NAV FORECASTING AND PERFORMANCE

EVALUATION OF MUTUAL FUNDS IN

BEAR AND BULL PHASE

A Graduate Project Report submitted to Manipal Academy of Higher Education

in partial fulfilment of the requirement for the award of the degree of

BACHELOR OF TECHNOLOGY
In
Electronics and Communication Engineering

Submitted by
Raghav Sharma
Reg. No: 160907402

Under the guidance of

Ms. Maithri Kowshik Dr. Vemuru Hema Sundara

Assistant Professor, HUM Moorthy
M.I.T, Manipal & Associate Professor, ECE
M.I.T, Manipal

DEPARTMENT OF ELECTRONICS AND COMMUNICATION ENGINEERING

MANIPAL-576104, KARNATAKA, INDIA

 MAY/JUNE 2020

MANIPAL-576104, KARNATAKA, INDIA

Manipal
th
30 May 2020

CERTIFICATE

This is to certify that the project titled NAV Forecasting and Performance
Evaluation Of Mutual Funds in Bear and Bull Phase is a record of the bonafide work
done by Raghav Sharma (Reg. No. 160907402) submitted in partial fulfilment of the
requirements for the award of the Degree of Bachelor of Technology (BTech) in
ELECTRONICS AND COMMUNICATION ENGINEERING of Manipal Institute of
Technology, Manipal, Karnataka, (A Constituent unit of Manipal Academy of Higher
Education), during the academic year 2019 - 2020.

Dr. Vemuru Hema Sundara Prof. Dr. M. Sathish Kumar

Moorthy HOD, ECE
Association Professor, ECE M.I.T, MANIPAL
M.I.T, MANIPAL
 ACKNOWLEDGEMENTS

We wish to express our sincere thanks and gratitude to our honourable Director, Dr. D
Srikanth Rao for his dynamic leadership and vision for the institution. We are also grateful to
Prof. Dr. M. Sathish Kumar, HOD, Electronics and Communication department, MIT,
Manipal, for permitting us to utilize the facilities in the department to accomplish the project
successfully.
 
We would also like to take this opportunity to thank our guide, Dr. Vemuru Hema Sundara
Moorthy, Associate Professor, Department of ECE, MIT, Manipal and Ms. Maithri Kowshik,
Assistant Professor, Department of Humanities and Management. Their guidance and support
has helped us in bringing out the best of us and has been integral in the completion of the
project.
 ABSTRACT

Mutual funds are key contributors to the globalization of financial markets and one of the
main sources of capital flows to emerging economies. These funds as a medium-to-long term
investment option are preferred as a suitable investment option by investors. In the present
scenario with the economic slowdown and recession looming over the horizon a smart
investor could navigate these storms and reap benefits. Mutual Funds are a suitable tool for a
uniformed investor to have an exposure to the financial market. Thus, if invested wisely these
funds could act as a great source of secondary income and therefore forecasting the trend and
its analysis in different market situations would help in making better judgement.

Through the use of Machine learning various mathematical models and algorithms were
tested so as to determine the one with the best performance metric compared to others for
facilitating the forecasting.
The project also dwelled into the performance of funds from different categories in bull and
bear phase so as to devise a better strategy for investing in aforementioned phases of the
market.

The project was majorly carried out on Google Colab and the script used was Python.
 LIST OF TABLES

Table No Table Title Page No

1 Mean absolute error of different funds with different models 24
2 Rate of returns for Bear and Bull cycle 26
3 Jensen’s Alpha of funds in bull and bear phase 29
4 Treynor’s Ratio values of funds in bull and bear phase 29
5 Sharpe Ratio values of funds in bull and bear phase 30
6 Average Sharpe values 30
7 Sortino Ratio values of funds in bull and bear phase 31
8 Beta values of funds in bull and bear phase 33
9 Standard Deviation of funds in bull and bear phase 33
10 Downside Deviation of funds in bull and bear phase 34
 LIST OF FIGURES

Figure Figure Title Page No

No
1 Possible Hyper planes 14
2 Hyper planes for 2D & 3D feature space 15
3 Support Vectors 16
4 NAV v/s Date (in years) 19
5 NAV v/s CPI 20
6 NAV v/s BSE Sensex Index 21
7 NAV v/s 10 year Treasury Bond 21
8 NAV v/s 5 year Treasury Bond 21
9 NAV v/s Export 22
10 NAV v/s Import 22
11 NAV distribution plot 22
12 5 year Treasury Bond distribution plot 23
13 10 year Treasury Bond distribution plot 23
14 Bear and Bull phases (bear are colour coded as red and bull as 25
green)
15 Axis Gold ETF and S&P 500 returns in 4 cycles 27
 Contents
Page
No
Acknowledgement
Abstract
List of Figures
List of Tables

Chapter 1 INTRODUCTION
1.1 Introduction 1
1.2 Area of work 1
1.3 Motivation 1
1.4 Objective 2
1.5 Project Work Schedule 2

Chapter 2 BACKGROUND THEORY

2.1 Introduction 4
2.2 Net Asset Value (NAV) 4
2.3 Economic Indicators 4
2.4 Different phases of a financial market 7
2.4.1 Bear Phase 7
2.4.2 Bull Phase 7
2.5 BSE S&P 500 Index 8
2.6 Technical Indicators 8
2.6.1 MACD 8
2.6.2 Stochastic Oscillator 9
2.6.3 MACD Histogram 9
2.7 Performance Measure 9
2.7.1 Beta 9
2.7.2 Standard Deviation 10
2.7.3 Downside Deviation 10
2.7.4 Jensen’s Alpha 10
2.7.5 Treynor’s Ratio 11
2.7.6 Sharpe Ratio 12
2.7.7 Sortino Ratio 12
Chapter 3 METHODOLOGY
3.1 Introduction 14
3.2 Modeling 14
3.3 Support Vector Machine (SVM) 14
3.3.1 Hyper Planes and Support Vectors 15
3.3.2 Larger Margin Intuition 16
3.3.3 Cost Function and Gradient Updates 16
3.4 Identification of bear and bull phase 17
3.5 Performance Analysis 17
3.6 Evaluation of Standard Deviation and Downside deviation 18
3.7 Tools used 18

Chapter 4 RESULT ANALYSIS

4.1 Introduction 19
4.2 Exploratory Data Analysis (EDA) 19
4.2.1 Scatter Plot 19
4.2.2 Distribution Plot 22
4.3 Accuracy of Models 24
4.4 Bear and Bull phase identification 24
4.5 Rate of return comparison 26
4.6 Performance Measure Analysis 28
4.6.1 Jensen’s alpha 28
4.6.2 Treynor’s Ratio 29
4.6.3 Sharpe Ratio 30
4.6.4 Sortino Ratio 31
4.6.5 Gold Exchange Traded Fund (ETF) Analysis 32
4.6.6 Beta values, Standard deviation and downside deviation 32

Chapter 5 CONCLUSION AND FUTURE SCOPE

5.1 Work Conclusion 35
5.2 Future Scope of Work 35

REFERENCES 36
ANNEXURES 37
PROJECT DETAILS 42
 CHAPTER 1
INTRODUCTION

1.1 Introduction to Mutual Funds

Financial markets have a vital role in the economic development of a country. They facilitate
the allocation of scarce resources by transferring them from savers to borrowers, thereby
accelerating investment activities in the economy. One of the most popular financial
investments is mutual funds, which pool the savings of a large number of investors with a
shared financial goal based on trust. The money thus collected is invested in capital market
instruments such as shares, debentures and other securities. Investors get the number of units
based on the amount invested and the net asset value of the units. The income earned is
shared among the investors in proportion to the number of units held by them. A mutual fund
is an investment that suits the needs of the common man. It is an indirect form of investment
in the capital market that has the advantages of diversification, professional management,
low-cost investment, liquidity and tax benefit. The primary objective is to provide better
returns to the investor by minimizing the risk associated with capital markets.

1.2 Area of Work

This project involves the use of concepts learnt during our tenure in Engineering and
applying them in the field of Finance. The project majorly revolves around 2 major spheres.

