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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
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Performance Evaluation of Mutual Funds Scheme in India - An Empirical Study

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Page 1: Performance Evaluation of Mutual Funds Scheme in India - An Empirical Study

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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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.

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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,

Treynor Ratio, Jensen Differential Return Measure, Sharpe Differential Return

Measure and Fama's Components of Investment Measure were applied to

evaluate the performance of selected schemes.

3.3 Period of the Study

The study covers a period of five years (i.e. from April 2002 to March 2007).

The secondary data pertaining to the mutual fund investments during the above

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period have been collected from the relevant authorized sources for an in-depth

analysis.

3.4 Sample Schemes Selected for the Study

For the evaluation of mutual fund schemes, 23 schemes from 11 mutual funds

have been selected. The selected schemes are presented in Table I.

Table

Name of the Selected Mutual Fund Schemes

S.No. Scheme Name Fund

Category

Asset Management

Company

Period

From To

1. Can Equity Tax Saver Equity Can Bank

Investment

Management

Services

Mar.1999 Mar. 2009

2. Franklin India Blue ship

Fund

Equity Franklin Temploton

Asset Management

(India) Pvt. Ltd.

Nov.1999 Mar.2007

3. Franklin India Prima

Plus

Equity Franklin Temploton

Asset Management

(India) Pvt. Ltd.

Sep.1999 Mar.2007

4 Franklin India Prima

Fund

Equity Franklin Temploton

Asset Management

(India) Pvt. Ltd.

Sep.1993 Mar.2007

5 HDFC Top 200 Fund Equity HDFC Asset

Management Co.

Ltd.

Sep.1996 Mar.2007

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6 Magnum Global Fund Equity SBI Funds

Management Ltd.

Sep.1994 Mar.2007

7 Prudential ICICI Tax

Plan

Equity Prudential ICICI

Asset Management

Co. Ltd.,

Sep.1994 Mar.2007

8. Prudential ICICI Power Equity Prudential ICICI

Asset Management

Co. Ltd.,

Sep.1999 Mar. 2007

9. Prudential ICICI Power Equity Prudential ICICI

Asset Management

Co. Ltd.,

June 1998 Mar.2007

10 Reliance Growth Fund Equity Reliance Capital

Asset Management

Ltd.,

Oct.1995 Mar.2007

11. Reliance Growth Fund Equity Reliance Capital

Asset Management

Ltd.,

Oct.1995 Mar.2007

12. Tata Growth Fund Equity Tata Asset

Management Ltd.

Jun.1994 Mar. 2007

13. Tata Growth Fund Equity Tata Asset

Management Ltd.

Mar.2003 Mar.2007

14. UTI-Growth and Value

Fund

Equity UTI Asset

Management

Company Ltd.,

Oct.1999 Mar.2007

15. UTI Equity Tax Saving

Plan

Equity UTI Asset

Management

Company Ltd.,

Dec.1999 Mar.2007

16. Birla Income plus Retail Income Birla Sun life Asset Oct.1995 Mar.2007

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Management

Co.Ltd.

17. Kotak Bond Regular

Plan

Income Kotak Mahindra

Asset Management

Co.Ltd.

Nov.1999 Mar.2007

18. Prudential ICICI Income Income Predential ICICI

Asset Management

Co.Ltd.

Jun.1998 mar.2007

19. Reliance income Fund Income Reliance Capital

Asset Management

Co.Ltd.

DEc.1997 Mar.2007

20. Sundaram Bond Saver Income Sundaram BNP

Paribas AMC Ltd.

Nov.1997 Mar.2007

21. Tata Income Fund Income Tata Asset

Management Ltd.

Apr.1997 Mar.2007

22. UTI- Bond Fund Income UTI Asset

Management

Co.Ltd.

Jun.1998 Mar.2007

23. UTI Bond Advantage

Fund LTP

Income UTI Asset

Management

Company Ltd.

Jul.1999 Mar.2007

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IV Empirical Analysis

4.1 Average Annual Risk and Return of Selected Equity Schemes

The rates of return for all the fifteen schemes were calculated on the basis of average

monthly net asset values. The dividend payments were included for determining the net

asset based annual returns. The year wise average returns were calculated and

provided in Table II for all the fifteen schemes.

