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MF Research Paper 1
MF Research Paper 1
ABSTRACT
Mutual Fund is a vehicle for small investors to enter into Bluechip companies. Mutual fund
companies collect the savings of the investors and make a big corpus of these savings and
invested in a well diversified portfolio of different companies. It is generally believed that
mutual funds are able to diversify the risk. Mutual fund industry has just four decades old in
India. During this short span of time it has made tremendous growth. So considering these points
this paper is an attempt to study the performance evaluation of selected open ended schemes in
terms of risk and return relationship. For this rate of return method, Beta, Standard Deviation,
Sharpe ratio and Treynor ratio has been used.BSE-30 has been used as a benchmark to study the
performance of mutual funds in India. The study period has been taken from 1st April 2009 to
31st March 2011.The findings of the study reveal that only three schemes have performed better
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KEYWORDS: Mutual Funds, Blue Chip Companies, Diversified Portfolio, Open Ended
Schemes.
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than benchmark.
INTRODUCTION
Mutual funds provide a mechanism to invest in the stock market without knowing the
complexities of stock market. Mutual funds provide the best option to the investors who have no
knowledge of the stock market. Mutual fund is just the connecting bridge or a financial
intermediary that allows a group of investors to pool their money together with a predetermined
investment objective. They are responsible for investing the gathered money into specific
securities (stocks or bonds). They invest their money on the behalf of investors. For this they
charge only nominal fees. When you invest in a mutual fund, you are buying units or portions of
the mutual fund and thus on investing becomes a shareholder or unit holder of the fund. Mutual
funds provide more return with less risk. The main advantage of mutual fund is that it diversifies
the risk because the pooled money is invested in diversified portfolio.
Mutual funds have started in India in 1964. The first scheme was Unit Scheme 1964. In that year
UTI has the monopoly over the mutual fund industry up to 1987. In 1987 government institutes
were allowed to start mutual funds operations. In 1993 it has opened for private sector. The
regulations on mutual funds came in the year 1996. Today there are near about 42 mutual funds
companies operated in India. Moreover government is doing every effort to promote the mutual
funds in India. In 1999 it has exempted the all dividend incomes in the hands of investors fully
tax free.
Mutual funds offer close ended and open ended schemes. Close ended schemes have some
stipulated time period that is normally between 3 to 15 years. Open ended schemes are available
effort to attract the investors to invest in mutual funds by offering innovative schemes. Moreover
Investors have great expectations from mutual funds.
So this paper is an attempt to study the performance of mutual funds in the framework of risk
and return during the period 1st April 2009 to 31st March 2011.
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balanced, ELSS, FMCG, ETF, gold fund and sector specific. Mutual fund industry is doing every
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for subscription during the all time period. These are further available in growth, income,
REVIEW OF LITERATURE:
Lots of studies have been conducted on performance evaluation of mutual funds in India. Some
of the studies has presented in a chronologically order:
Treynor (1965) presents a new way of viewing performance results. He attempted to rate the
performance of mutual funds on a characteristics line graphically. The steeper the line, the more
systematic risk or volatility a fund possesses. By incorporating various concepts, he developed a
single line index, Tn, called Treynor index. The systematic risk is risk which is common to all
securities of the same class in the market. His index measures the risk premium of the portfolio,
where risk premium equals the difference between the return of the portfolio and the riskless
rate. The risk premium is related to the amount of systematic risk assumed in the portfolio, the
higher the value of Tn, the better the performance of fund. Sharpe (1966) explains in a modern
portfolio theory context that the expected return on an efficient portfolio and its associated risk
(unsystematic risk) are linearly related. By incorporating various concepts he developed a Sharpe
index. In this paper he attempted to rate the performance on the basis of the optimal portfolio
with the risky portfolio and a risk-free asset is the one with the greatest reward-to-variability
.The unsystematic risk is related to particular security due to inefficient management. Moreover
he has examined 34 open-end mutual funds (period 1954-1963) and finds considerable
variability in the Sharpe ratio, ranging from 0.78 to 0.43. He provides two potential explanations
for the result that the cross-sectional variation is either random or due to high fund expenses or
the difference is due to management skills. Barua and Varma (1991) evaluated the performance
of master share (1987-1991) using CAPM approach from the view point of large investors, small
measures. They used capital market line to study the risk return relationship of the fund from the
prospective of large investors and security market line for small investors. The study concludes
that the fund performed better than the market for small investors and fund management but the
fund did not do well when compared to CML. Mishra, et al., (2002) measured mutual fund
performance using lower partial moment. In this paper, measures of evaluating portfolio
performance based on lower partial moment are developed. Risk from the lower partial moment
is measured by taking into account only those states in which return is below a pre-specified
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behavior. The risk adjusted performance is measured by using Sharpe, Jensen and Treynor
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investors and from fund management. The study had used ET Index as a proxy for market
target rate like risk-free rate. Acharya and Sidana (2007) attempted to classify hundred
mutual funds employing cluster analysis and using a host of criteria like the 1 year total return, 2
year annualized return, 3 year annualized return, 5 year annualized return, alpha, beta, Rsquared, Sharpes ratio, mean and standard deviation etc. The data is obtained from Value
research online. They do find evidences of inconsistencies between the investment
style/objective classification and the return obtained by the fund.
R = (P1-P0+D1)/P0
Whereas P1 is the price at the end of the year P0 at the beginning And D1 is the dividends
received during the year
Sharpe ratio (reward to variability ratio)
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S = (Rp-Rf)/
Rp is the return from the scheme Rf is the risk free return and standard deviation measure the
total risk
Treynor Ratio (reward to volatility ratio)
T = (Rp-Rf)/
Rp is the return from the scheme Rf is the risk free return and beta measure the systematic risk.
