Chapter 6 DATA ANALYSIS

Transcription

1 Chapter 6 DATA ANALYSIS 124

2 Chapter 6 DATA ANALYSIS INDEX Sr No Topic Page No 6 DATA ANALYSIS 6.1 Composition of Index Funds ICICI Prudential Index Fund Tata Index Fund- Sensex Plan -A ING Large Cap Equity Fund SBI Magnum Index Fund Franklin India Index Fund- BSE Sensex Plan HDFC Index Fund-Sensex Plan HDFC Index Fund Sensex Plus Plan HDFC Index Fund Nifty Plan UTI Nifty Index Fund LIC MF Index Fund- Sensex Advantage Plan LICMF Index Fund Nifty Plan Canara Robeco Nifty Index Fund Principal Index Fund Operating Expenses of Index Funds Tracking errors of Index Funds Investors Response to Index Funds Investments Mutual Fund Advisors Opinion on Index Fund Investment Hypothesis Testing

3 6.1 COMPOSITION OF INDEX FUNDS The detailed study of individual selected Index Fund is below ICICI Prudential Index Fund 130 The Fund was incepted in February The investment strategy of this fund is to closely track the performance of the CNX Nifty Index. The Fund tries to invest in almost all the stocks comprised in CNX Nifty Index. It also gives the same weightage of investment to these stocks as the weightage given in the CNX Nifty Index. Following are the important features of the fund Net Assets (as on 31 st March 2012) = Rs.88.90Crores Exit Load =0.25% for redemption within 7 days Tata Index Fund- Sensex Plan -A 131 This Fund was incepted in February 2003 by Tata Mutual Fund Company and is listed on Bombay Stock Exchange. The Fund aims on delivering medium as well as long term capital gains. The Investment Strategy of the fund is investing in Equity Shares of only those companies which are the part of the Sensex Index of the BSE. The Fund s Investment Strategy further says that it will invest exactly in same proportion in these shares as per their weightage in Sensex regardless of their investment merits. In other words, this Fund aims to be exactly mirror image of the BSE Index Sensex. Exit Load= 4% for redemption within 90 days

4 ING Large Cap Equity Fund 132 This Fund was incepted in February 2004 by ING Investment Management (India) Pvt Ltd AMC. The Fund is listed on National Stock Exchange with the Investment Strategy of investing predominantly in the same stocks as constituted in the S&P CNX Nifty Index. The Fund s Investment Strategy further says that it aims to maintain approximately same proportion and weightage as in the Nifty Index. Exit Load= 1% for redemption within 365 days SBI Magnum Index Fund 133 This Fund was incepted in January 2002 by SBI Funds Management Ltd. The Investment objective of this fund is passive investment in all the stocks comprising S&P CNX Nifty Index in the same proportion as their weightage in the Index. Exit Load = 1% for redemption within 7 days Franklin India Index Fund- BSE Sensex Plan 134 This Fund was incepted in July 2000 by Franklin Templeton Asset Management India Private Ltd AMC. The Fund aims to provide returns that closely correspond to the total return of stocks as represented by SENSEX. The Investment Strategy aims to invest in all the stocks comprising of the Index approximately in same proportion & weightage that they represent in the Index. Exit Load= 1% for redemption within 30 days

5 HDFC Index Fund-Sensex Plan 135 This Fund was incepted in July 2002 by HDFC Assets Management Company Ltd. The investment objective of the Fund states to generate the returns that are commensurate with the performance of BSE Sensex subject to tracking error. Exit Load- Nil HDFC Index Fund Sensex Plus Plan 136 The Fund was incepted in July 2002 by HDFC Assets Management Company Ltd. The Fund s investment strategy states to allocate 80 to 90 percent of the portfolio to Sensex Stocks in nearly the same proportion as that of Index. The balance 10 to 20 percent will be actively managed across the market caps, enabling the Fund Manager to pick stocks that have the potential to outperform the Sensex. Exit Load Nil HDFC Index Fund Nifty Plan 137 The Fund was incepted in July 2002 by HDFC Assets Management Company Ltd. The Investment strategy of the fund states to generate the returns which are commensurate with the performance of the Nifty Index. Exit Load = Nil

6 UTI Nifty Index Fund 138 The Fund was incepted in March 2000 by UTI Asset Management Company Ltd. The investment strategy of this fund states that it is an open ended passive fund with investment objective to invest in the securities of the companies comprising of the S&P CNX Nifty in the same weightage as they have in the Index. The Fund strives to minimize performance difference with the Index by keeping the tracking error at minimum level. Exit Load= 1% for redemption within 15 days LIC MF Index Fund- Sensex Advantage Plan 139 The Fund was incepted in November 2002 by LIC Nomura Mutual Fund Assets Management Company Ltd. The Investment strategy of the Fund states to invest in Sensex as well as Non-Sensex Stocks. The scheme aims to generate returns by investing 90 percent of its assets in the Sensex stocks and 10 to 20 percent in a basket of Non-Sensex stocks, subject to tracking errors. Exit Load = 1% for redemption within 365 days LICMF Index Fund Nifty Plan 140 The Fund was incepted in November 2002 by LIC Nomura Mutual Fund Assets Management Company Ltd. The Investment strategy of the Fund aims to generate the returns commensurate with the performance of S&P CNX Nifty Index stocks subject to tracking errors. Exit Load = 1% for redemption within 365 days

7 Canara Robeco Nifty Index Fund 141 The Fund was incepted in October 2004 by Canara Robeco Assets Management Company Ltd. The Investment Strategy of the Fund states to generate capital appreciation by investing in companies whose securities are in the CNX Nifty Index. Exit Load= 1% for redemption within 365 days Principal Index Fund 142 The Fund was incepted in June 1999 by Principal PNB Assets Management Company Ltd. The Fund is passively managed fund which tracks the S&P CNX Nifty Index. The investment strategy of the fund states that it can invest up to 100 percent in Nifty stocks and can take up to 10 percent exposure in money market securities as well Exit Load =Nil

8 INR INR INR INR INR INR INR 0.00 INR INR 4.64 INR 2.00 INR 3.00 INR INR INR INR INR 6.11 INR INR 5.61 INR Figure 6 -AUM under selected Index Funds 131

