1 Performance Evaluation Of Mutual Funds In India Sowmiya.G M.Phil (commerce), Auxilium college, Vellore-6 India
2 Abstract Mutual fund is an investment vehicle that pools together funds from investors to purchase stocks, bonds or other securities. Each unit in mutual fund is backed by a diversified pool of assets, where the funds have been invested. The objectives of this are to know the basic concepts and terminologies of the mutual funds in public limited companies and private limited companies, to analyze performance and growth of selected mutual funds schemes with their NAV and their returns, to identify the return variance and to provide suggestions based on the analysis. Keywords: Mutual fund- NAV-Return Variance -Sharpe ratio-beta-alpha-r-square-standard Deviation. 1. Introduction The Popularity of Mutual Funds has increased many folds in developed financial markets. In India, the mutual fund industry started with setting up of the erstwhile Unit Trust of India in 1963. Public sector banks and financial institutions were allowed to establish mutual funds in 1987. Since 1993, Private sector and foreign institutions were permitted to set up mutual funds. In February 2003, following the repeal of the Unit Trust of India Act 1963 the erstwhile UTI was bifurcated into two separate entities viz.the Specified Undertaking of the Unit Trust of India, representing broadly, the assets of US -64 scheme, schemes with assured returns and certain other schemes and UTI Mutual Fund conforming to SEBI Mutual Fund Regulations. 2. Advantages Of Mutual Funds Professional Management: Professional money managers research, select, and monitor the performance of the securities the fund purchases. Diversification: Diversification is an investing strategy that can be neatly summed up as "Don't put all your eggs in one basket." Spreading your investments across a wide range of companies and industry sectors can help lower your risk if a company or sector fails. Some investors find it easier to achieve diversification through ownership of mutual funds rather than through ownership of individual stocks or bonds. Affordability: Some mutual funds accommodate investors who don't have a lot of money to invest by setting relatively low pound amounts for initial purchases, subsequent monthly purchases, or both. Liquidity: Mutual fund investors can readily redeem their shares plus any fees and charges assessed on redemption at any time.
3 3. Disadvantages Of Mutual Funds Costs despite Negative Returns: Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive - even if the fund went on to perform poorly after they bought shares. Lack of Control: Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades. Price Uncertainty: With an individual stock, you can obtain real-time (or close to real-time) pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stock's price changes from hour to hour - or even second to second. By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the fund's net asset value, which the fund might not calculate until many hours after you've placed your order. 4. Literature Review 1. Haslem (1988) evaluated fund performance by comparing the fund return with the return on market portfolio with the comparable risk. The fund's systemic risk, beta co-efficient is used to compare portfolio risk relative to the market risk. 'Beta' is a measure of risk of the fund's portfolio relative to the risk of the market portfolio. 2. Hudson (1997) 'Wherever performance evaluation is implemented, there will always be two key ingredients (a) a measure of return and (b) a measure of risk, over a given time horizon. Proper evaluation and comparison is possible only if the reporting standard is of high quality and there are well based standards for calculating NAVs. 3. Nancy (1985) has stated that study of the past performance is helpful in forecasting. Study of the past performance unveils some or all factors that influence the level of financial returns. The study of these factors may help in improving the ability and accuracy of forecasting future returns. This study is likely to be useful for investors and portfolio managers. 4. Gupta LC (1981) presented a detailed and well-based estimate of "Portfolio" rate of return on equities. This pioneering study in the Indian context has been a major contribution in this field and is regarded as the benchmark on the rate of return on equities for the specified time. He laid the basis of rate of return concept in performance evaluation.
