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Efficiency of mutual funds and performance measurement in India: an

empirical investigation

Article  in  International Journal of Business Excellence · August 2017

DOI: 10.1504/IJBEX.2017.10007045

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Int. J. Business Excellence, Vol. 13, No. 2, 2017 217

Efficiency of mutual funds and performance

measurement in India: an empirical investigation

Naliniprava Tripathy
Indian Institute of Management Shillong,
Meghalaya, PIN 793 014, India
Fax: +91-364-2230041
Email: nalini_prava@yahoo.co.in
Email: nt@iimshillong.in

Abstract: The present study investigates the performance of mutual fund

schemes, selectivity and market timing skill of fund managers by using Sharpe
model, Treynor’s model, Jensen alpha, information ratio, M-square model,
Sortino ratio, Treynor-Mazuy and Henriksson-Merton models. The study uses
daily observation of NAV and NIFTY index over the period of August 2008 to
August 2014. The results of the study suggests that most of the mutual fund
schemes indicate good performance and professional management selectivity
skills in fund analysis as per Treynor ratio, Sharpe ratio, M square model,
Sortino ratio and Jensen’s alpha. The study also finds the evidence of reversal
performance and persistence of mutual funds as per information ratio indicating
presence of market efficiency in the long run. The study reveals that 43%
mutual fund managers are able to time the market correctly during the period of
study under both the models. The study concludes that an investor is required to
take wise investment decisions by analysing the return and risk parameters of
the mutual funds’ to achieve their investment objectives.

Keywords: mutual funds; MFs; performance evaluation; market timing; India.

Reference to this paper should be made as follows: Tripathy, N. (2017)

‘Efficiency of mutual funds and performance measurement in India: an
empirical investigation’, Int. J. Business Excellence, Vol. 13, No. 2,
pp.217–237.

Biographical notes: Naliniprava Tripathy is a Professor at Indian Institute of

Management Shillong, India. Prior joining to Shillong, she has also served as
an Associate Professor at IIM Indore, India. She holds MCom, MPhil, PhD and
DLitt degrees in Management. She is also the recipient of Post-Doctoral
Research Award of University Grant Commission, Government of India;
New Delhi. She is the author of over 80 scholarly research papers and seven
books. Currently, she is an editorial board member of International Journal of
Business and Emerging Markets, Inderscience Publisher, UK, International
Journal of Business and Development Research, Build Bright University,
Cambodia, The AIMS International Journal of Management, USA and Global
Review of Accounting and Finance, Australia. She is an Editor of IIMS Journal
of Management Science.

Copyright © 2017 Inderscience Enterprises Ltd.

218 N. Tripathy

1 Introduction

Mutual fund is essentially a mechanism of pooling the savings of investors and invested
in different types of securities depending upon the objective of the mutual fund scheme.
Mutual funds (MFs) have witnessed explosive growth during the last two decades in the
Indian financial markets. As on March 31, 2015, total assets under management (AUM)
of Indian MFs have reached USD 176 billion. In spite of tremendous growth, fund
managers’ ability to enhance portfolio return is remaining a concern in investment
process. Hence, it is imperative to understand the behaviour of MFs to take investment
decision appropriately to minimise risk and maximise return. Assessment of performance
of MFs along with their persistence effect has been an area of great interest to
researchers, practitioners, regulators and investors today.
Investors buy MFs with the anticipation of getting benefits that mutual fund managers
may achieve. However, active management ability of fund managers in empirical
literature indicates relatively conflicting results. Friend et al. (1962) have made an
extensive study by considering 152 mutual fund schemes with annual data from 1953 to
1958 and find that MFs earn an average annual return of 12.4%, while their composite
benchmark earned a return of 12.6%. Jensen (1968), Malkiel (1995), Gruber (1996),
Carhart (1997), Blake and Timmermann (1998), Lunde et al. (1999) and Wermers et al.
(2010) find the inability of fund managers to outperform the market benchmark and in
some cases underperform passive indices. On the other hand, Grinblatt and Titman (1989,
1992), Grinblatt et al. (1995), Daniel et al. (1997) and Wermers (1997) investigate the
individual equity holdings of funds (without considering transaction costs and expenses)
and finds the ability of mutual fund managers to select stocks that out-perform the broad
market index and passive benchmarks of stocks. Treynor and Mazuy (1966) and
Henriksson and Merton’s (1981) find no statistical evidence in favour of fund managers
concerning successfully outguessed the market. However, they debate that the
performance of funds looks better by using conditional market timing measures. Sawicki
and Ong (2000) use both unconditional and conditional Jensen’s measures, as well as
Treynor and Mazuy’s market timing model to examine the performance of MFs and find
poor evidence of positive performance and negative market timing performance.
However, they claim that conditional model looks better by incorporating lagged
information variables in the model. Cuthbertson et al. (2010) examine market timing and
security selection of German Equity Mutual Fund by using false discovery rate (FDR)
and Fama-French three factor (3F) model. The study find less than 1% of funds exhibits
positive alpha performance and 27% shows negative alpha performance and majority
mutual fund schemes displays zero-alpha performance. Leite and Cortez (2009),
Gudimetla (2015), Tan (2015) and Blake et al. (2015) also find no evidence of selective
ability and market timing ability.
Though extensive research literature is available on performance of MFs, no
consensus has emerged in this regard so far. Keeping in view of investors’ interest, it is
essential to appraise the performance of mutual fund managers continuously. Besides,
research studies in India particularly after financial crises 2008, an emerging market
economy, are scant in this context. However, no such leading research work has been
undertaken in India after financial crises period to evaluate the performance and market
timing ability of fund managers, the present research study seeks to address this gap.
 Efficiency of mutual funds and performance measurement in India 219

The present study has raised five research questions. First, the present study will add
to the existing literature by providing a robust result. Secondly, the study has used
Treynor model, Sharpe model, M-square and Sortino ratio to determine the performance
of funds and fund managers. Thirdly, the study has used Jensen’s alpha measure to
determine the selectivity skill of fund managers. Fourthly, the study has used information
ratio (IR) to determine the persistence of fund manager’s performance. Fifthly,
Treynor-Mazuy (TM) and Henriksson-Merton (HM) quadratic regression model is used
to detect the market timing ability of the mutual fund managers. Finally, the study has
tried to analyse the best funds in the Indian scenario on the basis of persistence exists in
the funds that have been displaying a winning trend. The paper is organised as follows:
Section 2 delivers literature review, data and methodology is presented in Section 3. The
results are discussed in Section 4, and Section 5 deals with concluding observation.

