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PERFORMANCE ANALYSIS OF MUTUAL FUNDS WITH REFERENCE TO ELSS FUNDS - A STUDY B.

Narayanan1 ABSTRACT
This study deals with investment in ELSS Schemes of Mutual funds available. Taxes grow without rain. Like it or not, you have to pay your taxes. The trouble is that understanding taxation requires more than a genius mind. Albert Einstein admitted, The hardest thing in the world to understand is the income tax.Tax planning is an essential part of your financial planning. Efficient tax planning enables you to reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions rebate and allowances while ensuring that your investments are in line with your long term goals. Mutual Fund ELSS is a damn good tax saving instrument but still it is not used by maximum Indians. In India there are close to 3.34 crore individual taxpayers but less than 20% have ever invested in Mutual Fund ELSS. These funds are well diversified and reduce sector-specific or company-specific risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times.

M.Arivazhagan2

INTRODUCTION Investing in various types of assets is an interesting activity that attracts people from all walks of life irrespective of their occupation, economic status, education and family background. The investor who is having extra cash could invest it in securities or in any other assets like gold or real estate or could simply deposit it in his bank account. The problem of surplus money gives rise to the question of where to invest. At present, a wide variety of investment avenues are open to the investors to suit their needs and nature. Mutual Fund and Household Savings Mutual funds are the fastest growing institution in the household saving sector. Growing complications and risk in the stock market, higher tax rates and rising inflation have pushed household financial assets was towards mutual funds. Concept of Modern Mutual Fund Since mutual fund is relatively recent phenomenon in India, there is a need for conceptual clarity on their structure and operation mechanism. The basis of mutual fund is pooling concept. in other words, mutual fund pool money from a cross- section of investors by issuing units, construct a diversified portfolio of stocks, bonds and other investment instruments and invest the same in the capital market. In short, A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. It is essentially a diversified portfolio of financial instruments - these could be equities, debentures / bonds or money market instruments. The corpus of the fund is then deployed in investment alternatives that help to meet predefined investment objectives. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them.

(Research Scholar & Assistant Professor, Shivani School of Business Management, Trichy-9) Email: narayanansrgm1974@gmail.com Mob: 9443219276 2 (Assistant Professor, Shivani School of Business Management, Trichy-9) Email: arivu.mba06@gmail.com Mob: 9600202630

The primary objective of all mutual funds is to provide better returns to the investors by minimizing the risk associated with capital market investment. The degree of risk associated with the expected return and the associated benefits differs. All mutual funds aim at achieving one or more of the following Providing a steady flow of income Providing high capital appreciation Providing capital appreciation with income Providing income or capital appreciation with tax benefits.

Origin of Modern Mutual Funds The mutual fund industry in India has come of age. It has substantially aligned itself with the international order. Mutual funds are the important institutions in the financial market and play an immensely significant role in the financial economy of a country. Funds can be broadly classified as either Close-ended or open ended. The Foreign & Colonial Investment Trust (F&CIT), still one of the most successful investment trusts in the UK, introduced the concept of Closed-ended fund to the world in 1868. the first open-ended fund , the Massachusetts Investors Trust (MIT) was established in the US in 1924..In India UTI was the first to introduce mutual fund in 1964 by launching Unit-64. BENEFITS OF INVESTING The benefits of investing in mutual funds are as follows Access to Professional Money Managers - Experienced fund managers using advanced quantitative and mathematical techniques manage your money. Diversification - Mutual funds aim to reduce the volatility of returns through diversification by investing in a number of companies across a broad section of industries and sectors. It prevents an investor from putting "all eggs in one basket". This inherently minimizes risk. Liquidity - The investors can sell their holdings in mutual fund investments anytime without worrying about finding a buyer at the right price. Tax Efficiency Currently, dividends are tax-free in the hands of the investor. There is no distribution tax payable by the Mutual Fund on dividends distributed. There is no tax deduction at source on dividends as well. Investments for over 12 months qualify for long term capital gains. Low Transaction Costs - Since mutual funds are a pool of money of many investors, the amount of investment made in securities is large. This therefore results in paying lower brokerage due to economies of scale. Transparency - Prices of open ended mutual funds are declared daily. Regular updates on the value of your investment are available. The portfolio is also disclosed regularly with the fund manager's investment strategy and outlook. Caveats of Investing in Mutual Funds No Guarantees Unlike bank deposits, mutual fund shares are not insured or guaranteed In fact, the value of a mutual fund may fluctuate Costs Control Not in the Hands of an Investor has to pay investment management fees and fund distribution costs as a percentage of the value of his investments Difficulty in Selecting a Suitable Fund Scheme Many investors find it difficult to select one option from the plethora of funds/schemes/plans available