4 5. Jain (1982) evaluated performance of unit trust of India (UTI) during 1964-65 to 1979-80, including the profitability aspects of unit scheme 1964, unit scheme 1971 and unit scheme 1976. He concluded that its real rate of return have been low indicating overall poor, performance of UTI Schemes. There has been so significant increase in the profitability over the years. 6. Holthausen (1992) have developed a model based on 60 financial ratios that predicts return over 12 months period. The strategy used in the study is to go long position in the companies predicted to have positive excess return and go short position in companies predicted to have negative return. The study was found particularly useful predictor of stock prices and can be useful in fundamental analysis while taking equity investment decisions. 5. Risk Adjusted Measures 5.1 Standard Deviation Standard deviation is used to measure the variation in individual from the average expected return over a certain period. Standard deviation is used in the concept of risk of portfolio of investments. SD is the deviation of the reading from the mean of the reading, higher SD indicates higher volatility and higher volatility and higher risk of the schemes. 5.2 Sharpe Ratio Sharpe index measures risk premium of a portfolio, relative to the total amount of risk in the portfolio. Sharpe index summarizes the risk and return of a portfolio in a single measure that categorizes the performance of Funds on the risk-adjusted basis. 5.3 Beta Beta measures the systematic risk and shows how prices of securities respond to the market forces. Beta is used in the capital asset pricing model (CAPM) a model that calculates the expected return of an asset based on its beta and expected market returns. Systematic risk is measured in term of beta which indicates the sensitivity of a schemes return in relation to market return. 5.4 Alpha The size of the alpha exhibits the stock s unsystematic returns and its average return independence of market return if the fund produces the expected return at the level of risk assumed, the fund would have an alpha equal to zero. A positive alpha indicates that the manager produced return greater than expected for the risk taken. Alpha is calculated comparing the fund s actual performance with the risk-adjusted expected return.
5 5.5 R-Squared R-Squared is a statistical term saying how good one term is at predicting another. If R-Squared is 1.0 then given the value of one term, you can perfectly predict the value of another term. If R-Squared is 0.0, then knowing one term doesn't not help you know the other term at all. More generally, a higher value of R- Squared means that you can better predict one term from another. 5.6 Return On Assets An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment". The formula for return on assets is: Note: Some investors add interest expense back into net income when performing this calculation because they'd like to use operating returns before cost of borrowing. 5.7AUM The market value of assets that an investment company manages on behalf of investors. Assets under Management (AUM) is looked at as a measure of success against the competition and consists of growth/decline due to both capital appreciation/losses and new money inflow/outflow. 6. Data Analysis The study is based on the secondary data collected from the newspaper and websites. Secondary data refers to the information or facts already collected. Such data are collected with the objective of understanding the past status of any variable. The secondary data is obtained from the news paper, Deccan chronicle and the websites of mutual funds india.com, amfi.com, and money control.com. The following Mutual Funds schemes are taken for the analysis: 1. Birla Sun Life Equity Fund (G) scheme 2. Franklin Templeton India Flexi Fund (D) scheme
