Analysis of Mutual

Funds
 INDEX
MAIN REPORT

S. No. Topic Page No.

1. Abstract 1

2. Datasets retrieved from Web 1

3. Trivial analysis using weekly 1

NAV data of given mutual
funds

4. Comparison of Risk 3
Parameter of Mutual Fund

5. AUM change over years 4

6. Sector-wise Comparison using 4

ANOVA

7. Analysis among Mutual Funds 7

Sector-wise using
Co-Integration

8. Significance of Age of Fund 8

and Minimum Investment

9. Fund Evaluation using Fuzzy 9

Logic

10 Macroeconomic Factor 12
Analysis

11. Conclusion 15

ANNEXURE:

S. No. Topic Page No.

1. Risk Parameter of different 20

Sector
2. ANOVA using tukey HSD 21

3. Fuzzy Logic 21

4. Formula 22

5. Graph of Growth Variation of 23

NAV on Macroeconomic factor

6. Graph showing the sector wise 24

NAV values of Sector Wise
Mutual Fund Schemes

7. Graph showing Sector wise 25

AUM of different Mutual Fund
Schemes
Abstract

Many investors in the market tend to make the mistake of investing in a mutual fund just on the
basis of investment returns without comparing the mutual funds thoroughly on all necessary
aspects like the risks investors are exposed to, portfolios of the funds, etc. The major problem here
was that the market state is essentially influenced by many factors relying on the analysis of any
one of them may lead to heavy loss. So for our analysis we used the various factors from past data
to compare and contrast the funds, their fund houses and the sectors.

We conducted our analysis in three major parts :-

● Preliminary analysis using the effect of NAV, NAV Growth, AUM Growth, risk/volatility
analysis(using Standard Deviation, Alpha, Beta, Sharpe ratio, etc.), determined the level of
confidence with which two sectors differ statistically,followed by similar analysis on funds
from a particular sector.
● Even after considering the above parameters we have to independently capture the
individual portfolio of a fund, an important factor in a fund’s performance. So we created a
model using fuzzy logic to appropriately analyze the same.
● Then we considered the macroeconomic factors which play an important influence in the
performance of a fund. We observed the trends each sector follows with these factors and
pointed to the key macroeconomic factors for each sector.

Performing these three steps we can reach a reasonable conclusion.

Datasets retrieved from web

Time series data from 01/2013 to 12/2017 of the following parameters was retrieved from three
sites - nseindia.com, moneycontrol.com, amfiindia.com mentioned in problem statement.
We have used the factors mentioned in problem statement which are:

❖ Asset under management (AUM)

❖ NAV
❖ NAV growth
❖ Return of Benchmark Index
❖ GDP(per quarter)
❖ BSE Sensex
❖ BSE Nifty
❖ NASDAQ
❖ S&P
❖ CPI
❖ USD-Rs Exchange rate
❖ 10 year government bond yield
Step by Step Approach-

Trivial analysis using weekly NAV data of given mutual funds -

Considering the approach of analyzing returns on investment, we plot the present value
of our investment ,that is Rs. 10,000/- done in the year 2013, with time using the weekly
value of NAV to visualize our gains. The plots of the value of investment quarterwise is
attached in annexure.

We calculated returns for each sector and summarize the performance of the fund houses
solely on the basis of their net returns in the given period.

Sector Best Performance Worst Performance

Banking Aditya Birla Sun Life SBI

FMCG SBI ICICI Prudential

Technology ICICI Prudential SBI

Pharmaceuticals SBI UTI

Large Capital Aditya Birla, ICICI, SBI Reliance

We now perform a trivial analysis for the performance of fund houses using returns of
investment (asset size weighted average).

Fig. 1 : Return from Different Fund houses with an initial investment of Rs.10,000/- averaged over its funds
Continuing with our motion for the need to consider the risk/ volatility associated before
investing money in a particular mutual fund of a particular fund class, we have used the
following parameters to compare the performance of houses -

Standard Deviation - Lower Standard Deviation signifies a stable fund so, for a good
fund a lower value of Standard Deviation is desired.

R-Squared - A greater value of R-Squared signifies a better match of the fund with its
benchmark. A value of 80% or more is desired.

Beta - The value of Beta should neither be too low or too high. Beta value of 1 signifies
that the fund is in total correlation with its benchmark. Beta value of greater than 1
signifies that each fund will grow more with growth of the Benchmark and fall more with
fall of the Benchmark.

Alpha - A positive alpha of 1.0 means that the fund has outperformed its benchmark
index by 1%. A higher value of Alpha is desired.