TYPES OF MUTUAL FUNDS Mutual fund schemes may be classified on the basis of their structure and their investment objective By Structure Open-Ended Funds An Open-ended Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices. Close-Ended Funds A Close-ended Fund has a stipulated maturity period, which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the Stock Exchanges, if they are listed. The market price at the stock exchange could vary from the scheme's NAV. BY INVESTMENT OBJECTIVE Equity Funds These schemes, also commonly called growth, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. However, because they invest in equities .these schemes are exposed to fluctuations in value especially in the short term. The schemes under equity oriented funds are General purpose equity schemes. Sector specific equity schemes. Index funds Tax savings schemes. Debt Funds The aim of Debt Funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Debt Funds are ideal for capital stability and regular income. Capital appreciation in such funds may be limited, though risks are typically lower than that in a growth fund. However, as compared to the money market schemes they do have higher price fluctuation risk and compared to a gilt fund they have a higher credit risk. Various Debt Based Schemes Incomes schemes Liquid schemes. Money market schemes. Gilt schemes. Balanced Funds The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. This proportion affects the risks

and the returns associated with the balanced fund - in case equities are allocated a higher proportion, investors would be exposed to risks similar to that of the equity market. By investing in a mix of a nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long term orientation. Money Market Funds The aim of Money Market Funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for corporate and individual investors as a means to park their surplus funds for short periods. Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws, as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction under Section 88 of the Indian Income Tax Act, 1961.The Equity Linked Savings Scheme (ELSS) is basically a scheme wherein the amount invested in the units of the fund is invested in the equity shares of the companies. Such investment will have to be made in the mutual fund specified u/s 10(23D) of the Income Tax Act to be eligible for rebate u/s 88 of the Act. up to a maximum of Rs.10,0000. To claim the rebate, the investment will have to be locked in for a period of 3 years. The unit holder is free to sell his holdings once this lock in expires at a price based on the Net Asset Value (NAV). While in the case of an open-ended scheme the units can be sold anytime after the lock in period, in the case of a closed end scheme, the units can be redeemed only after the specified due date. However on such sale, the capital gains will be chargeable to tax. Index Schemes Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50. Sectoral Schemes Sectoral Funds are those which invest exclusively in specified sector(s) such as FMCG, Information Technology, Pharmaceuticals, etc. These schemes carry higher risk as compared to general equity schemes as the portfolio is less diversified, i.e. restricted to specific sector or industry. PLANS To cater to different investment needs, Mutual Funds offer various investment options. Some of the important investment options include: Growth Option Dividend is not paid-out under a Growth Option and the investor realizes only the capital appreciation on the investment (by an increase in NAV). Dividend Payout Option Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.

Dividend Re-investment Option Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same.