6 7. Tools And Techniques For the purpose of the analysis, the appropriate statistical and financial tools, i.e., Average, Standard deviation, covariance, variance, R-Square, Beta, Alpha are employed to study the performance evaluation of mutual funds in a private limited company. These tools are computed with MS EXCEL 2007. Table 1: Returns Of Birla Sun Life Equity Fund(G) And S&P Cnx Nifty Year 2011-1 Months 3 6 12 months 24 months 36 months 2013 months months RETURNS% 6.1 3.4 5.6 4.1 8.0-2.9 S&P NIFTY CNX 3.7 0.7 4.3 4.2 7.2-2.2 Table 1.1: Performance Of Birla Sun Life Equity Fund(G)Jul-2013 DATE(A) NAV(B) NAV%(C) BSE- 200(D) BSE- 200%(E) 1/7/2013 256.46 254.92 2,345.25 2343.45 2/7/2013 255.92 250.83 2,344.45 2305.72 3/7/2013 251.83 254.01 2,306.72 2328.74 4/7/2013 255.01 254.66 2,329.74 2337.61 5/7/2013 255.66 254.01 2,338.61 2322.36 8/7/2013 255.01 256.12 2,323.36 2340.52 9/7/2013 257.12 255.92 2,341.52 2326.1 10/7/2013 256.92 259.38 2,327.10 2364.96 11/7/2013 260.38 261.45 2,365.96 2388.97 12/7/2013 262.45 263.49 2,389.97 2404.78 15/7/2013 264.49 258.86 2,405.78 2375.13 16/7/2013 259.86 256.81 2,376.13 2377.52 17/7/2013 257.81 259.13 2,378.52 2402.8 18/7/2013 260.13 257.69 2,403.80 2396.9 19/7/2013 258.69 258.37 2,397.90 2396.1 22/7/2013 259.37 260.41 2,397.10 2411.54 23/7/2013 261.41 255.61 2,412.54 2375.52 24/7/2013 256.61 251.49 2,376.52 2345.54
7 25/7/2013 252.49 250.65 2,346.54 2332.53 26/7/2013 251.65 248.4 2,333.53 2309.13 29/7/2013 249.4 243.83 2,310.13 2273.33 30/7/2013 244.83 243.65 2,274.33 2269.93 31/7/2013 244.65-1 2,270.93-1 Effective Return-1545.15 Standard Deviation of the return-1451.869 COVAR-9471.796 Varience-242219 Sharpe Ratio-1.064249 Beta-covar/varience-0.039104 R-Square-0.247313 Alpha-(average return of the company-average return of the market)*beta-0.10558. Interpretation: From the above table, it can be inferred that the NAV of the Birla Sun Life Equity Fund (G) scheme was highest in 15/7/2013 and with the value of 264.49. The effective return was 1545.15 and standard deviation of the returns of the scheme was 1451.869respectively. The higher standard deviation indicates higher volatility and higher risk of the scheme. The R-square of the scheme was 0.2473which shows that there was a correlation between the scheme NAV and benchmark index. The Beta value was 0.0391 which is less than 1 indicating the stock is said to be not that much riskier. The Alpha value was 0.10558. The sharpe ratio was more than 1 indicating performance of the scheme is good. Table 1.2: Birla Sun Life-Equity Fund(G)Aug-2013 BSE- Date NAV NAV% BSE-200 200% 1//8/2013 242.15 238 2257.12 2236.46 2//8//2013 239 237.76 2237.46 2242.55 5/8//2013 238.76 232.6 2243.55 2186.01 6/8//2013 233.6 234.05 2187.01 2185 7/8/20133 235.05 236.65 2186 2203.06 8/8/2013 237.65 240.01 2204.06 2224.53 12/8//2013 241.01 244.03 2225.53 2259.92 13/8/2013 245.03 245.34 2260.92 2276.55 14/8/2013 246.34 237.45 2277.55 2187.35