9 6.2. OPERATING EXPENSES OF INDEX FUNDS Operating Expenses are considered as one of the important factors for evaluation of the performance of the mutual fund scheme Expense ratio of a Fund is the total annual expenses of a particular Mutual Fund Scheme expressed as a percentage of average net assets. A mutual fund scheme having lesser expense ratio is considered to be efficient for the investment as it carries capacity to deliver better returns to the investors. Security & Exchange Board of India (SEBI) has specified specific rules for the expenses of the mutual fund schemes. Following are the details in this regard. a) Entry Load As per the SEBI rules 143, no entry load can be charged by the Scheme to the investor from 1 st August Upfront commission is paid directly by the investor to the service rendered by the ARN Holder. SEBI has made it clear that the investor should assess the advisor (ARN holder) while making the payment of the commission on various factors including the service rendered by the advisor regarding mutual fund investments. b) Exit Load Exit Load is the amount payable by the investor to the AMC if he redeems his investment before stipulated period of time (number of days). Every AMC has its own rules for exit load but the same has to be within the rules stipulated by SEBI C) Recurring Expenses Recurring expenses are the day to day expenses of the Mutual Fund Scheme. SEBI has laid down specific rules for the operating expenses 143 SEBI Circular No SEBI/IMD/CIR No.4 /168230/06 dated 30 th June,

10 which point out that the maximum operating expenses that can be charged to a Scheme are as follows 144 Net Assets(Rs) Recurring Expenses (% of weekly average net assets) First 100 crores 2.25% Next 300 crores 2.00% Next 300 crores 1.75% Balance 1.50% From the above detail explanation, it is very clear that the fund expenses which can be controlled by the AMC are Recurring Expenses. These mainly include expenses like investment management fees, marketing expenses, brokers commission, custodian fees, trustees fees, costs related to the investors communication etc The management of Index Funds Schemes is comparatively easier. No decision is needed on what stocks must be held, for how long, and how much must be invested in each. The fund manager just needs to keep the trading to the tiny level needed to accurately track the index. The logical fallout is on cost. Since no research is needed, there is no need for costly analysts. No brainstorming on investment strategy is required either. This translates into low recurring expenses and low transaction costs as, the fund manager does not actively churn his portfolio. Thus theoretically, index funds should not incur any operating expenses or should incur very minimum operating expenses however, on analyzing the operating expenses of selected index funds, the researcher has found that index funds also incur sizeable expenses. Following are details of the operating expenses of the selected Index Funds for the period 2005 to SEBI(Mutual Funds) Regulations,

11 1) Expense Ratio of ICICI Prudential Index Fund 145 Year Expense ratio % % % % % % % Expence Ratio 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Expense Ratio of ICICI Prudential Index Fund 1.50% 1.25% 1.35% 1.00% 1.00% 1.00% 1.00% Year Figure 7-Expense Ratio of ICICI Prudential Index Fund The Expense ratio of ICICI Prudential Index Fund was 1.25% in the year 2005 which declined to 1% in the year The fund successfully managed to maintain the expense ratio at 1% for next four years. In the year 2010 however, the expense ratio drastically increased to 1.50% which slightly reduced to 1.35% in the year The efforts of the fund manager and his team to maintain the expense ratio succeeded for some years but afterwards the expenses went up considerably

12 2) Expense Ratio of Tata Index Fund-Sensex Plan-A 146 Year Expense ratio % % % % % % % Expense Ratio of Tata Index Fund-Sensex Plan-A 2.50% 2.00% 2.00% 2.00% 2.00% Expence Ratio 1.50% 1.00% 1.49% 1.00% 1.50% 1.42% 0.50% 0.00% Year Figure 8-Expense Ratio of Tata Index Fund-Sensex Plan-A Tata Index Fund managed to reduce the expense ratio from 1.49% (year 2005) to 1% in the next year. However for next three years the expenses of the funds increased to 2% which shows the increase in overall expenditure level of the Fund. However in next two years the fund managed to bring the expenses down to its original level of around 1.40% to 1.50%.There is no any specific trend in the expenses ratio of the fund for these 7 years

13 3) Expense Ratio of ING Large Cap Equity Fund 147 Year Expense ratio % % % % % % % Expense Ratio of ING Large Cap Equity Fund Expence Ratio 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 2.00% 2.00% 3.00% 3.00% 3.00% 2.50% 2.50% 0.50% 0.00% Year Figure 9 -Expense Ratio of ING Large Cap Equity Fund ING Large Cap Equity Fund has the maximum expense ratio amongst the selected Index Funds. In the year 2005 the expense ratio was 2% which remained at the same level in the next year. Surprisingly the fund expense ratio increased to 3% in the year The fund expense ratio was not reduced in next two years and remained at 3% up to the year Though the expense ratio reduced in the year 2010, it remained as high as 2.50% which was more than the average expense ratio of the Index Funds

14 4) Expense Ratio of SBI Magnum Index Fund 148 Year Expense ratio % % % % % % % Expense Ratio of SBI Magnum Index Fund 2.50% 2.00% 2.00% 2.00% 2.00% 2.00% Expence Ratio 1.50% 1.00% 1.25% 0.77% 1.49% 0.50% 0.00% Year Figure 10 -Expense Ratio of SBI Magnum Index Fund SBI Magnum Index Fund s expense ratio was moderate in the year Next four years, the expense ratio went up to 2% and remained at that level. In the year 2010 the expense ratio reduced to less than 1%, but the level could not be maintained at low level. As a result the expense ratio almost doubled

15 5) Expense ratio of Franklin India Index Fund BSE Sensex Plan 149 Year Expense ratio % % % % % % % Expence Ratio Expense ratio of Franklin India Index Fund BSE Sensex Plan 1% 1% 1% 1% 1% 1% 0.99% Year Figure 11 -Expense ratio of Franklin India Index Fund BSE Sensex Plan The expense ratio of Frakinlin India Index fund(bse Sensex Plan) is one of the lowest expense ratios amongst all the selected Index Funds. Infact it has never crossed the level 1% in any of the 7 years of Study. The moderate level of 1% is maintained from the year 2005 to the year In the seventh year i.e. year 2011, the expense ratio has marginally reduced by 0.01%. Overall level of the fund expense ratio has been very impressive as compared to its peer competitors

