fund sector.
Fund
13 Panjwani, Kavita 2011 Performance and Used Standard The author concluded that all the selected
Growth of Selected Deviation, Beta, funds except one havse outperformed the
Liquid Fund Growth Sharpe & Treynor benchmark and able to give excessive
Schemes: An Ratio return over benchmark return.
Empirical Analysis
14 Athma, P. & 2011 Performance of Used Average, The authors concluded that all selected
Makarla, R. K Mutual Funds in Standard Deviation, Midcap mutual funds performed well
India: An Beta, Sharpe & during the study period. The Growth and
Evaluation of select Treynor Ratio Income options showed a positive value
Mid-Cap Funds due to the overall positive trends in the
capital market.
15 Loomba, J 2011 Investigating Used Sharpe Ratio, The results showed that Franklin India
Performance of Maan Whitney's U- Blue chip fund was the most risky scheme
Equity-based Test and Krusical and least risk was in the case of Templeton
Mutual Fund Wallis Test India Growth fund.
Schemes and
Comparison with
Indian Equity
Market
16 Kandavel, D 2011 Perception of the Used One-way The author found that the respondents had
Retail Investors Variance, T-Test, satisfied towards higher rate of return. The
towards Investment Coefficient of authors suggested that mutual fund
in Mutual Funds in Variation, Multiple industry needed to develop products to
Puducherry: An Regression and fulfill customer needs.
Empirical Study Convenience
Sampling
17 Mehta, Y. K 2012 Emerging Scenario Used Average, The author concluded that mutual funds
of Mutual Funds in Percentage Weight were properly diversified in various
India: An Analytical age. Correlation & sectors showed positive returns. The
Study of Tax Funds Sortino Model author suggested that investors should
prefer long term investment plan.
18 Singh, S. K., Singh, 2012 An Analysis of Used Sharpe & The study showed that all the funds except
K. B & Singh, A Balanced Mutual Treynor Ratio one have outperformed the benchmark in
Fund Schemes terms of compounded annualized growth
rate.
19 Mehta, Y. K. & 2012 Mutual Funds in Used Sortino The authors concluded that DSP Black
Rathore, G. S current Scenario: Model, Fema, Rock Balanced Fund has performed very >
An Analytical Study Treynor & Sharpe well during the past three years, giving
of Balanced Funds Measure maximum return. But, the fund under
performed in comparison to its benchmark
i.e. Crisil Balanced Fund Index.
An analysis of Table 4.1 reveals that the whole mutual fund industry has changed
specifically from year 2002-03 onwards as private sector mutual funds has started
dominating the Indian mutual fund industry in terras of assets under management. SEBI
has taken many initiatives fbr the better management of mutual funds, ensuring fairness
in dealings by the management, improving disclosures, ensuring investor's protection
>'
and bringing professionalism among advisors of mutual funds. The efforts of SEBI and
AMFI in promoting the assets of mutual fund industry have started yielding the result. In
39
terms of regulations, product offerings, service standards and procedures, the mutual
fund industry is well positioned to face the challenges and grow progressively.
4.2.2 STUDIES ON THE BASIS OF RISK AND RETURN ANALYSIS OF
MUTUAL FUNDS
Risk measurement is considered an important tool to judge the performance of
mutual funds. Further, return analysis also plays an important role in confirming the
performance of mutual funds. So risk and return analysis both goes hand in hand in
measuring the performance of mutual funds. The literature review related to the risk and
return analysis of mutual funds is as follows:
TABLE 4.2
Review of Literature related to Risk and Return Analysis of Mutual
Funds
S.No Author(s) Name Year Name of Research Paper Model Used Findings & Conclusion
1 Treynor 1965 How to Rate Used Beta The result showed that higher the
Management of Coefficient Treynor ratio, higher the returns and
Investment Funds lesser market risk of the fund. The author
concluded that the index was termed as
reward to volatility ratio.
2 Treynor & Mazuy 1966 Can Mutual Funds Studied portfolio The study exhibited that the Investment
Outguess the Markets performances to managers had no ability to outguess the
find out evidence market as a whole but they could Identify
of market timing under priced securities.
abilities
3 Sharpe 1966 Mutual Fund Calculated The author concluded that higher the
Performance Standard Deviation Sharpe ratio, the better is the funds return
relative to the amount of risk taken.
4 Jenson, M. C 1967 The Performance of Studied the His results indicated that these funds were
Mutual Funds in the performance of not able to predict security prices well
period 1945-1964 selected mutual enough to outperform a buy-the-market
funds and hold policy.
5 McDonald 1974 Objectives and Used Sharpe, The author found that more than 50% of
Performance of Mutual Treynor and funds had posted better performance in
Funds Jenson Measure terms of Treynor's measure, whereas only
32% of the funds performed superior in
terms as Sharpe's measure.
6 Ackermann, Enally, 1999 The Performance of Used Multi-Period The authors concluded that hedge funds
R. M & Scraft Hedge Funds: Risk, Sampling offered little advantage over indexing due
Return and Incentives to the low beta values of hedge funds. It
makes valuable addition to many
investors' portfolios.
7 Redman, A, GuUett 2000 The Performance of Used Sharpe, The authors concluded that from !985 to
& Manakyan Global and International Treynor and 1994 the portfolios of International
Mutual Funds Jenson Measure mutual funds outperformed the U. S.
market.
8 Anand, M. V 2000 Analysis of Performance Used Literature The authors concluded that Biria Sun Life
of Equity funds Survey, Delphi performs well compared to the
(Diversified) Open-end Technique & In- benchmarks and competitors schemes.
Mutual Fund during 1997 depth financial
-2000 review
40
Stehle, R & Grewe, O 2001 The Long-Run Used Sharpe and The study found that the rates of return of
Performance of German Jenson Measure the mutual funds and the chosen
Stock Mutual Funds benchmark must include identical return
components
10 Ahmed, P, 2001 Performance of Emerging Used Sharpe, The authors concluded that all the mutuai"
Gangopadhyay, P & Market Mutual Funds Treynor and funds were below average in their
Nanda, S and U.S. Monetary Policy Jenson Measure performance as compared to MSCI
indexes. Latin America funds had the
highest Sharpe and Treynor Ratios.
Diversified Emerging Market funds had
the next highest Sharpe and Treynor
Ratios and the highest Jensen Alpha.
11 Kothari, S. P & 2001 Evaluating Mutual Fund Used Multifactor The authors concluded that performance
Warner, J. B Performance Models measures used in previous mutual fund
research have little ability to detect
economically large magnitudes of
abnormal fund performance, particularly
if a fund's style characteristics differ from
those of the value-weighted market
portfolio.
12 Mishra & Rahman 2002 Measuring Mutual Fund Used Sharpe, The author concluded that some funds
Performance Using Treynor and performed better than S&P, while some
Lower Partial Moment Jenson Measure did worse. But, in I996-2(X)L most funds
outperformed the market using the same
measures. ^)
13 Roger, Otten & 2002 A Comparison between The Structure The authors found that Europe was still
Schweitzer, M the European and the Conduct lagging than American mutual fund
U.S. Mutual Fund Performance (SCP) industry when it comes to total asset size,
Industry paradigm used average fund size and market importance.
The study showed that European citizens
had a preference for fixed income mutual
funds than equity funds.
14 Bijan, R & Saikat, D 2003 The Conditional Used Conditional The authors concluded that the use of
Performance of Indian Performance conditioning lagged information variables
Mutual Funds: An evaluation method improves the performance of mutual fund
Empirical Study advocated by schemes and reducing the number of
Person & Schadt negative timing coefficients.
15 Narayan, R & 2003 Performance Evaluation Used Sharpe, The study concluded that 58 of 269 open
Ravindran, M of Indian Mutual Funds Treynor, Fama, ended mutual funds provided better
Jenson Measure returns than the overall market returns. 32
and relative out of 58 schemes were having Treynor's
performance index ratio, 30 out of 58 schemes were having
positive Sharpe's ratio, 35 Schemes out of^
58 schemes were positive Jensonr
measure.
16 Nithya, R 2004 Performance Evaluation Checked the The author concluded that Franklin
of Franklin Templeton performance of Templeton Mutual funds performed well
Mutual Funds Asset Management and met the expectations.
Company
17 Gupta, O. P & 2004 Performance Evaluation Studied weekly The study showed that the average risk
Gupta A of Select Indian Mutual returns based on free rate was 0.15 per cent per week
Fund Schemes: An NAVs of chosen indicating that the sample funds have not
Empirical Study funds earned even equivalent to risk-free return.
18 Shah, A & Hijazi, S 2005 Performance Evaluation Used Sharpe, The authors concluded that funds
of Mutual Funds in Treynor and outperformed the market in terms of
Pakistan Jenson Differential Sharpe and Treynor measures. Results of
Measure Jensen differential measure also showed
positive alphas.
19 Panwar, S & 2005 Characteristics and Used Jenson The authors found the statistical
Madhumathi, R Performance Evaluation Alpha, Sharpe differences in sponsorship classes icLi|
of Selected Mutual Funds Ratio and excess terms of eSDAR and residual value. The
in India standard deviation study showed that residual variance
adjusted return measure is directly related to Sharpe
(eSADR) Ratio.
41
20 Bhattacharjee, 2006 Fund Performance Used Performance The study revealed that there were
Kaushik & Bijan, R Measurement witliout Change Measure positive signals of information
Benclimark - A Case of (PCM) by asymmetry in the market with mutual
Select Indian Mutual Grinblatt & Titman fiind managers having superior
Funds information about the returns of stocks as
a whole.
21 Ferreira, Miguel, A, 2006 Performance and Used Domestic, The authors concluded that fund age is
Miguel, Antonia, F & Characteristics of Mutual International negatively related with fund performance
Ramos, Sofia Funds Market Model and indicating that younger funds tend to
Carhart perform belter.
International four-
factor model
22 Prasath, R. H 2009 A Study on Analysis of Used Sharpe, The author suggested that before
the Performance of Treynor, Jenson choosing the mutual fund scheme, the
Mutual Fund with and Information investor should undergo fact sheet and
reference to HDFC Ratio NAVs thoroughly and then choose the
best one.
23 Gupta, G, Panwar, S 2009 Investment Performance Used Sharpe, The study revealed that Canara Robeco
& Gupta, A of Mutual Fund Income Treynor, Jenson Income Scheme was having the
Schemes: An Analysis Measure, Standard maximum return in terms of Sharpe
deviation and Beta Ratio. 5 schemes showed the negative
returns during the specified period. 12
schemes showed the negative
performances in terms of Jenson measure.
24 Azar, S. A & 2010 The Performance of U.S. Used Jenson Alpha The study concluded that the S&P 500
Hourani, M Equity Mutual Funds was the most appropriate benchmark for
the sample of mutual funds. These fiinds
outperform before expenses while their
returns after expenses are marginally
significant.
25 Nemavathi, K. S 2010 A Study on Preference of Used Sharpe and The performance of funds showed
Mutual Funds with Treynor Ratio marginal variation due to total risk and
Special reference to ELSS market risk exposure and both the
Schemes measures showed similar performance of
ELSS mutual funds in terms of risk-
adjusted returns.
26 Kumar, N. L & Devi, 2010 Performance Evaluation: Used Average rate The authors concluded that returns of
V.R A Comparative Study of return, Standard mutual fund schemes significantly differ
between Indian and deviation, Sharpe, from one another. Indian mutual funds
Foreign Equity Mutual Treynor, Jenson performed better over foreign funds. For
Funds Ratio and ANOVA the long term success of the industry, the
Technique investor protection should be maintained.
27 Mehta, S. K 2010 State Bank of India Vs Used Sharpe, The study showed that performance of
Unit Trust of Indian: A Treynor, Fama and UTI and SBI mutual fund schemes had
Comparison of Jenson Measure been better in 2008 as compared to 2007.
Performance of Mutual SBI mutual fund schemes performed
Fund Schemes better than UTI. None of the funds have
been consistently the top performers in
terms of returns in both the years.
28 Kumar, N. L & Devi, 2011 Performance Evaluation Used Average rate The authors concluded that the future of
V.R of Private and Public of return. Standard mutual funds in India has lot of positive
Sponsored Mutual Funds deviation, Sharpe, things to offer to its investors. The
In India Treynor, Jenson competition among the private and public
Ratio players has increased the choice of
mutual funds schemes to the investors.
29 Keswani, S 2011 Effect of Fund Size on the Used correlation The author concluded that the Correlation
Performance of Balanced coefficients. Fund Coefficients of fund size and performance
Mutual Funds an Momentum, variables were not significant. There is no
Empirical Study in Sharpe Ratio and conclusive evidence that the fund size
Indian Context ANOVA affects performance of balanced mutual
Technique funds, be it micro, small, medium and
large sized funds.
42
30 Sharma, D., Loothra, 2011 Comparative Study of Used Sharpe Ratio, The authors concluded that results were
P. & Sharma, A Selected Equity Standard deviation. in the favor of Reliance Regular Savings
Diversified Mutual Fund Beta and Equity fiind with high returns over the
Schemes Coefficient of last five years and Birla Sun Life ,
Determination Dividend Yield Plus in terms or^-
maximum returns by taking minimum
risks as per Beta and Standard Deviation.
31 Ali, R., Syed & Zia 2011 Equity Mutual Funds Used Average The author concluded that performance of
Performance in Pakistan: returns. Standard most of the funds is better than the
Risk & Return Analysis deviation, benchmark returns. Test of relationship
coefficient of have shown significant and positive
variation and relationship between market returns
multiple regression measured by Karachi Stock Exchange.
method
32 Naidu, B. Suresh & 2011 Performance and Used Expense The authors concluded that selected
B. Sudhir Characteristics of Retail Ratio, Portfolio mutual funds showed positive results
Equity Mutual Funds in turnover Ratio, during the study. Investors prefers to
India Sharpe, Treynor invest in retail equity mutual funds for
and Jenson savings.
measure
33 Mahmud, M & 2011 An Evaluation of Mutual Used Sharpe The authors concluded that the selected
Mirza, N Fund Performance in an Measure and fund underperformed in market due to
Emerging Economy: Case Unconditional negative or insignificant alphas.
of Pakistan CAPM Models
34 Kumar, Nooney 2011 Cluster Analysis of Used Average rate The authors concluded that Cluster 2 was
Lenin & Devi, V. Mutual Funds of return. Standard the largest cluster. Cluster I was on 2nd
Rama deviation, Sharpe, position, and Cluster 4 was on 3"^ position
Treynor, Jenson followed by Cluster 3 and Cluster 5 with
Ratio 4th and 5th position. Risk is highest in
Cluster one.
35 Khurana, A. & 2011 Used Standard The authors concluded that majority of
Performance and Risk
Bhavet Deviation, Beta the schemes had performed well over
Analysis of Monthly
and Sharpe Ratio long horizon of time. All the selected
Income Plans (MIP) of
schemes compared with the benchmark
Selected Mutual Funds
index i.e. CRISIL MIP Blended Index.
36 Kono, P. M, Yatrakis 2012 A Study of Market Used Modem The authors concluded that an investor
& Wang, H. Efficiency in China: Portfolio Theory could develop best possible mutual fund
Comparing the portfolio based on MPT outperformers as
Performance of Mutual compared to the market index of China,
Fund Portfolios against when the performance was analyzed on
the SSE Composite Index the basis of Sharpe Ratio.
37 Saritha, B. 2012 Mutual Fund Investment Used Functional The author concluded that some of the
Decisions By Using Fama Classification funds were performing better than th~B*
Decomposition Models market. Some funds showed poor'
performance. Portfolio managers did
fairly good job in generating positive
returns.
38 Rasheed, Haroon & 2012 Performance Evaluation Used Sharpe, The authors concluded that on the basis of
Qadeer, Abdul Survivorship-Biased Treynor and different models, funds perform in
Open -Ended Mutual Sortino Mesure different order i.e. due to risk
Funds in Pakistan incorporation in these models and market
instability. Overall performance of the
fiinds remains best as compared to
market.
39 Dhanda, Batra & 2012 Performance Evaluation Used Rate of The authors concluded that in 2009-10
Anjum of Selected Open Ended return method. except ING core equity fund and Kotak
Mutual Funds in India Beta, Standard select focus fund schemes performed
deviation, Sharpe better compared to BSE- Sensex. But
and Treynor Ratio overall, except one scheme all were able
to provide reward for variability and^-
volatility more than the benchmark.
43
40 Bansal, S & 2012 Used Mean return, The research showed that UTI schemes
Kumar, S Beta, Sharpe, were the best performers and others had
Evaluation of Risk-
Treynor Ratio and showed below average. The risk adjusted
Adjusted Performance of
Jensen Alpha return of all the three sectors showed
Mutual Funds in India
negative values in terms of Sharpe,
Treynor's, and Jensen Measures.
41 Nimalathasan, B & 2012 Mutual Fund Financial Used Standard The authors concluded that superior
Gandhi, R Performance Analysis- A deviation. Beta, performance on an average occurs among
Comparative Study on Sharpe, Treynor, larger funds with average trading activity
Equity Diversified Jenson nd and higher betas having low cash levels.
Schemes and Equity Mid- Information Ratio
Cap Schemes
An analysis of Table 4.2 shows that there is an elementary relationship among

risk and return. There is an optimistic or direct relationship between risk and return. It
means that in any mvestment, in lieu of greater returns an investor is always ready to
take higher levels of risk. Otherwise, the investors are satisfied with comparatively
inferior returns with lesser predictable risk. By using the risk -return relationship, one
tries to assess the competitive strength of the mutual funds vis-a-vis one another in a
better way. Thus, it will be more interesting if the risk and return are analyzed
simultaneously in relation to one another.
4.2.3 STUDIES ON THE BASIS OF SELECTIVITY AND MARKET TIMING
ABILITIES OF MUTUAL FUND MANAGERS IN INDIA
The fund manager's ability to pick winners among individual stocks on a risk-
adjusted basis and market timing ability during bull or bear market is very important.
Market timing is the macro-forecasting ability of the fund manager in forecasting market
wide movements (e.g. a shift from a bull to bear market). Market timing skills imply
assessing correctly the direction of the market, whether bull or bear and positioning the
portfolios accordingly. Therefore, the present study also attempts to examine the review
of literature related to stock selectivity and market timing abilities of mutual fund
managers in India.
44
TABLE 4.3
Review of Literature related to Selectivity and Market Timing
Abilities of Mutual Funds in India
S.No Author(s) Name Year Name of Research Model Used Findings & Conclusion
Paper
1 Henriksson 1984 Market Timing and Used Parametric The author concluded that only three
Mutual Fund and Non- funds had showed significantly
Performance: An Parametric Tests positive estimates of market timing
Empirical ability in the parametric tests. But
Investigation these three funds showed negative
estimates of performance in non
parametric tests.
2 Grinblatt, M & 1989 Mutual fund Used Transaction The authors concluded that abnormal
Titman, S Performance: An Costs, Survivorship performance of the funds based on
Analysis of bias and studied gross returns was inversely related to
Quarterly Portfolio Abnormal the size but transaction cost was
Holdings performance inversely related to the fund size. Also
the actual net returns were not related
to the net asset value of the funds.
3 Wermers 1999 Mutual Fund Studied the The author found that funds hold
Herding and the quarterly stocks that outperform the market by
Impact on Stock transaction cost of 1.3 percent per year, but their net
Prices each mutual fiind returns underperform by one percent.
Of the 2.3 percent difference between
these results, 0.7 percent is due to the
underperformance of non stock
holdings, whereas 1.6 percent is due
to expenses and transactions costs.
4 Tripathy, Nalini 2006 Market Timing Used Treynor & The author concluded that the fund
Prava Abilities and Mazuy Model and managers had not been successful in
Mutual Fund Henriksson & reaping returns in excess of the
Performance- An Merton Model market, rather they were timing the
Empirical market in the wrong direction.
Investigation into
Equity Linked
Saving Schemes
5 Anand, S & 2006 Analysis of Used Fama Method The study concluded that the
Murugaiah, V Components of influence of market factor was more
Investment severe during negative performance of
Performance - An the funds while the impact on
Empirical Study of selectivity skills of fund managers
Mutual Funds In was also more important than the
India other factors.
6 Miglani, S. K 2007 Performance Used Sharpe, The author concluded that majority of
Appraisal of Treynor, Jenson selected mutual funds showed positive
Mutual Funds in Differential return returns in terms of Sharpe, Treynor
India: Empirical module, Treynor & and Jenson differential return module.
Evaluation of Risk Mazuy Model and Again the selected mutual funds
and Timings Henriksson & showed superior results on the basis
Performance Merton Model of Treynor & Mazuy model and
Henriksson & Merton model.
7 Agganval, D 2008 Measuring Used Standard The author concluded that the
Performance of deviation and performance is affected by the saving
Indian Mutual Correlation and investment habits of the people
funds analysis and also affected due to the
confidence and loyalty of the portfolio
manager.
45
8 Rao, D. N & Rao, 2009 Can balance and Used Shaq)e Ratio The authors concluded that both the
S.B Income Mutual funds i.e. Balanced and Income Funds
Funds Outperform had outperformed the Index over Bear
the Stock Market? run period and Bull Run period.
An Empirical
Study in the Indian
Context
9 Walia, N & Kiran, 2009 Portfolio Used Beta, Fama, The authors concluded that investors
R Diversification and Sharpe and Treynor must consider past performance of
Financial Measure funds with portfolio evaluation in
Performance of deciding asset mix that matches with
Mutual funds in vision of fund managers with
India investor's satisfaction.
10 Rao, N & 2010 Comparison Used Beta, The study showed that there has been
Chhatralia, H between the Indian Standard deviation, an increase in the amount of business
and US Mutual Siiarpe, P/E Ratio, that mutual funds are getting in India
Fund Industry P/B Ratio, Alpha and it is quite significant. US mutual
and Expense Ratio fund industry accounts for 51% of the
total worldwide share, due to its
enormous size. When it comes to
growth rate, Indian mutual fund
industry comes as one of the rapidly
growing industries.
11 Santhi & 2011 An Analysis of Used Sampling The study found that majority of the
Gurunathan, K Investors' Attitude metiiod. investor didn't have the knowledge on
towards Tax Saving Questionnaires and schemes and awareness on controlling
Mutual Funds in Chi-Square Test authorities and they were satisfied
India with the overall benefits on Tax
saving mutual funds.
12 Singh, R., Singh, A 2011 Positioning of Used Random The authors study pointed that out of
& Singh, H. R Mutual Funds Sampling and several factors considered for
among Small Town Cronbach's Alpha positioning the mutual funds into the
and Sub-Urban small town and sub-urban areas, the
Investors awareness about mutual funds is
having the highest influence on the
decision of the investors to make
investment in mutual funds.
An analysis of Table 4.3 shows that the investment performance of stock

