Performance Evaluation of Mutual Funds in India-Jaiprakash-0478

PERFORMANCE EVALUATION OF MUTUAL FUNDS IN INDIA

M P BIRLA INSTITUTE OF MANAGEMENT - 1 -

RESEARCH PROJECT

On

�PERFORMANCE EVALUATION OF MUTUAL FUNDS IN INDIA�

Submitted in partial fulfillment of the requirement for MBA

Degree of Bangalore University

BY

JAI PRAKASH K C Registration Number

04XQCM6034

Under the guidance of

DR T V N RAO

M.P.Birla Institute of Management

Associate Bharatiya Vidya Bhavan

Bangalore-560001

2004-2006

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DECLARATION

I hereby declare that the research project titled �PERFORMANCE EVALUATION OF

MUTUAL FUNDS IN INDIA� is prepared under the guidance of Dr T V N Rao in partial

fulfillment of MBA degree of Bangalore University, and is my original work.

This project does not form a part of any report submitted for degree or diploma under

Bangalore University or any other university.

Place: Bangalore JAI PRAKASH K C

Date:



PRINCIPAL�S CERTIFICATE

This is to certify that Mr. Jai Prakash K C bearing Registration No:

04XQCM6034 has done a research project on �PERFORMANCE EVALUATION OF

MUTUAL FUNDS IN INDIA� under the guidance of Dr T V N Rao M.P. Birla Institute of

Management, Bangalore. This has not formed a basis for the award of any degree/diploma for

any other university.

Place: Bangalore Dr.N.S.MALLAVALLI

Date: PRINCIPAL

MPBIM, Bangalore



GUIDE�S CERTIFICATE

I hereby declare that the research work embodied in this dissertation entitled

�PERFORMANCE EVALUATION OF MUTUAL FUNDS IN INDIA� has been undertaken

and completed by Mr. Jai Prakash K C under my guidance and supervision.

I also certify that he has fulfilled all the requirements under the covenant

governing the submission of dissertation to the Bangalore University for the award of MBA

Degree.

Place: Bangalore Dr T V N Rao

Date: Research Guide

MPBIM, Bangalore



ACKNOWLEDGEMENT

The successful accomplishment of any task is incomplete without acknowledging the

contributing personalities who both assisted and inspired and lead us to visualize the things that

turn them into successful stories for our successors.

First of all I thank the Almighty God for his grace bestowed on us throughout this project.

My special thanks to my project Guide Dr T V N Rao, who guided me with the timely advice

and expertise and has helped remarkably to complete the project.

Last, but not the least, I would like to thank my Parents and all my Friends for their

wholehearted direct and indirect support and encouragement.



ABSTRACT

Financial system in a country plays a dominant role in assets formation and

intermediation, and contributes substantially in macroeconomic development. In this

process of development mutual funds have emerged as strong financial intermediaries

and are playing a very important role in bringing stability to the financial system and

efficiency to resource allocation.

Mutual funds play a crucial role in an economy by mobilizing savings and investing them

in the capital market, thus establishing a link between savings and the capital market.

The activities of mutual funds have both short-and long-term impact on the savings and

capital markets, and the national economy.

The Indian Mutual fund Industry has witnessed a structural transformation during the

past few years. Therefore it becomes important to examine the performance of the

mutual fund in the changed environment. This research report has evaluate the

performance of Indian Mutual fund equity scheme by using monthly NAV returns of 10

equity Growth funds of 3 years past data from 1-1-2003 to 31-12-2005. BSE sensex

has been used as a proxy for the market portfolio, while 364 day Treasury bills (T-bills)

have been used as a surrogate for risk free rate of return. The performance of funds

has been computed by using Sharpe�s ratio, Treynors ratio and Jensen�s ratio. To

evaluate investment performance of mutual funds in terms of risk and return. TO

examine the funds sensitivity to the market fluctuations in terms of beta. To appraise

investment performance of mutual funds with risk adjustment the theoretical parameters

as suggested by Sharpe, Treynor and Jensen. To rank the funds according to Sharpe�s,

Treynor�s and Jenson�s performance measure. There is no conclusive evidence which

suggests that performance mutual funds superior to the market. However there is some

evidence that some of the funds are performing better than the market.



INTRODUCTION

MUTUAL FUNDS � AN OVERVIEW:

A Mutual Fund is a trust that pools the savings of a number of Investors who share a

common financial goal. The money thus collected is invested by the fund manager in

different types of securities depending upon the objective of the scheme. These could

range from shares to debentures to money market Instruments. The income earned

through these investments and the capital appreciations realized by the scheme are

shared by its unit holders in proportion to the number of units held by them. Thus a

mutual fund is the most suitable for the common man as it offers an opportunity to

invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody

with an invest able surplus of as little as a few thousand rupees can invest in Mutual

Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

A Mutual Fund is the ideal investment vehicle for today�s complex and modern financial

scenario. Markets for Equities, Bonds and other Fixed Income Instruments, real estate,

derivatives and other assets are driven by global events occurring in faraway places. A

typical individual is unlikely to have the knowledge, skills, inclination and the time to

keep track of events, understand their implications and act speedily. An Individual also

finds it difficult to keep track of ownership of his assets, brokerage, dues and bank

transactions etc.

A Mutual Fund is the answer to all these situations. It appoints professionally qualified

and experienced staff that manages each of these functions on full time basis. The large

pool of money collected in the fund allows it to hire such staff at a very low cost to each

investor. In effect, the mutual fund vehicle exploits economies of

Scale in all three areas- Research, Investments and Transaction Processing. While the

concept of coming together to invest money collectively is not new, the mutual funds in

their present form are a 20th century Phenomenon. In fact, mutual funds gained

popularity only after the Second World War. Globally there are thousands of mutual

funds with different investment objectives. Today, mutual funds, collectively manage

almost as much as or more money as compared to banks.



A draft offer document is to be prepared at the time of launching the fund. Typically, it

pre-specifies the investment objectives of the fund, the risk associated, the costs

involved in the process and the broad rules for entry into and exit from the fund and

other areas of operation. In India, as in most of the countries, these sponsors need

approval from a regulator, SEBI. SEBI looks at he records of the Sponsor and its

financial strength in granting approval to the fund for commencing operations.

A sponsor then hires an� Asset Management Company� to invest the funds according to

the investment objective. It also hires equity to the custodian of the assets of the fund

and perhaps a third one to handle registry work for the unit holders of the fund.

In the Indian concept, the sponsors promote the AMC also, in which it holds a majority

stake. In many cases a Sponsor can hold a 100% stake in the AMC eg. IL&FS is the

sponsor of IL&FS AMC, which has floated different Mutual fund schemes and also acts

as an asset manager or the funds collected under the schemes.



History of mutual funds in India

The history of mutual funds in India can be broadly divided into 5 important phases.

First Phase: 1963-87 Initial Development phase (Unit Trust of India)

In 1963, UTI was established by an Act of Parliament and given a monopoly. UTI

commenced its operations from July 1964 .The impetus for establishing a formal

institution came from the desire to increase the propensity of the middle and lower

groups to save and to invest. UTI came into existence during a period marked by great

political and economic uncertainty in India. The first and still one of the largest schemes,

launched by UTI was Unit Scheme 1964. UTI created a number of products such as

monthly income plans, children�s plans, equity-oriented schemes and offshore funds

during this period. The total asset under management for the year 1987-88 was 6,700

crores.

Second Phase: 1987-93 (Entry of Public Sector Funds)

Second phase witnessed the entry of mutual funds sponsored by state owned banks

and financial institutions. With the opening up of the economy, many public sector and

financial institutions were allowed to establish mutual funds. In November 1987 the

State Bank of India established the first non-UTI mutual fund-SBI Mutual Fund. This

was followed by Canbank Mutual Fund (launched in December, 1987), LIC Mutual Fund

(1989), and Indian Bank Mutual Fund (1990) followed by Bank of India Mutual Fund,

GIC Mutual Fund and PNB Mutual Fund. These mutual funds helped enlarge the

investor community and the invest able funds. During this period, investors were

shifting away from bank deposits to mutual funds. Most funds were growth-oriented

closed-ended funds. From 1987 to 1992-93, the fund industry expanded nearly seven

times in terms of Assets under Management. The total asset under management

considering both UTI and Public Sector was 47,004.



Third Phase: 1993-96 (Emergence of Private Funds)

A new era in the mutual fund industry began with the permission granted for the entry of

private sector funds in 1993, both Indian and Foreign. Also Government launched a

series of measures aimed at the financial sector as a part of the economic liberalization

and reform process. This included the setting up of the Securities and Exchange Board

of India (SEBI) as a regulatory body for the financial sector including Mutual Funds,

which issued the SEBI Mutual Fund Regulations in January 1993. During the year 1993-

94, five private sector mutual funds launched their schemes followed by six others in

1994-95.

