Professional Documents
Culture Documents
1.1 INTRODUCTION
In India most mutual funds have an expense ratio of 2.5 percent, a ceiling
fixed by the market regulator, SEBI .The management cost is 1.75 percent. On an
average equity funds in India charge expense ratios of over 2 percent per annum more
than double the global average of sub 1 percent. Bond funds charge around 0.6
percent, which is lower than global average of 0.9 percent. Expense ratio comprises
of management fees and operating expenses.
Mutual funds that invest more than half their corpus in shares of companies
accounting for the top 70 percent of the total market capitalization are categorized as
large cap funds. Funds predominantly investing in mid cap companies are those that
account for another 20 percent of the overall market cap. Mutual fund houses have
restricted their investment universe to barely 768 companies as on 31st January
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2008.A chunk of mutual fund money has gone into companies that are a part of two
indices, Sensex and Nifty. The mutual fund investment in companies ranges between
1 percent and 29 percent of their paid up capital.
Mutual Funds over the years have gained immensely in their popularity. With
the introduction of innovative products, the world of mutual funds nowadays has a lot
to offer to its investors. Since Indian economy is no more a closed market, and has
started integrating with the world markets, external factors which are complex in
nature affect us too. Factors such as an increase in short-term US interest rates, the
hike in crude prices, or any major happening in Asian market have a deep impact on
the Indian stock market. Mutual funds provide an option of investing without getting
lost in the complexities. India's mutual fund industry, buoyed by a phenomenal rise in
stock market indices and a spurt in foreign institutional investments, has been
rewarding investors handsomely. India's mutual funds sector has never had it so good.
Retail investors have been pouring billions of dollars into funds, and have been
reaping handsome rewards.
With emerging markets (including India, China and Brazil) being the flavor of
the season, international funds have been furiously earmarking a large portion of their
allocations to developing countries. Not surprising, considering the phenomenal
returns that markets like India have fetched them. With the Indian stock markets
providing attractive returns, foreign institutional investors (FIIs) have been making a
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beeline to the country. India's robust capital market has resulted in a flowering of its
mutual fund sector. Investors who had been disenchanted with mutual funds have
returned in a big way.
Mutual funds in India are also looking at increasing their exposure to the
infrastructure sector in the country. About $10 billion would be invested to build new
roads, highways, ports, airports and other infrastructure in India over the next three
years. Funds like Tata Mutual Fund, DSP Merrill Lynch and Prudential ICICI have
launched infrastructure funds, and others are also expected to follow suit.
The history of mutual funds in India can be broadly divided into 5 important phases.
Second phase witnessed the entry of mutual funds sponsored by state owned
banks and financial institutions. With the opening up of the economy, many public
sector and financial institutions were allowed to establish mutual funds. In November
1987 the State Bank of India established the first non-UTI mutual fund-SBI Mutual
Fund. This was followed by Canbank Mutual Fund (launched in December, 1987),
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LIC Mutual Fund (1989), and Indian Bank Mutual Fund (1990) followed by Bank of India
Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. 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.
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ROLE OF MUTUAL FUND IN 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.
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Composition of Indian Mutual Fund Industry:
Asset under Management for all Mutual Fund houses, as on 31, March, 2008 is as
follows
6
16 Sundaram Mutual Fund 203 13,285
7
FUTURE SCENARIO
The asset base will continue to grow at an annual rate of about 30 to 35 % over
the next few years as investor’s shift their assets from banks and other traditional
avenues. Some of the older public and private sector players will either close shop or
be taken over. Out of ten public sector players five will sell out, close down or merge
with stronger players in three to four years. In the private sector this trend has already
started with two mergers and one takeover. Here too some of them will down their
shutters in the near future to come. But this does not mean there is no room for other
players. The market will witness a flurry of new players entering the arena. There will
be a large number of offers from various asset management companies in the time to
come. Some big names like Fidelity, Principal, Old Mutual etc. are looking at Indian
market seriously. One important reason for it is that most major players already have
presence here and hence these big names would hardly like to get left behind. The
mutual fund industry is awaiting the introduction of derivatives in India as this would
enable it to hedge its risk and this in turn would be reflected in its Net Asset Value
(NAV). SEBI is working out the norms for enabling the existing mutual fund schemes
to trade in derivatives. Importantly, many market players have called on the Regulator
to initiate the process immediately, so that the mutual funds can implement the
changes that are required to trade in Derivatives. May the Net Asset Values grow!!
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THEORITICAL CONCEPT
As you probably know, mutual funds have become pretty popular over the last
few years. What was once just another obscure financial instrument is now a part of
our lives and here to stay. According to sources, more than 80 million people, or one
half of the households in America, invest in mutual funds. That means that, in the
United States alone, trillions of dollars are invested in mutual funds.
Its common knowledge that investing in mutual funds is (or at least should be)
better than simply letting your cash waste away in a savings account, but, for most
people, that's where the understanding of funds ends.
Originally mutual funds were meant to allow the common man to get a piece
of the market considering that the common man would be less knowledgeable about
financial markets and would have smaller investments to transact with. Instead of
spending all your free time buried in the financial pages of the Economic Times, all
you have to do is buy a mutual fund and you'd be set on your way to financial
freedom. As you might have guessed, it's not that easy. Not all mutual funds are the
same, and investing in mutual funds isn't as easy as throwing your money at the first
salesperson who attracts your attention.