16 6) Expense ratio of HDFC Index Fund-Sensex Plan 150 Year Expense ratio % % % % % % % 1.60% Expense ratio of HDFC Index Fund-Sensex Plan 1.50% 1.50% 1.50% 1.40% 1.23% Expence Ratio 1.20% 1.00% 0.80% 0.60% 0.40% 1.00% 1.00% 1.00% 0.20% 0.00% Year Figure 12 -Expense ratio of HDFC Index Fund-Sensex Plan HDFC Index Fund (Sensex Plan) clearly indicates downward trend showing very clearly continuous and gradual reduction in the expenses of the fund. The expense ratio of 1.50% in first three years reduced to 1.23% in the fourth year i.e.2008 and further reduced to 1% in the year For next 3 consecutive years the ratio remained at 1% which shows a better control over the fund expenses throughout the period of 3 years

17 7) Expense ratio of HDFC Index Fund-Sensex Plus Plan Year Expense ratio % % % % % % % 1.60% Expense ratio of HDFC Index Fund-Sensex Plus Plan 1.50% 1.50% 1.50% 1.40% 1.23% Expence Ratio 1.20% 1.00% 0.80% 0.60% 1.00% 1.00% 1.00% 0.40% 0.20% 0.00% Year Figure 13 -Expense ratio of HDFC Index Fund-Sensex Plus Plan Being the Index Fund from the same Family (HDFC Assets Management Company), the expense ratio of HDFC Index Fund(Sensex Plus Plan) is same like normal Sensex Plan Fund. The expense ratio of 1.50% for the first years which reduced to 1% and remained at the same level for next three years. 140

18 8) Expense ratio of HDFC Index Fund-Nifty Plan 151 Year Expense ratio % % % % % % % 1.60% Expense ratio of HDFC Index Fund-Nifty Plan 1.50% 1.50% 1.50% Expence Ratio 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 1.23% 1.00% 1.00% 0.00% Year Figure 14 -Expense ratio of HDFC Index Fund-Nifty Plan HDFC Index Fund-Nifty Plan also maintained the expense ratio at moderate level like other Index Funds from the same Fund Family

19 9) Expense ratio of UTI Nifty Index Fund 152 Year Expense ratio % % % % % % % Expence Ratio 1.51% 1.50% 1.49% 1.48% 1.47% 1.46% 1.45% 1.44% 1.43% 1.42% Expense ratio of UTI Nifty Index Fund 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.45% Year Figure 15 -Expense ratio of UTI Nifty Index Fund As regards to UTI Nifty Index Fund, the expense ratio of 1.45% in the first year (2005) rose to 1.50% in next year and remained at that level for next 5 years. The unique factor of the expense ratio is that there is no reduction in expense ratio in any of the 7 years of the Study as compared to the preceding year. In other words, though the fund has succeeded in maintaining the expense ratio constant, it has not succeeded in its reduction

20 10) Expense Ratio of LIC MF Index Fund- Sensex Advantage Plan. 153 Year Expense ratio % % % % % % % Expence Ratio Expense Ratio of LIC MF Index Fund- Sensex Advantage Plan 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 1.49% 2.00% 3.00% 2.00% 1.46% 1.50% Year 1.32% Figure 16-Expense Ratio of LIC MF Index Fund- Sensex Advantage Plan This is the classic example of rise in the expenses and subsequent fall in the expenses of the fund. The expense ratio of 1.49% in the year 2005 rose slowly and reached to 2% and 3% in the year 2006 and 2007 respectively. The expense ratio of 3% in the year 2007 is the maximum expenditure of any of the selected Index Funds for any of the selected years. However from the next year it started to reduce and went down to 1.46%, 1.50% and 1.32% in the years 2009, 2010 and 2011 respectively

21 11) Expense ratio of Canara Robeco Nifty Index Fund 154 Year Expense ratio % % % % % % % 1.20% 1.00% Expense ratio of Canara Robeco Nifty Index Fund 1.01% 1.00% 1.00% 1.00% Expence Ratio 0.80% 0.60% 0.40% 0.20% 0.00% 0.50% 0.50% 0.50% Year Figure 17 -Expense ratio of Canara Robeco Nifty Index Fund Canaara Robeco Nifty Index Fund has one of the lowest expense ratio amongst all the selected Index Funds. For the first three years (year 2005 to 2007) it was as low as 0.50%. In the fourth year the expense ratio increased and reached to the level of 1.01%. Though it was double of its previous year s expense ratio, it was very low as compared to the peer competitors

22 12) Expense ratio of LIC MF Index Fund Nifty Plan 155 Year Expense ratio % % % % % % % 3.00% 2.50% Expense ratio of LIC MF Index Fund Nifty Plan 2.50% 2.50% Expence Ratio 2.00% 1.50% 1.00% 1.10% 1.50% 1.50% 1.23% 0.85% 0.50% 0.00% Year Figure 18-Expense ratio of LIC MF Index Fund Nifty Plan This is one more example of Index Fund which successfully reduced the expense ratio inspite of initial rise in it. The expense ratio of LIC MF Index Fund(Nifty Plan) drastically increased from 1.10%(year 2005) to 2.50% (year 2006) and remained at 2.50% for the next year also. However from the fourth year onwards (i.e. year 2008) the fund started to reduce the expenses and as a result the expense ratio reduced to 1.50% and 1.23% in subsequent years

23 13) Expense ratio of Principal Index Fund 156 Year Expense ratio % % % % % % % Expense ratio of Principal Index Fund Expence Ratio 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 1.15% 0.75% 0.75% 1.29% 0.88% 1.00% 1.00% 0.20% 0.00% Year Figure 19-Expense ratio of Principal Index Fund The expese ratio of Principal Index Fund was maintained with the range of 0.75% to 1.29% during the selected 7 years. There are ups and downs in the expense ratio during these 7 years but the fund has managed to keep it at very low level

