Final Research Project

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CHAPTER-1

INTRODUCTION

1.1 Mutual Fund

A mutual fund is just the connecting bridge or a financial intermediary that allows a

group of investors to pool their money together with a predetermined investment

objective. The mutual fund will have a fund manager who is responsible for investing

the gathered money into specific securities (stocks or bonds). When you invest in a

mutual fund, you are buying units or portions of the mutual fund and thus on investing

becomes a shareholder or unit holder of the fund.

Mutual funds are considered as one of the best available investments as compare to

others they are very cost efficient and also easy to invest in, thus by pooling money

together in a mutual fund, investors can purchase stocks or bonds with much lower

trading costs than if they tried to do it on their own. But the biggest advantage to

mutual funds is diversification, by minimizing risk & maximizing returns.

Fig 1.1(A)

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1.2 Evolution

The mutual fund industry in India started in 1963 with the formation of Unit Trust of

India, at the initiative of the Government of India and Reserve Bank of India. The history

of mutual funds in India can be broadly divided into four distinct phases

First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up

by the Reserve Bank of India and functioned under the Regulatory and administrative

control of the Reserve Bank of India. In 1978 UTI was de-linked from the 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 Unit Scheme 1964. At the

end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase – 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector

banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation

of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June

1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund

(Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda

Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set

up its mutual fund in December 1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.47,004

crores.

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 of fund families. 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

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(now merged with Franklin Templeton) was the first private sector mutual fund registered

in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive

andrevised Mutual Fund Regulations in 1996. The industry now functions under the

SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds

setting up funds in India and also the industry has witnessed several mergers and

acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets

of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under

management was way ahead of other mutual funds.

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 is the Specified Undertaking of the Unit Trust

of India with assets under management of Rs.29,835 crores as at the end of January 2003,

representing broadly, the assets of US 64 scheme, assured return and certain other

schemes. The Specified Undertaking of Unit Trust of India, functioning under an

administrator and under the rules framed by Government of India and does not come

under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is

registered with SEBI and functions under the Mutual Fund Regulations. With the

bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of

assets under management and with the setting up of a UTI Mutual Fund, conforming to

the SEBI Mutual Fund Regulations, and with recent mergers taking place among

different private sector funds, the mutual fund industry has entered its current phase of

consolidation and growth.

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2004Onwards

The industry has also witnessed several mergers and acquisitions recently, examples of

which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C

Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more

international mutal fund players have entered India like Fidelity, Franklin Templeton

Mutual Fund etc. This is a continuing phase of growth of the industry through

consolidation and entry of new international and private sector players.

The graph indicates the growth of assets over the years:

Fig 1.2(A)

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From a single-player monopoly in 1964, the Indian mutual fund industry has evolved into

a high-growth and competitive market on the back of favourable economic and

demographic factors. As of August 2012, 44 asset management companies (AMCs) were

operating in India with assets under management (AUM) of INR 6.4 trillion. However,

after several years of persistent growth, the industry witnessed consistent declines of 6.3

percent and 5.1 percent in its AUM during FY11 and FY12, respectively. One of the

reasons could be the changes in regulatory guidelines-example ban on entry load,

stringent KYC norms, guidelines on transaction charges, tightening valuation and

advertisement norms - which were introduced in a short span of time thus giving less

time to the industry to adjust in the new environment.

Fig 1.2(B)

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1.3 Advantages of investing in mutual funds:

Diversification can reduce your overall investment risk by spreading your risk

across many different assets. With a mutual fund you can diversify your holdings

both across companies (e.g. by buying a mutual fund that owns stock in 100

different companies) and across asset classes (e.g. by buying a mutual fund that

owns stocks, bonds, and other securities). When some assets are falling in price,

others are likely to be rising, so diversification results in less risk than if you

purchased just one or two investments.

Choice: Mutual funds come in a wide variety of types. Some mutual funds invest

exclusively in a particular sector (e.g. energy funds), while others

might target growth opportunities in general. There are thousands of funds, and

each has its own objectives and focus. The key is for you to find the mutual funds

that most closely match your own particular investment objectives.

Liquidity is the ease with which you can convert your assets–with

relatively low depreciation in value–into cash. In the case of mutual funds, it’s as

easy to sell a share of a mutual fund as it is to sell a share of stock (although some

funds charge a fee for redemptions and others you can only redeem at the end of

the trading day, after the current value of the fund’s holdings has been calculated).

Low Investment Minimums: Most mutual funds will allow you to buy into the

fund with as little $1,000 or $2,000, and some funds even allow a ―no minimum‖

initial investment, if you agree to make regular monthly contributions of $50 or

$100. Whatever the case may be, you do not need to be exceptionally wealthy

in order to invest in a mutual fund.

Convenience: When you own a mutual fund, you don’t need to worry

about tracking the dozens of different securities in which the fund invests; rather,

all you need to do is to keep track of the fund’s performance. It’s also quite easy

to make monthly contributions to mutual funds and to buy and sell shares in them.

Low Transaction Costs: Mutual funds are able to keep transaction costs — that

is, the costs associated with buying and selling securities — at a minimum

because they benefit from reduced brokerage commissions for buying and selling

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large quantities of investments at a single time. Of course, this benefit is reduced

somewhat by the fact that they are buying and selling a large number of different

stocks. Annual fees of 1.0% to 1.5% of the investment amount are typical.

Regulation: Mutual funds are regulated by the government under the Investment

Company Act of 1940. This act requires that mutual funds register their securities

with the Securities and Exchange Commission. The act also regulates the way that

mutual funds approach new investors and the way that they conduct their

internal operations. This provides some level of safety to you, although you

should be aware that the investments are not guaranteed by anyone and that they

can (and often do) decline in value.

Additional Services: Some mutual funds offer additional services to their

shareholders, such as tax reports, reinvestment programs, and automatic

withdrawal and contribution plans.