Fourth Phase: 1996-1999 (SEBI Regulations for Mutual Funds)

More investor friendly regulatory measures have been taken both by SEBI to protect the

investor and by the Government to enhance investors� returns. A comprehensive set of

regulations for all mutual funds operating in India was introduced with SEBI (Mutual

Fund), 1996. These regulations set uniform standards for all funds and will eventually

be applied in full to Unit Trust of India as well, even though UTI is governed by its own

UTI Act. In 1999 Union Government Budget took a big step in exempting all mutual

funds dividends from income tax in the hands of investors. 1999 marks the beginning of

a new phase in the history of the mutual fund industry in India, a phase of significant

growth in terms of both amounts mobilized from investors and assets under

management.

Fifth Phase: 1999-2002

This phase was marked by very rapid growth in the industry, and significant increase in

market shares of private sector players. Assets crossed Rs. 1,00,000. The tax break

offered to mutual funds in 1999 created arbitrage opportunities for a number of

institutional players. Bond funds and liquid funds registered the highest growth in this



period, accounting for nearly 60% of the assets. UTI�s share of the industry dropped to

nearly 50%

MEANING & DEFINITIONS OF MUTUAL FUND:

Mutual Funds are financial intermediaries. They are companies set up to receive your

money, and then having received it, make investments with the money Via an AMC. It is

an ideal tool for people who want to invest but don't want to be bothered with

deciphering the numbers and deciding whether the stock is a good buy or not. A mutual

fund manager proceeds to buy a number of stocks from various markets and industries.

Depending on the amount you invest,

You own part of the overall fund.

The beauty of mutual funds is that anyone with an invest able surplus of a few hundred

rupees can invest and reap returns as high as those provided by the equity markets or

have a steady and comparatively secure investment as offered by debt instruments.

A Mutual Fund is an investment tool that allows small investors access to a well-

diversified portfolio of equities, bonds and other securities. Each shareholder

participates in the gain or loss of the fund. Units are issued and can be redeemed as

needed. The fund's Net Asset Value (NAV) is determined each day.

In simple words, a mutual fund is a trust, which collects the savings from small

investors, invest them in government securities and earn through interest, dividends and

capital gains.

For instance, if one has Rs. 1000 to invest, it may not fetch much on its own. But, when

it is pooled with Rs. 1000 each from a lot of other people, then, one could create a �big

fund� large enough to invest in wide varieties of shares and debentures on a

commanding scale and thus, to enjoy the economies of large scale operations.



DEFINITIONS:

The SEBI, 1993 defines a Mutual Fund as �a fund established in the form of a trust by a

sponsor, to raise monies by the trustees through the sale of units to the public, under

one or more schemes, for investing in securities in accordance with these regulations�.

According to Weston J. Fred and Brigham, Eugene, unit trusts are � Corporations

which accept dollars from savers and then use these dollars to buy stocks, long

term bonds and short term debt instruments issued by business or government

units; these corporations pool funds and thus reduce the risk of diversification�.

OPERATION OF THE FUND:

A mutual fund invites the prospective investors to join the fund by offering various

schemes so as to suit to the requirements of categories of investors. The resources of

individual investors are pooled together and the investors are issued units/shares for the

money invested. The amount so collected is invested in capital market instruments like

treasury bills, commercial papers, etc.

For managing the fund, a mutual fund gets an annual fee of 1.25% of funds

managed at the maximum as fixed by SEBI (MF) regulations, 1993 and if the funds

exceed Rs. 100 cores , the fee is only 1%. The fee cannot exceed 1%. Offcourse,

regular expenses like custodial fee, cost of dividend warrants, fee for registration, the

asset management fee etc are debited to the respective schemes. These expenses

cannot exceed 3% of the assets in the respective schemes. These expenses cannot

exceed 3% of the assets in the respective schemes each year. The remaining amount is

given back to the investors in full.



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

Mutual Fund Operation Flow Chart

ORGANISATION OF A MUTUAL FUND:

The formation and operations of Mutual Funds in India is solely guided by SEBI (Mutual

Funds) Regulations, 1993, which came into force on 20th January, 1996, through a

notification on 9th December, 1996. these Regulations make it mandatory for Mutual

Funds to have a three-tier structure of :

1. A Sponsor Institution to promote the Fund.

2. A team of Trustees to oversee the operations and to provide checks for the

efficient, profitable and transparent operations of the fund and

3. An Asset Management Company (AMC) to actually deal with the funds.

Sponsoring Institution:

The Company, which sets up the mutual fund, is called the Sponsor. SEBI has

laid down certain criteria to be met by the sponsor. The criterion mainly deals with

adequate experience, good past track record, net worth etc.

Sponsor appoints the Trustees, Custodian and the AMC with the prior

approval of SEBI, and in accordance with SEBI Regulations.



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

Financial Markets.

Trustees:

Trustees are the people with long experience and good integrity in the respective

fields carry the crucial responsibility in safeguarding the interests of the investors

.For this purpose, they monitor the operations of the different schemes. They have

wide ranging powers and they can even dismiss AMC with the approval of SEBI.

The Indian Trust Act governs them.

Rules regarding appointment of the Trustees are:

Appointment of Trustees has to be done with the prior approval of SEBI.

There must be at least 4 members in the Board of Trustees and at least

2/3rd of the members of the Board of Trustees must be independent.

Trustees of one Mutual Fund cannot be a Trustee of another Mutual Fund,

unless he is an independent trustee in both cases, and has the approval of

both the Boards.

Rights of Trustees:

Trustees appoint the AMC, in consultation with the sponsor and according

to SEBI Regulations.

All mutual Fund Schemes floated by the AMC have to be approved by the

Trustees.

Trustees can seek information from the AMC on the operations and

compliance of the Mutual Fund, with the provisions of the trust Deed,

investment management agreement and the SEBI Regulations.

Trustees can review and ensure that Net worth of the AMC is according to

stipulated norms and regulations.



Asset Management Company:

The AMC actually manages the funds of the various schemes. The AMC

employs a large number of professionals to make investments, carry out

research &to do agent and investor servicing. Infact, the success of any Mutual

Fund depends upon the efficiency of this AMC. The AMC submits a quarterly

report on the functioning of the mutual fund to the trustees who will guide and

control the AMC.

The AMC is usually a private limited company, in which the sponsors and their

associations or joint venture partners are shareholders. The AMC has to be

registered by SEBI and should have a minimum Net worth of Rs.10 cores all

times. The role of the AMC is to act as the Investment Manager of the Trust

along with the following functions:

It manages the funds by making investments in accordance with the

provision of the Trust Deed and Regulations

The AMC shall disclose the basis of calculation of NAV and Repurchase

price of the schemes and disclose the same to the investors.

Funds shall be invested as per Trust Deed and Regulations.

Restrictions on the AMC�s:

AMC�s cannot launch a fund scheme without the prior approval of

Trustees.

AMC�s have to provide full details of Employees and Board Members, in

all cases where such investments exceed Rs. 1 lakh.

AMC�s cannot take up any activity that is in conflict with the activities of the

mutual funds.



Registrars and Transfer Agents:

The Registrars and Transfer Agents are responsible for the investor

servicing functions, as they maintain the records of investors in the mutual funds.

They process investor applications , record details provided by the investors on

application forms, send out periodical information on the performance of the

mutual fund; process dividend pay-out to the investors; incorporate changes in

information as communicated by investors; and keep the investor record up to

date, by recording new investors and removing investors who have withdrawn

their funds.

Custodian:

Custodians are responsible for the securities held in the mutual fund�s

portfolio. They discharge an important back-office function, by ensuring that

securities that are bought are delivered and transferred to the books of mutual

funds, and that funds are paid-out when mutual fund buys securities. They keep

the investment account of the mutual fund, and also collect the dividends and

interest payments due on the mutual fund investments. Custodians also track

corporate actions like bonus, issues, right offers, offer for sale, buy back and

open offers for acquisition.



ORGANISATION OF A MUTUAL FUND:

There are many entities involved and the diagram below illustrates the

organisational set up of a mutual fund:

Composition of Indian Mutual Fund Industry:

Unit Trust of India

Bank sponsored

Bank of Baroda AMC

Bank of India AMC

Canbank Investment Management Services Ltd.

Punjab National Bank AMC Ltd.

SBI Funds Management Ltd.

Indfund Management Ltd.

Institutions:

General Insurance Corporation AMC

IDBI Principal Asset Management Co.

Jeevan Bima Sahayog Asset Management Co. Ltd.



Private Sector:

1. India

Benchmark AMC Ltd.

Cholamandalam AMC Ltd.

Escorts AMC Ltd.

J.M. Capital Management Co. Ltd.

Kotak Mahindra AMC Ltd.

Shriram AMC Ltd.

2. Joint Venture �Predominantly Indian

Birla Sun Life AMC Pvt. Co. Ltd.

DSP Merrill Lynch Investment Mangers (India) ltd.

HDFC AMC Ltd.

Sundaram Newton AMC

Tata TD Waterhouse Asset Management Private Ltd.

3. Joint Ventures �Predominantly Foreign

Alliance Capital Asset Management (India) Pvt. Ltd.

