Whole Thesis 111

CHAPTER- I
INTRODUCTION
This chapter contains information on Indian Mutual fund industry, types of fund management,
Active share measure, mutual fund performance and their Portfolio Management.
All these are covered under following head:
1.1 About Mutual Fund Industry and Mutual Funds
1.2 Defining Active Management and Passive Management
1.3 Active Share Measure
1.4 Need for Active Management
1.5 Active Management and Mutual Fund Performance
1.6 Active Share and Portfolio Management
1.1 About Mutual Fund Industry and Mutual Funds

The evolution of the Indian mutual fund industry was marked by the formation of Unit Trust
of India in the year 1963. At that time the primary objective was to attract the small investors and it
was made possible through the collective efforts of the Government of India and the Reserve Bank of
India. The history of mutual fund industry in India can be understood through the five phases where
the first phase i.e.1964-1987 saw the establishment and growth of Unit Trust of India.
Unit Trust of India was established in the year 1963 by an act of Parliament.UTI launched its first
scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors
in any single investment scheme over the years. The second phase i.e., 1987-1993 witnessed a number
of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund
from the State Bank of India became the first non-UTI mutual fund in India which was followed by
Canbank Mutual Fund, LIC Mutual Fund, etc. In the third phase (1993-96) there was emergence of
private sector funds which provided a wide range of choice to investors and more competition in the
industry. In the fourth phase i.e. 1996-2004, there was robust growth in mutual fund industry and
stricter SEBI regulations. The mobilisation of funds and the number of players operating in the
industry reached new heights as investors started showing more interest in mutual funds. SEBI
(Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual
funds in India. Various Investor Awareness Programmes were launched during this phase, both by
SEBI and AMFI, with an objective to educate investors and make them informed about the mutual
fund industry. The fifth phase i.e. 2004 onwards saw growth and consolidation as the industry
witnessed several mergers and acquisitions. This is a continuing phase of growth of the industry
through consolidation and entry of new international and private sector players. Thus the Indian
mutual fund industry is one of the fastest growing sectors in the Indian capital and financial markets.
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The mutual fund industry in India has seen dramatic improvements in quantity as well as quality of
product and service offerings in recent years.
A mutual fund is an investment product in which a pool of fund collected from investors is
placed in various securities like stocks, bonds, short-term money market instruments and/or
derivatives with the goal of generating income on a regular basis. . In a mutual fund, the fund
manager trades the fund's underlying securities, realizing capital gains or losses, and
collects the dividend or interest income. The investment proceeds are then passed along
to the individual investors. The value of a share of the mutual fund, known as the net
asset value per share (NAV), is calculated daily based on the total value of the fund
divided by the number of shares currently issued and outstanding. They provide small
investors an access to professionally managed, diversified portfolios of stocks, bonds, and other
securities that would be difficult for investors to do on their own with a small amount of money
Equity mutual funds are stock mutual funds wherein pooled amount of money is invested in
the stocks of public companies. Such stocks represent part ownership, or equity, in companies with an
aim to see the value of the companies increase over time. Stocks are often categorized by their market
capitalization and can be classified in three basic sizes: small, medium, and large. Many mutual funds
invest primarily in companies of one of these sizes and are thus classified as large-cap, mid-cap or
small- cap funds. Equity fund managers employ different styles of stock picking when they make
investment decisions for their portfolios. Some fund managers use a value approach to stocks,
searching for stocks that are undervalued when compared to other similar companies. Another
approach to picking is to look primarily at growth, trying to find stocks that are growing faster
than their competitors, or the market as a whole. Some managers buy both kinds of stocks,
building a portfolio of both growth and value stocks. Since equity funds invest in stocks, they
have the potential to generate more returns. On the other hand they carry greater risks too.
Equity funds can be further classified into diversified equity funds and sectoral equity funds.
1.2 Defining Active management and Passive Management