1. Finance: The project requires in-depth analysis of the financial market and its
working. Various important economic factors and events lead to changes in condition
and status of the stock market. By testing numerous hypothesis we are trying to find
those links or factors which affects the financial sector.
2. Technical: We are going ahead with the Machine Learning approach from Data
Science to support the hypothesis we presume. Various mathematical models and
algorithms would be investigated and tested to find the best fit for predicting the net
asset value. The project also dwells into the performance of funds from different
categories in bear and bull phase of the market. The performance would be analysed
using various predefined mathematical measures which in turn would help us in
understanding the dynamics of these funds in different phases.

1.3 Motivation

1
Mutual Funds as mentioned above are key contributors to the economy of the emerging
countries. Thus there lies a vast potential in exploring this field as it is bound to grow to
exceptional levels. They are also one of the key investment tools in the field of investing.

The previous work in this field is not recent and with the ever changing financial landscape
there is a need for new insights and analysis in this field. With the help of this project we
would like to point out economic indicators which affect the growth of mutual funds. The
second half of the project deals with the performance evaluation of these funds in bear and
bull phase. We would like to discuss the possible explanations for outliers with exceptional
performance in these phases with respect to other data points.

1.4 Objective

1) To identify the best possible mathematical model to forecast the net asset value.
2) To evaluate the performance of funds in bear and bull phase.

1.5 Project Work Schedule

o Review past research papers in the field of investments and in

January 2020 particular Mutual Funds.

o Find a suitable database and the required information.

o Select the time period of the study.
February 2020 o Extract the required features for the prediction model.
o Perform statistical analysis on the acquired data

o Performing Exploratory Data Analysis to extract the important

features.
March 2020 o Pre-processing the data
o Modeling – using different machine learning models to predict
our NAV values and testing our models by performance
metrics like mean absolute error, accuracy etc.
o Improving the accuracy of the model.

April 2020 o Reviewing research papers on bull phase and bear phase.
o Identifying the phases in our period of study.
o Evaluating the returns of different categories of mutual funds,

2
 large cap, mid cap and small cap in these phases.
o Asses the risk and rewards associated with the selected funds
by evaluating various performance measures like Jensen’s
alpha, beta, standard deviation, downside deviation, Treynor’s
ratio, Sharpe ratio, Sortino ratio in bull and bear phases.

May 2020 o Documentation.

3
 CHAPTER 2
BACKGROUND THEORY

2.1 Introduction
Although on first glance it may seem that the investment in mutual funds and stock market
seem similar but there are some starking differences in the pricing system. As opposed to a
stock market where the price of a stock or share is issued by the company on its IPO, every
mutual fund has its own net asset value which depends upon various factors such as assets
and liabilities of a fund.

2.2 Net Asset Value (NAV)

NAV is an abbreviation for Net Asset Value. It defines the market value of the fund nit of the
share.

NAV = (Assets - Liabilities) / Total number of outstanding shares

• The pricing system model of mutual funds for trading shares is quite different from
that of the common equities or stocks. These stocks are public and are issued by the
company for amongst masses and is listed on the stock exchange.
• Through an Initial Public Offering (IPO) a company issues some limited number of
share as equity and this could be extended subsequently and then traded on the
exchange market such as Bombay Stock exchange (BSE). The supply and demand of
shares dictate the stock prices and are governed by market forces. The pricing system
model is solely based on the demand created in the market.
• A Mutual fund's worth is evaluated on the basis of parameters such as asset under
management (AUM) and the total amount of money invested in the fund and the
number of outstanding shares.

2.3 Economic Indicators

4
Economic Indicators are used to measure the overall health and state of the economy. They're
typically issued by government agencies in the form of a census or survey and investors care
about them because they indicate the amount of
systematic risks in the system which affects the prices of securities and investments.
For the purpose of our project we have identified 11 such factors which could prove
detrimental in forecasting the net asset value of a fund.

1. Gross National Product (GNP): Gross national product is the estimate of the total
income that is earned by a country's factors of production regardless of where the
assets are located. GNP is equal to GDP plus income earned from assets abroad minus
income paid to foreign assets operating domestically. The income from abroad is the
income earned by firms operating in foreign countries.

2. Gross Domestic Product (GDP): GDP is an estimate of the total market value of all
finished goods and services produced in a country within a year. It measures how
large the economy is. GDP is the sum of consumer spending, government spending,
investments and net exports. GDP gives insights into a country's economy and enables
comparison with other countries.

3. Consumer Price Index (CPI): It is a measure that examines the rate of inflation. The
consumer price index is measured by analyzing the price of the goods and services in
a market basket. The market basket is a fixed set of goods and services whose prices
are used to calculate changes in prices year on year. The goods and services in the
basket vary by country due to differing consumption habits and also have different
weightings. The CPI is calculated by dividing the current price of the market basket
by the market basket of the base year, which is then multiplied by 100.

4. Narrow Money (M1): Narrow money is the money in forms that can be used as a
medium of exchange, generally notes, coins and certain balances held by banks. In the
United States, narrow money is classified as M1.

5. Broad Money (M3): Broad money is money in any form including bank and other
deposits as well as notes and coins.

5
6. 10 Year Bond (Treasury note): The 10-year Treasury note is a debt obligation issued
by the United States government with a maturity of 10 years upon initial issuance. A
10-year Treasury note pays interest at a fixed rate once every six months and pays
the face value to the holder at maturity.

7. 5 Year Bond: The 5-year Treasury note is a debt obligation issued by the United
States government with a maturity of 5 years upon initial issuance. A 5-year Treasury
note pays interest at a fixed rate once every six months and pays the face value to the
holder at maturity.

8. S&P BSE Index: The BSE Sensex is designed to measure the performance of 30
largest and financially sound companies across the sectors of India's economy that are
listed on the BSE. It is widely used as both, as a benchmark and an investable index.
The 30 companies listed on the index covers more than 44% of total market
capitalizations of the listed universe of BSE.

9. Net Export: Net exports is the amount by which the total exports of a country
exceeds its total imports.  Both exports and imports include physical goods, such as
food, clothes, and automobiles, and services, like business consulting, travel,
telemarketing, and government and military contracts.  If a country’s total exports are
greater than the total value of goods and services that it imports, net exports will be a
positive number.  If a country’s total exports are less than the value of the goods and
services it imports, net exports will be a negative number.

10. Net Import: A net importer is a country or territory whose value of imported goods
and services is higher than its exported goods and services over a given period of
time. A net importer, by definition, runs a current account deficit in the aggregate;
however, it may run deficits or surpluses with individual countries or territories
depending on the types of goods and services traded, competitiveness of these goods
and services, exchange rates, levels of government spending, trade barriers, etc.

6
 11. Exchange Rates: An exchange rate is the value of one nation's currency versus the
currency of another nation or economic zone. Most exchange rates are
free-floating and will rise or fall based on supply and demand in the market. Some
currencies are not free-floating and have some restrictions.

2.4 Different phases of a financial market

The financial market is never stagnant and thus it could be classified into two phases termed
as bear and bull. These terms indicate if the market is performing better compared to its
recent past.

2.4.1 Bear Phase

A bear phase is characterized by extended periods of decline in the prices. Widespread
distrust and pessimism towards the market accompanied by a decline of 20% or more from
the recent peak are the key indicators of a prevailing bear phase. Cash flows and profits of
companies are reflected on the stock price. With the eminent future looking bleak with little
to no growth prospect and dashed expectations the prices of the stock can fall rapidly.
Prolonged period of decreased or depressed prices of stocks generally stems from the herd
behavior and fear amongst the investors so as to protect their investment from downside
losses.

The most common perceived definition for bear market is that the stocks should fall at least
20% off from the recent high to define a bear territory. 20% as mentioned above is just an
arbitrary number same as 10% is for an arbitrary number for benchmark. Bear markets could
also be defined as a phase where the investors are more inclined towards aversion of risk.
Bear markets tend to exist for long periods as investors pour their money on sure bets.

● Characteristics of bear phase

The bear market is mostly brought upon by sluggish or slow economy but there could be
other reasons as well. The key indicators of a weak or slowing economy are considerable
drop in the profits earned by business, unemployment, low disposable income and decrease in
productivity. A bear market could also be triggered by any untimely intervention by the
government. For instance changes in the taxation laws or central fund rates can cause bear
market. The onset of a bear market is also accompanied by drop in the confidence of the

7
investor. Actions such as selling off shares in large amount to avoid losses may also lead to
bear market.