S.N

o

Scheme Name Average Total

2002-

03

2003

-04

2004-

05

2005

-06

2006

-07

Total

1. Can Equity Tax Saver Average

Risk

1.29

4.26

3.69

4.83

1.33

6.71

3.18

8.17

1.11

9.73

1.20

7.15

2. Franklin India Blue ship Fund Average

Risk

0.09

3.74

7.43

5.12

1.85

5.39

4.40

4.09

1.19

7.40

3.04

5.78

3. Franklin India Prima Plus Average

Risk

0.35

3.29

6.84

4.42

2.24

4.84

4.56

3.84

1.76

7.79

3.07

5.52

4 Franklin India Prima Fund Average

Risk

0.49

3.65

8.22

8.05

4.26

5.41

4.24

3.35

0.00

8.46

3.49

6.70

5 HDFC Top 200 Fund Average

Risk

0.14

3.42

7.46

5.70

2.68

5.64

4.74

3.52

1.02

6.90

3.26

5.71

6 Magnum Global Fund Average

Risk

1.09

3.69

4.24

8.63

4.29

6.01

5.85

4.58

1.84

8.94

3.10

6.95

7 Prudential ICICI Tax Plan Average

Risk

1.07

3.78

7.05

8.41

5.55

6.43

4.63

4.40

0.48

10.38

3.40

7.58

8. Prudential ICICI Power Average

Risk

0.55

4.44

6.98

5.13

2.41

5.46

4.96

4.46

1.41

7.49

3.31

5.85

9. ICIC Prudential Growth Plan Average

Risk

0.75

4.04

6.11

5.13

1.93

6.12

4.58

4.05

1.26

7.23

2.68

5.82

10 Reliance Growth Fund Average 1.19 8.32 4.35 5.13 1.55 4.16

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Risk 4.90 6.13 6.02 3.78 8.11 6.34

11. Reliance Vision Fund Average

Risk

2.56

5.67

7.61

5.99

3.02

5.92

4.41

3.27

1.25

7.69

3.79

6.09

12. Tata Growth Fund Average

Risk

0.21

3.11

6.11

5.44

3.55

6.52

3.61

4.74

0.87

8.50

2.84

6.19

13. Tata Equity Opportunities

Fund

Average

Risk

0.31

3.91

3.52

7.41

1.77

5.50

3.28

3.91

1.24

8.74

1.43

6.32

14. UTI-Growth and Value Fund Average

Risk

0.23

3.87

7.66

5.85

2.10

5.58

3.68

3.56

0.44

7.63

2.87

6.00

15. UTI Equity Tax Saving Plan Average

Risk

0.27

3.01

3.85

7.35

1.38

4.68

3.96

4.04

0.11

7.76

1.90

5.79

The overall annual average risk and return were calculated from the five years data

presented in the same table for all the fifteen schemes. all the fifteen schemes had

yielded positive return. The overall maximum return was from Reliance Growth Fund

which was followed by Reliance Vision Fund. The overall minimum return was from Can

Equity Tax Saver. Prudential ICICI Tax Plan was having the highest risk and Franklin

India Prima Plus was having the lowest risk.

4.2 Average Annual Risk And Returns of Selected income scheme

The rates of return for all the eight schemes were calculated on the basis of average

monthly net asset values. The dividend payments were included for determining the net

asset based annual return. The year wise average returns were calculated and provided

in Table – III for all the eight schemes.

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Table III

Average Annual Risk and Returns of selected Income Scheme

Scheme Name Period Total 2002-03 2003-

04

2004-

05

2005-06 2006-

07 Birla income Plus- Average 0.92 0.78 -0.03 0.28 0.4 0.46

Retail Risk 1.32 0.83, 0.79 0.23 0.34 0.84

Kotak Bond

Regular Average

0.9 0.83 0.19 0.37 "0.54. 0.56.

Plan Risk 1.33 0.81 0.82 0.23 0.28 0.81

Prudential ICICI Average 0.86 0.75 0.04 0.27 0.44 0.47

Income Risk 1.3 0.78 0.73 0.32 0.61 0.83

Reliance Income Average 0.83 0.81 0.25 0.37 0.42 0.53 Fund Risk 1.39 0.75 0.82 0.28 0.39 0.82

Sundaram Bond Average 1.0 0.74 -0.02 0.19 0.34 0.44

Saver Risk 1.37, 0.77 0.92 0.23 0.19 0.87

Tata Income Average 0.61 -3.85 6.71 0.76 0.38 0.93 Fund Risk 1.2 11.19 17.54 1.57 0.17 9.72

UTI-Bond Fund Average 0.81 0.6 0.17 0.63 0.4 0.52 Risk 0.91 0.56 0.82 0.6 0.26 0.68

UT I -Bond Average 0.92 0.8 0.05 0.33 0.4 0.49 Advantage Fund-LTP Risk 1.5 0.86 0.86 0.29 0.16 0.89

The overall annual average risk and return were calculated from the five year data and

presented in the same table for all the eight schemes. All the schemes had yielded

positive returns and risk were from Tata Income Fund There were not many differences

among the schemes on the basis of overall annual average risk and returns.

