ACKNOWLEDGEMENTS

It is a pleasure to be able to express my acknowledgements to all those who, in many ways, through encouraging words or helpful suggestions, made this project possible. I wish to express my deep sense of gratitude to my esteemed guide Dr. Suveera Gill, Professor, University Business School, Panjab University, Chandigarh, for her invaluable help, guidance and encouragement. Her persistence support and dedication have helped me to develop research skills in this particular area of research. Her insightful comments and suggestions always motivated me to complete this work and without whom, this work would have remained futile. I also express my heartiest thanks to Dr. Arshdeep Kaur who helped me in completing this work. Above all, I am thankful to the God Almighty, whose grace enabled me to complete this project.

Date Chandigarh

(Pankaj Singla)

CHAPTER1: INTRODUCTION
This chapter gives a brief introduction and a background description concerning the history of mutual funds and their increased importance in the Indian market. It further explores the existing literature and discusses the framework of present study, including its objectives, research design, limitations and chapter scheme. Investment is putting money into something with the expectation of gain that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time. In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or gambling. As such, those shareholders who fail to thoroughly analyze their stock purchases, such as owners of mutual funds, could well be called speculators. Indeed, given the efficient market hypothesis, which implies that a thorough analysis of stock data is irrational, all rational shareholders are, by definition, not investors, but speculators.

1.1 The concept of mutual fund

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 then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Mutual funds are considered as one of the best available investments as compare to others. They are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns. The Exhibit1 below describes the working of a mutual fund.

Exhibit 1: Concept of Mutual Fund

Mutual funds are considered as one of the best available investments as compare to others. They are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns. Mutual Funds in India follow a 3-tier structure. There is a Sponsor (the First tier), who thinks of starting a mutual fund. The Sponsor approaches the Securities & Exchange Board of India (SEBI), which is the market regulator and also the regulator for mutual funds. Not everyone can start a mutual fund. SEBI checks whether the person is of integrity, whether he has enough experience in the financial sector, his networth etc. Once SEBI is convinced, the sponsor creates a Public Trust (the Second tier) as per the Indian Trusts Act, 1882. Trusts have no legal identity in India and cannot enter into contracts, hence the Trustees are the people authorized to act on behalf of the Trust. Contracts are entered into in the name of the Trustees. Once the Trust is created, it is registered with SEBI after which this trust is known as the mutual fund.

It is important to understand the difference between the Sponsor and the Trust. They are two separate entities. Sponsor is not the Trust; i.e. Sponsor is not the Mutual Fund. It is the Trust which is the Mutual Fund. The Trustees role is not to manage the money. Their job is only to see, whether the money is being managed as per stated objectives. Trustees may be seen as the internal regulators of a mutual fund.

1.2 Types of Mutual Fund Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations. 1. Operational Classification A) Open - Ended Schemes: An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. Mutual fund schemes that continuously offer new units to the public are called open-ended schemes. They offer units for sale without specifying any duration for redemption.

B) Close - Ended Schemes: A mutual fund scheme in which the investors commit their money for a particular period. A closed-end fund has a stipulated maturity

period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. C) Interval Schemes: Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.
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The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investor opts for bank fixed deposits, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion. Thus, investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesnt mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile. 2. Portfolio Classification

Like issuing prospectus for issue of share capital, a mutual fund to raise funds has to issue similar statement communicating to prospective unit holders about the management policies and operations. It is known as offer document. The objectives of the mutual fund scheme launched are clearly spelled out facilitating the investor to choose a scheme meeting his own investment objectives. Following are the portfolio classification of fund which can be offered: A) Debt funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the Investors. Debt funds are further classified as:

Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.

Income Funds: Invest a major portion into various debt instruments such as bonds,
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corporate debentures and Government securities.

MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

B) Equity fund: Equity Funds are defined as those funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities. This is important from taxation point of view, as funds investing 100% in international equities are also equity funds from the investors asset allocation point of view, but the tax laws do not recognize these funds as Equity Funds and hence investors have to pay tax on the Long Term Capital Gains made from such investments (which they do not have to in case of equity funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities). Equity Funds come in various flavours and the industry keeps innovating to make products available for all types of investors. Relatively safer types of Equity Funds include Index Funds and diversified Large Cap Funds, while the riskier varieties are the Sector Funds. However, since equities as an asset class are risky, there is no guaranteeing returns for any type of fund .International Funds, Gold Funds (not to be confused with Gold ETF) and Fund of Funds are some of the different types of funds, which are designed for different types of investor preferences.

The structure of the fund may vary different for different schemes and the fund managers outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:

Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS) Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.

C) Balanced schemes: As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with predefined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment parameter: Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.

Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

Balanced Schemes: Balanced Schemes aim to provide both growth and income by
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periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

3. Other schemes

A) Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.80C of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.

B) Index Schemes: Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the Nifty 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.

C) Sector Specific Schemes: These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. ExPharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.

1.3 Advantages of Mutual Funds

Diversification It can help an investor diversify their portfolio with a minimum investment. Spreading investments across a range of securities can help to reduce risk.
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A stock mutual fund, for example, invests in many stocks .This minimizes the risk attributed to a concentrated position. If a few securities in the mutual fund lose value or become worthless, the loss maybe offset by other securities that appreciate in value. Further diversification can be achieved by investing in multiple funds which invest in different sectors. Professional Management- The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments. Well regulated- Mutual funds are subject to many government regulations that protect investors from fraud. Liquidity- It's easy to get money out of a mutual fund. Convenience- we can buy mutual fund shares by mail, phone, or over the Internet. Low cost- Mutual fund expenses are often no more than 1.5 percent of our investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index Transparency- The mutual fund offer document provides all the information about the fund and the scheme. This document is also called as the prospectus or the fund offer document, and is very detailed and contains most of the relevant information that an investor would need. Choice of schemes there are different schemes which an investor can choose from according to his investment goals and risk appetite. Tax benefits An investor can get a tax benefit in schemes like ELSS (equity linked saving scheme)

Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.

1.4 Growth of Mutual Fund Industry in India

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases. First Phase 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 Crores of assets under management. Second Phase 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 Crores.