Broadly fund managers practice to passive or active investing in managing mutual fund
portfolio. Active management can be defined as the extent to which the investor attempts to beat the
market by hiring investment management firms that analyze and select individual securities or groups
of securities expected to exceed the performance of specified benchmark.
Where Passive management involves a long-term, buy-and-hold approach to investing in
which the investor selects an appropriate target and buys a portfolio designed to closely track the
performance of that target.. In other words, Active management implies the use of a human element,
such as a single manager, co-managers or a team of managers, to actively manage a fund's portfolio.
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Active managers rely on analytical research, forecasts, and their own judgment and experience in
making investment decisions on what securities to buy, hold and sell. Under active management,
investor does not believe in following the efficient market hypothesis. They believe it is possible to
profit from the stock market through any number of strategies that aim to identify mispriced securities.
Whereas passive management is a style of management that consists of replicating the return on an
index with a strategy of buying and holding all (or almost all) index stocks in the official index
proportions. And thus measuring active management means measuring the degree of deviation from
passive management.
Also a passive investor holds every security with each represented in the same manner as in
the benchmark and will hold the same percentage of the total outstanding amount of each security in
the market. Whereas an active investor is not passive as he or she tends to trade fairly frequently by
paying for more research and trading. In other words, active portfolio management attempts to find
undervalued securities and profit from the market adjusting to the true value, or profit from asset
selection by using market timing strategy. While passive management simply replicate its benchmark
and buy the entire asset class i.e. benchmark without using either security selection or market timing.
In passive investing, fund manager tries to mimic the index, which the particular scheme is
following. In active investing, fund manager tries to generate positive alpha (i.e. risk-adjusted return).
In order to generate a positive alpha, two different approaches are used by active equity fund manager:
either stock selection or market timing (or both). Stock selection involves picking individual stocks
that the manager expects to outperform their peers. Factor timing involves time-varying bets on
systematic risk factors like entire industries, sectors of the economy, or any systematic risk relative to
the benchmark index. Because many funds favour one approach over the other, it is not clear how to
quantify active management across all funds. These two distinct approaches to active management
contribute very differently to tracking error, despite the fact that either of them could produce a higher
alpha.
1.3 Active Share Measure
In order to determine type of active management, fund managers can use two dimensions i.e.,
Active Share (Cremers and Petajisto, 2007) and tracking error. Active share measure can be described
as difference of portfolio’s benchmark index and that of share of portfolio holdings. This measure is
defined as Active Share of a fund as given by Cremers and Petajisto (2007).
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Active Share = ½ ∑ Wfund, i – Windex, i
i=1
where Wfund, i = portfolio weight of asset i in the fund,
and, Windex, i = portfolio weight of asset i in the index.
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This measure has an intuitive economic interpretation. The decomposition of a mutual fund
portfolio is done into a 100% position in the benchmark index, plus a zero-net-investment long-short
portfolio. The long-short portfolio represents all the active bets the fund has taken. Active Share then
measures the size of that long-short position as a fraction of the total portfolio of the fund. Then
division of the sum of portfolio weight differences is done by 2 so that a fund that has zero overlap
with its benchmark index gets a 100% Active Share. It can also be read and interpreted as follows:
Active Share = the % of stock holdings in a fund that differ from those in the index (Little, 2009)
Thus, it is a method used to quantify active management for comparing the holdings of a
mutual fund with that of benchmark index. Whereas tracking error is a traditional measure indicating
the difference between a portfolio return and its benchmark return. In other words, tracking error
volatility is defined as the time-series standard deviation of the difference between a fund return and
its benchmark index return.
In order to compute the active share, the portfolio holdings of a fund can be compared to its
benchmark index. A fund has an active long position in it if it over weights a stock relative to the
index weight, and when a fund under weights an index stock or does not buy it at all, it has an active
short position in it. Thus any portfolio can be decomposed into a 100% position in its benchmark
index plus a zero-net-investment long-short portfolio on top of that. For example, if a fund has 100%
in the Nifty 50 plus 40% in active long positions and 40% in active short positions then this measure
of size of the active long-short portfolio is known as the Active Share of a portfolio. As mutual funds
don’t take actual short positions, so they have an Active Share between zero and 100%. Thus Active
Share can be easily interpreted as the fraction of the portfolio that is different from the index.
1.4 Need for Active Management
There is a need to know the Active Share of a fund though its tracking error is already known
because different types of active management contribute differently to tracking error. There are two
distinct ways of how an active manager can outperform his benchmark index. First is to predict the
returns on large portfolios of correlated stocks (such as industry portfolios, value stocks, or the
benchmark index itself) and then optimize his performance by taking time-varying positions in these
portfolios. This practice is known as tactical asset allocation, and these managers are called market
timers or sector rotators. Second, a manager can analyze individual stocks and pick those that will
outperform other stocks in their industries. These managers create value with stock selection, even
when their market beta and industry weights exactly match those of the index. In terms of tracking
error, the key difference between the two types of active management is that the sector rotators and
market timers will bear systematic risk relative to the index, while stock pickers may bear only
idiosyncratic risk. Hence, the former will generate a relatively high tracking error, while the latter
through largely diversifying can achieve a relatively low tracking error. Tracking error therefore
understates the active management of diversified stock pickers, even though their stock selection skills
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could potentially generate large alphas. Conversely, tracking error overstates active management
when a manager only places bets on a few large portfolios but does not make any effort to pick
individual stocks.
So tracking error is not abandoned completely, but it is used together with Active Share. A
high Active Share can identify a diversified stock picker even when his tracking error is low. Tracking
error identifies bets on systematic risk factors for a given Active Share it is clearly more active to
pick all stocks from the same industry than from diversified industries. These two dimensions together
cover all the main types of active management. Diversified stock pickers are the ones with high
Active Share and low tracking error. Funds playing pure factor bets are in the opposite corner with
low Active Share and high tracking error. Funds combining the two approaches can be called
concentrated stock pickers, and they have both high Active Share and high tracking error. Funds
which are not doing much of the above will have low Active Share and low tracking error, and if they
claim to be active, they are known as closet indexers. And the funds with essentially zero Active
Share and zero tracking error are pure index funds.
Active Share is useful for mainly two reasons. First, it provides significant information about
a fund’s potential for generating a positive alpha. If benchmark indexes have a zero alpha, then any
non- zero fund alphas can only come from those positions that deviate from the index. Active Share
directly measures these deviations and therefore should be useful in estimating fund alphas. Secondly,
Active Share used together with tracking error, provides a comprehensive picture of active
management. A diversified stock picker can be very active despite its low tracking error, because its
stock selection within industries can still lead to large deviations from the index portfolio. In contrast,
a fund taking systematic factor bets can generate a large tracking error even without large deviations
from index holdings. A concentrated stock picker combines the two approaches, thus taking positions
in individual stocks as well as systematic risk. A closet indexer claims to be active while it scores low
on both dimensions of active management. And a pure index fund has almost zero tracking error and
Active Share.
According to the popular notion, small funds are more active than large funds. Expense ratios
are much lower for index funds, but for all other funds expenses don’t have much to do with active
management, which makes closet indexers expensive in a disproportionate way. The fraction of pure
index funds has grown substantially of mutual fund assets. But more than that, the fraction of passive
funds which claim to be active has also increased significantly. Furthermore, the aggregate Active
Share of such funds is even lower at the end of the period, which means that half of all active
positions of individual mutual funds cancel out within the mutual fund sector, thus producing no
aggregate benefit to mutual fund investors.
Fund performance is significantly related to active management, as revealed by a two-
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dimensional sort of non-index funds by Active Share and tracking error. Funds with the highest Active
Share exhibit some skill and pick portfolios which outperform their benchmarks. After fees and
transaction costs, this outperformance decreases. Whereas funds with the lowest Active Share have
poor benchmark-adjusted returns and alphas before expenses and do even worse after expenses,
underperforming per year. The difference in performance across the top and bottom Active Share
groups is also statistically significant.
Interestingly, tracking error by itself is not related to fund returns. If anything, higher tracking
error predicts slightly poorer performance. Hence, like active share not all dimensions of active
management are rewarded in the market. Economically, these results suggest that the most active
diversified stock pickers and concentrated stock pickers have enough skill to generate alphas that
remain positive even after fees and transaction costs. In contrast, funds focusing on factor bets seem to
have zero to negative skill, which leads to particularly bad performance after fees. Hence, there are
some mispricing in individual stocks that active managers can exploit, but broader factor portfolios
are either too efficiently priced to allow any alphas or too difficult for the managers to predict. Closet
indexers exhibit zero skill but underperform because of their expenses.
Active Share is very significantly related to returns within the smallest 60% of funds, while a
weaker but still positive relationship exists for the largest 40% of funds. The most active funds in the
smallest fund size quintile outperform very significantly before expenses and after expenses (Cremers
and Petajisto, 2007).
A typical active manager aims for an expected return higher than the benchmark index, but at
the same time he wants to have a low tracking error to minimize the risk of significantly
underperforming the index. Mean-variance analysis in this excess-return framework is a standard tool
of active managers. Thus the definition of tracking error assumes a beta equal to one with respect to
the benchmark index, and thus any deviation from a beta of one will generate tracking error. The
focus on is mainly because of its adoption by conventional practitioners for performance evaluation
and the desire to measure active management as perceived by the fund managers themselves.
1.5 Active Management and Mutual Fund Performance
The reasons for holding mutual funds mainly include customer service, low transaction costs,
diversification and professional management (Gruber, 1996). The first three reasons are provided by
both active and passive (index) funds and it is the fourth reason i.e. professional management that
distinguish an active fund. While discussing the performance of professional management, the pricing
of open end and closed end mutual funds is seen. In the short period open end mutual funds will sell at
net asset value irrespective of type of management. But in the long run management is priced and
more fees and expenses are charged from customers to reflect good management. While in closed end
funds professional management is not as good as in open end funds so they are sold at less than net
asset value though the closed end funds show same tilt in favour of growth stocks and small stocks as
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was shown by open end funds. So the reason may be that of having a market price different from net
asset value that changes the characteristics of a share in a closed end fund. On examining return on net
asset value and the return earned by investors from holding the fund, it was found that the variability
in the market return in funds is more than the variability of the return on the underlying assets. Market
returns on shares act differently than the return on the assets that underlie the shares. Moreover the
fact that the size variable has a positive coefficient means that there is an additional systematic risk
due to a size effect, and funds are priced as small stocks even after removing the size effect due to
capitalisation of the companies owned by funds. Further this additional small stock risk (beta) is cross-
sectionally related to the size of the fund i.e. smaller the total net asset value of the fund, the higher its
beta with the small minus large variable. The market prices a fund not only by the characteristics of
the asset it holds, but also according to the characteristics of the fund itself.
In respect of growth variable, it should be noted that for a cross section of individual stocks,
the growth index is inversely correlated with the book-to-market ratio. The findings show that growth
index is positively related to the net asset value return of the fund, the differential return (market
return- NAV return) is related to the growth index at a negative and statistically significant level. Thus
closed end funds are priced as if they have higher book- to-market ratios than exist for the underlying
assets these funds own. In addition, there is a positive cross-sectional relationship between the ratio of
price to net asset value at which a fund sells and its sensitivity (beta) with the growth variable.
Thus it is clear that closed end funds have both systematic risk and non systematic risk that
differs from that of the assets these funds hold.
Some other reasons that led to different pricing for open end funds and closed end funds can
be difference in services provided, tax liability imbedded, difference in the percentage of the funds
held in restricted stock. And the final reason for investors paying more for net assets in open end
funds than in closed end funds is the value of management in open end funds is not priced, while it is
not priced in closed end funds. Therefore if investors believe that superior management exists, they
can buy it for no cost in open end funds and earn a superior return. But this can’t be done for closed
end funds as expectations of management performance should be incorporated in the price of the fund.
Contrary to many previous studies, there are many evidences to support the value of active
mutual fund management. Chen et al (2000) show that stocks that fund managers buy perform
significantly better than stocks they sell during a one-year period. The evidence in Wermers (2000)
shows that fund managers who trade more are better at stock-picking than managers who trade less.
Wermers, 2003 concluded that active management does provide value, but that this value is
reflected in only a minority of funds that take relatively large volatility bets. That is, it showed that
funds taking large bets away from the market or style portfolios generally perform well during
contemporaneous time periods (where volatility and average return are measured over the same
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period). It was also found that high volatility funds persist in generating superior future alphas- future
one-year style-adjusted alphas are generally higher for funds with higher three-year lagged volatilities.
1.6 Active Share and Portfolio Management
There are some new measures of the value of active portfolio management by forming
replicating portfolios. These measures allow for a separate evaluation of fund managers' strategic and
tactical decisions. Also new evidence on the value of trading by decomposing it into long-term trading
decisions, short-term trading decisions, and trading that is the result of regulatory restrictions is
obtained. This value of active portfolio management and finds a positive alpha measure for the
average fund manager. Moreover, the results show a positive relation between the value created and
trading activity.
The performance of mutual funds suggests that the average fund does not outperform relevant
benchmarks. Hence, active portfolio management does not create value. Thus there is need on
thoroughly analysing fund managers' decisions of what fund managers really do in attempt to shed
light on their trading decisions, since these decisions are the distinguishing features of active and
passive portfolio management.
Previous evaluations of fund managers' skills have decomposed fund performance into stock
selectivity and market timing ability. These methods estimate fund managers' skills by time series
regressions, where aggregate data on portfolio returns are used. One drawback of these methods is that
the aggregation of asset returns might hide important information.
In further analysing the value of active portfolio management and trading, firstly, new measures
of the value of active portfolio management are introduced. These measures follow the developments
in the literature and require data on the funds' portfolio holdings. Using such data a passive strategy is
replicated for each fund that also meets the regulatory restrictions of the funds and use these portfolios
as benchmarks. One advantage of using a replicating portfolio or strategic portfolio as the benchmark
on an individual level is that it eliminates the problems of finding a benchmark that is suitable for all
funds. Moreover, this replicating portfolio also allows for a detailed analysis of performance by
obtaining separate performance measures of the fund manager's strategic asset allocation decisions
and tactical decisions. The performance of the strategic decisions is measured as the performance of
one-year buy-and-hold portfolios (the strategic portfolio). Hence, tactical decisions refer to changes in
the strategic portfolio during the year. Second, in contrast to previous studies that analyze aggregate
trading, the evidence is extended by decomposing trading activity attributable to three components.
One component captures long-term trading decisions, i.e., changes in the strategic portfolio. Another
component captures short-term trading decisions, i.e., deviations from the strategic portfolio during
the year. The third component is regulatory trading. This trading occurs as a result of regulatory