2.4.2 Bull Phase

When the prices are on the rise and are also expected to continue the trend in the future this
phenomenon is termed as bull phase. The key characteristics of a bull market are increase in
the confidence of an investor, optimism and that the strong result should continue to perform
in the same manner or even better. The trends of the markets are difficult to predict on a
consistent basis. Variables such as psychological effects and market speculations make it
even harder to predict.

Similar to that of bear market there is no defined metric to identify a bull phase. The most
common definition identified everywhere is that when the stock prices increase by 20% after
a drop of 20% and a second another 20% decline. This phase can only be recognized when it
has happened thus making it even more difficult to predict. The most recent bull market
occurred in the period 2016 - 2018. The S&P 500 increased significantly after a decline in the
previous period. With the advent of COVID-19 pandemic major decline took place again
after this good run.

● Characteristics of bull phase

These markets occur when there are positive signs such as strengthening of economy or when
if it’s already strong. The key characteristics of a bull phase are a drop in unemployment, a
strong domestic product (GDP) and most importantly increase in corporate profits. The
confidence of investors tends to climb during a bull market period. The overall tone and
demand for the stocks would be positive in the market. There will be an increased amount of
IPO activity in this period. The factors mentioned above are more easily quantifiable
compared to others. It is difficult to evaluate the general tone of the market even though
unemployment and corporate profits are quantifiable. For example there will be an increase in
the demand and the supply would be weak. The investors would be eager to buy securities
but then very few would be willing to part with it. During this phase the investors are more
willing to get involved with the stock market in order to earn greater profits.

2.5 BSE S&P 500 Index

Bombay Stock Exchange Limited constructed a new index, christened BSE-500, consisting
of 500 scrips w.e.f. August 9, 1999. While constructing this index the change in the pattern of
the economy and market were considered.

BSE-500 index represents nearly 93% of the total market capitalization on BSE. BSE-500
covers all 20 major industries of the economy. In line with other BSE indices, effective
August 16, 2005 calculation methodology was shifted to the free-float methodology.

2.6 Technical Indicators

8
Traders who follow technical analysis make use of these pattern based signals produced by
the price, open interest of a security and volume. These financial tools are termed as technical
indicators. By analysing historical data, technical analysts use indicators to predict future
price movements.

2.6.1 MACD (Moving Average Convergence Divergence)

Moving Average Convergence Divergence (MACD) is a trend

following momentum indicator that shows the relationship between two moving averages of a
security’s price.

(MACD) =12-period EMA -- 26-period exponential moving average (EMA)

MACD triggers technical signals when it crosses above (to buy) or below (to sell) its signal
line. The speed of crossovers is also taken as a signal of a market is overbought or oversold.
MACD helps investors understand whether the bullish or bearish movement in the price is
strengthening or weaken

2.6.2 Stochastic Oscillator

A stochastic oscillator is a commonly used technical analysis indicator to help identify the so
called overbought and oversold points in the market. It works by looking at the price
momentum, which is the rate at which the price is changing.

%K= (H 14 − L 14) / (C − L 14) ×100

Where:

C = the most recent closing price

L14: the lowest price traded from the 14 previous trading sessions

H14: the highest price traded during the same 14-day period

%K: the current value of the stochastic indicator​

It gives indication of the market being overbought or oversold by comparing the present price
and the past price and in this comparison it takes into account the highest highs and the
lowest lows across the period.

2.6.3 MACD Histogram

MACD-Histogram measures the distance between MACD and its signal line (the 9-day EMA
of MACD). Like MACD, the MACD-Histogram is also an oscillator that fluctuates above
and below the zero line. It anticipates signal line crossovers in MACD. Because MACD uses
moving averages and moving averages lag price, signal line crossovers can come late and

9
affect the reward-to-risk ratio of a trade. Bullish or bearish divergences in the
MACD-Histogram can alert chartists to an imminent signal line crossover in MACD.

2.7 Performance Measure

2.7.1 Beta

It measures the systematic risk, or is used as a measure of volatility of a portfolio or a pool of

securities and is then compared to the market as a whole.

Beta is used in CAPM (Capital Asset Pricing Model), which describes the relationship
between systematic risk and expected return for assets, particularly stocks.

Beta coefficient (β) = Covariance (Re, Rm) ​/ Variance (Rm​)

​

Where:

Re​=the return on an individual stock

Rm=the return on the overall market

Covariance=how changes in a stock’s returns arerelated to changes in the market’s returns

Variance=how far the market’s data points spreadout from their average value​

The swings in the market makes the security's return respond to it. This activity is indicated
by beta. It is defined as product of the covariance of market return and individual stock
divided by variance of the overall market return for a specified amount of time.

2.7.2 Standard Deviation

The standard deviation is a statistic measure which indicates the dispersion of data points
relative to its mean.

Standard Deviation= (∑ (xi​−x) ^2 / (N-1)) ^ (0.5)

Where :-

xi=Value of the ith point in the data set

x=Mean value of the data set

n=Number of data points in the data set​

Market and security volatility is measured by standard deviation. Thus making it an useful
tool for investing and devising trading strategies. For example the standard deviation of an
index fund is expected to be low as it mimics the benchmark index.

2.7.3 Downside Deviation

10
The returns that fall below a minimum threshold or minimum acceptable return (MAR) are
measured by Downside deviation. A measure of risk-adjusted return called Sortino ratio is
calculated using downside deviation. Sharpe ratio and Sortino ratio are quite similar with the
former having standard deviation in the denominator in place of downside deviation.

All the deviations from the average are considered the same irrespective of the fact that they
are positive or negative and treated in the same manner when making use of Standard
deviation. The investors should be more concerned about negative divergences compared to
positive ones, meaning downside risk is a bigger concern. This issue is resolved by downside
deviation by focusing only on negative downside risk.

Investors who have different levels of minimum acceptable return and have a different risk
profiles can make use of downside deviation as it would be tailored according to their needs.
Thus making it a better option compared to standard deviation.

2.7.4 Jensen’s Alpha

The Jensen's measure, or Jensen's alpha, is the portion of the excess return that is not
explained by the systematic risk. It is a measure that represents the excess return on a
portfolio or investment, above or below that predicted by the capital asset pricing model
(CAPM), given the portfolio's or investment's beta and the average market return.

Jensen’s Alpha = R(i) - (R(f) + B x (R(m) - R(f)))

Where:
R(i) = the realized return of the portfolio or investment

R(m) = the realized return of the appropriate market index

R(f) = the risk-free rate of return for the time period

B = the beta of the portfolio of investment with respect to the chosen market index

To accurately analyse the performance of an investment manager, an investor must look not
only at the overall return of a portfolio but also at the risk of that portfolio to see if the
investment's return compensates for the risk it takes.

If the value is positive, then the portfolio is earning excess returns. In other words, a positive
value for Jensen's alpha means a fund manager has "beat the market" with their stock-picking
skills.

11
2.7.5 Treynor’s Ratio

The Treynor ratio is a measurement of efficiency utilizing the relationship between

annualized risk adjusted return and risk. Unlike Sharpe Ratio, Treynor's Ratio utilizes
"market" risk or beta instead of total risk or a standard deviation. A high Treynor's ratio is
indicative of a good performance. It is reliant on portfolio's beta, which measures the
sensitivity of the portfolio's returns to movements in the market.

Treynor Ratio= (rp​−rf)​​/ βp​

Where:

rp​=Portfolio return

rf​=Risk-free rate

βp​=Beta of the portfolio​

In essence, the Treynor ratio is a risk-adjusted measurement of return based on systematic

risk. It indicates how much return an investment comprising of mutual funds, or
exchange-traded fund, portfolio of stocks, earned for the total amount of risk bared.

A portfolio which has a negative beta result does not make much sense.

2.7.6 Sharpe Ratio

The Sharpe ratio measures the risk adjusted return for a stock or a portfolio. The higher the
Sharpe ratio, the better is the performance.

Sharpe Ratio= (Rp​−Rf) / σp​​

​

Where:

Rp​=return of portfolio

Rf​= risk-free rate

σp​= standard deviation of the portfolio's excess return​

Risk adjusted returns are widely calculated using the Sharpe ratio. Returns can be saved if we
add assets to a diversified portfolio which has very low correlations. This is stated in the
Modern Portfolio Theory.