Standard Chartered Asset Management Co. Pvt. Ltd.

ING Investment Management (India) Pvt. Ltd.

JM Asset Management (India) Pvt. Ltd.

Morgan Stanley Investment Management Pvt. Ltd.

Prudential ICICI Management Co. Ltd.

Templeton Asset Management (I) Pvt. Ltd.



ROLE OF MUTUAL FUNDS IN THE FINANCIAL MARKET

Indian financial institutions have played a dominant role in assets formation and

intermediation, and contributed substantially in macroeconomic development. In this

process of development Indian mutual funds have emerged as strong financial

intermediaries and are playing a very important role in bringing stability to the financial

system and efficiency to resource allocation.

Mutual funds play a crucial role in an economy by mobilizing savings and investing them

in the capital market, thus establishing a link between savings and the capital market.

The activities of mutual funds have both short-and long-term impact on the savings and

capital markets, and the national economy. Mutual funds, thus, assist the process of

financial deepening and intermediation. They mobilize funds in the savings market and

act as complementary to banking; at the same time they also compete with banks and

other financial institutions. In the process stock market activities are also significantly

influenced by mutual funds.

There is thus hardly any segment of the financial market, which is not (directly or

indirectly) influenced by the existence and operation of mutual funds. However, the

scope and efficiency of mutual funds are influenced by overall economic fundamentals:

the interrelationship between the financial and real sector, the nature of development of

the savings and capital markets, market structure, institutional arrangements and overall

policy regime.





Regulatory Aspects of Mutual Fund

Schemes of mutual fund:

The asset management company shall launch no scheme unless the trustees

approve such scheme and a copy of the offer document has been filed with the

Board.

Every mutual fund shall along with the offer document of each scheme pay filing

fees.

The offer document shall contain disclosures which are adequate in order to

enable the investors to make informed investment decision including the

disclosure on maximum investments proposed to be made by the scheme in the

listed securities of the group companies of the sponsor.

No one shall issue any form of application for units of a mutual fund unless the

form is accompanied by the memorandum containing such information as may

be specified by the Board.

Every close ended scheme shall be listed in a recognized stock exchange within

six months from the closure of the subscription.

The asset management company may at its option repurchase or reissue the

repurchased units of a close-ended scheme.

A close-ended scheme shall be fully redeemed at the end of the maturity period.

"Unless a majority of the unit holders otherwise decide for its rollover by passing

a resolution".

The mutual fund and asset management company shall be liable to refund the

application money to the applicants,-



(I) If the mutual fund fails to receive the minimum subscription amount

referred to in clause (a) of sub-regulation

(ii) If the moneys received from the applicants for units are in excess of

subscription as referred to in clause (b) of sub-regulation (1).

The asset management company shall issue to the applicant whose application

has been accepted, unit certificates or a statement of accounts specifying the

number of units allotted to the applicant as soon as possible but not later than six

weeks from the date of closure of the initial subscription list and or from the date

of receipt of the request from the unit holders in any open ended scheme.

INVESTMENT OBJECTIVES AND VALUATION POLICIES:

The money collected under any scheme of a mutual fund shall be invested only in

transferable securities in the money market or in the capital market or in privately

placed debentures or securitised debts.

Provided that moneys collected under any money market scheme of a mutual fund

shall be invested only in money market instruments in accordance with directions

issued by the Reserve Bank of India.

The mutual fund shall not borrow except to meet temporary liquidity needs of the

mutual funds for the purpose of repurchase, redemption of units or payment of

interest or dividend to the unit holders.

The mutual fund shall not advance any loans for any purpose.

The Net Asset Value of the scheme shall be calculated and published at least in two

daily newspapers at intervals of not exceeding one week.

The price at which the units may be subscribed or sold and the price at which such

units may at any time be repurchased by the mutual fund shall be made available to

the investors.



TYPES OF MUTUAL FUNDS:

Broadly Mutual Funds are classified into:

Open-ended schemes:

The open-ended schemes do not have a fixed maturity and are open for

subscription the whole year. One can buy and sell units at the NAV related prices

to the Mutual funds. These schemes are normally not listed on the stock

exchanges and can be redeemed directly to the Mutual Fund.

Close-ended Schemes:

The closed ended schemes can be bought and sold on the stock exchange

subsequent to the initial subscription through the public offer. One can stay

invested in the scheme for a stipulated period ranging from 2 to 15 years.

Generally, the close-ended schemes are traded at a discount to their NAV in the

stock exchange.

On the basis of investments objective, there are five different types of

schemes:

Growth/Equity Scheme :

Majority of the corpus of such a scheme is invested in equities and equity

related instruments. This kind of scheme is for those investors who are not risk

averse and are willing to hold on to their investment for a long period of time,

caring little for volatility. In such schemes, dividend may or may not be declared.

Income /Debt Scheme:

The Fund Manager of such schemes invests a substantial portion of their fund

in fixed income securities like debentures, bonds and money market instruments.



This kind of scheme is ideal for risk averse investors who are interested in steady

income.

Balanced Schemes:

Fund Manager of such funds invests in both equity as well as debt

markets in the proportion as that highlighted in the prospectus. The objective of

such a scheme is to provide both growth and income by distributing a part of the

income and capital gains they earn. Such a scheme is suitable for investors who

want long-term returns without taking the entire risk of the equity market.

Money Market/Liquid Schemes:

These are schemes with very low risks. They invest in Zero risk or safer, short

term instruments like treasury bills, certificates of deposit, Commercial Paper and

inter-bank call money. The objective of these schemes is to provide liquidity and

moderate income and also preserve the capital.

Tax Saving Schemes:

The objective of such a scheme is to provide tax benefits to the investors.

Two types of schemes fall under this head.

1. ELSS (Equity Linked Savings Schemes:

A Fund Manager of such a scheme invests primarily in stocks. An

important feature of this scheme is that there is a lock-in period of three years

from the date of investment. During this period unit holders are prohibited from

trading, pledging and transferring the units. Repurchase is permitted only after

three years.



2. Pension Schemes:

A unit holder in a Pension Scheme can avail of a tax rebate of 20 per cent for

investments up to Rs 60,000 (tax saving of Rs 12,000).

Benefits of investing in Mutual Funds:

Small investments:

Mutual funds help you to reap the benefit of returns by a portfolio spread

across a wide spectrum of companies with small investments. Such a spread

would not have been possible without their assistance.

Professional Fund Management:

Professionals having considerable expertise, experience and resources

manage the pool of money collected by a mutual fund. They thoroughly analyse

the markets and economy to pick good investment opportunities.

Spreading Risk:

An investor with a limited amount of fund might be able to invest in only one or

two stocks / bonds, thus increasing his or her risk. However, a mutual fund will

spread its risk by investing a number of sound stocks or bonds. A fund normally

invests in companies across a wide range of industries, so the risk is diversified

at the same time taking advantage of the position it holds. Also in cases of

liquidity crisis where stocks are sold at a distress, mutual funds have the

advantage of the redemption option at the NAVs.



Transparency and interactivity:

Mutual Funds regularly provide investors with information on the value of their

investments. Mutual Funds also provide complete portfolio disclosure of the

investments made by various schemes and also the proportion invested in each

asset type. Mutual Funds clearly layout their investment strategy to the investor.

Liquidity:

Closed ended funds have their units listed at the stock exchange, thus

they can be bought and sold at their market value. Over and above this

the units can be directly redeemed to the Mutual Fund as and when they

announce the repurchase.

Choice:

The large amounts of Mutual Funds offer the investor a wide variety to choose

from. An investor can pick up a scheme depending upon his risk / return profile.

Regulations:

All the mutual funds are registered with SEBI and they function within the

provisions of strict regulation designed to protect the interests of the investor.

Flexibility:

Investors can exchange their units from one scheme to another, which cannot

be done in other kinds of investments. Income units can be exchanged for growth

units depending upon the performance of the funds.

Potential yields:

The pooling of funds from a large number of customers enables the fund to

have large funds at its disposal. Due to these large funds, mutual funds are able



to buy cheaper and sell dearer than the small & medium investors. Thus, they

are able to get better market rates and lower rates of brokerage. So, they provide

better yields to their customers. They also enjoy the economies of scale and

reduce the cost of capital market participation. The transaction costs of large

investments are quite lower than that of small investments. All the profits are

passed on to the investor in the form of dividends and capital appreciation.

Mutual funds have a return ranging from 12-17% p.a.

Renders expertise service at lower costs:

The management of the fund is generally assigned to professionals who are

well trained and have adequate experience in the field of investment. The

investment decisions of these professionals are backed by informed judgement

and experience. Thus, investors are assured of quality services in their best

interest. The fee charged by the mutual funds is 1%.

Risks of investment in Mutual Funds:

Mutual funds are not free from risks as the funds so collected are invested in

stock markets, which are volatile in nature and are not risk free. The following

risks are generally involved in mutual funds

Market risks:

In general, there are many kinds of risks associated with every kind of investment

on shares. They are called market risks. These market risks can be reduced, but

not completely eliminated even by a good investment management. The prices of

shares are subject to wide price fluctuations depending upon market conditions

over which nobody has control. The various phases of business cycle such as

Boom, Recession, Slump and Recovery affects the market conditions to a larger

extent.



