MUTUAL FUND FINANCIAL PERFORMANCE ANALYSIS- A COMPARATIVE STUDY ON EQUITY DIVERSIFIED SCHEMES AND EQUITY MID-CAP SCHEMES.

Transcription

1 91 MUTUAL FUND FINANCIAL PERFORMANCE ANALYSIS- A COMPARATIVE STUDY ON EQUITY DIVERSIFIED SCHEMES AND EQUITY MID-CAP SCHEMES. ABSTRACT DR.B.NIMALATHASAN*; MR.R.KUMAR GANDHI** *Department of Accounting, Faculty of Management Studies & Commerce, University of Jaffna, Jaffna, Sri Lanka. **A.P (Sr.G), SRM School of Management, Tamil Nadu, India. This article focused on the financial performance analysis of mutual fund schemes (equity diversified schemes and equity mid-cap schemes) of selected banks (State Bank of India, Canara Bank- Public Bank, ICICI Bank, HDFC Bank-Private Bank).The objectives of this research work is to analysis the financial performance of selected mutual fund schemes through the statistical parameters (Standard Deviation, Beta and Alpha) and ratio analysis (Sharpe Ratio, Treynor Ratio, Jenson Ratio, Information Ratio).The results of the research work concern Among the Open ended Tax Saving schemes, Canara Robeco Equity Diversified is the preferred and ranked top most, at the same time among the Open ended Midcap schemes, HDFC Capital Builder is the preferred and ranked top through various tools. These research findings useful to the investors in terms of understanding the financial performance of the mutual fund schemes. Also this research finding is useful to the Mutual Fund Company in terms of Behavioral aspects of mutual funds. KEYWORDS: mutual fund, tax, mid-cap. INTRODUCTION The SEBI regulations, 1993 defines a mutual fund as a fund in the form of a trust by a sponsor, to raise money by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations A mutual fund is a professionally-managed firm of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.

2 92 CONCEPT OF MUTUAL FUNDS MUTUAL FUND PROCESS

3 93 TYPES OF MUTUAL FUND SCHEME

4 94 BUSINESS STRUCTURE OF MUTUAL FUND

5 95 FRAME WORK In this research paper, the researcher took only two schemes and four banks taken as sample. The aim is to evaluate, compare and rank the financial performance of the mutual fund schemes. The data collected from the secondary source (i.e. fact sheets of the company,news paper, journals, periodicals etc. publishes the several data, Some private organization, research brochures, universities published material).all the data used for analysis is taken from the period June-2008 to the period May-2009,Mainly the Net Asset Value collected from the website( This research finding will be useful to the investors and the mutual fund company, in the investors point of view that the investors can understand that financial performance of the selected schemes of selected banks, in the same way the mutual fund organization can benefit with this research findings by understand the acceptance level of the mutual fund schemes. There is a necessary to include the constrains in this research work is only taken two schemes and four banks. So there is a scope that to do further research in the same concept by collecting data from more than two schemes and more than four banks REVIEW OF LITERATURE Review of the literature plays an important role in any research, it is considering the importance of mutual funds and several academicians have tried to study the performance of various mutual funds. Literature on mutual fund performance evaluation is enormous. Herewith some of the research studies that have influenced the preparation of this study substantially are discussed in this section. The Study Analysis of Performance of Equity funds(diversified) Open-end Mutual Fund during was performed by M.Vijay Anand in IFMR,Chennai (June 2000).The study focused on to understand the position of the schemes of birla sunlife and the competitors schemes available in the market. The study did Analysis of Performance of Equity fund for 3 years and SWOT Analysis of Birla Sunlife by Literature survey, Delphi technique, in depth financial review to identify among the selected equity funds that earns higher returns than benchmark and competitors and concluded that Birla Sunlife performs well compared to the benchmarks and competitors. The Research Performance Evaluation of Franklin Templeton Mutual Funds was done by R.Nithya in the IFMR Chennai (2004). The objective of the study is to analyse the performance of all the schemes available in the Franklin Templeton Mutual funds and Emphasize the values of mutual funds to the target people by identifying Asset Management Company that is performing well and identifying the top schemes in the category such as equity,balanced,monthly Income Plan(MIP) & Income in the AMC. The AMC chosen was Franklin Templeton Mutual funds and it performed well and met the expectations. The Research A study on Analysis of the performance of mutual fund with reference to HDFC was done by Prasath.R.H in Anna University (2009). The study is trying to emphasize the core values of mutual fund investment, benefits of mutual funds, types of mutual funds, etc., The study is going to conducted by taking the NAV values of different types of HDFC mutual fund

