The Indian Mutual Fund Industry

Transcription

1 The Indian Mutual Fund Industry

2 Also by G. V. Satya Sekhar BUSINESS POLICY AND STRATEGIC MANAGEMENT MANAGEMENT INFORMATION SYSTEMS PERFORMANCE APPRAISAL OF MUTUAL FUNDS IN INDIA STRATEGIC FINANCIAL MANAGEMENT WORKING CAPITAL MANAGEMENT

3 The Indian Mutual Fund Industry A Comparative Analysis of Public vs Private Sector Performance G. V. Satya Sekhar Assistant Professor, GITAM University, India

4 G. V. Satya Sekhar 2014 Softcover reprint of the hardcover 1st edition All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6 10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act First published 2014 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number , of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin s Press LLC, 175 Fifth Avenue, New York, NY Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN ISBN (ebook) DOI / This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Sekhar, G. V. Satya. The Indian mutual fund industry : a comparative analysis of public vs private sector performance / G. V. Satya Sekhar, Assistant Professor, GITAM University, India. pages cm Summary: Mutual funds are an emerging and popular investment option. They were established to pool the resources of small investors and capital markets to aid industrialization. The mutual fund industry imparts formal identity, provides access to the payments system as well as to a savings safety net. More recently, the Indian government has focussed on establishing the basic right of every person to have access to affordable basic financial services offered by banking and non-banking companies. Dr. Sekhar presents an overview of investment patterns for both public and private sector mutual funds, and analyses the performance of selected schemes using various measures of risk. He traces the trend in growth of mutual funds and the changes in regulatory measures of the mutual fund industry in India. He examines the factors influencing the resource mobilization patterns of mutual funds during the post-liberalization period and makes projections up to He examines! the investment behaviour of mutual funds and evaluates the performance of various schemes of mutual funds by employing Sharpe, Treynor and Jenson models. He also suggests suitable measures for the strengthening of mutual funds in India. The book offers comprehensive knowledge on the mutual fund industry in India and provides ready-made practical information for investors. Provided by publisher. 1. Mutual funds India. 2. Financial services industry India. I. Title. HG S ' dc Typeset by MPS Limited, Chennai, India.

5 Contents List of Figures, Tables and Graphs Preface List of Abbreviations and Acronyms x xv xx 1 Introduction Prologue Need for the study Objectives of the study Hypotheses Scope of the study Data analysis techniques Coverage of the study Plan of the study Genesis of global mutual funds The arrival of the modern fund Progress of the global mutual fund industry Global trends in open-ended mutual funds Genesis of Indian mutual fund industry First phase ( ) Composition of UTI assets Second phase ( ) Third phase ( ) Fourth phase (since February 2003) Trends in assets under management ( ) Role of Securities Exchange Board of India (SEBI) Restrictions of business activities Major recommendations of the Dave Committee SEBI guidelines during SEBI guidelines, issued on 8 April Circulars issued by SEBI during Role of Association of Mutual Funds in India (AMFI) Objectives of AMFI AMFI guidelines and norms for intermediaries (AGNI) 37 2 Review of Literature Performance evaluation methods Modelling dimensions for performance evaluation Jensen model 49 v

6 vi Contents Fama model Treynor and Mazuy model Statman model Choi model Elango model Chang, Hung and Lee model MM approach Fund selection behaviour/investors behaviour Other relevant studies 56 3 Trends in Resource Mobilization Introduction Significance of resource mobilization India s place Overview of resource mobilization in India Significance of scheme-wise analysis Purchases and sales for various schemes Trends in resource mobilization Gross resource mobilization Redemption and repurchases Net flows Resource mobilization and major banks and financial institutions Bank-sponsored institutions FI-sponsored institutions Factors influencing gross resources mobilization Dependent variables in different models Reasons for considering independent variables for all three models Methodology Regression model of private sector mutual funds Regression model of public sector (other than UTI) mutual funds Regression model of UTI mutual funds Regression equations (after considering independent variables X2 to X8) Impact of independent variables Findings and conclusions Findings Conclusion Investment and Investors Analysis Introduction Theoretical background SEBI guidelines on investment patterns of mutual funds Restrictions on investments 108