selection pertains to successful micro-forecasting of a company's specific events. It
refers to the fund manager's ability to identify under or overvalued securities. Further, it
is also important to study the market timing abilities of Indian fund managers. The study
of literature reveals that a positive and significant value of alpha and gamma indicates
selectivity and market timing ability of the fund managers respectively.
4.3 CONCLUSION
The review of literature shows that researchers have done considerable work on the
performance, persistence and market timing ability of mutual funds nationally and
globally. Various statistical tools varying from computation of basic statistical measures
like Arithmetic-mean, Standard Deviation and Correlation Coefficients and financial
models like Single Index Model, Multiple hidex Model etc have been used. In India, the
46
researchers have extensively explored the area of performance evaluation of mutual
funds by using various performance measures such as Sharpe Ratio, Treynor Ratio and
Jensen Measure. Further, some work in the areas of selectivity and market timing
abilities of fund managers have also been undertaken. However, the issues of market
timing abilities of mutual fund managers have remained relatively unexplored. The
present study not only evaluates the performance, growth and development of mutual
funds in hidia by using the above measures but also analyzes the stock selection, market
timing ability of fund managers and persistence of mutual funds by using rigorous
statistical and financial models. The above review of literature helps in identifying the
research issues and gaps for the present study. The foregoing review of empirical
literature confirms/highlights the following facts:-
> Different factors influence purchasing behavior of small investors. These factors
do not have much similarity as there are multiple reasons which dictate the
intention of buying which boils down to risk return equation. Innovative
marketing techniques are the need of the hour as there are plethora of funds in the
market with new ones being introduced regularly, the customer is confused and
by these techniques, a link needs to be created between customer awareness and
customer need which will help customer to make the informed choice and in turn
help the industry as a whole to grow.
> Big investors generally go through series of information during the process of
finalizing purchase of mutual funds. This information consists of fund's historical
performance and their related expenses and fees. Usually they seek advice of
financial advisors who are professionals in this field before making final
decision. There are also set of investors who turn to family, friends, mutual fund
company, internet and colleagues for information prior to making purchase which
can aid their decision making.
> Mutual fund activities are mainly confined to urban areas. A little effort is being
made to attract the savings of rural and agricultural sector. It is suggested that to
cover potential investors of vast section of society, these organizations should
open some branches in rural areas and specially recruit the agents in rural areas.
These agents should be given some additional incentives comparing to others
agents. It will attract more potential retail investors in the rural areas.
> Mutual fund companies should provide required transparency and also offer well
after sales services to the investors, so as to attract more and more investors to the
47
mutual fund industry. It is also suggested that these companies should market
their products and services in a better way so as to attract more investors.
> Whenever a mutual fund is launched, it states its portfolio according to the
objectives of funds. But, it is experienced that many mutual fund operators ignore
the basic objective of fund portfolio, particularly those mutual funds which are
income/growth oriented that require investing their money mainly in high
yielding debt instruments. A large part of resources of these funds is invested in
IPOs, Small and Mid-cap stocks which are not traded frequently at stock
exchanges. It is suggested that the mutual fund operators must understand the
basic objective of fund portfolio and accordingly launch funds in the market.
4.4 RESEARCH GAPS
The above review of literature proves beneficial in identifying the research gaps,
which are mainly the edifices on which the objectives of the present study are based on.
There are hardly few studies in India or globally which has taken the market timing
abilities of mutual fund managers. The present study makes an attempt to include the
above said variables.
Based on the literature review, it is found that so far some researches has dealt
with statistical tools or quantitative tools to analyze the performance of the mutual funds.
All researchers have used one or two methods to compare the mutual funds of one or two
schemes only. Some of the research has focused only on particular fund and tells that
fund's advantages and disadvantages. No research has focused on comparing the similar
type of open ended schemes/ close ended schemes and sector funds in various areas.
Hence this research has been taken to fill the gap to compare and analyze the above
mentioned mutual fund schemes by using different statistical tools. Thus, the present
study is an endeavor to discuss the other factors related to mutual funds other than risk
and return. The present study differs from the earlier studies in many ways and enriches
the existing literature in the following ways:
> Firstly, it has included variables other than the variables included by other
researchers.
> Secondly, the present study documents the performance, growth and development
of mutual fund at Indian context.
> Thirdly, the present study tries to highlight the changing attitude of smaller
investors from other sources of investment like PPF, NSC, Pension Funds and
Post Office Savings towards larger investments in mutual funds.
48
CHAPTER 5
GROWTH OF MUTUAL FUNDS
5.1 INTRODUCTION
5.2 TYPES OF MUTUAL FUND SCHEMES
5.3 ADVANTAGES OF MUTUAL FUNDS
5.4 STRUCTURE OF MUTUAL FUNDS
5.5 REGULATORY FRAMEWORK OF MUTUAL FUNDS
5.6 GROWTH OF MUTUAL FUNDS IN INDIA
5.7 UNIT HOLDING PATTERN OF INDIAN MUTUAL
FUNDS CLASSIFIED INTO PUBLIC SECTOR AND
PRIVATE SECTOR MUTUAL FUNDS
5.8 NET ASSETS OF MUTUAL FUNDS OF INDIA
5.9 ASSETS OF MUTUAL FUNDS- INDIA VS. WORLD
5.10 CONCLUSION
CHAPTER-5
GROWTH OF MUTUAL FUNDS
5.1 INTRODUCTION
objective of earning excellent returns. These investment companies diversify the
collected is typically invested in stocks, bonds, commodities and money market
instruments. A fund manager is appointed by every mutual fund company that buys and
sells the fund's investment. When an investor invests in mutual funds, it means the
investor buys units and thus becomes shareholder or unit holder. The profits and losses
are distributed by investors on pro-rata basis. Time to time mutual fund schemes are
being launched in the market according the needs of investors. Thus, mutual funds are
deemed to be the best option of savings for common man.
5.2 TYPES OF MUTUAL FUND SCHEMES

A wide variety of mutual fund schemes exists that cater to needs of investors. Mutual
fund schemes that can help in meeting the financial goals of the investors are grouped
into four broad classifications namely. Operation-based, Portfolio-based, Location-based,
and Others. This classification is presented in Graph 5.1 below:
Graph 5.1: Types of Mutual Funds Schemes
MUTUAL FUNDS
peration Based Classification Portfolio Based Classification Location Based Classification

Others | I 1 1
^ ^ I I I I I •-Load
Funds
• No Load Fui
;n ended Close ended Interval Return Investment Sector Domestic Off-Shore
unds Funds Funds based Funds based Funds based Funds Funds Funds
•No Market
Funds
>^ Index Funds
49
5.2.1 OPERATION BASED CLASSIFICATION
The most important and significant classification of mutual fund schemes is on
the basis of their operations. The two common types of schemes are open- ended and
closed-ended. These are discussed below:
5.2.1.1 Open-ended funds:
In case of these schemes, an investor can easily purchase, repurchase and sell
units at any time. It remains open for all the time. The price per unit i.e. Net Asset Value
has to be paid by the investor while buying units. Redemption of units is also done on the
basis of net asset value per unit. As defined in the AMFI booklet, NAV is the market
value of the assets minus its liabilities. It is calculated through dividing the market value
of fund by the total number of units outstanding at that time. The units are not permanent
in case of open ended schemes. When the new units are issued or repurchased, then the
value of outstanding units may rise or fall. Fund volume and sum of investment also
increases when more new units are bought by investors than redemption of units. In
another way, the fund volume and total investment decreases when redemption of units
are more than fresh subscriptions. The funds value continuously rises or falls due to the
buying or selling of units by investors.
5.2.1.2 Close-ended funds:
The 'unit capital' of a close-ended fund is fixed, as it makes a one time sale of a
fixed no. of units. These funds do not allow investors to buy or redeem units directly
from the funds. However, to provide the much- needed liquidity to investors, many
closed-ended funds get themselves listed on the stock exchanges. Trading through a
stock exchange enables investors to buy or sell units of a close-ended mutual fund from
each other, through a stockbroker, in the same fashion as buying or selling shares of the
company. The fund's unit may be traded at a discount or premium to NAV based on
investors' perceptions about the fund's future performance and other factors affecting the
demand for supply of the fund's units. The number of outstanding units of a close-ended
fund does not vary on account of trading in the fund's unit at the stock exchange.
5.2.1.3 Interval funds:
These funds combine the features of both open-ended and close-ended funds.
They may be traded on stock exchange or may be open for sale or redemption during
predetermined intervals at NAV related prices.
50
5.2.2 PORTFOLIO BASED CLASSIFICATION
Like issuing prospectus for issue of share capital by a company, a mutual fund to
raise funds has to issue similar statement communicating to prospective unit holders
about the policies and operations of the management. It is known as offer document. The
objective of the mutual fund scheme to be launched is clearly spelt out facilitating the
investor to choose a scheme meeting his own investment objectives. Following are the
portfolio based classification of fund, which can be offered:
5.2.2.1 Return Based Funds:
An investor invests his money with the objective of earning returns. An investor
wants the maximum benefit either by the way of dividend income at intervals or the
increment on capital outlay. Sometimes an investor expects both the above benefits
together. Different types of return based funds are discussed below:
5.2.2.1.1 Income Funds:
Income funds are those funds which give regular and stable earnings to the
investors. The income funds are mainly invested in bonds, debentures, government
securities and money market instruments which come in the category of fixed income
securities. Income funds are secure form of securities which are less risky than equity
funds. There is an inverse relation between interest rates and NAVs of the funds. In short
run, NAVs of the funds rises when interest rates fall whereas in the long run, as the time
period of investment is higher, these fluctuations doesn't affect the investor's risk
perception.
5.2.2.1.2 Growth Funds:
For capital appreciation in medium to long term, investing in growth fund is the
best option. Fund managers generally invest these types of funds in equity capital for
maximum wealth for investors. These are also known as "nest eggs" or "long haul"
investments. Growth funds are ideal for the investors seeking growth over the long term.
5.2.2.1.3 Conservative Funds:
The philosophy of these types of fund is "all things to all". This fund aims at the
judicious mix of both growth and income. It offers a blend of adequate return and
reasonable capital appreciation. These are, therefore, known as "middle of the road"
funds.
5.2.2.1.4 Monthly Income Plans (MIPs):
The primary investment objective of an MI? is to generate regular income
through investments in fixed income securities so as to make monthly payment or
51
distribution to its unit holders. The secondary objective is growth of capital through
investments in equity. The risk profile is generally low to medium.
5.2.2.2 Investment Based Funds:
Under this category, mutual funds are categorized on the method of investing in
particular "type of security". These include Equity funds. Bond funds and Balanced
funds which are explained below:
5.2.2.2.1 Equity Funds:
These funds invest most of their investible corpus in equity shares of companies
and under take the risk associated with the investment in equity shares. Most of the
equity funds are general in nature, and can invest in the entire basket of stocks available
in the market. The assumption higher the risk, higher the return or lower the risk proves
to be correct in case of these funds.
5.2.2.2.2 Bond Funds:
In this scheme, the fund managers invest generally in bonds and debentures etc.
These types of schemes are considered as highly secured form of investment. As the
capital appreciation is less in these funds, it still offers stable and regular earnings to the
investors. The emphasis in such funds is on liquidity and is associated with low risks and
low returns.
5.2.2.2.3 Balanced Funds:
The aim of balanced funds is to provide both growth and income by periodically
distributing a part of the income and capital gains. The percentage of allocation invested
in both income and growth is always mentioned in offer documents. This is also known
as "income-cum-growth" fund. These funds have reasonable mix of equity and bond in
their portfolio. It aims at distributing regular income as well as capital appreciation.
5.2.2.3 Sector Based Funds:
There are many funds, which make direct investment in specified sector of the
economy. These may invest in specified industry only like information technology or oil
and gas companies or in other specified products. The main disadvantage of this fund is
that it lacks diversification but at the same time, it has the advantage of developing the
fund managers, as they will have intense knowledge of specific sector. These funds are
ideal for investors who prefer to invest in a particular sector.
5.2.3 LOCATION BASED CLASSIFICATION
Mutual funds can also be classified on the basis of location from where they
mobilize the funds. These can be classified as domestic and off shore funds.
52
5.2.3.1 Domestic Funds:
The domestic mutual fund mobilizes savings of residents within the country
where investments are to be made. Such type of mutual funds collects investible surplus
from the people of India and invest this fund with in India.
5.2.3.2 Off-Shore Funds:
Economic reforms have opened the Indian economy not only to the domestic
private sector but also enabled global investors to put their money in the Indian market.
In this context off shore mutual funds attract the non-residential investors and are
regulated by the provisions of the countries where these are registered. These funds are
governed by the rules and procedure laid down for approving and monitoring their
performance by the Department of Economic Affairs, Ministry of Finance and as per
RBI's directives. These funds help in mobilizing the foreign exchange.
5.2.4. OTHER TYPES OF FUNDS
5.2.4.1 Load Funds:
In load fund, at the time of entry or exit of the fund, the company charges
commission at a certain predefined rate of commission. Thus, every time, somebody
buys or sells units of the fund, a commission will be payable. The charges typically range
from one percent to two percent. This fee is not deposited in the fund but paid to the
brokerage firm.
5.2.4.2 No Load Funds:
It is the type of fund that does not charge commission for entry or exit. There is
no commission payable on purchase or sale of units in the fund. If a fee is charged, it is
only if redemption occurs within a short period from the date of purchase.
5.2.4.3 Money Market Mutual Funds:
The aim of money market mutual fund is to provide easy liquidity, preservation
of capital and moderate income. These schemes generally invest in safer short-term
instruments such as treasury bills (T-bills), certificates of deposits, commercial papers
and interbank call money. Returns on these schemes may fluctuate, depending upon the
interest rates prevailing in the market. For short term earnings and more favourable
investment alternatives the option of money market instruments are best for individual or
institutional investors.
5.2.4.4 Index Funds:
Index funds invest their resources only in portfolio of scrips included in the select
index, hi India, they can be operated either through BSE Sensex or NSE Nifty or BSE-
53
200. The managers of index funds hold every stock in the index with the same
investment weight as if it had been decided to follow census approach. Index fund
schemes are ideal for investors who are satisfied with a return approximately equal to
that of an index.
5.3 ADVANTAGES OF MUTUAL FUNDS
hivestment in mutual fund becomes the best option for the common man in the
form of their sacrifices. Fund managers make excellent portfolios for investors through
proper research and findings based on market because the investors may not have proper
knowledge and resources while investing. The advantages of mutual fund are as follows:
• Professional Management:
One of the most important benefits of mutual fund investment is the availability
of low cost and highly professional management services. Mutual funds are managed by
highly skilled and professionally experienced managers' along with a research team
having sound knowledge of the market. As the investors are not professionally skilled in
putting their investments in best suitable schemes of mutual funds, so they need help of
some professional investment companies for planning of portfolios. Investors need some
experts as fund managers for the maximum benefit on fund's performance. Fund
managers oversee the fund's portfolio thoroughly for important decisions such as how
much scrip's are to be purchased, how much are to be sold. The selectivity and market
timing abilities of fund managers is again very crucial. Fund managers make full time
research and investigation to supervise a fund's performance continuously. The success
of every fund depends upon the knowledge and experience of fund managers.
• Portfolio Diversification:
The investment companies invest the savings of the investors in different
segments and sectors of industries. Fund managers apply safeguards by not putting all
the eggs in one basket. Through the process of diversification, it helps in reducing risk. It
enables investors to hold a diversified investment portfolio even with a small amount of
investment that would otherwise require big capital.
• Return Potential:
Through investing the mutual funds in different sectors of industries, investor's
gets higher returns in both bullish and bearish market. So by proper diversification, the
potential of earning profits increases.
54
• Less Expensive:
Investing in mutual funds is out of the cheapest ways as compared to investing
directly into capital markets. The reason behind is that the charges in the form of
brokerage, custodian fees and other expenses related to funds such as exit and entry load
are very less thereby making the investments in mutual funds less expensive.
• Liquidity:
A distinct advantage of mutual fund over other mvestments is that the units
purchased can be sold easily as per the NAVs of the mutual fimds which are being Usted
on the stock exchanges, websites of mutual fiinds and also in newspaper. Therefore,
investments in mutualfiindsare considered as liquid investments.
• Transparency:
The investor can get regular information on the value of tlieir investment in
addition to disclosure on the specific investments made by their schemes, the proportion
invested in each class of assets and the fiind manager's investment strategy and the
future outlook either by e-mail or tlirough information available on the websites of
mutual funds.
• Flexibility:
Tlie mutual funds investments also provideflexibilitythrough different options of
investment such as systematic investment plans (SlPs), monthly mcome plans (MIPs)
and dividend investment plans.
• Choice of Schemes:
Mutual funds offer a family of schemes to suit the investors' varying needs over a
hfetime. Given die plethora of options on hand, the investors can select the schemes on
the basis of their investment objectives along with a return-risk spectrum. If the investors
seek capital appreciation by earning high returns with high risk then t h ^ can invest in
equity funds and if the investors seek the highest level of income consistent with
preservation of capital then they can go for money market mutual fimds. If the investors
aim regular income as well as capital appreciation the hybrid fimds are the ideal fimds
for these investors. The investors can select onefimdor any number of different fimds to
help in meeting their specific goals such as growth of capital, regular income after
retirement, education of child, marriage of child etc.
• Well Regulated:
The Securities Exchange Board of Mdia (SEBI) works like a regulatory authority.
SEBI issues laws and guidelinesfi-omtime to time for efficient management of mutual
fimds thereby helping in safeguarding the interests of investors.
55
• Switching:
Many mutual funds allow investors to switchfi-omgroAvth to income funds and
vice versa, and accordingly their objectivefiromcapital gains to income and vice versa.
The Government of hidia introduced economic reforms in the field of trade, industry and
commerce since July 1991 so as to bring about the integration of the Indian economy
with the global economy. With the growth of the economy and the capital market in
India, the size of investors has also increased rapidly. The capital market in India has
experienced remarkable developments in the past few years. The responsibility of mutual
fimd companies has increased much more due to therisingreturns and progress in capital
markets. The capital markets attract large number of investors. Thus, due to involvement
of mutual funds in the transformation of Indian economy has made it urgent to view tlieir
services not only as afinancialintermediary but also as a pace setter as they are playing a
significant role in spreading equity culture (Datt, 2001).
5.4 STRUCTURE OF MUTUAL FUNDS
In India, the structure of a mutual fund is determined by SEBI regulations. These
regulations require a fund to be estaWished in the name of a trust registered with Indian
Trusts Act, 1882. Major players in the mutual fimd industry are similar to some extent to
the players in other financial service industry. The players include regulators, sponsor
and board of trustees, an asset management company, custodian, intermediaries and the
investors. The figure 5.1 below shows the process flow in relation to the parties involved
in the Indian mutual funds:
Figure- 5.1 Structure of Indian Mutual Funds
a^'uaflfe 0Ck5)Ut^xi«j'
-'•/r^^mMl ' r
Source: www.anifiindia.coni
56
5.4.1 SEBI
Different types of mutual funds sponsored by public/private sector banks,
financial institutions, private sector companies, non-banking finance companies and
foreign institutional investors work in our country. So for the regulation of these
sponsored mutual funds. The Securities Exchange Board of India (SEBI) works like a
regulatory authority. SEBI issues laws and guidelines from time to time for all types of
mutual funds. SEBI makes it mandatory for all the parties involved in the management of
mutual fund to comply with all the laws and guidelines.
5.4.2 Sponsor and Board of Trustees
'Sponsor' means any individual acting individually or in relation with some other
body/corporate which makes a mutual fund. The sponsor of a fund is the entity that sets
up the mutual fund. What a promoter is to a company, a sponsor is to a mutual fund. The
sponsor initiates the idea to set up a mutual fund. The sponsor constitutes the board of
trustees, which is responsible for mobilizing funds from investors and protecting tiieir
interests. Trustees are appointed by sponsors and can be either individuals or corporate
bodies. 'Trustee' means the Board of Trustees or the Trustee Company who hold the
property of the Mutual Fund in trust for the benefit of the unit holders.
5.4.3 Asset Management Company (AMC)
An 'Asset Management Company' is a firm that invests the pooled funds of
retail investors in securities in line with the stated investment objectives. For a nominal
fee, the investment company provides more diversification, liquidity and professional
management service than is normally available to individual investors. The
diversification of portfolio is done by investing in such securities which are inversely
correlated to each other. They collect money from investors by way of floating various
mutual fund schemes. Asset management companies provide investors with more
diversification and investing options than they would have by themselves. 'Asset
Management Company' means a company formed and registered under the Companies
Act, 1956 and approved as such by the Board under sub-regulation (2) of regulation 21.
The role of Asset Management Company becomes very important in the operations of
mutual fund. AMCs works like investment companies. The fund manager invests the
savings of the investor in various money market instruments, equity and corporate
debentures. AMCs charge fees for handling the managerial and administrative functions
of mutual fund.
57
5.4.4 Custodian
'Custodian' usually is a commercial bank, which holds securities under a written
agreement for a corporate client and buys or sell securities when instructed. Custody
services include securities safekeeping and collection of dividends and interest. The bank
acts only as transfer agent and makes no buy-sell recommendations. 'Custodian' means a
person who has been granted a certificate of registration to carry on the business of
custodian of securities under the Securities and Exchange Board of India (Custodian of
Securities) Regulations, 1996.
5.4.5 Intermediaries
The role of intermediaries is also important in the mutual fund industry. They act
as link between the mutual fund companies and the investor. The investment houses like
Bajaj Capital, not only help in the subscription of units but also provide guidance to the
investors regarding investment in various mutual fund schemes. The other intermediaries
such as registrar and transfer agent perform activities which are associated with
maintaining records concerning units already issued or to be issued by a company. On a
board reckoning, a registrar renders services in processing applications received by a
company for the issue of its units and in the allotment of these units to the investors. As a
transfer agent, he handles the work related to the transfer of units issued by a company.
5.4.6 Investors
Investors subscribe to the units issued by the mutual funds in the hope of getting
return compensating with risk involved. The investors' money is invested in various
securities by the asset management companies. The SEBI, who works like a regulatory
body helps in safeguarding the interest of investors. Besides individuals, other investors
include HUF (Hindu Undivided Family), Corporate and trusts (societies, associations,
etc).
5.5 REGULATORY FRAMEWORK OF MUTUAL FUNDS
Different Regulatory frameworks governing Indian mutual funds have been
discussed as below:
Indian Mutual Funds
The fast growing Indian mutual fund industry is regulated by the Securities and
Exchange Board of India (SEBI) since its inception. In 1989, RBI came out with
comprehensive guidelines applicable to mutual funds promoted by banks. Following this,
the Central Government came out with guidelines applicable to all mutual funds in June,
1990. SEBI was initially established as an interim body under the Ministry of Finance in
58
April, 1998 to regulate and develop the capital markets. It was later converted into a
statutory body under the SEBI Act, 1992 and given wide ranging powers. Mutual funds
were one of the players SEBI was authorized to regulate.
In August 1990, SEBI ruled that the RBI guidelines would only supplement those
issued by the Central Government. Hence, the mutual funds sponsored by banks were
required to fulfill obligations under both sets of regulations. After allowing private sector
players to enter the industry, the government came out with a fresh set of comprehensive
guidelines for all the players in February, 1992. These guidelines superseded the earlier
guidelines of the government and RBI. All mutual funds except money market mutual
fund (those investing exclusively in the money market) and offshore mutual funds were
governed by these guidelines. While the former were governed by guidelines issued by
RBI, the latter were governed by guidelines issued by the Department of Economic
Affairs under the Ministry of Finance.
Subsequently, SEBI issued even more detailed, comprehensive and stringent
Mutual Funds Regulations in 1993 which replaced the guidelines issued by the
government in 1992. These were further revised and replaced by Mutual Funds
Regulations, 1996. In October, 1999, the administration of Money Mutual Funds was
handed over by RBI to SEBI. With effect from March 7, 2000, RBI has withdrawn its
guidelines on Money Market Mutual Funds. Accordingly, such money market mutual
funds schemes, like any other mutual funds schemes, would exclusively by governed by
the SEBI (Mutual Funds) Regulations, 1996. The SEBI Mutual Fund Regulations contain
ten chapters and twelve schedules listed below:
Chapter I: Preliminary
Chapter II: Registration of Mutual Fund
Chapter III: Constitution and Management of Mutual Fund and Operation of
Trustees
Chapter IV: Constitution and Management of Asset Management Company and
Custodian
Chapter V: Schemes of Mutual Fund
Chapter VI: Investment Objectives and Valuation Policies
Chapter VII: General Obligations
Chapter VIII: Inspection and Audit
Chapter IX: Procedure for Action In Case of Default
Chapter X: Miscellaneous
59
Schedules I: Forms
Form A- Application for the Grant of Registration of Mutual Fund
Form B- Certificate of Registration
Form C- Trusteeship of the Mutual Fund
Form D- Asset Management Company
Schedule II: Fees
Schedule III: Contents of the Trust Deed
Schedule IV: Contents of the Investment Agreement
Schedule V: Code of Conduct
Schedule VI: Advertisement Code
Schedule VII: Restrictions on Investments
Schedule VIII: Investment Valuation Norms
Schedule IX: Accounting Policies and Standards
Schedule X: Initial Issues Expenses
Schedule XI: Annual Report
Schedule XII: Half Yearly Financial Results
5.6 GROWTH OF MUTUAL FUNDS IN INDIA
Though mutual funds were in operation in most of the developed countries in
40's and 50's, it was only 1964 when in India, first mutual fund. Unit Trust of India
(UTI) was established. It remained, the only mutual fund player in the country till 1987.
For pushing more savings and investments, UTI initiated its operations. The aim of UTI
was to gain profit from holding, acquisition management and disposal of securities. In
short, it was set by the Indian Government with a view to augment small savings in the
country and to channelize these savings to the capital markets. The first and sill very
popular product launched by UTI was Unit-64. Due to the immense popularity of Unit-
64, UTI launched a reinvestment plan in 1966-67. By the end of June 1974, UTI had six
lakhs unit holders. The unit capital totalled Rs. 152 Crores and investible funds Rs. 172
Crores. From 1987 onwards, other public sector institutions like banks, insurance
companies and financial institutions started establishing mutual funds. The first non- UTI
mutual fund was the SBI mutual fund, established in June 1987, followed by Can bank
mutual fund in December, 1987, Punjab National Bank fund in August 1989 and Indian
Bank mutual fund in October 1992. LIC set up its mutual fund in June, 1989, while GIG
established its mutual fund in December 1990. In the era of Liberalization, Privatization
and Globalization (LPG), the Government of India allowed the private sector to enter the
60
mutual fund industry in order to avail the benefits of mutual funds at a large scale in
1993. This also signalled the intensification of the competition. Private sector funds were
having certain operational advantages such as the management by experienced foreign
asset management companies, access to latest technology and infrastructure already
developed by the public sector. The first private sector mutual fund to launch a scheme
was the Madras-based Kothari Pioneer mutual fund. It launched the open-ended prima
fund in November 1993. The opening up of the market to private players had
international players like Morgan Stanley, Jardine Fleming, JP Morgan, George Stores
and Capital International entering the market. In February 2003, the Unit Trust of India
Act 1963 was repealed and UTI was bifurcated into separate entities: specified
undertaking of the Unit Trust of India under the control of Government of Indi, and the
UTI mutual fund Ltd. This was done in the wake of the severe payment crises that UTI
suffered on account of its assured return schemes of US-64 that finally resulted in an
adverse impact on the Indian capital market. Table 5.1 below presents a detailed account
of Growth statistics from the year 2000-2001 to 2010-2011:
TABLE 5.1
Growth of Mutual Funds in India
Year No. of mutual No. of AUM (Rs. % Change
Funds Schemes Crore)
2000-2001 34 393 90,587 -
2001-2002 34 417 1,00,594 11

