CHAPTER 5 ANALYSIS OF RESULTS: PORTFOLIO PERFORMANCE

CHAPTER 5 ANALYSIS OF RESULTS: PORTFOLIO PERFORMANCE 5.1 INTRODUCTION The preceding chapter has discussed the empirical results pertaining to portfolio strategies of fund managers in terms of stock selection and market timing strategies. This chapter discusses the empirical results of portfolio performance of equity mutual funds in India during the period April 2007 to March 2010. This chapter seeks to address these research questions: (i) Do the equity mutual fund schemes outperform the relative benchmark indices? Do the mutual fund schemes offer superior risk-adjusted returns to the investors? Is the performance of equity mutual fund schemes consistent? Do the characteristics (asset size, market capitalisation, nature of sponsorship, objective) of the equity mutual fund schemes affect its performance? For better exposition, this chapter is sub-divided into three sections including the present one. Section 5.2 presents the risk-return characteristics of sample equity schemes. Section 5.3 discusses the measures of portfolio performance and the hypotheses that are put to test. The final section 5.4 summarises the chapter along with the conclusions. 5.2 RISK RETURN CHARACTERISTICS OF EQUITY MUTUAL FUNDS Risk and return are the two basic measures of portfolio performance. Mutual funds performance is subject to market risk. The fund managers assume risks and are expected to earn risk premium to commensurate with the level of risk 109

that the portfolio is exposed to. Equity funds invest a major part of their corpus in equity and equity related instruments. The composition of the fund may vary from scheme to scheme and the fund manager s outlook on various scrips. Equity investments are meant for a longer time horizon. They rank high on the risk-return matrix. Over the years, it has been a matter of debate among the analysts, researchers and academicians whether the equity mutual funds follow the scheme s objective or not. The prime objective of equity funds is to provide superior returns by assuming higher risk compared to the market portfolio. Higher risk is the result of aggressive portfolio management strategy that focus on including aggressive stocks in the fund s portfolio to take advantage of favourable market impact on the funds return. If the fund s portfolio is invested in aggressive stocks, the funds are likely to earn higher returns than the market returns when the market is rising and lower returns when the market is declining. In order to analyse the performance of equity funds relative to the market proxy, in terms of risk return characteristics, the sample funds are mapped in the risk return grid. Table 5.1 presents the classification of equity mutual fund schemes using BSE Sensex as a market proxy while Table 5.2 presents the classification of equity mutual fund schemes using S&P CNX Nifty as a market proxy. All the funds have been categorised into four groups based on the combination of four parameters i.e., fund returns, risk of the fund returns, market returns and risk of market returns. Each of the quadrants provides a comparative analysis of the performance of equity schemes vis-à-vis market portfolio in terms of risk-return characteristics. (i) High Risk-High Return Funds: This group includes all those schemes whose risk and returns are higher than the market. Nearly 3% of the schemes (7 schemes) are in this category when Sensex is used as a benchmark index. The percentage of schemes falling under this category increased to 4.5% (10 schemes) when their average daily returns and standard deviation are compared 110

with Nifty as a benchmark index. These funds have been able to provide the investors with the higher returns than the market returns in commensurate with the additional risk undertaken. (ii) High Risk-Low Return Funds: This group includes all those schemes which are riskier than the market index but provides a lower return as against the market portfolio. Nearly 5% of the schemes (11 schemes) are in this category when Sensex is used as a benchmark index. The percentage of schemes falling under this category increased to 6.1% (14 schemes) when their average daily returns and standard deviation are compared with Nifty as a benchmark index. These funds have been exposed to high risk than the market portfolio but failed to provide return higher than the market portfolio. (iii) Low Risk-High Return Funds: This group includes all those schemes which are less risky than the market portfolio but generates higher returns. It is evident from the Table 5.1 and 5.2 that majority of the sample schemes fall under this domain. It is quite interesting to note that these funds are subject to low risk as compared to market portfolio but however, able to generate higher return to the unit holders. 54% of the schemes (119 schemes) and 45% of the schemes (99 schemes) fall under this category when their performance is mapped with that of the performance of Sensex and Nifty respectively. (iv)low Risk-Low Return Funds: This group includes those schemes characterised by low risk and low return as against the market portfolio. Nearly 38% of the schemes (83 schemes) and 44% of the schemes (97 schemes) are in this category when Sensex and Nifty respectively are used as benchmark indices. These funds have failed to achieve the basic objective of generating higher returns by exposing to high risk portfolios. 111

RISK RETURN MATRIX (SENSEX) 112

RISK RETURN MATRIX (NIFTY) 113

The analysis of the Table 5.3 reveals that majority of the funds have been able to achieve high returns with low risk securities in the portfolio, followed by low risk and low return funds. The results support that the high returns may be attainable irrespective of the level of risk tolerance associated with the portfolio. The findings are consistent with the works of Fama (1992) 1 which presents the evidence that high returns may be achievable by portfolios having low risk. The findings are contrary to the basic axiom of high risk high return. Majority of the fund managers were forming portfolios of low risk securities that generate lower returns. Only few fund mangers were able to provide higher returns by investing in securities characterised by high risk, thus realising the objective of growth schemes. Table 5.3 Frequency of Sample Equity Mutual Funds for Different Risk-Return Characteristics Risk Return Characteristics BSE Sensex S&P CNX Nifty Number of Equity Funds Percentage Number of Equity Funds Percentage High Risk High Return Funds 07 3% 10 5% High Risk Low Return Funds Low Risk High Return Funds Low Risk Low Return Funds 11 5% 14 6% 119 54% 99 45% 83 38% 97 44% Total 220 100% 220 100% 114