Professional Management: Mutual funds are managed by a team of

professionals, which usually includes one mutual fund manager and

several analysts. Presumably, professionals have more experience, knowledge,

and information than the average investor when it comes to deciding which

securities to buy and sell. They also have the ability to focus on just a single area

of expertise.

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1.4 Types of Mutual funds

By structure

Close ended fund/scheme: A close ended fund or scheme has a predetermined

maturity period (eg. 5-7 years). The fund is open for subscription during the launch of

the scheme for a specified period of time. Investors can invest in the scheme during

that time period. After it, the fund is closed.

Open ended fund/scheme: Investors can choose to invest or transact in these

schemes as per their convenience. In an open-ended mutual fund, there is no limit to

the number of investors, shares, or overall size of the fund, unless the fund manager

decides to close the fund to new investors in order to keep it manageable.

Interval schemes: Interval schemes combine the features of open-ended and close-

ended schemes. The units may be traded on the stock exchange or may be open for

sale or redemption during pre-determined intervals at NAV related prices. FMPs or

Fixed maturity plans are examples of these types of schemes.

By nature

Equity mutual funds: These funds invest maximum part of their corpus into equity

holdings. The structure of the fund may vary for different schemes and the fund

manager’s outlook on different stocks. Equity investments rank high on the risk-

return grid and hence, are ideal for a longer time frame.

The Equity funds are sub-classified depending upon their investment objective, as

follows:

Diversified equity funds

Mid-cap funds

Small cap funds

Sector specific funds

Tax savings funds (ELSS)

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Debt mutual funds: These funds invest in debt instruments to ensure low risk and

provide a stable income to the investors. Government authorities, private companies,

banks and financial institutions are some of the major issuers of debt papers.

Debt funds can be further classified as:

Gilt funds

Income funds

MIPs

Short term plans

Liquid funds

Balanced funds: They invest in both equities and fixed income securities which are

in line with pre-defined investment objective of the scheme. The equity portion

provides growth while debt provides stability in returns. This way, investors get to

taste the best of both worlds.

By investment objective

Growth schemes- Also known as equity schemes, these schemes aim at providing

capital appreciation over medium to long term. These schemes normally invest a

major portion of their fund in equities and are willing to withstand short-term decline

in value for possible future appreciation.

Income schemes - Also known as debt schemes, they generally invest in fixed

income securities such as bonds and corporate debentures. These schemes aim at

providing regular and steady income to investors. However, capital appreciation in

such schemes may be limited.

Index schemes- These schemes attempt to reproduce the performance of a particular

index such as the BSE Sensex or the NSE 50. Their portfolios will consist of only

those stocks that constitute the index. The percentage of each stock to the total

holding will be identical to the stocks index weight age. And hence, the returns from

such schemes would be more or less equivalent to those of the Index.

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1.5 Equity Linked Saving Schemes

Equity Linked Saving Schemes (ELSS) is an investment option that provides tax saving

benefits as well as capital gains. ELSS holds the advantage of being the only equity-

based tax saving instrument available in the country today and offers tax deduction on

investments up to Rs 1,10,000, under Section 80C of the Income-Tax Act.

Equity Linked Savings Schemes (ELSSs) are similar to the normal equity diversified

schemes that invest across the board and market segments. Features that differentiate

ELSS from an open-ended equity diversified scheme are tax saving benefit (deductions

under Sec 80C) and a lock-in period of three years. Also, one can invest in these schemes

in small amounts through a Systematic Investment Plan and begin with a small fund size

to add to this expense (i.e. entry/exit load)

Thus, an ELSS is a diversified equity mutual fund which has a majority of the corpus

invested in equities. Since it is an equity fund, returns from an ELSS fund reflect returns

from the equity markets.

This type of mutual fund has a lock in period of 3 years from the date of investment. This

means if you start a Systematic Investment Plan in an ELSS, then each of your

investments will be locked in for 3 years from the respective investment date. Investors

can exit ELSS by selling it after 3 years.

Salient features of ELSS:

A diversified equity mutual fund with majority of the corpus invested in equities.

ELSS has a lock in period of 3 years from the date of investment.

Investment upto Rs. 1 lakh is eligible for deduction from gross total income in a

financial year.

Returns from ELSS schemes reflect returns from the equity markets.

ELSS schemes have both growth and dividend options. Under the growth option,

investors get a lump-sum only on the expiry of 3 years. Under the dividend

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option, investors receive a regular dividend income even during the lock-in

period.

Returns from ELSS schemes are tax-free.

ELSS treatment after the introduction of Direct Tax Code (DTC)

The last draft of the Direct Tax Code (DTC) has excluded ELSS as a tax saving

instrument. This means that your investment in ELSS after the introduction of DTC will

not qualify for tax exemption under Sec 66 (which is a replacement of Sec 80C under

DTC). However, remember that this is only a draft version of the DTC. The mutual fund

industry has been trying hard to include ELSS as a tax saving instrument. The final DTC

may spring a positive surprise.

High inflows into ELSS funds are determined by the performance of the stock market in

general. Also, if an investor gets better tax-adjusted returns from other investment

avenues like debt, he will prefer to go for this, as risk is lower. But over a long term,

ELSS funds are the best tax saving instruments; especially if you are an investor who can

take on high risk. The success of this category of mutual fund depends on the tax

treatment it receives under the DTC.

Popular ELSS funds in the market:

Investing in tax saving funds should involve proper research and planning, similar to any

other fund. Some of the key parameters to select the right tax-saving fund include

performance of the fund, the investment approach of the fund manager, the expense ratio

of the fund and the volatility of the fund keeping in mind your risk-return profile. Based

on 10 year performance, top rated funds by Value research are SBI Magnum Tax gain,

HDFC Tax Saver & ICICI Prudential Tax Plan. Investor enthusiasm towards ELSS in the

previous tax planning season was subdued owing to a lackluster stock market, better

returns from alternative investments in debt and the uncertainty about the status of ELSS

after the implementation of the DTC. However, ELSS schemes are by far the best tax

saving instruments in the long term for investors with a high risk appetite, offering better

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returns compared to other tax saving instruments. Let’s hope the mutual fund industry is

successful in getting ELSS qualified as a tax saving instrument under DTC.