24 14) Average Expense Ratio of Selected Index Funds Year Expense ratio % % % % % % % Expence Ratio 1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Average Expense Ratio of Selected Index Funds 1.67% 1.27% 1.32% 1.44% 1.54% 1.41% 1.26% Year Figure 20-Average Expense Ratio of Selected Index Funds The ananlysis of 13 selected index funds for the period of 7 years from year 2005 to the year 2011 is reflected in the above graph. The range of average operating expenses is from 1.26% to 1.67%. The graph indicates that there is no consistency in the operating expenses policy of the individual funds. The detailed observations in this regard are covered in the OBSERVATIONS Chapter. 147

25 6.3) Tracking errors of Index Funds Analysis of tracking errors of Index Funds is very crucial point as performance of the concerned Fund is largely decided by its tracking error. Tracking error is measured as the standard deviation of difference between index returns and fund returns. The goal of an index fund is to minimise the tracking error. The idea of index funds has come from academic economics into the real world. Indexing is based on the premise that if markets are fairly efficient, then it would prove difficult for active managers to obtain excess returns, after considering the higher fees and costs that they have to run up. Hence, instead of actively engaging in stock picking, index funds simply try to replicate the returns on a chosen market index and aim to deliver the returns and the risk of that index. Evaluating an index fund s performance includes mainly observing how closely a fund tracks the underlying index. This is measured in terms of tracking error. A well managed index fund is one which exhibits low tracking error. The job of an index fund manager is therefore to minimise the tracking error. In principle, managing an index portfolio requires investment in all constituent index securities in the exact proportion as the underlying benchmark. This is called a full replication approach. In practice, fund managers often face problems in replicating the benchmark index returns. 157 Index funds incur transactions costs that are associated with portfolio implementation, re-balancing and capital flows. When the composition of 157 Chiang Difficulties faced by Index Fund Managers A report,

26 the underlying index changes, either due to additions or deletions of constituents or due to corporate restructuring, the index assumes that the theoretical portfolio s new weights to each security can be achieved automatically. However, for the index fund, realigning the portfolio to mimic the underlying benchmarks involves physical trading in stock and the transactions costs incurred thereby. Hence, factors driving tracking error include transactions costs, fund cash flows, uninvested/buffer cash, treatment of dividends by the index, corporate actions, and index composition changes. The liquidity of the underlying index securities also has implications for transaction costs (in terms of impact cost) and in turn the tracking error incurred by funds. As a result of ongoing subscriptions and redemptions, open ended index mutual funds engage in flow induced trading. Upon subscriptions, they are required to rapidly invest the cash flow across index securities, and upon redemptions, to sell securities to generate cash. Index funds often maintain buffer cash to meet redemptions. The size and timing of cash flows also has an impact on tracking error. Thus the problem of tracking error is affected by a number of factors and in return it affects various factors of the fund. Methodology to Calculate Tracking Error. Tracking error is defined as the annualised standard deviation of the difference in returns between the Index fund and its target Index. In simple terms, it is the difference between returns from the Index fund to that of the Index. An Index fund manager needs to calculate his tracking error on a daily basis especially if it is open-ended fund. Lower the tracking error, closer are the returns of the fund to that of the target Index. Tracking Error is always calculated against the Total Returns Index which shows the 149

27 returns on the Index portfolio, inclusive of dividend. A tracking error indicates following two important points. 1. How closely the fund is tracking the Index: It refers to the how close the weightages of the stocks in the portfolio are to the weightages of the stocks in the Index. Closer the weightage of the stocks in the portfolio to the Index, lower will be the tracking error. The factors that affect tracking error are inflows / outflows in the fund, corporate actions, change of Index constituents and the level of cash maintained in the fund for liquidity purposes. 2. The cost that routinely subtracts from fund returns: Expenses like transaction costs including broker commission, bid and ask spread, etc. gets subtracted from the returns of the fund. Higher the expenses incurred, greater will be the tracking error Calculation of tracking error 158 Step 1: Obtain the NAV values and the Index values for each day of the total time period required Step 2: Calculate the percentage change in the NAV and Index for each day over its previous day Percentage change in the NAV= NNNNNN aaaa oooo dddddd (tt) NNNNNN aaaa oooo dddddd (tt 1) NNNNNN aaaa oooo dddddd (tt 1)

28 Step 3: Calculate the difference between the percentage change in the NAV and the percentage change in the Index for each day Step 4: Calculate the standard deviation of the difference obtained from day(1)to day(n) in Step 3 Step 5: Calculate the annualised tracking error as per the formula given below Annualised tracking error = Standard deviation obtained (Step 4) 250 Following are the tracking errors of the selected Index Funds during the period of Study. 151

29 1) Tracking Error of ICICI Prudential Index Fund (year ) 159 Year Tracking Error % % % % % % % Tracking Error Tracking Error of ICICI Prudential Index Fund (year ) 4.00% 3.64% 3.50% 3.00% 2.50% 2.11% 2.00% 1.69% 1.43% 1.50% 1.00% 0.78% 1.00% 0.50% 0.00% -0.19% -0.50% Year Figure 21 Tracking Error of ICICI Prudential Index Fund ( ) ICICI Prudential Index Fund performed well during the period of study and has outperformed the index returns every year except in one year i.e. year In the year 2005 the fund outperformed its benchmark index Nifty by 3.64%. This is the best performance of this fund as regards to its comparison to the benchmark index. However the same efficiency is not maintained in next few years though the fund was able to beat the benchmark index. However the overall performance of the fund as compared to its benchmark index is impressive as except in one year (year 2009) the fund has been able to beat the benchmark index

30 2) Tracking Error of Tata Index Fund Sensex Plan-A(Year ) 160 Year Tracking Error % % % % % % % Tracking Error Tracking Error of Tata Index Fund Sensex Plan-A(Year ) 0.00% -0.25% -0.30% -0.61% -0.16% -0.50% % -1.50% -1.95% -2.00% -2.20% -2.50% -3.00% -3.50% -4.00% -4.60% -4.50% -5.00% Year Figure 22 -Tracking Error of Tata Index Fund Sensex Plan-A(Year ) Tata Index Fund s performance comparison as against the performance of the benchmark index has created the graph like English alphabet w which indicates the ups and downs in the performance of the funds. In fact the fund has underperformed throughout the seven years of the Study. Its performance as compared to the Index performance has been the worst in the year From the year 2006 onwards performance of the fund improved slightly but it never outperformed the benchmark index. Fund s worst performance (-4.60%) as compared to the benchmark index is in the 1 st year of the study (year 2005). However in the subsequent years the efficiency seems to be improved

