“Evaluation of Performance of Sector Specific Mutual

Funds with Equity Funds”

Authors: Jayesh Patil

Navin Boga

Rakesh Dodai

Abstract

Over the years, the mutual fund industry has undergone a major change in terms of the number
of participants and investors. This is partly due to the risks associated with investments in the
stock market due to its volatility and lack of knowledge on the part of the investors which do not
always ensure steady returns.

Many new players (private & foreign) have entered into the mutual fund industry to satisfy the
investors varied needs by offering them innovative products.

The scope of this research is to compare the performance of the sector-specific mutual funds in
the market with the other equity mutual funds. The performance of the two types of mutual funds
would be studied for the period of two to five years depending upon the mutual fund and its
inception year. The said performance is analyzed and evaluated to draw out conclusion from the
same. The data is assimilated from various secondary sources like journals, sites of various
mutual fund companies etc. The performance of sector specific schemes of various fund houses
is compared with the equity schemes of the respective fund houses.

The research paper will aid the existing and potential investors in understanding the performance
of the selected mutual fund schemes during the said period which may in turn benefit them in
their investment decision.

Key Words: Mutual Funds, Sector, Returns, Performance, Beta, Net Asset Value

1. Introduction:

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Mutual fund is a mechanism for pooling the resources by issuing units to the investors and
investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors and thus
the risk is reduced. Diversification reduces the risk because all stocks may not move in the same
direction in the same proportion at the same time. Mutual fund issues units to the investors in
accordance with quantum of money invested by them. Investors of mutual funds are known
as unit holders.
The profits or losses are shared by the investors in proportion to their investments. The mutual
funds normally come out with a number of schemes with different investment objectives which
are launched from time to time. A mutual fund is required to be registered with Securities and
Exchange Board of India (SEBI) which regulates securities markets before it can collect funds
from the public.
Types of Mutual Fund Schemes:

There are various kinds of mutual funds schemes available in the market to cater to varying
individual needs. The funds that are available can be classified on the following basis:
• Maturity Period:
✔ Open-ended Fund/ Scheme
✔ Close-ended Fund/ Scheme
• Investment Objective:

✔ Growth / Dividend Oriented Scheme

✔ Income / Debt Oriented Scheme
✔ Balanced Fund
✔ Money Market or Liquid Fund
✔ Gilt Fund
✔ Index Fund

• Sector specific funds/schemes

• Tax Saving Schemes
• Fund of Funds
• Load or no-load Fund

Sector specific mutual funds

These are the funds/schemes which invest in the securities of only those sectors or industries as
specified in the offer documents. E.g.Pharmaceuticals, Software, Banking Fast Moving
Consumer Goods (FMCG), Petroleum stocks, etc. These funds are not fully diversified, meaning
that these funds have exposure limited to a particular sector. Such partially diversified mutual
funds are very well diversified in a given sector. However they are more risky as compared to
normal equity funds because the return from such funds is more sensitive to performance of the
sector as a whole. The returns in these funds are dependent on the performance of the respective
sectors/industries.
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Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such
schemes normally invest a major part of their corpus in equities. Such funds have comparatively
high risks. These schemes provide different options to the investors like dividend option, capital
appreciation, etc. and the investors may choose an option depending on their preferences. The
investors must indicate the option in the application form. The mutual funds also allow the
investors to change the options at a later date. Growth schemes are good for investors having a
long-term outlook seeking appreciation over a period of time.
2. Measurement of Performance of Mutual Funds:
Performance of mutual fund can be analyzed by using following indicators.

Net Asset Value (NAV)

Net Asset Value is the current market value of all scheme’s assets, minus liabilities divided by
total number of units outstanding. NAV becomes the base value for purchase or sell of mutual
fund unit.

Net Asset Value of the scheme shall be calculated and published at least in two daily newspapers
at intervals of not exceeding one week. Provided that the Net Asset Value of a close ended
scheme, other than that of equity linked savings scheme, shall be calculated on daily basis and
published in at least two daily newspapers having circulation all over India.

