PERFORMANCE EVALUATION OF MUTUAL FUNDS(G) IN INDIA.

ABSTRACT
Financial system in a country plays a dominant role in assets formation and intermediation, and contributes substantially in macroeconomic development. In this process of development mutual funds have emerged as strong financial intermediaries and are playing a very important role in bringing stability to the financial system and efficiency to resource allocation. Mutual funds play a crucial role in an economy by mobilizing savings and investing them in the capital market, thus establishing a link between savings and the capital market. The activities of mutual funds have both short-and long-term impact on the savings and capital markets, and the national economy. The Indian Mutual fund Industry has witnessed a structural transformation during the past few years. Therefore it becomes important to examine the performance of the mutual fund in the changed environment. This research report has evaluate the performance of Indian Mutual fund equity scheme by using monthly NAV returns of 10 equity Growth funds of 5 years past data from 1-1-2003 to 30-04-2007. BSE sensex has been used as a proxy for the market portfolio, while 364 day Treasury bills (T-bills) have been used as a surrogate for risk free rate of return. The performance of funds has been computed by using Jensen’s ratio. To evaluate investment performance of mutual funds in terms of risk and return. To examine the funds sensitivity to the market fluctuations in terms of beta. To appraise investment performance of mutual funds with risk adjustment the theoretical parameters as suggested by Sharpe, Treynor and Jensen. To rank the funds according to Jensen’s performance measure. There is no conclusive evidence which suggests that performance mutual funds superior to the market. However there is some evidence that some of the funds are performing better than the market.

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INTRODUCTION
MUTUAL FUNDS. AN OVERVIEW: A Mutual Fund is a trust that pools the savings of a number of Investors who share a common financial goal. The money thus collected is invested by the fund manager indifferent types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market Instruments. The income earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units held by them. Thus a mutual fund is the most suitable for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an invest able surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy. A Mutual Fund is the ideal investment vehicle for today’s complex and modern financial scenario. Markets for Equities, Bonds and other Fixed Income Instruments, real estate, derivatives and other assets are driven by global events occurring in faraway places. Atypical individual is unlikely to have the knowledge, skills, inclination and the time to keep track of events, understand their implications and act speedily. An Individual also finds it difficult to keep track of ownership of his assets, brokerage, dues and bank transactions etc.

A Mutual Fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of Scale in all R.V. Institute of management 2

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three areas- Research, Investments and Transaction Processing. While the concept of coming together to invest money collectively is not new, the mutual funds in their present form are a 20th century Phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally there are thousands of mutual funds with different investment objectives. Today, mutual funds, collectively manage almost as much as or more money as compared to banks. A draft offer document is to be prepared at the time of launching the fund. Typically, it pre-specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most of the countries, these sponsors need approval from a regulator, SEBI. SEBI looks at he records of the Sponsor and its financial strength in granting approval to the fund for commencing operations. A sponsor then hires an. Asset Management Company. to invest the funds according to the investment objective. It also hires equity to the custodian of the assets of the fund and perhaps a third one to handle registry work for the unit holders of the fund. In the Indian concept, the sponsors promote the AMC also, in which it holds a majority stake. In many cases a Sponsor can hold a 100% stake in the AMC eg. IL&FS is the sponsor of IL&FS AMC, which has floated different Mutual fund schemes and also acts as an asset manager or the funds collected under the schemes.

History of mutual funds in India
The history of mutual funds in India can be broadly divided into 5 important phases. First Phase: 1963-87 Initial Development phase (Unit Trust of India) In 1963, UTI was established by an Act of Parliament and given a monopoly. UTI commenced its operations from July 1964 .The impetus for establishing a formal institution came from the desire to increase the propensity of the middle and lower groups to save and to R.V. Institute of management 3

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invest. UTI came into existence during a period marked by great political and economic uncertainty in India. The first and still one of the largest schemes, launched by UTI was Unit Scheme 1964. UTI created a number of products such as monthly income plans, children’s plans, equity-oriented schemes and offshore funds during this period. The total asset under management for the year 1987-88 was 6,700crores. Second Phase: 1987-93 (Entry of Public Sector Funds) Second phase witnessed the entry of mutual funds sponsored by state owned banks and financial institutions. With the opening up of the economy, many public sector and financial institutions were allowed to establish mutual funds. In November 1987 the State Bank of India established the first non-UTI mutual fund-SBI Mutual Fund. This was followed by Canbank Mutual Fund (launched in December, 1987), LIC Mutual Fund (1989), and Indian Bank Mutual Fund (1990) followed by Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. These mutual funds helped enlarge the investor community and the invest able funds. During this period, investors were shifting away from bank deposits to mutual funds. Most funds were growth-oriented closed-ended funds. From 1987 to 1992-93, the fund industry expanded nearly seven times in terms of Assets under Management. The total asset under management considering both UTI and Public Sector was 47,004.

Third Phase: 1993-96 (Emergence of Private Funds) A new era in the mutual fund industry began with the permission granted for the entry of private sector funds in 1993, both Indian and Foreign. Also Government launched a series of measures aimed at the financial sector as a part of the economic liberalization and reform process. This included the setting up of the Securities and Exchange Board of India (SEBI) as a regulatory body for the financial sector including Mutual Funds, which issued the SEBI Mutual Fund Regulations in January 1993. During the year 1993-94, five private sector mutual funds launched their schemes followed by six others in 1994-95.