6 96 products. The study concludes that before choosing the mutual fund scheme, the investor should undergo fact sheet thoroughly and he has to choose the best one by calculating Sharpe Ratio, Treynor s Ratio, Jensen Ratio, IR Ratio and NAV calculation. If the investor finds difficulty of getting Rp, Rf, Standard deviation, and Beta parameters, NAV calculations are the best alternative to assess the performance. The Research on Performance Evaluation of Indian Mutual Funds was done by Dr S Narayan Rao in IITB (2002). The Study is conducted to understand whether most of the mutual fund schemes were able to satisfy investor s expectations by giving excess returns over expected returns.the objective of this study was to evaluate the performance of Indian Mutual Fund Schemes during bear market through relative performance index (RPI), risk- return analysis, Treynor s ratio, Sharpe s ratio, Sharp s measure, Jensen s measure, and Fama s measure.the research study concluded that out of 269 schemes, 49 were under performers, 102 were par performers and 118 were out performers of the market and Medium Term Debt Funds were the best.it was also concluded that 58 of 269 open ended mutual funds have provided better returns than the market during the bear period of September 98-April Some of the funds provided excess returns over expected returns based on both premium for systematic risk and total risk. The research Characteristics and Performance Evaluation of Selected Mutual Funds in India was done by Sharad Panwar and Dr. R. Madhumathi, in IIT, Madras (2005). The objective of the study is to identify differences in characteristics of public-sector sponsored & private-sector sponsored mutual funds and to find the extent of diversification in the portfolio of securities of public-sector sponsored and private-sector sponsored mutual funds and to compare the performance of public-sector sponsored and private-sector sponsored mutual funds using traditional investment measures.the study found that public-sector sponsored, private-sector Indian sponsored and private-sector foreign sponsored mutual funds do not differ statistically in terms of portfolio characteristics such as net assets, common stock%, market capitalization, holdings, Top Ten %. Portfolio risk characteristics measured through private-sector Indian sponsored mutual funds seems to have outperformed both Public- sector sponsored and Privatesector foreign sponsored mutual funds. The research Fund Performance measurement without benchmark A case of selected Indian Mutual funds is complete by Mr. Kaushik Bhattacharjee and Prof. Bijan Roy in ICFAI University (2008). This study is actually a replication of the study conducted by Grinblatt & Titman and calculates PCM for a sample of 50 Indian mutual funds over a period of 26 months, with a view of validating their study in the Indian context. To understand whether or not the selected mutual funds (hence forth called funds) are able to outperform the market on the average over the studied time period.the study concluded that there are positive signals of information asymmetry in the market with mutual fund managers having superior information about the returns of stocks as a whole. For assessing the true performance of a particular mutual fund, a longer time horizon is better. The research Investors' Preference for Investment in Mutual Funds: An Empirical Evidence is done by Jaspal Singh and Subhash Chander in the University Guru Nanak Dev University, Punjab (2006).The results show that the investors consider gold to be the most preferred form of investment, followed by NSC and Post Office schemes. Hence, the basic psyche of an Indian investor, who still prefers to keep his savings in the form of yellow metal, is indicated. Investors