A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. It is essentially a diversified portfolio of financial
instruments - these could be equities, debentures / bonds or money market
instruments. The corpus of the fund is then deployed in investment alternatives that
help to meet predefined investment objectives. Investors of mutual funds are known
as unit holders. The income earned through these investments and the capital
appreciation realised are shared by its unit holders in proportion to the number of
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units owned by them. Thus a Mutual Fund is a 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.
Income is earned from dividends declared by mutual fund schemes from time
to time.
If the fund sells securities that have increased in price, the fund has a capital
gain. This is reflected in the price of each unit. When investors sell these units
at prices higher than their purchase price, they stand to make a gain.
If fund holdings increase in price but are not sold by the fund manager, the
fund's unit price increases. You can then sell your mutual fund units for a
profit. This is tantamount to a valuation gain.
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.
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OPERATION OF THE FUND
A mutual fund invites the prospective investors to join the fund by offering
various schemes so as to suit to the requirements of categories of investors. The
resources of individual investors are pooled together and the investors are issued
units/shares for the money invested. The amount so collected is invested in capital
market instruments like treasury bills, commercial papers, etc.
For managing the fund, a mutual fund gets an annual fee of 1.25% of funds
managed at the maximum as fixed by SEBI (MF) regulations, 1993 and if the funds
exceed Rs. 100 cores, the fee is only 1%. The fee cannot exceed 1%. Of 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:
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ORGANIZATION OF A MUTUAL FUND
There are many entities involved and the diagram below illustrates the
organizational set up of a mutual fund:
A mutual fund is set up in the form of a trust, which has sponsor, trustees,
asset Management Company (AMC) and custodian. The trust is established by a
sponsor or more than one sponsor who is like promoter of a company. The trustees of
the mutual fund hold its property for the benefit of the unit holders. Asset
Management Company approved by SEBI manages the funds by making investments
in various types of securities. Custodian, who is registered with SEBI, holds the
securities of various schemes of the fund in its custody. The trustees are vested with
the general power of superintendence and direction over AMC. They monitor the
performance and compliance of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e. they should not be associated
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with the sponsors. Also, 50% of the directors of AMC must be independent. All
mutual funds are required to be registered with SEBI before they launch any scheme.
However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15,
2002).
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.
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Asset Management Company:
The AMC actually manages the funds of the various schemes. The AMC
employs a large number of professionals to make investments, carry out research &to
do agent and investor servicing. 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.
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.
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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.
Liquidity - Open-ended mutual funds are priced daily and are always willing to
buy back units from investors. This means that investors can sell their holdings in
mutual fund investments anytime without worrying about finding a buyer at the
right price. In the case of other investment avenues such as stocks and bonds,
buyers are not necessarily available and therefore these investment avenues are
less liquid compared to open-ended schemes of mutual funds.
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Tax Efficiency - Mutual fund offers a variety of tax benefits. Please visit the tax
corner section or consult your tax advisor for details.
Low transaction costs - Since mutual funds are a pool of money of many
investors, the amount of investment made in securities is large. This therefore
results in paying lower brokerage due to economies of scale.
Transparency - Prices of open ended mutual funds are declared daily. Regular
updates on the value of your investment are available. The portfolio is also
disclosed regularly with the fund manager's investment strategy and outlook.
Well-regulated industry - All the mutual funds are registered with SEBI and they
function under strict regulations designed to protect the interests of investors.
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DISADVANTAGES OF INVESTING MUTUAL FUNDS
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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
1. Market risks: In general, there are many kinds of risks associated with every kind
of investment on shares. They are called market risks. These market risks can be
reduced, but not completely eliminated even by a good investment management.
The prices of shares are subject to wide price fluctuations depending upon market
conditions over which nobody has control. The various phases of business cycle
such as Boom, Recession, Slump and Recovery affects the market conditions to a
larger extent.
2. 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.
3. Investment risk: Whether the mutual fund makes money in shares or loses
depends upon the investment expertise of the Asset Management Company
(AMC). If the investment advice goes wrong, the fund has to suffer a lot. The
investment expertise of various funds are different and it is reflected on the
returns, which they offer to the investors.
4. Business Risk: The corpus of a mutual fund might have been invested in a
company’s shares. If the business of that company suffers any set back, it cannot
declare any dividend. It may even go to the extent of winding up its business.
Though the mutual funds can withstand such a risk, its income paying capacity is
affected.
5. Political risks: Every government brings new economic ideologies and policies.
It is often said that many economic decisions are politically motivated. Change of
government brings in the risk of uncertainty, which every player in the finance
service industry has to face.
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DIFFERENT TYPES OF MUTUAL FUNDS
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial
position, risk tolerance and return expectations etc. The table below gives an
overview into the existing types of schemes in the Industry.
Mutual fund schemes may be classified on the basis of their structure and their
investment objective.
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Figure 3 Mutual Fund Types
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BY STRUCTURE:
Open-ended Funds
An Open-ended Fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors can conveniently buy and sell units
at Net Asset Value (NAV) related prices.
Close-ended Funds
A Close-ended Fund has a stipulated maturity period, which generally ranges from
3 to 15 years. The fund is open for subscription only during a specified period.
Investors can invest in the scheme at the time of the initial public issue and
thereafter they can buy or sell the units of the scheme on the Stock Exchanges, if
they are listed. The market price at the stock exchange could vary from the
scheme's NAV on account of demand and supply situation, unit holders'
expectations and other market factors.