NAV= A/B, where

A= Market value of investment+ Receivables+ Other accrued income+ other assets- Accrued
expenses- other payables- other liabilities.

B= No of units outstanding as on NAV date.

Beta:

It is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to

the market as a whole.
• A beta of 1 indicates that the fund’s price will move with the market.
• A beta of less than 1 means that the fund’s price will be less volatile than the market.
• A beta of greater than 1 indicates that the fund’s price will be more volatile than the
market.
• A beta of 0 indicates that the fund’s price will move independent of the market.
Beta = Covariance (stock versus market returns) / Variance of the Stock Market
Standard Deviation:
Standard deviation is a statistical measurement that sheds light on historical volatility. It
measures the dispersion of a set of data from the mean. A large dispersion tells us how much the
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return on the fund is deviating from the expected normal returns. It is used by investors as a
gauge for the amount of expected volatility. So the standard deviation tells us how much the
return on the fund is deviating from the expected normal returns.
It is calculated as square root of variance.

Sharpe Ratio:

It is the most widely used measure of risk adjusted returns. The ratio describes the amount of
extra return received for the extra volatility of a more risky asset. The higher the Sharpe Ratio,
the greater returns are for each unit of risk. The Sharpe Ratio is a mutual fund's excess return
divided by its standard deviation, where excess return is the actual return less the risk-free rate of
return.
Sharpe Ratio = (Funds average return-Risk free return)/Standard deviation of fund.

Expense ratio:

It measure the costs incurred by an investment company to operate a mutual fund. An expense
ratio is determined through an annual calculation, where a fund's operating expenses are divided
by the average value of its assets under management. Operating expenses are taken out of a
fund's assets and they lower the returns to a fund's investors. The expense ratio measures the
percentage of a mutual fund's assets dedicated to running the fund. If the expense ratio is 1%,
then each year the total money in the fund is reduced by 1% to pay expenses. An actively
managed stock fund usually has a relatively high expense ratio, while an indexed stock fund
usually has a much lower expense ratio.

Expense ratio=Total Fund cost/Total Fund assets

R-Squared:

R-Squared is a statistical measure that represents the percentage of a fund portfolio's or security's
movements that can be explained by movements in a benchmark index. R-squared values range
from 0 to 1. More is the value of R-squared more is correlation of the performance of the fund
with benchmark index. A R squared measure of 0.85 means that 85% of the movement in the
fund is attributable to the index which it most closely follows. So ideally index fund has R-
squared of 1 and actively managed fund has R-squared on lower side.

3. Research Methodology:

For the purpose of determining the performance of Sector-specific mutual funds as compared to
pure equity related mutual funds scheme, secondary data was collected from the respective
mutual fund’s website in the form of fact sheets.

Research Design:

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To take into account the effect of downturn of 2008 on two kinds of scheme data spanning over a
period of 2-5 years was collected.

Sampling Design:
Sampling Unit: Mutual funds belonging to each sector specific and equity mutual fund
Sample Size: 5

Operational Design:
The performance of fund is measured by taking into consideration NAV, Beta, Sharpe ratio,
Standard Deviation, R-squared, Expense ratio values. The data obtained is finally analyzed with
the help of Microsoft excel.
The companies that we have selected for comparison are from six fund houses.viz. ICICI Mutual
fund, Reliance Mutual fund, Religare Mutual fund, HDFC Mutual fund, DSP Blackrock Mutual
fund and JM Financial Mutual Fund.

Possible Limitations of the study can be as follows:

The analysis is done for a limited number of mutual fund schemes. The value of certain
performance indicators was calculated by taking averages of daily reports of Asset Management
Company. The data that has gathered for the research is from fact sheets of respective fund
houses. However, where the required data essential for the research was not available in the fact
sheets, we found the same from various mutual fund research websites. In some of the cases, the
requisite data was not available on the mutual fund website. The analysis of selected funds done
in this research and the conclusion drawn from the same is based on the interpretation of data
which may or may not hold true.