4.3 Risk and Return of Mutual Fund with Benchmark Portfolios.

To have a meaningful evaluation of the investment performance of mutual fund

schemes their average return and risk are to be compared with the average return and

risk are to be compared with the average return and risk of the benchmark portfolio.

The average return and risk for both the selected mutual fund schemes and the

benchmark portfolio are computed and presented in Table IV Fund Beta (Systematic

risk) and value for Beta are also computed and presented in the same table.

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Table IV present return and risk of mutual fund schemes together with returns

and risk of benchmark portfolio and risk-free return. Normally, the funds are expected

to earn more than risk- free return. But, out of 23 schemes, 4 schemes had not earned

ever more than risk –free return. all the 15 equity schemes had earned more than risk

free return. Out of 23 schemes had not earned even more than the risk free return. Out

of 23 schemes, 11 schemes had not earned more than the market return. Out of 23

schemes, 14 schemes had more risk than market risk. Out of 15 equity schemes, only

one scheme namely Franklin India Prima Plus had less risk than market risk. All the

schemes from income fund had less risk than market risk out of 15 equity schemes,

only one schemes ICICI Prudential Tax Plan had high systematic risk and the remaining

fourteen schemes were reflected a moderate amount of systematic risk. Among the 8

Income schemes, Tata, Income Fund reflected a negative systematic risk. It can be

concluded that he return and risk are not always in conformity with the stated

objectively and the systematic risk free return and average market risk for all the

twenty three schemes were same with 0.506 and 5.485 respectively.

S

No

Schemes Average

Risk

Free

Return

Average

Portfolio

Return

Average

Market

Return

Fund

Portfolio

Risk

Market

Risk

Fund

Bet

beta Sig

Equity Schemes

1 Can Equity Tax Saver 0.506 1.200 2.446 7.086 5.485 0.991 9.031 **

2 Franklin India Blue Chip

Fund

0.506 3.041 2.446 5.734 5.485 1.957 17.177 **

3 Franklin India Prima Plus 0.506 3.067 2.446 5.469 5.485 0.913 17.222 **

4 Franklin India Prima

Fund

0.506 3.493 2.446 6.647 5.485 0.973 10.169 **

5 HDFC Top 200 Fund 0.506 3.259 2.446 5.664 5.485 0.943 16.907 **

6 Magnum Global Fund 0.506 3.095 2.446 6.889 5.485 0.911 7.963 **

7 ICICI Prudential Tax Plan 0.506 3.402 2.446 7.511 5.485 1.172 12.509 **

8 ICICI Prudential Power 0.506 3.307 2.446 5.796 5.485 0.950 15.486 **

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9 ICICI Prudential Growth 0.506 2.681 2.446 5.771 5.485 0.966 17.492 **

10 Reliance Growth Fund 0.506 4.155 2.446 6.285 5.485 0.965 11.794 **

11 Reliance

Vision Fund

0.506 3.792 2.446 6.037 5.485 0.924 11.672 **

12 Tata Growth Fund 0.506 2.839 2.446 6.139 5.485 0.979 0.766 ns

13 Tata Equity Opportunities

fund

0.506 1.432 2.446 6.262 5.485 0.817 7.729 **

14 UTI Growth & Value

Fund

0.506 2.866 2.446 5.945 5.485 0.976 15.598 **

15 UTI Equity Tax Saving

Plan

0.506 1.897 2.446 5.742 5.485 0.882 11.788 **

Income (Debt) Scheme

16 Birla Income Plus 0.506 0.464 2.446 0.831 5.485 0.015 0.751 ns

17 Kotak Bond Regular Plan 0.506 0.559 2.446 0.805 5.485 0.022 1.124 **

18 ICICI Prudential Income 0.506 0.467 2.446 0.822 5.485 0.023 1.166 ns

19 Reliance Income Fund 0.506 0.531 2.446 0.811 5.485 0.029 1.490 ns

20 Sundaram bond Saver 0.506 0.442 2.446 0.861 5.485 0.012 0.571 ns

21 Tata Income Fund 0.506 0.927 2.446 9.640 5.485 0.323 1.413 ns

22 UTI Bond Fund 0.506 0.517 2.446 0.672 5.485 0.019 1.198 ns

23 Unit Bond Advantage 0.506 0.493 2.446 0.878 5.485 0.017 0.821 ns

Note ** Significant at 1 Percent Level

* Significant at 5 percent level

Source : Computed from information in Table III and Table IV

4.4 Unique Risk and Diversification

The object of diversification is to earn superior returns by reduction of risk. To

analyze whether the sample mutual fund schemes are adequately diversified or not, the

value of diversification for each schemes is computed and unique risk or unsystematic

risk are also computed and presented in Table V.