Scheme risks:

There are certain risks inherent in the scheme itself. For instance, in a pure

growth scheme, risks are greater. It is obvious because if one expects more

returns as in the case of a growth scheme, one has to take more risks.

Investment risk:

Whether the mutual fund makes money in shares or loses depends upon the

investment expertise of the Asset Management Company (AMC). If the

investment advice goes wrong, the fund has to suffer a lot. The investment

expertises of various funds are different and it is reflected on the returns, which

they offer to the investors.

Business Risk:

The corpus of a mutual fund might have been invested in a company�s shares. If

the business of that company suffers any set back, it cannot declare any

dividend. It may even go to the extent of winding up its business. Though the

mutual funds can withstand such a risk, its income paying capacity is affected.

Political risks:

Every government brings new economic ideologies and policies. It is

often said that many economic decisions are politically motivated. Change of

government brings in the risk of uncertainty, which every player in the finance

service industry has to face.



MAJOR MUTUAL FUND COMPANIES IN INDIA

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life

Financial. Sun Life Financial is a global organization evolved in 1871 and is being

represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart

from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to

investment. Recently it crossed AUM of Rs. 10,000 cr.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely

Housing Development Finance Corporation Limited and Standard Life Investments

Limited.

HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and

Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual

Fund acts as the Trustee Company of HSBC Mutual Fund.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. Of America, one

of the largest life insurance companies in the USA. Prudential ICICI Mutual Fund was

setup on 13th of October 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The

Trustee Company formed is Prudential ICICI Asset Management Company Limited

incorporated on 22nd of June 1993.

Sahara Mutual Fund

Sahara Mutual Fund was setup on July 18, 1996 with Sahara India Financial

Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited



incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-

up capital of the AMC stands at Rs.25.8 cr.

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The

sponsors for Tata Mutual Fund are Tata Sons Ltd., and Tata

Investment Corporation Ltd. The investment manager is Tata Asset Management

Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited is

one of the fastest in the country with more than Rs. 7,703 cr. (as on April, 30 2005) of

AUM.

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of

KMBL. It is presently having more than 1,99,818 investors in its various schemes.

KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers

schemes catering to investors with varying risk - return profiles. It was the first company

to launch dedicated gilt scheme investing only in government securities.

Franklin Templeton India Mutual Fund

The group, Franklin Templeton Investments is a California (USA) based

company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the

largest financial services in the world. Investors can buy or sell the mutual fund through

their financial advisor or through mail or through their website. They have Open-End

Diversified Equity Scheme, Open-End Sector Equity Schemes, Open-End Hybrid

Schemes, Open-End Tax Savings Schemes, Open-End Income and Liquid Schemes,

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



Morgan Stanley India Mutual Fund

Morgan Stanley is a worldwide financial services company and it is leading in the

market of securities, investment management and credit services.

Morgan Stanley Investment Management (MSIM) was established in the year

1975. It provides customized asset management services and products to

governments, corporations, pension funds and non-profit organization. Its services are

also extended to high net worth individuals and retail investors. In India it is known as

Morgan Stanley Investment Management Private Limited (MSIM) and its AMC is

Morgan Stanley Mutual Fund (MSMF). This is the first close-end diversified equity

scheme serving the needs of Indian retail investors focusing on a long-term capital

appreciation.

Canbank Mutual Fund

Canbank Mutual Fund was setup on Dec 19, 1987 with Canara Bank acting as

the sponsor. Canbank Investment Management Services Ltd. incorporated on March

02, 1993 is the AMC. The corporate office of the AMC is in Mumbai.

LIC Mutual Fund

Life Insurance Corporation of India setup LIC Mutual Funds on 19th June 1989.

It contributed Rs. 2 cr. towards the corpus of the fund. LIC Mutual Fund was constituted

as a trust in accordance with the provisions of the Indian Trust Act 1882. The company

started its business on 29th April 1994. The trustees of LIC Mutual Fund have

appointed Jeevan Bima Sahyog Asset Management Company Ltd. as the investment

managers for LIC Mutual fund.



BACKGROUND OF THE STUDY

Industry and commerce so as to bring about the integration of the Indian economy with

the global economy. With the growth of the economy and the capital market in India,

the size investor has also increased rapidly. Thus the The Government of India

introduced economic reforms in the field of trade involvement of mutual funds in the

transformation Indian economy has made it urgent to view their services not only as

financial intermediary but also as pace setter as they are playing a significant role in

spreading equity culture. In this context close monitoring and evaluation of mutual

funds has become essential for fund managers to make this instrument as the strongest

and most preferred instrument in Indian capital market in the coming years.

It has been established that the single most important factor that has a strong bearing

on investor�s interest and growth of mutual fund industry is its superior financial

performance. The financial performance may be defined in terms of �rates of return�,

�risk-adjusted returns� or �benchmark comparison�. �Jensen�s alpha� is another widely

used measure of portfolio performance: It indicates the abilities of fund managers to

identify and select superior stocks for the portfolio. This constitutes the subject matter of

the present study.

In India, very little work has been done to investigate fund managers forecasting

abilities. Active fund managers are expected to reward higher return. If the fund

manager feels that market on the whole overvalued, then he would get out of the

market. Hence the present study has the objective of finding out the necessary facts

which can benefit the investors and fund managers. This paper evaluates the

performance evaluation of mutual fund in the framework of risk and return.



LITERATURE REIEW

An Empirical Analysis on Performance Evaluation of Mutual Funds in India (Nalini

Prava Tripathy)

The Government of India introduced economic reforms in the field of trade industry and

commerce so as to bring about the integration of the Indian economy with the global

economy. With the growth of the economy and the capital market in India, the size

investor has also increased rapidly. Thus the involvement of mutual funds in the

transformation Indian economy has made it urgent to view their services not only as

financial intermediary but also as pace setter as they are playing a significant role in

spreading equity culture. In this context close monitoring and evaluation of mutual

funds has become essential for fund managers to make this instrument as the strongest

and most preferred instrument in Indian capital market in the coming years.




market. Hence the present study has the objective of finding out the necessary facts

which can benefit the investors and fund managers. This paper evaluates the

performance of mutual fund schemes in the framework of risk and return.

The study tests the following hypothesis in respect of performance evaluation of the

Indian mutual funds

The sample mutual funds are earning higher returns than the market portfolio returns in

terms of risk. The sample mutual funds are offering the advantages of diversification

and superior returns due to selectivity to their investors. The investment objectives of

the mutual fund schemes are related to their systematic risk and total variability.

Generally investors invest in mutual fund by considering capital appreciation, better

liquidity less risk and tax liability. So, the study makes a comprehensive evaluation of

equity linked schemes. For the purpose of the study, schemes have been taken from



1994-95 to 2001-02. A total of 31 schemes offer are selected bank mutual funds have

taken for study. The risk is calculated on the basis of month end Net Asset Values.

Further, BSE national index was assessed as market index or benchmark. The returns

are computed on the basis of the Net Asset Values of the different schemes and returns

in the market index are computed on the basis of the BSE National Index on the

respective date.

The performance sample mutual fund scheme has been evaluated by using the six

performance measures. A brief description of these measures as

Rate of Return measure, Treynor measure, Sharpe measure, Jensen measure, Sharpe

differential return, Fama�s Decomposition measure.

According to the modern portfolio policy, the risk and return are to be in the linear form.

So the risk and return are expected to be in tandem with the investment policy. As the

tax planning schemes are expected to earn higher returns with higher risk. So, it is

highly essential to examine if the risk characteristics of these schemes are consistent

with their stated objectives. The risk return analysis indicates that some of the schemes

are not in con format with their stated objectives. The sated objections of the funds with

their average betas and average total risk.

This paper has examined the investment performance of Indian mutual funds in terms of

six performance measures. The empirical results reported here do not lend support to

the hypothesis taken in the study. . All other schemes do not demonstrate this

relationship. On the whole, 13 schemes have an alone average beta which indicates

that mutual fund returns are highly volatile. About 10 schemes have outperformed both

in terms of Treynor measure and Sharpe measure. However, four schemes exhibited

superior performance in terms of systematic risk but did not do so in respect of total risk.

The analysis made by the application of fama�s measure indicates that the return out of

diversification is very less. All other schemes show lack of net selectivity and

diversification. So, it was found that proper balance between selectivity and

diversification is not maintained. This is due to fund managers acumen of selectivity

and poor investment planning of the fund.



Performance Evaluation of Select Indian Mutual Fund Schemes (O P Gupta

and Amitabh Gupta)

During the past one and a half decade, the Indian mutual fund industry has witnessed a

major structural transformation and growth as result of policy initiatives taken by the

Government of India to break the monolithic structure of the Industry. Therefore, it

becomes important to examine the performance of the industry in the changed

environment. This paper aims at evaluating the investment performance of select

Indian mutual fund schemes during the recent four years period.