4. A Snapshot to Sector Specific schemes and Equity Schemes Selected for

Analysis in the Study:
The schemes selected are: Reliance Pharma Growth, ICICI Prudential FMCG-Growth, Religare
Banking Fund-Growth, DSP Blackrock Technology.com, HDFC Infrastructure Fund-Growth,
JM Financial Auto Fund-Growth and JM Financial Healthcare Fund-Growth

The following equity specific schemes are selected: Reliance Growth - Growth, ICICI Prudential
Growth Fund, Religare Equity Fund-Growth, DSP Blackrock Equity Fund-Growth, HDFC
Equity Fund-Growth and JM Financial Equity Fund-Growth

Name of the Scheme Objective Date of Inception Asset Under

Management
Reliance Pharma Fund- To generate consistent 30-March-2006 504.36 Crore
Growth returns by investing in
Pharma and other

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 associated companies.

Reliance equity Fund- To generate capital 30-March-2006 1814.55 Crore

Growth: appreciation and
consistent returns by
investing equity and
equity related
securities, in debt and
Money market
securities.
ICICI Prudential To generate long term 31-March-1999 81.18 Crore
FMCG-Growth capital appreciation
through investment in
Fast Moving Consumer
Goods sector.
ICICI Prudential To generate long term 09-July-1998 376.29 crore
Growth capital appreciation
and generate income
from a portfolio
constituted of equity
and equity related
securities.
Religare Banking To generate long term 14-July-2008 32.94 Crore
Fund-Growth capital growth from a
portfolio of equity and
equity related securities
of companies engaged
in the business of
banking and financial
services.

Religare Equity Fund- To generate long term 30-March-2006 25.66 Crore

Growth capital growth from a
focused portfolio of
predominantly equity
and equity related
securities.
DSP Blackrock To generate long term 16-May-2000 79.19 Crore
Technology-Growth capital appreciation
and to generate income
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 from a portfolio
constituting of equity
and equity related
securities
DSP Blackrock Equity To generate long term 7-June-2007 2379.03 Crore
Fund-Growth capital appreciation,
from a portfolio that is
substantially
constituted of equity
securities and equity
related securities.
HDFC Infrastructure To generate long term 8-January-2008 1618.01 Crore
Fund-Growth capital appreciation by
investing in equity and
equity related securities
of companies in the
infrastructure sector.
HDFC Equity Fund- To generate long term 1-January-1995 8024.26 Crore
Growth capital appreciation
through investments in
predominantly in
equity oriented
securities.
JM Financial Auto To provide capital 29-June-2004 10.36 Crore
Fund-Growth appreciation through
judicious deployment
of the corpus of the
scheme in the auto &
auto ancillary sector.
JM Financial To provide capital 29-June-2004 4.98 Crore
Healthcare Fund- appreciation through
Growth investment in the
healthcare sector.
To provide optimum 29-February-2008 36.61 Crore
capital growth and
JM Financial Equity appreciation.
Fund-Growth

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5. Analysing Performance of Funds:

• Reliance Pharma Fund- Growth Vs Reliance Equity Fund-Growth

Reliance Mutual Fund

Performance Sharpe Standard
Beta R Squared Expense Ratio
Indicators Ratio Deviation
Pharma-
0.75 0.072 3.04 0.58 2.44
Growth
Equity
0.76 0.034 3.89 0.91 1.87
Growth

Interpretation:

Prior to global slowdown in 2008 the Pharma fund’s performance was not at par with that of
equity fund and the benchmark index- CNX Nifty, as reflected in the above graph. During the
crisis, the performance of Pharma fund and equity fund was almost similar and Pharma fund
performed better than the benchmark CNX-Nifty index. Post crisis the Pharma fund has shown
excellent performance as compared to the equity fund and the benchmark index taking the
advantage of the kind of growth the Pharma industry witnessed during this period. During post
crisis, Pharma sector was one of the top performing sectors with CAGR of 14%. The average
risk adjusted return of the Pharma fund was marginally better than that of equity fund. The
deviation from investors’ expectation of return is more or less similar in two cases. The Pharma
fund has shown less dependence on the benchmark index as compared to the equity fund.
However the cost of managing Pharma fund is considerably higher than that of equity fund. So
more of investor’s money went towards managing the operations in case of Pharma fund.