31 3) Tracking Error of ING Large Cap Equity Fund 161 Year Tracking Error % % % % % % % Tracking Error Tracking Error of ING Large Cap Equity Fund 2.00% 1.59% 0.52% 1.36% 1.00% 0.04% 0.00% -1.00% % -2.68% -3.00% -3.81% -4.00% -5.00% -6.00% -6.00% -7.00% Year Figure 23 -Tracking Error of ING Large Cap Equity Fund The performance chart of The ING Large Cap Equity Fund as compared against the benchmark index has reflected the shape of English alphabet of W after the first year s very weak performance. In the first year of Study i.e. year 2005, the performance of this fund was almost 6% lesser as compared to the benchmark index. The performance in 6 years is comparatively improved however except in two years (year 2006 & year 2010), it has never outperformed the benchmark index returns

32 4) Tracking Error of SBI Magnum Index Fund( ) 162 Year Tracking Error % % % % % % % Tracking Error of SBI Magnum Index Fund( ) 3.00% 2.00% 2.22% Tracking Error 1.00% 0.04% 0.00% -1.48% -1.02% 0.01% -1.00% % -2.52% -3.00% -4.00% -5.00% -5.31% -6.00% Year Figure 24 Tracking Error of SBI Magnum Index Fund( ) The performance of SBI Magnum Index Fund rarely outperformed the benchmark index during the period of Study. The above graph makes it clear that except in the year 2006 the performance of the fund has been of an underperformer as compared to benchmark index. However in the last two years of the Study it can be observed that the fund managed to match its performance with that of benchmark performance

33 5) Tracking Error of Franklin Indian Index Fund-BSE Sensex Plan 163 Year Tracking Error % % % % % % % Tracking Error Tracking Error of Franklin Indian Index Fund-BSE Sensex Plan 1.50% 0.99% 1.00% 0.50% 0.36% 0.14% 0.50% 0.00% -0.31% -0.50% % -1.20% -1.50% -2.00% -2.50% -2.96% -3.00% -3.50% Year Figure 25 -Tracking Error of Franklin Indian Index Fund-BSE Sensex Plan The performance of Franklin India Index Fund has almost been at par with the performance of the benchmark index for all the years of the Study except in 2 years. The fund has neither been able to outperform the benchmark index nor underperformed with a very huge difference. In other words, the performance of the fund is relatively stable during the period of Study

34 6) Tracking Error of HDFC Index Fund-Sensex Plan 164 Year Tracking Error % % % % % % % Tracking Error of HDFC Index Fund-Sensex Plan Tracking Error 10.00% 8.00% 6.87% 5.99% 6.00% 5.27% 4.00% 2.00% 0.00% -0.66% -0.52% 0.02% -2.00% % -6.00% -7.62% -8.00% % Year Figure 26 -Tracking Error of HDFC Index Fund-Sensex Plan HDFC Index Fund Sensex Plan has outperformed the benchmark index performance most of the time during the period of Study. For instance in the first two years i.e. year 2005 and year 2006 the fund has outperformed the index by 5.99% and 6.87% respectively. In the third year of the study (year 2007), performance of the fund dropped suddenly and could achieve the returns which were almost 7.62% as compared to the benchmark performance

35 7) Tracking Error of HDFC Index Fund-Sensex Plus Plan 165 Year Tracking Error % % % % % % % 10.00% Tracking Error of HDFC Index Fund-Sensex Plus Plan 8.00% 6.00% 5.99% 6.87% 5.27% Tracking Error 4.00% 2.00% 0.00% -0.66% -0.52% -0.02% -2.00% % -6.00% -8.00% % -7.62% Year Figure 27 -Tracking Error of HDFC Index Fund-Sensex Plus Plan HDFC Index Fund Sensex Plus Plan has outperformed the benchmark index performance most of the time during the period of Study. For instance in the first two years i.e. year 2005 and year 2006 the fund has outperformed the index by 5.99% and 6.87% respectively. In the third year of the study (year 2007), performance of the fund dropped suddenly and could achieve the returns which were almost 7.62% as compared to the benchmark performance

36 8) Tracking Error HDFC Index Fund- Nifty Plan 166 Year Tracking Error % % % % % % % Tracking Error Tracking Error HDFC Index Fund- Nifty Plan 1.00% 0.18% 0.00% % % % -0.22% % -2.71% -3.00% -4.00% -5.00% -5.72% -5.33% -6.00% -7.00% Year Figure 28 -Tracking Error HDFC Index Fund- Nifty Plan The performance graph of HDFC Index Fund Nifty Plan has reflected the shape of English letter` W in the performance of the seven years from the year 2005 to Out of 7 years, the performance of 6 years has been not up the mark i.e. lesser than the performance of the benchmark returns

37 9) Tracking Error of UTI Nifty Index Fund 167 Year Tracking Error % % % % % % % Tracking Error Tracking Error of UTI Nifty Index Fund 8.00% 6.57% 6.00% 3.94% 4.00% 2.00% 0.58% 0.00% -0.43% 0.01% % % -2.56% -4.00% Year Figure 29 -Tracking Error of UTI Nifty Index Fund The performance of UTI Nifty Index Fund was very impressive for the first few years of the Study. In the first year (year 2005) for instance, the fund has outperformed the benchmark by 6.57% followed by outperformance of 3.94% in the second year (year 2006). However this impressive performance couldn t be maintained in next few years the fund underperformed as compared to the benchmark index- CNX NIFTY