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Third Phase 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 Crores. The Unit Trust of India with Rs.44, 541 Crores of assets under management was way ahead of other mutual funds Fourth Phase since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 Crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund.
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1.5 Review of literature

The literature on mutual fund performance evaluation primarily advocates usage of some asset pricing model because of a benchmark with two dimensionsreturn and risk. The basic notion underlying the methods of fund performance evaluation is that returns from a fund can be judged relative to those of naively selected portfolios, indicated in the asset pricing models with similar levels of risk. Various risk-return models are proposed to obtain the naively selected portfolio or benchmark portfolio. In addition to the traditional measures of performanceTreynor(1965),Sharpe(1966) and Jensen(1968)numerous new performance measures have been proposed. There is not one single approach that dominates all others in terms of reliability. Grinblatt and Titman (1989) states, One of the widely held folk theorems in finance is that informed investors can achieve a better risk-return tradeoff than uninformed investors. Numerous empirical studies have been made in using these models, and most of them see fund managers as below average performers. The objective of performance evaluation is to measure the value of services, if any, provided by the mutual fund manager. Chen and Knez (1996) assert, It is to investigate whether a fund manager helps enlarge the investment opportunity set faced by the investing public and, if so, to what extent the manager enlarges it. So, the fund strategy, which replicates using readily available public information, should not be judged as having superior performance. The literature further goes into the finer breakdowns of fund managers performance. Several studies attempted to measure two components of performanceselection and timing skill. While selection indicates the ability to pick the best securities of a given level of risk, timing skill is the contribution due to managers predictions of general market trend. The literature presents different methods for distinguishing these two components of performance as a whole. Many techniques have been developed for measuring the performance of a portfolio and to differentiate the returns due to smart stock picking ability and market timing ability of the fund manager. Treynor and Mazuy (1966) proposed an approach where an investor tries continually to outguess the market by oscillating between two characteristic lines, one of which has a high volatility and the other, a low volatility. Whenever the fund manager anticipates a rise in the market, he shifts to high volatility line. On the contrary, he shifts to low volatility line anticipating a fall in the market. So, the characteristic line is no longer straight.
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To identify timing activities, excess return of the fund has to be a convex function with respect to excess returns of the market portfolio. Treynor and Mazuy (1966) examined the timing ability of 57 fund managers during the period 1953-1962 using annual rate of return. No evidence of curvature of the characteristic lines is found for any of the funds. Henriksson and Merton (1981) extended the equilibrium theory and developed parametric and nonparametric statistical procedures to test for superior market timing forecasting skill. Nonparametric procedure proposed by them essentially demands that the forecasts of market timing or predictions of the forecasts must be observable. But in reality, the researcher does not have investment managers timing forecasts and rather only has access to the time series of realized returns on the portfolio. This acts as a major limitation of non-parametric procedure of this theory. However, its parametric counterpart derives fund managers timing ability using return data only. With this model, Irissapane etal. (2000) found that only four mutual fund schemes are exhibiting proper timing skill. Limited work has been done in India (Jayadev, 1998; Gupta, 2000; and Irrisapane et al., 2000). Moreover, this kind of result is due to the fact of overestimating systematic risk because of market timing ability and failure of informed investor to earn positive risk-adjusted returns due to increasing risk aversion. Gupta (2000) found the evidence of statistically significant positive timing coefficient of only two mutual fund schemes. Both the studies do not support the hypothesis that Indian fund managers are able to time the market correctly. However, they reported the evidence that Indian fund managers are timing the market in the wrong direction. This study, therefore, makes an attempt to evaluate the market timing and the stock selection ability of the Indian mutual fund managers, which constitute the major components of active management skills of fund managers. These active management skills enable fund managers to generate returns superior to the general market.

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1.6 Need of the study

Mutual funds in India have gained immense popularity in terms of number of schemes and assets under management during the last decade. With this, the total assets have increased considerably as shown in Exhibit 2. This shows that with the growth in mutual funds, the investor base has also increased. However the retail investors are facing problems in selecting the funds from the plethora of schemes existing in the Indian mutual fund industry. Due to this more and more investors are willing to take assistance of professional fund managers for managing their savings. During the recent years, several new and innovative instruments in mutual fund industry have been introduced by SEBI with the view to attract more and more customers. The increased complexity in the capital markets due to emergence of new instruments requires real expertise for direct participation in mutual fund industry. This has also increased the competition in the mutual fund market and forces the fund managers to continuously evaluate the performance of mutual funds to get an idea about what kind of mutual fund schemes show superior performance and continue to survive in the market. The second area of interest is whether the fund managers posses any market timing or stock picking abilities i.e. superior performance of a mutual fund manager occurs because of his ability to time the market(market timing) and his/ her ability to forecast the returns on individual assets (selection ability). Still further it is very important to determine whether the past performance persists in future. Though the past performance may not be a guarantee of future performance, yet it is the only quantitative way to judge how judge how good a fund performs at present.

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Exhibit 2: Growth in assets under management

The study would help the mutual fund companies, investors, researchers and so on to get the idea of performance of different mutual funds in India. From an academic perspective, the goal of identifying superior fund managers is interesting as it encourages the development and application of new models and theories and thus making a significant contribution to the body of knowledge of investment management. The present study will evaluate the performance, stock selectivity, market timing and persistence of mutual funds in India. For this purpose, the monthly NAVs of 35 open-ended equity (growth) schemes for the period of four years i.e. from April 1, 2007 to March 31, 2011 have been considered. Further, the 91 day treasury bills have been used as a surrogate for risk free rate.

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1.7 Objectives of study The following are the objectives of the study: 1. To evaluate the performance of equity diversified mutual funds schemes in India 2. To analyse the stock selection and market timing abilities of mutual fund managers in India 3. To test the persistence in mutual fund performance in India.

1.8 Hypotheses of the study

To evaluate the performance of mutual funds in India, the study will test the following hypothesis: H1: The performance of sample mutual funds is superior in comparison to the relevant benchmark portfolio. To analyse the stock selection and market timing abilities of mutual fund managers in India, the following hypotheses will be used : H2: Mutual funds managers of the sample schemes in India have superior stock selection abilities. H3: Mutual fund managers in India display distinct market timing abilities. To test the persistence in mutual fund performance in India, following hypothesis would be tested H4: the returns of sample schemes in India are persistent.

