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

2011
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.
Nishant Patel
Stevens Business School, Ahmedabad
3/16/2011
Performance Evaluation of Mutual Funds Scheme in 2011
India
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 Asset Management Period

Category Company From To
1. Can Equity Tax Saver Equity Can Bank Mar.1999 Mar. 2009
Investment
Management
Services
2. Franklin India Blue ship Equity Franklin Temploton Nov.1999 Mar.2007
Fund Asset Management
(India) Pvt. Ltd.
3. Franklin India Prima Equity Franklin Temploton Sep.1999 Mar.2007
Plus Asset Management
(India) Pvt. Ltd.
4 Franklin India Prima Equity Franklin Temploton Sep.1993 Mar.2007
Fund Asset Management
(India) Pvt. Ltd.
5 HDFC Top 200 Fund Equity HDFC Asset Sep.1996 Mar.2007
Management Co.
Ltd.
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6 Magnum Global Fund Equity SBI Funds Sep.1994 Mar.2007

Management Ltd.
7 Prudential ICICI Tax Equity Prudential ICICI Sep.1994 Mar.2007
Plan Asset Management
Co. Ltd.,
8. Prudential ICICI Power Equity Prudential ICICI Sep.1999 Mar. 2007
Asset Management
Co. Ltd.,
9. Prudential ICICI Power Equity Prudential ICICI June 1998 Mar.2007
Asset Management
Co. Ltd.,
10 Reliance Growth Fund Equity Reliance Capital Oct.1995 Mar.2007
Asset Management
Ltd.,
11. Reliance Growth Fund Equity Reliance Capital Oct.1995 Mar.2007
Asset Management
Ltd.,
12. Tata Growth Fund Equity Tata Asset Jun.1994 Mar. 2007
Management Ltd.
13. Tata Growth Fund Equity Tata Asset Mar.2003 Mar.2007
Management Ltd.
14. UTI-Growth and Value Equity UTI Asset Oct.1999 Mar.2007
Fund Management
Company Ltd.,
15. UTI Equity Tax Saving Equity UTI Asset Dec.1999 Mar.2007
Plan Management
Company Ltd.,
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 Income Kotak Mahindra Nov.1999 Mar.2007
Plan Asset Management
Co.Ltd.
18. Prudential ICICI Income Income Predential ICICI Jun.1998 mar.2007
Asset Management
Co.Ltd.
19. Reliance income Fund Income Reliance Capital DEc.1997 Mar.2007
Asset Management
Co.Ltd.
20. Sundaram Bond Saver Income Sundaram BNP Nov.1997 Mar.2007
Paribas AMC Ltd.
21. Tata Income Fund Income Tata Asset Apr.1997 Mar.2007
Management Ltd.
22. UTI- Bond Fund Income UTI Asset Jun.1998 Mar.2007
Management
Co.Ltd.
23. UTI Bond Advantage Income UTI Asset Jul.1999 Mar.2007
Fund LTP Management
Company Ltd.
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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 Scheme Name Average Total
o
2002- 2003 2004- 2005 2006 Total
03 -04 05 -06 -07
1. Can Equity Tax Saver Average 1.29 3.69 1.33 3.18 1.11 1.20
Risk 4.26 4.83 6.71 8.17 9.73 7.15
2. Franklin India Blue ship Fund Average 0.09 7.43 1.85 4.40 1.19 3.04
Risk 3.74 5.12 5.39 4.09 7.40 5.78
3. Franklin India Prima Plus Average 0.35 6.84 2.24 4.56 1.76 3.07
Risk 3.29 4.42 4.84 3.84 7.79 5.52
4 Franklin India Prima Fund Average 0.49 8.22 4.26 4.24 0.00 3.49
Risk 3.65 8.05 5.41 3.35 8.46 6.70
5 HDFC Top 200 Fund Average 0.14 7.46 2.68 4.74 1.02 3.26
Risk 3.42 5.70 5.64 3.52 6.90 5.71
6 Magnum Global Fund Average 1.09 4.24 4.29 5.85 1.84 3.10
Risk 3.69 8.63 6.01 4.58 8.94 6.95
7 Prudential ICICI Tax Plan Average 1.07 7.05 5.55 4.63 0.48 3.40
Risk 3.78 8.41 6.43 4.40 10.38 7.58
8. Prudential ICICI Power Average 0.55 6.98 2.41 4.96 1.41 3.31
Risk 4.44 5.13 5.46 4.46 7.49 5.85
9. ICIC Prudential Growth Plan Average 0.75 6.11 1.93 4.58 1.26 2.68
Risk 4.04 5.13 6.12 4.05 7.23 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 2.56 7.61 3.02 4.41 1.25 3.79
Risk 5.67 5.99 5.92 3.27 7.69 6.09
12. Tata Growth Fund Average 0.21 6.11 3.55 3.61 0.87 2.84
Risk 3.11 5.44 6.52 4.74 8.50 6.19
13. Tata Equity Opportunities Average 0.31 3.52 1.77 3.28 1.24 1.43
Fund Risk 3.91 7.41 5.50 3.91 8.74 6.32
14. UTI-Growth and Value Fund Average 0.23 7.66 2.10 3.68 0.44 2.87
Risk 3.87 5.85 5.58 3.56 7.63 6.00
15. UTI Equity Tax Saving Plan Average 0.27 3.85 1.38 3.96 0.11 1.90
Risk 3.01 7.35 4.68 4.04 7.76 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- 2004- 2005-06 2006-
Birla income Plus- Average 0.92 0.78 -0.03
04 05 0.28
07 0.4 0.46
Retail Risk 1.32 0.83, 0.79 0.23 0.34 0.84
Kotak Bond 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
Regular Average
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 Schemes Average Average Average Fund Market Fund beta Sig