7 Contents vii 4.3 Instruments of investment Investment mix Investment patterns during Classification of investments by AMFI Analysis of investments during Investments in Investments in Classification of investors in mutual funds Corporates or corporate investors Banks and financial institutions (or institutional investors) Foreign institutional investors (FIIs) High net worth individuals (HNI) Retail investors Mutual fund industry unit holding pattern ( ) Unit holding pattern in Unit holding pattern in Scheme-wise analysis of investors composition Liquid/money market funds Gilt funds (funds investing in government securities) Debt-oriented funds Equity-oriented funds Balanced funds Gold exchange-traded funds Exchange-traded funds (other than gold) Fund of funds (investing overseas) Analysis of investor groups portfolios Correlation between investor portfolios Testing of significance Unit holding pattern Findings and conclusion Findings Conclusion Performance of Mutual Funds Introduction Comparison between public sector and private sector Public sector Private sector Comparative analysis Increasing role of private sector during Leaders and laggards: public vs private sector 134

8 viii Contents Number of live schemes by Leaders Laggards Risk and return analysis Sample size Analysis of peer group consolidated results Analysis of performance Balanced fund schemes Hypothesis test Equity schemes Hypothesis test Floating rate income schemes Hypothesis test Gilt long term Hypothesis test Gilt short term Hypothesis test Income fund Hypothesis test Liquid funds Hypothesis test Monthly income plan (MIP) Hypothesis test Sector funds FMCG Hypothesis test Sector funds Pharma Hypothesis test Sector funds Infotech Hypothesis test Short-term income scheme Hypothesis test Tax scheme Hypothesis test Findings and conclusion Findings Conclusion Investors Behaviour: Survey Findings Introduction Methodology Significance test Demographic profile of the respondents Analysis of responses 198

9 Contents ix Awareness about mutual funds Investment objectives and goals Returns from investments of mutual funds Investment decision Conclusion 215 Appendices 216 Chapter 1 Appendix 1 Different mutual fund options 216 Appendix 2 Global investment company total net assets by type billions of dollars, year-end, Chapter 3 Appendix 1 List of top 100 BSE companies 219 Appendix 2 BSE 100 Index Constituent Stocks 223 Chapter 4 Appendix 1 Overview of investment by Indian mutual funds (31 December 2009) 226 Appendix 2 Classification of Investments by Mutual funds 228 Appendix 3 Asset under management and folios Category wise Aggregate as on 30 September Chapter 5 Appendix List of the asset management companies 232 Notes 233 Glossary 240 Bibliography 264 Subject Index 271 Author Index 273

10 List of Figures, Tables and Graphs Figure 1.1 Development of global mutual funds for Tables 1.1 The leading investment bankers of mutual funds at i nternational level during The leading investment bankers of mutual funds at i nternational level during Mutual funds abroad on 30 September Sectoral view of funds in the US financial markets, (in billion US$) Assets of open-ended investment companies US and non-us during (in million US$) Open-ended mutual funds in a few select countries during (in million US$) Ratio of assets of open-ended mutual funds to GDP in a few elect countries, (percentage) Global mutual funds trends number of funds and projections for Global mutual fund trends and projections for 2020 (in billion US$) Composition of UTI assets during Mobilization of resources by mutual funds (in crores (Rs.)) Cumulative savings mobilized by financial institutions during Mobilization of resources by mutual funds (in crores (Rs.)) Mobilization of resources by mutual funds (in crores (Rs.)) Assets under management during (in crores (Rs.)) Circulars and guidelines issued by AMFI 37 x