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Fourth Phase: 1996-1999 (SEBI Regulations for Mutual Funds) More investor friendly regulatory measures have been taken both by SEBI to protect the investor and by the Government to enhance investors. returns. A comprehensive set of regulations for all mutual funds operating in India was introduced with SEBI (Mutual Fund), 1996. These regulations set uniform standards for all funds and will eventually be applied in full to Unit Trust of India as well, even though UTI is governed by its own UTI Act. In 1999 Union Government Budget took a big step in exempting all mutual funds dividends from income tax in the hands of investors. 1999 marks the beginning of a new phase in the history of the mutual fund industry in India, a phase of significant growth in terms of both amounts mobilized from investors and assets under management. Fifth Phase: 1999-2002 This phase was marked by very rapid growth in the industry, and significant increase in market shares of private sector players. Assets crossed Rs. 1,00,000. The tax break offered to mutual funds in 1999 created arbitrage opportunities for a number of institutional players. Bond funds and liquid funds registered the highest growth in this period, accounting for nearly 60% of the assets. UTI.s share of the industry dropped to nearly 50% . MEANING & DEFINITIONS OF MUTUAL FUND: Mutual Funds are financial intermediaries. They are companies set up to receive your money, and then having received it, make investments with the money Via an AMC. It is an ideal tool for people who want to invest but don't want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you invest, you own part of the overall fund. The beauty of mutual funds is that anyone with an invest able surplus of a few hundred rupees can invest and reap returns as high as those provided by the equity markets or have a steady and comparatively secure investment as offered by debt instruments. A Mutual Fund is an investment tool that allows small investors access to a well diversified portfolio of equities, bonds and other securities. Each shareholder Participates in R.V. Institute of management 5

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the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day. In simple words, a mutual fund is a trust, which collects the savings from small investors, invest them in government securities and earn through interest, dividends and capital gains. For instance, if one has Rs. 1000 to invest, it may not fetch much on its own. But, when it is pooled with Rs. 1000 each from a lot of other people, then one could create a big fund. Large enough to invest in wide varieties of shares and debentures on a commanding scale and thus, to enjoy the economies of large scale operations. DEFINITIONS: The SEBI, 1993 defines a Mutual Fund as .a fund established in the form of a trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations. According to Weston J. Fred and Brigham, Eugene, unit trusts are: “Corporations which accept dollars from savers and then use these dollars to buy stocks, long term bonds and short term debt instruments issued by business or government units; these corporations pool funds and thus reduce the risk of diversification.” OPERATION OF THE FUND: A mutual fund invites the prospective investors to join the fund by offering various schemes so as to suit to the requirements of categories of investors. The resources of individual investors are pooled together and the investors are issued units/shares for the money invested. The amount so collected is invested in capital market instruments like treasury bills, commercial papers, etc. For managing the fund, a mutual fund gets an annual fee of 1.25% of funds managed at the maximum as fixed by SEBI (MF) regulations, 1993 and if the funds exceed Rs. 100 cores , the fee is only 1%. The fee cannot exceed 1%. Off course, regular expenses like custodial fee, cost of dividend warrants, fee for registration, the asset management fee etc are R.V. Institute of management 6

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debited to the respective schemes. These expenses cannot exceed 3% of the assets in the respective schemes. These expenses cannot exceed 3% of the assets in the respective schemes each year. The remaining amount is given back to the investors in full.

The flow chart below describes broadly the working of a mutual fund:

ORGANISATION OF A MUTUAL FUND: The formation and operations of Mutual Funds in India is solely guided by SEBI (Mutual Funds) Regulations, 1993, which came into force on 20th January, 1996, through a Notification on 9th December, 1996. These Regulations make it mandatory for Mutual Funds to have a three-tier structure of: 1. A Sponsor Institution to promote the Fund. 2. A team of Trustees to oversee the operations and to provide checks for efficient, profitable and transparent operations of the fund and 3. An Asset Management Company (AMC) to actually deal with the funds Sponsoring Institution: The Company, which sets up the mutual fund, is called the Sponsor. SEBI has laid down certain criteria to be met by the sponsor. The criterion mainly deals with adequate experience, good past track record, net worth etc.  Sponsor appoints the Trustees, Custodian and the AMC with the prior R.V. Institute of management 7 the

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Approval of SEBI, and in accordance with SEBI Regulations.   Sponsor must have at least 5-year track record of business interest in theFinancial Markets.

Trustees: Trustees are the people with long experience and good integrity in the respective fields carry the crucial responsibility in safeguarding the interests of the investors. For this purpose, they monitor the operations of the different schemes. They have wide ranging powers and they can even dismiss AMC with the approval of SEBI.The Indian Trust Act governs those rules regarding appointment of the Trustees are: • • • Appointment of Trustees has to be done with the prior approval of SEBI. There must be at least 4 members in the Board of Trustees and at least 2/3rd of the members of the Board of Trustees must be independent. Trustees of one Mutual Fund cannot be a Trustee of another Mutual Fund, unless he is an independent trustee in both cases, and has the approval of both the Boards. Rights of Trustees:  Trustees appoint the AMC, in consultation with the sponsor and according to SEBI Regulations.  All mutual Fund Schemes floated by the AMC have to be approved by the Trustees.  Trustees can seek information from the AMC on the operations and compliance of the Mutual Fund, with the provisions of the trust Deed, investment management agreement and the SEBI Regulations.  Trustees can review and ensure that Net worth of the AMC is according to stipulated norms and regulations.

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Asset Management Company:
The AMC actually manages the funds of the various schemes. The AMC employs a large number of professionals to make investments, carry out research & to do agent and investor servicing. Infact, the success of any Mutual Fund depends upon the efficiency of this AMC. The AMC submits a quarterly report on the functioning of the mutual fund to the trustees who will guide and control the AMC. The AMC is usually a private limited company, in which the sponsors and their associations or joint venture partners are shareholders. The AMC has to be registered by SEBI and should have a minimum Net worth of Rs.10 cores all times. The role of the AMC is to act as the Investment Manager of the Trust along with the following functions: • • • It manages the funds by making investments in accordance with the The AMC shall disclose the basis of calculation of NAV and Repurchase Funds shall be invested as per Trust Deed and Regulations. provision of the Trust Deed and Regulations price of the schemes and disclose the same to the investors.