The following table compares the performance of individual funds in the Banking and
Financial Services Sector :-

From the above data, we can infer and conclude the following statements for this
particular sector :

● SBI & Tata Mutual Funds have low Standard Deviation which signifies stability
● SBI & ICICI Prudential Funds have beta almost equal to 1 which shows great correlation
with their set benchmark
● ICICI Prudential & Aditya Birla Sun Life Mutual Funds have r-squared greater than 0.9
which implies the reliability on beta value and thus on the value of fund
● SBI & Aditya Birla Sun Life Mutual Funds have high alpha value which shows the extra
outcome on the predicted beta value. It shows that company has significant amount of
growth rate
● SBI Mutual Funds have good Sharpe ratio which shows its benefit over risk-free return

Conclusion
 In the above analysis, we observe that SBI Mutual Fund is found efficient in almost every
parameter. Aditya Birla Sun Life & ICICI Prudential Mutual Funds have also been
satisfactory.
Overall, we can say that SBI Mutual Fund is a better mutual fund company for Financial
Services Sector on the basis of above parameters.

AUM change over years

Figure: AUM vs Time (FMCG Sector)

It has been observed that usually regular plans have higher total asset size as compared
to direct plans of the same fund house. This trend is observed across all the fund classes.
This shows that people are more comfortable with investing in mutual funds via brokers
rather than buying directly themselves.

For individual funds higher AUM can be considered as a direct measure of the popularity
and trust among the general public for the Asset Management Company.

Sector-wise Comparison of Mutual Fund

Stressing about the fact that the investor should understand the importance of knowledge
of the fund class he/she is investing in. To statistically quantify this, we conduct ANOVA
test followed by post-hoc Tukey HSD test amongst various sectors to understand how
different sectors are from each other.

Stepwise procedure

1) We imported data containing i) Mutual Funds, ii) their Corresponding sectors, iii)
Features(Standard Deviation of absolute returns, Sharpe Ratio of fund houses).
2) Then for each feature we applied Tukey’s HSD test and did comparison between the
sectors.
3) We plotted graphs and observed tables to make inferences.
Plots and Tables

Plot 1(For ‘Sharpe Ratio’)

Plot 2(For ‘Standard Deviation on Absolute Returns’)

Interpreting plots

1. X-axis contain mean of features(Standard Deviation of absolute returns, Sharpe Ratio

of fund houses) and Y-axis contains Sector names
2. The dot represents the mean value of the feature.
3. For each sector, there is a confidence interval. The probability that the mean of the
feature lies within this interval is alpha(Confidence Level = 90%; level of significance
= 10%).
4. If any two intervals overlap, we conclude that corresponding sectors perform alike for
the concerned feature.

3) Table(For both features)

 Interpreting table

1. FWER(Confidence) represents the value of 'alpha' or level of significance. We have

taken it to be 10% or alpha = 0.10 .
2. All the five sectors are taken as groups and any two sectors are chosen for comparison.
3. ‘meandiff’ represents the difference between the mean of corresponding two sectors.
‘meandiff’ = mean of second corresponding sector values - mean of first corresponding
sector values.
4. [lower, upper] represents a confidence interval. Therefore the probability of difference of
means between two sectors lies in the [lower, upper] interval is alpha.
5. We take the null hypothesis as "The mean of both the sectors are the same".
6. If this interval contains zero, then we can safely assume that two sectors are performing
similarly. So we reject the null hypothesis. Else, we reject it. This is also evident from the
‘reject’ column that tells whether the hypothesis is rejected or not.

Inferences from the above analysis

1. As we can infer from the sharpe ratio plot, all the sectors perform similarly as far as the
‘Sharpe Ratio’ is concerned which translates to the fact the more risk you take, the
chances for greater return increases in every sector uniformly.
2. By standard deviation plot and table we can infer that for the feature ‘Standard Deviation
of Absolute Returns’, following sectors are performing significantly different
a. ‘Large Cap’ and ‘Banking & Finance’
b. ‘Large Cap’ and ‘Pharma & Health Care’
c. ‘Banking & Finance’ and ‘FMCG’
d. ‘Banking & Finance’ and ‘Technology’

Analysis amongst the mutuals funds sector-wise using co-integration

As we are now clear about the differences between various sectors, let’s quantify the
comparative performance of various mutual funds in the same sector. For this we conduct
cointegration amongst the mutual funds, where its Mackinnon p value will signify the
extent of difference in performance.
Cointegration

Cointegration is a statistical property of a collection of time series variables. In technical

terms, if we have two non-stationary time series X and Y that become stationary when
differenced (these are called integrated of order one series, or I (1) series; random walks
are one example) such that some linear combination of X and Y is stationary then we say
that X and Y are cointegrated . The below graph shows the heat map of cointegration of
the ‘Pharma and Healthcare’ sector, similarly heat maps of co-integration of other sector
was plotted and results are tabulated below.

