NCCMP Project

MEASURING PERFORMANCE OF MUTUAL FUNDS IN INDIA
SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

A
PROJECT REPORT
ON

SUBMITTED
IN PARTIAL FULFILLMENT OF NCCMP
COURSE OF SSCBS AND NSE
(2011-2012)

SUBMITTED BY: UNDER THE GUIDANCE OF:
AMAN LUTHRA Mr. RAKESH SAHANI
ROLL NO. N-327/11 (PROJECT COORDINATOR)

UNIVERSITY OF DELHI

JHILMIL COLONY,VIVEK VIHAR DELHI-110095

STUDENT UNDERTAKING

This is to certify that I have completed the Project titled MEASURING
PERFORMANCE OF MUTUAL FUNDS IN INDIA under the guidance of Mr.
RAKESH SAHANI in partial fulfillment of the requirement for the award of
degree of National Stock Exchange Certified Capital Market Professional
(NCCMP) from SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES,
UNIVERSITY OF DELHI. This is an original piece of work & I have not
submitted it earlier elsewhere.

AMAN LUTHRA
Roll No. N327/11


PRINCIPALS CERTIFICATE

This is to certify that Mr. AMAN LUTHRA bearing Roll No: N 327/11
has done a academic project on MEASURING PERFORMANCE OF
MUTUAL FUNDS IN INDIA under the guidance of Mr. Rakesh Sahani,
Shaheed Sukhdev College of Business Studies, University of Delhi, Delhi. This
has not formed a basis for the award of any degree/diploma for any other
university.

Mr. Neeraj kumar sehrawat Date-2
nd
April 2012
Course coordinator
Shaheed sukhdev college of business studies,

Delhi


GUIDES CERTIFICATE

I hereby declare that the academic work embodied in this dissertation entitled
MEASURING PERFORMANCE OF MUTUAL FUNDS IN INDIA has
been undertaken and completed by Mr. AMAN LUTHRA under my guidance and
supervision.

I also certify that he has fulfilled all the requirements under the covenant governing
the submission of dissertation to the SSCBS University of Delhi for the award of
NSE Certified Capital Market Professional (NCCMP) course.

Mr. Rakesh Sahani Date:2
nd
April 2012
Project Guide
SSCBS,Delhi

.


ACKNOWLEDGEMENT

A project starts with an objective but it is accomplished only with
enormous efforts and tremendous support and guidance.

It has been an utmost pleasure for me to study in Shaheed Sukhdev College
of business studies. The cordial environment here has always made me
feel to be a part of college.

The process of completion of project report involves creation of debt
towards innumerable persons. My special thanks to my project guide Mr.
Rakesh Sahani, who guided me with the timely advice and expertise and
has helped remarkably to complete the project.


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 6 months past data from 01-09-2011 to 29-02-2012. 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 Sharpes ratio, Treynors ratio and Jensens 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 Sharpes,
Treynors and Jensons 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.

INTRODUCTION

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 in
different 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 investable 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 todays 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. A
typical 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.

Scale in all 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 20
th
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 e.g. 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 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, childrens plans, equity-oriented schemes and offshore funds
during this period. The total asset under management for the year 1987-88 was 6,700
crores.

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 Can bank 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 investable 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.

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. UTIs 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 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 crores, 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 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:

Mutual Fund Operation Flow Chart

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 20
th
January, 1996, through a
notification on 9
th
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 the
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
approval of SEBI, and in accordance with SEBI Regulations.


- Sponsor must have at least 5-year track record of business interest in the
Financial 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 them.

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
2/3
rd
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.


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. In fact, 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
provision of the Trust Deed and Regulations

- The AMC shall disclose the basis of calculation of NAV and Repurchase
price of the schemes and disclose the same to the investors.

- Funds shall be invested as per Trust Deed and Regulations.

Restrictions on the AMCs:

- AMCs cannot launch a fund scheme without the prior approval of

Trustees.

- AMCs have to provide full details of Employees and Board Members, in
all cases where such investments exceed Rs. 1 lakh.

- AMCs cannot take up any activity that is in conflict with the activities of the
mutual funds.


Registrars and Transfer Agents:

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.


ORGANISATION OF A MUTUAL FUND:

There are many entities involved and the diagram below illustrates the
organizational 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

Can bank 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.