2002-2003 32 382 79,464 -21
2003-2004 31 403 1,39,616 76
2004-2005 29 451 1,49,554 7
2005-2006 29 592 2,31,862 55
2006-2007 30 756 3,26,388 41
2007-2008 33 956 5,05,152 55
2008-2009 35 1001 4,17,300 -17
2009-2010 38 882 6,13,979 47
2010-2011 41 1131 5,92,250 -4
Source: Comp iled from AMFI Cluarterly data
61
Growth statistics in the period ranging from 2000 to 2011 are as per the Table 5.1
and the table presents the data related to number of mutual funds, number of schemes,
total Assets under management (in Rupees Crores) and percentage change.
The Table 5.1 shows that the year ended March 2001 was an eventful year for the
mutual fund Industry. The year witnessed extreme volatility in the market and on a year
on year basis, the equity index declined by 28 percent and as a result, the assets under
management declined by about 20 percent to Rs. 90,587 Crores. This is the first time in
the last two decades that the industry has had such a decline in the total assets under
management. The erosion in the value of assets under management is however confined
only to the equity segment and this is reflective due to depressed market conditions.
In the year ending March 2002, the assets under management showed a modest
growth of 11 percent to Rs. 1, 00,594 Crores due to rise in Income Schemes. As many as
90 new schemes were launched and the gross mobilization was though up by 77 percent
to Rs. 1, 64,523 Crores, on a net basis the mobilization was down by 27 percent to Rs.
7,175 Crores. The asset allocation showed a marked shift towards debt and government
securities. On the performance sidej^hiteêJncome Schemes gave competitive returns,
Jyi» of /ecipsjv
the Equity Schemes remained gem^fcall'^deptesâ^ line with the market condition.
Mutual fund industry//^^messed a majiiSf development in the last quarter of
financial year 2002-03 and Itlî was tne em'ênce of a new UTI Mutual Fund
conforming to the SEBI RegurattcMi^-and sonte*sdnemes of the erstwhile Unit Trust of
India migrating to a new entity caHeSrffieiSpecified Undertaking of the Unit Trust of
India. A landmark organizational restructuring, innovatively conceived and successfully
completed in this year. The Indian mutual fund Industry starting with the establishment
of Unit Trust of India in 1964 has thus entered yet another new phase in 2003, the earlier
phases being the entry of private sector in 1993 and before that the setting up mutual
funds by public sector banks and financial institutions in 1987. Assets under
management as on March 31, 2003 were Rs.79, 464 Crores. Apart from this Rs. 29,835
Crores amounted to AUM of specified undertaking of UTI till January 31, 2003. Further,
53 new schemes as against 90 schemes last year were launched during the year i.e. 47 of
which were open ended and 6 close ended. Income schemes predominated with 32
schemes collecting Rs.3, 175 Cores which accounted for 83 percent of total collection of
Rs.3, 845 Crores from new schemes as against Rs. 3,335 Crores last year. There was
decrease in AUM by 21% in 2003 due to 50% less investment in equity as compared to
last year.
62
The year 2003-04 had yet another milestone, it was the year the industry had the
highest net mobilization of Rs 46,809 Crores so far. Also the net mobilization under
equity schemes at Rs. 7,684 Crores surpassed the previous levels. At the end of financial
year March 2004, AUM was Rs.l, 39,616 Crores which showed an increase of 76% over
the last year's level of Rs, 79,464 Crores due to 88% increase of aggregate sale of all the
403 schemes.
The year 2004-05 was a year with a difference for the mutual fund industry. It
was the year in which the largest numbers of new schemes i.e. 97 in all were launched in
a single year. The amount mobilized by the new schemes was at over Rs. 25,000 Crores
which was a new record. The gross amount garnered was as high as about Rs. 8.40
Crores up by 42 percent over the year. But what is indeed discouraging was the fact that
the net accretions were at only Rs. 2,154 Crores, being the lowest in the last five years.
This was mainly due to the net outflow of over Rs. 14,000 Crores from the Income
Funds and Rs. 1,345 Crores from Gilt Funds coupled with a substantially lower net
inflow of Liquid Funds (Rs. 10,347 Crores as against Rs. 24,577 Crores last year). In
spite of 36 new equity schemes mobilizing Rs. 11,756 Crores, ten times more than in the
previous year, the net mobilization under equity schemes was only Rs. 7,247 Crores,
lower than in the previous year. The AUM increased by 7% as compared to last year.
The mutual fund industry witnessed significant developments during the fiscal year
2005-06. It launched as many as 190 new schemes which together collected Rs.70,583
Crores of which 54 equity schemes mobilized Rs.38,015 Crores, which was an all time
record. In the backdrop of a bullish market, equity schemes both new and the existing
ones became popular in 2005-06. The total assets under management increased by 55%
due to the emergence of equity as a major asset class.
In 2006-07 there were a total of thirty mutual funds running around 756 mutual
fund schemes. There has been a noticeable growth in the assets under management. The
assets under management as on March 31, 2007 stood at Rs. 3, 26,388 Crores as against
Rs. 2, 31,862 Crores as at the end of the previous year, registering an increase of 41 %
over the year. 414 new schemes were launched during the year as against 190 in the
previous year. The amount mobilized was Rs. 1, 40,298 Crores as against Rs.70, 583 in
the previous year. The mutual fund industry continued to register robust growth with
AUM posting 41 percent increase over the year, one of the fast growing segments of the
Indian Economy. The reason for increased AUM was that, apart from several new
schemes, Gold ETFs were launched in this year. Some members have taken the bold
63
initiative to lower the entry level in Systematic Investment Plans and to offer investment
schemes to cater to the long term retirement needs of the low income strata of society.
These initiatives were indeed laudable.
By the end of financial year 2007-08, there were thirty three mutual funds having
a total of 956 schemes. The assets under management had reached an all time high figure
of Rs. 5, 05,152 Crores. The year had witnessed an all round growth i.e. 63 percent
increase in the net inflow during the year, 55 percent growth in the assets under
management and 44 percent increase in the number of folios. The reason for such an all
round growth was due to the continuous efforts put in by most of the members, the
number of cities and locations from which applications were received have also gone up
significantly. The geographical coverage was increased and more and more households
were participating in the industry.
In financial year 2008-09, 551 new schemes were launched as against 612 in the
previous year. The amount mobilized was Rs. 1, 03,177 Crores as against Rs. 1, 60,773
Crores in the previous year. The assets under management as on March 31, 2009 stood at
Rs. 4, 17,300 Crores as against Rs. 5, 05,152 Crores as at the end of the previous year.
Financial year 2008-09 was a challenging year for mutual fund industry. The industry
was growing till May 2008 at the growdi rate of about 50 percent per annum. After that,
there was a marked deceleration in the growth of assets under management till
September 2008 reflecting the financial 'Tsunami' which erupted elsewhere but impacted
our economy also to some extent. The AUM started declining over the year and though it
recovered somewhat in the last quarter, the month end AUM for March 2009 was over
17 percent lower than the previous year.
In the year 2009-10, the mutual fund industry's AUM stood at Rs 6.13 Crores
with a growth of 47 percent as against Rs. 4, 17,300 Crores at the end of the previous
year. The household participation in equity schemes continued to be low in this year also
which was a cause for concern. In diis year, AMFI hosted regulatory changes in several
areas which raised the bar, enhanced disclosures and standards and promoted investor
protection. AMFI had given a new thrust to nationwide Investor Awareness Programs
which they had initiated since 1995. AMFI had arranged many awareness programs and
workshops in metropolitan cities as well as in small cities, emphasized on the benefits of
investing in portfolios. They showed the importance of how a common man can make
good returns on mutual funds in the long run. These types of awareness programs had
been started by many investment companies also from May 1, 2010 onwards.
64
In the year 2010-11, AUM as on March 31, 2011 stood at Rs.592250 Crore as
against Rs.613979 Crore as the end of the previous year representing a decline of 4% due
to 12% decline in total fund mobilization as compared to last year.
Thus, since the inception of mutual fund in India i.e. 1964, the number of mutual
funds and number of schemes have increased in almost multiples. Similar growth trend
has been witnessed for assets under management. Briefly after the entry of private sector
mutual funds in India, there has been tremendous growth in mutual fund schemes and
assets. Thus, more investors have been added and more investments have been
channelized towards mutual funds since then.
5.7 UNIT HOLDING PATTERN OF INDIAN MUTUAL FUNDS CLASSIFIED
INTO PUBLIC SECTOR AND PRIVATE SECTOR MUTUAL FUNDS:
Unit holding pattern shows the number of investors, category of investors and
value of assets held by them in mutual funds. SEBI usually conducts survey on the unit
holding pattern of mutual funds. A classification of unit holding pattern of mutual funds
in private and public sector has been made here.
TABLE 5.2
Unit Holding Pattern of Public Sector Mutual Funds
31-03-2003 31-03-2003 31-03-2007 31-03-2007 31-03-2010 31-03-201
Category No. of Net Asset Value No. of Investors Net Asset Value No. of Investors Net Asset V
Investors (Rs. Crore) Accounts (Rs. Crore) Accounts (Rs. Cror
Accounts
ndividuals 11555665 14734.64 12,030,008 39584.25 16,285.824 54,217.94(39
(98.97) (64.27) (97.71) (61.68) (98.65)
NRIs 45895 (0.390 155.49(0.68) 111544(0.91) 1705.13(2.66) 155,691 (0.95) 2,725.1 (2.(
FIIS 741 (0.01) 33.16(0.14) 540 (0.00) 1160.73(1.81) 5 (0.00) 130.65(0.1
rporate/Insti 74007 (0.63) 8003.62(34.91) 169258(1.37) 21722.74 66,474 (0.40) 78,815.56(5!

ions/ Others (33.85)
Total 11676308 22926.91 (100.00) 12311350 64172.85 16307,994 135,889.2
(100.00) (100.00) (100.00) (100.00) (100.00)
Source : Compiled fronI SEBI Mutual Jûnds Unit ho der Surveys

In public sector mutual funds, however, unit holding pattern presents a highly
different picture. The number of accounts, though have increased in absolute terms, but
the proportion has reduced from 98.97% to 97.71% for individual investor from 2003-04
65
to 2007-08 and again increased in 2010 by 1 % more i.e. 98.65%. Similarly, the
percentage number of account of FIIs has also reduced during same period till 2010. The
number of accounts in case of individual investors was declined by 1.3% in 2007 due to
investment in other sectors by the investors. The NAV in case of individual investors
was approx 20 percent less in 2010 due to financial slowdown. Table 5.2 shows that the
number of accounts in public sector mutual funds has increased from 1.17 Crores to 1.71
Crores during 2003 to 2010. The number of accounts in the hands of individuals has
increased from 1.16 Crores to 1.63 Crores and in case of corporate/institutional investors
from 74,000 to 1.7 lacs. In terms of net asset value also, public sector mutual fund have
registered a reasonable growth. The net asset value of public sector mutual funds has
increased from Rs 22,927 Crores to Rs 64,173 Crores and then Rs 1,35,889.25 in 2010.
Here, the net asset value of mutual funds in the hands of individual investors has
increased from Rs. 14,734 Crores to Rs. 54,217.94 Crores and that in the hands of
corporate/institutional investors has increased from Rs. 8,004 Crores to Rs. 21, 723
Crores and Rs. 78, 815.56 till 2010. Thus, growth has taken place for public sector
mutual funds in terms of number of accounts as well as net asset value.
On the other hand, number of accounts held by NRIs and corporate/institutional

investors have increased in 2003 and 2007 but corporate/institutional investors reduced
in 2010. In 2003 and 2007, the percentage has increased. In both cases, the percentage
has increased more than twice. In terms of net asset value, the share of individual
investors had decreased from 64.27% to 61.68% and again reduced to 39.90% in 2010.
And so far, corporate/institutional investors reduced from 34.91% to 33.85% but
increased in 2010 to 58%. The share has somehow, increased for NRIs from 0.68% to
2.66% but reduced in 2010 and similar for FIIS from 0.14% to 1.81% and reduced in
2010 to 0.10%. So the net asset values of individuals, FIIs and NRIs have decreased, and
corporate/institutional/others had increased.
66
TABLE 5.2.1
Unit Holding Pattern of Private Sector Mutual Funds
31-03-2003 31-03-2003 31-03-2007 31-03-2007 31-03-2010 31-03-2010
Category No. of Net Asset No. of Net Asset No. of Net Asset
Investors Value (Rs. Investors Value (Rs. Investors Value (Rs.
Accounts Crore) Accounts Crore) Accounts Crore)
Individuals 4001841 17956.48 16839732 99626.66 30,041,859 191,172.34
(93.23) (31.68) (95.57) (37.66) (96.24) (39.74)
NRIs 38416 723.02 448772 15851.52 787,791 24,703.76

(0.89) (1.28) (2.55) (5.99) (2.52) (5.13)
FIIS 1317 528.51 129 6641.77 211 6,204.35

(0.03) (0.93) (0.00) (2.51) (0.00) (1.29%)
Corporate/Ins 250972 37465.91 331381 142452.69 385,856 258,997.02

titutions/ (5.85) (66.11) (1.88) (53.84) (1.24%) (53.84)
Others
Total 4292546 56673.92 17620014 264572.64 31,215,717 481,077.47
(100.00) (100.00) (100.00) (100.00) (100) (100)
Source: Compi led from SE BI Mutual Funds Unit-1lolder Surv eys

