Performance Evaluation of Mutual Funds Scheme in India An Empirical Study The performance of mutual funds depends on the performance of securities that make up the portfolio of the mutual fund. Mutual funds pool the money of investors and then invest this pool in the designated securities. Once this is done, the investors must understand that the performance of a particular scheme will depend on the performance of the underlying portfolio. For instance, a scheme has invested funds in equity shares, and the equity market is booming, then the performance of the scheme would be good. It may be noted that the performance of a scheme is restricted by the underlying portfolio and no scheme can rise faster than the rise in underlying portfolio. Even within a particular category or group of schemes, say income schemes, the performance of all mutual fund schemes under that category would not be same. What is required on the part of investors is to look at each of the schemed and its underlying portfolio. This will help them to know how and where their money is being invested and about the risk indirectly taken by them. 2011 Nishant Patel Stevens Business School, Ahmedabad 3/16/2011
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Performance Evaluation of Mutual Funds Scheme in India - An Empirical Study
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Performance Evaluation of Mutual Funds Scheme in India An Empirical Study The performance of mutual funds depends on the performance of securities that make up the portfolio of the mutual fund. Mutual funds pool the money of investors and then invest this pool in the designated securities. Once this is done, the investors must understand that the performance of a particular scheme will depend on the performance of the underlying portfolio. For instance, a scheme has invested funds in equity shares, and the equity market is booming, then the performance of the scheme would be good. It may be noted that the performance of a scheme is restricted by the underlying portfolio and no scheme can rise faster than the rise in underlying portfolio. Even within a particular category or group of schemes, say income schemes, the performance of all mutual fund schemes under that category would not be same. What is required on the part of investors is to look at each of the schemed and its underlying portfolio. This will help them to know how and where their money is being invested and about the risk indirectly taken by them.
2011
Nishant Patel Stevens Business School, Ahmedabad
3/16/2011
Performance Evaluation of Mutual Funds Scheme in India
2011
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ACKNOWLEDGEMENT
Preparing a project is an arduous task, but I was fortunate enough to get support
from large number of people to whom I shall always remain grateful and those
who have helped me directly or indirectly in completion of the project on
“Performance Evaluation of Mutual Funds Scheme in India – An Empirical
Study”. The project has given me an opportunity to learn many aspects. I am very
grateful to my guide Professor Deepak Krishnan, for giving me this privilege to
work under him and for all his support during the entire duration as well as for his
invaluable guidance that helped me to complete my project.
Performance Evaluation of Mutual Funds Scheme in India
2011
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I. INTRODUCTION
MUTUAL FUND IS a trust the 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.
The mutual fund industry plays a significant role in the development of the
economy as well. Its buoyant growth leads to lower intermediation costs,
Professor & Head of the Department, Er. Perumal Manimekalai College of
Engineer, Department of Management studies, Koneripalli, Hosur, Tamil Nadu,
INDIA.
Associate Professor, Alagappa University, Alagappa Institute of Management,
Karikudi, Kancheepuram, Tamil Nadu 630003, INDIA Submitted December 2007;
Accepted April 2010.
More efficient financial markets, increased vibrancy of the capital markets and
higher local ownership of financial assets. If retail investment is directed through
the mutual fund route, it will lead to greater wealth creation in the long run.
Thus, the industry can be one of the causative factors for a healthy economy.
Mutual funds have emerged as an important intermediary in all the capital
markets of the world. The mutual funds play and will continue to play an
important role in the growth of the capital market in India. One of the reasons
for mutual funds becoming popular in such a short period if that they offer low
risk coupled with stability of income and are ideally suited for average and small
investors who, otherwise, probably cannot operate in capital market. Growth of
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mutual funds in India, as well as, in all the capital markets of the world is a
testimony to the fact that mutual funds provide specialized financial securities to
the investors. Mutual funds provide different services to investors for making
investment. Making investment in a mutual fund is more convenient as compared
to dealing in the capital market. So, a mutual fund is a suitable investment for a
common man as it offers an opportunity to invest in a diversified and
professionally managed basket of securities at a relatively low cost.
The relation between risk and return determines the performance of a
mutual fund. As risk is commensurate with return, therefore, providing maximum
return on the investment made within the acceptable associated risk level helps
in demarcating the better performance from the laggards. So, there is always a
tradeoff between risk and return. In the present study these two attributes, viz.,
risk and return have been considered for detailed analysis. This study also
presents an empirical analysis of risk adjusted performance evaluation of mutual
fund schemes based on the Sharpe, Treynor, Jenson and Fama measures.