BY INVESTMENT OBJECTIVES
Income Funds are ideal for capital stability and regular income. Capital
appreciation in such funds may be limited, though risks are typically lower than
that in a growth fund.
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Balanced Funds
The aim of Balanced Funds is to provide both growth and regular income.
Such schemes periodically distribute a part of their earning and invest both in
equities and fixed income securities in the proportion indicated in their offer
documents. This proportion affects the risks and the returns associated with the
balanced fund - in case equities are allocated a higher proportion, investors would
be exposed to risks similar to that of the equity market.
Balanced funds with equal allocation to equities and fixed income securities
are ideal for investors looking for a combination of income and moderate growth.
Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each
time you buy or sell units in the fund, a commission will be payable. Typically
entry and exit loads range from 1% to 2%. It could be worth paying the load, if the
fund has a good performance history.
No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or exit.
That is, no commission is payable on purchase or sale of units in the fund. The
advantage of a no load fund is that the entire corpus is put to work.
Gilt Fund
These funds invest exclusively in government securities. Government
securities have no default risk. NAVs of these schemes also fluctuate due to
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change in interest rates and other economic factors as is the case with income or
debt oriented schemes
There are also exchange traded index funds launched by the mutual funds,
which are traded on the stock exchanges.
These are ideal for corporate and individual investors as a means to park their
surplus funds for short periods.
Index Schemes
Index Funds attempt to replicate the performance of a particular index such as
the BSE Sensex or the NSE S&P CNX 50. These schemes invest in the securities
in the same weightage comprising of an index. NAVs of such schemes would rise
or fall in accordance with the rise or fall in the index, though not exactly by the
same percentage due to some factors known as "tracking error" in technical terms.
Necessary disclosures in this regard are made in the offer document of the mutual
fund scheme.
Sectoral Schemes
Sectoral Funds are those which invest exclusively in specified sector(s) such
as FMCG, Information Technology, Pharmaceuticals, etc. These schemes carry
higher risk as compared to general equity schemes as the portfolio is less
diversified, i.e. restricted to specific sector(s) / industry (ies).
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SNAPSHOT OF MUTUAL FUND SCHEMES
Mutual
Investment Who should Investmen
Fund Objective Risk
Portfolio invest t horizon
Type
Those who
Treasury Bills,
Liquidity + park their
Certificate of
Moderate funds in
Money Deposits, 2 days - 3
Income + Negligible current
Market Commercial weeks
Reservation of accounts or
Papers, Call
Capital short-term
Money
bank deposits
Short-
term Call Money,
Funds Commercial Those with
Liquidity +
(Floating Little Papers, Treasury surplus 3 weeks -
Moderate
- short- Interest Rate Bills, CDs, Short- short-term 3 months
Income
term) term Government funds
securities.
Bond
Predominantly
Funds
Credit Risk Debentures, Salaried & More than
Regular Income &Interest Government conservative 9 - 12
(Floating
Rate Risk securities, investors months
- Long-
Corporate Bonds
term)
Salaried &
Gilt Security & Interest Rate Government 12 months
conservative
Funds Income Risk securities & more
investors
Aggressive
Long-term
Equity investors with 3 years
Capital High Risk Stocks
Funds long term plus
Appreciation
outlook.
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To generate
returns that are
NAV varies Portfolio indices
Index commensurate Aggressive 3 years
with index like BSE, NIFTY
Funds with returns of investors. plus
performance etc
respective
indices
Balanced ratio of
Capital
equity and debt
Balanced Growth & Market Risk Moderate & 2 years
funds to ensure
Funds Regular Income and Interest Aggressive plus
higher returns at
Rate Risk
lower risk
Table 2 Mutual fund Scheme
Investment
Investment horizon Ideal Instruments
Objective
Short-term
1- 6 months Liquid/Short-term plans
Investment
Capital Diversified Equity/ Balanced
Over 3 years
Appreciation Funds
Monthly Income Plans /
Regular Income Flexible
Income Funds
Equity-Linked Saving
Tax Saving 3 yrs lock-in
Schemes (ELSS)
Table 3 Selecting the Right Scheme
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DIFFERENT PLANS THAT MUTUAL FUNDS OFFER
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1.3 OBJECTIVES OF THE STUDY
With a view to find out the solutions for the problem raised above, the following
objectives have been framed.
1. To understand the concept of Mutual Funds.
2. To find out the Performance of different schemes of different companies in
relation with market performance.
3. To identify investment of funds which have generated high returns and low
risk.
4. To analysis the risk involved in the selected scheme of different companies
and
5. To analysis the performance of selected scheme of different companies using
different models of performance evaluation.
The scope of this project can be extended to various wealth management firms,
asset management companies, financial advisors, portfolio managers, High Net
worth individuals and retail investors. This study will help them in understanding the
risk and returns of various funds under study and help them in taking an informed
investment decision.
· Since the funds selected for this study are only related to Balanced, ELSS and
Index based growth mutual funds, so the fund composition kept on changing over
the time period, so it became difficult to understand the fund properties as
historical data pertaining to the fund composition was not available.