1.9 Research Design

1.9.1 Population and sample selection

The Indian Mutual Fund industry is flooded with number of schemes which fall in the category of open ended or close-ended scheme. Further each category has number of schemes within them viz: Equity (Dividend),Equity (growth),debt, gilt, ETF , balanced etc.
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The following criteria is used for selecting the sample

(i)

Equity schemes may be classified as: dividend and growth schemes. The dividend schemes distribute the profits made by funds to investors as dividend whole growth schemes plough back the profits in investment. Only growth schemes have been considered in the present study.

(ii)

Only those schemes which were launched after December 1996 considered. The reason is that SEBI came out with new set of regulations i.e. the SEBI (Mutual Fund) Regulations 1996 and the same would be used as the base year.

(iii)

Only open-ended mutual fund schemes were considered because they enjoy several advantages over the close ended schemes.

(iv)

The top 35 performers as on march 31 2011 is the sample of the study.

1.9.2 Data The choice of the sample is largely based upon the availability of the necessary data. Monthly returns based on Net Asset Values (NAV) were used for evaluation. Data for these samples were collected from moneycontrol.com, AMFI Website and mutualfundsindia.com, and the authenticity of the data collected from various sites can be cross-checked using NAV as reported in their respective individual websites. The study period covers the recent four-year period from April 1, 2007 to March 31, 2011. It is during this period that the Indian markets witnessed phases of boom, recessions and normality thus allowing to draw meaningful inferences. Further the monthly yields of 91-day treasury bills of Indian government for risk free rate. This data was available from the website of RBI i.e. http:// www.rbi.org The data regarding the benchmark indices like BSE Sensex was collected from the website of Bombay Stock Exchange(http://www.bseindia.com) 1.9.3 Framework of analysis A) Evaluation of performance of mutual funds in India is carved out as following:

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(i) Return: 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 NAVs are adjusted assuming dividends are reinvested at the ex-dividend NAV. In this study the weekly yields on 91-day Treasury bills have been used as a surrogate for risk-free rate of return. The returns are computed as follows: Rpt= ln[ (NAVt+1 NAVt)/ NAVt] Where Rpt is return on the fund during the period t, where t stands for time and NAV stands for Net Asset value of the fund. In is the natural logarithm.

(ii)

Standard deviation: A measure of the dispersion of a set of data from its mean. The more spread apart the data is, the higher the deviation. Standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility (risk). A volatile stock would have a high standard deviation. The standard deviation tells us how much the return on the fund is deviating from the expected normal returns. Standard deviation can also be calculated as the square root of the variance

(iii)

Beta: Beta measures the sensitivity of the stock to the market. For example if beta=1.5; it means the stock price will change by 1.5% for every 1% change in Sensex. It is also used to measure the systematic risk. Systematic risk means risks which are external to the organization like competition, government policies. They are non-diversifiable risks. Beta is calculated using regression analysis, Beta can also be defined as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta less than 1 means that the security will be less volatile than the market. A beta greater than 1 indicates that the security's price will be more volatile than
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the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Beta>11thenxaggressivexstocks Beta<1xthen1defensive1stocks Beta=1 then neutral So, its a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Many utilities stocks have a beta of less than 1. Conversely, most hi-tech NASDAQ-based stocks have a beta greater than 1, offering the possibility of a higher rate of return but also posing more risk. (iv) Sharpe ratio: A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been

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(v)

Treynor Ratio: The Treynor ratio, named after Jack Treynor, is similar to the Sharpe ratio, except that the risk measure used is Beta instead of standard deviation. This ratio thus measures reward to volatility.The scheme with the higher Treynor Ratio offers a better risk-reward equation for the investor. Since Treynor Ratio uses Beta as a risk measure, it evaluates excess returns only with respect to systematic (or market) risk. It will therefore be more appropriate for diversified schemes, where the nonsystematic risks have been eliminated. Generally, large institutional investors have the requisite funds to maintain such highly diversified portfolios. Also since Beta is based on capital asset pricing model, which is empirically tested for equity, Treynor Ratio would be inappropriate for debt schemes.

B) Analysis of selectivity and market timing ability of mutual fund managers in India (i) Jensens Alpha: Jensen Differential Return model is used for measuring stock selectivity skills of the fund managers. It is important to note here that Jensens alpha is popularly used to determine the excess return of a security or portfolio of securities over the securitys theoretical expected return. It is given as: = [ ]

Rp= portfolio return Rf=Risk free rate Rm= Market Return =

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A positive value of alpha would indicate that the fund manager has an ability to forecast security prices. A naive random selection buy-andhold policy can be expected to yield a zero for alpha. On the other hand, a fund manager not doing as well as a buy and hold portfolio, would yield a negative alpha. alpha is widely used to evaluate mutual fund and portfolio managers performance. (ii) Treynor and Mazuy model: These are several procedures that have been proposed to correct the effect of timing ability on the estimate of beta. The first is a quadratic regression proposed by Treynor and Mazuy. This regression Is Rp- Rf = a +b (Rm- Rf) + g (Rm- Rf)2 +ep

Rf =Risk free Return Ep =Random error turn a, b And g are parameter of the model.

The parameters in the above model can be estimated by using standard regression methodology. Treynor and Mazuy have argued that estimated value of parameter g in the above formula act as a measure of market timing skill of the fund manager. If fund managers could able to select the time correctly, the estimated value of g would be significantly positive. On the contrary if the estimated value of g should not be significantly different from zero, the fund managers are not be able to select the market timing correctly. The average beta of the portfolio would be constant when the fund manager is not engaged in market timing and only concentrates in stock selection. In this case the fund return and market return would be a linear relationship. Even if the fund manager changed the beta and would not be successful in assessing the
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market timing, still it shows the linear relationship. Treynor and Mazuy argued that in case the fund manage was able to successfully assess the market direction and changes the portfolio beta, it would find a higher than normal beta. In that situation it implies that the fund is doing better. When the market declines, the fund has a lower than normal beta. In such situations the plots of the fund returns against the market returns would lie above the linear relationship and would give a curvature to the scatter of points. C) Test for persistence To test whether the mutual fund returns in India are persistent, the Winner-Loser test will be used. Under this method, identify winners (W) and losers (L) in each sub-period and analyse to what extend winners in the former period turn out also to be winners in the later period Odds Ratio: Brown and Goetzman (1995) proposed the odds ratio as : =

The null hypothesis of no performance persistence corresponds to an odds ratio of one. An odds ratio above one indicates persistence for winners and losers.