The following table shows sector-wise most co-integrated mutual funds and least
co-integrated mutual funds-

Sector High Co-Integration Low Co-integration

Large Cap ICICI Prudential Focused HDFC Top 200 Fund -

Bluechip Equity Fund - Direct Plan,
Direct Plan, Sundaram Equity Plus
Aditya Birla Sun Life Top
100 Fund )

Pharma and Healthcare
UTI Pharma & Healthcare Tata India Pharma &
Fund (G), HealthCare Fund - Direct
UTI Pharma & Healthcare Plan (G),
Fund - Direct Plan (G) Tata India Pharma &
HealthCare Fund - Regular
Plan (G)

FMCG ICICI Prudential FMCG SBI FMCG Fund (G),

Fund (G), SBI FMCG Fund - Direct
SBI FMCG Fund (G) Plan (G)

Technology Aditya Birla Sun Life New Aditya Birla Sun Life New
Millennium Fund (G), Millennium Fund - Direct
 ICICI Prudential Plan (G) ,
Technology Fund (G) SBI IT Fund - Direct Plan
(G)

Banking SBI Banking & Financial Tata Banking and Financial

Services Fund - Regular Services Fund - Regular
Plan, Plan ,
UTI Banking Sector Fund - Tata Banking and Financial
Direct Plan) Services Fund - Direct
Plan)

Significance of Age of Fund and Minimum Investment

The most simple measure of performance is the change in the NAV values during the
period from 1 January 2013 and the present day. In order to check for the dependencies
of the influence factor which is the age of the funds and minimum investment we
regressed the performance measure i.e. change in nav values with the variables(‘Age of
funds’, ‘Minimum investment’). The results which we got after performing the above steps
is

As evident from the results, the performance measure as described above is dependent
only on the age of the fund and not on the minimum investment,since p value associated
with coefficient of age in years is significant hence the null hypothesis(which is that the
coefficient is zero) is rejected and the p values associated with the minimum investment is
zero and therefore the minimum investment as a variable doesn’t affect the performance
of the funds.

Fund evaluation using Fuzzy logic

In addition to direct increase in our net returns we need to compare the funds on stability
with respect to their benchmarks. In this we tried assigning a score to each mutual fund
as how stable they are with respect to their respective markets. A direct calculated score
based on their volatility such as the above 5 parameters would not be very efficient as it
only calculates the net fluctuations. We need a method to evaluate the performance
exhaustively during the whole time.

Our approach here was to use rules from fuzzy logic to calculate a score which highly
penalizes a fund falling in positive market conditions and rewarding a fund rising even in
adverse market conditions.

We used this basic blueprint of fuzzy systems. As inputs we used the slopes(or monthly
returns) of the Mutual Fund and its Benchmark. For output we used a scale centered at 0
with positive value denoting a stable mutual fund and negative being undesirable. Next
we needed to create membership functions for both input and output. We used triangular
membership functions denoting the confidence level of an input value lying in a specific
group.

How should an ideal mutual fund behave with respect to its benchmark? Let us look at
the behavior of such mutual funds.
Case 1: If benchmark is falling at a fast pace, MF should not fall at that fast pace. MF
should at least be still.
Case 2: If the benchmark is still, we want our MF to increase at fast or normal pace.
If mutual funds don’t behave like the above mentioned cases, we will penalize them by
giving a lower score.

For the inputs we divided the slopes in five categories : Fast Decrement(FD), Slow
Decrement(SD), Stable(S), Slow Increment(SI) and Fast Increment(FI). Similarly the
score was divided in 9 categories with mean values -8,-4,-2,-1,0,1,2,4 and 8. Now we
created the rules as the following matrix from our knowledge base to correlate the inputs
and outputs.

Benchmark

Fast Slow Slow Fast

Stable
Decrement Decrement Increment Increment
Mutual
Fund Fast
-1 -4 -4 -8 -8
Decrement
 Slow
2 0 2 -4 -8
Decrement

Stable 4 2 0 -2 -4

Slow
8 8 2 1 0
Increment

Fast
4 2 1 2 -1
Increment

Green denotes the area which we prefer for a mutual fund.