Sharpe ratio can be increased by adding diversification when in comparison with a similar
portfolio with low level of diversification. For the above statement to be valid we have to

12
make an assumption that the risk is equal to the volatility, although this isn't unreasonable but
it’s too niche for application in all sorts of investment.

It can also be used to evaluate a portfolio's past performance and actual returns are used in the
formula. Expected risk-free rate and expected portfolio performance can be used by an
investor to calculate an estimated Sharpe ratio.

2.7.7 Sortino Ratio

The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from
total overall volatility by using the asset's standard deviation of negative portfolio returns,
called downside deviation, instead of the total standard deviation of portfolio returns.

The Sortino ratio takes an asset or portfolio's return and subtracts the risk-free rate, and then
divides that amount by the asset's downside deviation.

Sortino Ratio= (Rp​−rf​​) / σd
​

Where:

Rp​=Actual or expected portfolio return

rf​=Risk-free rate

σd​=Standard deviation of the downside​

The Sortino ratio is a useful way for investors, analysts, and portfolio managers to evaluate
an investment's return for a given level of bad risk. Since this ratio uses only the downside
deviation as its risk measure, it addresses the problem of using total risk, or standard
deviation, which is important because upside volatility is beneficial to investors and isn't a
factor most investors worry about.

13
 CHAPTER 3
METHODOLOGY

3.1 Introduction
For forecasting the net asset value of fund various mathematical models were considered.
Support Vector Regression showed promising result with the least mean squared error. SVR
lies in the category of supervised machine learning model.

3.2 Modelling
The first step required selecting features which affected the NAV value of the funds
considerably. This was done by performing exploratory data analysis (EDA) as mentioned in
the previous section.
The required data for these features was collected from various government sites. The data
was pre-processed according to our requirement.

14
The data set was eventually split into two sets. The training set and test set with the test size
being 0.1.
The data set consisted of a total of 72 number of data points.
For evaluation of models the metric used is mean absolute error.

3.3 Support Vector Machine (SVM)

The objective of the support vector machine algorithm is to find a hyper plane in an
N-dimensional space (N — the number of features) that distinctly classifies the data points.

Figure 3.1: Possible Hyper planes

To separate the two classes of data points, there are many possible hyper planes that could be
chosen. Our objective is to find a plane that has the maximum margin, i.e. the maximum
distance between data points of both classes. Maximizing the margin distance provides some
reinforcement so that future data points can be classified with more confidence.

3.3.1 Hyper planes and Support Vectors

Hyper planes are decision boundaries that help classify the data points. Data points falling on
either side of the hyper plane can be attributed to different classes. Also, the dimension of the
hyper plane depends upon the number of features. If the number of input features is 2, then
the hyper plane is just a line. If the number of input features is 3, then the hyper plane
becomes a two-dimensional plane. It becomes difficult to imagine when the number of
features exceeds 3.

15
 Figure 3.2: Hyper planes for 2-D and 3-D feature space

Support vectors are data points that are closer to the hyper plane and influence the position
and orientation of the hyper plane. Using these support vectors, we maximize the margin of
the classifier. Deleting the support vectors will change the position of the hyper plane. These
are the points that help us build our SVM.

Figure 3.3: Support Vectors

3.3.2 Large Margin Intuition

In logistic regression, we take the output of the linear function and squash the value within
the range of using the sigmoid function. If the squashed value is greater than a threshold
value we assign it a label 1, else we assign it a label 0. In SVM, we take the output of the
linear function and if that output is greater than 1, we identify it with one class and if the

16
output is -1, we identify is with another class. Since the threshold values are changed to 1 and
-1 in SVM, we obtain this reinforcement range of values ([-1, 1]) which acts as margin.

3.3.3 Cost Function and Gradient Updates

In the SVM algorithm, we are looking to maximize the margin between the data points and
the hyper plane. The loss function that helps maximize the margin is hinge loss

Hinge loss function (function on left can be represented as a function on the right)

The cost is 0 if the predicted value and the actual value are of the same sign. If they are not,
we then calculate the loss value. We also add a regularization parameter the cost function.
The objective of the regularization parameter is to balance the margin maximization and loss.
After adding the regularization parameter, the cost functions looks as below.

Loss Function of SVM

Now that we have the loss function, we take partial derivatives with respect to the weights to
find the gradients. Using the gradients, we can update our weights.

Gradients

When there is no misclassification, i.e. our model correctly predicts the class of our data
point, we only have to update the gradient from the regularization parameter.

Gradient update – no misclassification

When there is a misclassification, i.e. our model make a mistake on the prediction of the class
of our data point, we include the loss along with the regularization parameter to perform
gradient update.

17
 Gradient update – misclassification

3.4 Identification of bear and bull phase

We have identified 3 technical indicators which would assist in identifying the phase of the
market. The technical indicators are MACD, stochastic oscillator and MACD histogram.

The identification would be based on a point system. Where each indicator is assigned a
value 1 if it changes its state and value 0 if it remains in the same state. The time axis is
flagged if 2 or more indicators have value 1. Thus the time axis is divided into various
sections accordingly based on the above rule.

The sections are then categorised as bear or bull based on the slope of the BSE S&P 500
index where a positive slope indicates bull state and a negative slope indicates bear state.

3.5 Performance Analysis

The performance analysis will be done by employing various measures. These measures are
mathematical ratios which gives us various insights about the funds. They would be evaluated
using Python and Microsoft Excel. The funds would be categorised on the basis of their
portfolios into large, mid, small, debt and ETF. The evaluation would be done for bear and
bull phase separately. The aim is to identify key characteristics in these respective phases.

3.6 Evaluation of Standard Deviation and Downside deviation

Standard deviation and downside deviation are one of the most sought after performance
measures while evaluating a funds or a portfolios performance. The evaluation of these
measures was done on Microsoft Excel.

For the evaluation of standard deviation, the daily NAV values of the fund in question were
collected. The next step involved finding daily returns of these NAV values. Then standard
deviation of the daily returns was calculated. The deviation now calculated is daily and not
annualised. For comparing and interpreting the deviation daily deviation isn’t appreciated.
Thus the daily standard deviations are multiplied by the total number of trading days in a
year. The final value obtained is the annualised standard deviation.

Downside deviation is another measure which was calculated. It is similar to standard

deviation but only those values which contribute to negative volatility are considered. For this
the daily return column of the NAV values is amended. Only values which are above the
average of the total returns in a period are considered. Then standard deviation of these
values are calculated and multiplied by the total number of trading days which is 252. This
gives us annualised downside deviation.

18
3.7 Tools Used

The model has been implemented on Google Colab using Python Script. The various libraries
which were used are:

1. Pandas: It is an open source Python package that provides numerious tools for data
analysis. It helps in organizing and manipulating the data by putting it in a tabular
form.

2. Numpy: It is an open source numerical python library which contains

multi-dimensional array and matrix data structures.

3. Scikit-Learn: It is a python module for machine learning. The sklearn library

contains a lot of efficient tools for machine learning and statistical modelling
including classification, regression, clustering and dimensionality reduction. Some
examples are support vector machines, random forests, gradient
boosting, k-means and DBSCAN, which are designed to interoperate with the Python
numerical and scientific libraries NumPy and SciPy.

4. Seaborn: Seaborn is a library for creating more attractive and informative statistical
graphics in python.

5. Matplotlib: It is a comprehensive library for creating static, animated, and interactive

visualizations in Python.

CHAPTER 4
RESULT ANALYSIS

4.1 Introduction

We looked into certain economic indicators which we believed had an impact on the financial
market. To support our hypothesis we performed exploratory data analysis on each economic
indicator. The indicators which passed this initial test were then used as features in various
mathematical models forecasting the net asset value. Throughout the analysis report Net
Asset value would be referred as NAV.

19
4.2 Exploratory Data Analysis (EDA)

4.2.1 Scatter Plots

● NAV v/s Date

20
 Figure 4.1: NAV v/s Date (year)

This is a plot of NAV V/S Date on which they were recorded. For each year, data points from
left to right denote January to December respectively. The fund used in this study is ICICI
Prudential Bluechip Fund. The NAV in its entirety shows an increasing trend through the
years. The Years 2017 and 2015 were remarkable in terms of growth whereas the year 2016
didn’t perform up to the expectations. This graph proves the fact that a patient investor would
surely reap rewards if they could wait out the volatility of the market and stay invested for
longer periods.