2 Review of literature

Numerous research studies have evaluated the persistence and performance of MFs by
using different performance measurement models. Sharpe’s (1966) research study is one
among foremost research to evaluate the performance of MFs by considering 34 open-
end MFs for a period of ten years from 1954–1963. The study finds that good
performance of schemes is related with low expenses ratio instead of investment size.
The study also observes that there is a significant relationship between the present and
past performance of MFs. Treynor and Mazury (1966) investigate the market timing
ability of fund managers. The study uses rates of return of 57 US open ended funds from
1953 to 1962 and finds that fund managers are unable to outguess the market and not able
to predict the changes of market direction. Jensen (1968) examine the absolute
performance of MFs relative to a benchmark performance by using sample data of 115
MFs and finds that fund managers are not able to produce returns to compensate their
research expenses and management fees. The study concludes that there is little evidence
found on any individual fund does better than mere random chance. Carlson (1970)
investigate the performance of MFs by employing fund data for the period 1948–1967 by
using risk-adjusted return. The study finds that past performance of MFs is having little
predictive power for future performance. The study also observes that net returns are not
influenced by fund size or expenses ratio. The study concludes that performance of fund
is positively related to availability of new cash resources for investment purposes.
Peasnell et al. (1979) examine the performance of MFs by using Jensen’s model and find
that professionally managed funds are incompetent to outperform the market. Henriksson
and Merton (1981) study the performance of investment managers to time the market
successfully so as to get the optimum risk and return. However, the study has concluded
that they are not quite successful in doing the same. Kon (1983) examine the market
timing ability of 37 MFs for the period 1960 to 1976 and finds that there is some
evidence of superior market timing ability at the individual fund level but fund managers
as a group have no information regarding the unexpected market portfolio returns.
Grinblatt and Titman (1989) observe that some funds abnormally achieve excess returns
by systematically picking stocks that give positive excess returns. Ippolito (1989) make
an interesting observation that MFs on aggregate offer excess returns but, however, are
offset by expenses and load charges thereby duplicating the efficient market hypothesis.
220 N. Tripathy

Hendricks et al. (1993), Goetzmann and Ibbotson (1994) and Brown and Goetzmann
(1995) test the persistence in performance of MFs over one to three years. They conclude
that persistence is due to ‘hot hands’ or common investment strategies. Elton et al.
(1993), Malkiel (1995), Cahart (1997) and Golec (1996) observe that there is negative
relationship exist in between expense ratio and performance of US MFs. Grinblatt et al.
(1995) and Carhart (1997) conduct research on short-term persistence in performance of
MFs. The study concludes that fund managers’ stock selection ability is lasting at least
for one year. Bollen and Busse (2004) use standard stock selection and market timing
models. The study finds that superior performance is a short-lived phenomenon that is
observable only when MFs are evaluated several times a year. Bauer et al. (2006) observe
persistence in performance of New Zealand MFs in the short term (six months), which is
driven by ‘icy hands’ rather than by ‘hot hands’. The study does not find any MF that is
persistently outperforming. The study does not find any evidence of market timing ability
of fund managers. The study concludes that that risk-adjusted performance of equity
funds directly related to the size of the fund and expense ratio and indirectly related to
load charges. Sehgal and Jhanwar (2008) investigate the short-term persistence of Indian
MFs’ performance for the period January 2000 to December 2004 and find no evidence
of persistence. Their results are inconsistent with the efficient market hypothesis. The
study also state that winner portfolios is having higher asset turnover and levied higher
entry loads, and thus partly offsetting their abnormal returns.
Soumya et al. (2008) investigate persistence in performance of Indian equity MFs by
using raw returns (absolute), TE (relative) and IR (risk-adjusted) measures. The study
concludes that persistence is more visible for one year investment horizon, but not for
other horizons. The study observes that past performance is hardly a reliable guide to the
performance of mutual fund in future. The findings of the study are in line with market
efficiency hypothesis.
Swinkels and Rzezniczak (2009) investigate the managers’ selectivity and market
timing skills of 38 polish MFs over a period of seven years from 2000–2007 by using TM
and HM model. The study has taken equity, bond and balanced MFs. The study finds that
polish mutual fund managers do not show any evidence of equity or bond selectivity
market timing skills. Cuthbertson et al. (2010) explore the market timing performance of
individual UK equity and balanced MFs by using TM and HM model. The study finds
that a relatively 1% of UK sample MFs exhibits positive market timing ability and around
19% of funds shows negative market timing by fund managers. The study concludes that
there is little evidence of successful market timing ability of UK mutual fund managers.
Nafees and Shah (2011) appraise the performance of both open ended and closed ended
MFs in Pakistan by using Sharpe, Treynor, Sortino, Jensen differential model and
information measure. The study finds that some funds are outperforming and some
exhibits underperformance returns in comparison to benchmark returns.
Ali and Qudous (2012) evaluate the performance of 15 sample MFs in Pakistan over
the period of 2005–2009 by using Sharp and Treynor model. The study finds that the
sample MFs do not show good performance in comparison to market portfolio return.
Almonte (2013) determine the risk adjusted performance of equity and balanced MFs in
Philippine by using Sharpe ratio, Treynor ratio and IR. The study observes that some
equity and balanced MFs exhibit under-performance and over performance in comparison
to bench mark index. The study concludes that there is correlation between Sharpe and
Treynor ratio, Treynor and IR and Sharpe and IR for both the mutual fund schemes.
Gudimetla (2015) explore the selectivity and timing performance of sector funds by using
 Efficiency of mutual funds and performance measurement in India 221