No Risk Portfolio Market Portfolio Risk Bet
Free Return Return Risk
Return
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 0.506 3.041 2.446 5.734 5.485 1.957 17.177 **
Fund
3 Franklin India Prima Plus 0.506 3.067 2.446 5.469 5.485 0.913 17.222 **
4 Franklin India Prima 0.506 3.493 2.446 6.647 5.485 0.973 10.169 **
Fund
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 0.506 3.792 2.446 6.037 5.485 0.924 11.672 **
Vision Fund
12 Tata Growth Fund 0.506 2.839 2.446 6.139 5.485 0.979 0.766 ns
13 Tata Equity Opportunities 0.506 1.432 2.446 6.262 5.485 0.817 7.729 **
fund
14 UTI Growth & Value 0.506 2.866 2.446 5.945 5.485 0.976 15.598 **
Fund
15 UTI Equity Tax Saving 0.506 1.897 2.446 5.742 5.485 0.882 11.788 **
Plan
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 Schemes Extent of Diversification (R2) Unique Risk

No (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 0.705 3.270
Vision Fund
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
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 Equity Scheme 1. Franklin India Prima Plus

2. Franklin India Prima Fund
Return Franklin India Prima Plus
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 Income Schemes Equity Schemes
Return All the I Income Schemes 1. Can Equity Tax Saver
AP>ARm>SDp<SDm III 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 Schemes Sharp Sharp
No (Fund) (Index)
Equity Schemes
5 HDFC Top 200 Fund 0.486 0.354
9 ICICI Prudential Growth 0.377
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11 Reliance 0.544 0.354
Vision Fund
16 Birla Income Plus -0.051 0.354
18 ICICI Prudential Income -0.048 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 Schemes Treynor’s Ratio Treynor’s Ratio
No (Fund) (Index)
Equity Schemes
5 HDFC Top 200 Fund 2.919 1.940
9 ICICI Prudential Growth 2.251 1.940
11 Reliance 3.555 1.940
Vision Fund
16 Birla Income Plus -2.820 1.940
18 ICICI Prudential Income -1.713 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 Schemes Jenson’s A Jenson’ B Expected
No 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 1.490 0.926 2.642
Vision Fund
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
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 Schemes Expected Return Actual Return Differential
No 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 2.642 3.79 1.148
Vision Fund
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
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 Schemes Diversifiable Impact of Beta Imperfect Net
No Risk (D.R.) Diversification 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 0.175 1.796 0.340 1.150
Vision Fund
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
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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34 | P a g e

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

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2011

II. Literature Review

2.1 Foreign Literature.

into a count. Guy (1978) on analyzing the performance of British Investment

2.2. Indian Literature :

proved to be an empirical evidence of Efficient Market Hypothesis in Indian

III. The study Objective, Methodology and Sample

3.3 Period of the Study

3.4 Sample Schemes Selected for the Study

Name of the Selected Mutual Fund Schemes

S.No. Scheme Name Fund Asset Management Period

6 Magnum Global Fund Equity SBI Funds Sep.1994 Mar.2007

4.2 Average Annual Risk And Returns of Selected income scheme

S Schemes Average Average Average Fund Market Fund beta Sig

Note ** Significant at 1 Percent Level

Source : Computed from information in Table III and Table IV

4.4 Unique Risk and Diversification

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

S Schemes Extent of Diversification (R2) Unique Risk

Source : Computed from information in table IV

High Equity Scheme 1. Franklin India Prima Plus

Note : ARp – Average Return on Mutual Fund Portfolio

4.6 Risk – Adjusted Performance of Selected Mutual Fund Schemes.

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

Source : Computed from information in table IV

Treynor Ratios of Selected Mutual Fund Schemes

Source : Computed from information in Table IV

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

Jaya, Dev. M, (1998), "Performance Evaluations of Portfolio Managers - An Empirical

Kothari, C.R., (2006), "Research Methodology", New Age International Publishers,

Ramachandran .G. and G. Subramartiyan, (2001), "Crushed by Mistrust", Portfolio

Sahadevan, K.G. and Thirupalraju.M., (1997), "Mutual Funds-Data, Interpretation

Srivastava, R.M., (1996), "Management of Financial Institutions", Himalaya

Treynor, J., (1965), "How to Rate Management of Investment Funds", Harvard

Tripathy, Nalini Prava, (2004), "An Empirical Analysis on Performance Evaluation of

Vengateshwarlu, M., (2004), "Investors Perception of Mutual Funds", Southern

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