● NAV v/s CPI (Consumer Price Index)

Figure 4.2: NAV v/s CPI

This is a plot of NAV against Consumer Price Index (CPI). The data points in this graph align
themselves to form a straight line with a steep slope, indicating that a small increase in the
CPI value leads to large increase in the value of NAV. CPI has always been used to determine
the inflation rate. In accordance with the theory Paradox of thrift an increase in the CPI value
or inflation rates need not necessarily mean that the purchasing power of the money has gone
down. A controlled increased in inflation rate indicates that the demand has increased in the
country and thus in turn affect the productivity which helps the citizens to get more work and
thus earn and save more.

21
 ● NAV v/s BSE Sensex Index

Figure 4.3: NAV v/s BSE Sensex Index

This plot is of NAV v/s BSE Sensex index. One of our null hypothesis was that there is no
correlation between the benchmark index and the NAV value but this plot proves our null
hypothesis right. The two features have a linear relation with slope almost equal to 1 thus
indicating a strong correlation between them.

● NAV v/s 10 year Bond and NAV v/s 5 year bond

22
\

This is a plot of NAV against 10 and 5 year treasury bonds. This features were primarily
chosen to establish a relation between the debt and equity market. From the plots we could
observe that there is a hyperbolic curve formation. The yield rates of these bonds keep
oscillating between two extreme values with majority of data points concentrated at 7.5%.

● Export and Import

Figure 4.6: NAV v/s Export Figure 4.7: NAV v/s Import

This is a plot of NAV against total export and import of goods. Since the data is calculated
yearly we had to extrapolate the data to calculate these data for each month. We made an
assumption that the import and export of goods is equal throughout the 12 months. After
observing the plot we could see that there is no direct correlation between these 2 values
because for a given import or export value there exists multiple values of NAV. Thus this
feature has to be discarded for the prediction model.

4.2.2 Distribution Plots

1. NAV

23
 Figure 4.8: NAV distribution plot

This is distribution plot for net asset value. The graph indicates that the mode for the fund
chosen for study had an NAV value of 30.

2. 5 - Year Bond (Treasury Bond)

Figure 4.9: 5 year bond distribution plot

The mode of 5 year bond is around 8%. This asserts our assumption that although debt bonds
are theoretically risk free investments there isn’t any scope of gaining exceptional returns and
thus they can be used as a liquidity option in an investor’s portfolio.

3. 10 - Year Bond (Treasury Bond)

24
 Figure 4.10: 10 year bond distribution plot

The same analysis applies to the 10 year bonds. The mode of 5 year bond is around 8%. This
asserts our assumption that although debt bonds are theoretically risk free investments there
isn’t any scope of gaining exceptional returns and thus they can be used as a liquidity option
in an investor’s portfolio.

4.3 Accuracy of models

The performance metric used was mean absolute error and the various models tested for
predicting the NAV values were
● SVR (Support Vector Regressor)
● LSVR (Linear Support Vector Regressor)
● RF (Random Forest Regressor)
● Linear Regression
● SGD (Stochastic Gradient Descent)
● MLP (Multi-Layer Perceptron)

Models SVR LSVR RF LR SGD MLPR

Funds
Cannara Robeco Bluechip fund 0.246 0.245 0.153 0.222 0.557 0.331
ICICI Prudential Bluechip Fund 0.255 0.283 0.227 0.259 0.561 0.311
SBI Focused Equity 0.314 0.665 0.403 0.798 0.690 0.309
DSP Tax Saver Fund 0.274 0.365 0.381 0.351 0.567 0.364
Axis Long Term Equity Fund 0.264 0.610 0.309 0.682 0.617 0.416
Mirae Asset Emerging Bluechip Fund 0.245 0.325 0.351 0.439 0.542 0.547
Standard Deviation 0.025 0.177 0.096 0.233 0.055 0.091

25
 Average 0.266 0.415 0.304 0.458 0.589 0.379

Table 4.1: Mean absolute errors of different funds and different models

The models were tested across various funds so as to reduce any ambiguity in the result.
From table 1 we can observe that Support Vector Regressor had the least mean absolute error
even when compared with different models. The standard deviation for SVR was also found
out to be the least when compared to other models thus indicating a consistent performance
compared to its peers.

Thus we can conclude that amongst all the models Support Vector Regressor (SVR) had the
best performance. Since ‘0’ mean absolute error is the theoretical value for a model to be
100% efficient a SVR reading of 0.025 indicates that it is optimal for forecasting NAV
values.

4.4 Bear and Bull phase identification

After applying the technical indicators to the BSE S&P 500 index we have identified 4 such
cycles in the period starting from 1st April 2004 to 21st May 2020.

The average duration of bear phase in this period = 568 days

The average duration of bull phase in this period = 755.25 days

26
 Figure 4.11: Bear and Bull phases (bear are colour coded as red and bull as green)

The identified period are:

• Bear Cycle
C1 - 03 Dec ‘07 - 02 Mar ‘09
C2 - Oct ‘10 - 02 Jan ‘12
C3 - Nov ‘14 - 01 Mar ‘16
C4 - Jan ‘18 - 21 May ‘20

• Bull Cycle
D1 - 01 Apr 04 - 03 Dec ‘07
D2 - 02 Mar 9 - 01 Oct ‘10
D3 - 02 Jan 12 - 03 Nov ‘14
D4 - 01 Mar 16 - 01 Jan ‘18

4.5 Rate of return comparison

The rate of return of funds from different categories was evaluated. The returns were as
expected and followed the notion of funds performing better in bull phase compared to bear
phase.

Category Fund Bear Phase Bull Phase

C1 C2 C3 C4 D1 D2 D3 D4
Large Cap ICICI Prudential NA -12.7% -7.2% -7.2% NA 80.5% 26.7% 28.4%
Bluechip
Cannara Robeco NA -10.5% -7.2% 0.3% NA NA 24.6% 23.6%
Bluechip
Mid Cap UTI Mid Cap -52.2% -22.9% -1.0% -14% NA 100.1% 43.8% 32.1%
Edelweiss Mid NA -21.7% 3.8% -12.9% NA 99.6% 39.6% 37.5%
Cap
Small Cap HDFC Small NA -22.7% -2.9% -20.3% NA 100.4% 28% 46%
Cap

27
 Kotak Small Cap -55.8% -25.3% 1.2% -16.6% NA 94.7% 34.4% 36.8%
ELSS Axis Long Term NA -11.9% 1.5% -1.8% NA NA 37.2% 24.7%
Equity
DSP Tax Saver -47.9% -23.6% -2.9% -7.9% NA 84.4% 32.1% 32.8%
Fund
Debt fund HSBC Debt 11.9% 8.3% 7.2% 8.5% 2.3% 4.7% 8.0% 6.4%
DSP Credit Risk 8.7% 8.1% 9.2% 0.6% 5.4% 4.9% 9.2% 8.8%
INDEX S&P BSE 500 -60.8% -40.6% -14.6% -65.1% 101.5% 164% 45.5% 42.2%

Gold ETF Axis Gold ETF NA NA 11.65% 21.3% NA NA -3.08% -9.89%

Table 4.2: Rate of return table for bull and bear cycle

We could infer from the above table that mutual funds are a safe investment tool and provides
an investor with extra downside protection. During the bear phase although the market
returns were exceptionally low the funds performed relatively better. The funds taken into
consideration here are active funds and thus it implies that the fund managers of respective
funds have implemented certain strategies to reduce the downside risk. This also proves that
investors with less risk appetite can still invest in the market through these funds.

On the other hand these funds have managed to not beat the market returns consistently over
the bull period. The downside protection witnessed during the bear phase comes at a cost and
this is evident from the bull section of the table. The return of these funds do not deviate
significantly from market returns thus a passive investor could still reap benefits along with
the downside protection for if the market shifts into bear phase.

While analysing the debt fund row it is evident that the returns are almost constant for both
bull and bear phase. Debt funds are regarded as the safest option for investment and these
results do prove this fact. These type of funds should be used if the investment horizon is
short term. Thus assisting in growing the investment and warding off unnecessary risks.