5.3 MEASURES OF PORTFOLIO PERFORMANCE Several measures have been used in the literature to evaluate the performance of mutual funds on a risk-adjusted basis. In the present chapter, Sharpe s ratio, Treynor s ratio, Jensen s alpha and Information ratio are used. The performance is measured across four different factors as stated earlier to know whether any of these factors influences fund performance. A brief description of these models is presented in the subsequent sections along with their empirical results. The following hypotheses are being tested for the performance evaluation of Indian mutual funds: Hypothesis 2: Equity mutual fund schemes beat the performance of relevant benchmark portfolio. Hypothesis 3: Equity mutual fund schemes do offer superior risk adjusted returns. Besides, the following hypotheses across different characteristics are also tested: Hypothesis 5: Asset size of the equity mutual fund schemes has no impact on its performance. Hypothesis 6: Market capitalisation of the equity mutual fund schemes has no impact on its performance. Hypothesis 7: Ownership of the equity mutual fund schemes has no impact on its performance. Hypothesis 8: Objective of the equity mutual fund schemes has no impact on its performance. 115

5.3.1 Results of Sharpe s Ratio Sharpe s ratio measures the reward to variability ratio of mutual fund schemes. It quantifies the ability of the scheme in providing excess returns per unit of total risk as measured by the standard deviation of portfolio returns. Higher the Sharpe s ratio better is the scheme s performance and vice versa. The ability of the fund manager in beating the market portfolio can also be assessed by comparing the Sharpe s ratio of the scheme with that of market portfolio. In the subsequent sub sections, the portfolio performance of mutual fund schemes have been examined using Sharpe s ratio across the four different factors, namely asset size, market capitalisation, nature of ownership and objective of the scheme. The objective is to assess the impact of these categories on portfolio performance. 5.3.1.1 Asset Size of Mutual Fund : Analysis of Sharpe s Ratio The impact of asset size of mutual fund schemes on portfolio performance is examined in this sub section. The alternate hypothesis is that the asset size significantly affects risk adjusted performance of equity schemes. All the 220 equity mutual fund schemes have been grouped into three asset size classes, namely small size funds (net assets less than 100), medium size funds (net assets between 100 crore and 500 crore) and large size funds (net assets over 500 crore). Table 5.4 presents the descriptive statistics of Sharpe s ratio of equity mutual fund schemes (size wise). The results show satisfactory performance of asset size classes. Medium size funds have recorded highest mean Sharpe s ratio as against the other two asset classes. The maximum Sharpe s ratio is recorded by a 116

medium size fund (Birla SL India GenNext) followed by small size fund (Birla SL Buy India). The schemes under large size funds recorded a least mean Sharpe s ratio (0.0349), however, the maximum Sharpe s ratio stood at 0.0977. Table 5.4 Descriptive Statistics of Sharpe s Ratio of Equity : Asset Size Mutual Fund Mean Maximum Minimum Median Small Size Funds 0.0393 0.1863-0.0547 0.0427 Medium Size Funds 0.0424 0.2204-0.0460 0.0428 Large Size Funds 0.0349 0.0977-0.0220 0.0359 Table 5.5 shows the summary results of the number of equity mutual fund schemes showing positive Sharpe s ratio and the number of schemes outperforming the market portfolio. Table 5.5 Summary Results of Sharpe s Ratio of Equity : Asset Size Percentage of Outperforming Mutual Fund Showing Showing Market Portfolio Positive Positive Sensex Nifty Sharpe s Ratio Sharpe s Ratio Small Size Funds 86 78 91% 48 43 Medium Size Funds 63 55 87% 37 33 Large Size Funds 71 64 90% 35 29 TOTAL 220 197 90% 120 105 117

Performance of small size funds is comparatively better as against other asset classes. The relevant data contained in table 5.5 reveals that 91% of these schemes have recorded positive Sharpe s ratio indicating that the fund managers of these schemes were able to post better performance in terms of providing returns per unit of total risk. The schemes which have posted poor performance in terms of Sharpe s ratio under this asset class include JM HI FI ( -0.0752), Magnum IT (-0.0547), Birla SL New Millennium (-0.0172), HSBC Unique Opportunities (-0.0090), Principal Tax Saving ( -0.0068), Birla SL India Opportunities (-0.0020), Magnum Midcap ( -0.0010) and L&T Multicap ( - 0.0003). Table 5.5 also depicts the Sharpe s ratio of medium size mutual fund schemes. Of 63 medium size funds, 55 schemes have shown better performance in generating excess returns per unit of total risk. The poor performance is displayed by Principal Personal Tax saver (-0.0492), L&T Global Advantage (- 0.0460), JM Emerging Leaders ( -0.0334), ICICI Pru Technology ( -0.0131), Kotak Life Style (-0.0079), JM Basic (-0.0074), JM Financial Services Sector (- 0.0066) and ING Tax Savings (-0.0008) as evident from their negative Sharpe s ratios. Akin to small size funds, majority of the large size funds have recorded positive Sharpe s ratio. However, the performance in terms of providing excess returns per unit of total risk is comparatively lower than the small size funds. The top five performers in this category include IDFC Premier Equity-A, ICICI Pru Discovery-Inst - I, ING Dividend Yield, HDFC Top 200 and ICICI Pru Discovery Fund. 10% of these schemes were unable to provide excess returns per unit of standard deviation. These schemes include Birla SL Basic Industries (-0.0967), Fortis Future Leaders ( -0.0220), L&T Contra ( -0.0201), Fortis Opportunities ( -0.0192), Birla SL Dividend Yield Plus ( -0.0156), Taurus Discovery (-0.0036) and SBI One India (-0.0007). 118