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Table V. presented information regarding the unique risk (diversifiable risk or

non- market risk) of mutual fund and the extent of diversification of sample schemes. It

will be seen that the average unique risk of the equity sample schemes is 3.219 and

income sample is 1.888 per month while the average diversification of the equity

sample schemes was 0.724 and income sample schemes was 0.029. Out of the 15

equity schemes, 8, schemes, only one schemes namely Tata Income Fund showed

higher than the average unique risk. Hence, it Can be concluded that the mutual fund

schemes risks are not adequately diversified.

S

No

Schemes Extent of Diversification (R2) Unique Risk

(Unsystematic Risk)

Equity Schemes

1 Can Equity Tax Saver 0.589 4.538

2 Franklin India Blue Chip Fund 0.838 2.296

3 Franklin India Prima Plus 0.839 2.189

4 Franklin India Prima Fund 0.645 3.941

5 HDFC Top 200 Fund 0.834 2.292

6 Magnum Global Fund 0.527 4.736

7 ICICI Prudential Tax Plan 0.733 3.859

8 ICICI Prudential Power 0.808 2.531

9 ICICI Prudential Growth 0.843 2.281

10 Reliance Growth Fund 0.709 3.373

11 Reliance

Vision Fund

0.705 3.270

12 Tata Growth Fund 0.766 2.960

13 Tata Equity Opportunities fund 0.512 4.367

14 UTI Growth & Value Fund 0.810 2.573

15 UTI Equity Tax Saving Plan 0.709 3.093

Average 0.724 3.219

Income (Debt) Scheme

1 Birla Income Plus 0.506 0.827

2 Kotak Bond Regular Plan 0.506 0.796

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3 ICICI Prudential Income 0.506 0.813

4 Reliance Income Fund 0.506 0.796

5 Sundaram bond Saver 0.506 0.858

6 Tata Income Fund 0.506 9.478

7 UTI Bond Fund 0.506 0.664

8 Unit Bond Advantage 0.506 0.873

Average 0.029 1.888

Source : Computed from information in table IV

4.5 Risk Returns Grid of Mutual Fund Scheme

In order to undertake further analysis, sample schemes have been classified into the

following four categories on the basis of their return and risk characteristic and they are

presented in the following figure.

High

Return

Equity Scheme

Franklin India Prima Plus

1. Franklin India Prima Plus

2. Franklin India Prima Fund

3. HDFC Top 200 Fund

4. Magnum Global Fund

5. ICICI Prudential Tax Plan

6. ICICI Prudential Power

7. ICICI Prudential Growth

8. Reliance Growth Fund

9. Reliance

10. Vision Fund

11. Tata Growth Fund

12. Tata Equity Opportunities fund

13. UTI Growth & Value Fund

APp>ARm SDp>SDm 1

AP>ARm>SDp<SDm II

Low

Return

Income Schemes

All the I Income Schemes

AP>ARm>SDp<SDm III

Equity Schemes

1. Can Equity Tax Saver

2. Tat Equity Opportunities fund

3. UTI Equity Tax Saving Plan

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APp>ARm SDp>SDm 1

Note : ARp – Average Return on Mutual Fund Portfolio

ARm – Average Return on Market Portfolio

SDp – Risk of Mutual Fund Portfolio

SDm – Risk of Market Portfolio

Figure – 1

Risk Return Grid of Mutual Fund Schemes

Quadrant – I (High Return and High Risk) : An analysis of the data indicated that oput

of the total 23 schemes, 11 schemes fall in the first quadrant. All the 11 schemes are

equity schemes. In terms of risk –return relationship, one would expect the equity

schemes should fall in this first quadrant. The results show that these schemes have

taken higher risk and returns. The topper in this category is Reliance Growth Fund with

415.5 percent of return.