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Arnold L. Redman, N.S. Gullett and Herman Manakyan (2000)[2] examines
the risk-adjusted returns using Sharpe’s Index, Treynor’s Index, and Jensen’s Alpha
for five portfolios of international mutual funds and for three time periods: 1985
through 1994, 1985-1989, and 1990-1994. The benchmarks for comparison were the
U. S. market proxied by the Vanguard Index 500 mutual fund and a portfolio of funds
that invest solely in U. S. stocks. The results show that for 1985 through 1994 the
portfolios of international mutual funds outperformed the U. S. market and the
portfolio of U. S. mutual funds under Sharpe’s and Treynor’s indices. During 1985-
1989, the international fund portfolio outperformed both the U. S. market and the
domestic fund portfolio, while the portfolio of Pacific Rim funds outperformed both
benchmark portfolios. Returns declined below the stock market and domestic mutual
funds during 1990-1994.
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Muthappan, P. K., Damondharan, E. (2006)[7] The objective of this paper is to
evaluate the performance of Indian Mutual Fund schemes in the framework of risk and
return during the period April 1, 1995 to March 31, 2000. Performance measures used
are Sharpe ratio, Treynor ratio, Jensen measure, Sharpe differential return measure
and Modigliani–Miller theorem 's components of performance. The results indicate
that the risk and return of mutual fund schemes are not in conformity with their stated
investment objectives. Further sample schemes are not found to be adequately
diversified. The funds are able to earn higher returns due to selectivity, however the
proper balance between selectivity and diversification is not maintained. The analysis
made by the application of Modigliani– Miller theorem 's measure indicates that the
returns out of diversification are very less. Based on the empirical investigation, it is
observed that the Indian Mutual Funds are not properly diversified.
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alternative model specifications differ depending on the number of primitive assets
taken to calibrate the SDF as well as the number of instrument variables used to scale
assets and/or factors.
31
CHAPTER III
RESEARCH METHODOLOGY
RESEARCH PROBLEM
Performance evaluation of mutual fund will be done with the help of different models
like, Treynor, Jenson, Sharpe, and Modigliani–Mille r theorem.
T-TEST HYPOTHESIS
Null Hypothesis:
H0: Mutual Fund schemes are giving more return than market.
Alternative Hypothesis:
H1: Mutual Funds schemes are not giving more return than market.
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RESEARCH DESIGN:
SAMPLE:-
1. Birla SL Tax Plan-D
2. Franklin India Index Tax
3. HDFC Taxsaver-G
4. ICICI Pru Tax Plan-G
5. LICMF Tax Plan-G
6. Magnum(SBI) Taxgain-G
7. Principal Tax Savings
8. Sundaram Taxsaver-G
9. Tata Tax Saving Fund
10. UTI Equity Tax Savings PlanG
For the research purpose different schemes of above companies will take into
consideration. The schemes will be ELSS fund, Indexed fund and Balanced Fund.
Time Horizon:
The time horizon of an individual will also influence the performance measures he/she
will look at more closely. If you are investing for less than four years, you need a fund
with consistent performance, so all your money will be there when you need it. You also
do not have time to earn back a large commission charge on the front end.
Conversely, if you plan to invest your money for more than four years, neither
consistency nor load is very important: you have plenty of time for the market to
recover. With a long-term horizon, we are conducting research for time period of last
5 years i.e. Jan. 2006 to Jan. 2011.
33
DATA COLLECTION:
We shall use secondary data from following sources for research.
Websites:
www.moneycontrol.com
www.mutualfunsindia.com
www.valueresearch.com
www.amfiindia.com
www.rbi.org.in
www.bseindia.com
Magazines:
Mutual Fund Insight.
· 364 days T-Bill risk free rate of return i.e. 7.6404% from Reserve bank of India.
· Market Return and standard deviation- BSE- Sensex Five year returns
1. Standard Deviation:-
It is measure of the value of the variable around its mean or it is as squire root of the
sum of the squared deviations from the mean divided by the number of observance
The arithmetic mean of the return may be same for two companies but the returns
may vary widely.
Treynor (1965) was the first researcher developing a composite measure of portfolio
performance. He measures portfolio risk with beta, and calculates portfolio’s market
risk premium relative to its beta:
R R
Treynor P f
Where: P
Ti = Treynor’s performance index
Rp = Portfolio’s actual return during a specified time period
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Rf = Risk-free rate of return during the same period
βp = beta of the portfolio
R R
Sharpe P f
Where:
Si = Sharpe performance index
σp = 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 Treynor and Sharpe indices would give
identical rankings.
4. Jensen’s Alpha:
Jensen (1968), on the other hand, writes the following formula in terms of
realized rates of return, assuming that CAPM is empirically valid:
Jensen
R R R R
f
P P f P M
Jenson's model proposes another risk adjusted performance measure. This measure
was developed by Michael Jenson and is sometimes referred to as the Differential
Return Method. This measure involves evaluation of the returns that the fund has
generated vs. the returns actually expected out of the fund given the level of its
35
systematic risk. The surplus between the two returns is called Alpha, which measures
the performance of a fund compared with the actual returns over the period.
Higher alpha represents superior performance of the fund and vice versa. Limitation
of this model is that it considers only systematic risk not the entire risk associated
with the fund and an ordinary investor cannot mitigate unsystematic risk, as his
knowledge of market is primitive.
The Modigliani–Miller theorem (of Franco Modigliani , Merton Miller) forms the
basis for modern thinking on capital structure. The basic theorem states that, under a
certain market price process (the classical random walk), in the absence of taxes,
36
bankruptcy costs, and asymmetric information, and in an efficient market, the value of
a firm is unaffected by how that firm is financed. It does not matter if the firm's capital
is raised by issuing stock or selling debt. It does not matter what the firm's dividend
policy is. Therefore, the Modigliani–Mille r theorem is also often called the capital
structure irrelevance principle.