This supports the alternate hypothesis that equity mutual fund schemes offer superior risk adjusted returns. Table 5.5 also presents the number of schemes that beats the market performance. More than 50% of the schemes across all asset sizes have outperformed the Sensex. Using Nifty as a market proxy, only 40% of the large size schemes have outperformed market portfolio, while nearly 50% of the schemes across the other two asset size classes have outperformed relative to the market portfolio suggesting that the investors of these schemes received adequate excess returns per unit of total risk. Thus, most of the mutual fund schemes fail to outperform the relevant benchmark portfolio. In this regard, the null hypothesis that the equity mutual fund schemes fail to beat the performance of relevant benchmark portfolio is accepted as against the alternate hypothesis. Further, it is also evident that the asset size of the equity schemes does not influence its performance. 5.3.1.2 Market Capitalisation of Mutual Fund : Analysis of Sharpe s Ratio In this sub section, the impact of market capitalisation on fund performance is examined. The alternate hypothesis is that the market capitalisation significantly influences risk adjusted performance of equity schemes. All the 220 equity mutual fund schemes have been grouped into three classes, namely small cap funds, mid cap funds and large cap funds. The descriptive statistics of Sharpe s ratio of equity mutual fund schemes classified on the basis of their market capitalisation are presented in Table 5.6. It 119

is observed that the schemes have posted satisfactory performance across different market capitalisation classes. Large cap funds have recorded highest mean Sharpe s ratio of 0.0392 as against the other two market capitalisation classes. The maximum Sharpe s ratio is recorded by a mid cap fund (Birla SL India GenNext) followed by large cap fund (Birla SL Buy India). The schemes under small cap funds recorded a least mean Sharpe s ratio (0.0283). Table 5.6 Descriptive Statistics of Sharpe s Ratio of Equity : Market Capitalisation Mutual Fund Mean Maximum Minimum Median Small Cap Funds 0.0283 0.0541-0.0074 0.0368 Mid Cap Funds 0.0388 0.2204-0.0547 0.0416 Large Cap Funds 0.0392 0.1863-0.0967 0.0400 Table 5.7 presents the summary results of number of equity mutual fund schemes showing positive Sharpe s ratio and the number of schemes outperforming the market portfolio. The analysis of table 5.7 reveals that the performance of mid cap and large cap funds is better compared to small cap funds. The data contained in table 5.7 shows that 90% of the mid cap and large cap mutual fund schemes have posted positive Sharpe s ratio. This shows that the fund managers of these schemes were able to provide the investors with better returns per unit of total risk. The schemes which have posted poor performance in terms of Sharpe s ratio under mid cap funds include Magnum IT ( -0.0547), Principal Personal Tax saver ( - 0.0492), JM Emerging Leaders ( -0.0334), L&T Contra ( -0.0201) and HSBC Unique Opportunities Fund (-0.0090); while in the large cap funds category, the poor performers are Birla SL Basic Industries ( -0.0967), JM HI FI(-0.0752), 120

L&T Global Advantage ( -0.0460), Fortis Future Leaders(-0.0220) and Fortis Opportunities Fund (-0.0192). Table 5.7 Summary Results of Sharpe s Ratio of Equity : Market Capitalisation Percentage of Outperforming Mutual Fund Showing Showing Market Portfolio Positive Positive Sensex Nifty Sharpe s Ratio Sharpe s Ratio Small Cap Funds 06 05 83% 02 02 Mid Cap Funds 88 79 90% 51 44 Large Cap Funds 126 113 90% 67 59 TOTAL 220 197 90% 120 105 It is inferred from the Table 5.7 that of the six small cap funds, five schemes have reported positive Sharpe s ratio. These schemes have shown better performance in generating excess returns per unit of total risk. It signals that these fund managers were able to provide better returns to mutual fund investors and were also able to generate returns above the market returns. The worst performance is displayed by JM Basic Fund (-0.0074). Table 5.7 also presents the number of schemes that outperformed the benchmark portfolios. 58% of the schemes under the mid cap fund category were able to beat the Sensex performance in terms of Sharpe s ratio. It indicates that the investors received adequate excess returns per unit of total risk. About 53% of large cap funds and 33% of small cap funds have outperformed the Sensex. 121

Using Nifty as a market proxy, about 50% of the mid cap funds and 47% of large cap funds have outperformed market portfolio, while only 33% of the schemes whose investments are mostly in small capitalisation companies were able to show better performance relative to the market performance. Thus, most of the mutual fund schemes fail to outperform the relevant benchmark portfolio. In this regard, the null hypothesis that the equity mutual fund schemes fail to beat the performance of relevant benchmark portfolio is accepted as against the alternate hypothesis. Further, it is evident that the market capitalisation of the equity schemes has influence on the fund performance. The equity schemes whose portfolio holdings were concentrated in mid cap stocks and large cap stocks have performed better. 5.3.1.3 Nature of Sponsorship of Mutual Fund : Analysis of Sharpe s Ratio The objective of this sub section is to assess the impact of sponsorship pattern on the risk adjusted performance of equity mutual fund schemes. The alternate hypothesis is that the ownership pattern significantly affects risk adjusted performance of equity schemes. All the 220 equity mutual fund schemes from 30 asset management companies have been grouped into four ownership classes i.e., UTI sponsored funds, public sector sponsored funds, private sector (Indian) sponsored funds and private sector (foreign) sponsored funds. Table 5.8 exhibits the descriptive statistics of Sharpe s ratio of equity mutual fund schemes classified on the basis of their sponsorship pattern. It is observed that the schemes across different sponsorship classes have fared better. UTI sponsored funds have recorded highest mean Sharpe s ratio of 0.0476 while the 122

least mean Sharpe s ratio is recorded by public sector sponsored funds. The maximum Sharpe s ratio is recorded by Birla SL India GenNext Fund, a private sector (Indian) sponsored fund followed by a UTI sponsored fund (UTI Banking Sector Fund). Except UTI funds, all equity schemes have posted minimum negative Sharpe s ratio. Table 5.8 Descriptive Statistics of Sharpe s Ratio of Equity : Nature of Sponsorship Mutual Fund Mean Maximum Minimum Median UTI Public Sector Private Sector (Indian) Private Sector (Foreign) 0.0476 0.0830 0.0178 0.0461 0.0305 0.0723-0.0547 0.0308 0.0421 0.2204-0.0967 0.0460 0.0312 0.0787-0.0492 0.0374 The summary results of number of equity mutual fund schemes across different sponsorship pattern showing positive Sharpe s ratio and the number of schemes outperforming the benchmark indices viz., Sensex and Nifty is presented in Table 5.9. The analysis of Table 5.9 reveals that all the sample equity schemes sponsored by UTI funds have produced positive Sharpe s ratio during the study period. Of the 18 schemes securing positive Sharpe s ratio, 12 schemes have outperformed Sensex and 11 schemes have outperformed Nifty benchmark. This supports that UTI funds have performed better in terms of providing superior risk adjusted returns. The schemes that outperformed both the benchmarks include UTI Banking Sector, UTI Opportunities, UTI Dividend Yield, UTI Master Value, UTI Equity, UTI Pharma & Healthcare, UTI Contra, UTI Master Share, UTI 123