Restrictions on the AMC.s:  AMC.s cannot launch a fund scheme without the prior approval of Trustees.  AMC.s have to provide full details of Employees and Board Members, in all cases where such investments exceed Rs. 1 lakh.  AMC.s cannot take up any activity that is in conflict with the activities of the mutual funds.

Registrars and Transfer Agents:

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The Registrars and Transfer Agents are responsible for the investor servicing functions, as they maintain the records of investors in the mutual funds. They process investor applications, record details provided by the investors on application forms, send out periodical information on the performance of the Mutual fund; process dividend pay-out to the investors; incorporate changes in information as communicated by investors; and keep the investor record up to date, by recording new investors and removing investors who have withdrawn their funds. Custodian: Custodians are responsible for the securities held in the mutual funds portfolio. They discharge an important back-office function, by ensuring that securities that are bought are delivered and transferred to the books of mutual funds, and that funds are paid-out when mutual fund buys securities. They keep the investment account of the mutual fund, and also collect the dividends and interest payments due on the mutual fund investments. Custodians also track corporate actions like bonus, issues, right offers, offer for sale, buy back and open offers for acquisition.

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ORGANISATION OF A MUTUAL FUND: There are many entities involved and the diagram below illustrates the organisational set up of a mutual fund:

Composition of Indian Mutual Fund Industry: Unit Trust of India Bank sponsored Bank of Baroda AMC Bank of India AMC Canbank Investment Management Services Ltd. Punjab National Bank AMC Ltd. SBI Funds Management Ltd. Indfund Management Ltd. Institutions: General Insurance Corporation AMC IDBI Principal Asset Management Co. Jeevan Bima Sahayog Asset Management Co. Ltd. R.V. Institute of management 11

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Private Sector: 1. India Benchmark AMC Ltd. Cholamandalam AMC Ltd. Escorts AMC Ltd. J.M. Capital Management Co. Ltd. Kotak Mahindra AMC Ltd. Shriram AMC Ltd. 2. Joint Venture .Predominantly Indian Birla Sun Life AMC Pvt. Co. Ltd. DSP Merrill Lynch Investment Mangers (India) ltd. HDFC AMC Ltd. Sundaram Newton AMC Tata TD Waterhouse Asset Management Private Ltd. 3. Joint Ventures .Predominantly Foreign Alliance Capital Asset Management (India) Pvt. Ltd. Standard Chartered Asset Management Co. Pvt. Ltd. ING Investment Management (India) Pvt. Ltd. JM Asset Management (India) Pvt. Ltd. Morgan Stanley Investment Management Pvt. Ltd. Prudential ICICI Management Co. Ltd. Templeton Asset Management (I) Pvt. Ltd.

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ROLE OF MUTUAL FUNDS IN THE FINANCIAL MARKET

Indian financial institutions have played a dominant role in assets formation and intermediation, and contributed substantially in macroeconomic development. In this process of development Indian mutual funds have emerged as strong financial intermediaries and are playing a very important role in bringing stability to the financial system and efficiency to resource allocation. Mutual funds play a crucial role in an economy by mobilizing saving and investing them in the capital market, thus establishing a link between savings and the capital market. The activities of mutual funds have both short-and long-term impact on the savings and capital markets, and the national economy. Mutual funds, thus, assist the process of financial deepening and intermediation. They mobilize funds in the savings market and act as complementary to banking; at the same time they also compete with banks and other financial institutions. In the process stock market activities are also significantly influenced by mutual funds. There is thus hardly any segment of the financial market, which is not (directly or indirectly) influenced by the existence and operation of mutual funds. However, the scope and efficiency of mutual funds are influenced by overall economic fundamentals: the inter relationship between the financial and real sector, the nature of development of the savings and capital markets, market structure, institutional arrangements and overall policy regime.

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Regulatory Aspects of Mutual Fund Schemes of mutual fund:  The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the board.  Every mutual fund shall along with the offer document of each scheme pay filing fees.  The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision

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 including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor.  No one shall issue any form of application for units of a mutual fund unless the form is accompanied by the memorandum containing such information as may be specified by the Board.  Every close ended scheme shall be listed in a recognized stock exchange within six months from the closure of the subscription.  The asset management company may at its option repurchase or reissue the repurchased units of a close-ended scheme.  A close-ended scheme shall be fully redeemed at the end of the maturity period. "Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution".  The mutual fund and asset management company shall be liable to refund the application money to the applicants,(I) If the mutual fund fails to receive the minimum subscription amount referred to in clause (a) of sub-regulation. (ii) If the moneys received from the applicants for units are in excess of subscription as referred to in clause (b) of sub-regulation (1).  The asset management company shall issue to the applicant whose application has been accepted, unit certificates or a statement of accounts specifying the number of units allotted to the applicant as soon

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as possible but not later than six weeks from the date of closure of the initial subscription list and or from the date of receipt of the request from the unit holders in any open ended scheme. INVESTMENT OBJECTIVES AND VALUATION POLICIES: • The money collected under any scheme of a mutual fund shall be invested only in transferable securities in the money market or in the capital market or in privately placed debentures or securitized debts. • Provided that moneys collected under any money market scheme of a mutual fund shall be invested only in money market instruments in accordance with directions issued by the Reserve Bank of India . • The mutual fund shall not borrow except to meet temporary liquidity needs of the Mutual funds for the purpose of repurchase, redemption of units or payment of Interest or dividend to the unit holders. • • The mutual fund shall not advance any loans for any purpose. The Net Asset Value of the scheme shall be calculated and published at least in two daily newspapers at intervals of not exceeding one week.