Private Sector:

1. India

Benchmark AMC Ltd.

Cholamandalam AMC Ltd.

Escorts AMC Ltd.

J.M. Capital Management Co.
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.


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 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. 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 interrelationship between the financial and real sector, the nature of development of
the savings and capital markets, market structure, institutional arrangements and overall
policy regime.


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 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 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.


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 adverse investors who are interested in
steady income.

- 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.


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.

- 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.

- 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

- 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 affect 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.

- 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
expertises 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 companys 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.
.

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

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.


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.

Morgan Stanley 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.

Can bank Mutual Fund

Can bank Mutual Fund was setup on Dec 19, 1987 with Canara Bank acting as
the sponsor. Can bank 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.

-

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 investors 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. Jensens 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.

LITERATURE REIEW

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.

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 are 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


2011-12 .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, Famas 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 sated 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 famas 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.

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 six months 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 September
1
st
, 1999 to February 29
th
, 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 on 91 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 six months period from September 1
st
, 2011 to February 29
th
,
2012. 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 Famas components of Investment
performance, all the funds suffered negative performance on account of risk bearing
activity of their fund managers. Only one fund earned 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 managers 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.

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 are 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 were 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. 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.

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

Shaheed Sukhdev College of Business Studies - 38 -
PERFORMANCE EVALUATION OF MUTUAL FUNDS IN INDIA

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



RESEARCH METHODOLOGY

PROBLEM STATEMENT

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 Sharpe, Treynor and Jensen.

- To rank the funds according to Sharpes, Treynors and Jensons performance
measure.

LIMITATIONS

- The study is confined to only to ten asset management companies.

- The study considers only for equity funds

- The ranks are assigned on the basis of only three 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 six .

months starting from September-03-2011 to February-05-2011.



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 nine
equity mutual funds of different asset management companies for a term of 6 months
and applying statistical tools to get the results. The time frame of the research is the
past 3 years and hence the information between the time periods September 2011 to
February 2012 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 September 2011 to
February 2012.

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.

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.



VARIABLE DEFINITION:

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 portfolios market risk
premium relative to its beta:

|
R R
|

|

P

f

Treynor =
\

.

|
P

Where:

T
i
= Treynors performance index

R
p
= Portfolios actual return during a specified time period

R
f
= Risk-free rate of return during the same period

p
= beta of the portfolio

SHARPES 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:

|
R R
|

|

P

f

Sharpe =
\

.

o
P



Where:

S
i
= Sharpe performance index
p = 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
rankings.

Jensens Alpha Model:

Jensen (1968), on the other hand, writes the following formula in terms of realized rates
of return, assuming that CAPM is empirically valid:

Jensen = o = R

R + |
|
R R
| (

| (
P P f P M

f

\

.

Jensen uses
j
as his performance measure. A superior portfolio manager would have a
significant positive
j
value because of the consistent positive residuals.

Inferior managers, on the other hand, would have a significant negative
j
. Average
portfolio managers having no forecasting ability but, still, cannot be considered inferior
would earn as much as one could expect on the basis of the CAPM. Jensen
performance criterion, like the Treynors measure, does not evaluate the ability of
portfolio managers to diversify, since the risk premiums are calculated in terms of .

Systematic &Unsystematic Risk Calculation Methods:

Systematic Risk =
2
2

Unsystematic Risk =
2

The returns of various schemes were classified into systematic return and unsystematic
return by using Sharpe model. Then return per unit of systematic risk and unsystematic
risk were calculated and ranked.



RESULTS & FINDINGS:

TABLE 1: THE RETURNS OF VARIOUS MUTUAL FUND SCHEMES & BSE SENSEX
RETURN FROM SEP.-11 TO FEB.-12

KOTAK LIC SUNDRAM TATA CANBANK FRANKLIN HDFC ICICI JM Birla
September 0.1759 0.028 0.0243 0.0482 0.0614 -0.027 0.0356 -0.0298 0.0286 0.058
October 0.0152 0.1163 0.1324 0.1296 0.0661 -0.008 0.1232 0.0158 0.1146 0.1233
November 0.0593 0.0135 0.0343 0.0603 0.0244 0.0059 0.0278 0.0415 0.0418 0.0193
December 0.0655 0.1172 0.1255 0.1064 0.1624 0.1512 0.1026 0.1587 0.1338 0.188
2012 Jan -0.09 -0.0287 -0.0445 -0.0524 -0.081 -0.057 -0.02 -0.0802 -0.0401 -0.0524
February 0.005 0.0329 0.0433 0.0756 0.0806 -0.001 0.0286 0.0042 0.0613 0.0578
RETURN 0.2135 0.25293 0.403267 0.417 0.3486 0.288 0.4574 0.419233 0.38237 0.42557