8 16/8/2013 238.45 234.08 2188.35 2150.62 19/8/2013 235.08 234.15 2151.62 2143.59 20/8/2013 235.15 229.76 2144.59 2105.38 21/8//2013 230.76 233.69 2106.38 2146.56 22/8/2013 234.69 236.86 2147.56 2168.76 23/8/2013 237.86 238.1 2169.76 2174.8 26/8/2013 239.1 230.8 2175.8 2104.81 27/8/2013 231.8 230.63 2105.81 2099.86 28/8/2013 231.63 235.64 2100.86 2144.38 29/8/2013 236.64 237.72 2145.38 2166.96 30/8/2013 238.72-1 2167.96-1 Effective Return-1478.193 Standard Deviation of the return-1390.691 COVAR-3648.939 Varience-240215.5 Sharpe Ratio-1.06292 Beta-covar/varience-0.01519 R-Square-0.02178 Alpha-(average return of the company-average return of the market)*beta-0.04101 Interpretation: From the above table, it can be inferred that the NAV of the Birla Sun Life Equity Fund (G) scheme was highest in 14/8/2013 and with the value of 246.34. The effective return was 1478.193 and standard deviation of the returns of the scheme was 1390.69. respectively. The higher standard deviation indicates higher volatility and higher risk of the scheme. The R-square of the scheme was 0.02178 which shows that there was a correlation between the scheme NAV and benchmark index. The Beta value was -0.01519 which is less than 1 indicating the stock is said to be not that much riskier. The Alpha value was 0.04101. The sharpe ratio was more than 1 indicating performance of the scheme is good. Table 1.3: Birla Sun Life-Equity Fund(G)Sep-2013 DATE NAV NAV% BSE- 200 BSE- 200% Monday, September 02, 2013 241.81 233.79 2,199.73 2,126.26 Tuesday, September 03, 2013 234.79 237.73 2,127.26 2,164.06
9 Wednesday, September 04, 2013 238.73 243.44 2,165.06 2,215.10 Thursday, September 05, 2013 244.44 246.05 2,216.10 2,245.49 Friday, September 06, 2013 247.05 252.93 2,246.49 2,320.52 Tuesday, September 10, 2013 253.93 254.28 2,321.52 2,333.34 Wednesday, September 11, 2013 255.28 252.13 2,334.34 2,308.97 Thursday, September 12, 2013 253.13 252.38 2,309.97 2,310.47 Friday, September 13, 2013 253.38 252.09 2,311.47 2,306.20 Monday, September 16, 2013 253.09 252.99 2,307.20 2,309.35 Tuesday, September 17, 2013 253.99 254.7 2,310.35 2,326.55 Wednesday, September 18, 2013 255.7 262.78 2,327.55 2,407.07 Thursday, September 19, 2013 263.78 259.96 2,408.07 2,372.00 Friday, September 20, 2013 260.96 255.7 2,373.00 2,330.77 Monday, September 23, 2013 256.7 256.07 2,331.77 2,331.52 Tuesday, September 24, 2013 257.07 255.41 2,332.52 2,326.35 Wednesday, September 25, 2013 256.41 255.9 2,327.35 2,328.53 Thursday, September 26, 2013 256.9 254.93 2,329.53 2,315.13 Friday, September 27, 2013 255.93 252.95 2,316.13 2,280.93 Monday, September 30, 2013 253.95-1 2,281.93-1.00 Interpretation: From the above table, it can be inferred that the NAV of the Birla Sun Life Equity Fund (G) scheme was highest in 15/7/2013 and with the value of 263.72 The effective returns was 1425.75 and standard deviation of the returns of the scheme was 1349.546 respectively. The higher standard deviation indicates higher volatility and higher risk of the scheme. The R-square of the scheme was 0.021609which shows that there was a correlation between the scheme NAV and benchmark index. The Beta value was 0.018683 which is less than 1 indicating the stock is said to be not that much riskier. The Alpha value was 0.05044.The Sharpe ratio was less than 1 indicating the performance of the scheme is good. Table 1.4: Returns Of Franklin Templeton India Flexi Capital Fund(D)And S&Pcnx500 MONTH 1month 3month 6month 12month 24month 36month RETURNS% 5.0 3.0 6.2 5.5 7.5-0.2 S&PCNXX500 3.8 0.3 3.4 2.8 6.3-2.7