11 List of Figures, Tables and Graphs xi 2.1 Overview of different measures Trends and projections for global net resources mobilized by mutual funds (in million US$) Scheme-wise resource mobilization by mutual funds during a Scheme-wise resource mobilization by mutual funds Trends in resource mobilization by mutual funds (in crores (Rs.)) Net resources mobilized by bank-sponosred and FI-sponsored mutual funds (rupees in billion) Basic data for private sector mutual funds Regression results using various equations for private sector mutual funds Summary of various regression equations private sector mutual funds Optimum model for private sector mutual funds Correlation coefficients among the variables Basic data for public sector (other than UTI) mutual funds Regression results using various equations for public sector (other than UTI) mutual funds Summary of various regression equations public sector mutual funds (other than UTI) Optimum regression model Correlation coefficients among the variables Basic data for UTI mutual funds Regression results using various equations for UTI mutual funds Summary of various regression equations UTI Optimum Model Correlation coefficients among the variables Investment pattern of mutual funds security wise (in crores (Rs.)) Fund category-wise classification during Unit holding pattern of mutual fund industry as on 31 March Unit holding pattern of private sector mutual funds as on 31 March

12 xii List of Figures, Tables and Graphs 4.5 Unit holding pattern of public sector mutual funds (other than UTI MF) as on 31 March Unit holding pattern of UTI mutual fund as on 31 March Unit holding pattern of mutual fund industry as on 31 March Unit holding pattern of private sector mutual funds as on 31 March Unit holding pattern of public sector mutual funds (including UTI MF) as on 31 March a Unit holding pattern of mutual funds Liquid/money market schemes Gilt funds (funds investing in government securities) Debt-oriented funds Equity-oriented funds Balanced funds Gold exchange-traded funds Exchange-traded funds (other than gold) Fund of funds (investing overseas) Analysis of investor groups portfolios assets under management a Analysis of investor groups number of portfolios Correlation of investor groups portfolios (31 March 2009) Results of t-test (31 March 2009) Trends in AUM of public sector mutual funds in India during Trends in AUM of private sector mutual funds in India in Average annual growth rate in AUM during April 2003 February Public vs private sector AUM during April 2003 February Status of mutual funds for the period April October 2013 (in crores (Rs.)) Increasing role of private sector during 1994 and Comparison of different mutual funds during Number of live schemes of different organizations 136

13 List of Figures, Tables and Graphs xiii 5.9 Leaders during Leaders during Leaders in Leaders as on 28 April Laggards in Laggards in Laggards in Laggards as on 28 April a Overview of different measures Particulars of selected sample schemes Performance evaluation of all India mutual fund schemes by December 2008 (peer group averages) Sharpe analysis Treynor analysis Jensen analysis CAGR analysis Correlation of fund movement (r 2 value) analysis Intensity of risk (standard deviation) analysis Beta analysis Balanced fund Equity schemes Floating rate income schemes Gilt long term Gilt short term Income fund Liquid funds MIP Sector funds FMCG Sector funds Pharma Sector funds Infotech Short-term income scheme Tax scheme Demographic profile of the respondents Easy availability of information 199

14 xiv List of Figures, Tables and Graphs 6.3 Dealing in mutual funds is easy to understand Main objective of investing in mutual fund Expected tenure for withdrawals of income from proposed investment Expected period within which you will reach your financial goal Return from private sector mutual funds is low Opinion about returns on investment (percent) Private sector mutual fund is a better choice Public sector (other than UTI): a better choice UTI mutual funds: a better choice Analysis of past investment of investors (percent) Analysis of proposed investments (percent) Investing in mutual funds is too risky Motivational forces for investing in mutual funds (percent) Analysis of investors attitude towards mutual fund organization: public vs private (percent) 214 Graphs 5.1 Trends in Simple Index public vs private sector Trends in Simple Index private and public sector Average annual growth rate in AUM during April 2003 February