In private sector mutual funds, individuals accounted for 93.23% in 2003 and it
increased to 95.57% in 2007 and again increased by 1% approx in 2010. It shows that
more individuals have invested in the private sector mutual funds within the specified
periods. Besides, the number NRIs have significantly increased from 0.80% to 2.55% but
a little bit decreased in 2010. Table 5.2.1 shows that the total number of accounts in
private sector mutual funds had increased from 0.43 Crores to 1.76 Crores, which is
almost four times during 2003 to 2007 and again increased to 31 Crores, that is doubled
in year 2010.
Here the number of accounts held by individual investors has increased from 40
lacs to 1.68 Crores and again increased to 30 Crores in 2010 and that for
corporate/institutional investors from 25 lacs to 38 lacs. Similar trend is being followed
in terms of net asset value. It has increased from Rs. 56,674 Crores to Rs. 2, 64,573
Crores and then 481,077.47 Crores. Here also, the net asset value of individual investors
has increased from Rs. 17,956 Crores to Rs. 99,627 Crores. Similarly, for corporate and
institutional investors, it has increased from Rs. 37,466 Crores to Rs. 1, 2, 58,997 Crores.
67
It is clear that private sector mutual funds have grown at a pace higher than the mutual
fund industry.
On the other hand, the total number of accounts held by FIIs and corporate have
significantly reduced from 5.85% to 1.24%. In terms of net assets held, the share of
individuals has increased from 31.68 % to 39.74%. The share of NRIs has increased
from 1.28% to almost 6% and decreased in 2010. Despite of reduction in the percentage
number of accounts of FIIs, the share in net asset value has increased from 0.93% to
2.51% and reduced in 2010. However, corporate/institutional investors have a reduced
share in net assets from 66.11% to 53.84% in 2007 and 2010.
TABLE 5.2.2
Unit Holding Pattern of Indian Mutual Funds
31-03-2003 31-03-2003 31-03-2007 31-03-2007 31-03-2010 31-03-2010
Category No. of Net Asset No. of Net Asset No. of Net Asset Value
Investors Value (Rs. Investors Value (Rs. Investors (Rs. Crore)
Accounts Crore) Accounts Crore) Accounts
Individuals 15,557,506 32.691.12 28869740 139210.91 46.327,683 2,453,900
(97.42) (41.07) (96.45) (42.35) (97.07) (39.77)
NRIs 84,311(0.53) 878.51 560316 17556.65 943,482 274.280
(1.10) (1.87) (5.34) (1.98) (4.44)
FIIS 2058 (0.01) 561.67 669 7802.50 216 63.350
(0.71) (0.00) (2.37) (0.00) (1.02)
Corporate/In 3,24,979 45,469.53 500639 16175.43 452,330 3,378.120
stitutions/ (2.04) (57.12) (1.67) (49.94) (0.95) (54.75)
Others
Total 15,968,85 79,600.83 29931364 328745.49 47,723.711 6.169,650
(100.00) (100.00) (100.00) (100.00) (100.00) (100.00)
S«jurce: Comp iled from SI:BI Mutual ] i'unds Unit lolder Sun eys
A compiled data on unit holding pattern from the financial year 2002-03, 2006-07
and 2009-10 has been provided in the Table 5.2.2. Different categories are individuals,
NRIs, FIIs, corporate/institutions/others. The table depicts that the number of accounts in
mutual funds have increased from 1.6 Crores to 3 Crores approximately and again
increased by 4.6 Crores. So, a comprehensive growth has been witnessed during 2003 to
2010. Now days, the investors have found a good shelter with the mutual funds among
other investment avenues. And their rage for investment in mutual funds has increasing
day by day.
Similar growth has been found in other categories also. The net asset value has
increased from Rs. 79,600 Crores to Rs. 3,28,746 Crores and just doubled by Rs.
6,169,650 Crores in 2010. In this case also, net asset value held by individuals has
increased from 32,691 Crores to Rs. 2,53,900 Crores and that held by corporate
institutional investors from Rs. 45, 470 Crores to Rs. 3,378,120 Crores. So a growth
68
trend is evident in mutual funds in terms of both the number of accounts and net asset
value.
The Table 5.2.2 shows that individuals top the list of number of accounts in all
financial year 97.42% in 2002-03, 96.45 % in 2006-07 and 97.07% of total investors
accounts belong to individual investors. The remaining share has been held by
Corporate, NRIs and FIIs. It is clear that most of the accounts in mutual funds are held
by individual investors. However, the picture totally changes for net asset value where
maximum share has been pocketed by the corporate or institutional investors. In 2003-
04, 57.12% share was with the corporate or institutional investors. However, it reduced
to 49.94% in 2007-08 and again increased by 5% approx in 2010. The share of NRIs has
increased from 1.10% to 5.34% in the same period and reduced in 2010 to 4.44%. The
share of FIIs has also increased from 0.71% to 2.37% and again reduced in 2010. It is
worthwhile to note that, for both NRIs and FIIs, the number of accounts and net asset
value held has increased over the period of four years and then starts declining due to
economic meltdown or financial 'Tsunami' of 2008 somehow. Further, most of the
investors of mutual funds are individual investors in India. But the investment in
absolute terms comes heavily from corporate and institutional investors.
5.8 NET ASSETS OF MUTUAL FUNDS OF INDIA
In the below table, the net assets of India have been shown:
TABLE 5.3
Assets of Mutual Funds- India
Year India
Total Assets Growth of Assets (%)
(Bn. Dollar)
2000-01 13.49 3.25
2001-02 15.28 13.30
2002-03 20.36 33.24
2003-04 29.80 46.34
2004-05 32.85 10.22
2005-06 40.55 23.44
2006-07 58.22 43.59
2007-08 108.58 86.51
2008-09 62.81 -42.13
2009-10 130.28 107.41
2010-11 111.42 -14.57
Source: Compiled from ICI Fact Books
Table 5.3 shows that the net assets of mutual funds of India have grown rapidly
over the past decade from 2000 to 2011. The mutual fund assets are increasing at a good
69
pace globally and India is not an exception. Beginning from the year 2000-01, Indian
mutual funds were having total assets worth $ 13.49 bn. Since then, the assets are
increasing every year with an exception of the year 2008-09 and 2010-11 when the assets
reduced to $62.8 Ibn and $111.42bn due to economic meltdown. Since 2000, the growth
rate of assets of Mdian mutual funds has been really impressive particularly in 2009-10
when growth rate has been recorded at the maximum of $130.28bn. Needless to say,
Indian mutual fund industry is growing by all bounds.
5.9 ASSETS OF MUTUAL FUNDS- INDIA VS. WORLD
Worldwide mutual fund has been dominated by US mutual funds in terms of net
assets. Hence, the period when the US mutual fund industry was facing declines, similar
state was of worldwide mutual fund industry. In the below table, the net assets of India
has been compared with World.
TABLE 5.4
Assets of Mutual Funds- India vs. World
Year India World
Total Assets Growth of Assets Total Assets Growth of
(Bn. Dollar) (%) (Bn. Dollar) Assets (%)
2000-01 13.49 3.25 11871 0.93
2001-02 15.28 13.30 11655 (1.82)
2002-03 20.36 33.24 11324 (2.84)
2003-04 29.80 46.34 14048 24.06
2004-05 32.85 10.22 16165 15.07
2005-06 40.55 23.44 17771 9.94
2006-07 58.22 43.59 21809 22.72
2007-08 108.58 86.51 26131 19.82
2008-09 62.81 (42.13) 18920 (27.60)
2009-10 130.28 107.41 22953 21.32
2010-11 111.42 (14.57) 24699 7.61
Source; Compiled from ICI Fact Books
Beginning from an asset base of $7291 bn, the worldwide mutual fund industry
grew up to $11871 bn assets. Thereafter, it also faced the recessionary move and the
assets were recorded at a reduced value of $11324bn in 2002-03. Thereafter, the assets
are growing rapidly till 2007-08. By the end of year 2008-09, the asset base of
70
worldwide mutual funds has been recorded at $18920bn reduced due to recession. Now
all time high level of $24699 bn in 2010-11, with a growth rate of 21.32% over the
previous year 2009-10.
5.10 CONCLUSION
Financial services industry has undergone a rapid evolution over a period of time.
Financial markets have experienced a variety of phases in the past several decades.
Through globalization, liberalization and the expansion of the internet, the modem day
mutual fund industry grows at a fast space. Mutual funds have started with a simple idea
and grown into multi-trillion dollar industry today. These funds really captured the
public's attention in 1980s and 90s globally, when mutual fund investment hit record
highs and investors saw incredible returns. However, the idea of pooling assets for
investment purposes has been around for a long time. Mutual fund industry today is one
of the most preferred investment avenues in India. The whole mutual fund industry has
changed specifically from year 2002-03 onwards as private sector mutual funds has
started dominating the Indian mutual fund industry in terms of assets under management.
SEBI has taken many initiatives for the better management of mutual funds, ensuring
faimess in dealings by the management, improving disclosures, ensuring investor's
protection and brining professionalism among advisors of mutual funds. The Indian
mutual fund industry is one of the fastest growing industries having the assets under
management of Rs. 592250 crore as on 31*' March, 2011. The industry has grown at a
Compounded Annual Growth Rate (CAGR) of 24% since 1965 and the AUM has grown
by 119% till 2011. There has been tremendous growth in the mutual fund industry in
terms of gross and net resources mobilized specifically through private sector mutual
funds. Product offerings for the investors in terms of Type-wise as well as Objective-
wise schemes have also increased substantially. Trends are reversing with regard to the
popularity of income and growth oriented schemes. Income schemes are now gaining
higher share as compared to the growth schemes. The efforts of SEBI and AMFI in
promoting the assets of mutual fund industry have started yielding the result. In temis of
regulations, product offerings, service standards and procedures, the mutual fund
industry is well positioned to face the challenges and grow progressively.
71
CHAPTER 6
EVALUATION OF
PERFORMANCE OF MUTUAL
FUNDS IN INDIA
6.1 INTRODUCTION
6.2 RESULTS AND DISCUSSION ON THE BASIS OF
RISK AND RETURN ANALYSIS
6.2.1 RISK ANALYSIS
6.2.2 RETURN ANALYSIS
6.2.3 RESULTS AND DISCUSSION ON THE
BASIS OF RISK ADJUSTED
PERFORMANCE MEASURES
6.3 PERFORMANCE OF MUTUAL FUNDS DURING
CRISIS AND AFTER CRISIS PERIOD
6.4 CONCLUSION
CHAPTER-6
EVALUATION OF PERFORMANCE OF MUTUAL FUNDS IN
INDIA
6.1 INTRODUCTION
In the current complex financial scenario, mutual funds are an ideal investment
vehicle to the small investors. The mutual fund industry in India has gained substantial
momentum. It is difficult for a man of small means and limited knowledge to make
sound and profitable investment decisions. Mutual funds provide a viable alternative for
the small investors. Mutual funds industry blossomed as they are able to cater to the
needs of small investors who cannot actively take part in the share market for lack of
information and professional expertise. With many players in the industry, mutual fund
investors have come to receive an unparalleled array of products and wide range of
services. The mutual fund industry scaled new heights in terms of assets under
management, number of players as well as in terms of product choices and investor
services. With this, the mutual fund industry in India has witnessed an impressive growth
both in terms of fund size as well as the number of schemes offered for investment.
Therefore, the performance evaluation of mutual funds and the identification of
successful fund managers became one of the most interesting areas for researches to both
investors and academics.
Diverse methods have been used by various researchers to estimate the
performance of mutual funds. Jayadev, M (1996) attempted to evaluate the performance
of two growth oriented mutual funds Mastergain 1991 of UTI and Magnum Express of
SBI on the basis of monthly returns compared to benchmark returns. He concluded that
both funds were found to be poor in earning better returns than the market and were not
offering advantages of diversification and professionalism to the investors. Gupta and
Sehgal (1997) compared a section of 80 mutual fund schemes in terms of benchmark
comparison and their risk-return characteristics from year 1992 to year 1996 and found
excellent performance of various funds during his study. Mishia (2001) evaluated the
performance of 24 public sector mutual funds from April, 1992 to December, 1996 by
using the risk adjusted measures like Sharpe, Treynor and Jenson measures. He
concluded that in India, the condition of public sector mutual funds was miserable.
Anand and Murugaiah (2003) examined the degree of correlation that exists between
fund and market return, to understand the impact of fund specific characteristics on
72
performance, to evaluate the diversification and selectivity skills of fund managers
between April 1999 and March 2003 and concluded that the additional return on sampled
schemes and the market over risk free return was significantly low during the study
period. Aggrawal (2007) studied an overview of mutual fund activity in emerging
markets and revealed that the performance is affected by saving and investment habits of
the people and loyalty of the fund manager.
Sathya Swaroop Debasish (2009) evaluated 23 schemes offered by six private
sector mutual funds and three public sector mutual funds from April 1996 to March 2009
(13 years) on the basis of mean return, beta, Coefficient of determination, Sharpe ratio,
Treynor ratio and Jensen Alpha. They concluded that mutual fund is the best tool to
diversify the risk and by investing in good portfolios, an investor makes healthy capital
gains. Khurana and Panjwani (2010) compared the performance of 15 open ended
selected balanced funds growth schemes as on 31'^ March 2010 by finding out Standard
Deviation, Beta, Sharpe ratio and Treynor ratio. And on the basis of arithmetic mean and
compounded aimualized growth rate, they concluded that all the funds performed very
well except one in the market.
Evaluating performance of mutual funds is important both for investors as well as
portfolio managers. Such an evaluation enables the investor to assess as to how much
return has been generated by the portfolio manager and what risk level has been assumed
in generating such returns. This chapter discusses the empirical results regarding the
performance of mutual funds in India during the period April 1, 2001 to March 31, 2011.
As mentioned in chapter 1, the study selected 5 mutual funds growth/equity options
consisting of Large Cap Funds, Diversified Funds, ELSS, Debt Funds and Balanced
Funds.
To analyze whether mutual funds under-perform or over perform the market
index, this section has been divided into two categories:
> Performance on the basis of Risk and Return Analysis
> Performance of Mutual Funds before Crisis and after Crisis period
6.2 PERFORMANCE ON THE BASIS OF RISK AND RETURN ANALYSIS
As already stated, in order to evaluate the performance of mutual funds, first risk
was analyzed on various schemes in selected categories. Risk measurement is very
important tool to judge the performance of mutual funds. Further, return analysis also
plays an important role in confirming the performance of mutual funds. So risk and
return analysis both goes hand in hand in measuring the performance of mutual funds.
73
Different funds have different levels of risk and return, which is calculated by fund
managers while planning the investment decision. The analysis in this section consists of
the following:
> For Risk Analysis
Standard deviation (Total Risk), Beta (Systematic Risk) and Coefficient of
Determination were calculated.
> For Return Analysis
Average Return was calculated for analysing return on mutual funds.
> Performance Evaluation by Risk Adjusted measures
For this purpose, Sharpe Ratio and Treynor Ratio were calculated.
6.2.1 Risk Analysis
There is some level of risk involved with each fund. It shows the unpredictability
in the returns associated with a particular fund. The general assumption is that higher
level of risk is always associated with returns due to high fluctuations in a particular
period. These fluctuations in returns are mainly due to the following reasons:
First, there is market risk called as systematic risk. It means that general market
fluctuations affect all types of securities. Systematic risk is thus calculated in terms of
beta, which shows the fluctuations in the NAVs of the fund. Higher /lower will be the
beta due to changes in NAV of a mutual fund. Beta is thus calculated by comparing the
returns of a mutual fund with the returns of the market.
Secondly, there is unsystematic risk called as total risk that means the
fluctuations due to specific securities present in the portfolio. The total risk is thus
calculated in terms of standard deviation.
> Performance in terms of Total Risk (Standard Deviation)
The total risk is measured in terms of standard deviation. This is obtained from
the average monthly returns of the selected mutual fund schemes during the period under
study. It is defined as the square- root of the mean of the squares of deviations of
individual returns taken from average return. Higher value of standard deviation implies
higher risk, whereas the lower value indicates low risk.
> Performance in terms of Systematic Risk (Beta)
Standard Deviation determines the volatility of a fund according to the disparity
of its returns over a period of time while beta determines the volatility or risk of a mutual
fund in comparison to that of its market index or benchmark. The beta of the market is
always 1.00. A fund with a beta very close to one means the fund's performance closely
74
matches the benchmark. It means the fund price fluctuations track the market. A beta
greater than one indicates that the fund will gain less in bull markets and lose less in bear
markets and thus depicts less volatility than the market (Constas and Shim, 2006).
> Performance in terms of Coefficient of Determination (R'')
The R ^ is a measure of a security's diversification in relation to the market. The
closer the R ^ is to 1.00, the more completely diversified the portfolio. R ^ ranging from 1
to 100 gives an idea about how well a fund's performance correlates with that of the
benchmark. An R ^ of 0 means that a fund's returns have no correlation with the market
and an R ^ of 1.00 indicates that a fund's returns are completely in sync-up and down-
with the benchmark (Contas and Shim, 2006). This coefficient helps in calculating the
level of market index which shows the deviation in performance of mutual funds. Total
Risk (Standard Deviation), Beta and Coefficient of determination (R ^) of the selected
mutual fund schemes of growth/equity option, respectively have been discussed in table
6.1 below:
75
TABLE 6.1
Risk Analysis of Mutual Fund Schemes-Growth Option
1 2 3 4 5
S.No Schemes Total Risk Beta R^
(Std. Deviation)
I Large Cap Funds
1 HDFC Equity Fund 0.0763 0.9332* 0.8806
2 SB I Magnum Equity Fund 0.0806 1.0091 0.9218
3 UTI Master Plus Unit Fund 0.0753 0.9442* 0.9245
4 0.0719 0.8942* 0.9096

ICICI Pru Top 100 Fund
II Diversified Funds
1 0.0750 0.8720* 0.7942
HDFC Capital Builder Fund
2 Birla Sun life buy India Fund 0.0760 0.8288* 0.6995
3 SBI Contra Fund 0.0865 0.9288* 0.6799
4 UTI Equity Fund 0.0729 0.8712* 0.8396
III ELSS Funds

1 HDFC Tax Saver Fund 0.0759 0.9194* 0.8625
SBI Magnum Tax Gain Fund 0.0860 1.0002 0.7954

2
3 UTI Equity Tax Saving Plan 0.1885 1.2081* 0.2431
Fund
76
ICICI Pru Tax Plan Fund 0.0872 0.9998* 0.7726
'
IV Debt Funds
1 HDFC Income Fund 0.0183 0.0289* 0.0149
2 Birla Sun life Income Retail 0.0262 0.0072* 0.0004
Plus Growth Fund
3 SBI Magnum Income Fund 0.0180 0.051* 0.048
4 UTI Bond Fund 0.2112 -0.0513 0.0004
V Balanced Funds
1 HDFC Prudential Fund 0.0585 0.6942* 0.8232
2 ICICI Prudential Balanced 0.0545 0.6647* 0.8731

Fund
3 UTI Balanced Fund 0.0724 0.6791* 0.5179
4 Franklin Templeton 0.0527 0.6544* 0.9032

Balanced Fund
Avei^gefiind m0f82 0.707 0.625
BiSl Senses •' '' 0.0167 1.00 1.00
R£sk free Return 0.0049

Note: I Ms a coefficient of determinat ion for a Dortfolio.
* indicates statistical significance at the five percent level
Source: Compiled from NAVs of different Mutual Funds
Column 3 of Table 6.1 presents the total risk of the selected mutual fund
schemes. The total risk of one scheme of Large Cap Funds, one scheme of Diversified
Funds, three schemes of ELSS and one scheme of Debt Funds were higher than the
corresponding market risk. There was no risk in any Balanced Fund schemes in terms of
total risk because the standard deviations of all funds lying in Balanced Fund category
77
were lesser as compared to corresponding market risk. SBI Magnum Equity Fund (Large
Cap Scheme), SBI Contra Fund (Diversified Scheme), SBI Magnum Tax Gain, UTI
Equity Tax Saving Plan and ICICI Pru Tax Plan (ELSS) and UTI Bond Fund (Debt
Scheme) have experienced higher variability and hence were more risky than the market.
The remaining three schemes of Large Cap Fund, three schemes of Diversified Fund, one
scheme of ELSS, three schemes of Debt Fund and all schemes of Balanced Fund have
shown low total risk than the market. The schemes like HDFC Equity Fund, UTI Master
Plus Unit Fund and ICICI Pru Top 100 Fund, (Large Cap Scheme), HDFC Capital
Builder Fund, Birla Sun life buy India Fund and UTI Equity Fund (Diversified Scheme),
HDFC Tax Saver Fund (ELSS) and HDFC hicome Fund, Birla Sun life Income Retail
Plus Growth Fund and SBI Magnum Income Fund (Debt Scheme), HDFC Prudential
Fund, ICICI Prudential Balanced Fund, UTI Balanced Fund and Franklin Templeton
Balanced Fund (Balanced Scheme) have shown low risk than the market, thereby
indicating superior performance in terms of total risk.
The systematic risks (i.e. beta) of all 20 mutual fund schemes have been shown in
Column 4 of Table 6.1. In all schemes it may be noted that the betas were in range of
0.0072 to 1.2081, the average beta for the selected funds being 0.707. Except three
schemes i.e., SBI Magnum Equity Fund (1.0091) (Large Cap Scheme), SBI Magnum
Tax Gain Fund (1.0002) and UTI Equity Tax Saving Plan Fund (1.2081) (ELSS) all
other schemes have beta less than one (i.e. market beta) implying that these schemes
tended to hold portfolios that were less risky than the market portfolio. It was observed
that UTI Master Plus Unit Fund (0.9442) of Large Cap Scheme and ICICI Pru Tax Fund
(0.9998) of ELSS scheme was found to be more risky (close to 1) as compared to other
schemes but less risky than market portfolio. HDFC Equity Fund, ICICI Pru Top 100
Fund and UTI Master Plus Unit Fund (Large Cap Scheme), HDFC Capital Builder Fund,
Birla Sun life buy India Fund, SBI Contra Fund and UTI Equity Fund (Diversified
Scheme), HDFC Tax Saver and ICICI Pru Tax Plan Fund (ELSS), HDFC hicome Fund,
Birla Sun life Income Retail Plus Growth, SBI Magnum Income Fund and UTI Bond
Fund (Debt Scheme), HDFC Prudential Fund, ICICI Prudential Balanced Fund, UTI
Balanced Fund and Franklin Templeton Balanced Fund (Balanced Scheme) were found
to be less risky than other schemes as the beta value is less than 1.
The coefficient of determination have been shown in column 5 of Table 6.1.The
analysis reveals that in Large Cap Funds, the maximum and minimum values of R ^ were
78
found in case of UTI Master Plus Unit Fund (0.9245) and HDFC Equity Fund (0.8806)
respectively. The low value of R ^ indicated less diversification of the portfolio. High
value of R 2 in case of UTI Master Plus Fund showed high diversification of the portfolio
that shows market variability. In Diversified Funds, the maximum value of R ^ was found
in case of UTI Equity Fund (0.8396) and minimum in SBI Contra Fund (0.6799). hi case
of ELSS, the maximum and minimum values of R * were found in case of HDFC Tax
Saver Fund (0.8625) and UTI Equity Tax Saving Plan Fund (0.2431). In case of Debt
Funds, all the funds have very lesser R ^. In SBI Magnum Income Fund the coefficient of
determination was only 0.048 and very far to 1, so it's not well diversified, lower in
HDFC Income Fund i.e. 0.0149 and lowest in both Birla Sun life Income Retail Plus
Growth Fund and UTI Bond Fund (0.0004). hi Balanced Funds the highest R ^ is 0.9032
in Franklin Templeton Balanced Fund and lowest in UTI Balanced Fund. High value of
R ^ in case of Franklin Templeton Balanced Fund showed high diversification of the
portfolio that can easily contain the market variability. The average R ^ for the selected
growth/equity schemes was 0.625. Fourteen out of twenty schemes have higher R ^ value
than the average R ^ which indicates that many of the funds were well diversified. In the
end it can be said that all four funds in Large Cap Funds i.e., HDFC Equity Fund, SBI
Magnum Equity Fund, UTI Master Plus Unit Fund and ICICI Pru Top 100 Fund, all four
in Diversified Funds, i.e., HDFC Capital Builder Fund, UTI Equity Fund, Birla Sun life
buy India Fund and SBI Contra Fund, three out of four funds in ELSS i.e., HDFC Tax
Saver Fund, SBI Magnum Tax Gain Fund and ICICI Pru Tax Plan Fund and three out of
four in Balanced Funds i.e., HDFC Prudential Fund , ICICI Prudential Balanced Fund
and Franklin Templeton Balanced Fund in terms of coefficient of determination (R ^),
have reasonably exploited the diversification strategy in their respective categories.
6.2.2 Return Analysis '
An investment is a commitment of funds made in the expectation of some

positive rate of return. If the investment is properly undertaken, the return will
commensurate with the risk the investor assumes. The investors are concerned with two
important properties inherent in securities i.e. the return that can be expected from
holding a security and the risk that the return might be less than the expected return.
Investors want to maximize expected returns subject to their tolerance for risk. The
performance evaluation of the mutual funds must take into account not only the rate of
return achieved but also the level of risk the investor was subjected to. Therefore, this
79
section discusses the empirical results with regards to the performance of selected mutual
funds in comparison with their benchmark portfolio (market index) in terms of return
analysis (average returns), risk analysis and risk-return relationship:
> Performance in terms of Average Returns
The performance evaluation is done by comparing the returns of a mutual fund
scheme with returns of a benchmark portfolio. Return is the motivating force and the
principle reward in the investment process and it is the key method available to investors
in comparing alternative investments. In this study, the returns have been called as
average returns. Average return is obtained by taking the simple mean of monthly
returns, whereby monthly returns are calculated by using the NAVs of the mutual fund
scheme. Then monthly returns were multiplied by 12 to get armual returns. The average
returns for the selected mutual fund schemes of all growth option with their benchmark
portfolio have been presented in Table 6.2 below:
TABLE 6.2
Average Returns of Selected Mutual Fund Schemes-Growth Option
1 2 3 4
S.No Schemes Average Return Average Return
(Monthly) (Annually)
I Large Cap Funds
HDFC Equity Fund 0.0269 0.3228
1
SBI Magnum Equity Fund 0.0202 0.2425
2
UTI Master Plus Unit Fund 0.0160 0.1926
3
ICICI Pru Top 100 Fund 0.0200 0.2400
4
1 HDFC Capital Builder Fund 0.0230 0.2757
2 Birla Sun life buy India Fund 0.0203 0.2436
3 SBI Contra Fund 0.0203 0.2436
80
UTI Equity Fund 0.0168 0.2016
4
III ELSS Funds
1 HDFC Tax Saver Fund 0.0256 0.3072
SB I Magnum Tax Gain Fund 0.0248 0.2973