restrictions, which forces the fund to diversify by limits on the weight of any single stock in the
portfolio.
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The active manager’s objective is to maximise the information ratio. The typical active manager
also uses modern portfolio theory in order to construct the managed portfolio. However in order to
outperform the market, the active manager must take advantage of perceived mispricing by making
regular changes to the holdings in the trustee’s portfolio. So the active manager has a multi-period
problem. But modern portfolio theory is for the single period decision problem, and applying it to
each period of the multi-period problem does not maximise information ratio. As we shall see there is
an alternative investment approach that maximises the information ratio.
On investigating the value of active mutual fund management by examining the stockholding and
trades of mutual funds, (Chen et al, 2007) it was found that stocks that are most widely held by mutual
funds do not outperform stocks that are least widely held. However, examining mutual fund trades, it
was found that stocks recently bought by funds have significantly higher returns than stocks recently
sold. This is true for large stocks as well as small stocks, and for value stocks as well as growth
stocks. The evidence that stocks actively traded by the funds outperform stocks that are passively held
from prior periods suggests that mutual funds hold stocks longer than the horizon over which they can
predict returns, possibly because of a preference to avoid high transactions costs or capital gains taxes.
A more detailed examination reveals that growth-oriented funds exhibit better stock selection skills
than income-oriented funds, especially in picking large growth stocks. It was also found that funds
that trade more frequently have marginally better stock selection skills than funds trading less often.
Finally, it was observed that much of the persistence in fund performance is due to the momentum
effect in stock returns. Specifically, the holdings of winning funds significantly outperform the
holdings of losing funds; to a large extent, this is due to the fact that losing funds generally hold stocks
that are past losers, which tend to earn low future returns. Stocks that are newly bought by winning
funds, however, only marginally outperform those newly bought by losing funds.
The expected value added in an actively managed portfolio is dependent on both the manager’s
forecasting skill and the ability to take appropriate positions in securities that reflect those forecasts.
The fundamental law of active management (Grinold, 1999) gives the maximum expected value added
for an actively managed portfolio based on the forecasting ability of the manager and the breadth of
the application. Though the impact of portfolio constraints on potential value added has not been
addressed, constraints like no short sales and security concentration limits impede the transfer of
information into optimal portfolio positions and decrease the expected value added (Clarke et al,
2001).
Many mutual fund managers decide to deviate from a well-diversified portfolio and concentrate
their holdings in industries where they have informational advantages. The rationale for selecting
industry concentration as the conditioning variable is that skilled fund managers may exhibit
superior performance by holding more concentrated portfolios to exploit their informational
advantages. The relation between the industry concentration and the performance of actively
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managed U.S. mutual funds from 1984 to 1999 indicate that, on average, more concentrated funds
perform better after controlling for risk and style differences using various performance measures
(Kacperczyk et al, 2004). Thus investment ability is more evident among managers who hold
portfolios concentrated in a few industries. Actively managed mutual funds are an important
constituent of the financial sector. On an average, actively managed funds underperform passive
benchmarks, mutual fund managers might still differ substantially in their investment abilities.
Conventional wisdom suggests that investors should widely diversify their holdings across
industries to reduce their portfolios’ idiosyncratic risk. Fund managers, however, might want to hold
concentrated portfolios if they believe some industries will outperform the overall market or if they
have superior information to select profitable stocks in specific industries. Thus it is expected that
funds with skilled managers to hold more concentrated portfolios. As a result, a positive relation
between fund performance and industry concentration is observed.
Mutual fund managers may also hold concentrated portfolios due to a potential conflict of
interest between fund managers and investors. Several studies indicate that investors reward stellar
performance with disproportionately high money inflows but do not penalize poor performance
equivalently. This behaviour results in a convex option-like payoff profile for mutual funds. This
result in some managers, especially those with lower investment abilities, having an incentive to adopt
volatile investment strategies to increase their chances of having extreme performance. Thus funds
pursuing such gaming strategies would hold more concentrated portfolios. In that case, there doesn’t
exist a positive relation between fund performance and industry concentration.
On analyzing the net returns of mutual funds, it shows that mutual funds on average, under-
perform passive benchmarks by a statistically and economically significant margin. However, based
on the gross returns of the portfolio holdings of mutual funds it was concluded that managers who
follow active investment strategies have stock-picking abilities.
The size of a fund also affects its ability to outperform the benchmark. In a theoretical paper,
Berk and Green (2002) explain many stylized facts related to fund performance using a model with
rational agents. In their model, skilled active managers do not outperform passive benchmarks after
deducting expenses because of a competitive market for capital provision combined with decreasing
returns to scale in active management. The ranking of the concentration deciles for the abnormal
returns after expenses is very similar to the one before expenses. The most concentrated fund
portfolios tend to have positive abnormal net returns, while the least concentrated portfolios tend to
have negative abnormal net returns. The difference in the performance between concentrated and
diversified funds declines slightly after-expense returns are studied, because highly concentrated funds
charge higher expenses than diversified funds. A trading strategy of going long in the most
concentrated portfolios and going short in the most diversified portfolios would have generated these
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risk-adjusted returns. Therefore, concentrated funds appear to outperform diversified funds even after
taking into account fund expense ratios.
To further analyze whether the effect of the Industry Concentration Index depends on the size
of the mutual funds, the mutual funds are segregated into different size portfolios and the performance
of concentrated and diversified funds is compared within these size portfolios. Diseconomies of scale
in money management make it difficult for very large funds to outperform passive benchmarks even
if fund managers are skilled.
There is a positive performance difference between the high and low concentration funds in
all size quintiles using the various performance measures. The concentration effect does not differ
significantly between the different size quintiles. This indicates that results are not primarily driven by
the smallest mutual funds. In a related empirical study, it was (Chen et al, 2002) find that smaller
funds tend to outperform larger funds due to diseconomies of scale. While the size of the fund
negatively affects its performance, it is possible that a wide dispersion of holdings across many
industries also may erode its performance.
Funds frequently concentrate their holdings in specific investment styles, for example, value
vs. growth or small vs. large capitalization stocks. On investigating to what extent concentration
results are related to funds’ investment styles, it is observed that mutual funds investing primarily in
small or growth stocks outperform other mutual funds with respect to all performance measures. On
the other hand, mutual funds specializing in large-value stocks tend to perform the worst according to
all measures.
Further a fund’s performance is also conditioned upon its industry concentration. The
rationale for selecting industry concentration as the conditioning variable is that skilled fund managers
may exhibit superior performance by holding more concentrated portfolios to exploit their
informational advantages.
Using U.S. mutual fund data from 1984 to 1999, an index based on the difference between the
industry weights of a mutual fund and the industry weights of the total market portfolio is analysed
which indicates that mutual funds differ substantially in their industry concentration and that
concentrated funds tend to follow distinct investment styles. The Industry Concentration Index
measures how much a mutual fund portfolio deviates from the market portfolio. This index is equal to
zero if a mutual fund has exactly the same industry composition as the market portfolio, and increases
as a mutual fund becomes more concentrated in a few industries. Managers of more concentrated funds
overweigh growth and small-cap stocks, whereas managers of more diversified funds hold portfolios
that closely resemble the total market portfolio.
Using the four-factor model of Carhart (1997), it is known that more concentrated funds
perform better after adjusting for risk and style differences. Mutual funds with above median industry
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concentration yield an average abnormal return more than below median industry both before
deducting expenses and after deducting expenses. While considering the causes of the abnormal
performance of concentrated portfolios, it is seen that the superior performance of concentrated
mutual funds is primarily due to their stock selection ability. Furthermore, concentrated funds are able
to select better stocks even after controlling for the average industry performance. Moreover the trades
of mutual funds and the stocks purchased tend to significantly outperform the stocks sold and the
return difference between the buys and the sells by mutual funds increases significantly with industry
concentration. This indicates that concentrated mutual funds are more successful in selecting
securities than diversified funds.
The value of active mutual fund management is investigated by examining the performance of
both the holdings and the trades of mutual funds. It was found that stocks held by mutual funds do not
outperform the general population of stocks. However, when examination of mutual fund trades is
done, it was found that stocks that the funds actively buy have significantly higher returns than stocks
that they actively sell. This return difference is roughly 2% during the one-year holding period
following the trades, adjusted for the characteristics of the stocks that are traded. This performance
estimate is more than double the stockholdings based estimate provided by Daniel, Crinblatt, Titman,
and Wermers (1997). The larger magnitude of performance estimate illustrates the advantage the
trades-based measure confers. Overall, the evidence is suggestive of the funds possessing superior
stock selection skills. The value of any superior information that some mutual funds might possess,
however, is fairly short-lived-the stocks that they buy outperform the stocks they sell for only the first
year following the trades. The fact that mutual funds often hold stocks longer than one year indicates
that they often avoid selling stocks from their portfolios because of transaction cost considerations, or
that they have only limited abilities in finding new, underpriced stocks to buy. Mutual funds, as a
group, have roughly the same level of skill in picking growth stocks as they do in picking value
stocks, and in picking large stocks vs. small stocks. However, we find that growth-oriented funds are
better at picking large growth stocks than income-oriented funds. In addition, it was found that high
turnover funds have better stock selection skills than low turnover funds. Finally, examination of
persistence in mutual fund performance, is done which has been a controversial issue. Since the
stockholdings data for mutual funds are able to directly address whether persistence in mutual fund
performance is due to the influence on returns of the characteristics of stocks passively carried over
from previous periods, or whether persistence is due to returns on stocks actively traded by winning
vs. losing funds. It was found that stockholdings passively carried over by winning funds outperform
holdings of losing funds. However, stocks that are newly bought by winning funds only marginally
outperform stocks newly bought by losing funds. The results also indicate that the superior
performance of these passive holdings is mostly attributable to the general tendency of past winners to
outperform past losers (or the momentum effect) rather than to persistent stock selection skills.
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In view of the same, this study is proposed with the following two objectives:
1. To determine and analyze active share measure of selected equity diversified mutual funds.
2. To study and analyze rolling performance of selected equity diversified mutual funds grouped
according to active share measure.
13
CHAPTER- II
REVIEW OF LITERATURE
Lehmann and Modest (1987) ascertained whether conventional measures of abnormal mutual fund
performance were sensitive to the benchmark chosen to measure normal performance for which
returns of 130 mutual funds over the period. The standard CAPM benchmarks and a variety of APT
benchmarks were employed for investigation. A little similarity was found between the absolute and
relative mutual fund rankings obtained from these alternative benchmarks, which suggested the
importance of knowing the appropriate model for risk and return. In addition, the rankings are not
insensitive to the method used to construct the APT benchmark. A statistically significant measured
abnormal performance using all the benchmarks was found. It was also concluded that choice of what
constitutes normal performance is important for evaluating the performance of managed portfolios.
Moreover these findings are not compromised by the potential problems associated with the shifting
risk levels of managed funds.
Grinblatt and Titman (1988) analyzed the quarterly portfolio holdings of sample of mutual funds to
estimate gross returns. The mutual fund performance has been analyzed through net returns of funds
which are fees, expenses, and other transaction costs subtracted from them or to add the estimated
transaction costs to the net returns to obtain the gross returns. The sample was analyzed to check the
ability of professional portfolio managers to earn abnormal returns which showed that actual returns
realised by investors are either having negative performance or no performance for an average mutual
fund. However mutual fund managers having superior investment talent may be able to earn rents in
the form of higher fees or perquisites. They compared the abnormal returns of active and passive
investment strategies, both with and without transaction costs, fees, and expenses. The abnormal
performance of the funds, based on gross returns, is inversely related to fund size, but as transaction
costs are inversely related to fund size, the actual net returns are unrelated to the net asset values of the
funds.
Brooks et al (1993) examined an aspect of professional investment management which has not been
adequately documented and studied; the extent to which equity mutual fund managers actively adjust
their portfolio's equity risk exposure over time. They developed the estimates of a portfolio's quarter-
end beta using the actual stock holdings of the portfolio at the quarter-end. Then changes in these beta
estimates from one quarter to the next were shown to arise from both passive and active asset
allocation. It was found that active risk adjustment dominates passive rebalancing and that equity risk
exposure is quite variable over time. Thus, individual investors who estimated the equity risk inherent
in a portfolio based on a single time series return beta might seriously misestimate the portfolio's
14
current equity risk. It was also tested whether active risk management is better characterized as
anticipatory of future market events or reactive to past market events.
Elton et al (1993) investigated the informational efficiency of mutual fund performance for the period
1965-84. It was found that returns on S &P stocks, returns on non- S &P stocks, and returns on bonds
are significant factors in performance assessment. Once the impact of non- S &P assets on mutual
fund returns is corrected, the mutual funds do not earn returns that justify their information acquisition
costs and this was consistent with results for the prior periods. Also mutual fund managers
underperform passive portfolios. Furthermore, funds with higher fees and turnover underperform
those with lower fees and turnover. Finally, funds do not adjust expenses over time to reflect their
performance.
Grinblatt and Titman (1993) introduced a new measure of portfolio performance and applied it to
study the performance of a large sample of mutual funds. In contrast to previous studies of mutual
fund performance, the measure used in this study employs portfolio holdings and does not require the
use of a benchmark portfolio. It was found that the portfolio choices of mutual fund managers,
particularly those that managed aggressive growth funds, earned significantly positive risk-adjusted
returns in the 1976-85 period. In comparing the performance evaluation measure developed in this
article with more traditional measures developed from asset-pricing theories, it was identified that the
new technique is more costly to implement, both in terms of data collected and computer time.
Moreover data on holdings are only available externally on a quarterly basis, outside evaluators are
not measuring the true performance of the fund but only the performance of some hypothetical
portfolio that is correlated with the fund. This is a nonissue for internal evaluations when this
technique can be used with transaction data. For outside evaluators, the use of quarterly holdings as
opposed to holdings that correspond to each transaction adds noise to true performance and thus
biases the measure toward finding no performance. However, the finding of significant performance
suggested that the frequency of the holdings data need not be a major concern for outside evaluators
who are at-tempting to identify informed managers.
Malkiel (1995) suggested that equity mutual fund managers achieve superior returns and that
considerable persistence in performance exists. The study utilized a unique data set including returns
from all equity mutual funds existing each year. These data enabled to examine more precisely the
performance and the extent of survivorship bias. In the aggregate, funds have underperformed
benchmark portfolios both after management expenses and even gross of expenses. Survivorship bias
appears to be more important than other studies have estimated. Moreover, while considerable
performance persistence existed during the 1970s, there was no consistency in fund returns during the
15
1980s. Thus the study of mutual funds does not provide any reason to abandon a belief that securities
markets are remarkably efficient. Most investors would be considerably better off by purchasing a low
expense index fund, than by trying to select an active fund manager who appears to possess a hot
hand. Since active management generally fails to provide excess returns and tends to generate greater
tax burdens for investors, the advantage of passive management holds.
Gruber (1996) examined as to why actively managed mutual funds have grown so fast as against their
