A Paradigm Shift in Risk Measuring Tools of Mutual Fund Industry

Research Paper Volume 2 Issue 5 January 2015 International Journal of Informative & Futuristic Research ISSN (Online): 2347-1697 A Paradigm Shift in Risk Measuring Paper ID IJIFR/ V2/ E5/ 019 Page No. 1250-1258 Subject Area Management Key Words Risk Management, Calmar Ratio, Safety First Criterion, Investment Strategies, Maximum Drawdown Sonali Srivastava 1 Dr. Sunita Malhotra 2 Research Scholar Department of Management Dayalbagh Educational Institute, Agra Assistant Professor Department of Management Dayalbagh Educational Institute, Agra Abstract The present study states the paradigm shift in risk measuring tools of mutual fund industry. The main objective of the study is to identify appropriate risk measuring techniques for Mutual Fund Industry, to analyze risk return relationship of selected open ended Mutual fund and to analyze investment opportunities for future and recommend investment strategies. The secondary data is used to collect NAV value from 2013-2014 of selected debt fund (SBI gilt fund and ICICI Prudential liquid fund) and equity fund (UTI fund and Reliance ELSS fund). The statistical tools used to analyze data are standard deviation, beta, Calmar ratio, Roy s Safety First Criterion and return. It appears from the study that equity funds performed better than debt fund. There is a dependent relationship between risk and return. Fund manager can adopt Calmar ratio and Safety First ratio to measure risk because these funds explain the market uptrend which is more prominent for investment purpose. The result of various risk measuring tools on selected mutual fund schemes is same as CRISIL mutual fund ranking. Investors should invest in equity and equity related instruments to diversify the risk. In further research researcher can use other risk measuring tools and compare among them that which is appropriate to measure risk. The present study is done on Equity and Debt fund more funds can also be included which is the basic limitation of the study. www.ijifr.com Copyright IJIFR 2015 1250

1. Introduction The Indian financial market is growing rapidly and providing various investment opportunities to the investors. Now a day s Mutual fund is an attractive investment avenue where most of the investors are attracted to invest their money. Mutual fund can be defined as a financial intermediary body which involved in the business of buying and selling securities and providing the current market value to the investors. The main aim of mutual fund is to diversify the risk related with various investment options and to provide better return. There are different mutual fund products available with different risk and return grade like Debt and Liquid fund involve low risk and low return while Equity fund and Sectorial fund have high risk and high return. Mutual fund industry has large range schemes and opportunities available in the financial market for the investors so, investors can pool their money by diversify the risk depending on their requirement. Mutual fund industry is involved large amount of trading business of securities in Indian as well as international financial market which help to increase the economies of scale. The present study includes various risk measuring techniques like Standard deviation, Beta, Calmar ratio, Roy s safety first criterion to identify the best mutual fund scheme for investment. Standard Deviation and Beta is categorized as a traditional tool while Calmar ratio and Safety first criterion as modern tools to measure risk. The return is also calculated to identify the risk return relationship of selected open ended mutual fund schemes. The study of risk and return helps to understand that which funds are providing higher return at a lower risk. On the basis of this study manager and investors come to know that which mutual fund scheme is better for investment in present as well as in future. Mutual fund industry is facing various competition and challenges due to having wide variety of opportunities available in the Indian and global financial market. 2. Literature Review Philip Hsu examines the efficiency of china stock market in which they found that mean variance is an efficient tool to measure risk which helps to construct global portfolio with minimum risk. Jelena Vidovic (2011)has stated the different risk measure techniques for central and south- east European emerging markets result shows that conditional value at risk tools provide the stable return of portfolio while mean absolute deviation result show the highest variation of portfolio. Nevi Danila (2012) has examined the value at risk of Indonesia mutual fund which result that equity fund involve high expected loss. Saeed Mirza (2014) used value at risk tools (GARCH and Monte Carlo) which shows that these tools is more efficient because of parametric test which provide high errors at a high level of confidence. Ambuj Mahanti (2014) has stated that Sharpe ratio is a common measure which is used for investment in portfolio management. Lam Weng Hoe and Jaaman Saiful Hafizah (2010) has done the comparison of different risk measuring tools like mean absolute deviation, Minimax model, variance and lower partial moment for portfolio optimization and result stated that Minimax model perform better than other tools for those investors who are risk averse. Dr. Anurag Pahuja (2014) has done the comparative study of traditional risk measuring tools and value at risk on equity mutual funds which state that the result are same of both risk measuring tools when they are used independently. Value at risk clearly explained the investor about maximum possible risk is related with portfolio. Md. Qamruzzaman ACMA (2014) has applied the Sharpe ratio; Treynor ratio and Jensen s alpha to evaluate the performance of selected mutual funds which shows that funds provide positive return while growth oriented mutual funds involve more volatility and do not perform better. Hussein A. Abdou (2010) evaluates the performance of diversifying equity mutual fund in which study state that there is a positive relationship between risk and return. 1251