.
MONTHLY BSE SENSEX RETURNS
B S E Sensex
September 0.0491
October 0.1014
November 0.0634
December 0.1314
2012 Jan -0.0245
February -0.0355
RETURN 0.380133333


Interpretation:

The table 1 shows the return of all equity funds. It implies that most of
the returns of equity fund are above the market index BSE Sensex. Over the period of
six months, out of 10 equity funds HDFC fund shows the highest return of 0.419233,
followed by Birla sun life ,Tata, JM Equity, ICICI , LIC,SUNDRAM, KOTAK

CANBANK and BSE SENSEX has given a return of 0.3801

TABLE 2 DESCRIPTIVE STATISTICS OF EQUITY FUNDS
B S E
FUNDS KOTAK LIC SUNDRAM TATA CANBANK FRANKLIN HDFC ICICI JM Birla Sensex
ANNUAL RETURN 0.2135 0.252933 0.403267 0.416967 0.348633 0.288 0.4574 0.4192 0.38237 0.42557 0.380133
MINIMUM RETURN -0.149 -0.168 -0.130 -0.144 -0.139 -0.082 -0.149 -0.096 -0.149 -0.167 -0.158
MAXIMUM RETURN 0.176 0.151 0.157 0.205 0.162 0.151 0.166 0.168 0.146 0.188 0.134
MEAN RETURN 0.01779 0.021078 0.033606 0.034747 0.029053 0.024 0.0381 0.0349 0.03186 0.03546 0.031678
RISK FREE RETURN 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509
SD 0.07342 0.06618 0.064999 0.070407 0.076747 0.05753 0.0661 0.0699 0.06239 0.07053 0.06783
VARIANCE 0.00539 0.00438 0.004225 0.004957 0.00589 0.00331 0.0044 0.0049 0.00389 0.00497 0.00460
CORRELATION 0.64191 0.893427 0.886762 0.890955 0.823803 0.79066 0.9051 0.7327 0.87417 0.8885
COVARIANCE 0.0032 0.004011 0.00391 0.004255 0.004289 0.00309 0.0041 0.0035 0.0037 0.00425
BETA 0.69482 0.871667 0.849721 0.924776 0.932077 0.67056 0.8814 0.7547 0.80397 0.92382
SYSTEMATIC RISK 0.0026 0.003328 0.00305 0.004239 0.005117 0.00149 0.0034 0.0028 0.00252 0.00425
UNSYSTEMATIC RISK 0.00279 0.001052 0.001174 0.000718 0.000773 0.00182 0.001 0.0021 0.00138 0.00073
EXPECTED RETURN 0.27966 0.337882 0.330656 0.355367 0.357771 0.27167 0.3411 0.2994 0.31559 0.35505
UNSYSTEMATIC RETURN 0.05618 0.024587 0.669229 0.00038 0.002225 0.02827 0.0025 0.0014 0.00185 0.00078
SYSTEMATIC RETURN 0.15732 0.228346 -0.26596 0.416587 0.346409 0.25973 0.4549 0.4179 0.38052 0.42479

INTERPRETATION:

The above table descriptive statistics of all equity funds. It give the details about the
mean, maximum, minimum return of all equity funds & beta, standard deviation,
variance, systematic risk & unsystematic risk of all funds. Out of 10 equity funds HDFC
shows the highest monthly return of 45.74% compared to others. In case of mean return
also, HDFC shows the highest mean return 3.81%. Beta is defined as the


measure of risk. Canara Bank tops with a beta of .093 compared to other funds and
Franklin with the least beta of 0.67. Standard deviation is the measure of the total risk.
KOTAK shows the highest standard deviation of 0.073 followed by others and Franklin
with the lowest standard deviation of 0.057. Then it also shows the value of systematic
risk and unsystematic risk for all funds.