38 10) Tracking Error of LIC MF Index Fund-Sensex Advant Plan 168 Year Tracking Error % % % % % % % Tracking Error Tracking Error of LIC MF Index Fund-Sensex Advant Plan 2.00% 0.64% 0.00% -1.45% 0.46% -2.09% -2.00% % -6.52% -6.00% -8.00% % % % % % % Year Figure 30 -Tracking Error of LIC MF Index Fund-Sensex Advant Plan (Year ) The performance of the LIC Index Fund Sensex Advantage Plan has been has never been up to the benchmark index returns. In some of the years, the performance of this fund has been very disturbing for example in the year 2006 and 2007 the fund has underperformed by 14.60% and 11.30% respectively

39 11) Tracking Error of LIC Index Fund- Nifty Plan (Year ) 169 Year Tracking Error % % % % % % % Tracking Error Tracking Error of LIC Index Fund- Nifty Plan 2.00% 0.28% 0.77% 0.00% -1.14% -0.92% % % -6.00% -6.81% -6.82% -8.00% -9.90% % % Year Figure 31 - Tracking Error of LIC Mutual Fund Nifty Plan LIC Index Fund-Nifty Plan has continuously underperformed as compared to the Index returns. Except in the last two years of the study (year 2010 and 2011) the fund could not achieve the benchmark performance

40 12) Tracking Error of Canara Robeco Nifty Index Fund (Year ) 170 Year Tracking Error % % % % % % % Tracking Error Tracking Error of Canara Robeco Nifty Index Fund(Year ) 1.00% 0.35% 0.00% 0.02% -0.30% 0.49% 0.00% % -2.00% -3.00% -4.00% -3.03% -4.12% -5.00% Year Figure 32 - Tracking Error of Canara Robeco Nifty Index Fund ( ) Canara Robeco Nifty Index Fund has also not performed well as compared to the benchmark index. Though the performance of this fund is comparatively better as compared to many of the funds selected for study, overall performance is disappointing. The tracking error is as high as almost 4% (Year 2009) which indicates the inefficiency on the part of the fund management. The fund was able to beat the index by a very minimal margin and that too in 2 years only

41 13) Tracking Error of Principal Index Fund (Year ) 171 Year Tracking Error % % % % % % % Tracking Error Tracking Error of Principal Index Fund (Year ) 1.00% 0.50% 0.31% 0.00% -0.34% -0.60% -0.50% % -1.50% -2.00% -2.54% -2.50% -3.00% -3.24% -3.43% -3.50% -3.74% -4.00% Year Figure 33 -Tracking Error of Principal Index Fund(Year ) As regards to the performance of Principal Index Fund, it has been continuously underperformer as compared with the benchmark returns. Out of the 7 years of the study, the fund was not able to achieve the returns equal to benchmark index for 6 years. Further, in 3 years the tracking error is more than 3%. The overall efficiency is disappointing

42 14) Average Tracking Error of Selected Index Funds (Year ) Year Tracking Error % % % % % % % Tracking Error Average Tracking Error of Selected Index Funds (Year ) 1.00% 0.50% 0.30% 0.00% -0.28% 0.35% -0.63% -0.50% % % -1.50% -2.03% -2.00% -2.50% -3.00% -3.50% -4.04% -4.00% -4.50% Year Figure 34 -Average Tracking Error of Selected Index Funds ( ) If the average tracking errors of the selected index funds are studied, the overall performance of the selected funds is satisfactory as in most of the years the average performance is at par with the benchmark returns. However at the same time, the important points to be noted are that the average performance has never outperformed the benchmark index by handsome difference. On the contrary, in some years it has underperformed with a very high margin e.g. in the year 2007 the average performance is underperformed by almost 4% while the underperformance in the year 2009 is 2% which is also quite disappointing. 165

43 6.4) Investors Response to Index Funds Investments. As stated earlier, the primary data was collected from the mutual fund investors through a well constructed questionnaire. Following are the frequency Tables and analysis of the same 1) Distribution of investors Table 9 -Occupation-wise distribution of investors Particulars Frequency Percent Valid Percent Cumulative Percent Professional Housewife Business Service Retired Student Total Retired 12.20% Student 0.10% Professional 7.50% Housewife 7.40% Service 34.60% Business 38.20% Figure 35 -Occupation-wise distribution of investors 166

44 2) Age Group-wise distribution of investors Table 10 -Age Group-wise distribution of investors Frequency Percent Valid Percent Cumulative Percent Valid Up to 30 years 31 to 50 years Above 51 years Total Above 51 years 30.60% Up to 30 years 4.70% 31 to 50 years 64.70% Figure 36 -Age Group-wise distribution of investors 167

45 3) Income-wise distribution of investors Table 11 -Age Group-wise distribution of investors Frequency Percent Valid Percent Cumulative Percent Up to 2 lakhs to 5 lakhs Valid 5 to 10 lakh Above 10 lakh Missing Total Above 10 lakh 25.90% Missing 1.30% Up to 2 lakhs 17.30% 5 to 10 lakh 30.20% 2 to 5 lakhs 25.30% Figure 37 -Income-wise distribution of investors 168

46 4) Relationship between Financial Liability and Investment in Mutual Funds Table 12 - Relationship between Financial Liability and Investment in Mutual Funds Financial Liability Frequency Percent Valid Percent Cumulative Percent Yes Valid No Total Not Answer System Total Not Answer 16.50% Yes 37.90% No 45.60% Figure 38 Relationship between Financial Liability and Investment in Mutual Funds 169

47 5) Investors Awareness about the Mutual Funds Table 13- Investors Awareness about the Mutual Funds Frequency Percent Valid Percent Cumulative Percent Good Knowledge Valid Working Knowledge No Knowledge Total No Knowledge 30.80% Good Knowledge 31.00% Working Knowledge 38.20% Figure 39 -Investors Awareness about the Mutual Funds 170

48 6) Regularity in Mutual Fund Investment Table 14 - Regularity in Mutual Fund Investment Frequency Percent Valid Percent Cumulative Percent Regular Valid Irregular Missing Total Missing 2.00% Regular 17.20% Irregular 80.80% Figure 40 -Regularity in Mutual Fund Investment 171