3. Importance of the Study This study is helps to know the present scenario of Indian mutual fund industry with respect to risk measuring techniques. This study is benefited to all the stakeholders (investors, policy maker, mangers etc.) of mutual fund industry. The study is also helpful to identify the appropriate risk measuring tools for mutual fund schemes. It helps to understand the average risk and return pattern and relationship of selected open ended mutual funds. This study helps mangers and investors to identify the best mutual fund schemes for investment and to construct the portfolio which minimizes the risk and maximizes the return. The study helps in comparison of debt and equity fund (public and private) which help to select best investment option. This study is also helpful to know the future investment aspects for mutual fund industry. 4. Objective of the Study i. To identify appropriate risk measuring techniques for Mutual Fund Industry. ii. To analyze risk return relationship of selected open ended Mutual fund. iii. To analyze investment opportunities for future and recommend investment strategies. 5. Research Methodology The secondary data is used to analyze the study. For research purpose the NAV value is taken from 2013-2014 of selected debt fund (SBI gilt fund and ICICI Prudential liquid fund) and equity fund (UTI fund and Reliance ELSS fund). These funds are selected on the basis of highest CRISIL Mutual Fund ranking. The various analytical tools applied to measure risk are standard deviation, beta, Calmar ratio, Roy s Safety First Criterion and return is also calculated. This is an analytical study which helps to explore various dimension of mutual fund industry. 6. Data Analysis NAV value is used to analyze the selected mutual fund from the time period of 2013-2014. 6.1 SBI MAGNUM GILT FUND SBI magnum gilt fund was launched on 28 November, 2003. SBI magnum gilt fund is open ended gilt fund which is issued by the central and state government. The main investment objective of fund is to generate high return at a lower risk by investing in government securities. Table 6.1.1(Risk measure Performance of SBI magnum gilt fund of 2013) January 0.14 0.93 2.23 1.65 22 February 0.11 0.9 4.02 2.01 23 March 0.05 0.56 7.87 5.59 23 April 0.21 1.48 2.86 1.12 23 May 0.44 0.38 1.2 5.6 24 June 0.12 0.32 4.73 1.88 24 July 0.34 0.89 1.38 6.8 24 August 0.47 0.51 1.1 4.8 23 September 0.18 0.36 2.53 1.22 23 October 0.18 1.97 2.28 1.43 23 November 0.11 1 4.26 2.16 23 December 0.08 0.21 7.21 2.97 23 1252

Table 6.1.2 (Risk measure Performance of SBI magnum gilt fund 2014) January 0.18 0.95 2 1.31 24 February 0.08 0.8 6.76 3.42 24 March 0.12 0.91 3.27 1.9 24 April 0.11 0.89 0 2.15 24 May 0.17 0.94 0 1.45 24 June 0.11 0.88 0 2.45 25 July 0.12 0.9 0 2.14 25 August 0.15 0.92 0 1.7 25 September 0.11 0.88 0 2.35 26 October 0.25 0.95 0 1.06 26 From the above (table 6.1.1 and 6.1.2) we can interpret that SBI Magnum gilt fund is providing good return in 2014. Calmar ratio and safety ratio is high in 2013 which shows that this fund is prominent for investment. Standard deviation has low value which represent that there is low risk involved to invest in this particular fund. Beta value is greater than 1 in 2013 which represent that it involve high level of risk while in 2014 beta value is above zero which defined that there is low risk to invest in SBI gilt fund. 6.2 ICICI Prudential Liquid Fund ICICI Prudential liquid fund is an open ended fund which was launched at 17 November, 2005. Probably, 80 percent is invested in money market instrument while 20 percent is invested in other debt instrument. The main objective of fund is to provide high level of liquidity and return at a lower risk. Table 6.2.1 (Risk measure Performance of ICICI Prudential Liquid fund of 2013) January 0.35 0.98 6.08 4.82 16 February 0.32 0.98 7.11 5.21 17 March 0.36 0.98 5.92 4.68 17 April 0.38 0.98 5.69 4.52 17 May 0.36 1.12 5.86 4.81 17 June 0.32 0.98 7.59 5.4 17 July 0.23 0.98 8.1 7.63 17 August 0.44 0.98 5.32 4.04 17 September 0.47 0.98 4.98 3.75 17 October 0.47 0.98 0 3.84 18 November 0.4 0.98 6.74 4.56 18 December 0.41 0.98 5.69 4.48 18 1253