Quadrant – II (High Return and Low Risk) The result show that out of the total 23

schemes, only one equity scheme had earned higher returns in comparison to the of

the market but have, in fact assumed lower risk than market risk.

Quadrant – III (Low Return and Low Risk) This Category includes all those schemes

whose average return and less than the average market return and their standard

deviations are also lower than that of the market. The result indicates that out of the 23

schemes, all the 8 income schemes fall in this quadrant.

Quadrant – IV (Low return and High Risk) This quadrant Included only three schemes,

all of them are equity schemes. These Schemes had earned a very lesser return during

the study period but have assumed higher risk than the market. Indeed, they are the

poorest performers, as they have not generated even the average returns.

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4.6 Risk – Adjusted Performance of Selected Mutual Fund Schemes.

Having established the risk and the return associated with the sample schemes and the

market indices, the next step is to evaluate the risk – adjusted performance of selected

mutual fund schemes by using the following five performance measures.

Sharpe Ratio,

Treynor Ratio,

Jensen Differential Return Measure, and

Sharpe Differential Return Measure and

Eama’s components of Investment Performance

A brief description of the five performance evaluation measures is given below.

4.6.1 Application of Share Ratio to Evaluate the Performance of Selected Schemes.

To evaluate the risk – adjusted performance of sample mutual fund schemes the

Sharpe ratio, both for the mutual fund schemes and for the benchmark portfolio (i.e.

BSE Sensex 100) are computed and presented in Table VI

Table VI

Sharpe Ratio of Mutual Fund Schemes

S

No

Schemes Sharp

(Fund)

Sharp

(Index)

Equity Schemes

1 Can Equity Tax Saver 0.767 0.589

2 Franklin India Blue Chip Fund 0.442 0.354

3 Franklin India Prima Plus 0.468 0.354

4 Franklin India Prima Fund 0.449 0.354

5 HDFC Top 200 Fund 0.486 0.354

6 Magnum Global Fund 0.376 0.354

7 ICICI Prudential Tax Plan 0.386 0.354

8 ICICI Prudential Power 0.483 0.354

9 ICICI Prudential Growth 0.377

10 Reliance Growth Fund 0.581 0.354

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11 Reliance

Vision Fund

0.544 0.354

12 Tata Growth Fund 0.380 0.354

13 Tata Equity Opportunities fund 0.148 0.354

14 UTI Growth & Value Fund 0.397 0.354

15 UTI Equity Tax Saving Plan 0.242 0.354

Income (Debt) Scheme

16 Birla Income Plus -0.051 0.354

17 Kotak Bond Regular Plan 0.066 0.354

18 ICICI Prudential Income -0.048 0.354

19 Reliance Income Fund 0.031 0.354

20 Sundaram bond Saver -0.075 0.354

21 Tata Income Fund 0.044 0.354

22 UTI Bond Fund 0.016 0.354

23 Unit Bond Advantage ``` -0.015 0.354

Source : Computed from information in table IV

Table VI present the Sharpe ratios for the sample schemes and for the

benchmark portfolios. Out of the 23 Schemes had better Sharpe ratios in comparison to

the relevant benchmark portfolios. Reliance vision is the top performer in the equity

schemes. All the 8 income Schemes had less Sharpe ratio in comparison with relevant

benchmark portfolio. Out of 15 equity schemes, two of them have performed less in

comparison with their relevant benchmark portfolios. All the income schemes have

performed less in comparison with their relevant benchmark portfolios. Though Can

Equity Tax Saver scheme had better Sharpe ration than the relevant benchmark

portfolio, which fell in the forth quadrant.

4.6.2 Application of Treynor Ratio to Evaluate the Performance of Selected Schemes.

Treynor ratio or measure evaluates the performance of the sample schemes with

respect to systematic risk. Table VII present Treynor rations of the Schemes and

benchmark portfolios.

Table VII

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Treynor Ratios of Selected Mutual Fund Schemes

S

No

Schemes Treynor’s Ratio

(Fund)

Treynor’s Ratio

(Index)