Treynor and Mazuy model. The study indicates that Indian mutual fund managers do not
have market timing and selectivity ability in sector funds. Tan (2015) analyses South
African equity funds performances by using Sharpe (1966) ratio, Treynor (1965) ratio,
Jensen’s (1968) alpha models. The studies also use Treynor and Mazuy (1966) and
Henriksson and Merton (1981) model to determine the selectivity skills and market
timing ability of fund managers. The study observes that South African fund managers
are having neither selective ability nor market timing ability. Kiymaz (2015) examine the
performance of Chinese MFs by using various risk performance measures, i.e., Sharpe
ratio, IR, Treynor ratio, M-squared and Jensen’s α. The results of the study show that
Chinese mutual fund provides positive returns to their investors since alpha shows
positive value. However, the study concludes that Chinese funds do not consistently
generate excess return. Kumar (2016) assess the performance of 51 mutual fund schemes
in India over the period of eight years from 2006 to 2014 by using conditional models.
The study observes that Indian fund managers are having strong stock picking ability but
unable to time the market. The study concludes that fund returns are sensitive to market
actions. Bilawal et al. (2016) investigates the performance of closed ended MFs in
Pakistan by using Sharpe, Treynor, Sortino, Information and Jensen alpha measures. The
study observes that Treynor and Information measures reveals satisfactory performance
while other measures shows strong underperformance. The study concludes that the
performance of funds exhibits mixed results.

3 Hypotheses of study

This paper aspires to study the performance and market timing skill of MFs and mutual
fund managers on the following hypotheses

3.1 Hypothesis 1
H0 The sample mutual fund schemes do not perform efficiently.
H1 The sample mutual fund schemes perform efficiently.

3.2 Hypothesis 2
H0 Mutual fund managers do not display stock selection and market timing ability.
H1 Mutual fund managers display distinct stock selection and market timing ability.

4 Research methodology

This study is based on 30 mutual fund schemes impelled by range of fund houses. These
MFs consist of variety of equity, debt and balanced funds of both income and growth
types. For evaluating the performance of mutual fund schemes, daily base net asset value
(NAV) data along with closing price of the bench mark stock index (Nifty) from
August 2008 to August 2014 have been collected from AMFI website and
http://www.nseindia.com. Risk free rate is obtained through RBI website. The beta of
222 N. Tripathy

fund is estimated using daily fund return data. The daily market return is assessed based
on Nifty index. Since Treasury bill rate is three months holding period, this rate is
converted to daily equivalent, to be regular with daily fund return and market return.
The returns of the funds are calculated by using the following formula:
⎛ NAVt ⎞
R p = ln ⎜ ⎟
⎝ NAVt −1 ⎠
Rp is return of fund.
The stock market return is calculated as follows.
⎛ P ⎞
Rm = ln ⎜ t ⎟
⎝ Pt −1 ⎠
Rm is the return of market

4.1 Risk-adjusted performance ratios

In order to evaluate mutual fund performance, Treynor measure, Sharpe measure,
M-square and Sortino ratio are calculated. Jensen alpha computes the selectivity skills of
fund managers while IR shows the persistence in performance of mutual fund managers
in India. The following are various risk-adjusted performance ratios:

4.1.1 Treynor performance measure

The Treynor (1965) ratio is the first risk-adjusted performance measurement model and
popular indicator of fund performance. This performance measures is based on
systematic risk called as a reward to volatility ratio. This model measures the relationship
between fund’s additional return over risk-free return and market risk measured by beta.
It is calculated by dividing the mean excess return of each fund by its beta (systematic
risk). A higher value proposes superior performance. Symbolically it is represented as
Rp − R f
TP =
βp
where Tp is the Treynor ratio, Rp the portfolio return, Rf the risk-free return and βp is the
systematic risk. Reilly and Brown (1992) if Rp > Rf and βp > 0. Greater Tp means better
the performance of portfolio for all investors. The portfolio has outperformed the market.
If the TP is less than the benchmark comparison (Rm – Rf), portfolio performance is very
poor.

4.1.2 Sharpe’s performance measure

Sharpe (1966) performance measure referred to as reward to variability ratio. It is another
important measure that evaluates the return that a fund has generated relative to the risk
taken. It is also similar to Treynor measure but Sharpe measures uses the total risk of
portfolio instead of systematic risk. This measure indicates the relationship between the
portfolios additional return over risk-free return and total risk of the portfolio measured in
terms of standard deviation. This measure helping the investors to know whether it is safe
 Efficiency of mutual funds and performance measurement in India 223

to invest in the mutual fund schemes by taking total risk. The higher the Sharpe ratio,
better the funds return relative to the amount of risk taken. A fund that has generated
higher returns per unit of total risk is a superior performance.
Rp − σ p
Sp =
σp

where RP = average return on the portfolio, Rf = risk-free rate, σP = total risk of the
scheme portfolio. If SP is greater than the benchmark comparison, the fund’s performance
is superior over the market.
A fund which may have outperformed according to Treynor measure may indicate
inferior performance according to Sharpe measure. For evaluating risk return relationship
for poorly diversified portfolio, total risk is appropriate. On the other hand, for evaluating
well-diversified portfolio, systematic risk is relevant. However for a well-diversified
portfolio, the total risk is equal to systematic risk.

4.1.3 Jensen differential return measure:

In order to determine portfolio managers’ predictive ability, Jensen (1968) suggests
Jensen’s alpha (α). Jensen’s alpha (α) indicates the difference between actual portfolio
return and estimated benchmark return given on its level of systematic risk. Alpha shows
whether the portfolio managers’ performances are superior or inferior to the market after
adjusting for risk. A positive alpha value indicates superior performance relative to the
market, and a negative alpha denotes inferior performance. Jensen uses performance
measure derived from capital asset pricing model. The CAPM contains that the expected
mutual fund return are linearly depending on their covariance with the market. Jensen
model is shown in the following regression equation:

R p − R f = α + β ( Rm − R f ) + ε

The intercept of this single factor model displays stock picking ability or selectivity of the
manager. Rp – Rf and Rm – Rf are excess portfolio and market returns.