10 Table 1.5: Franklin Templeton India Flexi Capital Fund(D)Jul-2013 S&PCNX Date NAV NAV% 500 S&PCNX500% 1-Jul-13 11.1455 10.15 4572.05 4541.8 2-Jul-13 11.1472 10.01 4542.8 4472.35 3-Jul-13 11.0109 10.11 4473.35 4516.7 6-Jul-13 11.1142 10.09 4517.7 4534.8 7-Jul-13 11.0893 10.17 4535.8 4500.25 8-Jul-13 11.1696 10.15 4501.25 4538.95 9-Jul-13 11.1471 10.31 4539.95 4510.4 10-Jul-13 11.3073 10.47 4511.4 4585.45 11-Sep-13 11.4719 10.50 4586.45 4629.95 15-Oct-13 11.5049 10.31 4630.95 4654.7 16-Jul-13 11.3071 10.24 4655.7 4595.5 17-Jul-13 11.2406 10.34 4596.5 4596.7 18-Jul-13 11.3442 10.32 4597.7 4646.55 19-Jul-13 11.3197 10.34 4647.55 4631.75 22-Jul-13 11.3417 10.38 4632.75 4630.1 25-Jul-13 11.3848 10.20 4631.1 4659.75 27-Jul-13 11.1964 10.05 4660.75 4587.25 28-Jul-13 11.0464 9.98 4588.25 4530.8 29-Jul-13 10.983-1.00 4531.8-1 Effective Return-2270.191 Standard Deviation of the return-2607.648 COVAR-12882.74 Varience-1105725 Sharpe Ratio-0.87059 Beta-covar/varience-0.011651 R-Square-0.05123 Alpha-(average return of the company-average return of the market)*beta-0.000315 Interpretation: From the above table, it can be inferred that the NAV of the Birla Sun Life Equity Fund (G) scheme was highest in 15/7/2013 and with the value of 11.3442. The effective returns was 2270.191 and standard deviation of the returns of the scheme was 2607.48 respectively. The higher standard deviation indicates higher volatility and higher risk of the scheme. The R-square of the scheme was 0.05123which
11 shows that there was a correlation between the scheme NAV and benchmark index. The Beta value was 0011651 which is less than 1 indicating the stock is said to be not that much riskier. The Alpha value was 0.000315.The sharpe ratio was less than 1 indicating the investment is risky. Table 1.6: Franklin Templeton India Flexi Capital Fund(D)Aug-2013 Date NAV NAV% S&PCNX500 S&PCNX500% 1-Aug-13 10.8371 9.7207 4354 4313.95 2-Aug-13 10.7207 9.7227 4314.95 4322.35 5-Aug-13 10.7227 9.4841 4323.35 4213.15 6-Aug-13 10.4841 9.5233 4214.15 4212.85 7-Aug-13 10.5233 9.591 4213.85 4249.35 8-Aug-13 10.591 9.7203 4250.35 4292.2 12-Aug-13 10.7203 9.9079 4293.2 4359.65 13-Aug-13 10.9079 9.9208 4360.65 4391.05 14-Aug-13 10.9208 9.5526 4392.05 4223.3 16-Aug-13 10.5526 9.3557 4224.3 4150.95 19-Aug-13 10.3557 9.3529 4151.95 4137.4 20-Aug-13 10.3529 9.1827 4138.4 4068.45 21-Aug-13 10.1827 9.2906 4069.45 4135.1 22-Aug-13 10.2906 9.3592 4136.1 4182.65 23-Aug-13 10.3592 9.3991 4183.65 4193.5 26-Aug-13 10.3991 9.1555 4194.5 4059.7 27-Aug-13 10.1555 9.122 4060.7 4046.7 28-Aug-13 10.122 9.3335 4047.7 4131.8 29-Aug-13 10.3335 9.3403 4132.8 4174.85 30-Aug-13 10.3403-1 4175.85-1 Effective Return-2174.92 Standard Deviation of the return-2498.19 COVAR-14604.496 Varience-893104.512 Sharpe Ratio-10.870597 Beta-covar/varience-0.0163525 R-Square-0.025192 Alpha-(average return of the company-average return of the market)*beta-0.000442
12 Interpretation: From the above table, it can be inferred that the NAV of the Birla Sun Life Equity Fund (G) scheme was highest in 15/7/2013 and with the value of 10.902. The effective returns was 2174.92 and standard deviation of the returns of the scheme was 2498.19respectively. The higher standard deviation indicates higher volatility and higher risk of the scheme. The R-square of the scheme was 0.025192which shows that there was a correlation between the scheme NAV and benchmark index. The Beta value was 0.016353 which is less than 1 indicating the stock is said to be not that much riskier. The Alpha value was 0.00044.The sharpe ratio was less than 1 indicating the investment is risky. Table1.7: Franklin Templeton India Flexi Capital Fund (D)Sep-2013 S&PCNX DATE NAV NAV% 500 S&PCNX500% 2-Sep-13 