TABLE3: THE RESIDUAL OF THE FUNDS
Residuals=Actual return-expected return
DATES KOTAK LIC SUNDRAM TATA CANBANK FRANKLIN HDFC ICICI JM BIRLA
September 0.126251 -0.0213 -0.073671 -0.00104 0.012178 -0.076593 -0.0137 -0.058 -0.0209 0.0088
October -0.07079 0.0214 -0.226211 0.031999 -0.03187 -0.092263 0.02779 -0.099 0.0231 0.0257
November -0.00029 -0.0483 -0.095822 -0.00216 -0.03815 -0.053382 -0.0341 -3E-04 -0.0191 -0.043
December -0.04133 -0.0039 -0.244803 -0.01894 0.036468 0.04632 -0.0193 0.0249 0.01818 0.0627
2012 Jan -0.08851 -0.0139 0.057669 -0.03357 -0.06152 -0.05754 -0.004 -0.04 -0.0304 -0.034
February 0.014133 0.0573 -0.020784 0.104601 0.110231 0.005736 0.05385 -0.057 0.07986 0.0867

INTERPRETATION:

This table shows the monthly residuals of each fund. This is calculated as
Residuals=Actual return-expected return


TABLE 4: Unsystematic risk and return
FUNDS UNSYSTEMATIC RISK UNSYSTEMATIC RETURN
KOTAK 0.002788328 0.056182167
LIC 0.00105201 0.024586898
SUNDRAM 0.001174394 0.669229297
TATA 0.000717746 0.000379531
CANBANK 0.000772983 0.002224788
FRANKLIN 0.001821397 0.028265841
HDFC 0.000973717 0.002490313
ICICI 0.002101004 0.001359151
JM 0.001376292 0.001847574
BIRLA 0.000728982 0.000776284

TABLE 5: SYSTEMETIC RISK AND RETURN
FUNDS SYSTEMATIC RISK SYSTEMATIC RETURN
KOTAK 0.002602634 0.157317833
LIC 0.003327783 0.228346435
SUNDRAM 0.003050437 -0.26596263
TATA 0.004239395 0.416587136
CANBANK 0.005117169 0.346408545
FRANKLIN 0.001488121 0.259734159
HDFC 0.003389123 0.454909687
ICICI 0.002780716 0.417874182
JM 0.002515646 0.380519093
BIRLA 0.00424528 0.424790382
INTERPRETATION:

The above table shows the systematic risk/return and unsystematic risk/return of equity
funds. The returns of unsystematic are calculated from the residual likewise the returns
from systematic are calculated from expected return.



TABLE 6: RETURN PER UNIT OF SYSTEMETIC RISK

FUNDS
RETURN PER UNIT OF SYSTEMETIC RISK
RANK

KOTAK 60.445628 9

LIC 68.61818402 7

SUNDRAM -87.18838054 10

TATA 98.26570078 6

CANBANK 67.69535042 8

FRANKLIN 174.5383837 1

HDFC 134.2263687 4

ICICI 150.2757558 3

JM 151.2609706 2

BIRLA 100.0618059 5

INTERPRETATION:

The above table shows the return per unit of systematic risk of the funds systematic
risk in Franklin mutual fund is more compare to other funds.

TABLE 7: RETURN PER UNIT OF UNSYSTEMETIC RISK
FUNDS RETURN PER UNIT OF UNSYSTEMETIC RANK
KOTAK 20.14905543 3
LIC 23.37135235 2
SUNDRAM 569.8506554 1
TATA 0.528781755 10
CANBANK 2.878183697 5
FRANKLIN 15.51877362 4
HDFC 2.557531687 6
ICICI 0.646905648 9
JM 1.342428615 7
BIRLA 1.064888334 8

INTERPRETATION:

The above table shows return per unit of unsystematic risk sundram as the highest
systematic risk compared to other funds and Tata mutual fund as the lowest
unsystematic.