49 7) Period of investment in Mutual Funds (Years of Investing in Mutual Fund) Table 15 -Period of investment in Mutual Funds Frequency Percent Valid Percent Cumulative Percent Below 1 year to 3 years Valid Above 3 years Total Not Answer System Total Above 3 years 24.30% Not Answer 2.40% Below 1 year 14.00% 1 to 3 years 59.30% Figure 41 -Period of investment in Mutual Funds 172

50 Number of Years planned to continue investment in Mutual Funds in future Table 16 -Funds Investors Awareness about the Mutual Frequency Percent Valid Percent Cumulative Percent Below 1 year to 3 years Valid Above 3 years Total Not Answer System Total Above 3 years 24.30% Not Answer 2.40% Below 1 year 14.00% 1 to 3 years 59.30% Figure 42 -Number of Years planned to continue investment 173

51 8) Mode of Investment in Mutual Funds Table 17 -Preferred mode of investment in mutual funds Frequency Percent Valid Percent Cumulative Percent Lump-sum Valid SIP Total SIP 53.80% Lump-sum 46.20% Figure 43 - Mode of Investment in Mutual Funds 174

52 9) Type of fund selected for investment Table 18 -Type of fund selected for investment Frequency Percent Valid Percent Cumulative Percent Diversified Sectoral Index Valid Diversified and Sectoral Diversified and Index Total Diversified and Sectoral 0.50% Index 21.90% Diversified and Index 0.30% Diversified 35.00% Sectoral 42.30% Figure 44 -Type of fund selected for investment 175

53 10) Awareness about Index and Index Funds Table 19 -Awareness about index and index funds Frequency Percent Valid Percent Cumulative Percent Yes Valid No Total Yes 46.30% No 53.70% Figure 45 -Awareness about the concept- "Index" 176

54 11) Investors Opinion on the question Would you like to invest in SENSEX stocks or NIFTY stocks through Mutual Funds? Table 20 -Investors' opinion about Index Stocks Frequency Percent Valid Percent Cumulative Percent Yes Valid No Total Not Answer System 2.2 Total Not Answer 0.20% Yes 46.20% No 53.60% Figure 46-Investors' opinion about Index Stocks 177

55 12) Awareness about Index Funds. Table 21 -Investors' opinion about index Funds Frequency Percent Valid Percent Cumulative Percent Fully Valid Partly No Total Not Answer System 2.2 Total Not Answer 0.20% Fully 30.70% No 17.20% Partly 51.90% Figure 47 -Awareness about Index Funds 178

56 13) Percentage of total Investment in Index Funds Table 22 -Proportion of investment in index funds Frequency Percent Valid Percent Cumulative Percent 0% Up to 25% Valid 26% to 50% Above 50% Total % to 50% 0.20% Above 50% 0.00% Up to 25% 37.10% 0% 62.70% Figure 48 -Proportion of investment in index funds 179

57 14) Opinion about Index Fund (Question Do you Agree with statement-"index Fund is simpler, cost effective instrument of Mutual Fund Investment " Options for the answer- Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree.) Table 23 -Percentage of total Investment in Index Funds Frequency Percent Valid Percent Strongly Disagree Disagree Valid Neutral Agree Strongly Agree Total Missing System 2.2 Total Cumulative Percent Strongly Agree 26.50% Strongly Disagree 0.70% Disagree 12.90% Agree 27.90% Neutral 32.00% Figure 49 -Percentage of total Investment in Index Funds 180

58 15) Investors opinion on inclusion of Index Funds in their portfolio. (Question Do you agree with the statement-index funds must be part of every mutual fund investor's portfolio.options for the answer- Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree) Table 24 -Investors opinion about index funds Frequency Percent Valid Percent Strongly Disagree Disagree Valid Neutral Agree Strongly Agree Total Missing System 2.2 Total Cumulative Percent Strongly Agree 24.90% Strongly Disagree 0.70% Disagree 13.80% Agree 28.90% Neutral 31.70% Figure 50 -Investors opinion about index funds. 181

59 16) Age Group-wise preference for the funds Table 25 -Age group-wise preference for funds Type of fund selected for investment Total Age Group Up to 30 years 31 to 50 years Diversified Sectoral Index Others Missin g Above years Total Up to 30 years 31 to 50 years Above 51 years 78 Diversified Sectoral Index Others Missing Figure 51 -Age Group-wise preference for the funds 182

60 17) Occupation wise classification of investment period Table 26-Occupation-wise classification of investors Years of Investing in Mutual Fund Below 1 year 1 to 3 years Above 3 years Total Professional Housewife Occupation Business Service Retired Student Total Professional Housewife Business Service Retired Student Below 1 year 1 to 3 years Above 3 years Figure 52 -Occupation-wise classification of investment period 183

61 18) Occupation-wise mode of investment in mutual funds Table 27 -Occupation-wise mode of investment Mode of Investment Total Lump sum SIP Professional Housewife Occupation Business Service Retired Student Total Lump sum SIP Figure 53 -Occupation-wise mode of investment in mutual funds 184

62 19) Factors affecting the decisions of investors (Scaling between 1 to 5) 19 a) Performance of the Fund Table 28 -Factors affecting the decisions of investors-performance of the fund Performance of the fund Professional Housewife Total Business Service Retired Student Total Maximum investors have given the weightage of 2 and 3 for the Performance of the Fund while selecting the fund Figure 54 -Factors affecting the decisions of investors-performance of the fund 185

63 19 b) Investment Strategy of the Fund. Table 29 -Factors affecting the decisions of investors-investment Strategy Investment Strategy of the fund Total Professional Housewife Occupation Business Service Retired Student Total investors have given the weightage of 2 for the criteria of Investment Strategy of the fund while selecting fund for investment Figure 55 -Factors affecting the decisions of investors-investment Strategy 186

64 19 c) Convenience in transactions Table 30-Factors affecting the decisions of investors-convenience in Occupation transactions Convenience in transactions Professional Housewife Total Business Service Retired Student Total Maximum weighatage is 2 given by 343 investors for the Convenience in transactions Figure 56 -Factors affecting the decisions of investors-convenience in transactions 187