MNC, UTI SUNDER and UTI Mid Cap Fund while UTI Infrastructure Fund has outperformed Sensex. Table 5.9 Summary Results of Sharpe s Ratio of Equity : Nature of Sponsorship Percentage of Outperforming Mutual Fund Showing Showing Market Portfolio Positive Sharpe s Ratio Positive Sharpe s Ratio Sensex Nifty UTI 18 18 100% 12 11 Public Sector 27 24 89% 09 08 Private Sector (Indian) 127 113 89% 75 70 Private Sector (Foreign) 48 42 88% 24 16 TOTAL 220 197 90% 120 105 In the case of funds sponsored by public sector companies and private sector (Indian) companies, it is amply clear from the data presented in table 5.9 that 89% of the sample equity schemes each from both the sponsors have posted positive Sharpe s ratio. The schemes under this category too have performed better. Nearly 88% of the private sector (foreign) sponsored funds have also fared better in securing positive Sharpe s index. However, the number of schemes beating the relevant benchmark indices ranges between 33%- 60% of the sample for all the ownership classes except UTI sponsored schemes. This indicates that the schemes performed better in terms of generating excess returns per unit of total risk but failed to beat the market portfolio. It is evident that the ownership pattern affects fund performance. 124

5.3.1.4 Objective of Mutual Fund : Analysis of Sharpe s Ratio Does the objective of the schemes affect the fund performance? This question is addressed in this sub-question using Sharpe s ratio. Based on objective of the schemes, all the 220 sample equity mutual fund schemes have been grouped into four categories viz., diversified funds (160), index funds (18), sector specific funds (15) and tax planning funds (27). Table 5.10 presents the descriptive statistics of Sharpe s ratio of equity mutual fund schemes classified based on their objectives. The results show satisfactory performance as these schemes were able to provide returns in excess of risk free rate of return as evident from the mean Sharpe s ratio. The diversified funds and index funds have posted higher mean Sharpe s ratio than the Sharpe s ratio of Sensex and the other two categories of sample equity schemes. Index funds have recorded highest mean Sharpe s ratio (0.0404). The maximum Sharpe s ratio is recorded by a diversified fund (Birla SL India GenNext) across all the categories while in the cluster of sector specific funds Reliance Pharma Fund has performed better among the peer schemes. The schemes under index funds category recorded a least mean Sharpe s ratio (0.0329). Table 5.10 Descriptive Statistics of Sharpe s Ratio of Equity : Objective of the Mutual Fund Mean Maximum Minimum Median Diversified Funds Index Funds Sector Funds Tax Planning Funds 0.0399 0.2204-0.0967 0.0437 0.0404 0.0828 0.0196 0.0390 0.0350 0.1172-0.0547 0.0286 0.0329 0.0925-0.0492 0.0358 125

Table 5.11 shows the summary results of number of equity mutual fund schemes showing positive Sharpe s ratio and the number of schemes outperforming the market portfolio. Table 5.11 Summary Results of Sharpe s Ratio of Equity : Objective of the Percentage of Outperforming Mutual Fund Showing Showing Market Portfolio Positive Positive Sensex Nifty Sharpe s Ratio Sharpe s Ratio Diversified Funds 160 144 90% 90 82 Index Funds 18 18 100% 11 06 Sector Funds 15 11 73% 07 07 Tax Planning Funds 27 24 89% 12 10 TOTAL 220 197 90% 120 105 The analysis of the table 5.11 reveals that the index funds have performed better as against other categories. The reason for this could be that the index fund manager follows passive strategy of tracking a benchmark portfolio. The relevant data contained in table 5.11 reveals that 100% of these schemes have recorded positive Sharpe s ratio indicating that the fund managers of these schemes were able to post better performance in terms of providing returns per unit of total risk. The top five performers under this category include Bank BeES (0.0828), Nifty Junior BeES (0.0574), HDFC Index-Sensex Plus (0.0496), ICICI Pru Index (0.0466) and UTI SUNDER Fund (0.0448). 126

Table 5.11 also depicts the Sharpe s ratio of diversified mutual fund schemes. Of 160 diversified funds, 90% of the schemes have shown better performance in generating excess returns per unit of total risk. The dismal performance is displayed by Birla SL Basic Industries ( -0.0967), JM HI FI ( -0.0752), L&T Global Advantage (-0.0460), JM Emerging Leaders (-0.0334), and Fortis Future Leaders (-0.0220).as evident from their negative Sharpe s ratios. Akin to diversified funds, majority of the tax planning funds have recorded positive Sharpe s ratio. However, the performance in terms of providing excess returns per unit of total risk is comparatively lower than the diversified funds. The top five performers in this category include Taurus Tax Shield (0.0925), Sahara Tax Gain (0.0689), Religare Tax Plan (0.0653), DSPBR Tax Saver (0.0611) and Franklin India Taxshield (0.0560). 11 % (3 schemes) of these schemes were unable to provide excess returns per unit of standard deviation. These schemes include Principal Personal Tax saver ( -0.0492), Principal Tax Saving (-0.0068) and ING Tax Savings (-0.0008). In case of sector specific funds, only 73% of the sample equity schemes were able to post positive Sharpe s ratio. The top five performers under this cluster include Reliance Pharma (0.1172), Reliance Banking (0.1111), UTI Banking Sector (0.0830), Franklin India Pharma (0.0733) and Magnum FMCG (0.0634). The number of schemes outperforming the benchmark portfolios varied across different categories as evident from table 5.11. It is seen that nearly 45% of the schemes across all categories have outperformed the Sensex. Using Nifty as a market proxy, about 51% of the diversified funds and 47% of sector funds have outperformed market portfolio, while 33%-37% of the sample equity schemes across the other two clusters have outperformed relative to the market portfolio suggesting that the investors received adequate excess returns per unit of total risk. 127