Table 6.2.2 (Risk measure Performance of ICICI Prudential Liquid fund of 2014) January 0.42 0.98 5.62 4.4 18 February 0.36 0.98 7.49 5.08 18 March 0.43 0.98 5.96 4.32 18 April 0.42 0.98 6.6 4.48 19 May 0.42 0.98 5.99 4.54 19 June 0.41 0.9 6.01 4.66 19 July 0.4 0.9 5.99 4.75 19 August 0.41 0.98 6.58 4.74 19 September 0.42 0.98 6.03 4.64 19 October 0.37 0.89 8.51 5.34 19 From the above (table 6.2.1 and 6.2.2) we can interpret that ICICI prudential liquid fund provide good return in 2014. In 2013 Beta value is greater than 1 which represent that it involve high level of risk while in 2014 beta value is above zero which defined that it involve low risk. Calmar ratio and safety ratio is high in 2013 which shows that this fund is prominent for investment. Standard deviation has low value which represent that there is low risk in both the years. 6.3 UTI MNC Fund UTI MNC fund is launched at 14 October, 1998. It is an open ended equity fund whose objective is to invest in various multinational companies of different sector like Automobile, IT, FMCG etc. and to generate high return for the investors. Table 6.3.1 (Risk measure Performance of UTI MNC Fund of 2013) January 1.24 0.98 0.96 5.8 73 February 0.91 0.97 1.06 7.6 70 March 0.52 0.97 2.06 1.28 68 April 1.17 0.97 0.89 5.7 68 May 0.89 0.98 1.14 8.1 73 June 1.46 0.97 0.82 5 74 July 1.07 0.98 0.72 6.1 74 August 1.22 0.97 0.92 5.5 69 September 1.31 0.97 0.91 5.3 71 October 0.9 0.97 1.29 8.1 74 November 0.58 0.97 1.53 1.27 75 December 1.68 0.97 0.75 4.6 78 1254

Table 6.3.2 (Risk measure Performance of UTI MNC Fund of 2014) January 1.62 0.98 0.53 4.8 79 February 0.53 0.97 2.28 1.44 77 March 2.28 0.97 0.59 3.5 81 April 0.47 0.97 2.63 1.81 86 May 3.78 0.97 0.45 2.3 89 June 1.66 0.97 0.75 5.9 99 July 1.41 0.97 0.8 7.3 104 August 2.79 0.97 0.74 3.8 108 September 1.84 0.98 1.06 6.2 116 October 2.39 0.97 0.78 4.8 117 From the above (table 6.3.1 and 6.3.2) we can interpret that we can interpret that UTI MNC Fund perform better in 2014 as it generates high return as comparison to 2013.Standard deviation is high in 2014 which involves high level of risk. Beta value of UTI MNC Fund is less than 1 which represent that this fund involve low level of risk and provide high return to the investor. Calmar ratio is high in 2014 as comparison to 2013 which defined that this fund is prominent for investment. 6.4 Reliance Tax Saver ELSS Fund Reliance tax saver ELSS is an open ended equity saving scheme which was launched at 23 August, 2005. The main investment objective is to invest in equity and to generate long term capital appreciation from a fund. Table 6.4.1 (Risk measure Performance of Reliance Tax Saver ELSS Fund of 2013) January 0.38 0.98 0.96 6.2 24 February 0.48 0.97 0.62 4.6 22 March 0.57 0.97 0.68 3.7 21 April 0.49 0.97 0.86 4.2 21 May 0.38 0.98 0.84 5.9 23 June 0.45 0.97 0.81 4.7 21 July 0.63 0.98 0.41 3.2 21 August 0.36 0.97 0.86 5.1 19 September 0.55 0.97 0.55 3.5 20 October 0.47 0.97 0.74 4.3 21 November 0.33 0.97 0.99 6.6 22 December 0.67 0.97 0.71 3.4 23 1255