• ICICI Prudential FMCG-Growth Vs ICICI Prudential Growth

ICICI Mutual Fund

Performance Sharpe Standard
Beta R Squared Expense Ratio
Indicators Ratio Deviation
FMCG-
1.03 0.407 27.26 0.75 2.5
Growth

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 Equity
0.85 0.306 29.98 0.97 2.32
Growth

Interpretation:

As it can be observed from the graph that ICICI-FMCG fund has underperformed pre as well as
post crisis period as compared with benchmark Nifty. The FMCG sector was one of the growth
drivers in India post crisis. However as it can be observed from graph even the benchmark BSE
FMCG index has underperformed as compared to benchmark NIFTY index, except for the return
that FMCG index has given in past quarter. The FMCG fund has underperformed as compared to
the equity fund throughout the period of five years except for marginal improvement in last
quarter. The fund has shown more volatility than market and equity fund as indicated by Beta
value. The average risk adjusted return given by FMCG fund is higher as compared to equity
fund which means that the fund has given more return above the risk free return to the investors
for the risk they have taken. The deviation from normal return is less as compared to equity fund.
The dependence of the FMCG fund on benchmark indices is on lower side as compared to equity
fund. The cost of managing the fund in both the cases is more or less same.

• Religare Banking Fund-Growth Vs Religare Equity Fund-Growth

Religare Mutual Fund

Performance Sharpe Standard
Beta R Squared Expense Ratio
Indicators Ratio Deviation
Banking
0.76 0.468 9.00 - 2.5
Growth
Equity
0.70 0.134 8.41 - 2.5
Growth

Interpretation:

As we can see from the above graph, since the inception Religare banking fund has outperformed
the equity fund. Also the fund has managed to match the kind of returns given by benchmark
index Bank Nifty. On the other hand, banking fund also out performed benchmark index CNX
Nifty. As we can see from the table, as indicated by Sharpe Ratio, the banking fund has given
more risk adjusted return to the investors in comparison to the equity fund. Deviation from the
normal returns for the funds is more or less similar. The cost of managing both the funds is same.

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 • DSP Blackrock Technology-Growth Vs DSP Blackrock Equity Fund-Growth

DSP BlackRock Fund

Performance Sharpe Standard Expense
Beta R Squared
Indicators Ratio Deviation Ratio
Technology.com
0.79 0.246 31.83 82.30 2.38
Growth
Equity
0.81 0.832 25.39 79.60 1.30
Growth

Interpretation:

As we can see from the graph the technology.com fund has outperformed benchmark IT index
and DSP Blackrock equity fund. The equity fund’s performance has been below par in
comparison to the indexes and technology.com for most of the period considered for the
research. On the other hand the technology.com fund has managed to match the returns given by
the benchmark CNX Nifty Index. The Sharpe ratio shows that the equity fund has given more
risk adjusted return as compared to the technology.com fund. Though the technology fund has
shown good growth in NAV over the years it has failed to give return justified to the risk taken
by the fund. R squared indicates that the technology.com fund is more correlated with the
benchmark IT index than equity fund. The cost of managing fund is substantially high in case
technology.com fund in comparison with equity fund, indicating that equity fund has managed to
invest more portion of the corpus collected from investors in the portfolio.