σ = +σ(−)
6. T-test
· Formula…
x
= √
Where,
Σ
x=
= Market return
n = Sample size.
37
CHAPTER IV
DATA ANALYSIS
BALANCE FUND
The proportion in which the balanced mutual funds allocate their assets is usually 60
% to 65 % in stocks and the balance in bonds. The proportion is not disturbed while
managing the fund as it is to remain within the pre set minimum and maximum limits.
Advantages:
1. Obviously the most striking advantage is being able to switch over from one
combination to the other available to a more aggressive growth oriented stocks
when the market is bullish and vice versa.
2. Diversity in true sense with portfolio containing top stocks and bonds for a
blend of growth and safety.
3. No trouble managing an assortment of investments yourself. The one fund
gives it all reduces your overall cost of owning and managing the investment.
Disadvantages:
1. Fees remain same regardless of whether you hold 60:40 patterns in favor of
stocks or the low return and sloppy 40:60 bond orientation.
2. If you forgot to switch back to growth 60:40 patterns even after market turning
around, you will lose out on the low risk high growth potential of bull market.
3. Funds may have bonds of lower tenures while your need is for a longer term.
Long term bonds earn significantly more than short term bonds.
38
BALANCED Std.
FUNDS Mean Deviation Beta Rp Rf Rp-Rf Rm m Sharpe Treynor Jenson MM
Birla 12.23 25.98 1.06 15.02 7.64 7.38 27.97 44.97 0.30 6.96 -14.17 29.74
FT India 6.32 21.68 0.9 11.38 7.64 3.74 27.97 44.97 0.09 4.16 -14.56 22.42
HDFC 13.65 23.88 0.97 13.46 7.64 5.82 27.97 44.97 0.39 6.00 -13.90 27.08
ICICI 9.78 21.87 0.91 8.67 7.64 1.03 27.97 44.97 0.25 1.13 -17.47 12.98
LICMF 5.74 23.55 0.96 5.38 7.64 -2.26 27.97 44.97 0.06 -2.35 -21.78 -11.25
Magnum(SBI) 5.34 26 1.08 9.35 7.64 1.71 27.97 44.97 0.04 1.58 -20.25 15.86
Principal 4.11 25.37 1.05 6.82 7.64 -0.82 27.97 44.97 -0.01 -0.78 -22.17 2.23
Sundaram 7.37 26.78 1.1 10.08 7.64 2.44 27.97 44.97 0.11 2.22 -19.93 18.52
Tata 8.51 25.25 1.04 12.24 7.64 4.60 27.97 44.97 0.16 4.42 -16.55 24.54
UTI 12.33 23.62 0.99 9.85 7.64 2.21 27.97 44.97 0.34 2.23 -17.92 17.73
Table 4 Balanced Funds Descriptive
39
Balanced Scheme
30
25
20
15
10
0
Bi rla FT HDF ICICI LIC SBI Princ Su nd Tata UTI
India C MF ipal ara
m
Std. Deviation 25.98 21.68 23.88 21.87 23.55 26 25.37 26.78 25.25 23.62
Beta 1.06 0.9 0.97 0.91 0.96 1.08 1.05 1.1 1.04 0.99
Rp 15.02 11.38 13.46 8.67 5.38 9.35 6.82 10.08 12.24 9.85
40
Sharpe
0.4
0.35
0.3
0.25
0.2
Rati
0.15
o
0.1
0.05
0
-0.05
Birla FT HDFC ICICI LIC SBI Princi Sund Tata UTI
India pal aram
Series1 0.3 0.09 0.39 0.25 0.06 0.04 -0.01 0.11 0 .16 0.34
Company
Interpretation:
Sharpe Ratio defines t he relation between return and volatility of the funds. It shows
the Risk adjusted retu rn. Comparatively HDFC fund is more rel iable i.e. its sharpe
ratio is 0.39 and Principal has the least ratio is -0.01. Birla, ICICI and UTI are giving
average risk adjusted r eturn.
41
Treynr
7.00
6.00
5.00
4.00
3.00
2.00
Rati
1.00
o
0.00
-1.00
-2.00
-3.00
Birla FT HDFC ICICI LIC SBI Princi Sund Tata UTI
I ndia pal aram
Series1 6.96 4.16 6.00 1.13 -2.35 1.58 -0.78 2.22 4.42 2.23
Company
Interpretation:
Treynor ratio of Birla is high i.e.6.96 and this shows that it has been able to earn
higher excess return near the risk free rate when compared to other schemes. LIC has
a Treynor ratio of -2.35 and is the undesirable choice for investmen t.
42
Jenson
0.00
-5.00
-10.00
Rati
o
-15.00
-20.00
-25.00
HDF
Birla FT C ICICI LIC SBI Princi Sund Tata UTI
India pal aram
Series1 -14.1 -14.5 -13.9 -17.4 -21.7 -20.2 -22.1 -19.9 - 16.5 -17.9
Company
Interpretation:
Jenson measure invol ves evaluation of the returns that the fund ha s generated vs. the
returns actually expect ed out of the fund given the level of its systematic risk. Here
all the above schemes are not giving expected returns according to Jen son. Principal
fund is more unexpected fu nd i.e. jenson ratio is -22.1.