The price at which the units may be subscribed or sold and the price at which such units may at any time be repurchased by the mutual fund shall be made available to the investors.

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TYPES OF MUTUAL FUNDS:
Broadly Mutual Funds are classified into:  Open-ended schemes: The open-ended schemes do not have a fixed maturity and are open for subscription the whole year. One can buy and sell units at the NAV related prices to the Mutual funds. These schemes are normally not listed on the stock exchanges and can be redeemed directly to the Mutual Fund .  Close-ended Schemes: The closed ended schemes can be bought and sold on the stock exchange subsequent to the initial subscription through the public offer. One can stay invested in the scheme for a stipulated period ranging from 2 to 15 years. Generally, the close-ended schemes are traded at a discount to their NAV in the stock exchange. On the basis of investments objective, there are five different types of Schemes:  Growth/Equity Scheme : Majority of the corpus of such a scheme is invested in equities and equity related instruments. This kind of scheme is for those investors who are not risk averse and are willing to hold on to their investment for a long period of time,caring little for volatility. In such schemes, dividend may or may not be declared.  Income /Debt Scheme: The Fund Manager of such schemes invests a substantial portion of their fund in fixed income securities like debentures, bonds and money market instruments. This kind of scheme is ideal for risk averse investors who are interested in steady income.

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 Balanced Schemes: Fund Manager of such funds invests in both equity as well as debt markets in the proportion as that highlighted in the prospectus. The objective of such a scheme is to provide both growth and income by distributing a part of the income and capital gains they earn. Such a scheme is suitable for investors who want long-term returns without taking the entire risk of the equity market.  Money Market/Liquid Schemes: These are schemes with very low risks. They invest in Zero risk or safer, short term instruments like treasury bills, certificates of deposit, Commercial Paper and inter-bank call money. The objective of these schemes is to provide liquidity and moderate income and also preserve the capital.  Tax Saving Schemes: The objective of such a scheme is to provide tax benefits to the investors. Two types of schemes fall under this head. 1. ELSS (Equity Linked Savings Schemes: A Fund Manager of such a scheme invests primarily in stocks. An important feature of this scheme is that there is a lock-in period of three years from the date of investment. During this period unit holders are prohibited from trading, pledging and transferring the units. Repurchase is permitted only after three years.

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2. Pension Schemes: A unit holder in a Pension Scheme can avail of a tax rebate of 20 per cent for investments up to Rs 60,000 (tax saving of Rs 12,000).

Benefits of investing in Mutual Funds:
 Small investments: Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments. Such a spread would not have been possible without their assistance.  Professional Fund Management: Professionals having considerable expertise, experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyze the markets and economy to pick good investment opportunities.  Spreading Risk: An investor with a limited amount of fund might be able to invest in only one or two stocks / bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified at the same time taking advantage of the position it holds. Also in cases of liquidity crisis where stocks are sold at a distress, mutual funds have the advantage of the redemption option at the NAVs.  Transparency and interactivity: Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type. Mutual Funds clearly layout their investment strategy to the investor. R.V. Institute of management 19

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 Liquidity: Closed ended funds have their units listed at the stock exchange, thus they can be bought and sold at their market value. Over and above this the units can be directly redeemed to the Mutual Fund as and when they announce the repurchase.  Choice: The large amounts of Mutual Funds offer the investor a wide variety to choose from. An investor can pick up a scheme depending upon his risk / return profile.  Regulations: All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor.  Flexibility: Investors can exchange their units from one scheme to another, which cannot be done in other kinds of investments. Income units can be exchanged for growth units depending upon the performance of the funds.  Potential yields: The pooling of funds from a large number of customers enables the fund to have large funds at its disposal. Due to these large funds, mutual funds are able to buy cheaper and sell dearer than the small & medium investors. Thus, they are able to get better market rates and lower rates of brokerage. So, they provide better yields to their customers. They also enjoy the economies of scale and reduce the cost of capital market participation. The transaction costs of large investments are quite lower than that of small investments. All the profits are passed on to the investor in the form of dividends and capital appreciation. Mutual funds have a return ranging from 12-17% p.a.

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 Renders expertise service at lower costs: The management of the fund is generally assigned to professionals who are well trained and have adequate experience in the field of investment. The investment decisions of these professionals are backed by informed judgment and experience. Thus, investors are assured of quality services in their best interest. The fee charged by the mutual funds is 1%.

Risks of investment in Mutual Funds:
Mutual funds are not free from risks as the funds so collected are invested in stock markets, which are volatile in nature and are not risk free. The following risks are generally involved in mutual funds are Market risks:

In general, there are many kinds of risks associated with every kind of investment on shares. They are called market risks. These market risks can be reduced, but not completely eliminated even by a good investment management. The prices of shares are subject to wide price fluctuations depending upon market conditions over which nobody has control. The various phases of business cycle such as boom, Recession, Slump and Recovery affects the market conditions to a larger extent .  Scheme risks: There are certain risks inherent in the scheme itself. For instance, in a pure growth scheme, risks are greater. It is obvious because if one expects more returns as in the case of a growth scheme, one has to take more risks.