inferior performance compared to index funds. The reason being that in actively managed funds,
management ability is not priced and fund is bought and sold at NAV. If management ability exists
and it is not included in the price of open end funds, then performance should be predictable.
Moreover, if the performance is predictable and investors are aware of this, then cash flows into and
out of funds should be predictable by the same metrics that predict performance. And if predictors
exist and at least some investors act on these predictions in investing in mutual funds, the return
should be better than average return for all investors in these funds. The flow of new money into the
best performing funds is much larger than the flow of money out of the poorer performing funds. The
flow of new money into and out of mutual funds underperforms naive rules for selecting mutual funds
and this is due to a disadvantaged client and sophisticated investor. Thus the evidences showed that
investors in actively managed mutual funds are more rational than it has been assumed.
Admati and Pfleiderer (1997) in their article examined the theoretical use of benchmark portfolios in
the compensation of privately informed portfolio managers. It was found that the use of a benchmark,
and particularly the types of benchmarks often observed in practice, cannot be easily rationalized.
Specifically, commonly used benchmark‐adjusted compensation schemes are generally inconsistent
with optimal risk‐sharing and do not lead to the choice of an optimal portfolio for the investor.
Moreover, benchmarks do not help in solving potential contracting problems such as inducing the
manager to expend effort or trying to screen out uninformed managers.
Grinold and Kahn (1999) discussed the perspective of the active manager of institutional assets in
terms of defined-benefit plans, defined-contribution plans, endowments, foundations, or mutual funds.
Though the focus is mainly on equities, but the analysis applied as well to bonds, currencies, and other
asset class. A structured approach as a process and a set of strategic concepts and rules of thumb
which broadly guide this process was provided for active investment management. The process
included researching ideas (quantitative or not), forecasting exceptional returns, constructing and
implementing portfolios, and observing and refining their performance. It was also discussed that
quantitative active management is the poor relation of modern portfolio theory and had the power and
structure of modern portfolio theory without the legitimacy. The focus on active management was
made due to the fact that moves away from the benchmark carry substantial investment and business
16
risk. Also, analyzing investments relative to a benchmark is more general than the standard total risk
and return framework. Throughout the book, the portfolios are related to return forecasts or asset
characteristics. This perspective provides a novel way to bring heterogeneous characteristics to a
common ground (portfolios) and use portfolio theory to study them. The relative focus would be on
the perspective of residual component of return: the return that is uncorrelated with the benchmark
return.
Chen et al (2000) investigated the value of active mutual fund management by examining the
stockholding and trades of mutual funds. It was found that stocks widely held by funds do not
outperform other stocks. However, stocks purchased by funds have significantly higher returns than
stocks they sell and this is true for large stocks as well as small stocks, and for value stocks as well as
growth stocks. Moreover growth-oriented funds exhibit better stock selection skills than income-
oriented funds. One weak evidence that was reported was that funds with the best past performance
have better stock-picking skills than funds with the worst past performance. Overall, the research
suggested of funds that possess superior stock selection skills. The value of any superior information
that some mutual funds might possess, however, was fairly short-lived-the stocks that they buy
outperform the stocks they sell for only the first year following the trades. The fact that mutual funds
often hold stocks longer than one year indicates that they often avoid selling stocks from their
portfolios because of transaction cost considerations, or that they had only limited abilities in finding
new, underpriced stocks to buy.
Wermers (2000) We use a new database to perform a comprehensive analysis of the mutual fund
industry. We find that funds hold stocks that outperform the market by 1.3 percent per year, but their
net returns underperform by one percent. Of the 2.3 percent difference between these results, 0.7
percent is due to the underperformance of non stock holdings, whereas 1.6 percent is due to expenses
and transactions costs. Thus, funds pick stocks well enough to cover their costs. Also, high-turnover
funds beat the Vanguard Index 500 fund on a net return basis. The evidence has also supported the
value of active mutual fund management.
Baks et al (2001) analyzed the mutual-fund performance from an investor’s perspective. It studied the
portfolio-choice problem for a mean-variance investor choosing among a risk-free asset, index funds,
and actively managed mutual funds. To solve this problem, Bayesian method of performance
evaluation was employed which was the key innovation in this approach is the development of a
flexible set of prior beliefs about managerial skill. The methodology is applied to a sample of 1,437
mutual funds. It was found that some extremely sceptical prior beliefs nevertheless lead to
economically significant allocations to active managers. The paper showed that some of these close
alternatives imply economically large investment in active managers. Thus, the case against investing
17
in actively managed funds cannot rest solely on the available statistical evidence. The analysis does
not include elements of the investor’s decision such as load fees, taxes, and limitations on short sales.
Furthermore, nobody knows the correct model of performance evaluation. It was not claimed to
provide a definitive analysis of the portfolio-choice decision. Most investors may be best served by
simple rules of thumb, especially if they did not possess the discipline or technology to implement
sophisticated trading strategies. Nevertheless, it was believed that the investor’s perspective motivates
the importance of using informed prior beliefs in a Bayesian method of performance evaluation.
These conclusions were held even when we measure the fund returns gross of management expenses
(that is assuming their bookkeeping, research, and other expenses except brokerage commissions were
obtained free). Thus on average the funds apparently were not quite successful enough in their trading
activities to recoup even their brokerage expenses.
Clarke et al (2001) generalized the fundamental law to include an information transfer coefficient
that reflects portfolio constraints. Active portfolio management is typically conducted within
constraints that do not allow managers to fully exploit their ability to forecast returns. Constraints on
short positions and turnover, for example, are fairly common and materially restrictive. Other
constraints, such as market-cap and value/growth neutrality with respect to the benchmark, or
economic sector constraints, can further restrict an active portfolio’s composition. Ex –ante and ex-post
correlation relationships was derived that facilitate constrained portfolio performance analysis. The ex-
ante relationship is a generalized version of Grinold (1989) fundamental law of active management,
and provides an important strategic perspective on the potential for active management to add value.
The ex-post correlation relationships represented a practical decomposition of performance into the
success of the return prediction process and the noise associated with portfolio constraints. The
accuracy of these relationships was verified with a Monte-Carlo simulation and illustrated their
application with equity portfolio examples based on the S&P 500 benchmark.
Chen et al (2002) investigated the effect of scale on performance in the active money management
industry. It was first documented that fund returns, both before and after fees and expenses, decline
with lagged fund size, even after accounting for various performance benchmarks. A number of
potential explanations for this relationship were explored. This association was most pronounced
among funds that have to invest in small and illiquid stocks, suggesting that these adverse scale effects
are related to liquidity. Controlling for its size, a fund’s return did not deteriorate with the size
of the family that it belongs to, indicating that scale need not be bad for performance depending on
how the fund was organized. It was found that this relationship was not driven by heterogeneity in
fund styles, fund size being correlated with other observable fund characteristics, or any type of
survivorship bias. Moreover, it was argued that organizational diseconomies related to hierarchy costs
18
may also play a role in addition to liquidity in the documented diseconomies of scale. Consistent with
this view, it was also concluded that the size of a fund’s family does not significantly erode fund
performance. Finally, by using data on whether funds were solo-managed or team-managed and the
composition of fund investments, the idea that scale erodes fund performance was explored because of
the interaction of liquidity and organizational diseconomies.
Hassan and Kofman (2003) analyzed persistent bear market conditions have led to a shift of focus in
the tracking error literature. Earlier the portfolio allocation literature focused on tracking error
minimization as a consequence of passive benchmark management under portfolio weights,
transaction costs and short selling constraints. But the abysmal benchmark performance shifted the
literature’s focus towards active portfolio strategies that aim at beating the benchmark while keeping
tracking error within acceptable bounds. Thus an investigation was made of an active (dynamic)
portfolio allocation strategy on Australian stocks over the period January 1999 through November
2002 that exploits the predictability in the conditional variance-covariance matrix of asset returns.
Jorion (2003) explored the risk and return relationship of active portfolios subject to a constraint on
tracking-error volatility (TEV), which can also be interpreted in terms of value at risk. Such a
constrained portfolio was the typical setup for active managers who were given the task of beating a
Benchmark. The problem with this setup was that the portfolio manager pays no attention to total
portfolio risk, which results in seriously inefficient portfolios unless some additional constraints were
imposed. The development in this article shows that TEV-constrained portfolios are described by an
ellipse on the traditional mean–variance plane. This finding yields a number of new insights. Because
of the flat shape of this ellipse, adding a constraint on total portfolio volatility can substantially
improve the performance of the active portfolio. Thus in general, plan sponsors should concentrate on
controlling total portfolio risk.
Wermers (2003) analyzed the relation between active bets made by fund managers and the
performance of the funds. The study indicates that funds having high level of return volatility provide
better performance. The analysis was made on the basis of the investment returns of shareholders in
U.S. domestic equity mutual funds over a 26-year period, focusing on whether fund managers taking
bigger portfolio bets have better stock picking skills. It was found that funds with higher levels of
return volatility provide better performance during the majority of the years during the period of
study. This finding was robust to measures of performance that control for differential market-based
and style-based investment strategies across the funds. Thus it was concluded that fund managers that
take larger active management bets have better stock picking skills, even though the average manager
underperforms her benchmarks. It was also found that adjusting for the differing exposures of funds to
19
the market did not significantly change the result and adjusting for the differing exposures of funds to
style loadings substantially strengthened the result, and lagging the risk measure, relative to the
performance measure generally supported the above results.
Engstrom (2004) obtained new measures of the value of active portfolio management by forming
replicating portfolios. These measures allow for a separate evaluation of fund managers’ strategic and
tactical decisions. Evidence was also obtained on the value of trading by decomposing it into long-
term trading decisions, short-term trading decisions, and trading that is the result of regulatory
restrictions. This paper also supported the value of active portfolio management and finds a positive
alpha measure for the average fund manager. The results showed a positive relation between the value
created and trading activity.
Shukla (2004) calculated the value of interim portfolio revision, an integral component of active
management of mutual funds by comparing the returns on actively managed mutual fund portfolios
with the returns the fund portfolios would have earned had there been no interim revision. The results
showed that, on an average, excess returns from interim portfolio revision do not cover the
incremental trading costs, even over holding periods as long as six months. Across mutual funds, the
evidence was found of a positive relationship between the excess returns and mutual fund expense
ratios suggesting that those managers who generate higher excess returns charge higher fees from the
stockholders.
20
Chapter III
RESEARCH METHODOLOGY
It is imperative to decide upon and document a research methodology well in advance to carry out the
investigation in a most effective and systematic way. This chapter describes the research methodology
adopted to serve the objectives of the study in an effective manner. This chapter consists of the
following sections:
3.1 Research Framework
3.2 Population and Sample
3.3 Collection of data
3.4 Analysis of data
3.5 Limitations of study
These sections are discussed as follows:
3.1 Research Framework
The main theme of the present investigation has been conceptualized within a framework to
avoid a disorder or an ambiguity in the process of conducting the study. It is also intended to provide
clear cut approach to the reader. The present research is based on objective of determining and
analyzing active share measure and rolling performance of selected equity diversified mutual funds
grouped according to active share measure. Active share measure can be described as difference of
portfolio’s benchmark index and that of share of portfolio holdings. This measure is defined as Active
Share of a fund as given by Cremers and Petajisto (2007). In order to compute the active share, the
portfolio holdings of a fund can be compared to its benchmark index. A fund has an active long
position in it if it over weights a stock relative to the index weight, and when a fund under weights an
index stock or does not buy it at all, it has an active short position in it. The rolling performance was
also analyzed on the basis of NAVs of the next month. Further the ranks of portfolios created on
active share measure were also compared with ranks of portfolios created on basis of NAV. Portfolio
values of two months was also compared to find the return.
3.2 Population and sample
The population for the study is all equity diversified mutual funds in Indian mutual fund
industry. For the study, those mutual funds were selected which are having at least 55 year operating
history as on 31st July, 2010 will be selected. List of these funds was prepared from
www.valueresearchonline.com and out of the same, 20 funds were selected randomly. For each month
from July 2010 to December 2010, the fund cards were obtained for all these 20 mutual funds from
21
the website. For the purpose of analyzing the rolling performance, the portfolios were created
according quartile statistics pertaining to active share measure and for these NAVs for last trading day
of each month were obtained from AMFI website.
3.3 Collection of data
For the purpose of study, portfolio composition in terms of specific stocks held by the fund
was collected for 6 months i.e. from July 2010 to December 2010 for each of the selected 20 funds
from the website valueresearchonline.com. The Nifty weights were also collected for the 50 stocks for
the last trading day of each of the month from July 2010 to January 2011 for the purpose of analyzing
the rolling performance for each month.
3.4 Analysis of data
Active share measure was calculated in the following manner. For carrying out the
calculations, MS- Excel was used.
To calculate Active share measure, the portfolio composition in terms of specific stocks held
was collected for the selected 20 mutual funds. Nifty weights were also collected for the 50 stocks for
the last trading day of each month from July 2010 to December 2010. Those portfolio stocks that were
not in Nifty were given weight equal to zero.
Active share measure was calculated using the formula as given by Cremers and Petajisto
(2007) as mentioned below:
N
Active Share = ½∑ Wfund, i – Windex, i
i=1
where Wfund, i = portfolio weight of asset i in the fund,
and, Windex, i = portfolio weight of asset i in the index.
For each fund, the portfolio weights of each stocks held of the selected funds were subtracted from
Nifty weights of that stocks. Then for each month the total of these differences were calculated for all
the selected mutual funds. This was divided by 2 to get the value of Active share.
For e.g. the total of the difference of the portfolio weight and Nifty weight of UTI Equity fund in the
month of July 2010 is 44.71.
Active share measure of UTI Equity for July 2010 is: 44.71 = 22.36
2
Similarly, this was calculated for all the selected 20 equity mutual funds.
22
After that average and standard deviation was calculated for the active share measure for all
the 20 mutual funds using MS-Excel formulas to know the average active share of all the funds.
The funds were grouped according to quartile statistics pertaining to active share measure.
Four portfolios were created in each month on the basis of quartiles calculated. For each of the month,
an investment of Rs. 500000 was made into each portfolio which was divided equally among the
mutual funds constituting that portfolio.
For e.g. in July 2010, 1st portfolio constitutes Baroda Pioneer Growth, HDFC Equity, HSBC Equity,
HSBC India opportunities and UTI Equity. Thus Rs. 100000 was allocated among all these stocks.
Then units were calculated for all stocks by dividing the investment made with the NAVs collected as
of 31st July 2010. The units calculated were multiplied with the next month NAV i.e. the units
invested are multiplied with the NAV of last trading day of August 2010. Thus the values we get for
all the funds in a portfolio are totalled to get the final value of investment as shown in tables 8-13 in
results and discussion.
After the calculation of above data, tables were constructed and secondary data were analyzed
using the following statistical tools:
• Mean
• Spearman’s rank correlation
• Quartile Statistics
• Standard deviation
• t-test for difference in ranks
3.4.1 Mean: The arithmetic mean or the average of a list of numbers is the sum of the entire list
divided by number of items in the list. The mean is the most commonly-used type of average and is
often referred to simply as the average. Its formula is:-
x=1 ∑
xi= 1 (x1+.................+ xn )
n i=1 n
Where x = mean
n = number of observations
x1,..., xn = a set of data.
23
3.4.2 Spearman’s Rank Correlation: The Spearman's rank correlation coefficient is a non-
parametric measure of statistical dependence between two variables. It provides a distribution free test
of independence between two variables. It assesses how well the relationship between two variables
can be described using a monotonic function. If there are no repeated data values, a perfect Spearman
correlation of +1 or −1 occurs when each of the variables is a perfect monotone function of the other.
If there are no tied ranks, then ρ is given by:
Where, ρ= rank correlation