Retirement Pension Option Some schemes are linked with retirement pension. Individuals participate in these options for themselves, and corporate participate for their employees. Insurance Option Certain Mutual Funds offer schemes that provide insurance cover to investors as an added benefit. Systematic Investment Plan (SIP) Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favour of the fund. The investor is allotted units on a predetermined date specified in the offer document at the applicable NAV. Systematic Encashment Plan (SEP) As opposed to the Systematic Investment Plan, the Systematic Encashment Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a predetermined interval. The investor's units will be redeemed at the applicable NAV as on that day. Why Should I Choose to Invest in a Mutual Fund? Mutual Funds provide the benefit of cheap access to expensive stocks. Mutual funds diversify the risk of the investor by investing in a basket of assets. A team of professional fund managers manages them with in-depth research inputs from investment analysts. Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access. NEEDS & SCOPE OF THE STUDY The study is to comparative analyzing a type of mutual funds to ascertain the performance and also the relationship between the risk return relationship involved in them. Such a study has a become crucial in view of huge amount of investment committed by investors in those funds in recent years. The study will be of the use to the investing public and investment advisors in choosing correct technique while purchasing or selling the mutual funds. OBJECTIVES OF THE STUDY To analyze the selected growth oriented Equity Linked Saving Scheme and compare with, S&P CNX Nifty as Benchmark. To know the performance of ELSS funds with Sharpe, Treynor, Jenson, and Fama ratio. To measure the risk and return of the ELSS funds. To give the performance rank of the ELSS funds. LIMITATION OF STUDY It is an agreed fact that a study can never claim to be cent percentage perfect. It may be subject to a certain limitations. The study is restricted to same index.

Only secondary sources have been used. It is difficult to select the tools to be used for the research. Limited time. Rating and analyses mutual funds is an imperfect science. There are many times those funds movements cannot be explained by any statistics because of random active.

REVIEW OF LITERATURE TREYNOR (1965) devised a concept of fund performance, which takes investment in to account. He used a concept of characteristic line for relating expected rate of return of a fund to the rate of return of a suitable market average as to obtain satisfaction performance measure. Risk in a diversified fund is sum of responses to (a) general market fluctuations peculiar to particular securities held by the fund. If a fund is properly diversified, the latter risk tends to average out. SHARPE (1966) attempted to evaluate performance of mutual funds through the capital market model that deal with future predictions regarding performance by substituting actual return and actual standard deviation values. The analysis open ended mutual funds during the period 1954-1963 showed that funds with large average return typically exhibit greater variability than those with small average returns. M.JAYADEV (1994), conducted a study on Mutual Fund Performance: An analysis of monthly returns. He analyzed two growth-oriented mutual funds (Master gain and Magnum Express) on the basis of monthly returns compared to benchmark returns. It was found that, Master gain has performed better according to Jensen and Treynor measures and on the basis of Sharpe ratio its performance is not up to the benchmark. RESEARCH METHODOLOGY Nature of Data Secondary data were taken for the purpose of the study. Method of Data Collection Secondary data were collected from related websites and various asset management companies, the fund fact sheet was also considered in order to calculate the risk, return and performance of the funds from the December 2009 to November 2010. Sampling procedure Among the growth oriented ELSS funds in India the Top three funds were selected for the study. METHODOLOGY Tools Used 1. BETA 2. ALPHA 3. STANDARD DEVIATION 4. SHARPE RATIO 5. TREYNOR RATE TERMS Before going to the study it is necessary to understand some of t he terms and concepts to understand the study better. They are

Return The Return has been calculated as: Portfolio Return: R it = NAV t NAVt-1/ NAVt-1 Where, R it is the difference between Net Asset Value (NAV) for two consecutive months divided by the NAV of preceding month. Market Return: Rmt = M.Ind t M. Ind t-1 / M. Ind t-1 Where R mt is the difference between market indices of two consecutive months divided by market index for the preceding month. . Sharpe Ratio The Sharpe ratio was derived in 1966 by William Sharpe. The Sharpe ratio is a riskadjusted measure of return that is often used to evaluate the performance of a portfolio. The idea of the ratio is to see how much additional return you are receiving for the additional volatility of holding the risky asset over a risk-free asset In short, it is the reward to variability ratio and is defined as: S (X) = ( rx Rf ) / StdDev (X) Where: X is the investment rx is the average rate of return of x Rf is the best available rate of return of a risk free security (i.e. T- bills) StdDev (X) is the standard deviation of rx A positive Sharpe ratio means the fund did better on a risk adjusted basis than the benchmark. A negative and a low Sharpe ratio mean the fund has underperformed the benchmark. Treynor Ratio Given by the Jack Treynor in 1965 it is expressed as ratio of return to systematic risk (Beta). Precisely, it is reward to volatility ratio and is defined as Ti = (Rp Rf)/ Bp Ti = Treynor ratio Rp = Average return on the fund p Rf = Return on risk free asset Bp = Beta of a fund (Sensitivity of fund return to market return)