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1.9 Tentative Chapter Scheme

The report is divided into 5 chapters Chapter 1 introduces the concept, origin, organization , types, advantages and growth of mutual funds in India. It also covers the review of literature, the need, the objectives and the research design of the project. Chapter 2 presents the results of performance evaluation of mutual funds in India. Chapter 3 highlights the results the selectivity and market timing abilities of mutual fund exchanges in India. Chapter 4 is regarding the persistence in mutual fund performance. Chapter 5 summarizes the main findings of study.

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CHAPTER2: PERFORMANCE EVALUATION This chapter presents the empirical evidence with regards to the evaluation of performance of selected mutual funds in terms of rate of return and risk adjusted measure.
The mutual fund industry in India began its operation in the year 1964 with the setting up of the UTI. The UTI enjoyed a complete monopoly till 1987 and that monopoly came to an end with the end of the first public sector mutual fund, i.e. the SBI mutual fund in 1987. This chapter discusses the empirical results regarding the performance of sample mutual funds schemes in during the period of April 2007 to March 2011. As mentioned in synopsis, this study utilized a sample of 35 mutual fund schemes in the equity diversified category. The study used the benchmark portfolio as BSE Sensex. The monthly yields on 91-day T-bills have been used as a surrogate for risk free returns. The null hypothesis (H0) and the corresponding alternate hypothesis (H1) have been stated as follows: H0: The performance of sample mutual funds is not superior in comparison to the relevant benchmark portfolio. H1: The performance of sample mutual funds is superior in comparison to the relevant benchmark portfolio. The performance of sample mutual fund schemes have been evaluated by using the return and risk analysis and also the risk adjusted performance measures such as Sharpe and Treynor ratio.

2.1 Results and discussion on the basis of return and risk analysis
An investment is a commitment of funds made in the expectation of some positive rate of return. If investment is properly undertaken, the return will commensurate with the risk the investor assumes. The investors are

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concerned with two principal properties inherent in securities: the return that can be expected from holding the security and the risk that the return might be less than the expected return. The performance evaluation of mutual funds must take into account not only the rate of return achieved but also the level of risk the investor was subjected to. Therefore this section discusses the empirical results with regards to the performance of sample mutual fund schemes in comparison to their benchmark portfolio in terms of return analysis and risk analysis. 2.1.1 Return analysis: The performance evaluation is done by comparing the returns of a mutual fund scheme with the returns of benchmark portfolio. Return is the motivating force and the principal reward in the investment process and it is the key method available to the investors in comparing alternative investment. Average return is obtained by taking the simple mean of the monthly returns whereby monthly returns are calculated by using the NAVs of mutual fund schemes. Table1 show the results the returns of sample mutual funds schemes in India. The table shows that all the sample mutual fund schemes have earned higher returns above in comparison to their benchmark portfolio. The top five performers in terms of returns were IDFC premier Equity Fund- plan A, UTI Dividend Yield Fund - Growth, ING Dividend Yield Fund-Growth , Birla Sun Life Dividend Yield Plus - Growth and UTI Opportunities Fund Growth . Table 1: Return analysis of mutual fund schemes
S.N 1 Scheme Name Return 22.92

IDFC Premier Equity Fund - Plan A - Growth

15.48 2 3 4 5

UTI Dividend Yield Fund - Growth ING Dividend Yield Fund - Growth Birla Sun Life Dividend Yield Plus - Growth UTI Opportunities Fund - Growth
14.16 15.17 14.60

27

14.00 6 7 8 9

Tata Dividend Yield Fund - Growth Canara Robeco Equity Diversified - Growth HDFC Top 200 - Growth
13.06 13.55 13.45

Reliance Regular Savings Fund - Equity - Growth

13.05 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Quantum Long-Term Equity Fund - Growth

13.02

HDFC Growth Fund - Growth

12.86

Tata Equity P/E Fund - Growth

12.85

HDFC Equity Fund - Growth

12.77

DSP BlackRock Top 100 Equity Fund - Growth

12.36

Fidelity Equity Fund - Growth

12.04

ICICI Prudential Discovery Fund - IP- Growth

12.02

Birla Sun Life Frontline Equity Fund - Plan A - Growth

11.86

UTI Master Value Fund - Growth

11.84

Reliance Equity Opportunities Fund - Growth

11.40

Sahara Midcap Fund - Growth

11.40

Sahara Midcap Fund - Growth - Auto Payout

11.38

Reliance Growth - Growth

11.37

ICICI Prudential Dynamic Plan - Growth

11.28

Franklin India Prima Plus - Growth

11.16

Templeton India Equity Income Fund - Growth

11.12

HDFC Capital Builder Fund - Growth

11.10

Franklin India Bluechip - Growth

28

28 29 30 31 32 33 34

Birla Sun Life India GenNext Fund - Growth UTI Equity Fund - Growth

11.10 10.96 10.72

ICICI Prudential Discovery Fund - Growth

10.64

Templeton India Growth Fund - Growth

10.63

BNP Paribas Dividend Yield Fund - Growth

10.54

Sundaram Select Midcap - Growth

10.48

SBI Magnum Equity Fund - Growth

35

Birla Sun Life Mid Cap Fund - Plan A - Growth BSE Sensex

10.42 9.60

Thus, it is interesting to note from Table 1 that all the sample funds schemes have shown superior return than the market and thus have beaten the market.

2.1.2 Risk analysis: The results presented in the earlier section did not consider the risk component of the concerned portfolio. Return should not be considered as the basis of measurement of performance of a mutual fund scheme, it should also include the risk taken by the fund manager because the different funds will have different levels of risk attached to them. Risk is defined in terms of variability or fluctuations in return of a security. The higher the fluctuations in the returns of a fund during a given period, higher will be the risk associated with it. Various techniques that are employed to measure the risk are

a)

Total risk: Total risk is measured in terms of standard deviation of

returns. It is a measure of the dispersion of a set of data from its mean. The
29

more spread apart the data is, the higher the deviation. Standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility (risk). A volatile stock would have a high standard deviation. Table 2 shows the standard deviation of sample schemes.