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II. Literature Review
The review of literature gives a broad outlook of the various research
studies made in the past and the details of such studies throw light on the future
studies to be made. It also strengthens the theoretical base of the research
study. Existing literature, both Indian and foreign are important, since it will
throw light on the performance evaluation of mutual fund schemes in India. The
deficiencies of the existing studies should help in conducting new studies and
updating the relevant literature. The literature on mutual funds has also
contributed to the development of various portfolio performance measures. The
review of literature helps to identify the research gap in the study on
performance evaluation of mutual fund schemes and which has given rise to the
present study. The review has been covered the research articles, textbooks and
research studies.
2.1 Foreign Literature.
Friend and Vickers (1965) while examining portfolio selection and
investment performance critically examined the performance of mutual funds
against the randomly constructed portfolios. The study concluded that mutual
funds on the whole have not performed superior to random portfolios. Treynor
and Mazuy (1966) developed a methodology for testing mutual funds historical
success in anticipating major turns in the stock market and found no evidence
that the funds had successfully out guessed the market. Sharpe (1966)
developed a composite measure for performance evaluation and reported
superior performance for 11 funds out or 34 during the period 1944-1963.
Jensen's (1968) classic study developed an absolute measure of performance
based upon the Capital Assets Pricing Model and reported that mutual funds did
not appear to achieve abnormal performance when transaction costs were taken
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into a count. Guy (1978) on analyzing the performance of British Investment
Trust Industry evaluated the risk-adjusted performance of UK Investment Trust
through the application of Sharpe and Jensen measures. The study concluded
that no trust had exhibited superior performance, compared to the London Stock
Exchange Index. Ippolito (1987) while testing the Efficient Market Theory.
concluded that mutual funds offer superior returns. However, expenses and load
charges offset them. This characterizes the Efficient Market Hypothesis.
2.2. Indian Literature :
Barua (1981) made the pioneering attempt in evaluating the performance of
master Share Scheme of Unit Trust of India from the Investor point of view.
CAPM model was unused to arrive at conclusion and considered that 'Master
Share' was a bonanza to the small investors with high return. Shukla (1993)
evaluated and compared the performance of Canshare and Mastershare by
employing the Sharpe, Jensen and Treynor ratios for the period from January
1988 to June 1991. He concluded that Mastershare had performed better in
terms of risk and return than Canshare. Jaideep and Majumdar, (1994)
evaluated performance of five growth oriented schemes for the period from
February 1991 to August 1993. CAPM model was used to evaluate the superior
performance of the growth schemes. Shaw and Thomas (1994) evaluated the
performance of 11 mutual fund schemes based on market price data. The weekly
returns were computed for these schemes since their commencement to April
1994. Jensen and Sharpe measures were used to evaluate the superior
performance of the schemes. Tripathy and Sahu (1995) evaluated the
performance of a major growth oriented schemes for a period of one year from
October 1994 to September 1995. They concluded that mutual fund investment
offers tremendous potential for Indian investors. Jayadev (1998) evaluated the
performance of mutual fund schemes in terms of risk and return. This study
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proved to be an empirical evidence of Efficient Market Hypothesis in Indian
context. This study covered relatively a large number of schemes. Bhayani and
Patidar (2006) evaluated the performance of balanced fund scheme in terms of
average return. A majority of the sample mutual funds schemes have recorded a
superior performance as compared to the benchmarks index. In the case of
equity diversified schemes, the performance of schemes have shown better
returns and most of the schemes have outperformed the benchmark. The results
of gilt fund schemes have outperformed the benchmark. The results of gilt fund
schemes indicated that all the schemes earned a slightly higher return in
comparison to the market return. Income fund schemes have shown poor
performance compared to the market return. The performance of tax planning
fund schemes has generated superior return as compared to the market return.
The performance of schemes was better in case of returns and has earned
returns on lower risk as compared to the market. To sum up the review of
literature, it is clear that the research studies both Indian and foreign are used to
evaluate the performance of mutual fund schemes.
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III. The study Objective, Methodology and Sample
3.1 Objectives of the Study
The main objectives of the study are as under.
- To evaluate performance of mutual funds in terms of risk and return.
- To examine funds sensitivity to the market fluctuations in terms of beta.
- To evaluate risk adjusted performance of selected mutual fund schemes by
applying the measures of Sharpe, Treynor, Jensen & Fama.
3.2 Methodology
To evaluate the investment performance of sample mutual fund schemes, 23
schemes were chosen as per the priority given by the respondents in Dharmapuri
district, Tamil Nadu. Secondary data were used to evaluate the performance of
the selected mutual fund schemes. The study is kept limited to only two fund
categories namely equity fund and income fund.
In this study the Bombay Stock Exchange (BSE) Sensex (100) has been used
as a surrogate for market portfolio and the bank interest rate has been used as a
surrogate for risk-free rate of return which have been accepted as the market
proxy and the risk-free proxy respectively by the researchers as well as
practitioners in India. Performance evaluation models such as Sharpe Ratio,