43
M
M
30.00
25.00
20.00
15.00
10.00
Rati
5.00
o
0.00
-5.00
-10.00
-15.00
HDF
Birla FT C ICICI LIC SBI Princi Sund Tata UTI
India pal aram
Series1 29.74 22.42 27.08 12.98 -11.2 15.86 2.23 18.52 2 4.54 17.73
Company
Interpretation:
MM measure involv es evaluation of the returns that the fund has generated in
efficient market condition. Here from the above schemes Birla fund is giving higher
return compare to others i.e. MM is 29.70. But LIC fund is not g enerating expected
return in efficient mar ket condition i.e. -11.2.
44
ELSS FUNDS
ELSS mutual funds give you tax benefit. These mutual funds are covered by Section
80C, which mean that the money you invest in these funds is reduced from your
taxable income (up to a limit of Rs. 1 lac) and hence you pay less tax.
Equity linked saving schemes are a kind of mutual funds like diversified equity funds
with Tax benefits. It is just like other tax saving instruments like National Savings
Certificate and Public Provident Fund. Main advantage with ELSS is lock-in period is
only 3 years while for NSC it is 6 years and for PPF it is 15 years. At the same time
risk factor is high in ELSS.
Advantages:
Disadvantages:
45
Std.
ELSS FUNDS Mean Beta Rp Rf Rp-Rf Rm σm Sharpe Treynor Jenson MM
Deviation
Birla 3.29 32.09 0.95 6.76 7.64 -0.88 27.97 44.97 -0.03 -0.93 -20.20 6.41
Franklin
5.64 32.4 0.98 10.28 7.64 2.64 27.97 44.97 0.04 2.69 -17.29 11.30
India
HDFC 19.18 31.56 0.93 12.15 7.64 4.51 27.97 44.97 0.47 4.85 -14.40 14.07
ICICI 19.75 34.27 0.99 10.23 7.64 2.59 27.97 44.97 0.45 2.62 -17.54 11.04
LIC 9.37 33.05 0.99 3.73 7.64 -3.91 27.97 44.97 0.15 -3.95 -24.04 2.32
Magnum(SBI) 10.47 32.23 0.96 10.41 7.64 2.77 27.97 44.97 0.19 2.89 -16.75 11.50
Principal -5.62 32.55 0.94 3.48 7.64 -4.16 27.97 44.97 -0.31 -4.43 -23.27 1.89
Sundaram 6.72 31.88 0.92 11.3 7.64 3.66 27.97 44.97 0.07 3.98 -15.05 12.80
Tata 11.93 30.38 0.91 7.49 7.64 -0.15 27.97 44.97 0.24 -0.17 -18.65 7.42
UTI 9.51 29.13 0.87 6.2 7.64 -1.44 27.97 44.97 0.18 -1.66 -19.13 5.42
Table 5 ELSS Funds Descriptive
46
ELSS
35
30
25
20
15
10
5
0
Birla Frankl HDFC ICICI LIC SBI Princi Sun d Tata UTI
in pal aram
India
Std. Deviation 32.09 32.4 31.56 34.27 33.05 32.23 32.55 31.88 30.38 29.13
Beta 0.95 0.98 0.93 0.99 0.99 0.96 0.94 0.9 2 0.91 0.87
Rp 6.76 10.28 12.15 10.23 3.73 10.41 3.48 11. 3 7.49 6.2
47
Sharp
e
0.50
0.40
0.30
0.20
0.10
Rati
0.00
o
-0.10
-0.20
-0.30
-0.40
Birla FT HDFC ICICI LIC SBI Princi Sund Ta ta UTI
India pal aram
Series1 -0.03 0.04 0.47 0.45 0.15 0.19 -0.31 0.07 0.24 0.18
Company
Interpretation:
Sharpe Ratio defines t he relation between return and volatility of the funds. It shows
the Risk adjusted retu rn. Comparatively HDFC fund is more rel iable i.e. its sharpe
ratio is 0.47 and Principal has the least ratio is -0.31. ICICI and TATA are giving
average risk adjusted r eturn.
48
Treyno
r
5.00
4.00
3.00
2.00
1.00
Rati
0.00
-1.00
o
-2.00
-3.00
-4.00
-5.00
Birla FT HDFC ICICI LIC SBI Princi Sund Tata UTI
India pal aram
Series1 -0.93 2.69 4.85 2.62 -3.95 2.89 -4.43 3.98 -0.17 -1.66
Company
Interpretation:
Treynor ratio of HDFC fund is high i.e.4.85 and this shows that it has been able to
earn higher excess return near the risk free rate when compared to other schemes.
Principal Fund has a Treynor ratio of -4.43 and is the unde sirable choice for
investment. LIC is als o same like as Principal fund i.e.-3.95.
49
Jenso
n
0.00
-5.00
-10.00
Rati
o
-15.00
-20.00
-25.00
HDF
Birla FT C ICICI LIC SBI Princi Sund T ata UTI
India pal aram
Series1 -20.2 -17.2 -14.4 -17.5 -24.0 -16.7 -23.2 -15.0 -18.6 -19.1
Company
Interpretation:
Jenson measure invol ves evaluation of the returns that the fund ha s generated vs. the
returns actually expect ed out of the fund given the level of its systematic risk. Here
all the above schemes are not giving expected returns according to Je nson. LIC fund
and Principal fund are more unexpected fund i.e. jenson ratio i s -24.0 and -23.2
respectively.