Benefits of ELSS

Money is invested over a longer period as the ELSS funds have a lock-in period

of three years.

Better returns are achieved as the investment in equity is over a long-term and it

prevents from unnecessary withdrawals

Apart from tax savings, the investor receives Capital gains or high returns

Small amount even Rs.500 can be invested in ELS through SIPs

Dividend option in ELSS helps you receive income even during the lock-in

period.

Involves less risk - Investing in ELSS, one cannot run away from equity market

risk as equity market is very volatile and fluctuating. One option to minimize risk

is to invest in Diversified funds and another option is to trust the fund manager for

SIP.

This is an investment in equity markets, and so investing in a good ELSS scheme

can give you better returns compared to other asset classes over the long term

Disadvantages of ELSS

Since ELSS comprises of investments in stock markets, all risks associated with

equity investments pertain to ELSS. If you are a risk-averse investor, it is better to

avoid ELSS.

Premature withdrawal is not possible in ELSS; instruments like PPF and bank

fixed deposits allow withdrawal subject to certain conditions.

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1.6 Types of ELSS options

There are three types of options in ELSS plans:

1. Growth option: In this option, the investor does not get regular income during

the duration of the investment. It is only when the tenure is complete or when the

investment is prematurely cancelled that he receives the interest generated. The

advantage of this is that the investor gets a lump sum amount when the investment

matures but the disadvantage is that there will be no steady income until maturity.

2. Dividend option: This is the exact opposite of the growth option and the investor

will have a steady amount flowing every month through the duration of the

investment. But this is a risk as the income will be unpredictable and erratic. The

main disadvantage of this type of investment is that at the end of the 3 years the

final value of the investment will not be much.

3. Dividend reinvestment option: There is a third option wherein the investor can

invest the dividends generated from the ELSS fund. But according to Section 80

C, the reinvested dividends are not liable for tax deductions and hence people

usually opt for either the growth option or the dividend option instead of the

dividend reinvestment option.

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1.7 Charges in a Mutual Fund

There are 3 types of charges in an ELSS Plan:

1. Entry Load: This is the charge levied by the mutual fund at the time of

investment. For example if the entry load is 2.25% and the investor has invested

Rs 100, the Rs 2.25 will go towards entry load charges and the remaining Rs

97.75 is invested by the mutual fund on behalf of the investor. If the NAV on that

day is Rs 10, then the investor will get 97.75/10 = 9.775 units in his account.

Recently from 1st August 2009, Securities and Exchange Board of India (SEBI)

has abolished the entry load for mutual funds. So now all ELSS plans are free of

entry load charges. This effectively means that if the investor invests Rs 100, the

full Rs 100 will be invested without deduction of any entry load charge.

2. Fund Management Charges: This is the recurring charge levied by the mutual

fund. This charge is for the day to day expenses of the mutual fund. The

maximum permissible by SEBI is 2.5% and the industry average is around 2.25%.

This charge is collected by the mutual fund by cancelling equivalent units from

the investors account.

3. Exit Load: This charge is levied by mutual funds when the investor sells the

units. In ELSS plans there is no exit load.

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CHAPTER-2

2.1 REVIEW OF LITERATURE

1. Dr.chandrakumarmangalam (2011) analyzed ELSS funds to ascertain the ranking

on the basis of risk, return &its volatility. Hence it provides basis for the investors

in choosing the mutual fund scheme.

2. Anand and Murugaiah (2008) examined the components and sources of investment

performance in order to attribute it to specific activities of Indian fund managers.

They also attempted to identify a part of observed return which is due to the ability to

pick up the best securities at given level of risk. For this purpose, Fama's

methodology is adopted here. The study covers the period between April 1999 and

March 2003 and evaluates the performance of mutual funds based on 113 selected

schemes having exposure more than 90percent of corpus to equity stocks of 25 fund

houses. The empirical results reported reveal the fact that the mutual funds were not

able to compensate the investors for the additional risk that they have taken by

investing in the mutual funds. The study concludes that the influence of market factor

was more severe during negative performance of the funds while the impact

selectivity skills of fund managers was more than the other factors on the fund

performance in times of generating positive return by the funds. It can also be

observed from the study that selectivity, expected market risk and market return

factors have shown closer correlation with the fund return.

3. Guha (2008) focused on return-based style analysis of equity mutual funds in India

using quadratic optimization of an asset class factor model proposed by William

Sharpe. The study found the ―Style Benchmarks‖ of each of its sample of equity

funds as optimum exposure to 11 passive asset class indexes. The study also analyzed

the relative performance of the funds with respect to their style benchmarks. The

results of the study showed that the funds have not been able to beat their style

benchmarks on the average.

4. A study by Agarwal (2007) provides an overview of mutual fund activity in emerging

markets. It describes their size and asset allocation. This paper analyzes the Indian

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Mutual Fund Industry pricing mechanism with empirical studies on its valuation. It

also analyzes data at both the fund-manager and fund-investor levels.

5. A study by Gupta and Aggarwal (2007) sought to check the performance of mutual

funds operation in India. In this regard, quarterly returns performance of all the

equity-diversified mutual funds during the period from January 2002 to December

2006 was tested. Analysis was carried out with the help of Capital Asset Pricing

Model (CAPM) and Fama-French Model. Amidst contrasting findings from the

application of the two models, the study calls for further research and insights into the

interplay between the performance determinant factor portfolios and their effect on

mutual fund returns.

6. Zakri (2005) matched a sample of socially responsible stock mutual funds to

randomly selected conventional funds of similar net assets to investigate differences

in characteristics of assets held, degree of portfolio diversification and variable

effects of diversification on investment performance. The study found that socially

responsible funds do not differ significantly from conventional funds in terms of any

of these attributes. Moreover, the effect of diversification on investment performance

is not different between the two groups. Both groups underperformed the Domini 400

Social Index and S & P 500 during the study period.