12-14
14-16 16-18
18-20

28
 Figure 4.12: Axis Gold ETF and S&P 500 returns in four cycles

Exchange traded funds are also referred to as Index funds which are listed and traded as
stocks. We have compared the Axis Gold ETF with the market returns. A Gold ETF tracks
the price of the Gold and is traded on the stock market.
We can observe that the Gold ETF has negative correlation with the market returns. During
the bear phase it shows significant positive returns and vice versa in the bull phase. This is
because during a bear cycle investors lose trust in the market and they shift their investments
into commodities which they feel would give them consistent returns. The demand for gold
has existed for centuries and thus these investors feel safe in rearranging their portfolios in
favour of debt and gold funds. This leads to an artificial demand for the commodity thus
increasing its value. The vice versa happens when the market goes through a bull phase. As
the market returns increase the investors flood the stock markets again since the demand
decreases the price of the commodity also decreases.

4.6 Performance Measure Analysis

4.6.1 Jensen’s Alpha

Fund Bear Phase Bull Phase

14-16 18-20 12-14 16-18

DSP Credit Risk

Fund
1.42 -6.61 0.84 1.56

29
 HDFC Small Cap
Fund
-5.97 -13.55 18.83 37.29

Kotak Small Cap

Fund
-2.02 -9.84 23.27 23.83

Axis Long Term

Equity Fund
-2.26 9.03 28.89 14.01

Axis Gold ETF

1.17 15.89 -8.10 -19.73

ICICI Prudential
Bluechip Fund
-10.56 -3 17.93 19.8

Canara Robeco
Bluechip Fund
-10.56 3.35 13.95 14.58

Table 4.3 Jensen’s alpha of funds in bull and bear phase

A positive alpha indicates that the fund or portfolio has performed better than the expected
return calculated using the CAPM (Capital Asset Pricing Mode).
Small cap and mid cap funds had large positive alpha during the bull phase on an average
when compared to the large cap funds. This could be attributed to the fact that small cap and
mid cap funds are riskier and have greater volatility thus they were rewarded during the bull
phase although the difference in returns between the two categories isn’t too significant.
On the other hand during bear phase the small and mid-cap funds have large negative
coefficients whereas large cap funds continue to have positive alphas. Thus we can infer that
even though the market isn’t performing well, large cap funds have exceeded or are close to
the expected returns because they are less risky and volatile.
The alpha coefficient for debt funds was almost negligible. Thus indicating that this category
of fund does not deviate much from the expected returns in either direction which in turn
makes them a safe bet for short term investment.
The general trend which can be noted here is that the funds tend to have positive and higher
Jensen’s alpha during the bull phase and negative or lower coefficient during the bear phase.

4.6.2 Treynor’s Ratio

30
 Fund Bear Phase Bull Phase
14-16 18-20 12-14 16-18
DSP Credit Risk
Fund 10.62 65.86 63.77 3.11
HDFC Small Cap
Fund
-0.41 -0.55 18.20 11.96
Kotak Small Cap
Fund
-0.26 -0.47 7.19 2.73
Axis Long Term
Equity Fund
-0.28 -0.14 -980.10 2.60

Axis Gold ETF

-0.26 0.22 2.48 -3.16
ICICI Prudential
Bluechip Fund
-0.53 -0.20 6.13 2.68
Canara Robeco
Bluechip Fund
-0.53 -0.11 1.01 1.67

Table 4.4: Treynor’s Ratio values of funds in bull and bear phase

A higher ratio indicates that the fund or portfolio has performed better compared to its peers.
This ratio cannot be used to compare funds of different categories because the market risk
pertaining to each category is different.
While analysing the funds it became evident that ICICI Prudential Bluechip fund has
performed better compared to its peers and has provided with better returns per unit in
relation to the market. The index used for large cap funds was BSE S&P 500. In the mid cap
and small categories Edelweiss mid cap fund and HDFC small cap fund have performed
better compared to their peers respectively. The index in question for mid and small cap funds
are NIFTY AUTO and NIFTY small cap 100.
Across all the categories the general trend observed is that the funds tend to have positive and
higher Treynor’s ratio during the bull phase and negative or lower ratio during the bear phase.

4.6.3 Sharpe Ratio

Fund Bear Phase Bull Phase

14-16 18-20 12-14 16-18

31
 DSP Credit Risk
Fund
1.57 -1.64 0.88 1.62

HDFC Small Cap

Fund
-0.63 -1.49 1.38 3.02

Kotak Small Cap

Fund
-0.40 -1.32 1.79 2.47

Axis Long Term

Equity Fund
-0.42 -0.44 2.17 1.63

Axis Gold ETF

0.30 1.07 -0.66 -1.43

ICICI Prudential
Bluechip Fund
-0.93 -0.68 1.3 1.85

Canara Robeco
Bluechip Fund
-0.86 -0.34 1.09 1.40

Table 4.5: Sharpe Ratio values of funds in bull and bear phase

Bear Phase Bull Phase

Large Cap -0.7025 1.41
Mid Cap -2.72 2.235
Small Cap -0.9595 2.15

Table 4.6: Average Sharpe values

Unlike Treynor’s ratio Sharpe ratio can be used to compare funds amongst categories. A
higher ratio is desirable when comparing two entities.
During bull phase the small and large cap funds seem to have the upper hand when discussing
the excess returns earned per total unit risk of the portfolio. This goes on to support the fact
that if the markets are timed an investor can generate excess returns.
But during the bear phase their lies a significant risk to lose almost all of their portfolios
value. The mid cap funds considered in this analysis have larger negative Sharpe values
indicating that they have performed poorly when compared to risk free returns. Large cap

32
funds have performed satisfactorily and have held their ground during the bear cycle but even
then they have performed slightly poorer when compared to risk free assets.
Debt fund’s portfolio mostly consists of risk free securities and assets and this can be asserted
from our findings because the Treynor’s ratio is mostly small and positive.
Across all the categories the general trend observed is that the funds tend to have positive and
higher Sharpe ratio during the bull phase and negative or lower ratio during the bear phase.

4.6.4 Sortino Ratio

Fund Bear Phase Bull Phase

14-16 18-20 12-14 16-18

DSP Credit Risk

Fund
1.13 -1.01 0.82 1.49

HDFC Small Cap

Fund
-0.64 -1.59 1.99 3.69

Kotak Small Cap

Fund
-0.42 -1.40 2.47 3.14
Axis Long Term
Equity Fund
-0.44 -0.51 3.11 2.25

Axis Gold ETF

0.21 1.76 -0.94 -2.23

ICICI Prudential
Bluechip Fund
-0.92 -0.71 1.96 2.85
Canara Robeco
Bluechip Fund
-0.93 -0.39 1.64 1.88

Table 4.7: Sortino Ratio values of funds in bull and bear phase

Sortino ratio is similar to Sharpe ratio but it does not punish positive volatility. Thus the
inference from the Sharpe ratio should be similar to that of Sortino ratio and it does turn out
to be the same but during bull phase the results deviate more towards the positive axis from
Sharpe ratio and remain almost constant during the bear phase. Small cap and mid cap funds
have shown greater positive volatility as its deviation from the Sharpe ratio is maximum. The
result eradicates the stigma about small cap funds being a risky investment to an extent. If the

33
markets are timed well the volatility of the small cap funds can be used to earn greater
returns.

4.6.5 Gold Exchange Traded Fund (ETF) Analysis

The gold ETF has negative correlation with the general trends. The negative correlation could
be attributed to the fact that the investors look for other options when the market isn’t
performing well or vice versa. They rely back on their traditional ideology of gold being a
safe investment. This herd mentality results in this negative correlation during the change of
cycles. The Jensen’s alpha for Gold ETFs aren’t exceptional thus indicating that they don’t
deviate much from the expected values. The volatility for this particular category is very low
thus indicating towards stability. The returns are almost always good compared to other assets
thus making Gold ETF’S a good choice for investment.