di = xi − yi i.e. differences between the ranks of each observation on the two variables
n= raw scores
3.4.3 Quartile Statistics: A quartile is one of three points that divide a data set into four equal groups,
each representing a fourth of the distributed sampled population. It is a type of quintile. The four
ranges defined by the three values discussed here.
• first quartile (designated Q1) = lower quartile = cuts off lowest 25% of data = 25th percentile
• second quartile (designated Q2) = median = cuts data set in half = 50th percentile
• third quartile (designated Q3) = upper quartile = cuts off highest 25% of data, or lowest 75% =
75th percentile
3.4.4Standard Deviation: Standard deviation is a measure of the variability or dispersion of a

population, a data set, or a probability distribution. A low standard deviation indicates that the data
points tend to be very close to the same value (the mean), while high standard deviation indicates that
the data are spread out over a large range of values. The sample standard deviation measures the
variability of data in a sample. The formula for standard deviation (σ) of the sample is:-
Where SN = sample standard deviation

N = number of observations
xi = a particular observation
x = mean of sample
3.4.5 t-test: t- test for difference in ranks (independent samples) was applied while comparing the two
types of portfolio ranks and also for comparison of ranks on basis of Active share measure and NAV.
Its formula for Independent one-sample t-test is:-
24
In testing the null hypothesis that the population mean is equal to a specified value μ0, one uses the
statistic
Where s = sample standard deviation of the sample an
n = sample size.
The degrees of freedom used in this test is n − 1
The null hypothesis for the study is that there is no significant difference between the Active
share measure and portfolio returns. t-test for difference in ranks was applied at 5 percent level of
significance.
Ho: No significant difference between Active share measure and portfolio returns
H1: Significant difference between Active share measure and portfolio returns
t-test was applied at the end of each month on half year period starting from 31st July 2010.
There were 6 month periods for both Portfolio returns and NAV returns.
All the calculations of t-test for testing returns were made on SPSS 17 and the results are
presented in chapter IV.
3.5 Limitations of the Study
Every study is subject to certain constraints and limitations. These are listed below so that the
findings of the study could be understood in right perspective and direction:
• The study was conducted for data pertaining to a period of 6 months. Therefore to have a
greater insight into the study, a relatively longer period needs to be understood.
• Only 20 equity diversified mutual funds were selected.
• Comparison of portfolio weights was made only with Nifty index.
• Only Equity mutual funds were taken for the study.
25
CHAPTER IV
RESULTS AND DISCUSSION
This chapter contains results and discussion of the empirical study conducted on the basis of
methodology described in Chapter- III. The analysis of secondary data collected to determine
and analyze active share measure and rolling performance of selected equity diversified
mutual funds grouped according to active share measure. For this purpose, this chapter has
been divided into four parts as follows:
4.1 Determine and analyze Active Share Measure of Equity Diversified Mutual Funds
4.2 Analysis of rolling performance of selected equity diversified mutual funds grouped
according to active share measure.
4.3 Return Performance analysis of Mutual Fund Return on the basis of Active Share Measure
4.4 Discussion
The analysis of active share measure and rolling performance of selected equity diversified
mutual funds was done as follows:
4.1 Determine and analyze Active Share Measure of Equity Diversified Mutual Funds
The active share measure was determined for 20 selected equity diversified mutual funds. For
the purpose of ascertaining the same, the portfolio composition of the selected mutual funds was
collected from July 2010 to December 2010. Nifty weights of the 50 stocks were also collected from
the same period. The formula for determining active share measure explained in the introduction part,
was applied on collected data. Through this we find active share measure for each of the fund for all
the 6 months i.e. July 2010 to December 2010.
26
Table 1: Active share measure of July 2010
Name of the fund July 2010