7 97 belonging to the salaried category, and in the age group of 20-35, years showed inclination towards close-ended growth (equity-oriented) schemes over the other scheme type. The research Measuring Performance of Indian Mutual Funds was done by Deepak Agrawal in Truba College of Management & Technology, Indore (2007). The objective of the study is to provide an overview of mutual fund activity in emerging markets,to Describe their size, asset allocation, to analyze the Indian Mutual Fund Industry pricing mechanism with empirical studies on its valuation,to analyzes data at both the fund-manager and fund-investor levels. The study reveled that the performance is affected saving and investment habits of the people at the second side the confidence and loyalty of the fund Manager and rewards affects the performance of the MF industry in India. The Research Analysis of Components of Investment Performance An Empirical Study of Mutual Funds in India was done by Dr. S. Anand & Dr. V Murugaiah in Goa Institute of Management,Goa (2003). The purpose of this study is to apply the measurement tools of modern portfolio theory to the performance of mutual funds. The study aims to examine the degree of correlation that exists between fund and market return, to understand the impact of fund specific characteristics on performance,to evaluate the diversification and selectivity skills of fund mangers. The study concluded on the basis of overall analysis in can be inferred here that the additional return on sampled schemes and the market over risk free return was significantly low during the study period. The study covers the period between April 1999 and March 2003 This indicates that the majority of schemes were showed underperformance in comparison with risk free return. The research Performance of Indian Equity Mutual Funds,Their Style Benchmarks An Empirical Exploration is done by Soumya Guha Deb, Prof. Ashok Banerjee,Prof. BB Chakrabarti in IIM,Calcutta(2005). The research aims to do a style analysis using Sharpe s RBSA approach, for Indian equity mutual funds and to perform a return based style analysis of equity mutual funds in India and analyzed their relative performance with respect to style benchmarks. The analysis shows that Indian equity mutual fund managers have not been able to beat their style benchmarks on the average. It also shows that although all the funds in our sample are equity funds, the fixed income asset classes have come out important components of their style exposures, may be due to sticky returns of their component securities. The most important component of their style exposures are the mid cap stocks. This may indicate actual investment in those stocks, or in some other stocks that behaved like the mid cap index. The research Mutual Fund Portfolio Creation Using Industry Concentration is done by Mohit Gupta, Navdeep Agarwal in ICFAI University (2009) There is very little research on the construction of mutual fund portfolio. The present study seeks to fill this gap. The objective of the research is to construct the portfolio using uses the cluster method, taking industry concentration as a variable and to compare the performance of two types of portfolios with selected benchmarks, selected according to the prevalent modes of mutual fund purchase Results are found to be encouraging, as far as risk mitigation is concerned. This study also expected to help in the construction of funds.

8 98 RESEARCH GAP Based on the literature study it is found that so far some researchs deal with statistical tools or quantitative tools to analyze the performance of the mutual fund. All research will use one or two methods to compare the mutual funds of one or two schemes only. Some of the research focused only on particular fund and tells that funds advantage and disadvantage. No research have focused on comparing the similar type of open ended schemes in various banks. Hence this research has been taken to fill the gap to compare selected two schemes and four banks by using of different statistical and ratio analysis. ANALYSIS - 1 PERFORMANCE ANALYSIS BASED ON STATISTICS PARAMETERS EQUITY DIVERSIFIED SCHEMES Name of the Fund Beta(β) Alpha ( ) Standard Deviation(σ) SBI Magnum Equity Fund Canara Robeco Equity Diversified HDFC Equity Fund ICICI Prudential Growth Plan INFERENCE All the funds are having beta less than one during the last one year, which shows they are less risky compared to their benchmark index during this period.out of this four funds ICICI Prudential Growth Scheme comes out to be the most aggressive with having beta of and SBI Magnum Equity Fund is the least aggressive (beta of 0.679).All the funds are studied ICICI having negative Alpha.The riskiest fund during the period is SBI Magnum Equity Fund having standard deviation of and the least risky fund is HDFC Equity Fund which is having standard deviation of

9 99 PERFORMANCE ANALYSIS BASED ON STATISTICS PARAMETERS Name of the Fund EQUITY MID-CAP SCHEMES Beta(β) Alpha ( ) Standard Deviation(σ) CanaraRobeco Emerging Equities- Growth SBI Magnum Emerging Business- Growth HDFC Capital Builder-Growth ICICI Prudential Emerging S.T.A.R. - Growth INFERENCE All the funds are having beta less than one during the last one year, which shows they are less risky compared to their benchmark index during this period. Out of this four funds HDFC Capital Builder fund(g) comes out to be the most aggressive with having beta of and Canara Robecco Emerging Equities(G) is the least aggressive (beta of ) All the funds are having negative Alpha. The riskiest fund during the period is ICICI Prudential Emerging S.T.A.R fund(g) having standard deviation of and the least risky fund is HDFC Capital Builder Fund (G) which is having standard deviation of For Canara Robeco Emerging Equities- Growth Fund, the 52 week high NAV is (on 02-Jun-08) and 52 week low NAV is 6.75 (on 12-Mar-09). For SBI Magnum Emerging Business- Growth Fund, the 52 week high NAV is (on 02-Jun-08) and 52 week low NAV is 11.5 (on 09-Mar-09). For ICICI Pru Emerging S.T.A.R Growth Fund - the 52 week high NAV is 29.9 (on 02-Jun-08) and 52 week low NAV is (on 09-Mar-09). For