Red denotes the area where the mutual fund is performing badly and we are penalizing it.
Orange is the area which shows mild increase or decrease in the performance.

For the inference engine we used the basic Larsen approach and for the defuzzification
process we collapsed the fuzzy result to its centroid. This whole process as stated earlier
gave us a score which represented how well a fund performed in adverse conditions and
vice versa.
Inference

A positive score tells us that the fund house has done a good job in creating the
portfolio as its funds are able to resist adverse market conditions and a negative
value shows that the fund house has done an equally poor job in creating the
portfolio.

Calculated scores from the model

We observe from the above score that almost all the equities funds are not performing
well. Sector specific funds are more ideal in nature. All the funds that have high positive
scores are sector specific.
IT and Pharma funds are performing best on this model. Financial markets and
FMCG are average.
Ideal mutual fund will have a good portfolio composition. For example if a fund is
performing ideal then their portfolio has good risk distribution and good returns compared
to the benchmark.
Macroeconomic factor Analysis

We have considered various macroeconomic factors like GDP, CGI, exchange rate etc
and plotted them against the mutual funds.

For example in the above graph we study percentage change in financial and banking
sector funds with percent change in GDP and CPI. Upon applying the granger causality
test on CPI and change in % NAV Aditya Birla Sun life Insurance, we concluded that CPI
is a lag variable in determining the future growth of finance and banking sector.

Upon extensive study of such graphs and their relationships and keeping in mind the
recent major events which directly affect the sector. We propose a few sector exclusive
macroscopic parameters which heavily influence the NAV growth values of funds of that
particular class which invest majorly in that sector.
Following is a sector wise macroscopic parameters which resulted in a positive/negative
behavior of a sector in the targeted time period -

Technology sector

1.) Daily US$ to Indian Currency Exchange Rate:

More depreciation in rupee relative to dollar causes a surge in technology index and
related mutual funds. These two graphs(BSE Tech and exchange rate) are cointegrated
on 90% confidence (with test statistics of -3.04) implying that BSE Tech and US
exchange rate move together.
2.) Demand adjustment:
Shift to digital and automation technology requirements(Majorly from U.S.A) rather than
based on conventional software further create panic in IT-industry cause lower return in
recent times.

Performance of technology mutual funds found to be co-integrated with NASDAQ.

FMCG sector:

1.) Consumer spending:

The FMCG sector responded positively with increased consumer spending in both rural
and urban area.Demonetization was one of the major economic events causing
significantly decreased spending.

2.) Retail Inflation:

High inflation causes lower sales and plunges the return from mutual funds deals with this
sector.

Banking/Finance sector:

1.) Government financing:

Government financing in this sector causes a sudden surge of growth in this sector and
mutual funds yield high return.Current recapitalization is one of the major event regarding
this.
*Circled point in BSE BANKEX shows the event of Indian government recapitalization in
this sector.

Pharmaceuticals - Pharma sector is under pressure due to tightening Regulatory

policies

1.) National Pharmaceutical Pricing Authority(NPPA) increased drug price controls

which caused slump in revenues of pharmaceutical companies which caused negative
return in 2016.

2.) USFDA (U.S Regulator) increased approvals make competition stiff and cause weak
exports.
Conclusion
The performance of a mutual fund is highly dependent on the condition of the economy.
Thus a fund’s returns are greatly affected by macroeconomic factors and the general
market opinion. This makes the prediction of future returns extremely difficult and prone to
error. One can only look at the past market behavior and hope to achieve a good return.
However, careful study of the market trends can greatly increase our chances of
maximizing our profits.

Our analysis of the macroeconomic factors revealed many correlations between different
market sectors and the current market trends. For example, we initially observed a large
boom in both Technology and Banking sectors over the past five years. Careful
examination of the macroeconomic factors revealed that the boom in the Technology
sector was caused by an increment in the exchange rate. Similarly, the Banking sector
was influenced by RBI’s backing of public banks through government investment.

Again we can naively break the performance of funds in two major categories :-

● Return Wise :- Getting only the net returns from NAV growth values neglecting
the risk factors.
● Stability Wise :- Getting a steady return irrespective of the market fluctuations
from the fuzzy model described above.

A person looking for high return-short term investments will invest in faster growing funds
with a higher risk factor while someone looking for a stable return-long term investments
will invest in a fund having low fluctuations. An ideal fund would strike the golden ratio
between these two achieving both high growth and high stability.