Where:

A positive and a higher value means the fund has performed better than the Benchmark. A negative and low value means the fund has under performed the Benchmark. Standard Deviation: () A statistical measure of the dispersion of a set of data from its mean, the more spread apart the data is, the higher the deviation. The standard deviation tells us how much the return on the fund is deviating from the expected normal returns. = (Ri- ) / N-1

Where, is the sample mean, Ri is the observations (returns), and N is the total number of observations or the sample size. Beta () Beta coefficient compares the variability of the funds return to the market as a whole. By convention, market will have beta 1.0. Mutual fund can be as volatile, more volatile or less volatile. Beta is calculated as: Beta = n*sum (xy)-[sum(x)*sum(y)] n *sum(x^2)-sum(x) ^2 Where, n denotes the total number of observations, and Where, y = Funds return percentage x = Markets return percentage. Alpha () Alpha represents the difference between a mutual funds actual performances that would be expected based on the level of risk taken by the manager. If a fund produced the expected return for the level of risk assumed, the fund would have an alpha equal to zero. Alpha = Y-beta* X X and Y respectively represent the arithmetic averages of x and y. An alpha of 1.0 means the fund out performed the market 1.0%. A positive alpha is the extra return awarded to the investor for taking additional risk rather than accepting the market return. Risk Free Rate Risk free rate of return refers to that minimum return on investment that no risk of losing the investment over which it is earned. For the present study, it has been marked as 8% per annum on post office saving schemes during the period of the study. DATA ANALYSIS & INTERPRETATION Equity Linked Saving Scheme Risk Performance Schemes Beta Standard deviation DSP Blackrock Tax Saver 1.000267 7.690246 HDFC Tax Saver 1.000798 7.640865 ICICI Prudential Tax Saver 0.904742 8.484702 Reliance Tax Saver 1.070026 7.056874 Taurus Tax Saver 0.908786 8.373271 Interpretation: From the above table it is inferred that the Reliance Tax Saver (1.070026) have taken higher risk than other schemes in case of risk against the market index, followed by HDFC Tax Saver has taken respectively . The volatility of return is high in ICICI Prudential Tax Saver Scheme (8.484702) followed by TAURUS Tax Saver Scheme.

Schemes DSP Black rock Tax Saver HDFC Tax Saver ICICI Prudential Tax Saver Reliance Tax Saver Taurus Tax Saver

Return Performance Alpha Mean return 0.232982 1.134081 0.794377 1.695955 0.738835 1.55388 0.524646 1.488588 0.457347 1.276035

Portfolio return 39.69285 59.35842 54.38579 52.10059 44.66122

Interpretation The portfolio and mean return of the fund is high in HDFC Tax Saver followed by ICICI Prudential Tax Saver and low in DSP Black rock Tax Saver. The excess return (alpha) against the risk was provided highly by HDFC Tax Saver (0.794377), followed by ICICI Prudential Tax Saver. Risk Return Trade Off Alpha 0.232982 0.794377 0.738835 0.524646 0.457347

Schemes DSP Blackrock Tax Saver HDFC Tax Saver ICICI Prudential Tax Saver Reliance Tax Saver Taurus Tax Saver

Beta 1.000267 1.000798 0.904742 1.070026 0.908786

Interpretation From the above chart inferred that ICICI Prudential Tax Saver has low risk and high return followed by HDFC Tax Saver Portfolio Performance Table showing the SHARPE ratio of the ELSS fund Schemes Sharpe Ratio DSP Black rock Tax Saver 4.316227 HDFC Tax Saver 6.917858 ICICI Prudential Tax Saver 5.643779 Reliance Tax Saver 6.461869 Taurus Tax Saver 4.557504