α = R p − { R f + β ( Rm − R f ) + ε}

Rp is rate of return of the fund, Rf is risk free rate, Rm is rate of return of market
(benchmark return), β is the estimated coefficient for the systematic risk, α denotes risk
adjusted performance, ε represents random error term

4.1.4 Modigliani risk-adjusted performance (M2) measure

Modigliani and Modigliani (1997) measure compares the performance of portfolio return
with benchmark return. The Modigliani risk-adjusted performance model is used to
characterise how well a portfolio return rewards an investor for the amount of risk taken
in the market. A portfolio that duplicates market (benchmark portfolio) performance has
M-squared equal to zero, whereas a positive value of M-squared pertains to a portfolio
that outperforms the market.
224 N. Tripathy

σm
M 2 = ( Rp − R f ) * − ( Rm − R f )
σp

where Rp is portfolio return; Rm is market return; Rf is risk free return; σm is total market
risk, σp is total portfolio risk

4.1.5 Information ratio

IR is a risk adjusted performance measure used to compare the active management skills
across managers. Information ration is a significant indicator of the persistence of a
manager’s performance. Fund managers in India are concerned not only with absolute
return but also with relative return (difference between funds return and benchmark
return also known as tracking error). Higher IR indicates the ability of fund managers to
produce additional return more efficiently than one with a low ratio by taking on
additional risk. The IR is used to gauge the skill of managers.

⎛ R p − Rm ⎞
Information ratio = ⎜ ⎟
⎝ σ p − σm ⎠
Rp is the return of the portfolio, Rm is the return of the index or benchmark,
σp – σm = tracking error (standard deviation of the difference between returns of the
portfolio and the returns of the index)

4.1.6 Sortino ratio

Sortino and Van Der Meer (1991) argue that investors are only concerned about the
downward volatility of investment. Unlike Sharpe, it does not take into account the total
volatility in the investment. It is taking into account the standard deviation of negative
asset returns, called downside deviation. The difference between upward and downward
volatility shows the measures of risk-adjusted returns. Sortino ratio is better for investors
who hold high volatility portfolio and are concerned about downside deviation
Rp − R f
Sortino ratio =
σd
where Rp is portfolio return; Rf is risk free return; σd is downward standard deviation
R2 measures the correlation of the portfolio’s return to the benchmark’s return. It
indicates that how much of the variability of funds return is explained by benchmark
return. A value for R2 close to one shows a good fit of forecasting model and a value
close to zero presents a poor fit. The higher the R-squared, the more the fund’s return is
explained by the market’s performance. The lower the R-squared, more the return is
explained by the fund manager’s decisions.

4.2 Unconditional models of market timing

TM model and HM regression model is used to determine the market timing abilities of a
mutual fund manager. These two models are based on CAPM.
 Efficiency of mutual funds and performance measurement in India 225

4.2.1 TM model
Treynor and Mazuy (1966) model developed a model that documents selectivity and
market timings to be assessed separately. Fund managers can beat the market if they are
able to adjust actively to anticipated changes in stock market movements. This model
calculates the alpha, which denotes the excess returns or abnormal returns (Rp – Rf). The
beta signifies the market risk. The gamma coefficient, on the other hand, represents
mutual fund managers’ market timing ability. If gamma is positive and statistically
significant, it indicates that mutual fund managers have superior market timing ability. It
gives us a better sense of how well a fund has managed. Negative gamma implies that
mutual fund managers do not exhibit market timing ability. On the other hand, if t-value
of gamma is negatively significant at 5% level, then fund manager is able to timing the
market but in the wrong direction. Treynor and Mazuy added a quadratic term to the
Jensen model to evaluate the market timing performance:

R p − R f = α + β ( Rm − R f ) + γ ( Rm − R f )2 + ε
Rp – Rf is the excess return of portfolio, Rm – Rf is the excess return of market, α
represents selectivity, γ indicates market timing ability, β captures adjustments for public
information effects.

4.2.2 HM model
Henriksson and Merton (1981) develop another model of market timing. In their model,
the portfolio beta is assumed to adjustment between two betas. This model tells us
whether the stock market will provide a greater return than risk-free return. If return of
market is greater than risk free rate (Rm > Rf), it indicates up market and market return
less than risk-free rate (Rm < Rf) displays down market.
The equation is:

R p − R f = α + β ( Rm − R f ) + γ ⎣⎡ D ( Rm − R f ) ⎦⎤ + ε

where Rp = return of the portfolio, Rf = risk-free rate, Rm = market return, α indicates fund
managers selection ability, β is systematic risk. Parameter γ indicates the difference
between the two betas and measures a fund managers’ market timing ability. Significant
positive/negative value of γ indicate good/poor market timing skill of the fund managers,
ε = error term, where D is a dummy variable that equals 1 for Rm >> Rf and 0 otherwise.
A successful market timer’s mutual fund should exhibit positive values of α and γ.

4.3 Performance persistence

If the return of mutual fund schemes is higher than or equal to the median, it is classified
as Winner. MFs that deliver lower returns than the median are treated as losers. Data on
MFs’ returns are subject to Survivorship bias. When the data sample divided into two
halves, funds’ performance is classified into four categories:
1 good in the first half, good in the second half
2 good in the first half, bad in the second half
226 N. Tripathy

3 bad in the first half, good in the second half

4 bad in the first half and bad in the second half.