15 Preface The concept of mutual funds has always been conceived as pooling the resources of small investors and deploying the same in the capital markets to help industrialization through participation in the equity and debt instruments. This study is aimed at examining past trends and future projections besides analysing risk and return for select schemes of mutual funds in the private and public sector in India. Chapter 1 deals with the introduction, origin and growth of mutual funds in India during and the need for the study. This chapter is intended to trace the historical background of global mutual funds in general and Indian mutual funds in particular. Apart from this, an analysis of trends in Assets under Management during relating to the private sector and public sector is presented. Chapter 2 is allotted to the review of literature relating to performance evaluation of mutual funds. In India, there were a few studies on mutual funds, which have a complete scientific analysis, primarily due to the comparatively short period of existence of mutual funds. However, a rigorous scientific research has taken place in this subject in other countries. Besides this, with the invention of networking technology and the World Wide Web, we can now obtain a lot of information through different websites or portals such as mutualfundindia.com. This chapter focuses on a review of some select studies relevant on mutual funding systems in India and abroad. The following areas are identified as crucial considerations, while doing a review of literature, for further research on mutual funds. 1. Size, structure, regulation and competition among various schemes offered by private and public sector mutual fund organizations. 2. Inter-relation between stock market volatility and resource mobilization by private sector and public sector mutual funds. 3. Investment pattern, investor composition and unit holding pattern. 4. Portfolio structure, portfolio turnover and operating performance. 5. Valuation and pricing of mutual fund units and reasons for discounts on mutual fund units. 6. Comprehensive study of performance evaluation of various schemes using risk measures like Sharpe, Treynor and Jensen. 7. Performance evaluation of the ability of mutual fund managers in order to achieve superior returns. xv

16 xvi Preface Chapter 3 sets out to examine the patterns and trends in resource mobilization by the mutual fund industry during the post-liberalization period (i.e ) in India and aims at future projections and place of India in the global context. The second objective of this chapter is to assess the impact of various factors influencing mutual funds in private sector and public sector. Regression equation technique is used to estimate the impact adopting the multiple regression technique for private sector, public sector and UTI separately. The main objective of this chapter is to find the impact of factors influencing gross resource mobilization by various sectors. This is estimated by deriving different regression equations for private sector, UTI and public sector (other than UTI). The data are taken from the handbook on Indian stock markets published by SEBI Dependent variable for different models Model-1: Dependent variable: Gross resource mobilized by private sector mutual funds. Model-2: Dependent variable: Gross resource mobilized by public sector mutual funds (other than UTI). Model-3: Dependent variable: Gross resource mobilized by the Unit Trust of India. Reasons for considering independent variables for all three models X1: Turnover Ratio of BSE: Higher turnover leads to decrease in gross mobilization by mutual fund organization. X2: Volatility Index Value of BSE Sensex: Higher volatility indicates more fluctuations in the stock market, as it indicates standard deviation of the sensex transaction. X3: Volatility Index Value of BSE 100 Index: This indicates standard deviation of BSE 100 Index. Thus major 100 companies will influence the resource mobilization patterns among investors. X4: FII Investment (Rs. Crores): Foreign institutional investors also influence the resource mobilization by the mutual fund organization. Hence, increase or decrease in FII Investments is expected to have significant impact. X5: Household savings percent of insurance funds: This represents proportion of savings in insurance funds; this is expected to influence mobilization of private and public sector funds. X6: Household savings percent in public sector other than UTI mutual funds. The increase in saving percent of investment in public sector other than UTI will influence private sector and UTI mutual funds.