Return wise Stability wise

Technology ICICI Prudential SBI

Banking And Finance Aditya Birla Tata

FMCG SBI ICICI

Pharmaceuticals SBI Tata

Large Cap Aditya Birla, ICICI, SBI SBI

The table above shows the best performing fund houses in each of the sectors according
to return and stability. While looking for an ideal fund, first of all the selection of sectors is
of utmost importance. During our analysis, we concluded the best way to select the sector
would be to carefully examine the macroeconomic factors, market trends, regulations and
policies. Once we have determined the best performing sector, we can select the mutual
fund of our choice depending upon the type of investment we are looking for.
ANNEXURE
 ANNEXURE

1. Risk Parameters of different Sector

1.) Large Cap

2.) FMCG

3.) Pharma & Healthcare

4.) Technology

2. ANOVA with Tukey’s HSD

Statistical Models/Tests used :

ANOVA - ANOVA(Analysis of Variance) is used to compare groups of datasets. It is used

to determine if there are significant differences between the means of different groups of
datasets. The thing with one-way ANOVA is that although we now know that there is
difference in the performance of the groups, we do not know exactly who performs how.
This is why the analysis of variance is often followed by a post hoc analysis. One of the
commonly used method for post hoc analysis is Tukey's HSD test.

Tukey’s HSD(Honest Significant Difference) - Tukey's HSD(honest significant

difference) test is a single-step multiple comparison procedure and statistical test. It can
be used on raw data or in conjunction with an ANOVA (post-hoc analysis) to find means
that are significantly different from each other. This test compares all possible pairs of
datasets and we can use it to precisely identify difference between two means that's
greater than the expected standard error.

3. Fuzzy Logic
We have used similar triangular input member functions to calculate the membership
vectors for each input. Then we used the following Larsen approach(max-product) to find
the output score distribution. During defuzzification we found the centroid of the area
formed and then calculated the mean of the output found for each time interval to find the
final score.
4.Formulae
1.) Alpha

A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk)
of a mutual fund and compares its risk-adjusted performance to a benchmark index
The excess return of the fund relative to the return of the benchmark index is a fund's
alpha
Alpha tells us how well a mutual fund or similar investment performs compared to the
stated benchmark it's trying to beat

∝ = 𝑅 − (𝑅𝑓 + β * (𝑅𝑚 − 𝑅𝑓))

R = Fund Return
Rf = Risk Free Return
Rm = Benchmark Return

2.) Beta

A measure of the volatility, or systematic risk, of a portfolio in comparison to the market

Beta is an expression of how volatile an investment is compared to the overall market
It can be thought as the tendency of a security's returns to respond to changes in the
market
β = 𝑠𝑞𝑟𝑡(𝐶𝑜𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒(𝑟, 𝑟𝑚)/𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒(𝑟𝑚))
r = fund return
rm = Benchmark return

3.) R-squared

R-Squared is a statistical measure that represents the percentage of a fund portfolio's

movements that can be explained by movements in a benchmark index

R-squared values range from 0 to 100. According to Morningstar, a mutual fund with an
R-squared value between 85 and 100 has a performance record that is closely correlated
to the index

2
𝑅𝑠𝑞𝑢𝑎𝑟𝑒𝑑 = (𝐶𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛(𝑟, 𝑟𝑚))
r = fund return
rm = benchmark return

4.) Standard deviation

Standard deviation measures the dispersion of data from its mean

With mutual funds, the standard deviation tells us how much the return on a fund is
deviating from the expected returns
A volatile fund would have a high standard deviation
2 0.5
σ = ((1/𝑁) * (∑(𝑥𝑖 − μ) )
Where,
μ = mean
N = number of returns

5.) Sharpe Ratio

Sharpe Ratio measures risk-adjusted performance. It is calculated by subtracting the
risk-free rate of return from the rate of return for an investment and dividing the result by
the investment's standard deviation of its return
The greater the Sharpe Ratio, the better its risk-adjusted performance

Sharpe Ratio = (R-Rf)/σ

R = Expected Return of fund
Rf = Risk free rate
σ = Standard deviation in returns

5. Graphs Below show the sector wise growth variation(NAV) of Mutual Fund
Schemes and their dependence on Indian GDP,CPI and NASDAQ.
6. Graph showing the sector wise NAV values of Sector Wise Mutual Fund Schemes
7. Graph showing Sector wise AUM of different Mutual Fund Schemes
**** The Data and Data Dictionary are given in “DATA” folder