The fund managers were able to post better performance in terms of providing superior risk-adjusted returns but failed to beat the relevant benchmark indices. In this regard, the null hypothesis that the equity mutual fund schemes fail to beat the performance of relevant benchmark portfolio is accepted as against the alternate hypothesis. Further, the objective of the scheme influences the fund performance as evident from the foregone analysis. 5.3.2 Results of Treynor s Ratio Treynor s ratio measures the reward to volatility ratio of mutual fund schemes. It quantifies the ability of the schemes in providing excess returns per unit of systematic risk. It indicates the portfolios offering highest reward to systematic risk ratio will be the only risky portfolio in which the investor will choose to invest. Higher Treynor s ratio translates better fund performance and vice versa. In addition, it helps in assessing the ability of fund manager in beating the market portfolio by comparing the Treynor s ratio of the scheme with that of the market portfolio. In the subsequent sub sections, the portfolio performance of equity schemes have been examined using Treynor s ratio across the different factors as stated earlier. The objective is to assess the impact of these categories on portfolio performance. 5.3.2.1 Asset Size of Mutual Fund : Analysis of Treynor s Ratio The aim of this sub-section is to assess the impact of asset size of mutual fund schemes on portfolio performance. 128

Table 5.12 Descriptive Statistics of Treynor s Ratio of Equity : Asset Size Market Proxy Sensex Nifty Mutual Fund Mean Maximum Minimum Median Small Size Funds 0.028 0.159-0.088 0.030 Medium Size Funds 0.033 0.189-0.056 0.035 Large Size Funds 0.023 0.074-0.120 0.026 Small Size Funds 0.020 0.160-0.090 0.023 Medium Size Funds 0.025 0.190-0.067 0.025 Large Size Funds 0.017 0.075-0.119 0.020 Table 5.12 shows the descriptive statistics of Treynor s ratio of sample equity mutual fund schemes (size wise). The results show satisfactory performance of asset size classes. Medium size funds have recorded highest mean Treynor s ratio as against the other two asset classes. The maximum Treynor s ratio is recorded by a medium size fund (Birla SL India GenNext) followed by small size fund (Birla SL Buy India). The schemes under large size funds recorded a least mean Treynor s ratio ( Principal Resurgent India Equity) using both the benchmark indices. Table 5.13 exhibits the results of number of equity mutual fund schemes showing positive Treynor s ratio and the number of schemes outperforming the market portfolios. It is evident from the table 5.13 that by using Sensex benchmark, 84% of the schemes (185 schemes) have recorded positive Treynor s ratio. On the other hand, 80% of the schemes (177 schemes) have posted positive Treynor s ratio using Nifty benchmark. It indicates that these schemes were able to provide the 129

investors with adequate returns as against the level of risk involved in the investment. The analysis of the table reveals that most of the equity schemes under large size funds category showed positive Treynor s index as compared to the market indices. It signals that the investors who invested in mutual funds to form well diversified portfolio received adequate returns per unit of systematic risk undertaken. Table 5.13 Summary Results of Treynor s Ratio of Equity : Asset Size Percentage of Outperforming Market Proxy Mutual Fund Showing Positive Treynor s Ratio Showing Positive Treynor s Ratio Market Portfolio Small Size Funds 86 71 83% 50 Sensex Medium Size Funds 63 53 84% 39 Large Size Funds 71 61 86% 37 TOTAL 220 185 84% 126 Small Size Funds 86 69 80% 37 Nifty Medium Size Funds 63 49 78% 29 Large Size Funds 71 59 83% 25 TOTAL 220 177 80% 91 Among 185 schemes showing positive Treynor s index (Sensex), majority of the schemes under small size funds have outperformed the benchmark in terms of volatility followed by medium size funds. The top five performers under small size funds include Birla SL Buy India, Reliance Banking, Sundaram BNPP SMILE Fund, UTI Opportunities and Tata Equity P/E Fund. Of the 49 schemes 130

in medium size funds category, Birla SL India GenNext, Reliance Pharma, Taurus Tax Shield, Reliance Regular Savings-Equity and Bank BeES Fund have outperformed the market index. IDFC Premier Equity (A), ING Dividend Yield, HDFC Top 200, ICICI Pru Discovery-Inst (1), L&T Opportunities Fund are the top outperformers under the large size funds category. It is observed that of the 177 schemes showing positive Treynor s index (Nifty), majority of the schemes under small size funds have outperformed the benchmark. The top five performers under small size funds include Birla SL Buy India, Reliance Banking, UTI Opportunities, Tata Equity P/E Fund and. Of the 53 schemes in medium size funds category, Birla SL India GenNext, Reliance Pharma, Taurus Tax Shield, Reliance Regular Savings-Equity and UTI Banking Sector Fund have outperformed the market index. The best performers under large size funds are IDFC Premier Equity (A), Reliance Growth-Retail, Magnum Comma, UTI Pharma & Healthcare and HDFC Top 200 Fund. Thus, in terms of Treynor s index, the Indian equity schemes have provided adequate returns to the investors for undertaking the commensurate level of systematic risk. However, most of the equity schemes failed to beat the relevant benchmark indices. Further, it is evident that asset size does not affect performance. 5.3.2.2 Market Capitalisation of Mutual Fund : Analysis of Treynor s Ratio Does market capitalisation affect the fund performance? This sub section addresses this question. The alternate hypothesis is that the market capitalisation significantly affects risk adjusted performance of equity mutual funds. 131