He has used a sample of 57 equity funds including 10 tax planning funds to study their

investment performance. The choice of the sample is largely based on the availability

of the necessary data. Weekly returns, based on Net Asset Values, have been used for

performance evaluation. The study period is a recent four year period from April 1,

1999 to March 31, 2003. It is during this period that a major structural change has

taken place in the Indian mutual fund industry. The study has used the weekly yields on

91 day Treasury bills as a surrogate for the risk free rate of return. The value data

collected from Value Research India Pvt. Ltd., while Treasury bill data has been

collected from PNB Gilts ltd.

The study tests the following hypotheses in respect of performance evaluation of mutual

fund schemes: The investment performance of schemes is superior to the relevant

benchmark portfolio. The mutual fund schemes are well diversified. There is a

relationship between investment objectives of the schemes and their risk

characteristics. We have utilized the following six measures to evaluate performance;

Rate of Return, Sharpe Ratio, Treynor Ratio, Jensen Differential Return Measure,

Sharpe Differential Return Measure. We have computed the weekly returns for each of

the sample. Weekly returns for the market index viz.

This paper has aimed at testing the investment performance of select Indian mutual

funds during a recent four year period from April 1, 1999 to March 31, 2003. Using



weekly returns, based on NAVs for 57 funds, the results reported here indicate that, in

general, fund managers have not outperformed the relevant benchmark during the

study period. After measuring in Sharpe, Treynor, Jenson measures only three funds

reflect superior performance. In terms of Fama�s components of Investment

performance, all the funds suffered negative performance on account of risk bearing

activity of their fund managers. Only one ffund earned a positive return on

diversification. Though 30 funds showed some net selectivity skills. It appears that

Indian fund managers do not appear to possess sock selection skills.

Thus, on the whole, it can be concluded that there is no conclusive evidence, which

suggests that performance of mutual funds is superior to the market during the study

period. However, there is some evidence that the sample funds are not adequately

diversified. However, the diversification level seems to have changed over time. In

addition, the average beta for the funds has increased over time. Overall the results

reported here are similar to the ones reported earlier for the Indian Market.

Empirical Investigation on the Indian Managers Stock Selection Abilities (Ramesh

Chander)

Investment decision making encompasses a variety of activities such as stock selection,

market timing, diversification and risk bearing. Stock selection and market timing are

prime activities that contribute widely in the return generation process while

diversification and risk bearing supplement as subsidiary activities. Professional

managers are heftily paid for a judious amalgam of these performances. Investment

performance on the stock selection pertains to successful micro forecasting for

company specific events. It refers to the managers ability to identify under or over

valued securities. Such performance attribution may be constructed as an indicator of

the investment decision making quality. It may even delineate the superior ex post

investment performance.

Study of investment manager�s stock selection skills is very important as it enables the

fund managers to understand how they have fared in achieving desired return targets

and how much risk has been controlled in the process. Second it enables the investors



to assess how well the fund manager has achieved these targets in comparison with

other managers or with some benchmark indices. In this sense it may even be viewed

as a feedback mechanism for improving investment mangers forecasting skills.

The study under performance outcomes obtained in this regard shall be analysed

across fund characteristics such as, nature, investment objectives and sponsorship

categories to identify any performance bias in regard thereto. Taking these objectives

into consideration, the present study test the following null hypotheses. Investment

managers lack superior stock selection abilities. Managers� stock selection

performance is maintained across the measurement criteria. Stock selection

performance is not influenced by the fund characteristics. Stock selection performance

is not influence by the choice of benchmark indices. The study under consideration is

based on the performance outcomes obtained for 80 samples for the five year period.

Monthly investment returns derived above are further annualized through geometric

averaging. The yield on the 91 day treasury bills issued by Government of India has

been used as surrogate for risk less return. Jensen and Fama is used for measuring the

performance of stock selectivity.

Managers stock selection performance obtained in relation to the fund characteristics

viz., nature, size investment objectives and sponsorship as well as benchmark indices

such as BSE Sensex, BSE-100, CNX Nifty 50.

Performance persistence is another vital dimension widely acknowledged and

investigated world over better comprehend portfolio performance evaluation. The

information inputs reported that to the absence of persistence of the stock selection

performance for the sample investment schemes, as the sample funds having

registered average positive performance in the period first came to realize negative

performance in the subsequent period second. Similar tendencies wer obtained for the

sample funds across all the quartiles. The results are equally robust for the positive

persistence as well as for the negative persistence.

Investment performance depends on the stock selection and pertains to the successful

micro forecasting for company specific events. It refers to the managers ability to



identify under or over valued securities. Such a performance attribution may be

construed as an indicator of the investment decision making quality as it delineates the

superior investment performance from that attributed to pure chance or luck. This study

examined the stock selection abilities across fund characteristics as well as the

performance persistence. The results reported in the study have wider implications for

the investment decision making in the sense that signify the vital relevance of stock

selection ability in the return generation process. The absence of performance

persistence signifies that past performance is in no way implicated for the future. The

outcomes thus obtained also have ramifications for the efficient market theory and

rational expectations in the performance.

An Empirical Analysis of Performance Evaluation of Mutual Fund schemes in

India(Sanjay j Bhayani and Vishal G Patidar)

Mutual funds play a vital role in mobilization of resources and their effective allocation.

These funds play a significant role in financial intermediation, development capital

markets and growth of the financial sector as a whole. The active involvement of

mutual funds in economic development can be seen by their dominant presence in the

money and capital market. The present study distinguishes itself from standard mutual

fund literature by making several unique contributions. First, it finds the trends of the

mutual fund industry in India second it uses risk return method to evaluate the various

funds and schemes outperform the market with the same level of risk or not.

The major objectives of the study are; To evaluate investment performance of mutual

funds in terms of risk and return. TO examine the funds sensitivity to the market

fluctuations in terms of beta. To find out the financial performance of mutual fund

schemes. To appraise investment performance of mutual funds with risk adjustment the

theoretical parameters as suggested by Sharpe, Treynor and Jensen. The period of

study was 5 years. The sample consists of top performer schemes and funds of mutual

fund companies in India based on average return during the last five years.

The main purpose of this analysis is to evaluate whether an organization uses its

resources effectively and efficiently or not. The overall objective of a business is to earn



satisfactory return on the funds invested in it consistent with maintaining sound financial

position. Performance of mutual fund schemes has been evaluated by using the

following measures; Risk, Standard Deviation, Beta, Jensen Alpha, Sharpe Ratio and

Treynor Index.

The results indicate that all the schemes have earned better return in comparison to the

market returns. Most of the schemes have beta less than one, there by implying that

these schemes tended to hold portfolios that were less risky than the market portfolio.

Higher positive value of alpha indicates its better performance. The analysis of the

alpha of all schemes as being positive, there by indicating superior performance of

these funds.

The performances of Balanced Fund schemes have been evaluated in terms of average

return. A majority of the sample mutual fund schemes have a recorded superior

performance as compared to the benchmark index. In the case of Equity Diversified

schemes, the performance of schemes have shown better returns and most of the

schemes have outperformed the benchmark.

The results of Gilt Fund Schemes indicated that all the schemes earned a slightly higher

return in comparison to the market return. The performances of Tax Planning Fund

Schemes have generated superior return as compared to the market. The performance

of schemes was better in case of returns and has earned returns on lower risk as

compared to the market



RESEARCH METHODOLOGY

PROBLEM STATEMENT




market. Hence the present study has the objective of finding out. The performance of

mutual fund schemes in the framework of risk and return.

OBJECTIVES OF THE STUDY

The present study has been undertaken to meet the following specific objectives,

To evaluate investment performance of mutual funds in terms of risk and return.

TO examine the funds sensitivity to the market fluctuations in terms of beta.

To appraise investment performance of mutual funds with risk adjustment the

theoretical parameters as suggested by Sharpe, Treynor and Jensen.

To rank the funds according to Sharpe�s, Treynor�s and Jenson�s performance

measure.

LIMITATIONS

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

The study considers only for equity funds

The ranks are assigned on the basis of only three measures & data is considered

for three years

The historical data was not easily available.

Findings of this study may change due to time constraint.

The study is mainly limited to 10 equity diversified funds for a period of three .

. Years starting from January-03 to December-05



STUDY DESIGN

The type of research being followed here is the Empirical Research. The

objective of this research work is to test the stock selective ability of equity fund

manager & evaluate the performance based on their return. It is a Secondary Research

as the data or information required is collected through secondary sources. It is a

Quantitative Research as the study involves a collection of secondary data of nine

equity mutual funds of different asset management companies for a term of 3 years and

applying statistical tools to get the results. The time frame of the research is the past 3

years and hence the information between the time periods January 2003 to Dec 2005 is

relevant for the purpose of the study.

STUDY TYPE

This research is an Empirical Research which is carried out on the

Ten equity fund schemes of different asset management companies.