17 Preface xvii X7: Household savings in shares and debentures: The changing attitude of investors towards shares and debentures is expected to have significant impact on their interest towards investment in mutual funds. X8: Household savings in bank deposits: Investors attitude to have more liquid money in bank deposits is expected to have direct and significant impact on gross resource mobilization. Methodology We have selected eight independent variables which can substantially influence the dependent variable, that is, gross resource mobilization by private sector, public sector (other than UTI) and Unit Trust of India. Different regression results are considered for testing significance, for instance, equations for X1; X1 and X2; X1 to X3; X1 to X4; X1 to X5; X1 to X6; X1 to X7 and X2 to X8; respectively. Finally, the equation having highest R 2 value is considered as the best model. This exercise is conducted separately for three models. Regression Equations (after considering independent variables X2 to X8): Private Sector: Y = X X X X X X X8 Public Sector (other than UTI): Y = X X X X X X X8 Unit Trust of India Y = X X X X X X X8 Chapter 4 examines the trends in investments by mutual fund organizations in India across various schemes and financial instruments. The changes in investment pattern during the post-liberalization period, that is, are also examined. The data indicate unexpected growth in bank deposits in case of private sector as well as public sector by mutual fund investment companies during the past 16 years. Average annual growth rate is very high for the CD/CPs and bank fixed deposits, that is, 1280% and 6720% of average annual growth rate. Chapter 5 is intended to make an overview and examine performance of all-india mutual fund schemes which are categorized into three groups, that is, (i) private sector, (ii) public sector (other than UTI) and (iii) Unit Trust of India. This information is categorized as (a) fund size, (b) compounded

18 xviii Preface annual growth rate (CAGR) for one year, two years and three years, (c) standard deviation, (d) R- Square, (e) Beta, (f) Sharpe, (g) Treynor and (h) Jensen. This section also presents the results that are classified on the basis of nature of schemes like (i) balanced fund, (ii) equity, (iii) floating rate income schemes, (iv) gilt long term, (v) gilt short term, (vi) income fund, (vii) liquid fund, (viii) MIP, (ix) sector fund FMCG, (x) sector fund Pharma, (xi) sector fund Infotech, (xii) short-term income scheme and (xiii) tax schemes. Analysis of peer group consolidated results: The test of hypothesis proved for six groups, viz., equity schemes, gilt long term, gilt short term, liquid funds, short-term income schemes and tax schemes. The test of hypothesis reveals that the results of seven groups are disproved, viz., balanced fund, floating rate scheme, income fund, monthly income plan, sector funds FMCG, Pharma and Infotech groups. Findings: The important risk measures considered for the study are Sharpe, Treynor, Jensen, R-Square, Beta, Standard Deviation and CAGR. They are further classified into three categories: (i) low performing, (ii) medium performing and (iii) better performing. The following are the major findings in this study of 311 schemes, of which 260 schemes are in private sector, 35 schemes in public sector (other than UTI) and 16 schemes in UTI. Sharpe Analysis: 114 schemes are low performing in private sector. In case of public sector 17 schemes and in case of Unit Trust of India 10 schemes have shown poor performance because their Sharpe measure is less than zero. It is interesting to note that liquid fund and floating rate income schemes in all the three sectors have shown better performance than other types of funds. Low performance has been observed in case of equity schemes and monthly income schemes offered by all the three sectors. Treynor Analysis: 111 schemes are low performing in private sector. In case of public sector 14 schemes and in case of Unit Trust of India 10 schemes have shown poor performance because their Treynor measure is less than zero. It is interesting to note that floating rate income schemes, gilt long term and short term in all the three sectors have shown better performance than other types of funds. Low performance has been observed in case of balanced schemes and equity schemes offered by all the three sectors. Jensen Analysis: 110 schemes are low performing in private sector. In case of public sector 20 schemes and in case of Unit Trust of India 7 schemes have shown better performance because their Treynor measure is less than zero. It is interesting to note that income fund and liquid fund schemes relating to all the three sectors have shown medium performance than other types of funds. Better performance has been observed in case of floating rate income schemes and equity schemes offered by all the three sectors.