Table 2: Standard Deviation of mutual fund schemes

S.N Scheme Name

Standard Deviation 3.56 2.89

1 2

IDFC Premier Equity Fund - Plan A - Growth UTI Dividend Yield Fund - Growth 3.57

3 4

ING Dividend Yield Fund - Growth 3.03 Birla Sun Life Dividend Yield Plus - Growth

UTI Opportunities Fund - Growth Tata Dividend Yield Fund - Growth Canara Robeco Equity Diversified - Growth

3.25 3.30 3.64 3.64 4.01 3.26 3.46

6 7 8

HDFC Top 200 - Growth

9

Reliance Regular Savings Fund - Equity - Growth

10

Quantum Long-Term Equity Fund - Growth

11

HDFC Growth Fund - Growth

12 13 14 15

Tata Equity P/E Fund - Growth HDFC Equity Fund - Growth DSP BlackRock Top 100 Equity Fund - Growth Fidelity Equity Fund - Growth

3.56 3.77 3.07

3.34 30

16 17

ICICI Prudential Discovery Fund - IP- Growth Birla Sun Life Frontline Equity Fund - Plan A - Growth

3.80 3.63

18 19 20 21 22 23 24 25 26 27 28 29

UTI Master Value Fund - Growth Reliance Equity Opportunities Fund - Growth Sahara Midcap Fund - Growth Sahara Midcap Fund - Growth - Auto Payout Reliance Growth - Growth ICICI Prudential Dynamic Plan - Growth Franklin India Prima Plus - Growth Templeton India Equity Income Fund - Growth HDFC Capital Builder Fund - Growth

3.85 3.72 4.14 4.14 3.73 3.08 3.45 3.97 3.31 3.40

Franklin India Bluechip - Growth 3.26 Birla Sun Life India GenNext Fund - Growth 3.08 UTI Equity Fund - Growth 3.80 ICICI Prudential Discovery Fund - Growth 3.75 Templeton India Growth Fund - Growth 2.90

30 31

32 33 34 35

BNP Paribas Dividend Yield Fund - Growth 4.36 Sundaram Select Midcap - Growth 3.76 SBI Magnum Equity Fund - Growth 4.20 Birla Sun Life Mid Cap Fund - Plan A - Growth BSE Sensex 1.11

The above results show that all the mutual fund schemes were not able to
31

perform superior in terms of the variation or fluctuations in their returns i.e. the variability in returns of mutual fund schemes was more than that of the benchmark portfolio. Thus, though the funds have shown greater returns than the benchmark portfolio (Table 1), but the fund managers are not able to reduce the risk inherent in the mutual fund schemes. The top five performers in this category are: UTI Dividend Yield Fund - Growth , BNP Paribas Dividend Yield Fund - Growth , Birla Sun Life Dividend Yield Plus - Growth ,DSP BlackRock Top 100 Equity Fund - Growth, ICICI Prudential Dynamic Plan Growt

(b) Systematic risk: Standard Deviation determines the volatility of a fund according to the disparity of its returns over a period of time while beta determines the volatility or risk of a mutual fund in comparison to that of its market index or benchmark. By definition, the beta of market is 1.00

Beta measures the systematic risk of the portfolio. Beta measures the sensitivity of the stock to the market. For example if beta=1.5; it means the stock price will change by 1.5% for every 1% change in Sensex. It is also used to measure the systematic risk. Systematic risk means risks which are e x ternal to the organization like competition, government policies. They are non-diversifiable risks.Table 3 shows the results of beta calculation of sample mutual funds schemes
Table 3:Beta of mutual fund schemes
S.N 1 2 Scheme Name Beta

IDFC Premier Equity Fund - Plan A - Growth

0.79 0.68

UTI Dividend Yield Fund - Growth

3

0.81 ING Dividend Yield Fund - Growth 0.68 Birla Sun Life Dividend Yield Plus - Growth UTI Opportunities Fund - Growth 0.76 32

4 5

0.78 Tata Dividend Yield Fund - Growth 0.86 Canara Robeco Equity Diversified - Growth 0.87 HDFC Top 200 - Growth 0.93 Reliance Regular Savings Fund - Equity - Growth 0.74 Quantum Long-Term Equity Fund - Growth 0.80 HDFC Growth Fund - Growth 0.79 Tata Equity P/E Fund - Growth 0.90 HDFC Equity Fund - Growth 0.72 DSP BlackRock Top 100 Equity Fund - Growth 0.81 Fidelity Equity Fund - Growth 0.86 ICICI Prudential Discovery Fund - IP- Growth Birla Sun Life Frontline Equity Fund - Plan A Growth UTI Master Value Fund - Growth 0.87 0.85 0.86 Reliance Equity Opportunities Fund - Growth 0.97 Sahara Midcap Fund - Growth 0.91 Sahara Midcap Fund - Growth - Auto Payout 0.86 Reliance Growth - Growth 0.72 ICICI Prudential Dynamic Plan - Growth 0.84 Franklin India Prima Plus - Growth 0.91 Templeton India Equity Income Fund - Growth 0.79 HDFC Capital Builder Fund - Growth 0.81 Franklin India Bluechip - Growth

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

33

28

0.71 Birla Sun Life India GenNext Fund - Growth 0.73 UTI Equity Fund - Growth 0.87 ICICI Prudential Discovery Fund - Growth 0.86 Templeton India Growth Fund - Growth 0.61 BNP Paribas Dividend Yield Fund - Growth 0.95 Sundaram Select Midcap - Growth 0.88 SBI Magnum Equity Fund - Growth 0.99 Birla Sun Life Mid Cap Fund - Plan A - Growth BSE Sensex 1.00

29 30 31 32 33 34 35

The results show that all the schemes have shown beta less than one (i.e. market beta) implying that these schemes tended to hold portfolios that were less risky than the market portfolio.

2.2 Results and discussion on the basis of risk adjusted performance measures
2.2.1 Performance in terms of Sharpe ratio: A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. Generally, if the Sharpe ratio is greater than the benchmark comparison, the funds performance is superior over the market and viceversa.