Beta = Cov (RjRm)/ Square root of m
Limitations of the study:
1. Time is too short to conduct the study. Due to shortage of time only ten schemes has been
taken for analysis.
2. Study is based on secondary data.
3. Sample size is too small.
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and volatility.
2009-10
2010-11
Rate of return
23.69
11.23
SD
27.94
20.78
Sharpe Ratio
0.61
0.14
Treynor ratio
16.94
2.98
Table-II
Year 2009-10
Name of the schemes
Annualized SD
Beta
return
HDFC Top 200 Fund
62.08
27.94
0.83
Sharpe
Treynor
Ratio
Ratio
1.980315
66.66265
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Year
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Table-I
69.18
26.37
0.78
2.367463
80.03846
24.79
0.73
2.016539
68.47945
Fund (Growth)
Tata Pure Equity Fund
55.94
28.49
0.82
1.726571
59.9878
51.73
33.28
0.99
1.351563
45.43434
23.52
21.21
0.42
0.790665
39.92857
54.33
29.71
0.88
1.601481
54.06818
55.35
30.52
0.89
1.592398
54.60674
60.17
36.14
1.073
1.478141
49.78565
18.21
0.71
0.093904
2.408451
We can see from table I and II in the year 2009-10 that HDFC capital Builder has the top
performer. It has 69.18 returns and 26.37 SD and 0.78 beta. This scheme has given the reward
for variability and volatility HDFC Top 200 Fund and Birla sun life advantage funds are on
second and third position in terms of return. HDFC top 200 fund has shown better performance
than Birla sun life advantage fund in terms of SD, Beta, Sharpe ratio and Treynor ratio. Birla sun
better than bench mark. Except Kotak select focus fund all other schemes are able to give reward
for variability and volatility. In that year all schemes has fulfilled the expectations of the
investors.
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performer in terms of risk and return. Except two schemes all other schemes has performed
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life advantage fund has more risk than the benchmark .Kotak select focus fund has the poorer
Table-III
Year 2010-11
Name of the schemes
Annualized SD
Beta
return
Sharpe
Treynor
Ratio
Ratio
10.02
16.88
0.75
0.104858
2.36
9.89
16.19
0.71
0.101297
2.309859
19.62
0.90
-0.04128
-0.9
0.45
17.93
0.77
-0.43503
-10.1299
8.91
16.64
0.74
0.039663
0.891892
6.16
16.37
0.73
-0.12767
-2.86301
9.03
15.62
0.68
0.049936
1.147059
1.00
18.28
0.80
-0.39661
-9.0625
-0.41
18.62
0.84
-0.46509
-10.3095
18.35
0.79
-0.33025
-7.67089
We can see from table I and III in the year 2010-11 no scheme has provided more return than
sensex. Only four schemes were able to provide the reward for variability and volatility. HDFC
top 200 fund, HDFC capital Builder fund and UTI opportunity fund was the three top
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Fund (Growth)
performers. In the year 2009-10 Birla sun life advantage fund performed good but in 2010-11 it
has given negative return with high risk.
CONCLUSION:
In the end the study concludes that in 2009-10 except ING core equity fund and Kotak select
focus fund all even schemes performed better than BSE- Sensex. Except one scheme all were
able to provide reward for variability and volatility more than the benchmark. Four schemes have
more risk than sensex. In the year 2010-11 bench mark has outperformed than all schemes. All
schemes have failed to give more reward for variability than benchmark. Only four schemes
were able to give reward for volatility than benchmark. So at the end we can see that HDFC top
200 Fund, HDFC capital builder fund and UTI opportunity funds were able to fulfill the
expectations of the investors in terms of risk and return.
SUGGESTIONS:
The mutual fund industry is still in a nascent stage in India. Presently it focus on urban areas, the
rural area is still untapped. In US the assets under management of mutual funds are more than
60% of the GDP as compared to a little above 8% in India. AUM as a percentage of bank
deposits is also abysmally low in India, at 25 percent, while it is 140 percent in US and 96
percent in Brazil. In India more than 95 percent of the financial savings of the individuals still go
into the traditional form of investment. If the proper attention is given, then it can grow rapidly.
Government should do various efforts and take various steps to promote the mutual funds in
India. In nutshell there is a need to create the awareness among the people regarding the
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BIBLIOGRAPHY/REFERENCES:
Acharya, Debashis. & Sidana, Gajendra. (2007), Classifying Mutual Funds in India:
some results from clustering Indian Journal of Economics and Business, Vol.6, No.1,
pp71-79.
Barua, Samir K. & Verma, Jaynath R. (1991), Master Share: a Bonanza for Large
Investors, Vikalpa, Vol.16, No.1. Jan-March, pp29-34.
Chandra Parssana (2007) Corporate Financial Management Tata McGraw Publishing
House.
Mishra, Banikanta. & Mahmud, Rahman. (2000), Measuring Mutual Fund Performance
using Lower Partial Moment, Global Business Trends, Contemporary Readings, 2001
edition.
Pandey, I.M. (1979), Financial Management, Vikas Publishing House Pvt.Ltd, New
Delhi.
Parthasarathy, Suresh. (2007), Mutual Funds: When Risk Enters The Performance
Equation, Business Line, THE HINDU, April 15.
Sharpe, W. (1966), Mutual Fund Performance, The Journal of Business, Vol. 39, Issue
38
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s1, pp 119-138.