10 100 HDFC Capital Builder - Growth Fund - the 52 week high NAV is (on 02-Jun-08) and 52 week low NAV is (on 09-Mar-09). ANALYSIS - 2 PERFORMANCE ANALYSIS BASED ON RATIO ANALYSIS AND RANKING EQUITY DIVERSIFIED SCHEMES TREYNOR RATIO COMPARISON Scheme Name Treynor Ratio Rank Canara Robeco Equity Diversified HDFC Equity Fund ICICI Prudential Growth Plan SBI Magnum Equity Fund MIDCAP SCHEMES TREYNOR RATIO COMPARISON Scheme Name Treynor Rank Canara Robeco Emerging Equities HDFC Capital Builder ICICI Pru Emerging S.T.A.R SBI Magnum Emerging Business INFERENCE As Treynor Ratio represents mutual fund's excess return to its standard deviation high Treynor ratio indicates more attractive fund. All the Ratio for the schemes compare are low, they are relatively compared and ranked accordingly HDFC offered HDFC Capital Builder schemes has a higher Treynor s ratio & expected to perform well among the other Equity Mid Cap Schemes Canara Bank sponsored Canara Robeco Equity Diversified has a higher Treynor s ratio & expected to perform well among the other Equity Diversified Schemes.

11 101 Equity Diversified Schemes Sharpe Ratio Comparison Scheme Name Sharpe Ratio Rank Canara Robeco Equity Diversified HDFC Equity Fund ICICI Prudential Growth Plan SBI Magnum Equity Fund Midcap Schemes Sharpe Ratio Comparison Scheme Name Sharpe Ratio Rank Canara Robeco Emerging Equities HDFC Capital Builder ICICI Pru Emerging S.T.A.R SBI Magnum Emerging Business INFERENCE As Sharpe Ratio represents mutual fund's excess return to its standard deviation high Sharpe ratio indicates more attractive fund. All the Ratio for the schemes compare are low, they are relatively compared and ranked accordingly HDFC offered HDFC Capital Builder schemes has a higher Sharpe s ratio & expected to perform well among the other Equity Mid Cap Schemes Canara Bank sponsored Canara Robeco Equity Diversified has a higher Sharpe s ratio & expected to perform well among the other Equity Diversified Schemes

12 102 Midcap Schemes Information Ratio Comparison Scheme Name Information Ratio Rank Canara Robeco Emerging Equities HDFC Capital Builder ICICI Pru Emerging S.T.A.R SBI Magnum Emerging Business Equity Diversified Schemes Information Ratio Comparison Scheme Name Information Ratio Rank Canara Robeco Equity Diversified HDFC Equity Fund ICICI Prudential Growth Plan SBI Magnum Equity Fund INFERENCE A high information ratio means a manager can achieve higher returns more efficiently than one. All the ratio in the compared schemes are negative. Relatively HDFC Capital Builder scheme has a higher Information ratio and is expected to achieve higher returns compared to the other schemes. Canara Bank sponsored Canara Robeco Equity Diversified has higher Information ratio & expected to performs well among the other Equity Diversified Schemes

13 103 COMPARISON AND RANKING OF MUTUAL FUND BASED ON VARIANCE AND STANDARD DEVIATION Midcap Schemes Variance and Standard Deviation Comparison Fund Name Variance Standard deviation Rank Canara Robeco Emerging Equities- Growth SBI Magnum Emerging Business- Growth HDFC Capital Builder-Growth ICICI Prudential Emerging S.T.A.R Equity Diversified Schemes Variance and Standard Deviation Comparison Fund Name Variance Standard deviation Rank Canara Robeco Equity Diversified HDFC Equity Fund ICICI Prudential Growth Plan SBI Magnum Equity Fund INFERENCE As standard deviation represents risk involved in the mutual fund, fund with low standard deviation is preferred when the investor is more concern on their investment. SBI Sponsered SBI Magnum Emerging Business- Growth scheme has a lower Variance and Standard deviation and is expected to be less risky among the mid cap schemes. HDFC offered HDFC Equity Fund scheme has a lower Variance and Standard deviation and is expected to be less risky among the Equity diversified schemes.