5 Empirical analysis

The basic descriptive analysis of the mutual fund returns are shown in Table 1. All
returns are calculated as the first difference of the log of the daily closing price. The
mean of daily market return is 0.02% with standard deviation of 1.66%.
Table 1 Descriptive statistics for MFs

Fund Mean Std. dev. Skewness Kurtosis JB statistic p-value

BSE-Sensex 0.020 1.659 0.474 14.258 6,408.643 0.000
Birla sun life 95 0.042 0.964 0.773 18.547 12,255.620 0.000
fund
Birla sun life 0.038 1.402 0.698 17.961 11,336.060 0.000
frontline equity
fund
Birla sun life long 0.022 1.349 0.292 13.807 5,880.907 0.000
term advantage
fund
BOIAXA equity 0.066 1.479 0.740 20.009 14,636.280 0.000
Canara Robeco 0.042 1.009 1.004 24.536 23,488.300 0.000
balance fund
Franklin 0.040 1.323 0.403 16.468 9,139.339 0.000
Templeton mid
cap fund (growth)
HBSC equity 0.013 1.304 0.260 11.132 3,333.936 0.000
growth fund
HDFC Balanced 0.043 0.925 0.213 13.658 5,712.035 0.000
fund
HDFC top 200 0.034 1.459 0.443 12.748 4,810.034 0.000
ICICI pru balanced 0.039 1.233 8.956 210.284 2,173,398.000 0.000
fund
ICICI pru very 0.022 0.169 15.922 423.305 8,920,529.000 0.000
cautious plan
ING 5star fund of 0.027 1.287 –1.622 40.189 69,968.190 0.000
fund
ING Balanced 0.022 1.063 0.488 15.849 8,336.569 0.000
fund
LIC mid cap fund 0.017 1.000 –0.064 10.782 3,041.588 0.000
(growth)
LIC nomura –0.009 2.131 8.036 174.796 1,494,812.000 0.000
infrastructure fund
LIC nomura 0.013 1.493 0.444 14.968 7,230.650 0.000
opportunity fund
 Efficiency of mutual funds and performance measurement in India 227

Table 1 Descriptive statistics for MFs (continued)

Fund Mean Std. dev. Skewness Kurtosis JB statistic p-value

Morgan Stanley 0.032 1.848 9.923 224.161 2,475,582.000 0.000
equity fund (D)
Pinebridge 0.001 1.277 1.175 26.643 28,342.310 0.000
infrastructure and
economic dividend
fund
Principal balanced 0.021 1.199 7.255 153.550 1,148,563.000 0.000
fund
Reliance banking 0.048 2.447 13.720 340.882 5,769,808.000 0.000
fund
Reliance mid cap 0.024 0.176 27.964 907.116 41,198,603.000 0.000
fund (growth)
Reliance pharma 0.088 1.857 19.872 573.787 16,437,098.000 0.000
fund
SBI mid cap fund 0.020 1.534 3.574 63.707 187,599.000 0.000
(growth)
TATA equity 0.036 1.346 6.294 119.911 694,212.300 0.000
management fund
Tata indexed fund 0.019 1.815 2.480 43.604 84,013.150 0.000
– Sensex plan
TATA money 0.020 0.135 30.372 1,007.669 50,863,552.000 0.000
market fund
Taurus infra fund –0.004 1.833 3.869 63.326 185,725.300 0.000
UTI balanced fund 0.032 1.273 9.681 212.693 2,226,538.000 0.000
UTI banking 0.044 2.419 10.417 238.245 2,800,340.000 0.000
sector fund
UTI bond fund 0.034 0.282 –3.817 87.197 358,861.600 0.000

It is evident from Table 1 that 18 mutual fund schemes exhibit positive average daily
returns and delivered returns greater than the daily market returns. On the other hand,
13 mutual fund schemes are underperformed and provided returns below than bench
mark returns. Two schemes, i.e., LIC Nomura infrastructure fund and Taurus Infra Fund
are showing negative returns. Table 1 depicts that seven mutual fund schemes are more
risky than the market. However, LIC Nomura infrastructure fund and Taurus infra fund
are taking higher risk than the market risk but provided negative return to the investors.
Other funds are taking more risk than market risk but provide positive return to investors.
All Mutual fund returns have positive kurtosis. These schemes show high Jarque-Bera
statistic statistics. It implies that the distribution is skewed to the right, and they are
leptokurtic. The Jarque-Bera statistics for all 30 mutual fund schemes are significantly
greater than zero and shows that all the series exhibit non-normality and indicate the
presence of heteroscedasticity.
228 N. Tripathy

Table 2 Mutual fund performance models

Treynor’s Sharpe’s Jensen’s Sortino’s

Fund M2 IR
ratio ratio alpha ratio
Birla Sun Life 95 Fund 0.039 0.021 0.021 0.057 –0.031 0.030
Birla Sun Life Frontline 0.020 0.011 0.017 0.041 –0.067 0.016
Equity Fund
Birla Sun Life Long-Term –0.001 –0.001 0.000 0.020 0.000 –0.001
Advantage Fund
BOIAXA Equity 0.062 0.029 0.044 0.070 –0.247 0.040
Canara Robeco Balance 0.036 0.020 0.021 0.055 –0.032 0.027
Fund
Franklin Templeton Mid 0.027 0.014 0.019 0.045 –0.057 0.019
Cap Fund (growth)
HBSC Equity Growth Fund –0.013 –0.008 –0.009 0.009 0.025 –0.011
HDFC Balanced Fund 0.043 0.023 0.022 0.060 –0.031 0.031
HDFC Top 200 0.016 0.009 0.014 0.037 –0.070 0.013
ICICI PRU Balanced Fund 0.032 0.012 0.016 0.042 –0.039 0.018
ICICI PRU very Cautious 2.246 0.017 0.003 0.049 –0.003 0.019
Plan
ING 5star Fund of Fund 0.008 0.003 0.005 0.027 –0.014 0.004
ING Balanced Fund 0.000 0.000 0.001 0.022 –0.002 0.000
LIC Mid Cap Fund (growth) –0.008 –0.004 –0.004 0.014 0.005 –0.006
LIC Nomura Infrastructure –0.038 –0.015 –0.031 –0.003 –0.065 –0.025
Fund
LIC Nomura Opportunity –0.010 –0.005 –0.007 0.013 0.041 –0.007
Fund
Morgan Stanley Equity 0.013 0.006 0.011 0.031 0.060 0.009
Fund (D)
Pinebridge Infrastructure –0.032 –0.016 –0.020 –0.005 0.051 –0.022
and Economic Dividend
Fund
Principal Balanced Fund 0.000 0.000 0.000 0.022 –0.002 0.000
Reliance Banking Fund 0.031 0.011 0.027 0.039 0.034 0.021
Reliance Mid Cap Fund 5.411 0.052 0.009 0.109 –0.007 0.043
(growth)
Reliance Pharma Fund 0.157 0.036 0.067 0.082 0.344 0.080
SBI Mid Cap Fund (growth) –0.004 –0.002 –0.002 0.018 0.015 –0.003
TATA Equity Management 0.025 0.011 0.016 0.040 –0.051 0.017
Fund
Tata Indexed Fund – Sensex –0.003 –0.001 –0.002 0.019 –0.010 –0.002
Plan
TATA Money Market Fund 8.792 0.053 0.007 0.110 –0.005 0.048
Taurus Infra Fund –0.032 –0.014 –0.026 –0.002 –0.145 –0.020
UTI Balanced Fund 0.016 0.007 0.009 0.033 –0.025 0.012
UTI Banking Sector Fund 0.024 0.009 0.022 0.036 0.030 0.016
UTI Bond Fund 0.917 0.047 0.013 0.100 –0.010 0.041
 Efficiency of mutual funds and performance measurement in India 229