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Investment risk:

Whether the mutual fund makes money in shares or loses depends upon the investment expertise of the Asset Management Company (AMC). If the investment advice goes wrong, the fund has to suffer a lot. The investment expertise of various funds are different and it is reflected on the returns, which they offer to the investors. Business Risk:

The corpus of a mutual fund might have been invested in a company’s shares. If the business of that company suffers any set back, it cannot declare any dividend. It may even go to the extent of winding up its business. Though the mutual funds can withstand such a risk, its income paying capacity is affected. Political risks:

Every government brings new economic ideologies and policies. It is often said that many economic decisions are politically motivated. Change of government brings in the risk of uncertainty, which every player in the finance service industry has to face.

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MAJOR MUTUAL FUND COMPANIES IN INDIA
Birla Sun Life Mutual Fund Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial. Sun Life Financial is a global organization evolved in 1871 and is being represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment. Recently it crossed AUM of Rs. 10,000 cr. HDFC Mutual Fund HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely Housing Development Finance Corporation Limited and Standard Life Investments Limited. HSBC Mutual Fund HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund. Prudential ICICI Mutual Fund The mutual fund of ICICI is a joint venture with Prudential Plc. Of America, one of the largest life insurance companies in the USA. Prudential ICICI Mutual fund was setup on 13th of October 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June 1993.

Sahara Mutual Fund

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Sahara Mutual Fund was setup on July 18, 1996 with Sahara India Financial Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid up capital of the AMC stands at Rs.25.8 cr. Tata Mutual Fund Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsors for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited is one of the fastest in the country with more than Rs. 7,703 cr. (as on April, 30 2005) of AUM. Kotak Mahindra Mutual Fund Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having more than 1,99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities. Franklin Templeton India Mutual Fund The group, Franklin Templeton Investments is a California (USA) based company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services in the world. Investors can buy or sell the mutual fund through their financial advisor or through mail or through their website. They have Open-End Diversified Equity Scheme, Open-End Sector Equity Schemes, Open-End Hybrid schemes, Open-End Tax Savings Schemes,

Open-End Income and Liquid Schemes, Closed-End Income Schemes and Open-End Fund Of Funds Schemes to offer.

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Morgan Stanley India Mutual Fund Morgan Stanley is a worldwide financial services company and it is leading in the market of securities, investment management and credit services. Investment Management (MSIM) was established in the year 1975. It provides customized asset management services and products to governments, corporations, pension funds and non-profit organization. Its services are also extended to high net worth individuals and retail investors. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close-end diversified equity scheme serving the needs of Indian retail investors focusing on a long-term capital appreciation. Canbank Mutual Fund Canbank Mutual Fund was setup on Dec 19, 1987 with Canara Bank acting as the sponsor. Canbank Investment Management Services Ltd. incorporated on March 02, 1993 is the AMC. The corporate office of the AMC is in Mumbai. LIC Mutual Fund Life Insurance Corporation of India setup LIC Mutual Funds on 19th June 1989. It contributed Rs. 2 cr. towards the corpus of the fund. LIC Mutual Fund was constituted as a trust in accordance with the provisions of the Indian Trust Act 1882. The company started its business on 29th April 1994. The trustees of LIC Mutual Fund have appointed Jeevan Bima Sahyog Asset Management Company Ltd. as the investment managers for LIC Mutual fund. Morgan Stanley

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BACKGROUND OF THE STUDY
Industry and commerce so as to bring about the integration of the Indian economy with the global economy. With the growth of the economy and the capital market in India, the size investor has also increased rapidly. Thus The Government of India introduced economic reforms in the field of trade involvement of mutual funds in the transformation Indian economy has made it urgent to view their services not only as financial intermediary but also as pace setter as they are playing a significant role in spreading equity culture. In this context close monitoring and evaluation of mutual funds has become essential for fund managers to make this instrument as the strongest and most preferred instrument in Indian capital market in the coming years. It has been established that the single most important factor that has a strong bearing on investor’s interest and growth of mutual fund industry is its superior financial performance. The financial performance may be defined in terms of .rates of return., .risk-adjusted returns. or .benchmark comparison.. .Jensen’s alpha. is another widely used measure of portfolio performance: It indicates the abilities of fund managers to identify and select superior stocks for the portfolio. This constitutes the subject matter of the present study. In India, very little work has been done to investigate fund managers forecasting abilities. Active fund managers are expected to reward higher return. If the fund manager feels that market on the whole overvalued, then he would get out of the market. Hence the present study has the objective of finding out the necessary facts which can benefit the investors and fund managers. This paper evaluates the performance evaluation of mutual fund in the framework of risk and return.

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LITERATURE REVIEW An Empirical Analysis on Performance Evaluation of Mutual Funds in India (Nalini Prava Tripathy) The Government of India introduced economic reforms in the field of trade industry and commerce so as to bring about the integration of the Indian economy with the global economy. With the growth of the economy and the capital market in India, the size investor has also increased rapidly. Thus the involvement of mutual funds in the transformation Indian economy has made it urgent to view their services not only as financial intermediary but also as pace setter as they are playing a significant role in spreading equity culture. In this context close monitoring and evaluation of mutual funds has become essential for fund managers to make this instrument as the strongest and most preferred instrument in Indian capital market in the coming years. In India, very little work has been done to investigate fund managers forecasting abilities. Active fund managers are expected to reward higher return. If the fund manager feels that market on the whole overvalued, then he would get out of the market. Hence the present study has the objective of finding out the necessary facts which can benefit the investors and fund managers. This paper evaluates the performance of mutual fund schemes in the framework of risk and return. The study tests the following hypothesis in respect of performance evaluation of the Indian mutual funds.The sample mutual funds is earning higher returns than the market portfolio returns in terms of risk. The sample mutual funds are offering the advantages of diversification and superior returns due to selectivity to their investors. The investment objectives of the mutual fund schemes are related to their systematic risk and total variability.