The descriptive statistics Treynor s ratio of sample equity mutual fund schemes classified on the basis of their market capitalisation is depicted in Table 5.14. The results show that the mean Treynor s ratio across all the categories is positive. It shows that these schemes have shown satisfactory performance during the study period under consideration. Mid cap funds have recorded highest Treynor s ratio as against the other two asset classes. On the other hand, the mean Treynor s ratio of small cap funds was found to be least. The maximum Treynor s ratio is recorded by a mid cap fund (Birla SL India GenNext) followed by large cap fund (Birla SL Buy India). It is observed that mid cap funds have shown superior performance than the small cap and large cap funds. Table 5.14 Descriptive Statistics of Treynor s Ratio of Equity : Market Capitalisation Market Proxy Sensex Nifty Mutual Fund Mean Maximum Minimum Median Small Cap Funds 0.012 0.038-0.022 0.019 Mid Cap Funds 0.030 0.189-0.061 0.033 Large Cap Funds 0.028 0.159-0.088 0.030 Small Cap Funds 0.012 0.038-0.022 0.019 Mid Cap Funds 0.021 0.190-0.079 0.026 Large Cap Funds 0.020 0.160-0.119 0.022 Table 5.15 highlights the results of number of equity mutual fund schemes showing positive Treynor s ratio and the number of schemes outperforming the market portfolios. 132

Table 5.15 Summary Results of Treynor s Ratio of Equity : Market Capitalisation Percentage of Outperforming Market Proxy Mutual Fund Showing Positive Treynor s Ratio Showing Positive Treynor s Ratio Market Portfolio Small Cap Funds 06 04 67% 02 Sensex Mid Cap Funds 88 76 86% 55 Large Cap Funds 126 105 83% 69 TOTAL 220 185 84% 126 Small Cap Funds 06 04 67% 02 Nifty Mid Cap Funds 88 71 81% 37 Large Cap Funds 126 102 82% 52 TOTAL 220 177 80% 91 The analysis of table 5.15 reveals that by using Sensex benchmark, 84% of the schemes (185 schemes) have recorded positive Treynor s ratio. While 80% of the schemes (177 schemes) have posted positive Treynor s ratio using Nifty benchmark. It shows that most of the equity schemes under mid cap funds category i.e., 73% of schemes (Sensex) and 52% of schemes (Nifty) have shown better performance relative to the market proxies. It indicates that the schemes under the umbrella of mid cap funds have provided the investors with excess returns per unit of systematic risk. Among 126 schemes outperforming the market portfolio ( Sensex), majority of the schemes under mid cap funds have outperformed the benchmark in terms of volatility followed by large cap funds. The top five performers under mid cap 133

funds include Birla SL India GenNext, Taurus Tax Shield, UTI Opportunities, Templeton India Growth and Tata Equity P/E Fund. Of the 69 schemes from the sample of large cap funds, Birla SL Buy India, Reliance Pharma, Reliance Banking, Reliance Regular Savings-Equity, and UTI Banking Sector Fund have outperformed the market index. The two outperforming small cap funds are DWS Alpha Equity and Birla SL Index Fund. Of the 91 schemes outperforming the market portfolio (Nifty), majority of the schemes under mid cap funds have outperformed the benchmark in terms of volatility followed by large cap funds. The schemes outperforming relative to the market index under mid cap funds category are UTI Services Industries, UTI Opportunities, UTI Nifty Index, UTI MNC and UTI Mid Cap Fund. Among the 52 schemes in large funds category, Birla SL Buy India, Reliance Banking, Reliance Pharma, IDFC Premier Equity (A), and Reliance Reg Savings-Equity Fund have shown better performance as against the benchmark portfolio. DWS Alpha Equity and Birla SL Index Fund have posted higher Treynor s index relative to market proxy under the small cap funds category. It is amply clear that majority of the equity schemes have shown positive Treynor s index. However, mid cap funds and large cap funds have shown better performance than the small cap funds. Thus, majority of the equity schemes were able to offer superior risk-adjusted rate of return, but most of them failed to beat the relevant benchmark portfolios. Thus, market capitalisation influences the fund performance. 134

5.3.2.3 Nature of Sponsorship of Mutual Fund : Analysis of Treynor s Ratio The objective of this sub-section is to examine the influence of nature of sponsorship on fund performance. Table 5.16 Descriptive Statistics of Treynor s Ratio of Equity : Nature of Sponsorship Market Proxy Sensex Nifty Mutual Fund Mean Maximum Minimum Median UTI 0.049 0.080 0.018 0.049 Public Sector 0.022 0.062-0.061 0.019 Pvt. Sector (Indian) 0.030 0.189-0.120 0.033 Pvt. Sector (Foreign) 0.016 0.079-0.056 0.022 UTI 0.029 0.069 0.003 0.023 Public Sector 0.013 0.057-0.079 0.014 Pvt. Sector (Indian) 0.024 0.190-0.119 0.028 Pvt. Sector (Foreign) 0.013 0.062-0.067 0.021 Table 5.16 presents the descriptive statistics of Treynor s ratio of sample equity mutual fund schemes (according to nature of sponsorship). The results show that the mean Treynor s ratio across all the categories is positive. The performance of private sector (Indian) sponsored funds is found to be satisfactory as evident from the highest Treynor s ratio as against the other three sponsorship classes. On the contrary, the mean Treynor s ratio of private sector (foreign) sponsored fund was found to be least in relation in relation to Sensex while both public sector and private sector (foreign) funds have shown least mean Treynor s ratio in relation to Sensex and Nifty. The maximum Treynor s ratio is recorded by a 135

private sector (Indian) sponsored fund (Birla SL India GenNext Fund) followe d by a UTI fund (UTI Banking Sector Fund). It is evident that UTI and private sector (Indian) sponsored funds fared well than their counterparts. Table 5.17 displays the results of number of equity mutual fund schemes showing positive Treynor s ratio and the number of schemes outperforming the market portfolios. Market Proxy Sensex Nifty Table 5.17 Summary Results of Treynor s Ratio of Equity : Nature of Sponsorship Percentage of Outperforming Mutual Fund Showing Positive Treynor s Ratio Showing Positive Treynor s Ratio Market Portfolio UTI 18 18 100% 16 Public Sector 27 24 89% 10 Pvt. Sector (Indian) 127 106 83% 81 Pvt. Sector (Foreign) 48 37 77% 19 TOTAL 220 185 84% 126 UTI 18 18 100% 08 Public Sector 27 20 74% 07 Pvt. Sector (Indian) 127 104 82% 63 Pvt. Sector (Foreign) 48 35 73% 13 TOTAL 220 177 80% 91 It is evident that by using Sensex, majority of the schemes under private sector (Indian) sponsored funds have shown better performance measured in terms of 136