50
MM
15.00
10.00
Ratio
5.00
0.00
UT
Birla FT HDF ICICI LIC SBI Princ Sund Tata I
Ind ia C ipal aram
Series1 6.41 11 .3 14.0 11.0 2.32 11.5 1.89 12.8 7.42 5.42
Company
Interpretation:
MM measure involv es evaluation of the returns that the fund has generated in
efficient market condition. Here from the above schemes HDFC fu nd is giving higher
return compare to oth ers i.e. MM is 14.00. But Principal fund is generating lesser
expected return in com pare to other funds i.e. 1.89.
51
INDEX FUNDS
Advantages:
5. Investor of index funds also enjoys the tax advantages associated with this type of
investments.
Disadvantages:
1. The disadvantage of index funds is that their return over investment is low when
compared with other financial instruments; even with the best index funds.
2. Index funds are subject to the same financial trouble as the rest of securities.
52
INDEX Std.
Mean Beta Rp Rf Rp-Rf Rm σm Sharpe Treynor Jenson MM
FUND Dev
Birla 5.31 33.39 1.01 10.00 7.64 2.36 27.97 44.97 0.03 0.07 -18.18 10.82
Franklin 6.09 33.36 0.99 10.39 7.64 2.75 27.97 44.97 0.05 0.08 -17.38 11.35
HDFC 4.35 33.27 0.99 7.97 7.64 0.33 27.97 44.97 0.00 0.01 -19.80 8.09
ICICI 13.12 32.96 1.00 12.53 7.64 4.89 27.97 44.97 0.26 0.15 -15.44 14.31
LIC 9.47 33.62 1.00 8.93 7.64 1.29 27.97 44.97 0.15 0.04 -19.04 9.37
SBI 4.95 33.10 1.00 9.46 7.64 1.82 27.97 44.97 0.02 0.05 -18.51 10.11
Principal 4.78 32.91 0.99 9.00 7.64 1.36 27.97 44.97 0.01 0.04 -18.77 9.50
Sundaram 10.09 31.39 0.92 11.60 7.64 3.96 27.97 44.97 0.18 0.13 -14.75 13.31
Tata 12.05 33.09 0.99 10.62 7.64 2.98 27.97 44.97 0.23 0.09 -17.15 11.69
UTI 12.56 33.32 1.00 11.23 7.64 3.59 27.97 44.97 0.25 0.11 -16.74 12.49
Table 6 Index Funds Descriptive
53
INDEX SCHEMES
35
30
25
20
15
10
0
UT
Birla Frankli H D F ICICI LIC SBI Princip Sunda Tata I
n C al ra m
Std. Dev 33.39 33.36 33.27 32.96 33.62 33.1 32.91 31. 39 33.09 33.32
Beta 1.01 0.99 0.99 1 1 1 0.99 0.9 2 0.99 1
Rp 10 10.39 7.97 12.53 8.93 9.46 9 11. 6 10.62 11.23
54
Sharpe
0.30
0.25
0.20
Rati
0.15
o
0.10
0.05
0.00
Birla FT HDFC ICICI LIC SBI Princi Sund Tata UTI
India pal aram
Series1 0.03 0.05 0.00 0.26 0.15 0.02 0.01 0.18 0.23 0.25
Company
Interpretation:
Sharpe Ratio defines t he relation between return and volatility of the funds. It shows
the Risk adjusted ret urn. Comparatively ICICI fund is more reli able i.e. its sharpe
ratio is 0.26 and HDF C has the least ratio is 0.00. UTI and TAT A funds are also at
high ratio i.e. 0.25 an d 0.23 respectively. Birla, SBI and Princip al are giving lower
risk adjusted return.
55
Treynor
0.16
0.14
0.12
0.10
0.08
Rati
o
0.06
0.04
0.02
0.00
Birla FT HDFC ICICI LIC SBI Princi Sund Tata UTI
India pal aram
Series1 0.07 0.08 0.01 0.15 0.04 0.05 0.04 0.13 0.09 0.11
Company
Interpretation:
Treynor ratio of ICICI is high i.e. 0.15 and this shows that it ha s been able to earn
higher return compared to other schemes. HDFC has a Treynor ratio of 0.01 and is the
less desirable choice f or investment.
56
Jenson
0.00
-2.00
-4.00
-6.00
-8.00
Rati
-10.00
o
-12.00
-14.00
-16.00
-18.00
-20.00
UT
Birla FT HDF ICICI LIC SBI Princ Sund Tata I
India C ipal aram
Series1 -18. -17. -19. -15. -19. -18. -18. -14. -17. -16.
Company
Interpretation:
Jenson measure invol ves evaluation of the returns that the fund ha s generated vs. the
returns actually expect ed out of the fund given the level of its systematic risk. Here
all the above schemes are not giving expected returns according to Jen son. HDFC
fund is more unexpected fund i.e. Jenson ratio is -22.1.
57
MM
15.00
10.00
Ratio 5.00
0.00
UT
Birla FT HDFC ICICI LIC SBI Princi Sund Tata I
India pal aram
Series1 10.8 11.3 8.09 14.3 9.37 10.1 9.50 13.3 11.6 12.4
Company
Interpretation:
MM measure involv es evaluation of the returns that the fund has generated in efficient
market condition. Here from the above schemes ICICI fund is giving higher return
compare to others i.e. MM is 29.70. But LIC fund is not g enerating expected return in
efficient mar ket condition i.e. -11.2.