Table 2 shows summery statistics of performance measures estimated from the Treynor
model, Sharpe model, Jensen model, Sortino ratio, M-square, and IR. Treynor measure
evaluates the performance of mutual fund schemes with respect to systematic risk. It is
seen from Table 2 that out of 30 schemes, 19 mutual fund schemes are outperformed than
benchmark return. It implies that these schemes have better performance than other
mutual fund schemes. These 19 schemes are also outperformed with respect to Sharpe
measure too. The higher Sharpe ratio indicates that investors are getting more return per
unit of risk and funds are performing better in the market. The lower the Sharpe ratio, the
more risk the investor is taking to get additional return. It is observed that nine schemes
are showing negative Sharpe ratio indicating bad performance during the period of study.
It is noticed that Reliance Pharma Fund and the BOIAXA Equity Fund are the two top
performing funds and are able to make abnormal gains. Table 2 presents the Jensen
measures as well. Jensen’s alpha indicates the selectivity skills of fund managers. Out of
the 30 mutual fund schemes, 20 schemes are showing positive alpha values indicating
superior ability in selecting appropriate MFs schemes. It indicates that fund managers
have shown higher performance relative to the market and earning superior return over
the expected return in the market. Eight schemes are showing negative alpha value
indicating the inability of fund managers to forecast price in time to take an investment
decision.
It is observed that 19 mutual fund schemes are performing considerably good in the
market for all time-periods of investment as per Treynor ratio, Sharpe ratio and Jensen’s
alpha. All these schemes show positive value and better performance on a
risk-adjusted basis. The findings suggest that all these mutual fund schemes are well
diversified.
Table 2 reports M-squared measures, Sortino ratio and IR. A positive IR indicates
persistence of performance. It is observed that nine mutual fund schemes have a positive
IR signifying good management by the fund managers. On the other hand, the rest 21
schemes are exhibiting reversal performance and persistence is almost vanishes implying
market efficiency in the long run. However, mutual fund managers are not able to achieve
a higher return in the market. Out of 30 mutual fund scheme, 27 schemes show positive
value of M-squared indicating that mutual fund schemes outperform the market. Only
three schemes, i.e., LIC Nomura infrastructure fund, Pinebridge infrastructure and
economic dividend fund and Taurus infra fund have negative M-squared value. LIC
Nomura infrastructure fund and Taurus infra fund are taking more risk than the market
but are not able to generate proportionally higher returns. It is also noticed that the fund
with the highest Modigliani measure and highest Sharpe ratio providing highest return for
any level of risk taken in the market.
Sortino ratio for all the 30 mutual fund schemes is presented in Table 2. Sortino ratio
measures the performance of a scheme considering only downward volatility. Nineteen
schemes are showing positive return by taking downward volatility in the market. The
Sortino ratio for stock market is –0.009. Out of 30, four schemes are having Sortino ratio
less than market return indicating underperformance of mutual fund schemes. Taurus
infra fund takes more risk but unable to generate higher returns compared to market
return.
230 N. Tripathy

Table 3 TMs model

Fund names β Std. err t Stat γ Std. err t-stat. R2

Birla Sun Life 95 Fund 0.521 0.007 71.361 0.004 0.001 3.158* 0.81
Birla Sun Life Frontline 0.822 0.005 150.636 0.003 0.001 3.042* 0.95
Equity Fund
Birla Sun Life Long-Term 0.760 0.008 91.164 0.001 0.001 0.020 0.87
Advantage Fund
BOIAXA Equity 0.688 0.016 44.115 0.019 0.003 7.469* 0.62
Canara Robeco Bal. Fund 0.556 0.007 80.827 0.004 0.001 3.803* 0.85
Franklin Templeton Mid 0.684 0.012 57.832 0.001 0.002 0.431 0.74
Cap Fund (growth)
HBSC Equity Growth Fund 0.758 0.006 123.052 –0.002 0.001 –1.555* 0.93
HDFC Balanced Fund 0.497 0.007 67.582 –0.001 0.001 –0.535 0.79
HDFC Top 200 0.822 0.009 92.279 0.001 0.001 0.861 0.88
ICICI PRU Balanced Fund 0.490 0.016 30.043 –0.005 0.003 –1.841* 0.43
ICICI PRU very Cautious 0.001 0.003 0.425 0.001 0.000 –0.041 0.00
Plan
ING 5star Fund of Fund 0.569 0.015 37.165 0.001 0.003 0.029 0.54
ING balanced fund 0.620 0.005 131.230 0.001 0.001 0.848 0.94
LIC Mid Cap Fund 0.524 0.009 60.189 –0.003 0.001 –2.195* 0.75
(growth)
LIC Nomura Infrastructure 0.831 0.028 29.352 0.006 0.005 1.346* 0.42
Fund
LIC Nomura Opportunity 0.826 0.010 80.419 0.001 0.002 0.833 0.85
Fund
Morgan Stanley Equity 0.765 0.023 32.718 0.005 0.004 1.283* 0.48
Fund (D)
Pinebridge Infrastructure 0.646 0.012 54.651 0.008 0.002 4.103* 0.72
and Economic Dividend
Fund
Principal Balanced Fund 0.514 0.015 34.850 –0.001 0.002 –0.357 0.51
Reliance Banking Fund 0.827 0.035 23.521 0.015 0.006 2.504* 0.32
Reliance Mid Cap Fund 0.002 0.003 0.536 0.001 0.001 0.163 0.00
(growth)
Reliance Pharma Fund 0.435 0.030 14.504 –0.012 0.005 –2.403* 0.15
SBI Mid Cap Fund 0.732 0.016 45.327 0.008 0.003 2.850* 0.64
(growth)
TATA Equity Management 0.594 0.016 37.491 0.005 0.003 2.051* 0.54
Fund
Tata Indexed Fund – 0.882 0.019 47.208 0.002 0.003 0.619 0.65
Sensex Plan
Note: *significant at 5%
 Efficiency of mutual funds and performance measurement in India 231