volatility followed by private sector (foreign) sponsored and UTI sponsored funds. All the UTI funds have recorded positive Treynor s ratio. The top five performers under private sector (India) sponsored funds in clude Birla SL India GenNext (0.1894), Birla SL Buy India (0.1590), Reliance Pharma (0.1161), Reliance Banking (0.1057) and Taurus Tax Shield (0.0916). Of the 15 schemes in the private sector (foreign) sponsored funds category, Templeton India Growth (0.0790), Principal Large Cap (0.0560), Templeton India Equity Income (0.0550), ING Dividend Yield (0.0538) and Franklin India Bluechip (0.0427) are the top five equity schemes that have outperformed the market index. Of the 177 schemes showing positive Treynor s index (Nifty), 104 schemes under private sector (Indian) sponsored funds have outperformed the benchmark. Again, all the schemes of UTI have shown positive Treynor s ratio. in terms of volatility followed by private sector (foreign) sponsored funds. The top five performers under private sector (Indian) sponsored funds that have outperformed Nifty include Birla SL India GenNext (0.1904), Birla SL Buy India (0.1599), Reliance Banking (0.0951), Reliance Pharma (0.0881) and IDFC Premier Equity-A (0.0753). Of the 13 schemes in private sector (foreign) sponsored category, Templeton India Growth (0.0618), ING Dividend Yield (0.0609), Principal Large Cap (0.0455), Franklin India Bluechip (0.0429) and Franklin India Taxshield (0.0399) are the five top outperfor mers in relation to the performance of Nifty portfolio. The equity schemes were able to post superior risk-adjusted returns. However, the performance of most of the funds was below the benchmarks. The performance varied across different ownership classes. UTI funds might have shown best performance on account of its existence for several years. 137

5.3.2.4 Objective of Mutual Fund : Analysis of Treynor s Ratio The impact of objective of the scheme on portfolio performance has been analysed in this sub-section. The alternate hypothesis is that the objective of the scheme significantly affects risk adjusted performance of equity mutual funds. Table 5.18 Descriptive Statistics of Treynor s Ratio of Equity : Objective of the Market Proxy Sensex Nifty Mutual Fund Mean Maximum Minimum Median Diversified Funds 0.029 0.189-0.120 0.032 Index Funds 0.031 0.070 0.009 0.029 Sector Funds 0.018 0.116-0.061 0.003 Tax Planning Funds 0.022 0.092-0.056 0.025 Diversified Funds 0.022 0.190-0.119 0.024 Index Funds 0.027 0.070 0.006 0.026 Sector Funds 0.006 0.095-0.079 0.004 Tax Planning Funds 0.015 0.074-0.067 0.019 Table 5.18 contains the descriptive statistics of Treynor s ratio of sample equity mutual fund schemes based on the objective of the scheme. The results show that the mean Treynor s ratio across all the categories is positive. Index funds have posted highest mean Treynor s ratio in relation to the two market portfolios and also against the schemes under other categories. It shows that the performance of these schemes were far superior. On the other hand, the mean Treynor s ratio of sector specific funds was found to be least in relation to Sensex and Nifty. The maximum Treynor s ratio is recorded by a diversified fund (Birla SL India 138

GenNext Fund) while under sector specific fund category Reliance Pharma Fund has posted maximum Treynor s ratio. Table 5.19 Summary Results of Treynor s Ratio of Equity : Objective of the Percentage of Outperforming Market Proxy Mutual Fund Showing Positive Treynor s Ratio Showing Positive Treynor s Ratio Market Portfolio Diversified Funds 160 136 85% 95 Index Funds 18 18 100% 12 Sensex Sector Funds 15 09 60% 06 Tax Planning Funds 27 22 81% 13 TOTAL 220 185 84% 126 Diversified Funds 160 131 82% 72 Index Funds 18 18 100% 06 Nifty Sector Funds 15 08 53% 04 Tax Planning Funds 27 20 74% 09 TOTAL 220 177 80% 91 It is evident from the table 5.19 that by using Sensex benchmark, 84% of the schemes (185 schemes) have recorded positive Treynor s ratio. While 80% of the schemes (177 schemes) have posted positive Treynor s ratio using Nifty benchmark. It indicates that these schemes provided adequate returns as against the level of risk involved in the investment. The analysis of the table reveals that all the sample equity schemes under index funds showed positive Treynor s index as compared to both the market indices. It signals that the investors who 139

invested in mutual funds to form well diversified portfolio received adequate returns per unit of systematic risk undertaken. Among 185 schemes showing positive Treynor s index (Sensex), all the sample schemes under index funds category have been able to post positive Treynor s ratio. In case of diversified funds, Birla SL India GenNext (0.1894), Birla SL Buy India (0.1590), Reliance Reg Savings -Equity (0.0875), UTI Opportunities (0.07990 and Templeton India Growth (0.0790) have recorded highest Treynor s ratio exceeding the market Treynor s ratio. Of the 18 schemes under the cluster of index funds Bank BeES (0.0705), Nifty Junior BeES (0.0498), UTI SUNDER (0.0442), UTI Nifty Index (0.0368) and Nifty BeES (0.0343) are the top five schemes that have outperformed the market index. Of the 177 schemes showing positive Treynor s index (Nifty), again index funds have fared better than others. Followed by index funds, 82% of the sample diversified funds have also been able to secure positive Treynor s index. It reflects that these schemes have outperformed the benchmark in terms of generating excess returns per unit of systematic risk. It is also evident from the table that nearly 75% and 79% of the sample schemes under the cluster of diversified funds have shown Treynor s index higher than the Sensex and Nifty respectively. Using Sensex as a market proxy, the schemes outperforming market portfolio include Birla SL India GenNext (0.1894), Birla SL Buy India (0.1590), Reliance Pharma (0.1161), Reliance Banking ( 0.1057) and Taurus Tax Shield (0.0916). The schemes that failed to outperform the market indices include Birla SL Basic Industries (-0.1196), JM HI FI (-0.0883), Magnum IT (-0.0610), Principal Personal Tax Saver (-0.0560) and L&T Global Advantage Fund (-.0529). 140