10.4149 9.1082 4572.05 4541.8 3-Sep-13 10.1082 9.3405 4542.8 4472.35 4-Sep-13 10.3405 9.6118 4473.35 4516.7 5-Sep-13 10.6118 9.7917 4517.7 4534.8 6-Sep-13 10.7917 10.0779 4535.8 4500.25 10-Sep-13 11.0779 10.0983 4501.25 4538.95 11-Sep-13 11.0983 9.9795 4539.95 4510.4 12-Sep-13 10.9795 9.9702 4511.4 4585.45 13-Sep-13 10.9702 10.0492 4586.45 4629.95 16-Sep-13 11.0492 10.0997 4630.95 4654.7 17-Sep-13 11.0997 10.1827 4655.7 4595.5 18-Sep-13 11.1827 10.5697 4596.5 4596.7 19-Sep-13 11.5697 10.3999 4597.7 4646.55 20-Sep-13 11.3999 10.2068 4647.55 4631.75 23-Sep-13 11.2068 10.1974 4632.75 4630.1 24-Sep-13 11.1974 10.1924 4631.1 4659.75 25-Sep-13 11.1924 10.1929 4660.75 4587.25 26-Sep-13 11.1929 10.098 4588.25 4530.8 27-Sep-13 11.098 9.9459 4531.8 4506.25 30-Sep-13 10.9459-1 4507.25 4458.9 4459.9 4389.35 4390.35-1
13 Effective Return-2856.05 Standard Deviation of the return-3285.50 COVAR-24870.97 Varience-1530355 Sharpe Ratio-0.869289 Beta-covar/varience-0.016252 R-Square-0.0213 Alpha-(average return of the company-average return of the market)*beta-0.000439 Interpretation: From the above table, it can be inferred that the NAV of the Birla Sun Life Equity Fund (G) scheme was highest in 15/7/2013 and with the value of 11.5697 The effective returns was 2856.05 and standard deviation of the returns of the scheme was 3285.50 respectively. The higher standard deviation indicates higher volatility and higher risk of the scheme. The R-square of the scheme was 0.0213which shows that there was a correlation between the scheme NAV and benchmark index. The Beta value was 0.016252 which is less than 1 indicating the stock is said to be not that much riskier. The Alpha value was 0.000439. The sharpe ratio was less than 1 indicating the investment is risky. 8. Suggestions For Investors To Select Appropriate Scheme 1. Inspect the documents of the Mutual Funds specified in the scheme s offer document. 2. The investor has to see the published their NAV, in accordance with the regulations: daily, in case of open-ended schemes and once a week, in case of close ended schemes. 3. It is not only fund or company s goodwill which should be considered for selecting the portfolio,the market factors like government policies, sales and trend in the particular sector has to be considered. 9. Conclusion This study provides a necessary and sufficient result to help to choose the best portfolio to get maximum return with minimum risk.standard deviation and mean proves to be very useful statistical tool in order to reach to some valuable result.without help ofaverage and standard deviation one cannot apply sharpe index method.the sharpe index model is easily understood and helps investors to decide which mutual funds are performing well and which funds are not. The performance of Birla Sun Life Equity Fund(G) scheme for the three months namely july,august,september 2013 was good compared to the other schemes.the beta and alpha values of all the schemes have shown that there was more risk than returned earned.
14 10. References Journals 1. Andrews.joshy (2007), A Study on the growing mutual funds industry in india with special reference to eqquity funds The Management accountant February 2007,p.p.151-155. 2. Hwang. S. and Satchell.S.(1998) Performance evulation of mutual fund in emerging. Markets, Emerging Markets Quarterly, volume2, p.p. 39-52. Websites 1.http://www.icicidirect.com/mutual fund/mutual funds 2.http://www.moneycontrol.com 3.http://www.amfi.com 4.http://www.bseindia.com 5.http://www/nseindia.com