58
Hypothesis Testing (T-test)
· Null Hypothesis:
· Alternative Hypothesis:
H1: Balanced Funds are not giving more return than market.
n =10 df = n-1
x =10.225
=27.97 s=44.97 Significant level= 0.05
x −
=
√
10.22 − 27.97
= 44.97
√10
= -1.248
So, our Ho: Balanced Funds are giving more return than market is REJECTED.
59
T-test ELSS Fund
· Null Hypothesis:
· Alternative Hypothesis:
H1: ELSS Funds are not giving more return than market.
n =10 df = n-1
x =8.203
=27.97 s=44.97 Significant level= 0.05
x −
=
√
8.203 − 27.97
= 44.97
√10
= -1.39
So, our Ho: ELSS Funds are giving more return than market is REJECTED.
60
T-test Index Fund
· Null Hypothesis:
· Alternative Hypothesis:
H1: Index Funds are not giving more return than market.
n =10 df = n-1
x =10.173
=27.97 s=44.97 Significant level= 0.05
x −
=
√
10.173 − 27.97
= 44.97
√10
= -1.2517
So, our Ho: INDEX Funds are giving more return than market is REJECTED.
61
ANALYSIS
BALANCED FUNDS:
Birla Fund has given highest return in last five years i.e.15.02 with compare to
other Balanced funds.
LIC has given lowest return i.e.5.38.
Franklin India has lowest volatility with Beta of 0.9 and Sundaram Fund has high
volatility with Beta of 1.1.
Sundaram Fund has highest risk (26.78) with return of 10.08.
Franklin India has lowest return (21.68) with return of 11.38.
According to Sharpe measure HDFC is more reliable fund and Principal Fund is
less profit generated fund.
As per Treynor measure Birla fund is more reliable fund and LIC is less profit
making fund.
As per Jenson measure all the balanced schemes are not giving expected returns.
Principal fund is more unexpected fund.
As per MM measure in efficient market condition Birla is giving more return than
other schemes and LIC is less profit making fund.
As per T-test Balanced funds are not giving more return than market.
ELSS FUNDS:
HDFC Fund has given highest return in last five years i.e.12.15 with compare to
other ELSS funds.
Principal has given lowest return i.e.3.48.
ICICI and LIC has lowest volatility with Beta of 0.99.
ICICI Fund has highest risk (34.27) with return of
10.23. UTI has lowest risk (29.13) with return of 6.2.
According to Sharpe measure HDFC is more reliable fund and Principal Fund is
less profit generated fund.
62
As per Treynor measure HDFC fund is more reliable fund and Principal is less
profit making fund.
As per Jenson measure all the ELSS schemes are not giving expected returns. LIC
fund is more unexpected fund.
As per MM measure in efficient market condition HDFC is giving more return
than other schemes and LIC is less profit making fund.
As per T-test ELSS funds are not giving more return than market.
INDEX FUNDS:
ICICI Fund has given highest return in last five years i.e.12.53 with compare to
other ELSS funds.
HDFC has given lowest return i.e.7.97.
ICICI, LIC, SBI and UTI has no volatility with Beta of 1. Birla has Beta of 1.01.
Birla Fund has highest risk (33.39) with return of 10.00.
Sundaram has lowest risk (31.39) with return of 11.6.
According to Sharpe measure ICICI is more reliable fund and HDFC Fund is less
profit generated fund.
As per Treynor measure ICICI fund is more reliable fund and HDFC is less profit
making fund.
As per Jenson measure all the Index schemes are not giving expected returns.
HDFC fund is more unexpected fund.
As per MM measure in efficient market condition ICICI is giving more return
than other schemes and HDFC is less profit making fund.
As per T-test INDEX funds are not giving more return than market.
63
CHAPTER V
CONCLUSION
This research report was a very good learning experience for us. The project
on mutual fund facilitated us in understanding the theoretical concepts along with the
in- depth study of various important parameters to evaluate mutual fund schemes and
has made us self sufficient in analyzing the wide variety of schemes available in the
market and picking up the right one to invest.
By and large it has been seen that specific schemes like BALANCED, ELSS
& INDEX have not found investors return as compare to market return, here market is
consider as BSE-Sensex. But market has more risk of 44.97 as giving higher return.
This is mainly due to the high risk involved by investing in a particular sector.
Investors tend to prefer diversified sectorial investment as the risks are reduced.
Ranking of funds maybe done as per Risk Adjusted Returns method. This is
the most precise and comparative way of ranking as it takes the risk and return, both
into consideration. Thus, it has proved to be more accurate and concrete. Also by the
means of Sharpe, Treynor, Jenson, MM measures all the specific schemes were
analyzed and ranked. This provides a ready guide for the investor in making the right
investment decision.
It was traced that the funds, which embarked lower risk, did not always
validate lower returns or vice versa. This states that the risks and return need not
always be in a beeline or point-blank relationship.
64
BIBLIOGRAPHY
Books Referred
Magazines Referred
· Value Research-Mutual Fund Insight
Websites
· www.mutualfundsofindia.com
· www.valueresearch.com
· www.amfi-india.com
· www.rbi.org.in
· www.bse-india.com
References:
65
4. Bessler,Wolfgang, Drobetz, Zimmermann, Heinz, 2009, CONDITIONAL
PERFORMANCE EVALUATION FOR GERMAN EQUITY MUTUAL
FUNDS, European Journal of Finance; Vol. 15 Issue 3, p287-316, 30p, 10
Charts, 1 Graph.
66