• HDFC Infrastructure Fund-Growth Vs HDFC Equity Fund-Growth

HDFC Fund

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 Performance Sharpe Standard
Beta R Squared Expense Ratio
Indicators Ratio Deviation
Infrastructur
0.26 0.14 5.38 - 1.9
e Growth
Equity
0.90 0.163 9.13 - 1.30
Growth

Interpretation:

In this case, the graph indicates that the equity fund has outperformed during the entire period
taken for the research. During the economic slowdown(2008-09), the variability between the
returns given by the two funds and the indices was very low. However even during this period
the equity fund managed to provide higher return as compared to the infra-fund and the two
indices. The infrastructure fund has outperformed the benchmark infra index throughout the
period considered for the research. However it managed to cross the returns given by the
benchmark CNX Nifty only after Sept 2009. Beta indicates that the equity fund has shown more
volatility as compared with the Infrastructure fund. The risk adjusted return in case of both the
funds is more or less similar. Expense ratio tells us that Infrastructure fund has incurred more
cost to manage the activities of the fund.

• JM Financial Auto Fund Vs JM Financial Equity Fund-Growth

JM Financial Fund
Performance Sharpe Standard Expense
Beta R Squared
Indicators Ratio Deviation Ratio
Auto
0.63 0.03 3.2 - 2.5
Growth
Equity
0.83 0.04 3.19 - 2.5
Growth

Interpretation:

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From the graph, it can be interpreted that the Equity fund has outperformed both the Auto Sector
fund and the Auto Index up till December 2008.However,during the period 2008-09 all the three
comparables have declined because of the economic slowdown and their performance was more
or less on the same line. From December 2008-September 2010, the Auto fund returns have
grown steadily as compared to the Equity fund. The volatility of the equity fund is higher as
compared to the Auto fund, the same could be interpreted by the Beta value. The risk adjusted
return is more or less the same. Deviation from normal returns is also more or less the same. The
cost of managing both the fund is exactly the same for both the funds.

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 • JM Financial Healthcare Fund-Growth Vs JM Financial Equity Fund-Growth

JM Financial Fund
Performance Sharpe Standard
Beta R Squared Expense Ratio
Indicators Ratio Deviation
Healthcare
0.58 0.03 3.19 - 2.5
Growth
Equity
0.83 0.04 3.19 - 2.5
Growth

Interpretation:

As can be seen from the graph, the returns generated by Equity and Healthcare fund were more
or less the same, except for the period June 2007-08. The Healthcare fund has underperformed
when compared with Healthcare Index from the period post September 2009. Till September
2009, the Healthcare fund has performed in line with the Healthcare index. The risk adjusted
returns of both the fund were more or less the same, whereas the cost of managing the fund and
the deviation of the returns from the normal returns were exactly the same. Equity fund has been
more volatile in comparison to the Healthcare fund.

6. Conclusion
By analyzing the performance of the sector specific mutual funds with the equity funds, it can be
concluded that:

• Most of the sector specific mutual funds have managed to provide better returns to the
investors as compared to the equity funds.
• Most of the sector specific funds have managed to outperform the CNX Nifty index and
their respective index for a considerable period of time considered for the analysis.

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 • Expect for one instance, it was observed that the expense ratio for the sector specific
funds was higher or same as compared with the equity funds.
• Sharpe ratio, on the other hand was higher for sector specific schemes in case of some
funds whereas it was lower in case of others.

From the observation, it can be further stated that the sector specific schemes tend to give more
returns than the equity schemes. However, the performance of the sector specific funds solely
depends upon the performance of the respective sector which in turn depends upon the nation’s
outlook on the growth prospects of that particular sector. It also depends upon the government
approach towards that particular sector.

7. Bibliography
Papers:

Performance Evaluation of Indian Mutual Funds-Narayan Rao Sappar and Ravindra

Madaya

Books:

S.gayatri,S.kartika and Gajendra Lenin Kumar,”Mutual Funds in India-Emerging prospects

Issues and challenges”,2010.

Websites:

• www.icicipruamc.com/factsheet.htm
• www.reliancemutual.com/Downloads/Factsheets.aspx
• www.dspblackrock.com/downloads/downloads.asp
• www.religare.com
• www.hdfcfund.com/Downloads/
• www.jmfinancialmf.com/Downloads/
• www.mutualfundsindia.com
• www.valueresearchonline.com
• www.investopedia.com
• www.wikipedia.org

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