34

Table 4 shows the results of Sharpe ratio of sample mutual funds schemes
Table 4: Sharpe ratio of mutual fund schemes
S.N 1 2 Scheme Name

Sharpe Ratio IDFC Premier Equity Fund - Plan A - Growth 4.19 UTI Dividend Yield Fund - Growth
3

2.59 2.01 2.18 1.90 1.82 1.53 1.50 1.26 1.55 1.45 1.37 1.29 1.55 1.31 1.06

ING Dividend Yield Fund - Growth

4

Birla Sun Life Dividend Yield Plus - Growth

5

UTI Opportunities Fund - Growth

6

Tata Dividend Yield Fund - Growth

7

Canara Robeco Equity Diversified - Growth

8

HDFC Top 200 - Growth

9

Reliance Regular Savings Fund - Equity - Growth

10

Quantum Long-Term Equity Fund - Growth

11

HDFC Growth Fund - Growth

12

Tata Equity P/E Fund - Growth

13

HDFC Equity Fund - Growth

14

DSP BlackRock Top 100 Equity Fund - Growth

15

Fidelity Equity Fund - Growth

16

ICICI Prudential Discovery Fund - IP- Growth

17

Birla Sun Life Frontline Equity Fund - Plan A Growth

18

1.11 1.00 1.03 35

UTI Master Value Fund - Growth

19

Reliance Equity Opportunities Fund - Growth

20 21 22

Sahara Midcap Fund - Growth Sahara Midcap Fund - Growth - Auto Payout Reliance Growth - Growth

0.82 0.82 0.91 1.10 0.95 0.80 0.94 0.91 0.95 0.96 0.72 0.71 0.91 0.58 0.66 0.58 1.08

23

ICICI Prudential Dynamic Plan - Growth

24

Franklin India Prima Plus - Growth

25

Templeton India Equity Income Fund - Growth

26

HDFC Capital Builder Fund - Growth

27

Franklin India Bluechip - Growth

28

Birla Sun Life India GenNext Fund - Growth

29

UTI Equity Fund - Growth

30

ICICI Prudential Discovery Fund - Growth

31

Templeton India Growth Fund - Growth

32

BNP Paribas Dividend Yield Fund - Growth

33

Sundaram Select Midcap - Growth

34

SBI Magnum Equity Fund - Growth

35

Birla Sun Life Mid Cap Fund - Plan A - Growth BSE Sensex

The table shows that out of the sample of 35 mutual fund schemes 17 (48%) of the schemes have earned higher Sharpe ratio above in comparison to their benchmark portfolio. The top 5 performers in terms of Sharpe ratio are IDFC Premier Equity Fund - Plan A - Growth, UTI Dividend Yield Fund - Growth, Birla Sun Life Dividend Yield Plus Growth, ING Dividend Yield Fund - Growth ,UTI Opportunities Fund Growth.
36

2.2.2 Performance in terms of Treynor Ratio: The Treynor ratio, named after Jack Treynor, is similar to the Sharpe ratio, except that the risk measure used is Beta instead of standard deviation. This ratio thus measures reward to volatility. Generally, if the Sharpe ratio is greater than the benchmark comparison, the funds performance is superior over the market and vice-versa. Table 5 shows the results of Treynor ratio of the sample mutual fund schemes
Table 5: Treynor ratio of mutual fund schemes
S.N 1 Scheme Name

Treynor Ratio 18.89

IDFC Premier Equity Fund - Plan A Growth UTI Dividend Yield Fund - Growth

11.00
3 4

ING Dividend Yield Fund - Growth Birla Sun Life Dividend Yield Plus Growth

8.86

9.72
5 6

UTI Opportunities Fund - Growth Tata Dividend Yield Fund - Growth

8.13

7.70
7

Canara Robeco Equity Diversified Growth HDFC Top 200 - Growth Reliance Regular Savings Fund - Equity Growth Quantum Long-Term Equity Fund Growth HDFC Growth Fund - Growth Tata Equity P/E Fund - Growth

6.45 6.27

8 9 10 11 12

5.45 6.83 6.29 6.16 37

13 14 15

HDFC Equity Fund - Growth 5.40 DSP BlackRock Top 100 Equity Fund Growth Fidelity Equity Fund - Growth 5.39 6.63

16

ICICI Prudential Discovery Fund - IPGrowth

17

4.70

Birla Sun Life Frontline Equity Fund Plan A - Growth

18

4.63 4.54

UTI Master Value Fund - Growth

19

Reliance Equity Opportunities Fund Growth

20

4.47 3.51

Sahara Midcap Fund - Growth

21

Sahara Midcap Fund - Growth - Auto Payout

22

3.75 3.94 4.69

Reliance Growth - Growth

23

ICICI Prudential Dynamic Plan - Growth

24

Franklin India Prima Plus - Growth 3.91

25

Templeton India Equity Income Fund Growth

26

3.48 3.96 3.84

HDFC Capital Builder Fund - Growth

27

Franklin India Bluechip - Growth

28

Birla Sun Life India GenNext Fund Growth

29 30 31

4.37 4.07 3.13 3.08 38

UTI Equity Fund - Growth ICICI Prudential Discovery Fund Growth Templeton India Growth Fund - Growth

32 33

BNP Paribas Dividend Yield Fund Growth Sundaram Select Midcap - Growth

4.32 2.68 2.83 2.45 1.20

34 35

SBI Magnum Equity Fund - Growth Birla Sun Life Mid Cap Fund - Plan A Growth BSE Sensex

Table 5 shows that all the sample mutual funds schemes have shown superior performance in terms of Treynor ratio as compared to their benchmark portfolio. The top 5 performers in terms of Treynor were Birla Sun Life Dividend Yield Plus Growth , ICICI Prudential Discovery Fund - IP- Growth , IDFC Premier Equity Fund - Plan A - Growth , ICICI Prudential Discovery Fund - Growth and UTI Dividend Yield Fund Growth. Thus, it is interesting to note that a significant majority of sample mutual fund schemes have shown superior performance than the market.

39

CHAPTER3: SELECTIVITY AND MARKET TIMING ABILITIES OF MUTUAL FUND MANAGERS IN INDIA
This chapter presents the empirical evidence regarding the selectivity and market timing abilities of mutual fund managers in India by making use of various measures as given by Jenson, Treynor and Mazuy model.

In the previous chapter, the performance of sample mutual fund schemes were measured and analysed in terms of return and risk adjusted performance analysis. In the present chapter, an attempt has been made to evaluate the stock selection and market timing abilities of mutual fund managers in India. The investment performance of stock selection pertains to successful micro forecasting of company specific events. It refers to the fund managers ability to identify under or over-valued securities. In other words, it refers to the fund managers ability to pick winners among individual stocks on a risk adjusted basis. Market timing is the macro-forecasting ability of the fund manager in forecasting market wide movements. Market timing skills imply assessing correctly the direction of the market, whether bull or bear and positioning the portfolios accordingly. The study states the following null hypothesis (i.e H01 and H02) and corresponding alternative hypothesis ( i.e H1 and H2) for assessing the stock selectivity and market timing abilities of the mutual fund managers in India.