Generally investors invest in mutual fund by considering capital appreciation, better liquidity less risk and tax liability. So, the study makes a comprehensive evaluation of equity linked schemes. For the purpose of the study, schemes have been taken from 1994-95 R.V. Institute of management 27

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to 2001-02. A total of 31 schemes offer are selected bank mutual funds have taken for study. The risk is calculated on the basis of month end Net Asset Values. Further, BSE national index was assessed as market index or benchmark. The returns are computed on the basis of the Net Asset Values of the different schemes and returns in the market index are computed on the basis of the BSE National Index on the respective date. The performance sample mutual fund scheme has been evaluated by using the six performance measures. A brief description of these measures as rate of Return measure, Treynor measure, Sharpe measure, Jensen measure, Sharpe differential return, Fama.s Decomposition measure. According to the modern portfolio policy, the risk and return are to be in the linear form. So the risk and return are expected to be in tandem with the investment policy. As the tax planning schemes are expected to earn higher returns with higher risk. So, it is highly essential to examine if the risk characteristics of these schemes are consistent with their stated objectives. The risk return analysis indicates that some of the schemes are not in con format with their stated objectives. The stated objections of the funds with their average betas and average total risk. This paper has examined the investment performance of Indian mutual funds in terms of six performance measures. The empirical results reported here do not lend support to the hypothesis taken in the study. . All other schemes do not demonstrate this relationship. On the whole, 13 schemes have an alone average beta which indicates that mutual fund returns are highly volatile. About 10 schemes have outperformed both in terms of Treynor measure and Sharpe measure. However, four schemes exhibited superior performance in terms of systematic risk but did not do so in respect of total risk. The analysis made by the application of fama.s measure indicates that the return out of diversification is very less. All other schemes show lack of net selectivity and diversification. So, it was found that proper balance between selectivity and diversification is not maintained. This is due to fund managers acumen of selectivity and poor investment planning of the fund.

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Performance Evaluation of Select Indian Mutual Fund Schemes (O P Gupta and Amitabh Gupta) During the past one and a half decade, the Indian mutual fund industry has witnessed a major structural transformation and growth as result of policy initiatives taken by the Government of India to break the monolithic structure of the Industry. Therefore, it becomes important to examine the performance of the industry in the changed environment. This paper aims at evaluating the investment performance of select Indian mutual fund schemes during the recent four years period. He has used a sample of 57 equity funds including 10 tax planning funds to study their investment performance. The choice of the sample is largely based on the availability of the necessary data. Weekly returns, based on Net Asset Values, have been used for performance evaluation. The study period is a recent four year period from April 1, 1999 to March 31, 2003. It is during this period that a major structural change has taken place in the Indian mutual fund industry. The study has used the weekly yields on91 day Treasury bills as a surrogate for the risk free rate of return. The value data collected from Value Research India Pvt. Ltd., while Treasury bill data has been collected from PNB Gilts ltd. The study tests the following hypotheses in respect of performance evaluation of mutual fund schemes: The investment performance of schemes is superior to the relevant benchmark portfolio. The mutual fund schemes are well diversified. There is a relationship between investment objectives of the schemes and their risk characteristics. We have utilized the following six measures to evaluate performance; Rate of Return, Sharpe Ratio, Treynor Ratio, Jensen Differential Return Measure, Sharpe Differential Return Measure. We have computed the weekly returns for each of the sample. Weekly returns for the market index viz. This paper has aimed at testing the investment performance of select Indian mutual funds during a recent four year period from April 1, 1999 to March 31, 2003. Using weekly returns, based on NAVs for 57 funds, the results reported here indicate that, in general, fund managers have not outperformed the relevant benchmark during the study period. After measuring in Sharpe, Treynor, Jenson measures only three funds reflect superior performance. In terms of Fama.s components of Investment performance, all the funds suffered negative performance on account of risk bearing activity of their fund managers. Only one fund earned R.V. Institute of management 29

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a positive return on diversification. Though 30 funds showed some net selectivity skills. It appears that Indian fund managers do not appear to possess sock selection skills. Thus, on the whole, it can be concluded that there is no conclusive evidence, which suggests that performance of mutual funds is superior to the market during the study period. However, there is some evidence that the sample funds are not adequately diversified. However, the diversification level seems to have changed over time. In addition, the average beta for the funds has increased over time. Overall the results reported here are similar to the ones reported earlier for the Indian Market Empirical Investigation on the Indian Managers Stock Selection Abilities (Ramesh Chander) Investment decision making encompasses a variety of activities such as stock selection, market timing, diversification and risk bearing. Stock selection and market timing are prime activities that contribute widely in the return generation process while diversification and risk bearing supplement as subsidiary activities. Professional managers are heftily paid for a judious amalgam of these performances. Investment performance on the stock selection pertains to successful micro forecasting for company specific events. It refers to the managers ability to identify under or over valued securities. Such performance attribution may be constructed as an indicator of the investment decision making quality. It may even delineate the superior ex post investment performance. Study of investment manager.s stock selection skills is very important as it enables the fund managers to understand how they have fared in achieving desired return targets and how much risk has been controlled in the process. Second it enables the investors to assess how well the fund manager has achieved these targets in comparison with other managers or with some benchmark indices. In this sense it may even be viewed as a feedback mechanism for improving investment mangers forecasting skills.