19 Preface xix CAGR analysis: 52 schemes have negative CAGR in private sector. In case of public sector six schemes and in case of Unit Trust of India seven schemes have shown negative CAGR for a three-year period. It is observed that the various schemes of floating rate income schemes, gilt short term, gilt long term and liquid funds have shown constant returns in all the three sectors. A positive CAGR for a three-year period is observed. Better performance has been observed in case of floating rate income schemes and equity schemes offered by all the three sectors. Correlation of a fund movement (R 2 ): 110 schemes have shown a higher value of R 2 (> 0.61) in private sector. In case of public sector 12 schemes and in case of Unit Trust of India 10 schemes have shown a high risk measure. Medium risk was observed for 55 schemes in private sector, four schemes in public sector (other than UTI) and for schemes of UTI. It is observed that the various schemes of equity schemes, balanced schemes and monthly income plan in the private sector have shown higher rate of risk. A less rate of risk is observed in case of 19 schemes out of 35 schemes observed in the public sector (other than UTI). Standard deviation-analysis: 117 schemes have shown a lower value of SD (< 0.50) in private sector. In case of public sector 16 schemes and in case of Unit Trust of India one scheme have the lowest rate of standard deviation. Medium risk was observed for 53 schemes in private sector, 8 schemes in public sector (other than UTI) and 2 schemes of UTI. It is observed that the various schemes of equity schemes, balanced schemes and monthly income plan in the private sector have shown higher rate of risk. Beta analysis: 223 schemes have shown a lower value of BETA (< 1) in private sector. In case of public sector 29 schemes and in case of Unit Trust of India all the 16 schemes have shown lowest beta value. It is observed that the 13 schemes of income fund, 9 schemes of monthly income schemes in the private sector have shown higher rate of risk (with beta >1). A higher value of beta indicates higher risk of the scheme and vice-versa. The results indicate that only a few schemes have higher risk rate, that is, beta > 1. For instance, 37 schemes in private sector and 6 schemes in public sector (other than UTI) have shown high risk rate with beta >1. In Chapter 6, the survey reveals that although investors are disinterested in risky investment, they are even less enthusiastic about mutual funds being able to provide a superior alternative to their own investment judgement. It is interesting to note that most of the investors are interested to have short-term investment rather than long term. Very few of them are interested towards speculation through mutual funds. The survey also found that self-motivation towards decision-making for investing in mutual funds is dominating all other motivating factors like parents, spouse, children, friends, agents and advertisement through media.

20 List of Abbreviations and Acronyms AAGR AMC AMFI ANOVA AUM BOIMF BSE CAGR CAPM CD CP DEA EAFEI ELSS FDI FEMA FERA FII FIPB FMCG GDR GIC HDFC HNI HSBC ICI ICICI ICRA IDBI IDFC LIC MFs MIP NAV NIFTY NNA NPA NSE NYSE Average Annual Growth Rate Asset Management Company Association of Mutual Funds in India Analysis of Variance Assets under Management Bank of India Mutual Fund Bombay Stock Exchange Compounded Annual Growth Rate Capital Asset Pricing Model Certificates of Deposit Commercial Paper Data Envelopment Analysis Europe, Australia, Far East Index Equity Linked Savings Scheme Foreign Direct Investment Foreign Exchange Management Act Foreign Exchange Regulation Act Foreign Institutional Investor Foreign Investment Promotion Board Fast Moving Consumer Goods Global Deposit Receipt General Insurance Corporation of India Housing Development Finance Corporation High Net Worth Individual Hong Kong Shanghai Banking Corporation Investment Company Institute Industrial Credit Investment Corporation of India Institutional Credit Rating Agency Industrial Development Bank of India Industrial Development Finance Corporation Life Insurance Corporation of India Mutual Funds Monthly Income Plan Net Asset Value National Stock Exchange 50 Index Net New Assets Non-Performing Assets National Stock Exchange New York Stock Exchange xx

21 List of Abbreviations and Acronyms xxi PNBMF RBI REMF SAI SBI SCBs SEBI SID ULIP US 64 USD UTI UTIMF Punjab National Bank Mutual Fund Reserve Bank of India Real Estate Mutual Fund Statement of Additional Information State Bank of India Scheduled Commercial Banks Securities and Exchange Board of India Scheme Information Document Unit Linked Insurance Plan Unit Scheme 1964 of UTI United States Dollar Unit Trust of India Unit Trust of India Mutual Funds