2
UTI Equity Tax Saving Plan Fund 0.0240 0.2884
3
ICICI Pru Tax Plan Fund 0.0258 0.3098
4
IV Debt Funds
0.0064 0.0764
1 HDFC Income Fund
2 Birla Sun life Income Retail Plus 0.0071 0.0854
Growth Fund
3 SB I Magnum Income Fund 0.0050 0.0599
4 UTI Bond Fund 0.0184 0.2214
V Balanced Funds
0.0228 0.2739
1 HDFC Prudential Fund
0.0160 0.1919
2 ICICI Prudential Balanced Fund
0.0160 0.1919
3 UTI Balanced Fund
0.0169 0.2031
4 Franklin Templeton Balanced Fund
B|ESensex , ,^^ , ft017l Qom
> • -
Note: Average return shown in the third column is the average return on monthly basis.
81
An analysis of Table 6.2 reveals that in case of all schemes of Large Cap Funds
three out of four, three out of four Diversified Funds, four out of four ELSS, one out of
four Debt Funds and one out of four Balanced Funds have earned higher returns (average
monthly and annual returns) in comparison to their benchmark portfolio returns. The top
performers in terms of returns were HDFC Equity Fund (Large Cap Scheme), HDFC
Capital Builder Fund (Diversified Scheme), ICICI Pru Tax Plan (ELSS), UTI Bond Fund
(Debt Fund) and HDFC Prudential Fund (Balanced Fund). The remaining one Large Cap
Fund, one Diversified Fund, three Debt Funds and three Balanced Funds have shown
inferior returns than the market returns and have thus been unsuccessful in beating the
market. These schemes were UTI Master plus Unit Fund, UTI Equity Fund, HDFC
Income Fund, Birla Sun life Income Retail Plus Growth, SB I Magnum Income Fund,
ICICI Prudential Balanced Fund, UTI Balanced Fund and Franklin Templeton Balanced
Fund.
In case of Large Cap Funds, the performance of HDFC Equity Fund, SBI
Magnum Equity Fund and ICICI Pru Top 100 Fund was good in terms of average return.
But the performance of UTI Master Plus Unit Fund was low in terms of both monthly
and annual average returns as compared to BSE Sensex. HDFC Equity Fund has
emerged as a winner in the equity. This is because of the constant efforts of the fund
managers as their investment is driven by research with a medium to long term view.
This has been possible because the fund follows a focused approach to investments and
back ideas that carry conviction. HDFC Equity Fund controls risk by investing in quality
companies and through diversification across key economic variables. SBI Magnum
Equity Fund has beaten almost all equity funds by delivering a return close to 48 percent
by the end of April 2012. The reason for the fund's success has been lower redemption
and the fund manager picks stocks of companies that have core competency in the field
of their operation. SBI Magnum Equity a 5-star fund has beaten the Sensex by 5
percentage points, respectively in 2011. The mantra of success of ICICI Pru Top 100
Fund was due to focused fund manager. The fund manager has a strategy of focused
blue-chip that has seen highest inflow of money across all equity schemes. The AUM of
focused blue-chip has risen by 93 percent (Rs 1,836 Crores) to Rs 3,805 Crores on 31^'
March 2011.
82
HDFC Capital Builder Fund had highest average return followed by Birla Sun
life buy India Fund and SB I Contra Fund which were also good in terms of average
return. But UTI Equity Fund is low performer in category of Diversified Funds in terms
of monthly and annually average returns. Analysts feel that HDFC Group is very strong
in terms of brand capability. HDFC Capital Builder's Fund 3-year returns stand at 33.96
percent and it has a portfolio ratio of 27.32 percent as on 9 February, 2012. Though the
timing of returns is uncertain, but still the investors persisting with HDFC investments
got excellent rewards for the holding period due to its good returns. Birla Mutual Fund
today has emerged as one of India's leading mutual funds with over Rs 17,300 Crores of
assets under management and an investor base of more than 8 Lakhs. It offers a spectrum
of investment options designed to cater to every need of the investor and gaining
popularity among the investors. SBI Contra Fund has consolidated their position in the
industry due to better management by fund managers. UTI Equity Fund shed 16 per cent
value in 2011 compared to 24 per cent decline in the Sensex and the Nifty. The year
2011 was bad for equity investors as the country's two large-cap equity indices - the
Bombay Stock Exchange (BSE) Sensex and the National Stock Exchange (NSE) Nifty
fell 24 per cent.
In case of ELSS Funds, all the funds performed very well. ICICI Pru Tax Plan
was the top performer, then HDFC Tax Saver Fund ranked second, SBI Magnum Tax
Gain Fund stood third and UTI Equity Saving Plan Fund ranked fourth in case of average
returns. Equity-Linked Saving Schemes (ELSS), best serve the purpose by combining tax
benefits with wealth creation using equities. The main purpose of these schemes is tax
saving. However, over the last few years, investors in these funds have grown their
wealth tremendously. ICICI Pru Tax Plan Fund has given 15.67 returns over three years,
25.48 per cent in two years and 10.15 per cent (seventh best) in the past one year. This
fund is 12 years old and has Rs 1,252.55 Crores assets under management where as
HDFC Tax Saver Fund with 18.71 per cent returns in three years, 24.40 per cent returns
over two years and 10.27 per cent (sixth best) in the past one year. The scheme is 15
years old and quite popular with Rs 3,117.54 Crores asset under management. If the fund
is performing well in the past, it is expected that the fund will keep performing well in
the future. So the investors opted for systematic investment plan. ELSS has the potential
to give higher returns as these funds invest in equity market which have given an average
return of 15 years in a long term scenario. ICICI Pru and HDFC fund managers are doing
well. The other popular scheme in this basket on the basis of AUM is SBI Magnum Tax
83
gain with over Rs 5,000 Crores assets under management. But in terms of performance,
the scheme has been lagging for a long time now. Sometimes, while asset under
management does reflect popularity of a scheme when compared with their age of
existence, the most popular scheme doesn't necessarily need to be the best performer.
Here UTI Equity Tax Saving Plan Fund is also performing well but a little bit less than
others. Good companies, run by able manager and at reasonable valuations helps in
gaining popularity of this fund also from last many years.
UTI Bond Fund ranked highest in Debt Fund category in terms of average
returns, Birla Sun Life Income Retail Plus Growth Fund ranked second and HDFC
Income Fund stood third. Here SBI Magnum Income Fund was the low performer in
terms of monthly and annually average returns. Its AUM is Rs 1776.96 Crores till
September 2013. The aim of UTI Bond Fund is to invest in rated corporate debt papers
and government securities with relatively low risk and easy liquidity and the fund is
gaining popularity among investors. The current AUM in Birla Sun Life Income Retail
Plus Growth Fund is Rs 2901.32 till Sept 2013. The fund managers are doing well. The
present AUM in HDFC Income Fund is Rs 3896.60 Crores. The fund's manager seeks to
optimize returns while maintaining a balance of safety, yield and liquidity from a
portfolio of debt and money market instruments. However, still the performance of the
fund is very low.
In Balanced Funds, HDFC Prudential Fund was the top performer in terms of
monthly and annually avaerge returns. Then Franklin Templeton Balanced Fund ranked
second. ICICI Prudential Balanced Fund and UTI Balanced Fund were on third position
with same returns. The HDFC Prudential Fund managers seek periodic returns and long-
term capital appreciation from a balanced portfolio of debt and equity. Also, the AUM of
HDFC Prudential Fund was Rs. 6162.21 Crores, which was highest in comparison to
others. The quarterly average AUM of Franklin Templeton Balanced Fund is also good.
The objective of ICICI Prudential Balanced Fund is long-term capital appreciation and
income generation through investments in equity and debt securities. The fixed income
component in the fund helps reduce the overall risk of the portfolio. But here ICICI
Pmdential Balanced Fund and UTI Balanced Fund both have performed low.
Thus, it is interesting to note tiiat a significant majority of selected mutual fund
schemes have shown superior returns than the market returns and thus beaten the market.
84
6.2.3 Results on the basis of Risk Adjusted Performance Measures
When considering portfolio's performance, it is important to consider both risk
and return. The Sharpe (1966) Ratio and Treynor (1965) Ratio are the two such risk-
adjusted performance measures which considered both risk and return simultaneously to
evaluate a portfolio's performance. Two risk adjusted measures, namely standard
deviation and systematic risk (beta) have been used to obtain the above mentioned
measures of risk adjusted performance.
> Risk-Return Relationship
There is an elementary relationship among risk and return. In an existing asset
saving plan, the inter-connection between risk and return affects the predictable rates of
return. There is an optimistic or direct relationship between risk and return. It means that
in any investment, in lieu of greater returns an investor is always ready to take higher
levels of risk. Otherwise, the investors are satisfied with comparatively inferior returns
with lesser predictable risk. By using the risk -return relationship, one tries to assess the
competitive strength of the mutual funds vis-a-vis one another in a better way. Thus, it
will be more interesting if the risk and return are analyzed simultaneously in relation to
one another. It helps in explaining the performance of individual selected schemes in
relation to the market proxy. An investor with a given level of either risk or return
preference will be amply benefited from such analysis.
> Performance in terms of Sharpe Ratio
The Sharpe Ratio measures the fund's excess return per unit of its risk (i.e. total
risk). This ratio indicates the relationship between the portfolio's additional return over
risk-free return and total risk of the portfolio measured in terms of standard deviation. A
high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund
while low and negative Shape Ratio is an indication of unfavorable performance.
Generally, if Sharpe Ratio is greater than the benchmark comparison, the fund's
performance is superior over the market and vice-versa.
Table 6.3 below presents the Sharpe Ratios for the selected mutual fund schemes
of growth/equity options -with the market portfolios according to fund objectives,
respectively.
85
TABLE 6.3
Sharpe Ratios of Mutual Fund Schemes-Growth Option
1 2 3
S.No Schemes Sharpe Ratio
I Large Cap Funds
0.2880
1 HDFC Equity Fund
0.1899
2 SB I Magnum Equity Fund
0.1480
3 UTI Master Plus Unit Fund
0.2100
4 ICICI Pru Top 100 Fund
0.2411
1 HDFC Capital Builder Fund
0.2025
2 Birla Sun life Buy India Fund
0.1775
3 SB I Contra Fund
0.1633
4 UTI Equity Fund
III ELSS Funds
0.2728
I HDFC Tax Saver Fund
0.2311
2 SBI Magnum Tax Gain Fund
0.1015
3 UTI Equity Tax Saving Plan Fund
0.2398
4 ICICI Pru Tax Plan Fund
86
IV Debt Funds
0.0799
1 HDFC Income Fund
0.0842
2 Birla Sun life Income Retail Plus
Fund
0.0053
3 SBI Magnum Income Fund
0.0641
4 UTI Bond Fund
V Balanced Funds
1 HDFC Prudential Fund 0.3056
2 ICICI Prudential Balanced Fund 0.2027
3 UTI Balanced Fund 0.1527
4 Franklin Templeton Balanced Fund 0.2280
Sharpe Ratio of the BSE Sensex 0.1591
Table 6.3 depicts that the Sharpe Ratios of the selected mutual fund schemes of
all the growth/equity options with the benchmark portfolios. Three out of four Large Cap
Funds, four out of four Diversified Funds, three out of four ELSS and three out of four
Balanced Funds have recorded better Sharpe Ratios than the market. No fund in Debt
category has better Sharpe Ratio. The Top performers in case of Large Cap Funds were
HDFC Equity Fund, HDFC Capital Builder Fund (Diversified Scheme), HDFC Tax
Saver (ELSS) and HDFC Prudential Fund in Balanced Fund. The remaining one in Large
Cap Fund, one in ELSS, four in Debt Fund and one in Balanced Fund has shown inferior
Shape Ratio than the market benchmark. The schemes having inferior Sharpe ratio were:
87
UTI Master Plus Unit Fund, UTI Equity Tax Saving Plan Fund, UTI Master Value Fund,
HDFC Licome Fund, Birla Sun life Income Retail Plus Fund, SBI Magnum Income
Fund, UTI Bond Fund and UTI Balanced Fund.
> Performance in terms of Treynor Ratio
This ratio was developed by Jack L. Treynor in 1965 and expressed this as a ratio
of returns to systematic risk (beta). Treynor Ratio measures the relationship between
fund's additional return over risk-free return and market risk is measured by beta. The
larger the value of Treynor Ratio, the better the portfolio has performed. Generally, if the
Treynor Ratio is greater than the benchmark comparison, the portfolio has outperformed
the market thereby indicating superior risk-adjusted performance. Table 4.4 below
presents the results of Treynor Ratio from the selected schemes of all growth/equity
option with their respective benchmark portfolios, respectively.
TABLE 6.4
Treynor Ratios of Mutual Fund Schemes-Growth Option
1 2 3
S.No Schemes Treynor Ratio
I Large Cap Funds
1 HDFC Equity Fund 0.0236
2 SBI Magnum Equity Fund 0.0152
3 UTI Master Plus Unit Fund 0.0118
4 ICICI Pru Top 100 Fund 0.0169
1 HDFC Capital Builder Fund 0.0207
2 Birla Sun life Buy India Fund 0.0186
3 SBI Contra Fund 0.0165
88
0.0137
F UTI Equity Fund
III ELSS Funds

HDFC Tax Saver Fund 0.0225
SB I Magnum Tax Gain Fund 0.0199
UTI Equity Tax Saving Plan Fund 0.0158
ICICI Pru Tax Plan Fund 0.0209
IV Debt Funds
HDFC Income Fund 0.0508
Birla Sun life Income Retail Plus Growth 0.3060

Fund
SB I Magnum Income Fund 0.0019
UTI Bond Fund -0.2640
V Balanced Funds
HDFC Prudential Fund 0.0258
ICICI Prudential Balanced Fund 0.0166
UTI Balanced Fund 0.0163
Franklin Templeton Balanced Fund 0.0184
Tjp^picr Rati<i ^Wm I S I S«^tx QDru
89
The table 6.4 showed that except one scheme in Large Cap Funds and two
schemes in Debt Fund, all other funds have showed higher value of Treynor Ratio as
compared to their concerned benchmark (i.e., BSE Sensex). The Top performers were
HDFC Equity Fund (Large Cap Funds), HDFC Capital Builder Fund (Diversified
Funds), HDFC Tax Saver Fund (ELSS), HDFC Income Fund (Debt Fund) and HDFC
Prudential Fund (Balanced Fund). A higher Treynor Ratio as compared to benchmark
indicates that the managers properly diversified the portfolios for the investors and the
investors receive sufficient return on the basis of beta (systematic risk) calculation. The
remaining schemes i.e. UTI Master Plus Unit Fund (Large Cap Fund), SBI Magnum
Income Fund (Debt Fund) and UTI Bond Fund (Balanced Fund) have shown lesser
Treynor ratio in comparison to their concerned benchmark. Except the above three funds,
other funds have outperformed in respect of Treynor Ratio.
6.3 PERFORMANCE OF MUTUAL FUNDS DURING CRISIS AND AFTER
CRISIS
The thesis seeks to present a brief overview of the developments in the Indian
mutual fund industry during the financial crisis and after scrisis period. The broad
developments show that while recovery in the industry post-crisis has been quite robust,
a tendency towards risk aversion, akin to a global trend, has become visible, with the
mutual fund industry's asset base, resource mobilization and investment in capital
markets increasingly leaning towards the most liquid asset classes. Lower policy rates
and risk aversion are seen to have encouraged fund flows to debt oriented funds and
mutual funds' investments in the debt market. Superior returns performance by equity
mutual funds, however, are found to be accompanied by net withdrawals from these
funds and net disinvestments by mutual funds in the equity market. An interesting
finding of our study is the statistically significant change in the causal relationship
between mutual funds' and foreign institutional investors investments in the Indian
equity market during the most recent session of heightened economic and policy
uncertainties.
From many years, the performance evaluation of mutual funds has become a
fascinating subject of research. The most popular measurement test given by Sharpe used
in the thesis to calculate the differences in performance of mutual funds. The 10 year
period is divided into two parts i.e. the period before the financial crisis, i.e. April 2000
to August 2008, and the period after the financial crisis, September 2008 to March 2011.
The researcher would attempt to find out which fund has fared better overtime and after
90
crises. As we all know, in a crisis the NAVs of funds normally fall down. The researcher
attempts to investigate whether mutual funds will defeat the market or vice versa by
looking at Sharpe Model and to see whether there is a different outcome for a period
There has already been a lot of research on the performance evaluation of a
mutual fund. There are some studies in which this performance is linked to financial
crisis. The researcher attempts to find out which fund has fared better overtime and after
crises, as in crisis the price of funds will fall down. The search is whether mutual funds
will defeat the market or vice versa by looking at Sharpe Model and to see whether there
is a different outcome for a period before and the crisis.
hi September, 2008 the financial meltdown started due to the collapse of Lehman
brothers. Few questions arise in order to find out how mutual funds perform before and
during financial crises.
6.3.1 PERFORMANCE OF MUTUAL FUNDS IN TERMS OF SHARPE RATIO
BEFORE FINANCIAL CRISIS AND AFTER CRISIS
As mentioned, there has already been a lot of research on the performance
evaluation of mutual funds. The Sharpe Ratios of sample of 20 mutual funds in different
categories are calculated. Table 6.5 below presents the Sharpe Ratios for the selected
mutual fund schemes of growth/equity options with the market portfolios according to
fund objectives, respectively.
TABLE 6.5
Sharpe Ratios of Mutual Fund Schemes-Growth Option
1 2 3 4
S.No Schemes Sharpe Ratio Sharpe Ratio after
before Crisis Crisis
I Large Cap Funds
1 HDFC Equity Fund 0.3844 0.1363
2 SB I Magnum Equity Fund 0.2530 0.0578
3 UTI Master Plus Unit Fund (0.0514) 0.0200
4 ICICI Pru Top 100 Fund (0.0484) 0.0685
91
1 HDFC Capital Builder Fund 0.3134 0.1021
2 Birla Sun life Buy India Fund 0.2608 0.0850
3 SB I Contra Fund 0.2389 0.0336
4 UTI Equity Fund 0.1988 0.0629
III ELSS Funds

1 HDFC Tax Saver Fund 0.3604 0.1153
2 SB I Magnum Tax Gain Fund 0.3231 0.0239

3 UTI Equity Tax Saving Plan Fund 0.1188 0.0131
4 ICICI Pru Tax Plan Fund 0.3026 0.0868
IV Debt Funds
1 HDFC Income Fund 0.0808 0.0869
Fund
3 SB I Magnum Income Fund 0.0344 (0.0538)
4 UTI Bond Fund 0.0761 0.0075
V Balanced Funds
1 HDFC Prudential Fund 0.4194 0.1488
2 ICICI Prudential Balanced Fund 0.2838 0.0349
3 UTI Balanced Fund 0.1807 0.0604
4 Franklin Templeton Balanced 0.3117 0.0479