14 104 COMPARISON AND RANKING OF MUTUAL FUND BASED ON JENSONS ALPHA Midcap Schemes Jenson Alpha Comparison Scheme Name Jenson Alpha Rank Canara Robeco Emerging Equities HDFC Capital Builder ICICI Pru Emerging S.T.A.R SBI Emerging Business Magnum Equity Diversified Schemes Jenson Alpha Comparison Scheme Name Jenson Alpha Rank Canara Robeco Equity Diversified HDFC Equity Fund ICICI Prudential Growth Plan SBI Magnum Equity Fund INFERENCE All the ratio in the compared schemes are negative and few have positive alpha HDFC offered HDFC Capital Builder has the lowest negative Alpha value of implies that the fund return has underperformed the benchmark index by % over the last one year. Canara Bank offered Canara Robeco Equity Diversified has the positive Alpha value of implies that the fund return has over performed the benchmark index by 0.060% over the last one year.

15 105 CONCLUSIONS This study also creates awareness among the investor community thereby before choosing the mutual fund scheme, the investor should undergo fact sheet thoroughly and he has to choose the best one. Among the Open ended Midcap schemes, HDFC Capital Builder (G) is the preferred and recommended one for the investors based on the past performance analysis using Treynors, Sharpe, and Information ratio, Alpha index. And Among the Open ended Equity Diversified schemes, Canara Robeco Equity Diversified (G), is the preferred and recommended one for the investors based on the past performance analysis using Treynors, Sharpe, and Information ratio. REFERENCES Krishnan, M.A., 1999, Moving into growth mode, The Hindu Survey of Indian Industry, Kulshreshta, C.M., 1994, Mastering Mutual Funds, Vision Books, New Delhi. Madhusudan V. Jambodekar, 1996, Marketing Strategies of Mutual Funds Current Practices and Future Directions, Working Paper, UTI IIMB Centre for CapitalMarkets Education and Research, Bangalore. Raja Rajan V., 1997, Chennai Investor is conservative, Business Line, Feb Raja Rajan, 1997, Investment size based segmentation of individual investors, Management Researcher, 3 (3 & 4), Raja Rajan, 1998, Stages in life cycle and investment pattern, The Indian Journal of Commerce, 51 (2 & 3), Sadhak, H., 1991, The alternate saving media, The Economic Times, April 30, 9. Samir K. Barua et al., 1991, Master Shares : A bonanza for large Investors, Vikalpa, Vol.16, No.1 (Jan-Mar) SEBI NCAER, 2000, Survey of Indian Investors, SEBI, Mumbai. Shankar, V., 1996, Retailing Mutual Funds : A consumer product model, The Hindu, July 24, 26. Shanmugham, R., 2000, Factors Influencing Investment Decisions, Indian Capital Markets Trends and Dimensions (ed.), Tata McGraw-Hill Publishing Company Limited, New Delhi, Sharma C. Lall, 1991, Mutual Funds How to keep them on Right Track, Yojana, Vol.35, No.23, Dec

16 106 Sujit Sikidar and Amrit Pal Singh, 1996, Financial Services : Investment in Equity and Mutual Funds A Behavioural Study, in Bhatia B.S., and Batra G.S., ed., Management of Financial Services, Deep and Deep Publications, New Delhi, Chapter 10, Syama Sundar, P.V., 1998, Growth Prospects of Mutual Funds and Investor perception with special reference to Kothari Pioneer Mutual Fund, Research Report, Sri Srinivas Vidya Parishad, Andhra University, Visakhapatnam. Thaler, R.D., Kahneman, and Knetsch J, 1992, The Endowment Effect, loss aversion and status quo bias, in R. Thaler, ed., The Winner s Curse : Paradoxes and Anamolies of Economic Life, The Free Press, New York. Websites