Equity Schemes

1 Can Equity Tax Saver 0.700 1.940

2 Franklin India Blue Chip Fund 2.649 1.940

3 Franklin India Prima Plus 2.803 1.940

4 Franklin India Prima Fund 3.069 1.940

5 HDFC Top 200 Fund 2.919 1.940

6 Magnum Global Fund 2.841 1.940

7 ICICI Prudential Tax Plan 2.470 1.940

8 ICICI Prudential Power 2.949 1.940

9 ICICI Prudential Growth 2.251 1.940

10 Reliance Growth Fund 3.781 1.940

11 Reliance

Vision Fund

3.555 1.940

12 Tata Growth Fund 2.382 1.940

13 Tata Equity Opportunities fund 1.134 1.940

14 UTI Growth & Value Fund 2.418 1.940

15 UTI Equity Tax Saving Plan 1.578 1.940

Income (Debt) Scheme

16 Birla Income Plus -2.820 1.940

17 Kotak Bond Regular Plan 2.449 1.940

18 ICICI Prudential Income -1.713 1.940

19 Reliance Income Fund 0.882 1.940

20 Sundaram bond Saver -5.430 1.940

21 Tata Income Fund -1.300 1.940

22 UTI Bond Fund 0.556 1.940

23 Unit Bond Advantage ``` -0.756 1.940

Table Vii presents the Treynor ratios for the selected schemes as well as for the

benchmark portfolio, which fell in the fourth quadrant.

4.6.2 Application of Treynor Ratio to Evaluate the Performance of Selected Schemes.

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Treynor ratio or measure evaluates the selected schemes as well as for the

benchmark portfolios.

Table Vii present the Treynor ratios for the selected schemes as well as for the

benchmark portfolios. It can be seen that out of the 23 schemes, 10 schemes, had

outperformed the benchmark in terms of volatility. Reliance Growth Fund is the top

performer of the equity schemes. Interestingly, among the 10 schemes, 9\ schemes

outperformed in respect of Sharpe ratio too. The only scheme namely Can Equity Tax

Server had offered more return than benchmark in respect of Sharpe ratio.

The result pertaining to Share and Treynor ratio reflect some conflict in

performance ranking. The reason for such a conflict arises due to the fact that Sharpe

ratio takes into accounts the total risk of the portfolio whereas the Treynor ratio

considers only the systematic or the market risk. Thus it is possible that a portfolio

might have outperformed the market in terms of Treynor ratio whereas in terms of

Sharpe ratio it did not. The Reason for this difference is that the portfolio under

consideration may have a relatively larger amount of unique risk. The presence of

unique risk in the portfolio does not affect the Treynor ratio whereas it would affect the

Sharpe ratio. Therefore in order to detect any conflict in performance ranking, the

sample schemes have been ranked in terms of Sharpe and Treynor ratios.

4.6.3 Application of Jensen Measure to Evaluate the Performance of selected Scheme.

The Jensen measure has given a different dimension to the portfolio performance. In

the Jensen measure, Alpha values are computed which indicates the additional return of

the portfolio i.e. the difference between the expected return and actual return and

actual return. Jensen’s alphas, beta and expected return value are given in Table VIII

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Table VIII

Jensen Measures of Selected Mutual Fund Schemes

S

No

Schemes Jenson’s A Jenson’ B

Expected

Return

Equity Schemes

1 Can Equity Tax Saver -1.232 0.992 3.013

2 Franklin India Blue Chip Fund 0.676 0.958 2.535

3 Franklin India Prima Plus 0.787 0.914 2.441

4 Franklin India Prima Fund 1.093 0.976 2.857

5 HDFC Top 200 Fund 0.920 0.945 2.510

6 Magnum Global Fund 0.819 0.912 2.943

7 ICICI Prudential Tax Plan 0.617 1.175 3.163

8 ICICI Prudential Power 0.956 0.951 2.556

9 ICICI Prudential Growth 0.300 0.967 2.548

10 Reliance Growth Fund 1.773 0.967 2.729

11 Reliance

Vision Fund

1.490 0.926 2.642

12 Tata Growth Fund 0.430 0.981 2.678

13 Tata Equity Opportunities fund -0.663 0.819 2.721

14 UTI Growth & Value Fund 0.464 0.977 2.609

15 UTI Equity Tax Saving Plan -0.321 0.882 2.537

Income (Debt) Scheme

16 Birla Income Plus -0.075 0.017 0.539

17 Kotak Bond Regular Plan 0.007 0.024 0.791

18 ICICI Prudential Income -0.087 0.025 0.797

19 Reliance Income Fund -0.034 0.031 0.793

20 Sundaram bond Saver -0.091 0.014 0.811

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21 Tata Income Fund 1.039 -0.319 3.916

22 UTI Bond Fund -0.031 0.021 0.744

23 Unit Bond Advantage ``` -0.051 0.020 0.817

Table VIII present the Jensen measures of the mutual fund schemes. Out of the total

23 schemes, alpha values for 14 schemes were positive thereby indicating superior

performance. IN other words, these schemes had generated returns in excess of

equilibrium return. The value of alphas is an absolute, which indicates differential return

of the portfolio between equilibrium return and actual return. It is noted that the

equilibrium return of a fund is the return that it is expected to earn with the given level

of systematic or market risk. The additional return earned by the fund manager over

equilibrium return can be attributed to his ability to select the securities.