Fund
Sharpe Ratio of the BSE Sensex 0.2217 0.0330
92
Table 6.5 depicts the Sharpe Ratios of selected mutual fund schemes of
growth/equity options divided into two periods before financial crisis i.e from April 2000
to March 2008 and after crisis i.e. from April 2008 to March 2011 with the benchmark
portfolios.
Before financial crisis, two out of four Large Cap Funds, three out of four
Diversified Funds, three out of four ELSS Funds and three out of four Balanced Funds
have better Sharpe Ratios than the market. No fund in Debt category has better Sharpe
Ratio. The Top performers in case of Large Cap Funds were HDFC Equity Fund, HDFC
Capital Builder Fund (Diversified Scheme), HDFC Tax Saver (ELSS) and HDFC
Prudential Fund in Balanced Fund. The remaining two in Large Cap Fund, one in
Diversified Fund, one in ELSS, four in Debt Fund and one in Balanced Fund has shown
inferior Shape Ratio than the market benchmark. The schemes having inferior Sharpe
ratio were UTI Master Plus Unit Fund, ICICI Pru Top 100 Fund in Large Cap Funds,
UTI Equity Fund in Diversified Funds, UTI Equity Tax Saving Plan Fund in ELSS,
HDFC Income Fund, Birla Sun life Income Retail Plus Fund, SBI Magnum Income
Fund, UTI Bond Fund in Debt Funds and UTI Balanced Fund in Balanced Funds.
After financial crisis, three out of four Large Cap Funds, four out of four
Diversified Funds, two out of four ELSS Funds, two out of four Debt Funds and four out
of four Balanced Funds have better Sharpe Ratios than the market. The Top performers
in case of Large Cap Funds were HDFC Equity Fund, SBI Magnum Equity Fund, ICICI
Pru Top 100 Fund and HDFC Capital Builder Fund, Birla Sun life Buy India Fund, SBI
Contra Fund, UTI Equity Fund (Diversified Scheme), HDFC Tax Saver, ICICI Pru Tax
Plan Fund (ELSS), HDFC Income Fund, Birla Sun life Income Retail Plus Fund (Debt
Fund) and HDFC Prudential Fund, ICICI Prudential Balanced Fund, UTI Balanced Fund
and Franklin Templeton Balanced Fund in Balanced Fund. The remaining one in Large
Cap Fund, two in ELSS, two in Debt Fund and one in Balanced Fund has shown inferior
Shape Ratio than the market benchmark. The schemes having inferior Sharpe ratio were
UTI Master Plus Unit Fund in Large Cap Funds, SBI Magnum Tax Gain Fund, UTI
Equity Tax Saving Plan Fund in ELSS and SBI Magnum Income Fund, UTI Bond Fund
in Debt Fund.
The results showed that eleven mutual funds out of twenty outperformed the
market and demonstrated superior performance in terms of Sharpe Ratio before financial
crisis. But majority of funds i.e. fifteen funds out of twenty mutual funds outperformed
the market. According to the above results the Sharpe Ratio shows that mutual funds
93
performed better after the crisis than before. The fund managers were able to beat the
market properly after the crisis period. The results showed that performance of the
majority of selected mutual fund schemes have been better than the market benchmark
indexes in term of Sharpe ratio based on historical monthly returns. The reasons of
outperformance of the funds can be attributed to the efficiency of the fund managers.
They are diversifying the funds in different stocks which are generating higher returns.
Sharpe's measure revealed that majority of the mutual fund schemes have reported
positive returns after financial crisis indicating superior stock selection of the fund
managers. Mutual fund managers also outperform the market through their superior
security selection and timing.
6.4 CONCLUSION
The conclusion has been divided into two sections namely:
> Conclusions on the basis of Risk and Return Analysis
> Conclusions on the basis of Risk and Return Analysis before financial crisis and
after the crisis
6.4.1 Conclusions on the basis of Risk and Return Analysis
The present study comprised of twenty mutual funds schemes consisting of five
categories of mutual funds one each in Large Cap Funds, Diversified Funds, ELSS
Funds, Debt Funds and Balanced Funds. The performance of selected mutual funds was
studied on the basis of risk and returns analysis and risk adjusted measures.
Risk Analysis:
The performance of selected mutual funds was also examined in relation to the total
risk (standard deviation), systematic risk (Beta) and coefficient of determination (R^).
The results pertaining to these are as follows:
> Total Risk (or Standard Deviation)
From the above analysis, it is concluded that in terms of risk analysis majority of
mutual funds have less risky in terms of total risk (standard deviation). There was no risk
in all balanced funds as the standard deviation of all funds was lower. SB I Magnum
Equity Fund (Large Cap Scheme), SBI Contra Fund (Diversified Scheme), SBI Magnum
Tax Gain Fund, UTI Equity Tax Saving Plan Fund, ICICI Pru Tax Plan Fund (ELSS)
and UTI Bond Fund (Debt Scheme) have experienced higher variability and hence were
more risky than the market. The total risk was found to be lower than that of the market
portfolio in three funds of Large Cap scheme, three funds of Diversified Scheme, one
94
fund of ELSS, three funds of Debt schemes and all funds of Balanced scheme have
shown low total risk than the market. The performance of these schemes has been
considered superior in this regard and implied that these schemes were holding portfolios
which were less risky than the market.
> Systematic Risk (Beta)
With regard to systematic risk, a significant majority of selected mutual funds
i.e., 17 funds have beta values less than one (i.e. market beta). This indicates that a
significant majority of the selected mutual fund schemes showed lower risk than the
market risk and have enormous potential for risk reduction through diversification. The
value of beta of seventeen mutual funds out of all twenty schemes have less than one (i.e.
market beta) implying that these schemes tended to hold portfolios that were less risky
than the market portfolio. Except three schemes i.e., SBI Magnum Equity Fund, SBI
Magnum Tax Gain, UTI Equity Tax Saving Plan all other schemes have beta less than
one and less risky.
> Coefficient of Determination (R ^
In all, fourteen mutual funds have higher R ^. UTI Master Plus Unit Fund (Large
Cap Funds), UTI Equity Fund (Diversified Funds), HDFC Tax saver (ELSS) and
Franklin Templeton Balanced Fund (Balanced Fund) have maximum value of coefficient
of determination in different categories. The R •^ was very low in all mutual funds in Debt
Category. The value of R^ has been found maximum in majority of funds which
indicated that these funds were well diversified.
Return Analysis
The following were the main findings:
> Average Returns
In terms of average returns, a significant majority of selected mutual fund
schemes of growth option i.e., three funds of Large Cap Scheme, three funds of
Diversified Scheme, all four funds of ELSS, one fund of Debt Scheme and again one
fi'nd of Balanced Scheme have shown higher and superior returns in comparison to their
benchmark portfolio returns thus beating the market. The top performers were according
to the respective objective schemes were HDFC Equity Fund in Large Cap Funds, HDFC
Capital Builder Fund in Diversified Funds, ICICI Pru Tax Plan Fund in ELSS, UTI Bond
Fund in Debt Funds and HDFC Prudential Fund in Balanced Fund category.
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Risk-Return Relationship
The results indicated that the risk and return of selected mutual funds of all
categories were in conformity with their stated investment objectives. Further, the
selected mutual funds on an average performed better than the risk free return and the
market return.
Risk Adjusted Performance Measures
The two most familiar risk-adjusted performance measures such as the Sharpe
(1966) and Treynor (1965) ratios have been employed to evaluate the performance of
mutual funds.
> Shape Ratio
The results showed that thirteen mutual funds outperformed the market and
demonstrated superior performance in terms of Sharpe Ratio. The Top performers in
case of Large Cap Fund were HDFC Equity Fund, HDFC Capital Builder Fund in
Diversified Fund, HDFC Tax Saver Fund in ELSS, Birla Sun Life hicome Retail Plus
Growth Fund in Debt Fund and HDFC Prudential Fund in Balanced Fund.
> Treynor Ratio
In terms of Treynor Ratio, seventeen mutual funds have outperformed their
respective benchmarks. Most of these schemes have also outperformed their respective
benchmarks in terms of Treynor Ratio. The Top performers in case of Large Cap Fund
were HDFC Equity Fund, HDFC Capital Builder Fund in Diversified Fund, HDFC Tax
Saver Fund in ELSS, Birla Sun Life Income Retail Plus Growth Fund in Debt Fund and
HDFC Prudential Fund in Balanced Fund.
Overall, it can be concluded that a significant majority of sample mutual fund
schemes have shown superior performance in terms of the risk and return analysis and
risk-adjusted performance measures of Sharpe and Treynor Ratios. The alternative
hypothesis that the performance of selected mutual fund schemes in India is
superior in comparison to the respective benchmark portfolio stands supported.
6.4.2 Conclusions on the basis of Risk and Return Analysis before financial crisis
and after the crisis
The analysis shows that Asset Management Company has been able to beat their
benchmarks. The reasons behind the positive Sharpe ratios of mutual funds are as
follows:
> The fund managers invested in the industries that have been successful during the
storm and fair weather. During the financial crisis, the fund managers diversified
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the funds in liquid and debt schemes which help in contribution of maximum
asset under management in 2007-08. But as far as the short run prospects are
concerned, mutual funds are considered to be one of the safer form of investment
for a common man. During crisis the fund managers preferred the policy of
diversification.
> After the net resource mobilization of mutual funds turned negative, RBI
announced various liquidity augmentation measures to provide liquidity support
to mutual funds through banks. With the easing of overall liquidity conditions,
net resource mobilization by mutual funds again turned positive during the
periods December 08 to February 09. Further, with liquidity conditions remaining
comfortable and stock markets registering strong gains, the net resource
mobilization by mutual funds grew considerably during the first quarter of
financial year 2010. In an endeavor to ease liquidity pressures in the system and
restore stability in the domestic financial markets, the RBI announced a slew of
measures. The key measures announced by die RBI include:
> The RBI decided to conduct a special 14 day repo at 9% per annum for a notified
amount of Rs 200 billion from October 14, 2008 with a view to enable banks to
meet the liquidity requirements of mutual funds.
> Scheduled Commercial Banks (SCBs) and All India term lending and refinancing
institutions were allowed to lend against and buy back CDs (certificate of
deposits) held by mutual funds for a period of 15 days.
> As a temporary measure, banks were allowed to avail of additional liquidity
support exclusively for the purpose of meeting the liquidity requirements of
mutual funds to the extent of up to 0.5% of their net demand and time liabilities
(NDTL). Accordingly on November 1, 2008, it was decided to extend this facility
and allow banks to avail liquidity support under the LAF through relaxation in
the maintenance of SLR to the extent of up to 1.5% of their NDTL. This
relaxation in SLR was provided for the purpose of meeting the funding
requirements of Non Banking Financial Corporations and mutual funds.
> The borrowing limit prescribed in Regulation 44(2) of SEBI (Mutual Fund)
Regulations, 1996 was enhanced from 20% of net asset of the scheme to 40% of
net asset of the scheme to those mutual funds who approached SEBI. This
enhanced borrowing limit was made available for a period of six months and
could be utilized for the purpose of redemptions/ repurchase of units.
97
> In order to moderate the exit from close ended debt schemes and in the interest of
those investors who choose to remain till maturity and with a view to ensure that
the value of debt securities reflects the current market scenario in calculation of
NAV, the discretion given to mutual funds to mark up/ mark down the
benchmark yields for debt instruments of more than 182 days maturity was
enhanced from 150 basis points to 650 basis points.
Hence, the comparison of before and during financial crises showed positives
returns in terms of Sharpe Ratios.
98
CHAPTER 7
EVALUATION ON THE BASIS OF
ABILITIES OF MUTUAL FUND
MANAGERS IN INDIA
7.1 INTRODUCTION
7.2 EVALUATION ON THE BASIS OF
ABILITIES OF MUTUAL FUND MANAGERS IN
INDIA
7.3 CONCLUSION
CHAPTER?
SELECTIVITY AND MARKET TIMING ABILITY OF MUTUAL
FUND MANAGERS IN INDIA
7.1 INTRODUCTION
A mutual fund is a special type of institution that acts as an investment
instrument. Apart from the many advantages that investing in mutual funds provide like
diversification, professional management, the ease of investment process has proved to
be a major enabling factor. However, with the introduction of innovative products, the
world of mutual funds nowadays has a lot to offer to its investors. A mutual fund is a
pure intermediary that performs a basic function of buying and selling securities on
behalf of its unit holders. Again, to give maximum benefit to the investors, it is very
important for the fund manager to select the right fund at the right time.
7.2 PERFORMANCE ON THE BASIS OF SELECTIVITY AND MARKET
TIMING ABILITY OF MUTUAL FUND MANAGERS IN INDIA
In the previous section, the performance of selected mutual fund schemes were
measured and analyzed in terms of risk and return analysis and risk-adjusted
performance measures such as Sharpe (1966) and Treynor (1965) Ratios. In this section,
an attempt has been made to evaluate the performance of selected mutual funds on the
basis of selectivity of mutual funds and also market timing abilities of mutual fund
managers in India. The analysis in this section consists of the following:
• The Jenson Measure
• The Treynor and Mazuy Model
The investment performance of stock selection pertains to successful micro-
forecasting of a company's specific events. It refers to the fund manager's ability to
identify under or overvalued securities. In other words, it refers to the fund manager's
ability to pick winners among individual stocks on a risk-adjusted basis.
Market timing is the macro-forecasting ability of the fund manager in forecasting
market wide movements (e.g. a shift from a bull to bear market). Market timing skills
imply assessing correctly the direction of the market, whether bull or bear and
positioning the portfolios accordingly. It attempts to predict future market directions,
usually by examining recent price and volume data or economic data, and make
investments based on these predictions in the hope of making profit. Therefore, it is also
called timing the market. For example, if the portfolio manager knows when the stock
99
market is going to rise, he will shift into high beta stocks and these stocks will be
expected to go up even further than the market. Conversely, if the portfolio manager
knows when the market is going to fall, he will switch into low beta stocks, which will
go down less than the market. It means the market timer switches from more risky to less
risky securities (or vice-versa) in an attempt to outguess the movement of the market.
Thus, market timing is defined as the strategy of changing a ftmd's allocation
between stocks and cash to capture gains in up markets ad to avoid losses in down
markets. In other words, market timers are special breed of technicians who track the
market to enhance the yield return on stock or bond by investing during the periods of
market upswing and switching into money market instruments when the market
conditions are unfavorable.
Therefore, the present study attempts to examine the stock selectivity and market
timing abilities of mutual fund managers in India. Two models of selectivity and market
timing have been empirically examined: the Jenson (1968) Measure and Treynor and
Mauzy (1966) Model. The necessary details regarding the sample schemes, study period,
benchmark, risk free rate and the detailed explanation of these two models have already
been provided in Chapter 1.
The study states the following null hypothesis (i.e. HOI and H02) and
corresponding alternative hypothesis (i.e. HI and H2) for assessing the stock selectivity
and market timing abilities of the mutual fund managers in India:
HOI: Mutual fund managers of the selected schemes in India lack stock selection
abilities.
HI: Mutual fund managers of the selected schemes in India have superior stock selection
abilities.
HOI: Mutual fund managers of the selected schemes in India lack market timing abilities.
HI: Mutual fund managers of the selected schemes in India display distant market timing
abilities.
Results and Discussion
The empirical results pertaining to selectivity and market timing abilities of fund
managers of the sample of 20 mutual fund schemes comprising of 5 schemes each of
Large Cap Fund, Diversified Fund, ELSS, Debt Fund and Balanced Fund of growth
option measured by the Jenson Measure and the Treynor and Mazuy Model which have
been presented in two sections i.e. the results of Jenson Measure and the results of
Treynor and Mazuy Model respectively:
100
> Assessing Stock Selectivity using Jenson Measure
Michael C. Jenson proposed an absolute measure of performance in 1968 to
evaluate the portfolio manager's predictive ability i.e. the ability to achieve higher
returns through successful prediction of security prices than expected for the given level
of risk. It is the regression of excess fund return with excess market return. The intercept
i.e. alpha (a) of the regression equation provides Jenson's Measure of the sample mutual
fund schemes of growth options respectively.
The results of Jenson Measure of the selected mutual fund schemes of
growth/equity option respectively have been discussed in Table 7.1 below:
TABLE 7.1
Results of Jenson Measure-Growth Option
1 2 3 4
S.No Schemes Alpha t- Alpha
I Large Cap Funds
1 HDFC Equity Fund 0.011* 4.300
2 SB I Magnum Equity Fund 0.003 1.418

3 UTI Master Plus Unit Fund 0.000 -0.194
4 ICICI Pru Top 100 Fund 0.004* 2.069
1 HDFC Capital Builder Fund 0.007* 2.333
2 Birla Sun life Buy India Fund 0.005 1.350
3 SBI Contra Fund 0.004 0.879
4 UTI Equity Fund 0.001 0.464
III ELSS Funds
1 HDFC Tax Saver Fund 0.009* 3.595
2 SBI Magnum Tax Gain Fund 0.008* 2.104

3 UTI Equity Tax Saving Plan Fund 0.004 0.287
4 ICICI Pru Tax Plan Fund 0.009* 2.239
IV Debt Funds
1 HDFC Income Fund 0.001 0.660
Growth Fund
3 SBI Magnum Income Fund 0.000 -0.324
4 UTI Bond Fund 0.014 0.723
V Balanced Funds
1 HDFC Prudential Fund 0.009* 4.092
2 ICICI Pmdential Balanced Fund 0.003 1.615
3 UTI Balanced Fund 0.003 0.595
4 Franklin Templeton Balanced 0.004* 2.628
Fund
Note: * indicates statistical significance at the five percent level.
101
A close examination of the Table 6.1 indicates that all of the schemes have posted
positive alpha values in all the categories of all mutual funds. Out of the positive alpha
values, the fund manager of two Large Cap Funds, one of Diversified Funds, two of
ELSS, two of Balanced Funds have successfully generated significantly positive alpha
values at five percent level of significance. This indicated that the fund managers of
these schemes have shown superior selectivity performance (stock selection or micro
forecasting skills) in India.
> Assessing Stock Selection and Market Timing Abilities using Treynor and
Mazuy (1966) Model
Treynor and Mazuy (1966) Model has been used to detect both selectivity and
market timing abilities of the fund managers of the sample mutual funds. A statistically
significant and positive value of alpha and gamma indicates positive stock selection and
market timing skills among the fund managers respectively. Table 7.2 below presents the
empirical results for the Treynor and Mazuy Model of the sample mutual funds:
TABLE 7.2
Results of Treynor and Mazuy Model-Growtli Option
1 2 3 4 5 6
S.No Schemes a B R2
Y
I Large Cap Funds
1 HDFC Equity Fund 0.010* 0.938* 0.31 0.881
(3.664) (29.345) (0.135)
2 SBI Magnum Equity Fund 0.003 0.960* -0.002 0.922
(1.234) (37.115) (-0.009)
3 UTI Master Plus Unit Fund 0.000 0.962* -0.088 0.925
(.067) (37.889) (-0.481)
4 ICICI Pru Top 100 Fund 0.008* 0.957* -0.605* 0.916
(3.509) (36.000) (-3.323)
1 HDFC Capital Builder Fund 0.010* 0.893* -0.368 0.797
(2.643) (21.421) (-1.235)
2 Birla Sun life Buy India Fund 0.006 0.837* -0.159 0.700
(1.385) (16.519) (-0.434)
3 SBI Contra Fund 0.005 0.825* -0.180 0.680
(0.968) (15.781) (-0.418)
4 UTI Equity Fund 0.003 0.918* -0.208 0.841
(0.801) (24.832) (-0.309)
III ELSS Funds
1 0.010* 0.930* -0.168 0.863
HDFC Tax Saver Fund (3.458) (27.146) (-0.023)
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2 SB I Magnum Tax Gain Fund 0.010* 0.893* -0.322 0.0797
(2.295) (21.426) (-0.039)
UTI Equity Tax Saving Plan -0.009 0.488* 2.199 0.258
3 Fund (-0.506) (6.126) (1.543)
4 ICICI Pru Tax Plan Fund 0.011* 0.881* -0.313 0.774
(2.368) (20.020) (-0.856)
VI Debt Funds
1 HDFC Income Fund 0.002 0.126 -0.159 0.023
(1.068) (1.373) (-1.005)
2 0.003 0.024 -0.170 0.005
Birla Sun life Income Retail (1.117) (0.259) (-0.739)
Plus Growth Fund
3 0.001 0.225* -0.234 0.067
SBI Magnum Income Fund (0.470) (2.521) (-1.536)
4 UTI Bond Fund 0.018 -0.018 -0.615 0.001

(0.792) (-0.190) (-0.334)
V Balanced Funds
1 HDFC Prudential Fund 0.010* 0.907* -0.010 0.823
(3.572) (23.320) (-0.046)
2 ICICI Prudential Balanced 0.007* 0.940* -0.677* 0.890
Fund (3.591) (30.628) (-4.248)
3 UTI Balanced Fund 0.002 0.719* 0.089 0.518