H01: mutual fund managers in India lack stock selection abilities.

H1: mutual fund managers in India have superior stock selection abilities. H02: mutual fund managers in India lack market timing abilities.

40

H2: mutual fund managers in India have superior market timing abilities.

3.1 Assessing selectivity using Jensens Alpha: Jensen Differential Return model is used for measuring stock selectivity skills of the fund managers. It is important to note here that Jensens alpha is popularly used to determine the excess return of a security or portfolio of securities over the securitys theoretical expected return. Table 6 shows the data regarding the Jenson Alpha of sample of mutual fund schemes in India.
Table 6:Jensen's Alpha of mutual fund schemes S.No 1 2 3 4 5 UTI Opportunities Fund Growth 6 Tata Dividend Yield Fund Growth 7 Canara Robeco Equity Diversified Growth 8 HDFC Top 200 Growth 9 Reliance Regular Savings Fund - Equity Growth 10 Quantum Long-Term Equity Fund Growth 11 HDFC Growth Fund Growth 12 Tata Equity P/E Fund Growth 13 14 15 HDFC Equity Fund Growth DSP BlackRock Top 100 Equity Fund Growth 0.029 Fidelity Equity Fund Growth 0.335 0.034 0.034 0.036 0.037 0.035 0.039 0.046 0.046 Scheme IDFC Premier Equity Fund - Plan A Growth UTI Dividend Yield Fund Growth ING Dividend Yield Fund Growth Birla Sun Life Dividend Yield Plus Growth Alpha 0.135 0.425 0.057 0.053 0.048

41

0.025 16 17 18 19 20 21 22 Reliance Growth Growth 23 ICICI Prudential Dynamic Plan Growth 24 Franklin India Prima Plus Growth 25 Templeton India Equity Income Fund Growth 26 HDFC Capital Builder Fund Growth 27 Franklin India Bluechip Growth 28 Birla Sun Life India GenNext Fund Growth 29 UTI Equity Fund Growth 30 ICICI Prudential Discovery Fund Growth 31 Templeton India Growth Fund Growth 32 BNP Paribas Dividend Yield Fund Growth 33 Sundaram Select Midcap Growth 34 SBI Magnum Equity Fund Growth 35 Birla Sun Life Mid Cap Fund plan A Growth 0.010 0.008 0.010 0.014 0.001 0.012 0.016 0.018 0.017 0.017 0.015 0.018 0.020 Reliance Equity Opportunities Fund Growth Sahara Midcap Fund Growth Sahara Midcap Fund - Growth - Auto Payout Birla Sun Life Frontline Equity Fund - Plan A Growth UTI Master Value Fund Growth ICICI Prudential Discovery Fund - IPGrowth 0.025 0.024 0.023 0.018 0.018 0.019

A positive value of Jensens Alpha shows that the fund manager has a superior stock selectivity. The table clearly shows that all the sample mutual fund schemes have shown superior stock selectivity performance (stock selection or micro forecasting techniques).

42

3.2 Stock selectivity and market timing abilities using Treynor and Mazuy (1966) model: The procedure that have been proposed to check the stock selection ability of the fund manager is given as: Rp- Rf = + (Rm- Rf) + (Rm- Rf)2 Where Rf =Risk - free Return Rm= Return on market Rp= Portfolio return =Jensens Alpha =Beta Treynor and Mazuy have argued that estimated value of parameter in the above formula act as a measure of market timing skill of the fund manager. If fund managers could able to select the time correctly, the estimated value of would be significantly positive. On the contrary if the estimated value of is not be significantly different from zero, the fund managers are not be able to select the market timing correctly. Table 7 shows the results of such analysis :
Table 7:Treynor and Mazuy coefficient of mutual fund schemes
S.N 1 2 3 4 5 6 Scheme Name

IDFC Premier Equity Fund - Plan A - Growth UTI Dividend Yield Fund - Growth ING Dividend Yield Fund - Growth Birla Sun Life Dividend Yield Plus - Growth UTI Opportunities Fund - Growth Tata Dividend Yield Fund - Growth

0.26 0.21 0.24 0.29 0.22 0.23

43

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Canara Robeco Equity Diversified - Growth HDFC Top 200 - Growth Reliance Regular Savings Fund - Equity Growth Quantum Long-Term Equity Fund - Growth HDFC Growth Fund - Growth Tata Equity P/E Fund - Growth HDFC Equity Fund - Growth DSP BlackRock Top 100 Equity Fund Growth Fidelity Equity Fund - Growth ICICI Prudential Discovery Fund - IPGrowth Birla Sun Life Frontline Equity Fund - Plan A - Growth UTI Master Value Fund - Growth Reliance Equity Opportunities Fund - Growth Sahara Midcap Fund - Growth Sahara Midcap Fund - Growth - Auto Payout Reliance Growth - Growth ICICI Prudential Dynamic Plan - Growth Franklin India Prima Plus - Growth Templeton India Equity Income Fund Growth HDFC Capital Builder Fund - Growth Franklin India Bluechip - Growth Birla Sun Life India GenNext Fund - Growth UTI Equity Fund - Growth ICICI Prudential Discovery Fund - Growth Templeton India Growth Fund - Growth BNP Paribas Dividend Yield Fund - Growth

0.19 0.15 0.1 0.21 0.11 0.13 0.2 0.09 0.15 0.22 0.11 0.22 0.26 0.09 0.09 0.08 0.12 0.11 0.07 0.15 0.15 0.17 0.13 0.19 0.1 0.25

44

33 34 35

Sundaram Select Midcap - Growth SBI Magnum Equity Fund - Growth Birla Sun Life Mid Cap Fund - Plan A Growth

0.22 0.11 0.08

The positive values of provide evidence to support the hypothesis that fund managers in India have stock selectivity abilities.