TABLE 8: DIVERSIFIED AND NON DIVERSIFIED FUNDS IN PERCENTAGE

FUNDS DIVERSIFIED IN % NON DIVERSIFIED IN %
KOTAK GROWTH EQUITY FUND 51.722 48.278
LICMF EQUITY GROWTH FUND 24.020 75.980
SUNDRAM EQUITY GROWTH
FUND 27.797 72.203
TATA EQUITY GROWTH FUND 14.479 85.521
CANBANK GROWTH FUND 13.123 86.877
FRANKLIN EQUITY GROWTH
FUND 55.035 44.965
HDFC EQUITY GROWTH FUND 22.318 77.682
PRU ICICI GROWTH EQUITY
FUND 43.038 56.962
JM EQUITY GROWTH FUND 35.363 64.637
BIRLA ADVANTAGE GROWTH
FUND 14.655 85.345

INTERPRETATION:

The above table shows the diversified and non diversified funds in percentages.

Franklin fund shows the more diversified fund where as Canbank fund shows less
diversified fund. But Canbank fund is more efficient then Franklin fund because its
unsystematic risk per unit is 2.87, where as Franklin fund unsystematic risk per unit is
15.5187. So for this reason Canbank is more efficient then other funds.



TABLE 9: RANKING OF MUTUAL FUND SCHME BASED ON SHRPES RATIO:

NAME RATIO RANK
KOTAK 2.21456 10
LIC 3.05279 9
SUNDARAM 5.42113 2
TATA 5.1993 6
CANBANK 3.8794 8
FRANKLIN 4.12144 7
HDFC 6.15426 1
ICICI 5.27175 5
JM 5.31321 3
BIRLA 5.31228 4

INTERPRETATION:

Sharpe prefers to compare portfolios to the capital line rather than the security market
line. HDFC is the best compare to the other funds and the Kotak is the lowest
performance in case of Sharpe measure.



TABLE 10: RANKING OF MUTUAL FUND SCHME BASED ON TREYNORS RATIO:

NAME RATIO RANK
KOTAK 0.23402 9
LIC 0.23178 10
SUNDARAM 0.41469 3
TATA 0.39584 6
CANBANK 0.31943 8
FRANKLIN 0.35359 7
HDFC 0.46121 2
ICICI 0.48803 1
JM 0.41229 4
BIRLA 0.40556 5

INTERPRETATION:

The above table shows the ranking of mutual fund scheme based on Treynors ratio.

ICICI is the best compared to other funds and LIC is the least rank and less
performance in case of Treynors measure.



TABLE 11: RANKING OF MUTUAL FUND SCHME BASED ON JENSENS RATIO:

NAME RETURN RANKS
KOTAK -0.06616 10
LIC 0.2464 9
SUNDARAM 0.39562 5
TATA 0.41314 3
CANBANK 0.34518 7
FRANKLIN 0.27123 8
HDFC 0.45136 1
ICICI 0.40675 4
JM 0.37239 6
BIRLA 0.42169 2

INTERPRETATION:

The alpha values varied widely, the highest being HDFC and the lowest Kotak. 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.



Interpretation of Sharpe, Treynor, and Jensens 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 Sharpe and Treynor and 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.



SUMMARY OF FINDINGS

From the research it is found that most of the returns of equity fund are above
the market index BSE Sensex. Over the period of six months, out of 10 equity
funds HDFC fund shows the highest return of 0.4574,followed by Birla sun life

, Tata, JM Equity, ICICI, LIC, SUNDRAM, KOTAK, CANBANK and BSE

SENSEX has given a return of 0.3801

. Out of 10 equity funds HDFC shows the highest monthly return of 45.74%
compared to others. In case of mean return also, HDFC shows the highest
mean return 3.81%.
Beta is defined as the measure of risk. Canbank 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.



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. Some funds have out
performed both in terms of Treynor measure and Sharpe measure. 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 HDFC and the lowest Kotak. 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.



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
- STATISTICS FOR MANAGEMENT BY LEVIN & RUBIN

JOURNAL

- THE ICFAI JOURNAL OF FINANCE.

- VALUE RESEARCH ONLINE
SHAHEED SUKHDEV COOLEGE OF BUSINESS STUDIES

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MEASURING PERFORMANCE OF MUTUAL FUNDS IN INDIA

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

INVESTMENT OBJECTIVES AND VALUATION POLICIES:

Franklin with the lowest standard deviation of 0.057.

Systematic risk in Franklin mutual fund is more compare to other funds.

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