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The study under performance outcomes obtained in this regard shall be analyzed across fund characteristics such as, nature, investment objectives and sponsorship categories to identify any performance bias in regard thereto. Taking these objectives into consideration, the present study test the following null hypotheses. Investment managers lack superior stock selection abilities. Managers. Stock selection performance is maintained across the measurement criteria. Stock selection performance is not influenced by the fund characteristics. Stock selection performance is not influence by the choice of benchmark indices. The study under consideration is based on the performance outcomes obtained for 80 samples for the five year period. Monthly investment returns derived above are further annualized through geometric averaging. The yield on the 91 day treasury bills issued by Government of India has been used as surrogate for risk less return. Jensen and Fama is used for measuring the performance of stock selectivity.

Managers stock selection performance obtained in relation to the fund characteristics viz., nature, size investment objectives and sponsorship as well as benchmark indices such as BSE Sensex, BSE-100, CNX Nifty 50. Performance persistence is another vital dimension widely acknowledged and investigated world over better comprehend portfolio performance evaluation. The information inputs reported that to the absence of persistence of the stock selection performance for the sample investment schemes, as the sample funds having registered average positive performance in the period first came to realize negative performance in the subsequent period second. Similar tendencies wer obtained for the sample funds across all the quartiles. The results are equally robust for the positive persistence as well as for the negative persistence. Investment performance depends on the stock selection and pertains to the successful micro forecasting for company specific events. It refers to the managers ability to identify under or over valued securities. Such a performance attribution may be construed as an indicator of the investment decision making quality as it delineates the superior investment performance from that attributed to pure chance or luck. R.V. Institute of management 31

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This study examined the stock selection abilities across fund characteristics as well as the performance persistence. The results reported in the study have wider implications for the investment decision making in the sense that signify the vital relevance of stock selection ability in the return generation process. The absence of performance persistence signifies that past performance is in no way implicated for the future. The outcomes thus obtained also have ramifications for the efficient market theory and rational expectations in the performance.

An Empirical Analysis of Performance Evaluation of Mutual Fund schemes in India(Sanjay j Bhayani and Vishal G Patidar) Mutual funds play a vital role in mobilization of resources and their effective allocation. These funds play a significant role in financial intermediation, development capital markets and growth of the financial sector as a whole. The active involvement of mutual funds in economic development can be seen by their dominant presence in the money and capital market. The present study distinguishes itself from standard mutual fund literature by making several unique contributions. First, it finds the trends of the mutual fund industry in India second it uses risk return method to evaluate the various funds and schemes outperform the market with the same level of risk or not. The major objectives of the study are; To evaluate investment performance of mutual funds in terms of risk and return. To examine the funds sensitivity to the market fluctuations in terms of beta. To find out the financial performance of mutual fund schemes. To appraise investment performance of mutual funds with risk adjustment the theoretical parameters as suggested by Sharpe, Treynor and Jensen. The period of study was 5 years. The sample consists of top performer schemes and funds of mutual fund companies in India based on average return during the last five years. R.V. Institute of management 32

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The main purpose of this analysis is to evaluate whether an organization uses its resources effectively and efficiently or not. The overall objective of a business is to earn satisfactory return on the funds invested in it consistent with maintaining sound financial position. Performance of mutual fund schemes has been evaluated by using the following measures; Risk, Standard Deviation, Beta, Jensen Alpha, Sharpe Ratio and Treynor Index.

The results indicate that all the schemes have earned better return in comparison to the market returns. Most of the schemes have beta less than one, there by implying that these schemes tended to hold portfolios that were less risky than the market portfolio. Higher positive value of alpha indicates its better performance. The analysis of the alpha of all schemes as being positive, there by indicating superior performance of these funds. The performances of Balanced Fund schemes have been evaluated in terms of average return. A majority of the sample mutual fund schemes have a recorded superior performance as compared to the benchmark 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 indicated that all the schemes earned a slightly higher return in comparison to the market return. The performances of Tax Planning Fund Schemes have generated superior return as compared to the market. The performance of schemes was better in case of returns and has earned returns on lower risk as compared to the market

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RESEARCH METHODOLOGY
PROBLEM STATEMENT In India, very little work has been done to investigate fund managers forecasting abilities. Active fund managers are expected to reward higher return. If the fund manager feels that market on the whole overvalued, then he would get out of the market. Hence the present study has the objective of finding out. The performance of mutual fund schemes in the framework of risk and return. OBJECTIVES OF THE STUDY The present study has been undertaken to meet the following specific objectives,  To evaluate investment performance of mutual funds in terms of risk and return.  To examine the funds sensitivity to the market fluctuations in terms of beta.

 To appraise investment performance of mutual funds with risk adjustment the theoretical parameters as suggested by Jensen.  To rank the funds according to Jensen’s performance measure.

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LIMITATIONS  The study is confined to only to ten asset management companies.  The study considers only for growth funds.

 The ranks are assigned on the basis of only five measures & data is considered for three years.  The historical data was not easily available.

 Findings of this study may change due to time constraint.  The study is mainly limited to 10 equity diversified funds for a period of three years starting from January-03 to April-07

STUDY DESIGN The type of research being followed here is the Empirical Research. The objective of this research work is to test the stock selective ability of equity fund manager & evaluate the performance based on their return. It is a Secondary Research as the data or information required is collected through secondary sources. It is a Quantitative Research as the study involves a collection of secondary data of ten equity mutual funds of different asset management companies for a term of 5 years and applying statistical tools to get the results. The time frame of the research is the past 5 years and hence the

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information between the time periods January 2003 to April 2007 is relevant for the purpose of the study. STUDY TYPE This research is an Empirical Research which is carried out on the Ten equity fund schemes of different asset management companies. STUDY POPULATION, SAMPLE, SAMPLING FRAME The study population is the whole of the Indian Equity funds. But it is infeasible to incorporate all of the Equity funds for the research mainly due to two reasons:  Large Volumes of Data: There are a very large number of equity funds with huge volume of data.  Time Constraint: The time duration of the research is from April 2007 to April 2007. Hence to overcome these problems, a sample of equity funds was selected from equity mutual funds.