Baroda Pioneer Growth 20.16
Birla Sun life Dividend Yield Plus 32.66
DSPBR Equity 35.74
Fortis Opportunities 30.17
Franklin India Prima Plus 32.91
HDFC Top 200 26.59
HSBC Equity 23.14
HSBC India Opportunities 26.32
ICICI Prudential Emerging STAR 32.17
IDFC Classic Equity Fund 36.44
ING Core Equity 29.00
Kotak 30 31.02
Kotak Opportunities 33.70
Magnum Emerging Business 42.03
Magnum Global 43.15
Reliance Vision 39.54
Sundaram BNP Paribas Select midcap Reg 35.02
Taurus Bonanza 28.65
UTI Equity 22.36
UTI Master Value 33.87
Table 1 shows the Active Share Measure of the 20 selected equity diversified mutual funds for the
month of July 2010. It was found that active share measure was highest for Magnum Global fund at
43.15 which shows that it is highly actively managed fund. The lowest active share measure was
recorded for Baroda Pioneer Growth fund at 20.16. All the other mutual funds are having active share
measure in the range of 20-45.
Table 2: Active share measure of August 2010
Name of the fund August 2010

DSPBR Equity 38.96
HDFC Top 200 26.93
HSBC Equity 25.11
27
Kotak 30 28.92
Magnum Global 43.37
UTI Equity 23.57
month of August 2010. It was found that active share measure was highest for Magnum Emerging
Business fund at 43.68 which shows that it is highly actively managed fund. The lowest active share
measure was recorded for Baroda Pioneer Growth fund at 18.51. All the other mutual funds are having
active share measure in the range of 18-44.
Table 3: Active share measure of September 2010
Name of the fund September 2010

DSPBR Equity 39.96
HDFC Top 200 26.61
HSBC Equity 28.08
Kotak 30 29.76
Magnum Global 40.09
28
UTI Equity 25.41
month of September 2010. It was found that active share measure was highest for IDFC Classic
Equity Fund at 57.97 which show that it is highly actively managed fund. The lowest active share
Table 4: Active share measure of October 2010
Name of the fund October 2010

DSPBR Equity 34.19
HDFC Top 200 26.27
HSBC Equity 27.80
Kotak 30 29.65
Magnum Global 38.82
UTI Equity 24.98
month of October 2010. It was found that active share measure was highest for IDFC Classic Equity
Fund at 58.24 which show that it is highly actively managed fund. Again the lowest active share
29
Table 5: Active share measure of November 2010
Name of the fund November 2010

DSPBR Equity 32.86
HDFC Top 200 26.64
HSBC Equity 27.87
Kotak 30 27.52
Magnum Global 42.14
UTI Equity 27.76
month of November 2010. It was found that active share measure was highest for IDFC Classic
Equity Fund at 53.81 which show that it is highly actively managed fund. Baroda Pioneer Growth
fund was again recorded with lowest active share measure at 11.17. All the other mutual funds are
having active share measure in the range of 11-54.
30
Table 6: Active share measure of December 2010
Name of the fund December 2010