STUDY POPULATION, SAMPLE, SAMPLING FRAME

The study population is the whole of the Indian Equity funds. But it is

infeasible to incorporate all of the Equity funds for the research mainly due to two

reasons:

Large Volumes of Data: There are a very large number of equity funds with

huge volume of data.

Time Constraint: The time duration of the research is from April 2006 to June

2006.

Hence to overcome these problems, a sample of equity funds was selected from equity

mutual funds.



DATA GATHERING PROCEDURES

The major data relevant for this research is secondary data which has

been collected from different means.

DATA COLLECTION

NAV: The monthly NAV data of various mutual funds are collected from

www.amfiindia.com and WWW.INDIAINFOLINE.COM.

MARKET INDEX: The monthly BSE sensex data are collected from

www.bseindia.com.

RATE OF RETURN OF 364 DAYS T-BILL:

The weighted average return of 364 days T-Bill is taken for risk free return. The data

are collected from www.rbi.org.in (which has been extracted from various directories of

statistics of Reserve Bank of India).

DATA

The various mathematical, statistical and logical operations performed on the data

obtained from the www.amfiindia.com are as follows:

Mean

Standard Deviation

Calculation of yearly Highs and Lows by using MAX and MIN

functions in the spreadsheet.

These were some of the tools and techniques applied on the data,

collected for the Ten equity funds in order to use the data as different variables in the

research.

All of these operations have been done using the Microsoft Excel and the SPSS for

windows software.

http://www.amfiindia.com

http://WWW.INDIAINFOLINE.COM.

http://www.bseindia.com.

http://www.rbi.org.in




VARIABLE DEFINITION:

TREYNORS MODEL:

Developed by Jack Treynor, this performance measure evaluates funds

basis of Treynor's Index. This Index is a ratio of return generated by the fund over and

above risk free rate of return during a given period and systematic risk associated with it

(beta).

Treynor (1965) was the first researcher developing a composite measure of portfolio

performance. He measures portfolio risk with beta, and calculates portfolio�s market risk

premium relative to its beta:

Where:

Ti = Treynor�s performance index

Rp = Portfolio�s actual return during a specified time period

Rf = Risk-free rate of return during the same period

âp = beta of the portfolio

SHARPE�S MODEL

Sharpe (1966) developed a composite index which is very similar to the

Treynor measure, the only difference being the use of standard deviation, instead of

beta, to measure the portfolio risk, in other words except it uses the total risk of the

portfolio rather than just the systematic risk:

P

fR

PR

Sharpe

P

fR

PR

Treynor



Where:

Si = Sharpe performance index

óp = Portfolio standard deviation

This formula suggests that Sharpe prefers to compare portfolios to the capital market

line(CML) rather than the security market line(SML). Sharpe index, therefore, evaluates

funds performance based on both rate of return and diversification (Sharpe 1967). For a

completely diversified portfolio Treynors and Sharpe indices would give identical

rankings.

Jensen�s Alpha Model:

Jensen (1968), on the other hand, writes the following formula in terms of realized rates

of return, assuming that CAPM is empirically valid:

Jensen uses áj as his performance measure. A superior portfolio manager would have a

significant positive áj value because of the consistent positive residuals.

Inferior managers, on the other hand, would have a significant negative áj. Average

portfolio managers having no forecasting ability but, still, cannot be considered inferior

would earn as much as one could expect on the basis of the CAPM. Jensen

performance criterion, like the Treynors measure, does not evaluate the ability of

portfolio managers to diversify, since the risk premiums are calculated in terms of â.

Systematic &Unsystematic Risk Calculation Methods:

Systematic Risk = â2ó

2

Unsystematic Risk =ó2ì

The returns of various schemes were classified into systematic return and unsystematic

return by using Sharpe model. Then return per unit of systematic risk and unsystematic

risk were calculated and ranked.

fR

MR

PfR

PR

PJensen



RESULTS & FINDINGS: TABLE 1: THE ANNUALISED RETURNS OF VARIOUS MUTUAL FUND SCHEMES & BSE SENSEX RETURN FROM JAN-03 TO DEC-05 KOTAK LIC SUNDRAM TATA CANBANK FRANKLIN HDFC ICICI JM Birla

2003 Jan -0.0939 -0.0362 -0.0127 -0.0564 -0.056 -0.039 -0.021 -0.0569 -0.0121 -0.0284

February -0.0108 0.0072 0.0119 0.0093 -0.015 0 0.0127 0.0013 0.0285 -0.005

March -0.0873 -0.0732 -0.0541 -0.0656 -0.07 -0.073 -0.048 -0.0776 -0.0452 -0.0459

April -0.1493 -0.0069 0.0223 0.0013 0 0.042 0.059 0.036 0.0014 0.0296

May -0.0407 0.1222 0.1566 0.1125 0.1419 0.0753 0.1095 0.0981 0.0864 0.1373

June 0.1116 0.1015 0.0749 0.205 0.0999 0.0668 0.1418 0.0877 0.0866 0.1034

July 0.0477 0.0514 0.0659 0.0623 0.0716 0.0143 0.0665 0.0263 0.0747 0.0492

August 0.0727 0.1505 0.1572 0.1411 0.1476 0.1252 0.1663 0.0895 0.1459 0.1484

September 0.1759 0.028 0.0243 0.0482 0.0614 -0.027 0.0356 -0.0298 0.0286 0.058

October 0.0152 0.1163 0.1324 0.1296 0.0661 -0.008 0.1232 0.0158 0.1146 0.1233

November 0.0593 0.0135 0.0343 0.0603 0.0244 0.0059 0.0278 0.0415 0.0418 0.0193

December 0.0655 0.1172 0.1255 0.1064 0.1624 0.1512 0.1026 0.1587 0.1338 0.188

2004 Jan -0.09 -0.0287 -0.0445 -0.0524 -0.081 -0.057 -0.02 -0.0802 -0.0401 -0.0524

February 0.005 0.0329 0.0433 0.0756 0.0806 -0.001 0.0286 0.0042 0.0613 0.0578

March -0.075 -0.0242 -0.0173 -0.0456 -0.052 -0.049 -0.025 -0.0748 -0.0359 -0.0321

April 0.0225 0.0088 0.0223 0.0204 -0.01 -0.003 -7E-04 0.0579 0.0159 -0.0035

May -0.0058 -0.1677 -0.1296 -0.1436 -0.139 -0.078 -0.149 -0.09 -0.1487 -0.167

June 0.0211 0.0043 -0.0073 0.0019 0.0015 0.0066 -0.009 0.0091 0.0015 0.0219

July 0.0664 0.0396 0.0605 0.0571 0.0485 0.0415 0.0665 0.0539 0.0539 0.064

August 0.0474 0.0109 0.0287 0.05 0.0148 0.0223 0.0445 0.0844 0.0302 0.0294

September 0.0477 0.0534 0.0615 0.0732 0.082 0.049 0.0539 0.0194 0.05 0.045

October 0.0509 -0.0085 0.0013 0.0017 0.0311 -0.023 -0.011 -0.0123 0.0046 0.0168

November 0.0895 0.0568 0.0869 0.1025 0.1172 0.1165 0.0898 0.1677 0.0542 0.1072

December -0.0021 0.0749 0.0849 0.0728 0.1374 0.0735 0.0999 0.1029 0.0881 0.1008

2005 Jan -0.021 -0.0436 -0.0342 -0.0176 -0.04 0.0224 -0.038 0.0254 -0.0222 -0.042

February 0.045 0.0217 0.048 0.0411 0.0786 0.0304 0.0742 0.0075 0.0521 0.0487

March 0.0181 -0.0291 -0.024 -0.0156 -0.033 0.0031 -0.014 0.0279 -0.0043 -0.0039

April -0.1289 -0.0641 -0.0602 -0.0284 -0.059 -0.006 -0.042 0.0323 -0.0228 -0.0533

May 0.1454 0.0448 0.0689 0.0747 0.061 0.0989 0.0923 0.1038 0.0774 0.077

June 0.0517 0.0236 0.0359 0.0125 -0.021 0.0341 0.0277 0.0287 0.0517 0.0139

July -0.0151 0.0834 0.0635 0.0572 0.042 0.0651 0.09 0.1126 0.0342 0.0698

August 0.064 0.0605 0.0504 0.0654 0.1099 0.0939 0.0493 0.1531 0.0979 0.0521

September 0.0278 0.0306 0.0614 0.0572 0.0327 0.0409 0.0821 0.0637 0.0339 0.0759

October -0.0594 -0.1137 -0.0865 -0.0911 -0.127 -0.082 -0.064 -0.096 -0.1108 -0.0697

November 0.0771 0.0594 0.1112 0.0975 0.0918 0.0707 0.1093 0.0883 0.1007 0.0972

December 0.0923 0.0413 0.0462 0.0304 0.0451 0.0595 0.0601 0.0776 0.0393 0.0459

RETURN 0.2135 0.25293 0.403267 0.417 0.3486 0.288 0.4574 0.419233 0.38237 0.42557



.