(0.418) (11.196) (0.202)
4 Franklin Templeton Balanced 0.006* 0.953* -0.316* 0.907
Fund (3.422) (33.794) (-2.229)
Note: Alpha (a) indicates the stock selection coefficient.
Gamma (P) indicates market timing coefficient
* indicates statistical significarice at the five percent level.
An analysis of the above table reveals that the fund managers of four of Large
Cap Funds, four of Diversified Funds, three of ELSS, four of Debt Funds and four of
Balanced Funds have generated positive alpha coefficients. While it was negative in case
of one scheme of ELSS Funds i.e. UTI Equity Fund. Out of the positive alpha
coefficients, two of Large Cap Funds, one of Diversified Fund, three of ELSS and three
of Balanced Funds were statistically significant at five percent level of significance
indicating superior stock selection abilities of the fund managers of these schemes.
In order to test the market timing of fund managers, the coefficient gamma (y)
was found to be positive in case of the fund managers of only three schemes (none was
statistically significant). While it has been negative for the remaining fund managers of
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17 schemes (of which 3 schemes of growth option were statistically significant). This
indicates that none of the fund managers portrayed any market timing abilities as none of
the sample schemes exhibited significantly positive gamma coefficient. However, there
were three schemes of growth option, for which the gamma coefficients were found to be
significant at five percent but these coefficients were in fact negative, there by indicating
that the managers of these schemes were found to be engaged in timing activities but
were doing so in the wrong direction. These schemes were ICICI Pru Top 100 Fund
(Large Cap Fund), ICICI Prudential Balanced Fund and Franklin Templeton Balanced
Fund (Balanced Fund). Thus, it was observed that the fund managers of 9 (statistically
positive alphas) out of the 20 schemes have superior stock selection abilities. This
provides some evidence to support the hypothesis that fund managers in India have
selectivity abilities. The results reported, however, did not support the hypothesis that the
fund managers in India display distinct market timing abilities because none of the
sample schemes were depicting significantly positive values of gamma. Though, there
was evidence that some of the schemes were timing the market in the wrong direction, as
they have shown significant but negative gamma coefficients.
TABLE 7.3
Summary of Regression Results of Jenson Model as well as Treynor and Mazuy
Model
Parameter Being Jenson (1968) Measure TM (1966) Model
Estimated
GROWTH OPTION Positive* Negative* Positive* Negative*
Alpha(a) 20 0 09 0
Gamma(y) - 0 3
Note: The figures in Table 6.3 presents number of schemes out of the sample of 24
schemes of growth option which shows significant stock selection coefficient (a) and
significant market timing coefficient (y).
* indicates statistical significant at five percent level.
7.3 Conclusion
The present chapter provides empirical results with regards to selectivity and
market timing abilities of the fund managers of the sample of 20 mutual fund schemes
categorized in five categories i.e. Large Cap Funds, Diversified Funds, ELSS, Debt
Funds and Balanced Funds in terms of two models- the Jenson Measure and Treynor and
104
Mazuy Model. Jenson Measure has been used to measure the stock selection ability of
the fund managers in India. Positive and significant alpha value indicates superior stock
selection ability of the fund managers. As demonstrated by Grinblatt and Titman (1989),
Jenson's Measure is not distorted if the fund manager is not a market timer. Therefore, to
consider the effect of timing ability, Treynor and Mazuy Model have been used. The
Treynor and Mazuy Model consider both selectivity and market timing skills of the fund
managers. A positive and significant value of alpha and gamma indicates selectivity and
market timing ability of the fund managers respectively.
The empirical evidence revealed that fund managers of the some of the sample
fund schemes were engaged in micro forecasting (or stock selection), as the value alpha
in case of all the 20 schemes in terms of Jenson Measure and 11 schemes in Treynor and
Mazuy Model were positive and statically significant at five percent level. The top
performers in case of Jenson measure were UTI Bond Fund in Debt Fund, HDFC Equity
Fund in Large Cap Funds, HDFC Capital Builder Fund in Diversified Funds, HDFC Tax
Saver Fund in ELSS and HDFC Prudential Fund in Balanced Fund. Further, the top
performers in Treynor and Mazuy Model were UTI Bond Fund in Debt Fund, HDFC
Equity Fund in Large Cap Funds, HDFC Capital Builder Fund in Diversified Funds,
HDFC Tax Saver Fund in ELSS and HDFC Prudential Fund in Balanced Fund.
However, none of the fund managers of the sample schemes were successful in
exhibiting significantly positive value of gamma estimates, hence indicating that fund
managers lack market timing skills. There was evidence that a few schemes were timing
the market but in the wrong direction, as their gamma coefficients were significantly
negative.
On the basis of the results, it can be concluded that the fund managers in India are
not seriously engaged in any market timing activities and relied only on stock selection
skills. So the alternative hypothesis that the fund managers in India have stock
selection skills was accepted. But the hypothesis that the fund managers in India
display distinct market timing skills was not accepted.
105
CHAPTER 8
FINDINGS AND SUGGESTIONS
CHAPTERS
FINDINGS AND SUGGESTIONS
8.1 INTRODUCTION
A mutual fund is a trust that pools the savings of a number of investors who share
a common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realized is shared by its unit holders in
proportion to the number of units owned by them. Thus, a mutual fund is the most
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost.
In this chapter we shall presmt a summary of mainfindingsof the present study, conclusions
and suggestions that are drawn on the basis of this study. The present study is based upon analyzing the
performances of mutualfimdsin different categories of mutualfimdsin India. The study is based upon
secondary datafixjm2000-2011. A variety of tools including tabular and graphical analysis
have been applied in the present study. We have computed average risk, average return,
standard deviation, beta and coefficient of determination. For risk adjusted measures,
sharpe and treynor ratios are calculated. To measure the performance of selected mutual
funds on the basis of selectivity and market timing abilities of mutual fund managers in
India, Jenson model and Treynor-Mazuy model were applied.
8.2 FINDINGS
This section includes findings on the basis of Performance of mutual funds. The main
findings are as follows:
8.2.1 PERFORMANCE EVALUATION OF MUTUAL FUNDS
The performance evaluation of sample mutual fund scheme of growth option has
been done by using risk and return analysis and risk-adjusted performance measures of
Sharpe (1966) Ratio and Treynor (1965) Ratio.
8.2.1.1 Risk and Return Analysis
• Risk Analysis
The summaries of main results in terms of Risk Analysis are as follows:
> Performance in terms of Total Risk (Standard Deviation)
The results revealed that three mutual funds of large cap scheme three mutual
funds of diversified scheme, one mutual fund of ELSS, four mutual funds of debt scheme
and four mutual funds of balanced scheme have shown low total risk (less standard
106
deviation) than the market and thereby indicating superior performance in terms of total
risk.
> Performance in terms of Systematic Risk (Beta)
When systematic risk (i.e. beta) was considered as a measure of risk, the results
revealed that three mutual funds of large cap scheme, four mutual funds of diversified
scheme, two mutual funds of ELSS, four mutual funds of debt scheme and four mutual
funds of balanced scheme have beta values less than one (market beta), indicating that
these schemes were less volatile or less risky in comparison with the market.
> Performance in terms of Coefficient of Determination (R ^)
In terms of coefficient of determination, four mutual funds of large cap scheme,
four mutual funds of diversified scheme, three mutual funds of ELSS, no mutual fund of
debt scheme and four mutual funds of balanced scheme have higher R '^ value than the
average R ~^ indicating that some relationship exists between these schemes and their
respective benchmarks and further revealed that these schemes were successful in
exploiting the diversification strategy.
• Return Analysis
The summaries of main results in terms of Return Analysis are as follows:
> Performance in terms of Average Returns
In terms of average returns all schemes i.e. three out of four large cap funds, three
out of four diversified funds, four out of four ELSS funds, one out of four debt funds and
one out of four balanced funds have earned higher returns (average returns and average
annual returns) in comparison to their benchmark portfolio returns. The top performers in
terms of returns were HDFC Equity Fund (large cap scheme), HDFC Capital Builder
Fund Growth (diversified scheme), ICICI Pru Tax Plan (ELSS), UTI Bond Fund (debt
fund) and HDFC Prudence Fund (balanced fund).
Thus, it is interesting to note that a significant majority of sample mutual funds
schemes have shown positive and superior returns than the market returns.
8.2.1.2 Risk Adjusted Measures of Performance
In order to assess the performance of mutual funds accurately, both risk and
return should be considered. The two most commonly used risk-adjusted performance
measures are Sharpe (1966) and Treynor (1965) ratio. Sharpe ratio is called as reward-to-
variability ratio. This ratio has been developed by William F. Sharpe in 1966. It is a ratio
of returns generated by the fund over and above risk free rate of return and the total risk
107
(i.e. standard deviation) associated with it. hi other words, it is ratio of excess portfolio
return minus the average risk free rate of return. Treynor ratio is calculated as the ratio of
excess portfolio return to beta. This ratio has been developed by Jack L. Treynor in 1965
and also known as reward-to-volatility ratio. The main findings in terms of Risk
Adjusted Measures of Performance are listed below:
> Performance in terms of Sharpe Ratio:
The results of Sharpe ratio revealed that thirteen funds out of twenty mutual
funds have outperformed the market index during the study period. It means that out of
twenty mutual funds in different categories, thirteen mutual fund schemes have shown
good results. Three out of four large cap schemes, four out of four diversified schemes,
three out of four ELSS, Zero out of four debt fund and three out of four balanced funds
have recorded better Sharpe ratios than the market. The Top performers were HDFC
Equity Fund (large cap schemes), HDFC Capital Builder Fund Growth (diversified
schemes), HDFC Tax Saver (ELSS) and HDFC Prudence Fund (balanced fund).
> Performance in terms of Treynor Ratio:
In terms of Treynor ratio, most of selected mutual fund schemes have shown
positive and superior performance than market. As seventeen funds out of twenty mutual
funds have outperformed the market index during the study period which means that out
of twenty mutual funds in different categories, seventeen mutual fund schemes have
given good results. One scheme i.e. UTI Master Plus Unit Fund in large cap funds and
two schemes i.e SBI Magnum Income Fund and UTI Bond Fund in debt fund, all other
funds have showed higher value of Treynor ratio as compared to their respective
benchmark (i.e., BSE Sensex). The Top performers were HDFC Equity Fund (large cap
funds), HDFC Capital Builder Fund Growth (diversified funds), HDFC Tax Saver
(ELSS), HDFC Income Fund (debt fund) and HDFC Prudence Fund (balanced fund).
Further, the mutual fund schemes selected for the study have shown better results
in terms of Treynor ratio than Sharpe ratio, 85 percent of the growth schemes under
Treynor ratio showed higher values as compared to market where as 65 percent of
growth schemes under Sharpe ratio performed well. The difference in performance
would arise because Sharpe ratio evaluates the fund manager on the basis of total risk i.e.
low standard deviation while Treynor ratio uses systematic risk i.e. beta and thus a
mutual fund scheme with a low amount of beta could have a high amount of total risk,
resulting in a relatively high Treynor ratio (due to low amount of beta) and a low Sharpe
ratio (due to the high amount of total risk). Accordingly, Treyor ratio could indicate that
108
some of the mutual fund schemes outperformed the market, while at the same time
Sharpe ratio indicates these schemes did not perform as well as the market.
8.2.2 PERFORMANCE OF MUTUAL FUNDS BEFORE FINANCIAL CRISIS
AND AFTER CRISIS
After evaluating the performance of sample mutual fund schemes by using risk
and return adjusted measures, then it is important to evaluate the performance of mutual
funds before financial crisis and during crisis. Therefore, the present study has evaluated
the performance of mutual funds before and during crisis with the help of Sharpe Ratio.
The main findings are as follows:
> Before financial crises, two out of four Large Cap Funds, three out of four
Diversified Funds, three out of four ELSS Funds and three out of four Balanced
Funds have better Sharpe Ratios than the market. No fund in Debt category has better
Sharpe Ratio.
^ The Top performers in case of Large Cap Funds were HDFC Equity Fund,
HDFC Capital Builder Fund (Diversified Scheme), HDFC Tax Saver (ELSS) and
HDFC Prudential Fund in Balanced Fund. The remaining two in Large Cap Fund,
one in Diversified Fund, one in ELSS, four in Debt Fund and one in Balanced
Fund has shown inferior Shape Ratio than the market benchmark. The schemes
having inferior Sharpe ratio were UTI Master Plus Unit Fund, ICICI Pru Top 100
Fund in Large Cap Funds, UTI Equity Fund in Diversified Funds, UTI Equity
Tax Saving Plan Fund in ELSS, HDFC Income Fund, Birla Sun life Income
Retail Plus Fund, SB I Magnum Income Fund, UTI Bond Fund in Debt Funds and
UTI Balanced Fund in Balanced Funds.
-^ After financial crises, three out of four Large Cap Funds, four out of four
Diversified Funds, two out of four ELSS Funds, two out of four Debt Funds and
four out of four Balanced Funds have better Sharpe Ratios than the market. The
Top performers in case of Large Cap Funds were HDFC Equity Fund, SB I
Magnum Equity Fund, ICICI Pru Top 100 Fund and HDFC Capital Builder Fund,
Birla Sun life Buy India Fund, SB I Contra Fund, UTI Equity Fund (Diversified
Scheme), HDFC Tax Saver, ICICI Pru Tax Plan Fund (ELSS), HDFC Income
Fund, Birla Sun life Income Retail Plus Fund (Debt Fund) and HDFC Prudential
Fund, ICICI Prudential Balanced Fund, UTI Balanced Fund and Franklin
Templeton Balanced Fund in Balanced Fund. The remaining one in Large Cap
Fund, two in ELSS, two in Debt Fund and one in Balanced Fund has shown
109
inferior Shape Ratio than the market benchmark. The schemes having inferior
Sharpe ratio were UTI Master Plus Unit Fund in Large Cap Funds, SBI Magnum
Tax Gain Fund, UTI Equity Tax Saving Plan Fund in ELSS and SBI Magnum
Income Fund, UTI Bond Fund in Debt Fund.
The results showed that eleven mutual funds out of twenty outperformed the
market and demonstrated superior performance in terms of terms of Sharpe Ratio before
financial crises. But majority of funds i.e. fifteen funds out of twenty mutual funds
outperformed the market. According to the above results the Sharpe Ratio shows that
mutual funds performed better after the crisis than before. The fund managers were able
to beat the market properly after the crises period.
8.2.3 SELECTIVITY AND MARKET TIMING ABILITY OF MUTUAL FUND
MANAGERS IN INDIA
After evaluating the performance of the sample mutual fund schemes by
comparing with the performance of the corresponding benchmarking portfolios, then it is
important to determine whether such performance was due to skill or by chance.
Therefore, the present study has also evaluated the stock selection and market timing
abilities of the mutual fund managers with the help of Jenson (1968) Measure and the
Treynor and Mazuy (1966) Model. The main findings relating to this segment are listed
below:
8.2.3.1 Assessing Stock Selectivity using Jenson (1968) Measure
In terms of Jenson measure, the fund managers of all 20 schemes have posted
positive alpha values in all the categories of mutual funds. Out of the positive alpha
values, the fund manager of two large cap funds, one of diversified funds, three of ELSS,
zero debt funds and two of balanced funds in the growth option category have
successfully generated significantly positive alpha values at five percent level of
significance. The top performers were HDFC Equity Fund and ICICI Top 100 Fund in
large cap scheme, HDFC Capital Builder Fund in diversified scheme, HDFC Tax Saver
Fund, SBI Magnum Tax Gain Fund and ICICI Pru Tax Fund in ELSS, HDFC Prudence
Fund and Franklin Templeton Fund in balanced fund scheme. This indicated that the
fund managers of these schemes have shown superior selectivity performance (stock
selection or micro forecasting skills) in India.
110
8.2.3.2 Assessing Stock Selectivity and Market Timing using Treynor and Mazuy
Model
On the examination of TM Model, the fund managers of four of large cap funds,
four of diversified funds, three of ELSS, four of debt funds and four of balanced funds
among all schemes have shown positive and significant alpha values, indicating superior
selectivity skills of fund managers of these schemes. Whereas it was negative in case of
one scheme of ELSS funds i.e. UTI Equity Fund. Out of the positive alpha coefficients,
two of large cap funds, one of diversified fund, three of ELSS, none of debt funds and
three of balanced funds in growth/equity option, were statistically significant at five
percent level of significance indicating superior stock selection abilities of the fund
managers of these schemes. The top performers were HDFC Equity Fund, ICICI Top
100 fund in large cap scheme, HDFC Capital Builder Fund in diversified scheme, HDFC
Tax Saver Fund, SBI Magnum Tax Gain Fund, and ICICI Pru Tax Fund in ELSS, HDFC
Prudence Fund, ICICI Prudence Fund and Franklin Templeton Fund in balanced fund
scheme.
In order to test the market timing of fund managers, the coefficient gamma (y)
was found to be positive in case of the fund managers of only three schemes among all
schemes (none was statistically significant), while it has been negative for the remaining
fund managers of 17 schemes (of which 3 schemes were statistically significant). This
indicates that none of the fund managers portrayed any market timing abilities as none of
the selected schemes exhibited significantly positive gamma coefficient. However, there
were three schemes for which the gamma coefficients were found to be significant at five
percent but these coefficients were in fact negative, there by indicating that managers of
these schemes were found to be engaged in timing activities but were doing so in the
wrong direction. These schemes were ICICI Pru Top 100 Fund (large cap fund), ICICI
Prudence Fund and Franklin Templeton Fund (balanced fund). Thus, it was observed that
the fund managers of 9 out of the 20 schemes selected for the study have superior stock
selection abilities. This provides evidence to support the hypothesis that fund managers
in India have selectivity abilities. The results reported, however, did not support the
hypothesis that the fund managers in India display distinct market timing abilities
because none of the sample schemes were depicting significantly positive values of
gamma. Though, there was evidence that some of the schemes were timing the market in
the wrong direction, as they have shown significant but negative gamma coefficients.
Ill
8.3 SUGGESTIONS
1. Asset Management Company operates all schemes of the mutual fund and can act
as an AMC of only one mutual fund. The sponsor or the trustees appoint AMC to
manage the affairs of the mutual fund. To ensure efficient management, it is
suggested that the SEBI must check that existing Asset Management Company
should have a sound track record in terms of good net worth, dividend paying
capacity, profitability, general reputation and fairness in transaction etc for the
benefit of small investor.
2. To check the authenticity and reliability of mutual fund, each fund or asset
management company must prepare an aimual report and annual statement of
accounts and funds. Then an auditor should be selected by the fund's trustees,
who should not be associated in any way with the AMC's auditor, must audit
each fund's statement of accounts. The auditor prepares a report highlighting the
fair and true picture of balance sheet and revenue account, forwards it to the
trustees is included in the fund's annual report. It is suggested that an annual
report or an abridged summary thereof must be mailed to each investor at the end
of year through post or email and the annual report must be displayed on the
mutual fund's website so that it helps the prospective investors in future.
3. Mutual fund companies should provide required transparency and also offer
efficient after sales services to the investors, so as to attract more and more
investors to the mutual fund industry. It is also suggested that these companies
should market their products and services in a better way so as to attract more
investors.
4. Indian investor will invest in a mutual fund scheme by completing an application
form provided by the AMC and sending the completed application to the AMC.
An offer document is a document by which the AMC invites the public to
subscribe for units of a scheme. The offer document must disclose that are
adequate to enable an investor to make an informed investment decision. It is
suggested that an AMC must disclose certain disclosures to the prospective
investors before the sale of fund units actually takes place.
5. Before taking any investment decision, one should not only track the past
performance of different mutual fund schemes in terms of risk and return but also
consider the political and economical parameters like GDP growth rate, inflation
rate, government policies, investments by FIIs, behaviour of global indices etc.
112
An investor before investing in any mutual fund scheme must carefully read the
offer document of the mutual fund because it contains very useful information
about mutual fund schemes, main features, risk factors, initial issue expenses and
any recurring expenses to be charged to the schemes, entry or exit load, sponsor's
track record, fund manager's educational qualifications and work experiences,
pending litigations and penalties imposed, past performance of other schemes
launched by the mutual funds, and so on. So, it is suggested that the offer
document must ensure that proper information relating to the above may be made
available to the prospective investors to allow them to take informed and fair
decision.
6. In the complex investment environment, there is a need to educate the
intermediaries as well as financial advisors, agents or brokers, who sell the
mutual funds to investors, by providing sufficient training and knowledge about
the mutual fimd products and also about the dynamic investment environment, so
that they should guide the investors in the right direction. Therefore, it is
suggested that AMFIs with the association of universities and management
institutes should take necessary steps to train the current and prospective persons
to efficiently manage the mutual funds.
7. The SEBI should also take steps to strengthen and revise corporate governance
standards from time to time in keeping with international standards. Corporate
governance should be made mandatory for all mutual fund companies. The asset
management companies must follow these corporate governance standards in a
very fair manner to protest the interest of investors.
8. It is also suggested that SEBI should mandate that every fund's Annual Report
must disclose the fees/commission paid to each specific distributor used by that
fund, as distributors are also remunerated by the AMC out of fund assets for
selling scheme units to the investor. AMCs are permitted to charge fund schemes
for marketing and selling expenses, a category that includes commissions paid to
distributors. This would enable investors to see how much of their investment is
going into the pocket of distributors' website and how much is further invested.
9. It is further suggested that, in order to secure the patronage of Indian investor,
mutual fund companies are expected to ensure full disclosure and regular updates
of the regular information along with the assurance of safety and monetary
benefits.
113
10. By considering the importance of society, ethics and values, the mutual fund
companies in India should launch such new schemes which are socially
responsible and should be based on high ethical standards. Socially responsible
investing (SRI) is very popular in US since the sixteenth century. SRI is an
investment process that takes into consideration social and environment
consequences of investments, both positive and negative, within the financial
analysis framework. It is a process of identifying and investing in companies that
fulfill certain basic criteria like open and transparent business practices that are
based on ethical values and respect for employees, communities and the
environment, collectively referred to corporate social responsibility (CSR).
114
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• Business Line
• Business India
• Business Today
• Business World
• The Economic Times
• The Financial Express
131
• The Economist
WEBSITES
• Association of Mutual Funds in India www.amfiindia.com
• Birla Sunlife Mutual Fund www.birlasunlife.com
• Bombay Stock Exchange www.bseindia.com
• Crisil www.crisil.com
• Franklin Templeton Mutual Fund www.franklintempletonindia.com
• HDFC Mutual Fund www.hdfcfund.com
• ICICI Prudential Mutual Fund www.icicipruamc.com
• SBI Mutual Fund www.sbimf.com
*> UTI Mutual Fund www.utimf.com
• Investment Company Institute www.ici.org
• Kotak Mahindra Mutual Fund www.kotakmutual.com
• Lie Mutual Fund www.licmutual.com
•> Mutual Funds India www.mutualfundsindia.com
• National Stock Exchange www.nseindia.com
• Reserve Bank of India www.rbi.org.in
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132
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• Value Research Online www.valueresearchonline.com
133
LIST OF PUBLICATIONS
Papers Published in National /International Journals
1. Choudhary Vikas and Chawla, Preeti. S., 2012, "Growth and History
of Mutual Funds In India", International Journal of Marketing,
Financial Services & Management Research (ISSN No. 2277-
6788),Vol.l, No. 1pp. 174-181.
2. Choudhary Vikas and Chawla, Preeti. S., 2012, "A Study of Unit
Holding Pattern of Mutual Funds Industry in India", TSME Journal
of Management (ISSN No. 2249-6092), Vol. 2, No. 2, pp. 27-34.
3. Choudhary Vikas and Chawla, Preeti. S., 2013, " A Critical
Evaluation of Selected Equity Diversified Mutual Funds In India",
International Journal of Marketing, Financial Services &
Management Research (ISSN No. 2277-6788), Vol. 2, No. 3, pp.
141-153.
4. Choudhary Vikas and Chawla, Preeti. S., 2013, " Selectivity And
Market Timing Ability Of Fund Managers In India: An Analysis Of
Selected Equity Mutual Funds", lOSR Journal of Economics and
Finance (ISSN (e): 2321-5933), ISSN (p): 2321-5925) Vol. 1, pp. 75-
83.
5. Choudhary Vikas and Chawla, Preeti. S., 2015, "Performance
Evaluation of Mutual Funds: A Study of Selected Mid-Cap Mutual
Funds In India", International Journal of Social Sciences &
Interdisciplinary Research (ISSN: 2277-677X), Vol.4, No. 4, pp. 39-
46
Papers Presented in National/ International Conference
1. Choudhary Vikas and Chawla, Preeti. S.," Selectivity And Market

Timing Ability of Fund Managers In India: An Analysis of Selected
Equity Mutual Funds", International Business Research Conference
134
Organized by Indian Education Society Management College and
Research held at Mumbai on January, 2014.
2. Choudhary Vikas and Chawla, Preeti. S.,"Performance Evaluation of
Mutual Fund- A Study of Selected Diversified Equity Mutual Funds in
India", International Conference on Business, Law and Corporate
Social Responsibility held at Phuket (Thailand) on October, 2014.
Mutual Funds: A Study of Selected Balanced Equity Mutual Funds In
India", Advances in Management for Business Excellence held at
NIT, Kurukshetra on Febuary, 2015.
Papers Published in Edited Book

Mutual Funds: A Study of Selected Balanced Equity Mutual Funds In
India", Advances in Management for Business Excellence (ISBN:
978-93-84370-32-9), pp. 65-71, Manakin Press.
135
APPENDIX
APPENDIX-1
Total Risk (Std. Deviation)

0.082 0.0806
0.08 r •• T
0.078 0.0763 i
0.076 0.0753
. , • . .
; 1
1
0.074 \ 0.0719
0.072 ; "1
0.07 t3 Total Risk (Std. Deviation)
0.068 !
0.066 k J,
HDFC SBI UTI ICICI Pru

Equity Magnum Master Top 100
Fund Equity Plus Unit Fund
Fund Fund
Total Risk (Standard Deviation) of Large Cap Funds
Beta
1.02 . 1.0091
1 * f 1
0.98 • I
0.96 • 0;9442
0.9332
0.94 •
0.92 • f. •
0.8942
0.9 • h- • Beta
0.88 r
0.86 • r
0.84 ^ 1
0.82 - - -"—1
HOFC Equity SBI Magnij m UTI Master Plus ICICI Pru Top
Fund Equity Furid Unit Fund 100 Fund
Beta (Systemtic Risk) of Large Cap Funds