7. Pendaraki, Zopounidis and Doumpous (2005) studied construction of mutual fund

portfolios, developed a multi-criteria methodology and applied it to the Greek market

of equity mutual funds. The methodology is based on the combination of discrete and

continuous multi-criteria decision aid methods for mutual fund selection and

composition. UTADIS multi-criteria decision aid method is employed in order to

develop mutual fund’s performance models. Goal programming model is employed

to determine proportion of selected mutual funds in the final portfolios.

8. Fernandes (2003) evaluated index fund implementation in India. In this paper,

tracking error of index funds in India is measured. The consistency and level of

tracking errors obtained by some well-run index fund suggests that it is possible to

attain low levels of tracking error under Indian conditions. At the same time, there

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seems to be periods where certain index funds appear to depart from the discipline of

indexation.

9. Mishra and Mahmud (2002) measured mutual fund performance using lower partial

moment. In this paper, measures of evaluating portfolio performance based on lower

partial moment are developed. Risk from the lower partial moment is measured by

taking into account only those states in which return is below a pre-specified ―target

rate‖ like risk-free rate.

10. Gupta (2000) has examined the investment performance of Indian mutual funds using

weekly NAV data and found that the schemes showed mixed performance during

1994-1999.

11. Sethu (1999) conducted a study examining 18 open-ended growth schemes during

1985-1999 and found that majority of the funds showed negative returns and no fund

exhibited any ability to time the market.

12. Barua, Raghunathan and Varma (1991) evaluated the performance of Master Share

during the period 1987 to 1991 using Sharpe, Jensen and Treynor measures and

concluded that the fund performed better than the market, but not so well as

compared to the Capital Market Line.

13. Ippolito (1989) concludes that mutual funds on aggregate offer superior returns but

they are offset by expenses and load charges.

14. John and Donald (1974) examined the relationship between the stated fund objectives

and their risks-return attributes and concluded that on an average, the fund managers

appeared to keep their portfolios within the stated risk.

15. Friend, Marshal and Crocket (1970) in their study on mutual funds found that there is

a negative correlation between fund performance and management expense measure.

16. Friends and Vickers (1965) concluded that mutual funds on the whole have not

performed superior to random portfolio.

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17. Early studies on mutual funds included the several works of Jensen (1968), Sharpe

(1966) and Treynor (1965) who used the capital asset pricing model to compare risk-

adjusted returns of funds with that of a benchmark market portfolio. The findings of

Sharpe and Jensen demonstrated that mutual funds under perform market indexes and

suggest that the returns were not sufficient to compensate investors for the diverse

mutual fund charges.

18. Friend, Brown, Herman and Vickers (1962) did a systematic study on mutual funds

considering 152 funds with data period of 1953 to1958 and created an index of

Standard and Poor’s indexes of five securities, with the elements by their

representation in the mutual fund sample.

2.2 Need of the study:

Since people are investing their money in various funds these days, their main concern is

about safe and secure returns. Also they are seeking for some tax benefits for their

investments being made in different schemes. So in order to know which fund in this

category is better, this study has been done.

2.3 Scope of the study:

The study would cover various ELSS schemes that are available in India for investment.

2.4 Title of the study:

Performance Evaluation of Equity Linked Saving Schemes

2.5 Objectives of the study:

To study various ELSS schemes available for investment in India.

To measure the returns earned by sample mutual funds.

To compare the return with the market portfolio return.

To find which scheme is offering advantage of diversification along with

adequate systematic risk compared to market beta risk.

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CHAPTER-3

3.RESEARCH METHODOLOGY

3.1 TYPE OF RESEARCH

Analytical research as I have to use already existing facts and analyze them to critically

evaluate various ELSS schemes available for investment in India.

3.2 DATA COLLECTION

Data collected is of secondary in nature. It is collected from business newspapers,

magazines, on-line journals and websites.

Historical analysis of reported financial data

Monthly Net Asset Values (NAV) data have been used for the Schemes

3.3 SAMPLING PLAN

POPULATION

It is total of all 137 ELSS open ended schemes available for investment in India.

SAMPLE SIZE

The sample size is 18 ELSS schemes.

SAMPLING TECHNIQUE

Judgemental sampling

3.4 TOOLS OF DATA ANALYSIS

The various measures of return / risk and portfolio performance are used:

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Return. The returns are computed on the basis of the NAV of the different schemes and

returns in the market index are calculated on basis of NSE Nifty on the respective date.

Risk-Free Rate of Return (Rf)

In this study, 8% has been used as risk free rate.

Risk: The risk is calculated on the basis of month-end NAV.

The following measures of risks associated with mutual funds have been for the study:

i. Beta (β): i.e., fund’s volatility as regard market index measuring the

extent of co-movement of fund with that of the benchmark index.

ii. ii. Standard Deviation (Ϭ): i.e., fund’s volatility or variation from the

average expected return over a certain period.

iii. Co-efficient of Determination (R2): i.e., the extent to which the

movement in the fund can be explained by corresponding benchmark

index ( here, NSE Nifty )

For further evaluating the performance of mutual funds, the risk-return relation models

given by Sharpe (1966), Treynor (1965), Jensen (1968) and Fama have been applied.

Sharpe Ratio:

The Sharpe measure provides the reward to volatility trade-off. It is the ratio of the fund

portfolio’s average excess return divided by the standard deviation of returns and is given

by Equation

The higher this "Reward-to-Variability-Ratio" the more attractive is the evaluated

portfolio because the investor receives more compensation for the same increase in risk.

Treynor Ratio:

The Treynor measure is similar to the Sharpe ratio, except that it defines reward (average

excess return) as a ratio of the CAPM beta risk. Treynor's performance measure is

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defined as the risk premium earned per unit of risk taken. Thus, the Treynor ratio is

computed as the average return of the portfolio in excess of the risk-free return divided

by the portfolio's beta. Treynor’s ratio is given by Equation-

While a high and positive Treynor's Index shows a superior risk-adjusted performance of

a fund, a low and negative Treynor's Index is an indication of unfavorable performance.