The result indicates alpha values for only three schemes viz. Franklin India

Prima fund, Reliance Growth Fund and Reliance Vision Fund were found to be

statistically significant, thereby implying that these three schemes have generated

above normal returns.

In order to test whether the mutual funds schemes are offering superior risk –

adjusted return or not under Jensen alpha measure, the following null hypothesis was

formulated.

Hypothesis HO : Mutual Fund does not offer superior risk – adjusted returns.

A positive and significant alpha will mean that the schemes provide superior risk

adjusted returns. The result of the study reveals that out of the 23 schemes, only 3

schemes are having positive and significant alphas values. Hence, the hypothesis is

accepted.

4.6.4 Application of Sharpe differential Return measure to Evaluate the performance

of Selected Schemes.

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To analyze the manager’s ability in selecting stocks and his ability to provide

diversification, Sharpe uses the differential return measure. For this, the value of

expected return and actual return are calculated and presented in Table IX

Table IX

Sharpe Differential Return of Selected Mutual Fund Scheme

S

No

Schemes Expected Return Actual Return

Differential

Return

Equity Schemes

1 Can Equity Tax Saver 3.013 1.201 -1.813

2 Franklin India Blue Chip Fund 2.535 3.041 0.505

3 Franklin India Prima Plus 2.441 3.071 0.629

4 Franklin India Prima Fund 2.857 3.491 0.633

5 HDFC Top 200 Fund 2.510 3.26 0.750

6 Magnum Global Fund 2.943 3.10 0.157

7 ICICI Prudential Tax Plan 3.163 3.40 0.237

8 ICICI Prudential Power 2.556 3.310 0.754

9 ICICI Prudential Growth 2.548 2.68 0.132

10 Reliance Growth Fund 2.729 4.16 1.431

11 Reliance

Vision Fund

2.642 3.79 1.148

12 Tata Growth Fund 2.678 2.84 0.162

13 Tata Equity Opportunities fund 2.721 1.43 -1.291

14 UTI Growth & Value Fund 2.609 2.87 0.261

15 UTI Equity Tax Saving Plan 2.537 1.900 -0.637

Income (Debt) Scheme

16 Birla Income Plus 0.539 0.46 -0.079

17 Kotak Bond Regular Plan 0.791 0.56 0.231

18 ICICI Prudential Income 0.797 0.47 0.327

19 Reliance Income Fund 0.793 0.53 0.263

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20 Sundaram bond Saver 0.811 0.44 0.371

21 Tata Income Fund 3.916 0.93 2.986

22 UTI Bond Fund 0.744 0.52 0.224

23 Unit Bond Advantage ``` 0.817 0.49 0.327

Source : Computed from information in Table IV

Table IX present information pertaining to Sharpe’s differential return for mutual fund

schemes. Out of the 23 schemes, 12 schemes reflected positive differential returns,

thereby indicating superior performance. The top two performances are Reliance

Growth Fund and Reliance vision Fund. The remaining 09 schemes showed negative

differential returns indicating that they could not generate return commensurate with

the risk they assumed. A comparison of Share differential returns and Jensen alpha

indicates the impact of selectivity and diversification on the fund’s returns. As revealed

earlier, the Indian mutual funds are not adequately diversified.

The analysis is further extended to pinpoint the reasons for good or bad

performance which also identifies the areas for correction. This is fulfilled by Fama’s

decomposition measures.

4.6.5 Application of Fama’s components to evaluate the performance of

selected schemes.

In order to analyze the selected schemes’ returns under Fama’s components of

investment performance the returns are grouped into four components for the sample

mutual fund schemes are computed and presented in Table X

Table X

Fama’s Break-up of selected Mutual Fund Scheme

S

No

Schemes Diversifiable

Risk (D.R.)