R2
0.93 0.9218 0,9245
0.92
^ , 0.9096
0.91 t
i
0.9
0.89 f
0.8806
0.88 • R2
0.87
0.86 i
0.85 i j
HDFC Equity SBI Magnum UTI Master Plus ICICI Pru Top
Fund Equity Fund Unit Fund 100 Fund
Coefficient of Determination (R') of Large Cap Funds
136
0.09 - 0.08fr5
0,085
0.08
"~C(.07!. o.07€- -
0.075 0 .0729
0.07 -
D Total Risk (Std. Deviation)
0.065 -^
i : BirIa SBI Contra UTI Equity

Capit al Sunlife Fund Fund
Buildc;r Buy India
-unc1 Fund
Total Risk (Standard Deviation) of Diversified Funds
Beta
0.9288
0.94
0.92
0.9
0.872 0.8712
0.88 i—
0.86
0.8288,
.r
0.84
0.82 • Beta
0.8
0.78
0.76
HDFC Capital BirIa Sunlife Buy SBI Contra Fund UTI Equity Fund
Builder Fund India Fund
Beta (Systemtic Risk) of Diversified Funds
R2
0.8396
! 0.7942
0.8 i O.bSSb — 0.6799 —
0.6 -i . • '
0.4 -i
nR2
0.2 H . ., - ._., - — •
HDFC Capital BIrIa Sunlife Buy SBI Contra Fund UTI Equity Fund
Bui derFu nd India FurId
Coefficient of Determination (R^ of Divereified Funds
137
0.2 , 0.1885
0.18 t _ .._
0.16 •
0.14 '
0.12 r .
0.086 0.0872
0.08 - , ,
0.06 • 1 :•
Q Total Risk (Std. Deviation)
0.04 • 1 .t
0.02 • t (
0 • "^^ - . - J ,
HDFCTax SBI Magnum UTI Equity ICICI Pru Tax
Saver Fund Tax Gain Tax Saving Plan Fund
Fund Plan Fund
L..- .,- .
Total Risk (Standard Deviation) of ELSS Funds
Beta
1.4
1.2081
1.2 '
1.0002 0.9998
1 I 0.9194
r 1 I
0.8 '
i
0.6 -" t
i • -
QBeta
0.4 . - - "'
t
0.2 * ' 1
0 • :_ i
HDFCTax Saver SB! Magnum Tax UTI Equity Tax ICICI Pru Tax Plan
Fund Gam Fund Saving Plan Fund Fund
I. . . . .. . — .,., .^
Beta (Systemtic Risk) of ELSS Funds
R2
0.9 * °-»"5
017954 - .. .
0.7726
0.8 * f " 1
0.7 ^ J 1 p ~n
0.6 - 1 1
0.5 • ••
i
f . ..- ^
• 0.4 • aR2
0.3 i i- •
0^431.
0.2
0.1
t
f
1" i 1 ... -.
__ 1 -
'
HDFCTax Saver G SBI Magnum Tax UTI Equity Tax ICICI Pru Tax Plan
Gain Schem i;(G) Saving Plan
Coefficient of Determination (R^) of ELSS Funds
138
0.25
0 211 2
0.2
0.15
0.1 —
0.05 HoiSS ^•02&2- ~o:oi8 D Total Risk (Std. Deviation)
0 1 rz] „ n , m .
HOFC BirlaSun SBl UTlBond
Income life Income Magnum Fund
Fund Retail Plus Income
Growth Fund
Fund
Total Risk (Standard Deviation) of Debt Funds
Beta
0.06 0.051
0.04 i
0.0289
0.02 -[ - -
0.0072
0 + .1 1 DBeta
! HDFCIncome BirlaSun life SBl Magnum UTlponci f und
-0.02 -f- -Fund- Income Retail --Income Fond -
i PlusGrowth
-0.06 O.0515
Beta (Systemtic Risk) of Debt Funds
R2
0.06
0.048
0.05
0.04
0.03
0.02 T 0^^0149
I oR2
0.01 4- 0,0004 0.0004
0
HDFCIncomc BirlaSun life SBl Magnum UTlBond Fund
Fund Income Retail Income Fund
PlusGrowth
Fund
Coefficient of Determination (R') of Debt Funds
139
0.08 0.0724
0.07
0.0585 0.0545
0.06 0.0527
0.05
0.04
0.03
n
0.02
D Total Risk (Std. Deviation)
0.01
0
HDFC ICICI UTI Franklin
Prudence Prudential Balanced Templeton
Fund Balanced Fund Balanced
Fund Fund
Total Risk (Standard Deviation) of Balanced Funds
Beta
0.7 0.6942 — - •
0.69 •*• \
0.6791
0.68 :.
0.67 0.6647 - - -
0.66
0.65 '
'n
, \ . •
0.6544
- - DBeta
0.64 - -
0.63 .,_ L. ;,
_ l_j' "^ *
HDFC Prudence ICICI Prudential UTI Balanced Franklin
Fund Balanced Fund Fund Templeton
Bala ncedF und
Beta (Systemtic Risk) of Balanced Funds

R2
1 • 0.8731 9:9032
0.9 • 0.8232
0.8 +
_
0.7 ^
0.6 . - -- 0.5-17*- - - - -
0.5 *
0.4 .
0.3 + .... OR2
0.2 r ,.
0.1 ;
0 -i-
Balanced Fund
Coefficient of Determination (R-) of Balanced Funds

140
APPENDIX-n
0.35
0,3
0.25 f •1 (•
0.2
0.15
0.1 D Schemes
a Average Return (Monthly)
0.05
0 ^=U- TT^ _ j-aL- J • - — • • " ^
a Average Return (Annually)
/
.^^ .o^
ONS"
.o<J
. / ,xO^
^^
Average Return of Large Cap Funds

0.3 f
0.25 T '
0.2
0.15
0.1
D Schemes
0.05
0 7 J -r"--"r r =t- T ^ . ^ - / D Average Return (Monthly)
D Average Return (Annually)

.^-'
. / >*>
<f
.X*
c^* 4 f
,<r
J9'
/
Average Return of Diversified Funds
0.35 ---
0.3 • ' — 1 f
0.25
0.2
0.15
0.1
a Schemes
0.05
0
—J \=U- y~_j^
D Average Return (Monthly)
Q Average Return (Annually)

c / ./
A*" ^x<* oN*
V^
^ \^ S^
.<»"
.^ i>
•^#
<*-^
s^
Average Return of ELSS Funds
141
0.25 -r
0.2
0.15
0.1 -T
0.05
0. I " D Schemes
0 ¥^ D Average Return (Monthly)
. ^ • •
C Average Return (Annually)
/
.>r A<^ ^-^^
/ / /
/ ./"
Average Return of Debt Funds
0.3 •
0.25 •
0.2 • r
•^
0.15 •
0.1 •
0.05 -
r f' n Schemes
0 1 T r 1
• Average Return (Monthly)
6 r: Average Return (Annually)
Average Return of Balanced Funds
142
APPENDIX-III
Sharpe Ratio < Large Cap Funds

0.35 1
0^288 - ,, . _
0.3 + —
0.25 j - 0.21
0.1899
0.2 + - -
'- 0.148
0.15 f
D Sharpe Ratio
0.1 4-- - •
i
0.05 -t- _
0 f---
HDFC Equity SBI Magnum UT! Master ICICIPruTop
Fund Equity Fund Plus Unit Fund 100 Fund
Sharpe Ratio of Laiê Cap Funds
Sliarpe Ratio - Diversified Funds

0.3
0.2411
0.25 4„-. •0:202
0.2 JJ.1775 ^ - H , ^ € 3 3 -
0.15
0.1 t
0.05 • Sharpe Ratio
0
HDFC Capital BirlaSunlife SBI Contra UTI Equity
Builder Fund Buy India Fund Fund
Fund
Sharpe Ratio of Diversified Funds
Sharpe Ratio - ELSS Funds

0-3 T -0.^728
0.25 ! 0,2311 _ 0-2398
0,2 i -
0.15 + .. _.. -
t C).101 n Sharpe Ratio
0.1 +- • -
1
0.05 r -
0 ^ •
H DFCT ax SBI Magn um UTIIEquity Tax ICIC IPru Tax

Sa /erFu nd Tax <3ainF und Sa\MngP an PI anFuii d
Sharpe Ratio of ELSS Funds

143
Sharpe Ratio - Debt Funds
0.09 0i)84I
0.0799
0.08
0.07 0.0641
0,06 -\
0.05
0.04
O.OJ i I
0,02 • Sharpe Ratio
0.01 0.0053
0 i..J
HDFC Income Birla Sun life SBl Magnum UTI Bond Fund
Plus Growth
Fund
Sharpe Ratio of Debt Funds
Sharpe Ratio - Balanced Funds

0.35 0.3056
0.3 T
0.25 0.228
0.2027
0.2 r "7 0.1527 r
I
0.15 i :•• •• 1 — '
}•
j
0.1
0.05
0
HDFC
ij 1 r^
ICICI UTI Balanced Franklin
i
J
o Sharpe Ratio
Prudence Prudential Fund Templcton

Fund Balanced Balanced
Fund Fund
Sharpe katio of Balanced Funds
Treynor Ratio - Large Cap Funds

0.025 0-0236
0.02 ( 0.0169
0.0152
0.015 - j
0.0118
0.01 ' '
• Treynor Ratio
0.005 '<
0 * >•
\ HDFC Equity SBl Magnum UTI Master ICICIPruTop

I Fund Equity Fund Plus Unit 100 Fund
Fund
Treynor Ratio of Large Cap Funds
144
Treynor Ratio - Diversified Funds
0.025 -j—^Q"(5207
0.0186
0.02 0;01€5-
0.0137
0.015 +
0.01 I
0.005 1- D Treynor Ratio
I
0 I-
HDFC Capita! Biria Surttife SBI Contra UTI Equity
Fund
Treynor Ratio of Diversified Funds
Treynor Ratio - ELSS Funds

0.025 "l—a.0225
0.0199 C(.0209
0.02 +
^.,. -, 0.0158
0.015 + - • --
- - - •
0.01 4—
D Treynor Ratio
0.005 f - ... _ • • - - -
0 t-
HDFCTax SBIMagnum UTt Equity ICICIPruTax
Saver Fund Tax Gain Tax Saving Plan
Fund Plan
Treynor Ratio of ELSS Funds
Treynor Ratio - Debt Funds
i 0.306
0.2 -j
1
0.1 + - 0.0508 —
0.0019 o Treynor Ratio
0 I .-.I 1
HDFCIncome BirlaSunlife SBIMagnum UTIIoi)d!und
-0.1 -j -fTund rncome"Ketan^Tric6n1oFund"
' nit ,f / T i - y ^ i . . ! - ! ^
Plus Growth
-0.2 Fund
-0.3 -i- -0.264-
Treynor Ratio of Debt Funds

145
Treynor Ratio - Balanced Funds
°°^ 0.0258 - - -
0.025 t • V • -' -
0.02 • ' 0.0184
0.0166-
aoi63'" 7~~
0.015 ^ 1-
:
0.01 f ^ \ :
a Treynor Ratio
0.005 -r
0 t
[
i
T—' • 1 i
1 r ••'
HDFC ICICI UTI Balanced Franklin

Prudence Prudential Fund Templeton
Fund Balanced Balanced
Fund Fund
Treynor Ratio of Balanced Funds
146
APPENDIX-IV
Large Cap Funds

0.012 1
0.01 —,
0.008
0.006 • • —_,. . .. ^ ^^^.. -_ -_w

.-
o Alplâ
0.002 1 • - — • • — — —
0 +-
HD FCEqt ity SBI Magnum UTI Master Plus ICICI Pru Top
Jenson Measure of Large Cap Funds
Diversified Funds
0.008
0.007
0.006
0.005
0.004
0.003 a Alpha
0.002
0.001
0
HOFCCapital Birta Sun life SBI Contra UTI Equity Fund
Jenson Measure of Diversified Funds
ELSS Funds
0.01
0.009
0.008 t -
0.007 t -
0.006 +
0.005
0.004
0.003 c Alpha
0.002
0.001
0
HDFCTax Saver SBI Magnum UTI Equity Tax ICICIPruTax
Fund Tax Gain Fund Saving Plan Plan Fund
Fund
Jenson Measure of ELSS Funds

147
Debt Funds
0.016
0.014 ^
0.012 t
0.01 f
0.008 -^
0.006
0.004 • Alpha
0.002
0 r : : i ., , ]
HDFC Income Biria Sun life SBI Magnum UTI Bond Fund
Plus Growth
Fund
^ __
Jenson Masure of Debt Funds
Balanced Funds
0.01
0.009
0.008
0.007
0.006
0.005
0.004
0.003 D Alpha
0.002
0.001
0
Balanced Fund
Jenson Measure of Balanced Funds
148
APPENDK-V
a
0.012 ' —
0.01
0.01 ^
0.008
0.008
0.006 - - •
tia
0.004 0.003 --
0.002 —
0
0 ^
HO FCEqu ity SBI M a g n u m UTI Master Plus ICICI Pru Top
Treynor & Mazuy Measure of Large Cap Funds (Value of a)
0.955 0.962
0.96
0.96 -0.9S7
0.955
0.95
0.94S
0.94 _0.S38._ Dp
0.935
0.93
0.925
HDFC Equity SBI Magnum UTI Master Plus ICICI Pru Top
Treynor & Mazuy Measure of Large Cap Funds (Value of P)
0.4 -p 0-3J
0.2 t
... \lHDFC Equity

Ftind-
SBt"^9§i?um
—Cqtirtyf wnd-
UTI Master Plus ICICI 'i u Tot 100
t^md F'jnd cy
-0.4
-0.6
-0.605
-0.8 -
Treynor «& Mazuy Measure of Large Cap Funds (Value of y)

149
R
0.93 0.925
0.322
0.92 • 1 , 0.916
:
0.91 +
i
0.9 r 1 1
0.89
0.88
•
0.881
-f
I
t • • R
0.87 ' - \ i
r
•
0.86 • 1
0.85 >
1
1 ^J
HDFC Equity SB! M a g n u m UTI Master Pius ICICl Pru Top 100
Fund Equity Fund U n i t Fund Fund
Treynor & Mazuy Measure of Large Cap Funds (Value of R '^)
a
0.012
0.01
0.01 ^ r-
1
0.008 * 0.006
0.005
0.006 J
• a
i 0.004 1 0.003
0.002 •
O ' i
J
1
HDFC Capital Biria Sun life? Buy SBI C o n t r a f u n d UTIE q u i t y Fund
Builder Fund India Fui i d
Treynor & Mazuy Measure of Diversified Funds (Value of a)
0.94 0.918
0.92
0.9 0.893
0.88
0.86
0.837
0.84 O.S25
0.82 a(5
0.8
0.78
0.76
HDFC Capital BirIa Sun life Buy SBI Contra Fund UTI Equity Fund
Treynor & Mazuy Measure of Diversified Funds (Value of P)
150
V
0 •
-0.05 ^ HP -C Cap tal Biria • Buy SBI C :-n(r,i • u n d UTif qi:ilV • und
Bu In id
-0.1
-0.15 i. ,
-0.159
-0.2 ay
-0.208
-0.25
-0.3 ^ - - . . . . .... . . -
-0.35 - - • - - • -
-0.4 - —- 0 . 3 6 8
I — • -
— , — ,_ . .._. — - . — .. -_ .-
Treynor & Mazuy Measure of Diversified Funds (Value of y)
R
0.9 J- -o;„7 - - — O.SAl
0.8 + - 0.7 ~- 0.68
0.7 f- -
0.6 1
o.s 1
- -
1- -1
1
0.4 -j- 1
• R
0.3 t i.
0.2 t- , ... ._ • -
0.1 1 r - • •
t: ••._ r
0 i
HDFC Capital BirIa Sun life Buy SBI Contra Fund UTI Equity Fund
L . __ . .. . . _ „ .,
_... . .. _»,.— -- -
Treynor & Mazuy Measure of Diversified Funds (Value of R ^)
a
0.015 r -- — _ _. ..
1 0.011
0.01 0.01
0.01
I
0.005 1 Da
0
HDF CTaxS aver SBI M a g n u m Tax UTI Lt)U:;,s Tax ICICI Pru Tax
-0.005 4. Fund Gain Fund Sa ^/inp. P an Plan F u n d
Fl..ri;.i
!
1
-0.01 - - —
-0.009
- - • - - • .
Treynor & Mazuy Measure of ELSS Funds (Value of a)
151
1 0.93 0.893 0.881
0.9
0.8
0.7
0.6
0.48S
0.5
0.4
0.3 •P
0.2
0.1
O
HDFCTaxSaver SBI Magnum Tax UTI Equity Tax ICICI Pru Tax Plan
Fund Gain Fund Saving Plan Fund Fund
Treynor & Mazuy Measure of ELSS Funds (Value of P)
Y
2.5
2.199
--
2 • ' - - • - - • - - - -
1.5 +
1 r - — • -
DV
0.5 *'• - ••
HDFCoT^gâver SBI Magnirrn Tax UTI Equity Tax ICICI Plan

'°-^ ^ Fund G a C h 3 W i d ~ Saving Plan Fund -Pi3W "
Treynor & Mazuy Measure of ELSS Funds (Value of y)
R
1 0.863
0.9 0.774
0.8 1
0.7
i
0.6
0.5
0.4 J 0.2^8 ^ OR
0.3
0.2 0.0797 1 h
0.1 {
O
HDFCTax Saver SBI M a g n u m Tax UTI Equity Tax ICICI Pru Tax Plan
Fund Gain Fund Saving Plan Fund Fund
Treynor & Mazuy Measure of ELSS Funds (Value of R ^
152
a
0.02 T 0.018- ~
0.018 f
0.016 +--
0.014 -(—
0.012
0.01
0.008
0.006
0.004 - 0;O02- - • 0.003 no
0.002 ^0.001
0 .1 I J
HDFC Income Biria Sun life SB! Magnum UTI Bond Fund
Plus Growth
Fund
Treynor & Mazuy Measure of Debt Funds (Value of a)
P
0.25 T -0.-225
0.2 t
0.15 0.126-
0.1 f-
0.05 ^^024 op
0 1
-0.05 HDFC income^ BirIa Sun life_ SBljyiagnuiTi UTI 6@.i(^ûncl
Plus Growth
Fund
Treynor & Mazuy Measure of Debt Funds (Value of P)
°r..
-0.1 ^
HDCincqme Bit J fc SB Magnum UTI tend Pund
t Fund Inc )rt)o Ri tall Inc )iiic F nd
PldrtSTTTO^th
-0.2
=0^15^ —md "
-0.3 +- ..-P.234-
ay
-0.4
-0.5
-0.6 -I-
-0.615
-0.7 i
Treynor & Mazuy Measure of Debt Funds (Value of y)
153
Y
0.2 - •
0.089
- - -. . . . w —
0.1 f 1
0
-0.1 • HOFCPt'Silence lOdPrudJitiat ^TJSatanced- Pronklift--
-0.2 f Fund Balqiicod Fund Fund Tampletipn
Balanced Ftind
-0.3 •1 _ ^ .-
-L .J- oy
-0.4 t •j . ,..„-. -. ._ ._. -0316 -._
-0.5 i
-0.6 *- ^ - -
-0.7 ' "' " "" " "
-0.677
-0.8
Treynor & Mazuy Measure of Balanced Funds (Value of y)
R
1 0.89 • ' •
0.907
0.9 0.823
1
/— — - V
0.8
0.7
0.6 0.518
0.5
0.4
0.3 nR
0.2
0.1 .
0 J
HDFC Prudence ICICI Prudence UTI Balanced Franklin

Balanced Fund
Treynor & Mazuy Measure of Balanced Funds (Value of R '^)
155

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PERFORMANCE EVALUATION OF MUTUAL FUNDS (A STUDY OF

SELECTED MUTUAL FUNDS IN INDIA)

SUBMTTED FOR THE A WARD OF THE DEGREE OF

Dr. VIKAS CHOUDHARY

DEPARTMENT OF HUMANITIES AND SOCIAL SCIENCES

NATIONAL EVSTFTUTE OF TECHNOLOGY

, > ; .• in.H.l 1 .T <J .

This is to certify that the thesis entitled. Performance Evaluation of Mutual

DR. VIKAS CHOUDHARY

TITLE PAGE NO.

CHAPTER - 1 INTRODUCTION 1-7

1.2 Concept of Mutual Funds 3-5

1.3 Objectives of the Study 5

1.4 Hypotheses of the Study 5

5.2 Types of Mutual Fund Schemes 49-54

5.3 Advantages of Mutual Funds 54-56

5.4 Structure of Mutual Funds 56-58

5.5 Regulatory Framework of Mutual Funds 58-60

5.6 Growth of Mutual Funds in India 60-65

5.7 Unit Holding Pattern of Indian Mutual Funds 65-69

Classified into Public and Private Sector

5.8 Net Assets of Mutual Funds of India 69-70

5.9 Assets of Mutual Funds- India vs. World 70-71

CHAPTER- 6 EVALUATION OF PERFORMANCE OF 72-98

MUTUAL FUNDS IN INDIA

6.1 Introduction 72-73

6.2 Results and Discussion on the basis of Risk

and Return Analysis 73-90

6.2.1 Risk Analysis

Sr. No. Title Page No.

AMFI - Association of Mutual Funds in India

BSE - Bombay Stock Exchange

CAPM - Capital Asset Pricing Model

CSR - Corporate Social Responsibility

DFIs - Development Financial Institutions

ELSS - Equity Linked Saving Schemes

ETF - Exchange Traded Fund

FIIs - Foreign Institution Investors

FoFs - Fund of Funds

GIC - General Insurance Corporation of India

GDP - Gross Domestic Product

ICRA - Investment Information &Credit Rating Agency

IDBI - Industrial Development Bank of India

ICI - Investment Company Institute

Lie - Life Insurance Corporation of India

MIP - Monthly Income Plan

NSE - National Stock Exchange

NAV - Net Asset Value

NFO - New Fund Offer

PNB - Punjab National Bank

SEBI Security Exchange Board of India

SBI State Bank of India

SIP Systematic Investment Plan

T-bills Treasury Bills

TM Treynor & Mazuy Model

U.K. United Kingdom

U.S. United States

UTI Unit Trust of India

U.S. MAO THE W O R t O S lABGCST M O T U A t FUND MARKET

^""^ ' ""^ 03 e<*y<l ».:?•»

Jc , . « V<»«J V » - f C,-«.» - » •«[-•.»» £ i » i « « 9 « f - - » . •wAl5«TV<a- J#-<«—f A <J. »• «> rt-ft-**--^jrk.:'»-,f. lij^x

HISTORY OF MUTUAL FUNDS

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