DSPBR Equity 28.42
HDFC Top 200 23.99
HSBC Equity 29.14
Kotak 30 30.74
Magnum Global 39.60
UTI Equity 25.08
month of December 2010. It was found that active share measure was highest for IDFC Classic Equity
Fund at 54.07 which show that it is highly actively managed fund. Baroda Pioneer Growth fund was
again recorded with lowest active share measure at 11.25. All the other mutual funds are having active
share measure in the range of 11-55.
All the above tables show the active share measure for each of the 6 months from July 2010 to
December 2010 for all the 20 selected mutual funds. On analyzing the data, it was found that except
for the months of July 2010 and August 2010, active share measure was highest for IDFC Classic
Equity fund in all the other months. However, Baroda Pioneer Growth fund recorded lowest Active
Share measure for all the months from July 2010 to December 2010.
Table 7: Average and Standard Deviation of Active Share Measure
Name of the fund Average Standard Deviation
Baroda Pioneer Growth 15.50 3.69
Birla Sun life Dividend Yield Plus 26.11 4.22
DSPBR Equity 35.02 4.23
31
Fortis Opportunities 29.37 2.57
Franklin India Prima Plus 34.17 1.63
HDFC Top 200 26.17 1.09
HSBC Equity 26.85 2.26
HSBC India Opportunities 26.87 0.97
ICICI Prudential Emerging STAR 33.06 0.93
IDFC Classic Equity Fund 49.83 9.79
ING Core Equity 28.48 1.32
Kotak 30 29.60 1.27
Kotak Opportunities 31.35 3.48
Magnum Emerging Business 44.11 1.43
Magnum Global 41.19 1.94
Reliance Vision 39.52 1.25
Sundaram BNP Paribas Select midcap Reg 35.25 0.49
Taurus Bonanza 29.25 2.74
UTI Equity 24.86 1.83
UTI Master Value 31.82 1.91
Table 7 shows the average and standard deviation of active share measure of each of the 20 selected
equity diversified mutual funds for the months July 2010 to December 2010. On an average, IDFC
Classic Equity fund has the highest active share measure in all the months which show that it is a
highly actively managed fund. However, Baroda Pioneer Growth fund has the lowest average active
share measure. The standard deviation i.e. deviation from mean was lowest for Sundaram BNP
Paribas Select midcap Reg fund at 0.49 as against IDFC Classic Equity fund which recorded highest
standard deviation of 9.79.
4.2 Analysis of rolling performance of selected equity diversified mutual funds grouped
according to active share measure
The analysis of rolling performance of the selected equity mutual funds was done on the basis
of groups created according to active share measure. For this purpose, four portfolio groups of equity
mutual funds were constructed in accordance with quartile statistics pertaining to active share
measure. Rolling monthly performance analysis of each of the portfolio was carried out by comparing
the performance with the next month portfolio value for the same funds in the group. Then ranks were
32
given to the portfolio value created for the next month with highest value given the 1st rank and the
lowest was given the 4th rank. Spearman’s rank correlation was calculated to find out the degree of
correlation between initial portfolio group and rank of the portfolio group for the next month for all
the months i.e. from July 2010 to December 2010. For the calculation of return, NAV of Growth
Funds was collected for the last trading of each of the months from July 2010 to January 2011. If p
value is p>0.05, then there is no significance difference between the two ranks and if p value p<0.05,
then there is significant difference between the two ranks. These means were checked at 5 percent
level of significance.
Table 8: Comparison of Portfolio Performance (July 2010 vs. August 2010)
Portfolio Initial Investment (Rs.) Final Value (Rs.) Rank Return %
1 500000 510903.02 3 2.18
2 500000 509000.21 4 1.80
3 500000 517662.62 2 3.53
4 500000 520532.09 1 4.11
Rank Correlation (P. Value) = -0.8 (0.20)
Table 8 shows the portfolios created for the month of July 2010 on the basis of quartile statistics of
active share measure of July 2010. For each portfolio, the initial investment was taken as Rs. 500000.
The final value for each portfolio was determined by adding the August 2010 portfolio value
calculated on the basis of NAV of August 2010 for the same funds. Returns were ascertained for each
portfolio on the basis NAV. The return was highest for the 4 th portfolio which is having a return of
4.11%. The rank correlation value shows a negative correlation of -0.8 which means that the
correlation between ranks is very low. The p-value p= 0.20>0.05 which means there is no statistically
significant difference between the two month’s portfolio ranks.
Table 9: Comparison of Portfolio Performance (August 2010 vs. September 2010)
1 500000 546351.05 1 9.27
2 500000 541969.93 2 8.39
3 500000 535848.75 3 7.17
4 500000 535256.32 4 7.05
Rank Correlation (P. Value) = 1.00 (0.00)
33
Similarly Table 9 shows the portfolios created for the month of August 2010 on the basis of
quartile statistics of active share measure of September 2010. The final value for each portfolio was
determined by adding the September 2010 portfolio value calculated on the basis of NAV of
September 2010 for the same funds. Returns were ascertained for each portfolio on the basis NAV.
The return was highest for the 1st portfolio which is having a return of 9.27%. The rank correlation
value shows a perfect positive correlation of 1which means ranks are highly correlated. The p-value
was p= 0.00<0.05 which means there was statistically significant difference between the two month’s
portfolio ranks.
Table 10: Comparison of Portfolio Performance (September 2010 vs. October 2010)
1 500000 507234.86 1 1.45
2 500000 505583.86 2 1.12
3 500000 503534.06 3 0.71
4 500000 499530.75 4 (0.09)
Table 10 shows the portfolios created for the month of September 2010 on the basis of
quartile statistics of active share measure of October 2010. The final value for each portfolio was
determined by adding the October 2010 portfolio value calculated on the basis of NAV of October
2010 for the same funds. Returns were ascertained for each portfolio on the basis NAV. The return
was highest for the 1st portfolio which is having a return of 1.45%. The rank correlation value shows a
perfect positive correlation of 1which means ranks are highly correlated. The p-value was p=
0.00<0.05 which means there was statistically significant difference between the two month’s
portfolio ranks.
Table 11: Comparison of Portfolio Performance (October 2010 vs. November 2010)
1 500000 485453.42 1 (2.91)
2 500000 482830.01 2 (3.43)
3 500000 480259.59 3 (3.95)
4 500000 478006.82 4 (4.40)
34
Table 11shows the portfolios created for the month of October 2010 on the basis of quartile
statistics of active share measure of November 2010. The final value for each portfolio was
determined by adding the November 2010 portfolio value calculated on the basis of NAV of
November 2010 for the same funds. Returns were ascertained for each portfolio on the basis NAV. All
the portfolios showed a negative return. The rank correlation value shows a perfect positive
correlation of 1which means ranks are highly correlated. The p-value was p= 0.00<0.05 which means
there was statistically significant difference between the two month’s portfolio ranks.
Table 12: Comparison of Portfolio Performance (November 2010 vs. December 2010)
1 500000 476444.81 4 (4.71)
2 500000 514495.41 1 2.90
3 500000 509587.07 3 1.92
4 500000 512965.58 2 2.59
Rank Correlation (P. Value) = -0.4 (0.6)
Table 12 shows the portfolios created for the month of November 2010 on the basis of
quartile statistics of active share measure of December 2010. The final value for each portfolio was
determined by adding the November 2010 portfolio value calculated on the basis of NAV of
November 2010 for the same funds. Returns were ascertained for each portfolio on the basis NAV.
The return was highest for the 2nd portfolio which is having a return of 2.90%. However, the 1 st
portfolio showed a negative return of 4.71.The rank correlation value shows a negative correlation of
0.4 which means ranks are least correlated. The p-value was p=0.6>0.05 which means there is no
statistically significant difference between the two month’s portfolio ranks.
Table 13: Comparison of Portfolio Performance (December 2010 vs. January 2010)
1 500000 453506.91 2 (9.30)
2 500000 499875.23 1 (0.02)
3 500000 450790.15 3 (9.84)
4 500000 444502.39 4 (11.10)
35
Table 13 shows the portfolios created for the month of December 2010 on the basis of quartile
statistics of active share measure of January 2011. The final value for each portfolio was determined
by adding the December 2010 portfolio value calculated on the basis of NAV of December 2010 for
the same funds. Returns were ascertained for each portfolio on the basis NAV. All the portfolios
showed a negative return. The rank correlation value shows a positive correlation of 0.80 which
means ranks are significantly correlated. The p-value was p= 0.20>0.05 which means there was no
statistically significant difference between the two month’s portfolio ranks.
4.3 Return Performance analysis of Mutual Fund Return on the basis of Active Share Measure
In this part of the analysis, return performance of the mutual funds was determined on the
basis of active share measure. In each of the month from July 2010 to December 2010, the selected
equity diversified mutual funds were ranked according to active share measure with fund with highest
active share measure given the first rank and smallest value given the lowest rank. Then ranks were
also assigned on the basis of next month NAV return. On the basis of these two available ranks, the
return performance was analyzed for the each month through the statistical techniques like
Spearman’s Rank correlation and P-value.
Table 14: Return Performance of Mutual Fund Return categorised on Active Share Measure for
July 2010
Name of the Fund
Rank Correlation (P .Value) = 0.668( 0.001)

Table 14 shows the return performance of selected mutual funds for the month of July 2010. For this
purpose, the funds were given ranks according to active share measure for the month of July 2010
with highest active share measure given the first rank. Similarly, ranks were also given on the basis
of NAV return calculated for August 2010. Rank correlation was calculated which comes out to be
36
0.668 which shows that there exists a positive correlation between the Active share rank and NAV
return rank. The p-value p= 0.001<0.05 which means that there is a significant difference between
the ranks.
Table 15: Return Performance of Mutual Fund Return categorised on Active Share Measure
for August 2010
Name of the Fund Rank- Active Share Rank-NAV
Measure Return
Magnum Emerging Business 1 19
Magnum Global 2 16
Reliance Vision 3 5
DSPBR Equity 4 13
IDFC Classic Equity Fund 5 17.5
Sundaram BNP Paribas Select Midcap Reg 6 15
UTI Master Value 7 20
Taurus Bonanza 8 8
ICICI Prudential Emerging STAR 9 17.5
Franklin India Prima Plus 10 11
Fortis Opportunities 11 10
Kotak Opportunities 12 12
ING Core Equity 13 9
Kotak 30 14 6
HSBC India Opportunities 15 7
Birla Sun Life Dividend Yield Plus 16 14
HDFC Top 200 17 4
HSBC Equity 18 3
UTI Equity 19 2
Baroda Pioneer Growth 20 1
Rank Correlation (P .Value) = -0.713(.000)
Table 15 shows the return performance of selected mutual funds for the month of
August 2010. For this purpose, the funds were given ranks according to active share measure for
the month of August 2010 with highest active share measure given the first rank. Similarly, ranks
were also given on the basis of NAV return calculated for September 2010. Rank correlation was
calculated which comes out to be -0.713 which shows that there exists a negative correlation
37
between the Active share rank and NAV return rank. The p-value p= 0.000<0.05 which means that
there is a significant difference between the ranks.
September 2010