Table 3 TMs model (continued)

Fund names β Std. err t Stat γ Std. err t-stat. R2

TATA Money Market Fund 0.001 0.002 0.301 0.001 0.000 0.426 0.00
Taurus Infra Fund 0.820 0.021 38.579 0.010 0.004 2.783* 0.56
UTI Balanced Fund 0.524 0.016 32.487 0.006 0.003 2.101* 0.47
UTI Banking Sector Fund 0.907 0.033 27.505 0.009 0.005 1.654* 0.39
UTI Bond Fund 0.017 0.005 3.418 –0.003 0.001 –4.099* 0.01
Note: *significant at 5%
Table 3 presents the empirical results of Treynor and Mazuy model of selectivity and
market timing. It is evident from Table 3 that 23 mutual fund schemes have positive
gamma indicating evidence of market timing skills. The rest seven schemes are showing
negative gamma indicating inability of fund managers in market timing skills. There is
evidence of statistically significant positive market timing of fund managers in 13 mutual
fund schemes out of 23 schemes. On the other hand, 5 schemes are exhibiting positive
gamma but negatively significant at 5% level. It signifies that fund manager is able to
time the market but in the wrong direction. The public information is also well captured
in case of 23 mutual fund schemes and also able to adjust for market timing ability since
beta is highly significant. So, according to Treynor and Mazuy model, the majority of the
Indian fund managers show positive and statistically significant superior market timing
skills.
Table 4 HM regression model

Standard
Standard
Scheme name Beta t-beta Gamma error t-gamma R2
error beta
gamma
Franklin Templeton 1.074 0.083 12.976 0.406 0.085 4.754* 0.743
Mid Cap Fund
(growth)
LIC Mid Cap Fund 0.559 0.062 9.068 0.038 0.064 0.604 0.751
(growth)
Reliance Mid Cap 0.002 0.021 0.085 0.001 0.022 0.007 0.0002
Fund (growth)
SBI Mid Cap Fund 1.312 0.113 11.597 0.600 0.117 5.139* 0.643
(growth)
Birla Sun Life 1.089 0.038 28.744 0.277 0.039 7.086* 0.952
Frontline Equity Fund
HDFC Balanced Fund 0.628 0.052 12.107 0.136 0.053 2.550* 0.794
Reliance Pharma Fund 0.087 0.212 0.410 –0.354 0.218 –1.618* 0.147
Tata Indexed Fund – 1.107 0.132 8.395 0.233 0.136 1.713* 0.654
Sensex Plan
UTI Balanced Fund 0.941 0.114 8.283 0.430 0.117 3.670* 0.479
UTI Bond Fund –0.019 0.035 –0.544 –0.035 0.036 –0.970 0.008
Birla Sun Life 95 Fund 0.839 0.051 16.456 0.328 0.053 6.247* 0.817
232 N. Tripathy

Table 4 HM regression model (continued)

Standard
Standard
Scheme name Beta t-beta Gamma error t-gamma R2
error beta
gamma
UTI Banking Sector 1.509 0.233 6.491 0.621 0.240 2.591* 0.395
Fund
ICICI PRU very 0.002 0.021 0.111 0.001 0.021 0.052 0.000
Cautious Plan
ICICI PRU Balanced 0.496 0.115 4.303 0.010 0.119 0.086 0.428
Fund
LIC Nomura 1.099 0.200 5.498 0.275 0.206 1.336* 0.423
Infrastructure Fund
TATA Equity 1.021 0.112 9.150 0.440 0.115 3.826* 0.550
Management Fund
TATA Money Market 0.004 0.016 0.231 0.003 0.017 0.184 0.000
Fund
LIC Nomura 1.029 0.072 14.225 0.211 0.075 2.823* 0.846
Opportunity Fund
HBSC Equity Growth 0.694 0.044 15.938 –0.066 0.045 –1.468* 0.927
Fund
Taurus Infra Fund 1.722 0.148 11.612 0.933 0.153 6.102* 0.572
Morgan Stanley Equity 1.267 0.165 7.691 0.519 0.170 3.055* 0.480
Fund (D)
Reliance Banking Fund 1.816 0.247 7.338 1.019 0.255 3.996* 0.331
Birla Sun Life Long 0.902 0.059 15.344 0.147 0.061 2.432* 0.876
Term Advantage Fund
ING 5star Fund of 1.032 0.107 9.615 0.482 0.111 4.356* 0.545
Fund
ING Balanced Fund 0.736 0.033 22.168 0.121 0.034 3.524* 0.936
Canara Robeco Bal 0.969 0.047 20.436 0.427 0.049 8.733* 0.855
Fund
BOIAXA Equity 1.418 0.111 12.802 0.747 0.114 6.538* 0.632
HDFC Top 200 0.941 0.063 14.975 0.123 0.065 1.903* 0.878
Pinebridge 1.369 0.082 16.798 0.747 0.084 8.890* 0.734
Infrastructure and
Economic Dividend
Fund
Principal Balanced 0.647 0.104 6.214 0.139 0.107 1.296* 0.506
Fund