Jenson alpha:

Jenson's model proposes another risk adjusted performance measure. This measure was

developed by Michael Jenson and is sometimes referred to as the Differential Return

Method. This measure involves evaluation of the returns that the fund has generated vs.

the returns actually expected out of the fund given the level of its systematic risk. The

surplus between the two returns is called Alpha, which measures the performance of a

fund compared with the actual returns over the period. Required return of a fund at a

given level of risk (Bi) can be calculated as:

Ri = Rf + Bi (Rm - Rf)

Higher alpha represents superior performance of the fund and vice versa.

Fama Model

The Eugene Fama model is an extension of Jenson model. This model compares the

performance, measured in terms of returns, of a fund with the required return

commensurate with the total risk associated with it. The difference between these two is

taken as a measure of the performance of the fund and is called net selectivity.

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Coefficient of Determination

The Coefficient of Determination, also known as R Squared, is interpreted as the

goodness of fit of a regression. The higher the coefficient of determination, the better the

variance that the dependent variable is explained by the independent variable. The

coefficient of determination is the overall measure of the usefulness of a regression. R2

equals the square of the Pearson correlation coefficient between the observed and

modeled (predicted) data values of the dependent variable.

3.5 LIMITATIONS OF STUDY

Since the funds selected for this study were open ended equity based growth

mutual funds the fund composition kept on changing over the time period, so it

became difficult to understand the fund properties as historical data pertaining to

the fund composition was not available.

Only secondary data is used for analyzing the financial performance of companies

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CHAPTER-4 –ANALYSIS & INTERPRETATION

4.1 Equity linked tax saving schemes under the study:

Axis long term equity fund

Investment Objective

To generate income and long-term capital appreciation from a diversified portfolio of

predominantly equity and equity-related securities.

Scheme details

Fund Type Open-Ended

Investment Plan Dividend

Launch date Dec 21, 2009

Benchmark S&P BSE 200

Asset Size (Rs cr) 369.10 (Dec-31-2012)

Minimum Investment Rs.500

Last Dividend Rs.0.80 (Aug-07-2012)

Fund Manager Jinesh Gopani

Asset allocation (31/12/2012): 96% in equities and 4% in cash. In equity ~55% is

invested in large cap and ~45% in mid cap and small cap.

Investment style: Bottom up approach

Top Sectors: Financial services, automobile, healthcare, technology and FMCG which

constitutes around 65% of total portfolio.

24

Top holdings: ICICI Bank, TCS, Reliance Industries, HDFC, Kotak Mahindra Bank and

ITC which makes up ~30% of net assets in the fund.

Performance: Moderate towards investment in mid cap and small cap stocks with strong

valuations. The fund has outperformed its peers with fare returns since launch in last

three years.

Birla sun life tax relief 96-div


An open-ended equity linked savings scheme (ELSS) with the objective of long term

growth of capital through a portfolio with a target allocation of 80%equity, 20% debt and

money market securities.

Scheme details



Launch date Mar 29, 1996




Last Dividend Rs.3.00 (Mar-08-2013)

25

Canara robeco equity tax saver


ELSS seeking to provide long term capital appreciation by predominantly investing in

equities and to facilitate the subscribers to seek tax benefits as provided under Section 80

C of the Income Tax Act, 1961.

Scheme details


Investment Plan Growth





Last Dividend N.A.

Fund Manager Krishna Sanghavi

Asset allocation (31/12/2012): 97.58% in equities, 2.08% in debt instruments and 0.34%

in cash. In equity ~73% is invested in large cap and ~27% in mid cap and small cap.

Investment style: Mixture of top down approach and bottom up approach.

Top Sectors: Financial services, diversified, energy, technology and FMCG which


Top holdings: ICICI Bank, HDFC Bank, Infosys, Reliance Industries, ITC, Reliance

Industries and Tata Consultancy which makes up ~30% of net assets in the fund.

26

Performance: Moderate towards investment in mid cap stocks and diversifies its portfolio

by investing in various sectors. The fund has given consistent returns in bull and bear

phases.

DSP Blackrock tax saver fund


An Open ended equity linked savings scheme whose primary investment objective is to

seek to generate medium to long-term capital appreciation from a diversified portfolio

that is substantially constituted of equity and equity related securities of corporates and to

enable investors avail of a deduction from total income as permitted under the Income

Tax Act,1961 from time to time.

Scheme details



Launch date Nov 27, 2006

Benchmark CNX 500



Last Dividend Rs.1.50 (Feb-15-2013)

Bonus N.A.

Fund Manager Apoorva Shah

27

Franklin tax shield fund


An open end Equity Linked Savings scheme with an objective to provide medium to

long-term growth of capital along with income tax rebate.

Scheme details



Launch date Apr 10, 1999

Benchmark CNX 500



Last Dividend N.A.

Bonus N.A.

Fund Manager Anand Radhakrishnan / Anil Prabhudas

28

HDFC long-term advantage fund


To generate long term capital appreciation from a portfolio that is invested predominantly

in equity and equity-related instruments.

Scheme details



Launch date Jan 02, 2001

Benchmark S&P BSE SENSEX




Bonus N.A.

Fund Manager Chirag Setalvad / Miten Lathia

29

HDFC tax saver fund


To achieve long term growth of capital.

Scheme details




Benchmark CNX 500

Asset Size (Rs cr) 3,447.60 (Dec-31-2012)



Bonus N.A.

Fund Manager Vinay Kulkarni / Miten Lathia

30

HSBC tax saver equity fund


Aims to provide long term capital appreciation by investing in a diversified portfolio of

equity & equity related nstruments of companies across various sectors and industries,

with no capitalisation bias The Fund may also invest in fixed income securities.

Scheme details








Bonus N.A.

Fund Manager Aditya Khemani

31

ICICI prudential tax plan


An open-ended equity linked savings scheme, is an opportunity aimed at harnessing the

benefits of investing in equity and also providing tax benefits.