MONTHLY BSE SENSEX RETURNS B S E Sensex 2003 Jan -0.0412 February 0.0141 March -0.0715 April -0.0292 May 0.0747 June 0.1341 July 0.0522 August 0.1228 September 0.0491 October 0.1014 November 0.0634 December 0.1314 2004 Jan -0.0245 February -0.0355 March -0.0399 April 0.0115 May -0.1583 June 0.0075 July 0.0782 August 0.0042 September 0.0754 October 0.0262 November 0.0991 December 0.0602 2005 Jan -0.0071 February 0.0459 March -0.0238 April -0.0356 May 0.0911 June 0.0713 July 0.0724 August 0.0177 September 0.1062 October -0.086 November 0.1136 December 0.0693 RETURN 0.380133333



Interpretation:

The table 1 shows the annualized return of all equity funds. It implies that

most of the returns of equity fund is above the market index BSE Sensex. Over the

period of three years, out of 10 equity funds HDFC fund shows the highest return of

0.4574,followed by Birla sun life ,Tata, JM Equity, ICICI , LIC,SUNDRAM, KOTAK

CANBANK and BSE SENSEX has given a return of 0.3801

TABLE 2 DESCRIPTIVE STATISTICS OF EQUITY FUNDS

INTERPRETATION:

The above table descriptive statistics of all equity funds. It give the details about the

mean, maximum, minimum return of all equity funds & beta, standard deviation,

variance, systematic risk & unsystematic risk of all funds. Out of 10 equity funds HDFC

shows the highest monthly return of 45.74% compared to others. In case of mean

return also, HDFC shows the highest mean return 3.81%. Beta is defined as the

FUNDS KOTAK LIC SUNDRAM TATA CANBANK FRANKLIN HDFC ICICI JM Birla

B S E Sensex

ANNUAL RETURN 0.2135 0.252933 0.403267 0.416967 0.348633 0.288 0.4574 0.4192 0.38237 0.42557 0.380133

MINIMUM RETURN -0.149 -0.168 -0.130 -0.144 -0.139 -0.082 -0.149 -0.096 -0.149 -0.167 -0.158

MAXIMUM RETURN 0.176 0.151 0.157 0.205 0.162 0.151 0.166 0.168 0.146 0.188 0.134

MEAN RETURN 0.01779 0.021078 0.033606 0.034747 0.029053 0.024 0.0381 0.0349 0.03186 0.03546 0.031678

RISK FREE RETURN 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509 0.0509

SD 0.07342 0.06618 0.064999 0.070407 0.076747 0.05753 0.0661 0.0699 0.06239 0.07053 0.06783

VARIANCE 0.00539 0.00438 0.004225 0.004957 0.00589 0.00331 0.0044 0.0049 0.00389 0.00497 0.00460

CORRELATION 0.64191 0.893427 0.886762 0.890955 0.823803 0.79066 0.9051 0.7327 0.87417 0.8885

COVARIANCE 0.0032 0.004011 0.00391 0.004255 0.004289 0.00309 0.0041 0.0035 0.0037 0.00425

BETA 0.69482 0.871667 0.849721 0.924776 0.932077 0.67056 0.8814 0.7547 0.80397 0.92382

SYSTEMATIC RISK 0.0026 0.003328 0.00305 0.004239 0.005117 0.00149 0.0034 0.0028 0.00252 0.00425

UNSYSTEMATIC RISK 0.00279 0.001052 0.001174 0.000718 0.000773 0.00182 0.001 0.0021 0.00138 0.00073

EXPECTED RETURN 0.27966 0.337882 0.330656 0.355367 0.357771 0.27167 0.3411 0.2994 0.31559 0.35505

UNSYSTEMATIC RETURN 0.05618 0.024587 0.669229 0.00038 0.002225 0.02827 0.0025 0.0014 0.00185 0.00078

SYSTEMATIC RETURN 0.15732 0.228346 -0.26596 0.416587 0.346409 0.25973 0.4549 0.4179 0.38052 0.42479



measure of risk. Canara Bank tops with a beta of .093 compared to other funds and

Franklin with the least beta of 0.67. Standard deviation is the measure of the total risk.

KOTAK shows the highest standard deviation of 0.073 followed by others and Franklin

with the lowest standard deviation of 0.057. Then it also shows the value of systematic

risk and unsystematic risk for all funds.



TABLE3: THE RESIDUAL OF THE FUNDS

Residuals=Actual return-expected return

DATES KOTAK LIC SUNDRAM TATA CANBANK FRANKLIN HDFC ICICI JM BIRLA

2003 Jan -0.08081 -0.0068 0.040059 -0.02213 -0.02136 -0.027742 0.00977 -0.045 0.01105 0.0058

February -0.03613 -0.0116 -0.03153 -0.00757 -0.0317 -0.026223 -0.0058 -0.027 0.00719 -0.022

March -0.05315 -0.0174 0.107206 -0.00331 -0.00691 -0.041624 0.00948 -0.032 0.00231 0.0163

April -0.14454 0.012 -0.005137 0.024475 0.023759 0.044812 0.0787 0.0346 0.0149 0.0527

May -0.10814 0.0506 -0.227723 0.03959 0.068817 0.008441 0.03762 0.0117 0.01637 0.0644

June 0.002891 -0.0219 -0.196497 0.077159 -0.02855 -0.03989 0.01757 0.0011 -0.0312 -0.024

July -0.0041 -0.0006 -0.117905 0.010198 0.019488 -0.037472 0.01445 -0.048 0.02275 -0.003

August -0.02816 0.0369 -0.269195 0.023709 0.029684 0.026087 0.05203 -0.056 0.03719 0.0311

September 0.126251 -0.0213 -0.073671 -0.00104 0.012178 -0.076593 -0.0137 -0.058 -0.0209 0.0088

October -0.07079 0.0214 -0.226211 0.031999 -0.03187 -0.092263 0.02779 -0.099 0.0231 0.0257

November -0.00029 -0.0483 -0.095822 -0.00216 -0.03815 -0.053382 -0.0341 -3E-04 -0.0191 -0.043

December -0.04133 -0.0039 -0.244803 -0.01894 0.036468 0.04632 -0.0193 0.0249 0.01818 0.0627

2004 Jan -0.08851 -0.0139 0.057669 -0.03357 -0.06152 -0.05754 -0.004 -0.04 -0.0304 -0.034

February 0.014133 0.0573 -0.020784 0.104601 0.110231 0.005736 0.05385 -0.057 0.07986 0.0867

March -0.06281 0.004 0.043555 -0.01253 -0.01827 -0.039013 0.00393 -0.039 -0.0138 0.0009

April -0.00102 -0.0078 -0.039721 0.005936 -0.02428 -0.02788 -0.0169 0.042 -0.0033 -0.018

May 0.088657 -0.0362 0.256462 -0.00104 0.00509 0.010981 -0.0156 0.0587 -0.0314 -0.025

June 0.000355 -0.0088 -0.006722 -0.00886 -0.00895 -0.015198 -0.0217 0.0076 -0.0145 0.0111

July -0.00347 -0.0351 -0.134597 -0.01905 -0.02785 -0.027706 -0.0085 0 -0.0189 -0.012

August 0.028948 0.0007 -0.039918 0.042287 0.007428 0.002715 0.03476 0.0542 0.01685 0.0216

September -0.02022 -0.0189 -0.133218 -0.00036 0.008264 -0.018329 -0.0186 -0.031 -0.0206 -0.029

October 0.017162 -0.0379 -0.031212 -0.02636 0.003222 -0.057137 -0.0405 -0.017 -0.0264 -0.011

November 0.00511 -0.0361 -0.178757 0.007026 0.021374 0.033279 -0.0036 0.1135 -0.0355 0.0118

December -0.05946 0.0159 -0.143702 0.0133 0.077832 0.016364 0.0408 0.0148 0.02972 0.0413

2005 Jan -0.0316 -0.0439 0.032584 -0.01486 -0.03664 0.010392 -0.0379 0.0476 -0.0265 -0.039

February -0.00243 -0.0248 -0.094651 -0.00518 0.03236 -0.017147 0.02771 -0.045 0.00522 0.0024

March 0.019103 -0.0149 0.036574 0.002581 -0.01457 0.002291 0.00134 0.0322 0.00486 0.0142

April -0.1197 -0.0396 0.082801 0.000693 -0.02968 0.001503 -0.017 0.0551 -0.0042 -0.024

May 0.066568 -0.0411 -0.153959 -0.01338 -0.02737 0.021044 0.00597 0.0264 -0.0058 -0.011

June -0.01337 -0.0451 -0.104134 -0.05727 -0.09051 -0.030479 -0.0412 -0.023 -0.0156 -0.056

July -0.08094 0.0138 -0.132669 -0.01358 -0.02894 -0.000217 0.02015 0.0784 -0.034 -1E-03

August 0.036168 0.0385 -0.073089 0.045203 0.089945 0.065263 0.02766 0.0552 0.07369 0.0319