Impact of Beta

Imperfect

Diversification

Net

Selectivity

Equity Schemes

1 Can Equity Tax Saver 0.300 1.926 0.581 -1.813

2 Franklin India Blue Chip Fund 0.087 1.859 0.169 0.507

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3 Franklin India Prima Plus 0.083 1.773 0.161 0.626

4 Franklin India Prima Fund 0.236 1.894 0.457 0.635

5 HDFC Top 200 Fund 0.088 1.833 0.171 0.749

6 Magnum Global Fund 0.344 1.770 0.667 0.153

7 ICICI Prudential Tax Plan 0.195 2.279 0.378 0.239

8 ICICI Prudential Power 0.106 1.845 0.205 0.751

9 ICICI Prudential Growth 0.085 1.876 0.166 0.134

10 Reliance Growth Fund 0.179 1.876 0.347 1.426

11 Reliance

Vision Fund

0.175 1.796 0.340 1.150

12 Tata Growth Fund 0.139 1.903 0.269 0.161

13 Tata Equity Opportunities fund 0.323 1.589 0.627 -1.289

14 UTI Growth & Value Fund 0.107 1.896 0.207 0.257

15 UTI Equity Tax Saving Plan 0.164 1.712 0.319 -0.640

Income (Debt) Scheme

16 Birla Income Plus 0.539 0.46 -0.079 -0.336

17 Kotak Bond Regular Plan 0.791 0.56 0.231 -0.232

18 ICICI Prudential Income 0.797 0.47 0.327 -0.330

19 Reliance Income Fund 0.793 0.53 0.263 -0.262

20 Sundaram bond Saver 0.811 0.44 0.371 -0.369

21 Tata Income Fund 3.916 0.93 2.986 -2.990

22 UTI Bond Fund 0.744 0.52 0.224 -0.227

23 Unit Bond Advantage ``` 0.817 0.49 0.327 -0.323

Source : Computed from information in Table IV

Table X presents information pertaining to Fama's components of performance for

the mutual fund schemes. Note that the overall performance has been broken down

into various components such as diversifiable risk, impact of beta, imperfect

diversification and net selectivity.

The above table shows that except the only one income scheme namely Tata Income

Fund, the remaining 22 schemes had provided positive performance on account of risk

bearing activity of fund managers.

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However, all the 23 schemes had provided positive performance in terms of

diversifiable risk and imperfect diversification. The only scheme namely Tata Income

Fund had provided highest value (4.028) of imperfect diversification.

After accounting for diversification, the residual performance on selectivity is

attributed to net selectivity and it will be equal or less than that on selectivity. A positive

net selectivity will indicate superior performance. However, in case net selectivity is

negative then it would mean that fund managers have taken diversifiable risk that has

been compensated by extra returns. It can be seen from the same table 10 that only 12

schemes appeared to have superior stock selection ability as the selectivity measure

was found to be positive. The two top performers with regard to selectivity were

Reliance Growth Fund and Reliance Vision Fund.

V. Conclusion

The risk and return of mutual fund schemes were not in conformity with their stated

investment objectives. Further, sample schemes were not found to be adequately

diversified. It can be stated that 13 schemes out of 23 schemes selected had superior

performance than the benchmark portfolio in terms of Sharpe ratio, 13 schemes had

superior performance in terms of Treynor ratio (Systematic Risk), and 14 schemes had

superior performance according to Jensen measure. 12 schemes reflected positive

differential returns, thereby indicating superior performance in respect of Sharpe

differential return measure and 12 schemes appeared to have superior stock selection

ability as the selectivity measure was found to be positive in respect of Fama's

components of investment performance. The funds were able to earn higher returns

due to selectivity. But the proper balance between selectivity and diversification was not

maintained. The analysis made by the application of Fama's measure indicates that the

returns out of diversification were less. Thus the Indian mutual funds are not properly

diversified.

Even though the Dharmapuri District is the most backward in terms of economics as

well as education, the mutual funds investors in the district are having an average

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awareness on various mutual fund schemes and their risk and returns. Lack of deeper

distribution networks and channels, domination of the banking sector, impact of global

developments, operational hassles, lack of investment advisors are the major challenges

that are being faced by the Indian mutual fund industry. In spite of the above

bottlenecks, the mutual fund industry is having a good prospect in our country. The

factors such as support from SEBI, declining bank deposits' interest rate in the recent

past, opening of the market to the foreign investors, the entry of large domestic

institutional investors, increased focus on product innovation, security and liquidity, tax

concession would go a long way in making mutual funds an increasingly popular,

lucrative and cost efficient vehicle for investment. If mutual funds ensure, creating

awareness among retail investors, controlling operational costs, deeper penetration in

the rural areas, curbing unethical practices, spreading the mutual fund culture,

maintaining transparency and flexibility and creating a good rapport with the investors,

their future will be very bright.

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