Measure Return
IDFC Classic Equity Fund 1 12
Reliance Vision 3 17
Magnum Global 4 20
DSPBR Equity 5 8
Sundaram BNP Paribas Select Midcap Reg 7 2
ICICI Prudential Emerging STAR 9 19
UTI Master Value 11 1
Taurus Bonanza 12 14
Kotak 30 13 9
HSBC Equity 14 11
HDFC Top 200 17 13
UTI Equity 19 5
38
Rank Correlation (P .Value) = -0.368 (0.110)
September 2010. For this purpose, the funds were given ranks according to active share
measure for the month of September 2010 with highest active share measure given the first
rank. Similarly, ranks were also given on the basis of NAV return calculated for October 2010.
Rank correlation was calculated which comes out to be -0.368 which shows that there exists a
negative correlation between the Active share rank and NAV return rank. The p-value p=
0.110>0.05 which means that there is not a significant difference between the ranks.
Table 17: Return Performance of Mutual Fund Return categorised on Active Share Measure for October
2010
October 2010. For this purpose, the funds were given ranks according to active share measure for
the month of October 2010 with highest active share measure given the first rank. Similarly,
ranks were also given on the basis of NAV return calculated for November 2010. Rank
correlation was calculated which comes out to be -0.379 which shows that there exists a negative
correlation between the Active share rank and NAV return rank. The p-value p= 0.099>0.05
which means that there is not a significant difference between the ranks.
November 2010
39
Measure Return
IDFC Classic Equity Fund 1 17
Magnum Global 3 15
Reliance Vision 4 9
Sundaram BNP Paribas Select Midcap Reg 5 12.5
ICICI Prudential Emerging STAR 7 18
DSPBR Equity 8 6
UTI Master Value 9 12.5
Taurus Bonanza 12 3
HSBC Equity 13 4
UTI Equity 14 5
Kotak 30 15 11
HDFC Top 200 18 14
40
November 2010. For this purpose, the funds were given ranks according to active share measure
for the month of November 2010 with highest active share measure given the first rank.
Similarly, ranks were also given on the basis of NAV return calculated for December 2010.
Rank correlation was calculated which comes out to be -0.041 which shows that there exists a
negative correlation between the Active share rank and NAV return rank. The p-value p=
0.865>0.05 which means that there is not a significant difference between the ranks.
December 2010
December 2010. For this purpose, the funds were given ranks according to active share measure for
the month of December 2010 with highest active share measure given the first rank. Similarly, ranks
were also given on the basis of NAV return calculated for January 2011. Rank correlation was
calculated which comes out to be -0.335 which shows that there exists a negative correlation
between the Active share rank and NAV return rank. The p-value p= 0.148>0.05 which means that
there is not a significant difference between the ranks.
4.4 Discussion
In this section overall discussion is presented about the results. There are certain studies
that favour the use of Active management like, it was found in Cremers and Petajisto (2007) that the
active management predicts fund performance i.e. the funds with the highest Active Share significantly
outperform their benchmark indexes both before and after expenses, while the non-index funds with
the lowest Active Share underperform. The most active stock pickers tend to create value for investors
while factor bets and closet indexing tend to destroy value. It was found that small funds are more
41
active, while a significant fraction of large funds are closet indexers. However, for funds with large-cap
benchmarks this pattern emerges only gradually after certain amount in assets and before that, fund
size does not matter much for the fraction of active positions in the portfolio. Funds with the highest
Active Share significantly outperform their benchmarks both before and after expenses, while funds
with the lowest Active Share underperform after expenses. The relationship between Active Share and
fund returns exists for all fund sizes but it is stronger within the bottom three fund size quintiles than
within the top two quintiles.
Another study by Clarke et al (2001) exhibited that the expected value added in an actively
managed portfolio is dependent on both the manager’s forecasting skill and the ability to take
appropriate positions in securities that reflect those forecasts. Constraints like no short sales and
security concentration limits impede the transfer of information into optimal portfolio positions and
decrease the expected value added. In the study of Chen et al (2000), on investigation of the value of
active mutual fund management through examination of the stockholding and trades of mutual funds.
It was also found that that stocks widely held by funds do not outperform other stocks and growth-
oriented funds exhibit better stock selection skills than income-oriented funds.
From the analysis performed in this chapter, following discussion can be drawn. On the
analysis of the calculated active share measure, it was found that Baroda Pioneer Growth fund
recorded the lowest active share measure for all the 6 months i.e. from July 2010 to December 2010.
While IDFC Classic Equity fund has the highest active share in the months from September to
December 2010.The portfolios created on the basis of the quartile statistic of the active share measure
and NAVs exhibits that in the months of July, November and December 2010, the rolling performance
showed that there is no significant difference between the two month’s portfolio ranks. While for the
months of August, September and October 2010, there is a significant difference between the portfolio
ranks.
On making the comparison of the return performance of the mutual funds categorised on the
basis of active share measure for each of the 6 months, it was found that for the months of September
to December 2010, there exist a non significant difference between the ranks on basis of ASM and
NAV as p-value was >0.05. while for July and August 2010, the results are found to be significant i.e.
there is significant difference between the ranks.
CHAPTER V
SUMMARY
In this chapter, a brief summary and conclusions of the study have been presented, so as to
understand the implications of the findings. This chapter gives the final conclusion of the study.
5.1 Summary
42
Active management can be defined as the extent to which the investor attempts to beat the
market by hiring investment management firms that analyze and select individual securities or groups
of securities expected to exceed the performance of specified benchmark. It implies the use of a
human element, such as a single manager, co-managers or a team of managers, to actively manage a
fund's portfolio. Thus Active share is a method used to quantify active management for comparing the
holdings of a mutual fund with that of benchmark index. In order to compute the active share, the
portfolio holdings of a fund can be compared to its benchmark index. A fund has an active long
position in it if it over weights a stock relative to the index weight, and when a fund under weights an
index stock or does not buy it at all, it has an active short position in it. The present study has been
conducted to determine and analyze the Active share and rolling performance of selected equity
diversified mutual funds grouped according to active share measure. Firstly, an attempt has been made
to ascertain the active share of the selected 20 equity diversified mutual funds. Secondly, on the basis
of quartile statistic of active share, four portfolios of the selected mutual funds were created for the 6
months period i.e. from July 2010 to December 2010. Rolling performance was analyzed for each of
the month by making a comparison of present month portfolio rank with the next month ranks. The
total sample consisted of 20 equity mutual funds and for the purpose of study, their portfolio
composition in terms of specific stocks held was collected. Using t-test, it was found that for three
months i.e. July, November and December 2010 the p-value was >0.05 which means there is no
statistically significant difference between the two month’s portfolio ranks while for the other 3
months August to October 2010, the p-value was <0.05 and thus results were significant for difference
between the two month’s portfolio ranks
5.2 Conclusions
• The calculated Active share measure for July 2010 to December 2010 showed that for each
month Baroda Pioneer Growth recorded the lowest active share.
• While Magnum Global Fund recorded the highest active share in July 2010 at 43.15 in August
2010, Magnum Emerging Fund has highest active share at 43.68.
• In all the other months i.e. from September 2010 to December 2010, IDFC Classic Equity
fund recorded the highest Active share which shows that is highly actively managed fund.
• On analyzing the average and standard deviation of the active share of the all the equity
mutual funds, it was found that IDFC Classic Equity fund has the highest average at 49.83
while lowest standard deviation was recorded by Sundaram BNP Paribas Select midcap Reg
at 0.49.
43
• Rolling monthly portfolio performance analysis for the month of July 2010 and November
2010 on the basis of Quartile statistic of Active share measure showed negative correlation of
-0.8 and -0.4 respectively which means that correlation between ranks is very low. The p-
value of 0.20 and 0.60 both >0.05 shows that there is no statistically significant difference
between the two month’s portfolio ranks.
• While rolling monthly portfolio performance analysis from the month of August 2010 to
October 2010 showed a perfect correlation of 1. The p-value thus is 0.00<0.05 which means
there was statistically significant difference between the two month’s portfolio ranks.
• The comparative rolling monthly performance analysis for month of December 2010 vs.
January 2011showed a positive correlation of 0.80 which means ranks are significantly
correlated. The p-value was p= 0.20>0.05 which means there was no statistically significant
difference between the two month’s portfolio ranks.
• The returns for the portfolio value for July 2010 and August 2010 showed all positive returns.
In July 2010, the 4th portfolio has the highest return at 4.11% while in August 2010, the 1st
portfolio showed the highest return of 9.27%.
• The returns for September 2010 portfolio value showed that 1st portfolio has the highest return
but the 4th portfolio has the negative return of -0.09.
• The returns for the portfolio value for October 2010 and December 2010 showed all negative
returns.
• The returns for November 2010 portfolio value showed that 2 nd portfolio has the highest
return of 2.90 but the 1st portfolio has the negative return of -4.71.
• The rank correlation between Active share measure rank and NAV rank for the month of July
2010 showed a positive correlation of 0.668.
• However, in all the other months i.e. from August 2010 to December 2010, a negative
correlation was found.
5.3 Scope for future research
Present research can be extended to explore a number of issues. Few suggestions in this regard
have been listed below:
44
• The study has been conducted on 20 mutual funds only. It is suggested to study for more
than 20 funds to get a clear picture about Active Management.
• In the present study, the comparison was made only with the Nifty benchmark index. To
carry out the study further, some more indexes can be taken for benchmark comparison.
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CHAPTER- I

1.1 About Mutual Fund Industry and Mutual Funds

1.2 Defining Active management and Passive Management

Active Share = ½ ∑ Wfund, i – Windex, i

3.1 Research Framework

3.2 Population and Sample

3.3 Collection of data

3.4 Analysis of data

3.5 Limitations of study

These sections are discussed as follows:

3.1 Research Framework

3.3 Collection of data

3.4 Analysis of data

• Spearman’s rank correlation

• t-test for difference in ranks

Where, ρ= rank correlation

3.4.4Standard Deviation: Standard deviation is a measure of the variability or dispersion of a

Where SN = sample standard deviation

Where s = sample standard deviation of the sample an

The degrees of freedom used in this test is n − 1

• Only 20 equity diversified mutual funds were selected.

• Comparison of portfolio weights was made only with Nifty index.

• Only Equity mutual funds were taken for the study.

RESULTS AND DISCUSSION

Name of the fund July 2010

Table 2: Active share measure of August 2010

Name of the fund August 2010

Table 3: Active share measure of September 2010

Name of the fund September 2010

Table 4: Active share measure of October 2010

Name of the fund October 2010

Name of the fund November 2010

Name of the fund December 2010

Table 7: Average and Standard Deviation of Active Share Measure

Name of the fund Average Standard Deviation

Baroda Pioneer Growth 15.50 3.69

Birla Sun life Dividend Yield Plus 26.11 4.22

DSPBR Equity 35.02 4.23

Franklin India Prima Plus 34.17 1.63

HDFC Top 200 26.17 1.09

HSBC Equity 26.85 2.26

HSBC India Opportunities 26.87 0.97

ICICI Prudential Emerging STAR 33.06 0.93

IDFC Classic Equity Fund 49.83 9.79

ING Core Equity 28.48 1.32

Kotak 30 29.60 1.27

Kotak Opportunities 31.35 3.48

Magnum Emerging Business 44.11 1.43

Magnum Global 41.19 1.94

Reliance Vision 39.52 1.25

Sundaram BNP Paribas Select midcap Reg 35.25 0.49

Taurus Bonanza 29.25 2.74

UTI Equity 24.86 1.83

UTI Master Value 31.82 1.91

Table 8: Comparison of Portfolio Performance (July 2010 vs. August 2010)

Portfolio Initial Investment (Rs.) Final Value (Rs.) Rank Return %

1 500000 510903.02 3 2.18