Scheme details



Launch date Aug 09, 1999

Benchmark CNX 500




Bonus N.A.

Fund Manager Chintan Haria

Asset allocation (31/12/12): 90.5% in equities and 9.5% in cash. In equity ~65% is


Investment style: Top down approach.

Top Sectors: Financial services, energy, technology, metals and healthcare which


32

Top holdings: Cairn India, Infosys, Reliance Industries, ICICI Bank and HDFC Bank

which makes up ~25% of net assets in the fund.

Performance: Moderate towards investment in mid cap stocks and diversifies its portfolio

by investing in various sectors. The fund has given consistent returns in last five years.

IDFC tax advantage fund


The investment objective of the Scheme is to seek to generate long term capital growth

from a diversified portfolio of predominantly equity and equity related securities. There

can be no assurance that the investment objective of the scheme will be realized.

Scheme details







Last Dividend N.A.

Bonus N.A.

Fund Manager Neelotpal Sahai

33

Asset allocation (31/12/12): 95% in equities and 5% in cash. In equity ~57% is invested

in large cap and ~43% in mid cap and small cap.

Investment style: Top down approach.

Top Sectors: Financial, energy, healthcare, energy, services and FMCG which


Top holdings: Axis Bank, Wockhardt, State Bank of India, ICICI Bank and HDFC Bank

which makes up ~25% of net assets in the fund.

Performance: Aggressive towards investment in mid cap stocks and diversifies its

portfolio by investing in various sectors with strong valuations. The fund has

outperformed its peers in last one year and gave in-line returns among its peers in last

three years.

34

Kotak tax saver fund


To generate long-term capital appreciation from a diversified portfolio of equity and

equity related securities and enable investors to avail the income tax rebate, as permitted

from time to time.

Scheme details



Launch date Oct 28, 2005

Benchmark CNX 500




Bonus N.A.

Fund Manager Pankaj Tibrewal / Harsha Upadhaya

35

L&T tax advantage fund


The scheme aims to generate long-term capital growth from a diversified portfolio of

predominantly equity and equity-related securities.

Scheme details



Launch date Jan 31, 2006





Bonus N.A.

Fund Manager S. N. Lahiri

36

Reliance tax saver fund


The primary objective of the scheme is to generate long term capital appreciation from a

portfolio that is invested predominantly in equity and equity related instruments.

Scheme details



Launch date Aug 23, 2005





Bonus N.A.

Fund Manager Ashwani Kumar / Viral Berawala

Asset allocation (31/12/2012): 99.8% in equities and 0.2% in cash. In equity ~20% is


Investment style: Bottom up approach.

Top Sectors: Automobile, Engineering, Financial services, Construction and Services

which constitutes around 80% of total portfolio.

37

Top holdings: State Bank of India, Maruti Suzuki India, Eicher Motors, Madras cement,

Sanofi India and Divi’s Lab which makes up ~30% of net assets in the fund.

Performance: This fund invests is tilted towards investment in mid cap and small cap

stocks which has strong valuation. However, the performance of this fund is affected

when there is rally in large cap stocks and mid cap stocks are range bound.

SBI magnum tax gain 93 Gr.


The prime objective of this scheme is to deliver the benefit of investment in a portfolio of

equity shares, while offering deduction on such investments made in the scheme under

Section 80 C of the Incometax Act, 1961. It also seeks to distribute income periodical ly

depending on distributable surplus.

Scheme details







Last Dividend N.A.

Bonus N.A.

Fund Manager Jayesh Shroff

38

Sundaram tax saver


To achieve capital appreciation by investing predominantly in equities and equity-related

instruments. A lock-in period of 3 years is applicable.

Scheme details







Last Dividend Rs.5.00 (Jan-28-2005)

Bonus N.A.

Fund Manager Srividhya Rajesh / J Venkatesan

39

Tata tax saving fund


To provide medium to long term capital gains along with income tax relief to its

unitholders while emphasizing the importance of capital appreciation.

Scheme details



Launch date Apr 01, 1996

Benchmark S&P BSE SENSEX



Last Dividend Rs.1.50 (Dec-03-2012)

Bonus N.A.

Fund Manager Pradeep Gokhale

40

Union KBC tax saver scheme


To generate income and long-term capital appreciation by investing substantially in a

portfolio consisting of equity and equity related securities.

Scheme details








Bonus N.A.

Fund Manager Ashish Ranawade

41

UTI equity tax saving plan


The funds collected under the scheme shall be invested in equities, fully convertible

debentures/ bonds and warrants of companies. Investment may also be made in issues of

partly convertible debentures/bonds including those issued on rights basis subject to the

condition that, as far as possible, the non-convertible portion of the debentures/bonds so

acquired or subscribed shall be disinvested within a period of twelve months from their

acquisition.

Scheme details







Last Dividend N.A.

Bonus N.A.

Fund Manager Swati Kulkarni

42

4.2 Return Earned by the Schemes:

Table 4.1 Ranking of ELSS funds by Returns earned:

(Where 1 is highest value and 18 is lowest value)

Equity linked tax saving schemes Return%

(mar2012-feb2013)

Rank


12.6 4


10.1 6


9.4 8


11.8 5


9.7 7


7.1 15

HDFC tax saver fund

2.2 18


13.8 1


9.2 9


13.4 2


8.1 12


5.3 17


6.7 16


8.9 10

Sundaram tax saver

7.7 13


8.4 11


13.3 3


7.2 14

43

Analysis of Returns earned by schemes:

Return is a very popular metric because of its versatility and simplicity.

High return shows that the fund has performed better and whereas low return vice-versa.

Schemes are ranked from 1 to 18 where 1 is highest return and 18 is lowest return

Here, HSBC tax saver equity fund, IDFC tax advantage fund & Union KBC tax saver

scheme has shown higher returns. The returns offered by these schemes are much higher

than those offered by others considered under the study. This means that these schemes

are one of the best in the market which are giving high returns.