Rank 5 1 3 2 4

Interpretation The HDFC Tax Saver fund ranks top among the five funds because of the higher return and low volatility in return, followed by Reliance Tax Saver fund and ICICI Prudential Tax Saver Table showing the Treynor Ratio of the ELSS fund Schemes Treynor Ratio DSP Black rock Tax Saver 33.184 HDFC Tax Saver 52.81627 ICICI Prudential Tax Saver 52.92758 Reliance Tax Saver 42.61634 Taurus Tax Saver 41.99142

Rank 5 2 1 3 4

Interpretation The ICICI Prudential Tax Saver fund has high value due to the high risk premium and the low market risk, followed by HDFC Tax Saver, whereas in the DSP Blackrock Tax Saver fund, the premium is low and the market related risk is high. PERFORMANCE ANALYSIS Funds DSP Blackrock Tax Saver HDFC Tax Saver ICICI Prudential Tax Saver Reliance Tax Saver Taurus Tax Saver Average Fund return 1.134081 1.695955 1.55388 1.488588 1.276035 Nifty Benchmark return 0.900859 0.900859 0.900859 0.900859 0.900859 Performance Over performed Over performed Over performed Over performed Over performed

Interpretation (From the above table it was found that HDFC, DSP Blackrock, ICICI Prudential, Reliance and Taurus have over performed against its benchmark. Low levels of uncertainty low risk) are associated with low potential returns. whereas high levels of uncertainty (high risk) are associated with high potential returns returns, whereas high levels of uncertainty (high risk) are associated with high potential returns FINDINGS Risk performance: It was found that Reliance Tax Saver has taken higher risk than other schemes in case of risk against the market index. The standard deviation of the funds also high in ICICI Prudential Tax Saver scheme, have high vitality of return. Better management of the funds by funds manager could overcome their in the near future. Return performance In ELSS, HDFC Tax Saver is earner as against corresponding market return. It could be seen that almost all the schemes in this category has outperformed than the market. The excess return against risk was provided by HDFC Tax saver. Risk Return Trade Off In the ELSS, ICICI Prudential has low risk and high return, and ranks top among the five funds. Portfolio performance: It is understood from the table that HDFC Tax Saver and Reliance Tax Saver has performed better, using Sharpe ratio. The funds have earned additional return for additional volatility of holding the risky over a risk free asset. From the Treynor ratio, it was found that, ICICI has performed well when compared to the market risk.

Performance Analysis A Mutual Fund's performance can be benchmarked against other Mutual Funds of similar type. For a true picture the returns should also be compared with the returns given by the same benchmark and other funds in the same category. It was found all the funds have over performed the benchmark return. It basically indicates what the fund has earned as against what it should have earned. At the current high point in the stock market, almost every equity fund has done extremely well but many of them have negative benchmark returns, indicating that their performance is just a side-effect of the markets' rise rather than some brilliant work by the fund manager. SUGGESTIONS The small investors who seek diversification through Mutual Funds are recommended to invest in ELSS. The small investors are suggested to invest their money in ELSS schemes. So that they get advantage of more than one fund managers ability. The investors can invest their money in HDFC Tax Saver and Reliance Tax Saver to avail tax benefits. Moreover the investors can choose the fund to invest in various form the investors should kept in mind the following The track record of performance of schemes over the last few years managed by the fund. Quality of management and administration. Percentage of Investment in various mutual funds. Quality and adequacy of disclosures. The price at which you can enter/exist (i.e. entry load /exist load) the schemes and its impact on overall return. The market price of the units of the schemes (where available) to see the discount /premium that the market assigns to the stated NAV of the scheme. CONCLUSION Mutual Funds units are investment vehicles that help small investors to take a big ride through capital market, which is not possible individually with small amount of investment. The above given discussion on evaluating the performance of Mutual Funds concludes that the selected Mutual Funds scheme of ELSS have performed better than the market BIBLIOGRAPHY Punithavathy Pandian, Security Analysis and Portfolio Management Prasanna Chandra, Investment Analysis and Portfolio Management Tata McGraw Hill, New Delhi, 2003. C.R. Kothari, Research Methodology, Wishwa Prakashan A division of New Age International (P) Ltd., New Delhi, 2003. Websites www.amfiindia.com www.valueresearchonline.com www.mutual funds india. Com www.money control.com www.finance.indiamart.com