4.6.6 Beta values, Standard deviation and downside deviation

Fund Bear Phase Bull Phase

14-16 18-20 12-14 16-18

DSP Credit Risk

0.0013 -0.001 0.0002 0.0061
Fund

HDFC Small Cap

Fund
0.26 0.50 0.01 0.03

Kotak Small Cap

Fund
0.25 0.50 0.04 0.11

Axis Long Term

Equity Fund
0.22 0.65 0.00 0.07

Axis Gold ETF

-0.15 0.06 -0.04 0.05

ICICI Prudential
Bluechip Fund
0.28 0.7 0.03 0.08
Canara Robeco
Bluechip Fund
0.28 0.63 0.16 0.10

34
 Table 4.8 Beta values of funds in bull and bear phase

Fund Bear Phase Bull Phase

14-16 18-20 12-14 16-18

DSP Credit Risk

Fund
0.89% 4% 1.58% 1.17%

HDFC Small Cap

Fund
16.86% 18.43% 14.69% 12.95%
Kotak Small Cap
Fund
17% 18% 15% 12%
Axis Long Term
Equity Fund 15% 20% 14% 11%

Axis Gold ETF

13% 13% 17% 12%

ICICI Prudential
Bluechip Fund
16.19% 20.95% 14.12% 11.58%

Canara Robeco
Bluechip Fund
17.3% 19.84% 14.92% 11.9%

Table 4.9 Standard Deviation of funds in bull and bear phase

Fund Bear Phase Bull Phase

14-16 18-20 12-14 16-18

DSP Credit Risk

1,24% 6.54% 1.71% 1.27%
Fund

HDFC Small Cap

Fund
16.66% 17.3% 10.14% 10.6%

Kotak Small Cap

Fund
15.17% 16.93% 10.78% 9.52%

35
Axis Long Term
Equity Fund
14.31% 17.68% 9.45% 7.91%

Axis Gold ETF

18% 8% 12% 8%

ICICI Prudential
Bluechip Fund
16.13% 18.16% 9.37% 7.52%
Canara Robeco
Bluechip Fund
15.86% 17.84% 9.84% 8.87%

Table 4.10 Downside Deviation of funds in bull and bear phase

36
 CHAPTER 5
CONCLUSION AND FUTURE SCOPE OF WORK

5.1 Conclusion

It is a preconceived notion that markets are largely inefficient. If this wasn’t the case then
there wouldn’t have been any opportunity to make profits more than the benchmark indexes.
The mutual fund industry breeds on this notion of inefficient markets and has been
consistently able to have better odds compared to its other competitors. Although this is true
till a certain extent in developing or emerging markets the same couldn’t be said about
developed markets. Thus predicting future worth of these markets is comparatively harder as
almost all the data is public and is quickly realised or reflected in the stock prices.
Thus the prediction models would have a better risk to reward ratio when applied to emerging
or developing markets. With the help of this project we were able to identify features and
models which would help in predicting these values to an extent so that an investor could
make an informed decision. Models such as Random forest regressor and Support vector
regressor showed positive results in predicting compared to its peers.
Timing the market is only the first step towards earning greater profits or returns. The
investor should also be smart enough to invest money in a diverse portfolio. Which could be
created by analysing the performance of the funds in different phases. We have generated a
general guideline as to what an investor should look for while investing and creating their
portfolio so as to maximise his or her gains.

5.2 Future Scope

There is lot of scope for improvement in the research for evaluating mutual fund
performances. Various other multi-criteria decision models could be tested for evaluating
mutual fund performances. The size of the data can be increased in order to enhance the
performance of the models. Although MF market is too young but in the long run testing of
fund performances can be made. Portfolio risk through the measure of value at risk (VaR) can
also be tested for differences in mutual fund classes.
Furthermore, the buying behaviour of mutual funds of individual investors can also be
studied. Various attributes can be identified that investors consider important while investing
in a mutual fund..

37
 REFERENCES

1. Panwar, S., & Madhumathi, R. (2006). “Characteristics and Performance Evaluation

of Selected Mutual Funds in India". SSRN Electronic Journal.
doi:10.2139/ssrn.876402 2. William F. Sharpe "Mutual Fund Performance", The
Journal Of Business, Vol. 39, No.1, Part

2. Supplement on Security Prices(Jan 1996), pp. 119-138 2: Supplement on Security

Prices(Jan 1996), pp. 119-138

3. Kanojia, S., & Arora, N. (2017). Investments, Market Timing and Portfolio

Performance across Indian Bull and Bear Markets. Asia-Pacific Journal of
Management Research and Innovation, 13(3-4), 98–109. doi:10.1177

4. Estimating Turning Points Using Large Data Sets James H. Stock and Mark W.
Watson NBER Working Paper No. 16532 November 2010

5. Kole, E., & van Dijk, D. (2016). How to Identify and Forecast Bull and Bear
Markets? Journal of Applied Econometrics, 32(1), 120–139. doi:10.1002/jae.2511 

6. Chiang, W.-C., Urban, T. L., & Baldridge, G. W. (1996). A neural network approach
to stock value forecasting. Omega, 24(2), 205–215.

7. Indro, D. C., Jiang, C. X., Patuwo, B. E., & Zhang, G. P. (1999). Predicting mutual
fund performance using artificial neural networks.

38
 ANNEXURES

Code:

1) Importing libraries

import pandas as pd
import numpy as np
import sklearn
import matplotlib.pyplot as plt
import matplotlib
import seaborn as sns
from sklearn.model_selection import train_test_split
from sklearn.preprocessing import StandardScaler
from sklearn.svm import SVR, LinearSVR
from sklearn.ensemble import RandomForestRegressor
from sklearn.linear_model import LinearRegression, SGDRegressor
from sklearn.neural_network import MLPRegressor
from sklearn.metrics import mean_absolute_error, mean_squared_log_error

2) Pre-processing

df_mirae = pd.read_excel('Mirae Asset Emerging Bluechip Fund.xlsx')
df_mirae.drop(index= [0,1,2,3,4], axis = 0, inplace=True)
df_mirae.columns = ['Date', 'NAV']
for i in range(df_mirae.shape[0]):
  df_mirae.iloc[i]['Date'] = df_mirae.iloc[i]['Date'][df_mirae.iloc[i]['Date'].find('-')+1:]
df_mirae['NAV'] = pd.to_numeric(df_mirae['NAV'])
df_mirae = df_mirae.groupby('Date', as_index= False).mean()

df_sbi = pd.read_excel('SBI Focused Equity Fund.xlsx')
df_sbi.drop(index= [0,1,2,3,4], axis = 0, inplace=True)
df_sbi.columns = ['Date', 'NAV']
for i in range(df_sbi.shape[0]):
  df_sbi.iloc[i]['Date'] = df_sbi.iloc[i]['Date'][df_sbi.iloc[i]['Date'].find('-')+1:]
df_sbi['NAV'] = pd.to_numeric(df_sbi['NAV'])
df_sbi = df_sbi.groupby('Date', as_index= False).mean()

39
df_dsp = pd.read_excel('DSP Tax Saver Fund.xlsx')
df_dsp.drop(index= [0,1,2,3,4], axis = 0, inplace=True)
df_dsp.columns = ['Date', 'NAV']
for i in range(df_dsp.shape[0]):
df_dsp.iloc[i]['Date'] = df_dsp.iloc[i]['Date'][df_dsp.iloc[i]['Date'].find('-')+1:]
df_dsp['NAV'] = pd.to_numeric(df_dsp['NAV'])
df_dsp = df_dsp.groupby('Date', as_index= False).mean()

df_axis = pd.read_excel('Axis Long Term Equity Fund.xlsx')
df_axis.drop(index= [0,1,2,3,4], axis = 0, inplace=True)
df_axis.columns = ['Date', 'NAV']
for i in range(df_axis.shape[0]):
  df_axis.iloc[i]['Date'] = df_axis.iloc[i]['Date'][df_axis.iloc[i]['Date'].find('-')+1:]
df_axis['NAV'] = pd.to_numeric(df_axis['NAV'])
df_axis = df_axis.groupby('Date', as_index= False).mean()

df_icici = pd.read_excel('ICICI Prudential Bluechip.xlsx')
df_icici.drop(index= [0,1,2,3,4], axis = 0, inplace=True)
df_icici.columns = ['Date', 'NAV']
for i in range(df_icici.shape[0]):
  df_icici.iloc[i]['Date'] = df_icici.iloc[i]['Date'][df_icici.iloc[i]['Date'].find('-')+1:]
df_icici['NAV'] = pd.to_numeric(df_icici['NAV'])
df_icici = df_icici.groupby('Date', as_index= False).mean()