Another method to evaluate the market timing ability of fund managers is Henriksson and
Merton (1981) model. Market timing ability enables the fund managers to predict
whether funds return will be higher than the risk free rate. Table 4 shows the results of
Henrikson and Merton model. The gamma value of 27 mutual fund schemes out of 30
schemes are positive and exhibit stock selection skills and market timing skill of fund
managers. However, 22 schemes shows positive gamma and statistically significant at
5% level suggesting fund managers stock selection skills are adding value to fund’s
 Efficiency of mutual funds and performance measurement in India 233

returns. Two schemes, i.e., Reliance Pharma fund and HBSC equity growth fund shows
positive gamma but negatively statistically significant at 5% level signifying that wrong
market timing abilities of fund managers. The gamma of three funds shows negative
value and statistically insignificant indicating managers’ poor selectivity and market
timing performance.
Table 5 Performance persistence

Current year
Previous year Status No. of funds Percentage
status
2008–2009 Winner Winner 25 83%
Loser 5 17%
Loser Winner 0 0%
Loser 0 0%
2009–2010 Winner Winner 19 63%
Loser 6 20%
Loser Winner 0 0%
Loser 5 17%
2010–2011 Winner Winner 10 33%
Loser 9 30%
Loser Winner 6 20%
Loser 5 17%
2011–2012 Winner Winner 11 37%
Loser 5 17%
Loser Winner 5 16%
Loser 9 30%
2012–2013 Winner Winner 11 37%
Loser 5 17%
Loser Winner 9 30%
Loser 5 16%
Total Winner Winner 76 51%
Loser 30 20%
Loser Winner 20 13%
Loser 24 16%

The results indicate that 13 mutual fund schemes are indicating superior market timing
ability under both the market timing models. This result may attribute to structure of
mutual fund schemes. It observes that 29 mutual fund schemes show positive beta
indicating that the selected sample funds gear up their systematic risk exposures during
market recovery and lowered such exposures during the market recession. The empirical
findings support that Indian fund managers are having market timing ability and
providing additional return to investors. In a nutshell, it is said that most of the schemes
rewards the investors and simultaneously portfolio managers’ book the profit in spite of
financial crises happened across the world.
234 N. Tripathy

It is observed that R2 value of mutual fund schemes are close to one indicating the
good fit of model. The analysis reveals that the stock market performance is able to
explain most of the funds’ return.
The performance persistence means a fund is able to gain return in one year will
continue to increase further, and one is loser will continue to remain so. Thirty mutual
fund schemes are tested for performance. It is noted that 70% of the performance
persistence is found in the analysis. Out of this, the winning funds have displayed a
tendency towards the same. 75% of this is the winning funds as opposed to losing funds
that demonstrated persistence for 25% of the time. These findings are contradictory to
most literature that suggests that the losing funds tend to display persistence as compared
to the winners. However, persistence between all six years has been observed only in
36.67% of the funds. It reveals that only Birla Sun Life Frontline fund has been able to do
the same consistently over the past six years.

6 Concluding observation

This study analyses the performance of 30 mutual fund schemes by using Treynor
measure, Sharpe measure, Jensen’s alpha performance measures. In addition to it, Sortino
ratio, M-square measure and IR is used to determine the performance of funds. The study
further uses two unconditional market timing model, i.e., TM and HM regression model
to assess the selection of skill and market timing abilities of the Indian mutual fund
managers. It is found from the analysis that 19 mutual fund schemes are performing
considerably good in the market for all time-periods of investment. All these 19 schemes
shows positive value and better performance according to Treynor ratio, Sharpe ratio and
Jensen’s alpha. It is observed from Jensen performance measure that 67% of funds (20
schemes) have produced positive return than market return indicating superior selectivity
skill of mutual fund managers in India. The study finds that about 90% (27 schemes out
of 30) mutual fund schemes are rewarded return to the investors for the amount of risk
taken in the market as per M-squared measure. The positive value of M-squared indicates
that most of the mutual fund schemes outperform the market during the period of study.
The study exhibits that as per IR measures, 30% (9 schemes) of the funds have a positive
IR signifying good management by the fund managers. The rest 21 schemes are
displaying reversal performance indicating long run efficiency of market. The study
depicts that 63% schemes (19 schemes) are showing positive return as per Sortino ratio.
13% schemes have a Sortino ratio less than benchmark return indicating
underperformance. The findings of market timing skills of fund managers based on TM
and HM models have disclosed positive and significant superior market timing skills and
providing additional return to investors. It is observed that 43% (13 mutual fund
schemes) fund managers have shown market timing ability as per both the models. It
confirms the findings of earlier studies for the Indian market as well as for developed
capital markets (Treynor and Mazuy, 1966; Henriksson and Merton, 1981; Gupta, 2000;
Tripathy, 2006; Chopra, 2011; Kumar, 2012). From the analysis, the study finds that
performance persistence of MFs are not evident in the market. If funds own past
performance is compared, about 36% of the funds displaying this trait. However,
persistence in low-performing funds has been noticed to be lower than that in the winning
funds. It is also observed that some funds that have been consistently performing well
 Efficiency of mutual funds and performance measurement in India 235

noticed under all performance measures. The analysis reveals that that there has been a
reasonable performance shown by the industry as a whole.
This study has multiple implications. An investor is required to consider some
statistical measures like alpha, beta, and standard deviation while taking investment
decision in MFs to minimise their risk and maximise return. Secondly, investment actions
of fund managers are not directly noticeable by investors, this study will provide insights
to understand the dynamics of selectivity and market timing skill of fund managers.
Thirdly, this study will also provide insights to the fund management companies to
formulate market timing strategies in better way to manage funds in broad market
movements. Since use of appropriate measures increase market efficiency, persistence of
performance and reduce informational asymmetries, this study will provide policy
implications to the fund management industries. Finally, it is suggested that regulation is
to be passed for mutual fund industries to disclose the methods of stock selection in the
offer documents for the awareness of investors. One limitation of the study is that the
study has taken only 30 schemes, hence the results may lead to certain level of bias.
However, future research can be carried out by taking Fama-French model to know the
performance of MFs.

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