Whereas, Reliance tax saver fund, L&T tax advantage fund & HDFC tax saver fund has

shown low returns as compared to other schemes under the study. This means that these

schemes have not been up to the mark in giving good returns.

44

4.3 Sharpe ratio:

The Sharpe ratio tells investors whether an investment's returns are due to smart

investment decisions or the result of excess risk. This measurement is very useful because

although one portfolio or security can reap higher returns than its peers, it is only a good

investment if those higher returns do not come with too much additional risk. The greater

an investment's Sharpe ratio, the better its risk-adjusted performance.

When analyzing the Sharpe ratio, the higher the value, the more excess return investors

can expect to receive for the extra volatility they are exposed to by holding a riskier asset.

Similarly, a risk-free asset or a portfolio with no excess return would have a Sharpe ratio

of zero. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has

been.

Table 4.2 Ranking of ELSS funds by Sharpe Ratio


Equity linked tax saving

schemes

Sharpe ratio Ranks

Axis long term equity fund -15.35 9

Birla sun life tax relief 96-div -14.68 5

Canara robeco equity tax saver -15.56 10

DSP Blackrock tax saver fund -15.33 8

Franklin tax shield fund -17.67 18

45

HDFC long-term advantage fund -16.20 13

HDFC tax saver fund

-14.90 7

HSBC tax saver equity fund -13.34 2

ICICI prudential tax plan -16.23 14

IDFC tax advantage fund -14.39 4


-13.26 1

L&T tax advantage fund -16.72 15

Reliance tax saver fund -13.47 3

SBI magnum tax gain 93 Gr. -16.19 12

Sundaram tax saver

-14.82 6


-17.08 17

Union KBC tax saver scheme -16.76 16

UTI equity tax saving plan -16.15 11

46

Analysis of Sharpe Ratio measure

Here, the sharpe ratio of the funds discussed varies from -13.26 to -17.67.

So, according to the sharpe ratio the better performing mutual funds are Kotak tax saver

fund, HSBC tax saver equity fund & Reliance tax saver fund which indicates that these

have a better risk-adjusted performance compared to other ELSS mutual funds.

Whereas, Franklin tax shield fund, Tata tax saving fund & Union KBC tax saver scheme

are least performers.

This means that such mutual funds will give less return at a lesser level of risk involved

and risk averse investors can invest in such type of mutual funds. The other investors who

can take risk should avoid investing in such mutual funds.

So, this shows that as the sharpe ratio goes on reducing, the level of risk involved in

investing in mutual funds keeps on decreasing as well and so does the returns.

47

4.4 Treynor ratio:

The Treynor ratio is another risk-adjusted performance figure that is very similar to the

Sharpe ratio. It measures that how well an investment vehicle compensates the investor

for a given level of risk. It measures the excess return above the risk-free rate per unit of

risk. The main difference is that the Sharpe ratio uses standard deviation as the risk

measure, whereas the Treynor ratio uses beta. While a high and positive Treynor's Index

shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index

is an indication of unfavorable performance.

Table 4.3 Ranking of ELSS Funds by Treynor Ratio


Equity linked tax saving

schemes

Treynor ratio Rank







HDFC tax saver fund

-0.66 5


48




-0.69 11




Sundaram tax saver

-0.69 12


-0.72 16



49

Analysis of Treynor Ratio

As the treynor ratio indicates that the higher the value, the more excess return investors

can expect to receive for the extra volatility they are exposed to by holding a riskier asset,

so here the rankings are accorded to the ELSS mutual funds in accordance to their treynor

ratio i.e. in accordance to the volatility of the mutual fund.

The treynor ratio of the mutual funds discussed here varies from -0.49 to -0.97

Here, DSP Blackrock tax saver fund, HDFC long-term advantage fund & ICICI

prudential tax plan are better performers. This means that the investor can invest in any of

these mutual funds and can earn similar amount of return at an almost similar level of risk

involved with the similar level of volatility.

Whereas, Canara robeco equity tax saver, SBI magnum tax gain 93 Gr. & Tata tax saving

fund are not good performers.


and risk averese investors can invest in such type of mutual funds. The other investors

who can take risk should avoid investing in such mutual funds.

50

4.5 Jensen alpha ratio:

Jensen Alpha is a measure of an investment's performance on a risk-adjusted basis. It

takes the volatility (price risk) of a security or fund portfolio and compares its risk-

adjusted performance to a benchmark index. The excess return of the investment relative

to the return of the benchmark index is its "alpha."

The jensen alpha states that if the value of alpha is positive, then the portfolio is earning

excess returns. In other words, a positive value for Jensen's alpha means a fund manager

has "beat the market" with his or her stock picking skills.

Table 4.4 Ranking of ELSS Funds by Jensen Alpha Measure


Equity linked tax saving schemes Jensen ratio Rank




DSP Blackrock tax saver fund 0.220 1



HDFC tax saver fund

0.001 4

51


ICICI prudential tax plan 0.196 2



-0.030 11




Sundaram tax saver

-0.024 10


-0.060 15

Union KBC tax saver scheme 0.131 3


52

Analysis of Jensen Alpha Measure

The value of Jensen alpha of the mutual funds discussed here varies from 0.220 to -0.209

Simply stated, alpha is often considered to represent the value that a portfolio manager

adds or subtracts from a fund portfolio's return. A positive alpha means the fund has

outperformed its benchmark index. Correspondingly, a similar negative alpha would

indicate an underperformance. For investors, the more positive an alpha is, the better it is.

Here, DSP Blackrock tax saver fund, ICICI prudential tax plan & Union KBC tax saver

scheme are better performers as they have a positive value of Jensen alpha.

Whereas, HDFC long-term advantage fund, Canara robeco equity tax saver & SBI

magnum tax gain 93 Gr. Have negative value of Jensen alpha.

This means that such mutual funds are the least perfroming, so, the investors should

avoid investing in such mutual funds.