DATA GATHERING PROCEDURES
The major data relevant for this research is secondary data which has been collected from different means. DATA COLLECTION NAV: The monthly NAV data of various mutual funds are collected from www.amfiindia.com and WWW.INDIAINFOLINE.COM.

MARKET INDEX: The monthly BSE sensex data are collected from www.bseindia.com. R.V. Institute of management 36

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RATE OF RETURN OF 364 DAYS T-BILL: The weighted average return of 364 days T-Bill is taken for risk free return. The data are collected from www.rbi.org.in (which has been extracted from various directories of statistics of Reserve Bank of India). DATA The various mathematical, statistical and logical operations performed on the data obtained from the www.amfiindia.com are as follows:  Mean  Standard Deviation  Calculation of yearly Highs and Lows by using MAX and MIN functions in the spreadsheet. These were some of the tools and techniques applied on the data, collected for the ten equity funds in order to use the data as different variables in the research. All of these operations have been done using the Microsoft Excel and the SPSS for windows software. TREYNORS MODEL : Developed by Jack Treynor, this performance measure evaluates funds basis of Treynor's Index. This Index is a ratio of return generated by the fund over and above risk free rate of return during a given period and systematic risk associated with it (beta). Treynor (1965) was the first researcher developing a composite measure of portfolio performance. He measures portfolio risk with beta, and calculates portfolio’s market risk premium relative to its beta:

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Ti = Treynor.s performance index Rp = Portfolio.s actual return during a specified time period Rf = Risk-free rate of return during the same period âp = beta of the portfolio SHARPE.S MODEL Sharpe (1966) developed a composite index which is very similar to the Treynor measure, the only difference being the use of standard deviation, instead of beta, to measure the portfolio risk, in other words except it uses the total risk of the portfolio rather than just the systematic risk:

Where: Si = Sharpe performance index óp = Portfolio standard deviation This formula suggests that Sharpe prefers to compare portfolios to the capital market line (CML) rather than the security market line (SML). Sharpe index,

therefore, evaluates funds performance based on both rate of return and diversification (Sharpe 1967). For a completely diversified portfolio Treynors and Sharpe indices would give identical ranking. R.V. Institute of management 38

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Interpretation of Jensen’s measures:
Thus the result suggests that these funds are not completely diversified, because a completely diversified fund or portfolio would have given the similar ranking for composite performance measurement of Jensen. A poorly diversified portfolio will have a higher ranking under the Treynor measure than for the Sharpe measure. The funds which constitute this category are- Franklin India, HDFC and TATA. Based on the analysis of these 10 funds, majority of the mutual funds are poorly diversified. This means there is still some degree of unsystematic risk that one can get rid of by diversification. This also leads us to another conclusion that majority of these funds will land on Markowitz efficient portfolio curve. The efficient frontier consists of those portfolios which maximizes expected return given the portfolio risk (variance of portfolio returns).The full potential of these funds is not exploited and there is still room for improvement.

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SUMMARY OF FINDINGS
 From the research it is found that most of the returns of equity fund is above the market index BSE Sensex. Over the period of three years, out of 10 equity funds

Reliance fund shows the highest return of 0.6643,followed by H.D.F.C, Templeton, Sundaram, TATA , J.M., CANBANK, LIC, SBI, BIRLA and BSE200
has given a return of 0.3937.  Out of 10 equity funds RELIANCE shows the highest monthly return of 66.43% compared to others.  Beta is defined as the measure of risk. H.D.F.C. tops with a beta of .093 compared to other funds and Franklin with the least beta of 0.67.  KOTAK shows the highest standard deviation of 0.073 followed by others and Franklin with the lowest standard deviation of 0.057.  Systematic risk in Franklin mutual fund is more compare to other funds.  The alpha values varied widely, the highest being HDFC and the lowest Kotak.  Return per unit of unsystematic risk sundram as the highest systematic risk compared to other funds and Tata mutual fund as the lowest unsystematic risk. R.V. Institute of management 41

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CONCLUSION SUMMARY:
It is examined that investment performance of Indian Mutual funds in terms of performance measure, some funds shows conformity with the linear relationship of return and risk. Some funds do not demonstrate this relationship. However some funds exhibited superior performance in terms of systematic risk but did not do so in respect of total risk. According to Jensen measure funds have positive alpha values indicating superior performance of the scheme. The alpha values varied widely, the highest being JM and the lowest HDFC. Such large variation of alpha values show that stock selection abilities of fund manager vary for different mutual funds. Positive alpha values of mutual fund may be a result of adopting better forecast techniques by the fund managers; they seem to have been able to pick up undervalued stocks enabling them to post better performance during the period under consideration. For the same reason, it becomes increasingly necessary to periodically monitor and evaluate performance as objectively as can. More importantly, such evaluation should provide meaningful feedback for improving the quality of the investment management process on a continuing basis. In particular, it should help in articulating the investment objectives with greater clarity, sharpening the investment strategy and refining the methods of security selection. Value of experience that matters.

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BIBLIOGRAPHY:
WEBSITES  www.amfiindia.com  www.bseindia.com  www.rbi.org.in  www.investopedia.com  www.google.com  www.valuepro.net BOOKS  INVESTMENT MANAGEMENT ,SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT BY V.K.BHALLA

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 STATISTICS FOR MANAGEMENT BY LEVIN & RUBIN JOURNAL  THE ICFAI JOURNAL OF FINANCE.  VALUE RESEARCH ONLINE

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