The performance is affected by the objective of the schemes. The sector specific funds concentrate their portfolio holdings in a specific sector; hence the performance of these schemes depends on the performance of the sector. While the diversified funds and tax planning funds invests their corpus across different sectors, the losses in one sector is mitigated by the benefits from the others sectors. 5.3.3 Results of Jensen s Alpha The Jensen s alpha is based on CAPM and reflects the difference between the return actually earned on a portfolio and the return the portfolio was supposed to earn, given its systematic risk. It indicates the ability of the fund managers to construct portfolios for the mutual fund that enables them to earn superior returns. Alpha measures the performance of mutual funds in terms of additional return due to the manager s choice. It also represents the fund manager s selectivity ability without considering market timing ability. Positive and statistically significant alpha shows the superior ability of the portfolio manager in selecting under-valued securities (selectivity) and vice versa. In the subsequent sub sections, the portfolio performance of the mutual fund schemes have been examined using Jensen s alpha across the four different factors, namely asset size, market capitalisation, nature of ownership and objective of the scheme. The objective is to assess the impact of these categories on portfolio performance. 5.3.3.1 Asset Size of Mutual Fund : Analysis of Jensen s Alpha Is the performance of equity schemes is influenced by their asset size? This question is addressed in this sub-section. 141

Table 5.20 shows the mean, maximum, minimum and median of Jensen s alpha of equity mutual fund schemes according to their asset sizes. The results show satisfactory performance of small size and medium size funds. The large size funds have recorded a least mean alpha estimate. The highest alpha estimate is generated by a medium size fund (Birla SL India GenNext). The wide range of deviation between the maximum and minimum alpha estimates also support that the equity schemes were more vulnerable to achieve alpha values. Table 5.20 Descriptive Statistics of Jensen s Alpha of Equity : Asset Size Market Proxy Sensex Nifty Mutual Fund Mean Maximum Minimum Median Small Size Funds 0.0092 0.1509-0.1118 0.0110 Medium Size Funds 0.0108 0.1854-0.0837 0.0122 Large Size Funds 0.0038 0.0722-0.1363 0.0047 Small Size Funds 0.0051 0.1824-0.1158 0.0042 Medium Size Funds 0.0047 0.1824-0.0873 0.0040 Large Size Funds -0.0001 0.0693-0.1400 0.0016 Table 5.21 gives the results of number of equity mutual fund schemes showing positive and statistically significant Jensen s alpha coefficients under two benchmark portfolios viz., Sensex and Nifty. The data in Table 5.21 amply reveals that by using Sensex as a market proxy majority of medium size funds and small size funds have been able to generate positive alpha values indicating that the fund managers of these schemes have been able to include stocks that seem to appreciate in its value in future during the study period under consideration. The analysis of the table reveals that in small size funds category, alpha values of only 67% of the sample schemes are 142

positive thereby indicating superior performance than the market. Maximum and negative alpha have been recorded for Birla SL Buy India (0.1509) and JM HI FI (-0.1118). None of the small size funds were able to show statistically significant positive alpha values. Thus, none of the schemes under the cluster of small size funds were able to provide the investors with abnormal returns. Similar results were shown by medium size funds. Of the 68% schemes showing positive alpha values, only two schemes (Reliance Pharma and Templeton India Growth Fund) posted positive and statistically significant alpha values. Nearly 45% of the schemes under large size funds failed to pick up under valued stocks leading to overall negative alpha values. Only one scheme (HDFC Top 20) has show n statistically significant and positive alpha coefficient. Table 5.21 Summary Results of Jensen s Alpha of Equity : Asset Size Percentage of Market Proxy Mutual Fund Showing Positive Jensen s Alpha Showing Positive Jensen s Alpha Showing Statistically Significant Alpha Small Size Funds 86 58 67% -- Sensex Medium Size Funds 63 43 68% 02 Large Size Funds 71 39 55% 01 TOTAL 220 140 64% 03 Small Size Funds 86 48 56% -- Nifty Medium Size Funds 63 38 60% 03 Large Size Funds 71 38 54% 01 TOTAL 220 124 56% 04 143

Of the 124 schemes showing positive Jensen s alpha (using Nifty), only four schemes were able to reward the investors with the abnormal returns as evidenced by the positive and statistically significant alpha values. Of the four schemes, three schemes belong to the category of medium size funds namely UTI SUNDER, Reliance Pharma and Templeton India Growth Fund and one scheme namely HDFC Top 200(G) belong to large size funds. These schemes were able to provide equilibrium returns higher than the portfolio return in statistical sense. Thus, in terms of Jensen s alpha, the fund managers of more than 50% of the sample equity schemes have been able to form their portfolio holdings that show the signs of appreciation in their values. However, they failed to provide the investors with abnormal returns. Further, it is evident that size does not affect fund performance. 5.3.3.2 Market Capitalisation of Mutual Fund : Analysis of Jensen s Alpha This sub-section makes a modest attempt to assess the financial performance of small cap, mid cap and large cap funds vis-à-vis, Sensex and Nifty. Table 5.22 presents the descriptive statistics of Jensen s alpha of sample equity mutual fund schemes classified on the basis of their market capitalisation. The results show that small cap funds have recorded negative mean alpha value in relation to both the market indices. However, the large cap funds have posted highest mean alpha coefficient followed by mid cap funds. The maximum alpha coefficient of 0.1854 was shown by a mid cap fund Birla SL India GenNext (G) Fund when the performance is mapped with the performance of Sensex portfolio. In relation with Nifty index, one equity scheme each from mid cap 144