53

4.6Fama measure:

Fama model compares the performance, measured in terms of returns, of a fund with the

required return commensurate with the total risk associated with it. The difference

between these two is taken as a measure of the performance of the fund and is called net

selectivity, higher value of which indicates that fund manager has earned returns well

above the return commensurate with the level of risk taken by him.

The fama measure states that high returns are a reward for taking on high risk. So, the

riskier a mutual fund is, more will be the return generated by it.

Table 4.5 Ranking of ELSS Funds by Fama Measure


Equity linked tax saving schemes Fama Rank


Birla sun life tax relief 96-div 0.014 5

Canara robeco equity tax saver 0.007 8




HDFC tax saver fund

-0.009 9


54




0.021 4

L&T tax advantage fund 0.011 7


SBI magnum tax gain 93 Gr. 0.051 1

Sundaram tax saver

0.013 6


0.037 2


UTI equity tax saving plan 0.035 3

55

Analysis of Fama measure

The fama measure of the funds discussed here varies from 0.051 to -0.731

Here, SBI magnum tax gain 93 Gr., Tata tax saving fund & UTI equity tax saving plan

are having positive values. So these are top performing schemes. These are the funds

which are giving higher returns for high amount of risks involved.

Whereas, HSBC tax saver equity fund, HDFC long-term advantage fund & DSP

Blackrock tax saver fund are least performers as they are having negative value.


and risk averese investors can invest in such type of mutual funds. The other investors

who can take risk should avoid investing in such mutual funds.

56

4.7 Co-efficient of determination:

Beta, also known as the "beta coefficient," is a measure of the volatility, or systematic

risk, of a security or a portfolio in comparison to the market as a whole. By definition, the

market has a beta of 1.0. Individual security and portfolio values are measured according

to how they deviate from the market.

A beta of 1.0 indicates that the investment's price will move in lock-step with the market.

A beta of less than 1.0 indicates that the investment will be less volatile than the market,

and, correspondingly, a beta of more than 1.0 indicates that the investment's price will be

more volatile than the market. For example, if a fund portfolio's beta is 1.2, it's

theoretically 20% more volatile than the market.

Table 4.6 Ranking of ELSS Funds by co-efficient of determination


Equity linked tax saving schemes

beta R2


0.823 0.666


0.905 0.892


0.590 0.428


1.215 0.665


0.769 0.691


1.219 0.725

HDFC tax saver fund 0.977 0.897

57


1.039 0.898


1.115 0.669


0.891 0.544


1.048 0.912


0.851 0.916


0.904 0.604


0.826 0.918

Sundaram tax saver

0.957 0.923


0.791 0.903


1.059 0.789


0.874 0.972

58

Analysis of Co-efficient of determination:

The beta value of the funds discussed here varies from 0.590 to 1.219

Here, HDFC long-term advantage fund, DSP Blackrock tax saver fund, ICICI prudential

tax plan, Union KBC tax saver scheme, Kotak tax saver fund & HSBC tax saver equity

fund have beta value more than 1. The beta of these funds is more than one which

increases the risk on them.

Conservative investors looking to preserve capital should focus on securities and fund

portfolios with low betas, whereas those investors willing to take on more risk in search

of higher returns should look for high beta investments.

R-Squared is a statistical measure that represents the percentage of a fund portfolio's or

security's movements that can be explained by movements in a benchmark index. High

value of shows higher diversification of the schemes portfolio that can easily contain

the market variability,

The R-Squared value of the funds discussed here varies from 0.428 to 0.972

Here, UTI equity tax saving plan, Sundaram tax saver, SBI magnum tax gain 93 Gr.,

L&T tax advantage fund & Kotak tax saver fund have high value of .

This shows that these schemes have high diversification and contains market variability

as well.

Whereas, Canara robeco equity tax saver, IDFC tax advantage fund & Reliance tax saver

fund are having low value of which shows that these funds have less variability and

diversification.

59

CHAPTER-5

CONCLUSION & SUGGESTION

As per the study conducted on 18 various ELSS, following conclusions has been drawn:

HSBC tax saver equity fund, Kotak tax saver fund, DSP Blackrock tax saver fund,

HDFC long-term advantage fund & ICICI prudential tax plans are the Mutual

Fund Equity linked saving schemes which are top performers in the market.

The returns offered by these schemes are much higher than those offered by

others considered under the study.

The beta of these funds is more than one which increases the risk on them but the

returns are equally higher.

If we just consider the lower risk factor then Canara robeco equity tax saver &

Franklin tax shield fund will be the one to be considered for investment purpose

but only by the conservative investors because the returns are on the lower side on

these schemes.

As per Sharpe, Treynor & Jenson’s Alpha measure, the performance of the Funds

like SBI magnum tax gain 93 Gr., Tata tax saving fund & Union KBC tax saver

scheme have not been up to the mark or better than the market performance.

For investors looking for the diversified investment and moderate returns Kotak

tax saver fund, Sundaram tax saver & UTI equity tax saving plan will be a good

choice because these funds are capable of containing the market variability very

well.

60

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62

Websites

www.amfiindia.com

www.mutualfundsindia.com

www.moneycontrol.com

www.financeresearch.net

http://sify.com/finance/mutualfunds/

http://business.mapsofindia.com

http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/MF_News/Mutual

_funds_assets_jump_4_pc_in_Dec_add_Rs_16300_cr/articleshow/3926747.cms

http://www.amfiindia.com/

http://www.mutualfundsindia.com/

http://www.moneycontrol.com/

http://www.financeresearch.net/

http://sify.com/finance/mutualfunds/

http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/MF_News/Mutual_funds_assets_jump_4_pc_in_Dec_add_Rs_16300_cr/articleshow/3926747.cms

http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/MF_News/Mutual_funds_assets_jump_4_pc_in_Dec_add_Rs_16300_cr/articleshow/3926747.cms

Final Research Project

Documents

canbank mutual fund

sbi mutual fund

indian bank mutual fund

private sector mutual

bank of baroda mutual

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indian mutual fund industry

sebi mutual fund regulations