September -0.06152 -0.0685 -0.15929 -0.04484 -0.06974 -0.047082 -0.0175 0.0298 -0.0615 -0.026

October -0.01518 -0.0453 0.151927 -0.0154 -0.0503 -0.040701 0.00586 0.0148 -0.0516 0.0059

November -0.01737 -0.0462 -0.215378 -0.01138 -0.01754 -0.022244 0.00314 -0.012 -0.0006 -0.012

December 0.028615 -0.0256 -0.112735 -0.03752 -0.02295 -0.003738 -0.007 0.0383 -0.0264 -0.022

INTERPRETATION:

This table shows the monthly residuals of each fund. This is calculated as

Residuals=Actual return-expected return



TABLE 4: Unsystematic risk and return FUNDS UNSYSTEMATIC RISK UNSYSTEMATIC RETURN KOTAK 0.002788328 0.056182167 LIC 0.00105201 0.024586898 SUNDRAM 0.001174394 0.669229297 TATA 0.000717746 0.000379531 CANBANK 0.000772983 0.002224788 FRANKLIN 0.001821397 0.028265841 HDFC 0.000973717 0.002490313 ICICI 0.002101004 0.001359151 JM 0.001376292 0.001847574 BIRLA 0.000728982 0.000776284 TABLE 5: SYSTEMETIC RISK AND RETURN FUNDS SYSTEMATIC RISK SYSTEMATIC RETURN KOTAK 0.002602634 0.157317833 LIC 0.003327783 0.228346435 SUNDRAM 0.003050437 -0.26596263 TATA 0.004239395 0.416587136 CANBANK 0.005117169 0.346408545 FRANKLIN 0.001488121 0.259734159 HDFC 0.003389123 0.454909687 ICICI 0.002780716 0.417874182 JM 0.002515646 0.380519093 BIRLA 0.00424528 0.424790382 INTERPRETATION:

The above table shows the systematic risk/return and unsystematic risk/return of equity

funds. The returns of unsystematic are calculated from the residual likewise the returns

from systematic are calculated from expected return.



TABLE 6: RETURN PER UNIT OF SYSTEMETIC RISK

FUNDS RETURN PER UNIT OF SYSTEMETIC RISK RANK

KOTAK 60.445628 9

LIC 68.61818402 7

SUNDRAM -87.18838054 10

TATA 98.26570078 6

CANBANK 67.69535042 8

FRANKLIN 174.5383837 1

HDFC 134.2263687 4

ICICI 150.2757558 3

JM 151.2609706 2

BIRLA 100.0618059 5 INTERPRETATION:

The above table shows the return per unit of systematic risk of the funds systematic

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

TABLE 7: RETURN PER UNIT OF UNSYSTEMETIC RISK

FUNDS RETURN PER UNIT OF UNSYSTEMETIC RANK

KOTAK 20.14905543 3

LIC 23.37135235 2

SUNDRAM 569.8506554 1

TATA 0.528781755 10

CANBANK 2.878183697 5

FRANKLIN 15.51877362 4

HDFC 2.557531687 6

ICICI 0.646905648 9

JM 1.342428615 7

BIRLA 1.064888334 8

INTERPRETATION:

The above table shows return per unit of unsystematic risk sundram as the highest

systematic risk compared to other funds and Tata mutual fund as the lowest

unsystematic.



TABLE 8: DIVERSIFIED AND NON DIVERSIFIED FUNDS IN PERCENTAGE

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

INTERPRETATION:

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

Franklin fund shows the more diversified fund where as canbank fund shows less

diversified fund. But canbank fund is more efficient then Franklin fund because its

unsystematic risk per unit is 2.87, where as Franklin fund unsystematic risk per unit is

15.5187. So for this reason canbank is more efficient then other funds.



TABLE 9: RANKING OF MUTUAL FUND SCHME BASED ON SHRPE�S RATIO: NAME RATIO RANK

KOTAK 2.21456 10

LIC 3.05279 9

SUNDARAM 5.42113 2

TATA 5.1993 6

CANBANK 3.8794 8

FRANKLIN 4.12144 7

HDFC 6.15426 1

ICICI 5.27175 5

JM 5.31321 3


Sharpe prefers to compare portfolios to the capital line rather than the security market

line. HDFC is the best compare to the other funds and the Kotak is the lowest

performance in case of Sharpe measure.



TABLE 10: RANKING OF MUTUAL FUND SCHME BASED ON TREYNOR�S RATIO: NAME RATIO RANK KOTAK 0.23402 9 LIC 0.23178 10

SUNDARAM 0.41469 3

TATA 0.39584 6

CANBANK 0.31943 8

FRANKLIN 0.35359 7

HDFC 0.46121 2

ICICI 0.48803 1

JM 0.41229 4


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

ICICI is the best compared to other funds and LIC is the least rank and less

performance in case of Treynors measure.



TABLE 11: RANKING OF MUTUAL FUND SCHME BASED ON JENSEN�S RATIO: NAME RETURN RANKS

KOTAK -0.06616 10

LIC 0.2464 9

SUNDARAM 0.39562 5

TATA 0.41314 3

CANBANK 0.34518 7

FRANKLIN 0.27123 8

HDFC 0.45136 1

ICICI 0.40675 4

JM 0.37239 6

BIRLA 0.42169 2

INTERPRETATION:

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

large variation of alpha values show that stock selection abilities of fund manager vary

for different mutual funds. Positive alpha values of mutual fund may be a result of

adopting better forecast techniques by the fund managers; they seem to have been able

to pick up undervalued stocks enabling them to post better performance during the

period under consideration.



Interpretation of Sharpe, Treynor, and Jensen�s measures:

Thus the result suggests that these funds are not completely diversified, because

a completely diversified fund or portfolio would have given the similar ranking for

composite performance measurement of Sharpe and Treynor and Jensen. A poorly

diversified portfolio will have a higher ranking under the Treynor measure than for the

Sharpe measure. The funds which constitute this category are- Franklin India, HDFC,

and TATA.

Based on the analysis of these 10 funds, majority of the mutual funds are poorly

diversified. This means there is still some degree of unsystematic risk that one can get

rid of by diversification. This also leads us to another conclusion that majority of these

funds will land on Markowitz efficient portfolio curve. The efficient frontier consists of

those portfolios which maximises expected return given the portfolio risk (variance of

portfolio returns).The full potential of these funds is not exploited and there is still room

for improvement.



SUMMARY OF FINDINGS

From the research it is found that most of the returns of equity fund is above the

market index BSE Sensex. Over the period of three years, out of 10 equity

funds HDFC fund shows the highest return of 0.4574,followed by Birla sun life

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

SENSEX has given a return of 0.3801

. Out of 10 equity funds HDFC shows the highest monthly return of 45.74%

compared to others. In case of mean return also, HDFC shows the highest

mean return 3.81%.

Beta is defined as the measure of risk. Canbank tops with a beta of .093

compared to other funds and Franklin with the least beta of 0.67.

KOTAK shows the highest standard deviation of 0.073 followed by others and

Franklin with the lowest standard deviation of 0.057.

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

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

Return per unit of unsystematic risk sundram as the highest systematic risk

compared to other funds and Tata mutual fund as the lowest unsystematic risk.



CONCLUSION SUMMARY:

It is examined that investment performance of Indian Mutual funds in terms of

performance measure, some funds shows conformity with the linear relationship of

return and risk. Some funds do not demonstrate this relationship. Some funds have out

performed both in terms of Treynor measure and Sharpe measure. However some

funds exhibited superior performance in terms of systematic risk but did not do so in

respect of total risk. According to Jensen measure funds have positive alpha values

indicating superior performance of the scheme. The alpha values varied widely, the

highest being HDFC and the lowest Kotak. Such large variation of alpha values show

that stock selection abilities of fund manager vary for different mutual funds. Positive

alpha values of mutual fund may be a result of adopting better forecast techniques by

the fund managers; they seem to have been able to pick up undervalued stocks

enabling them to post better performance during the period under consideration

For the same reason, it becomes increasingly necessary to periodically monitor

and evaluate performance as objectively as can. More importantly, such evaluation

should provide meaningful feedback for improving the quality of the investment

management process on a continuing basis. In particular, it should help in articulating

the investment objectives with greater clarity, sharpening the investment strategy and

refining the methods of security selection. Value of experience that matters.



BIBLIOGRAPHY: WEBSITES

www.amfiindia.com

www.bseindia.com

www.rbi.org.in

www.investopedia.com

www.google.com

www.valuepro.net

BOOKS

INVESTMENT MANAGEMENT ,SECURITY ANALYSIS AND PORTFOLIO

MANAGEMENT BY V.K.BHALLA

STATISTICS FOR MANAGEMENT BY LEVIN & RUBIN

JOURNAL

THE ICFAI JOURNAL OF FINANCE.

VALUE RESEARCH ONLINE


http://www.bseindia.com

http://www.rbi.org.in

http://www.investopedia.com

http://www.google.com

http://www.valuepro.net

Documents

Performance Evaluation of Mutual Funds in India-Jaiprakash-0478