45

CHAPTER 4: PERFORMANCE PERSISTENCE: EMPIRICAL EVIDENCE

This chapter presents the empirical evidence with regards to the performance persistence of selected mutual funds in India and examines whether past performance or mutual funds in India contain useful information about future performance, at least for one-year holding period. Mutual fund performance persistence is a topic of great importance to financial planners, investment advisors and other managers who use mutual funds a vehicle for investing clients assets. In India, the mutual fund industry has witnessed impressive growth with their number of schemes increasing from one in 1964 to 592 in 20061. These statistics demonstrates that private investment managers have potentially a major role to play in helping the current and prospective clients in selecting the mutual funds for meeting their investment goals. Further the mangers of actively managed portfolios are expected to consistently outperform a benchmark and also their peers. This implies that the fund managers must either have access to information that is not widespread or make use of available information in a better and speedier way than most other managers. Funds mangers

reputation and remuneration are heavily influenced by their ability to achieve consistently superior performance. This chapter discusses the empirical evidence of persistence in performance of the sample mutual funds during the period of April 1, 2007 to March 31, 2011. The null hypothesis (H0) and the corresponding alternative hypothesis (H1) have been stated as follows: H0: The sample mutual funds in India show no persistence in performance. In other words, the sample mutual funds in India show no relationship in performance across periods. H1: The returns on sample mutual funds in India are persistence in persistent. 1. http://www.amfiindia.com
46

Performance persistence of returns Odds Ratio and t-statistic of Odds Ratio: To test whether the mutual fund returns in India are persistent, the Winner-Loser test isused. Under this method, identify winners (W) and losers (L) in each sub-period and analyse to what extend winners in the former period turn out also to be winners in the later period.

Odds Ratio and t-statistic of Odds Ratio: Brown and Goetzman (1995) proposed the odds ratio as:
=

The null hypothesis of no performance persistence corresponds to an odds ratio of one. Table 8 reports the 2 way contingency tables of winners and losers on the basis of returns.

Table 8: Performance persistence of mutual fund schemes Period WW LL WL LW Odds Ratio Apr 07/Mar08-Apr 08/Mar09 Apr 08/Mar09-Apr 09/Mar10 Apr 09/Mar10-Apr 10/Mar11 6 7 5 7 6 8 11 11 10 11 11 12 0.34 0.34 0.33

The value of odds ratio thus shows that mutual funds doesnt show any persistence in their performance throughout the period of the study.

47

CHAPTER 5: SUMMARY, CONCLUSION, SUGGESTIONS AND DIRECTIONS FOR FURTHER RESEARCH

This chapter delivers the findings of the study. Finally, some directions for further research in this area have also been put forward. These section summaries the main findings of the study: 1. The results, in terms of rate of return measure and risk adjusted performance measures of Sharpe and Treynor, support the hypothesis that the sample mutual fund schemes in India outperformed the market during the sample period, i.e. April 2007 to March 2011. The superior performance of mutual fund schemes could be due to robuststock market growth, continued foreign institutional investments, strong macro-economic fundamentals including improvement in GDP and so on. This shows that investors confidence in mutual funds has significantly improved. 2. The results in terms of stock selectivity did support the hypothesis that the mutual fund managers in India have superior stock selection skills by showing positive alpha values. 3. The results pertaining to market timing abilities of the fund managers shows that fund managers in India deliver significant market timing ability. The results do support the hypothesis that the fund managers in India display distinct timing abilities during the study period. 4. Further, the results have shown a little evidence of performance persistence of the sample mutual funds and thereby, reject the hypothesis that mutual fund returns in India persists. Most of the mutual funds failed to persists. The reason for not showing persistence in performance may be due to the domestic economic conditions and international pressures. On behalf of investors, mutual funds invest their savings in the stock market to earn positive returns in future, but nobody can predict the market with certainty.

48

Table 9 presents the summary of results for hypothesis of the study.

Table 9: Summarization of the results for hypotheses

Hypotheses

Results

H1

The performance of sample mutual fund schemes in India is superior in comparison to the relevant benchmark portfolio

Supported

H2

Mutual fund managers of the sample schemes in India have superior stock selection abilities

Supported

H3

Mutual fund managers of the sample schemes in India display distinct market timing abilities

Supported

H4

The returns on sample mutual fund schemes in India are persistence

Not Supported

Directions for Future Research

1. The present study can be extended by taking a larger sample of both open-ended as well as close ended schemes. The study period can also be extended. The analysis can be done by applying multi-factor models like Fama-French three factor model and Carharts four factor model.

49

2. One can evaluate the performance of mutual funds on the basis of different fund characteristics such as fund size, fund age, turnover, management and load fees etc. 3. One can also analyse the market timing by examining the daily data instead of monthly data, as used by Bollen and Busse( 2001). 4. One potential are for future research is how the emergence of exchange trade funds affects the performance, timings and persistence of mutual funds. 5. Evaluation of corporate governance and CSR standard on the performance and growth of mutual fund companies can be undertaken. Further one can conduct a study whether mutual fund companies follow this standard fairly. Another area for future research is how the increased scrutiny and regulations affect the performance persistence. Also whether the investors have the knowledge of such regulations. 6. On cannot only evaluate the performance of individual mutual fund schemes but also evaluate the aggregate performance of fund families.

50

References
1. Adamau, A.R. Bhattacharya, S.Pfleider P. and Ross, S.A 1986. On timing and selectivity, The Indian Journal of Finance. 2. Arshdeep 2008.Performance Evaluation of Indian Mutual funds in India, University Business School, Panjab University, Chandigarh. 3. Brown, S.J and Goetzman W.N. 1985. Performance Persistence. The Journal of Finance. 4. Gupta A. 2001. Mutual fund in India. A study of investment management. Finance India. 5. Henriksson R.D. 1984, Market timing and mutual fund performance: An empirical investigation. The Journal of Business. 6. Irissappane A. Murugesam B and Rax K.C.S.C. 2000. Portfolio selection skill and timing abilities of fund managers. An empirical evidence on Indian Mutual funds. 7. Manju P. Chopra, Do Indian Mutual Fund Managers Select the Stock and Time the Market Correctly. The IUP Journal of finance. 8. Singh P. and Singla, S.K 2000. Evaluation of performance of mutual funds using risk return relationship models. The Indian Journal of Commerce. 9. Sharpe W.F. 1966. Mutual fund performance. The journal of Business. 10. Treynor J.L. and Mazuy, K.K. 1966. Can mutual funds outguess the market? Harvard Business Review. 11. The analyst July 2010. IUP Journal ICFAI University Press.

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52