df_5_bond = pd.read_excel('5 year bond yield.xlsx')
df_5_bond.drop(labels= ['Price', 'High', 'Low', 'Change %'], inplace=True, axis=1)
df_5_bond['Date'] = df_5_bond['Date'].astype('str')

date = []
for i in range(df_5_bond.shape[0]):
  date.append(df_5_bond.iloc[i]['Date'][:df_5_bond.iloc[i]['Date'].find('-')+1] + '20' + df_5_bo
nd.iloc[i]['Date'][df_5_bond.iloc[i]['Date'].find('-')+1:])
df_5_bond['Date'] = date

df_10_bond = pd.read_csv('10 Year Bond.csv')
df_10_bond = df_10_bond[['Date', 'Open']]
month_to_num = {'Jan': '01', 'Feb': '02', 'Mar': '03', 'Apr': '04', 'May': '05', 'Jun': '06', 'Jul': '07', '
Aug': '08', 'Sep': '09', 'Oct': '10', 'Nov': '11', 'Dec': '12'}
date = []
for i in range(df_10_bond.shape[0]):
  date.append(month_to_num[df_10_bond.iloc[i]['Date'][:df_10_bond.iloc[i]['Date'].find('-')]]
 + df_10_bond.iloc[i]['Date'][df_10_bond.iloc[i]['Date'].find('-'):])
df_10_bond['Date']  = date
date = []
for i in range(df_10_bond.shape[0]):
  date.append(df_10_bond.iloc[i]['Date'][:df_10_bond.iloc[i]['Date'].find('-')+1] + '20' + df_10
_bond.iloc[i]['Date'][df_10_bond.iloc[i]['Date'].find('-')+1:])

40
df_10_bond['Date']  = date

df_expimp = pd.read_excel("Emport_Import.xlsx")
df_expimp['DATE'] = df_expimp['DATE'].astype('str')
date = []
for i in range(df_expimp.shape[0]):
  date.append(df_expimp.iloc[i]['DATE'][:len(df_expimp.iloc[i]['DATE'])-3])
df_expimp['DATE']  = date
date = []
for i in range(df_expimp.shape[0]):
  date.append(df_expimp.iloc[i]['DATE'][df_expimp.iloc[i]['DATE'].find('-')+1:] + '-' + df_ex
pimp.iloc[i]['DATE'][:df_expimp.iloc[i]['DATE'].find('-')])
df_expimp['DATE']  = date

df_expimp.rename(columns={'DATE': 'Date'}, inplace=True)

df_cpi = pd.read_excel('consumer price index.xlsx')
df_cpi['date'] = df_cpi['date'].astype('str')
date = []
for i in range(df_cpi.shape[0]):
  date.append(df_cpi.iloc[i]['date'][:len(df_cpi.iloc[i]['date'])-3])
df_cpi['date']  = date
date = []
for i in range(df_cpi.shape[0]):
  date.append(df_cpi.iloc[i]['date'][df_cpi.iloc[i]['date'].find('-')+1:] + '-' + df_cpi.iloc[i]['date']
[:df_cpi.iloc[i]['date'].find('-')])
df_cpi['date']  = date
df_cpi.columns = ['Date', 'CPI']

df_bse = pd.read_csv('BSE Sensex.csv')
date = []
for i in range(df_bse.shape[0]):
  date.append(month_to_num[df_bse.iloc[i]['Date'][df_bse.iloc[i]['Date'].find('-')+1:df_bse.ilo
c[i]['Date'].find('-')+4]] +df_bse.iloc[i]['Date'][df_bse.iloc[i]['Date'].find('-')+4:])
df_bse['Date']  = date
date = []
for i in range(df_bse.shape[0]):
  date.append(df_bse.iloc[i]['Date'][:df_bse.iloc[i]['Date'].find('-')+1] + '20' + df_bse.iloc[i]['D
ate'][df_bse.iloc[i]['Date'].find('-')+1:])
df_bse['Date']  = date
df_bse['Close'] = pd.to_numeric(df_bse['Close'])
df_bse = df_bse.groupby('Date', as_index=False).mean()

df_gdp = pd.read_csv('gdp.csv')

41
df_gdp.drop(labels= ['Unnamed: 2', 'Unnamed: 3', 'Unnamed: 4', 'Unnamed: 5', 'Unnamed: 6',
 'Unnamed: 7', 'Unnamed: 8', 'Unnamed: 9'], inplace=True, axis=1)
df_gdp.rename(columns={'DATE': 'Date'}, inplace=True)

df_3 = df_2.join(df_5_bond.set_index('Date'), on = 'Date')
df_4 = df_3.join(df_10_bond.set_index('Date'), on = 'Date')
df_5 = df_4.join(df_gdp.set_index('Date'), on = 'Date')
df_final_axis = df_5.join(df_axis.set_index('Date'), on = 'Date')
df_final_canara = df_5.join(df_canara.set_index('Date'), on = 'Date')
df_final_dsp = df_5.join(df_dsp.set_index('Date'), on = 'Date')
df_final_mirae = df_5.join(df_mirae.set_index('Date'), on = 'Date')
df_final_sbi = df_5.join(df_sbi.set_index('Date'), on = 'Date')
df_final_icici = df_5.join(df_icici.set_index('Date'), on = 'Date')

3) Modeling

X, Y = df_final_canara[['GDP', 'CPI', 'Close', 'Open', 'Open_10']], df_final_canara[['NAV']]
X_train, X_test, Y_train, Y_test = train_test_split(X, Y, test_size = 0.1, random_state = 42)
ss_x = StandardScaler()
ss_y = StandardScaler()
ss_x.fit(X_train)
ss_y.fit(Y_train)
x_train = (ss_x.transform(X_train))
x_test = (ss_x.transform(X_test))
y_train = ss_y.transform(Y_train)
y_test = ss_y.transform(Y_test)

svr = SVR()
svr.fit(x_train, y_train)
print(mean_absolute_error((svr.predict(x_test)),(y_test)))

lsvr = LinearSVR()
lsvr.fit(x_train, y_train)
print(mean_absolute_error((lsvr.predict(x_test)), (y_test)))

rf = RandomForestRegressor()
rf.fit(x_train, y_train)
print(mean_absolute_error((rf.predict(x_test)), (y_test)))

lr = LinearRegression()
lr.fit(x_train, y_train)
print(mean_absolute_error((lr.predict(x_test)), (y_test)))

42
sgd = SGDRegressor()
sgd.fit(x_train, y_train)
print(mean_absolute_error((sgd.predict(x_test)), (y_test)))

nn = MLPRegressor()
nn.fit(x_train, y_train)
print(mean_absolute_error((nn.predict(x_test)), (y_test)))

43
 PROJECT DETAILS

Student Details
Student Name Piyush Nimbalkar
Register Number 160907552 Section / Roll D 58
No
Email Address nimbalkarpiyush@gmail.com Phone No (M) 7507397221
Student Name Raghav Sharma
Register Number 160907402 Section / Roll D / 39
No
Email Address iamraghavsharma1997@gmail.co Phone No (M) 8209649354
m
Project Details
Project Title NAV forecasting and performance evaluation of funds in bear and
bull phase
Project Duration 4 months Date of 23-01-2020
reporting
Expected date of 31-05-2020
completion of
project
Organization Details
Organization
Name
Full postal address
with pin code
Website address
Supervisor Details
Supervisor Name
Designation
Full contact
address with pin
code
Email address Phone No (M)
Internal Guide Details
Faculty Name Dr. Vemuru Hema Sundara Moorthy

44
Full contact Dept. of E&C Engg., Manipal Institute of Technology, Manipal – 576
address with pin 104 (Karnataka State), INDIA
code
Email address vhs.moorthy@manipal.edu
Co- Guide Details(if any)
Faculty Name Ms. Maithri Kowshik
Full contact Dept. of E&C Engg., Manipal Institute of Technology, Manipal – 576
address with pin 104 (Karnataka State), INDIA
code
Email address maitri.m@manipal.edu

45