65 19 d) Stock Market Movements. Table 31-Factors affecting the decisions of investors-stock Market Movements Occupation Stock Market Movements Professional Housewife Total Business Service Retired Student Total Stock Market Movement factor has been given the maximum weighatage of 4 by 582 investors Figure 57 -Factors affecting the decisions of investors-stock Market Movements 188

66 19 e) Dividend frequency by the fund Table 32-Factors affecting the decisions of investors-dividend Frequency Dividend frequency by the fund Total Professional Housewife Occupation Business Service Retired Student Total Maximum weightage is 5 for the factor of Dividend frequency by 416 investors Figure 58-Factors affecting the decisions of investors-dividend Frequency 189

67 19 f) Lock-in Period Table 33-Factors affecting the decisions of investors-lock-in period Lock-in Period Total Professional Housewife Occupation Business Service Retired Student Total Maximum weightage is 4 given by 448 investors for the Lock-in Period factor Figure 59 -Factors affecting the decisions of investors-lock-in period 190

68 19 g) Advice by the Mutual Fund Advisor Table 34 Advice by the Mutual Fund Advisor Advice by the Mutual Funds Advisor Total Professional Housewife Occupation Business Service Retired Student Total Maximum weightage is 5 given by 399 investors for the Advice by the mutual fund advisors while selecting fund for investment Figure 60 Advice by the Mutual Fund Advisor 191

69 Table 35-Factors affecting investors decision-advice by the mutual fund advisor Performance of the fund Total Professional Housewife Occupation Business Service Retired Total Student Investment Strategy of the fund Total Professional Housewife Occupation Total Business Service Retired Student

70 Convenience in transactions Total Professional Occupation Total Housewife Business Service Retired Student Stock Market Movements Total Professional Housewife Occupation Total Business Service Retired Student

71 Dividend frequency by the fund Total Professional Housewife Occupation Total Business Service Retired Student Lock-in Period Total Professional Housewife Occupation Business Service Retired Total Student

72 Advice by the Mutual Funds Advisor Total Professional Housewife Occupation Business Service Retired Student Total Figure 61-Factors affecting investors decision-advice by the mutual fund advisor Summary of weighted averages total given by the investors 195

73 Table 36 -Factors considered by the investors Criteria Total of Weighted Mean (Total Weight )/ Rank Preference Number of observations Performance of the fund Investment Strategy of the fund Convenience in transactions Stock Market Movements Dividend frequency by the fund Lock-in Period Advice by the Mutual Funds Advisor Factors considered by the investors Toal weightage Performance of the fund Investment Strategy of the fund Convenience in transactions Stock Market Movements Factors Dividend frequency by the fund Lock-in Period Advice by the Mutual Funds Advisor Crosstabs 196

74 Occupation * Type of fund selected for investment Cross tabulation Count Type of fund selected for investment Total Divers ified Sectoral Index Other type Missing Professional Housewife Occupation Business Service Retired Student Total ) The most preferred type of mutual fund is Sectoral Mutual Fund (preferred by 420 investors) 2) The least preferred type is Index Fund (preferred by 218 investors) 3) Except in case of housewives and retired persons, the preference for Sectoral Fund is more than for Index Funds. The detailed observations and interpretations on all the data analysis described above is explained in the chapter No.7 197

75 6.5) MUTUAL FUND ADVISORS OPINION ON INDEX FUND INVESTMENT As pointed out earlier, data was collected from the mutual fund advisors through a well constructed questionnaire. Following are the major observations in this regard. 1) Opinion on the capacity of index funds to give returns in the long run Table 37 -Advisors opinion about index funds' capacity Frequency Percent Valid Percent Cumulative Percent Valid Total % % % % % Figure 62 -Advisors opinion on Index funds capacity 198

76 2) Opinion on simplicity in investment philosophy Table 38 -Advisors Opinion on simplicity in investment philosophy of index funds Frequency Percent Valid Percent Cumulative Percent Valid Total % % % % % Figure 63 -Advisors Opinion on simplicity in investment philosophy of index funds 199

77 3) Opinion on Cost effectiveness of Index Funds Table 39-Advisors' opinion on index funds' cost effectiveness Valid Frequency Percent Valid Percent Cumulative Percent Total % % % % % Figure 64 - Advisors' Opinion on Cost effectiveness of Index Funds 200

78 4) Mutual Fund Advisors Opinion about Index Funds (Question Do you agree with statement-"index fund is simpler, cheaper investment as compared to other equity funds"- Options for the Answer Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree) Table 40-Advisors' opinion about index funds Frequency Percent Valid Percent Cumulative Percent Valid Strongly disagree Disagree Neutral Agree Strongly Agree Total Strongly disagree 0.00% Disagree 0.00% Neutral 11.10% Strongly Agree 31.50% Agree 57.40% Figure 65 -Mutual Fund Advisors Opinion about Index Funds 201

79 5) Mutual Fund Advisors opinion on inclusion of Index Funds in their portfolio. (Question Do you agree with the statement-index funds must be part of every mutual fund investor's portfolio.options for the answer- Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree) Table 41-Advisiors' opinion on inclusion of index funds in portfolio Valid Strongly disagree Disagree Frequency Percent Valid Percent Cumulative Percent Neutral Agree Strongly Agree Total Strongly Agree 11.09% Strongly disagree 0.00% Disagree 9.29% Neutral 5.59% Agree 74.03% Figure 66- Advisors opinion on inclusion of Index Funds in their portfolio. 202

80 6) Factors affecting the decisions of mutual fund investors (As per the opinion of mutual fund advisors) Table 42-Advisors' opinion about the factors affecting mutual fund investments decisions Criteria Total of Weighted Preference Mean (Total Weight )/ Number of observations Rank Performance of the fund Investment Strategy of the fund Convenience in transactions Stock Market Movements Dividend frequency by the fund Lock -in Period Advice by the Mutual Funds Advisor Total Weightage Performance of the fund Investment Strategy of the fund Convenience in transactions Stock Market Movements Factors Dividend frequency by the fund Lock -in Period Advice by the Mutual Funds Advisor Figure 67 -Advisors' opinion about the factors affecting mutual fund investments decisions The detailed observations and interpretations on all the data analysis described above is explained in the chapter No.7 203