Table 6.4.2 (Risk measure Performance of Reliance Tax Saver ELSS Fund of 2014) January 0.57 0.98 0.66 4.1 24 February 0.31 0.97 1.39 7.3 23 March 0.99 0.97 0.5 2.6 26 April 0.24 0.97 2.41 1.12 28 May 2.33 0.97 0.34 1.3 31 June 0.78 0.97 0.67 7 35 July 0.76 0.98 0.72 4.9 37 August 0.68 0.97 1.03 5.5 38 September 0.81 0.98 0.86 5 41 October 1.08 0.97 0.83 3.8 41 From the above (table 6.4.1 and 6.4.2) we can interpret that Reliance Tax Saver ELSS fund perform better in 2014 as it generate high return as comparison to 2013. Beta value of Reliance ELSS fund represent that it involve low level of risk. Calmar ratio and safety first ratio is high in 2014 as comparison to 2013 which defined that this fund is good for investment. Standard deviation is high in the month of October in 2014 which involves high level of risk and return. 6.5 Risk Comparison of selected mutual fund scheme Table 6.5.1 (Risk Comparison of selected mutual fund scheme2013) Mutual Fund Scheme Standard Dev. Beta Calmar Ratio SF Ratio Return (%) SBI Magnum Gilt Fund 0.20 0.79 3.47 3.10 23 ICICI Prudential Liquid Plan 0.38 0.99 5.76 4.81 17 Reliance ELSS Fund 0.48 0.97 0.75 4.62 22 UTI MNC Fund 1.08 0.97 1.09 5.36 72 From the above (table 6.5.1) we can interpret that debt funds are performing better than equity fund. UTI Fund generates high level of return and have high safety ratio as comparison to other funds so, this fund is good for investment purpose. ICICI Prudential liquid fund have high Calmar ratio which represent that this fund is uptrend and more prominent for investment. Beta value of all selected funds represent that it involve low level risk. UTI Fund has high standard deviation which defined that it involves high level of risk as comparison of other funds. Table 6.5.2 (Risk Comparison of selected mutual fund scheme 2014) Mutual Fund Scheme Standard Dev. Beta Calmar Ratio SF Ratio Return (%) SBI Magnum Gilt Fund 0.14 0.90 1.20 1.99 25 ICICI Prudential Liquid Plan 0.41 0.96 6.48 4.70 19 UTI MNC Fund 1.88 0.97 1.06 4.19 96 Reliance ELSS Fund 0.86 0.97 0.94 4.26 32 1256

From the above (table 6.5.2) we can interpret that equity funds are performing better than debt funds. UTI MNC fund generates higher return as comparison to other funds. ICICI Prudential liquid fund have high Calmar ratio and safety first ratio which represent that this fund is more prominent for investment. UTI Fund has high standard deviation as comparison to other funds which represent that this fund involves high level of risk. 7. Findings i. In 2013 debt funds perform better but in 2014 equity funds perform better and generate high return at a given level of risk. ii. ICICI Prudential liquid fund have high Calmar ratio which represent that this fund is prominent for investment purpose. iii. Overall UTI MNC Fund has performed better than other selected mutual funds in debt as well as in equity funds. iv. In 2014 SBI Magnum Gilt Fund, ICICI Prudential Liquid Fund, UTI MNC Fund, Reliance Tax Saver ELSS fund are providing high return at a given level of risk. v. Debt fund has beta value more than 1which represent that there is more risk involved in investing the debt schemes. vi. Equity fund has beta value more than zero which represent that there is low risk involved in investing the equity schemes. vii. Investors should invest in equity funds as comparison to debt funds because these funds are performing better and generating high return at a low risk. viii. Fund Managers are always using standard deviation and beta tools to measure risk which can be defined as a traditional tool. They should adopt a modern tool like Calmar ratio and safety first ratio to measure risk because we select those funds whose Calmar and safety first value is high that represent uptrend of fund which is more prominent for investment. ix. Those funds which have high Calmar ratio and safety first ratio are providing high return which shows that there is a dependent relationship between risk and return if risk is high then return will also high and if risk is low then return are also low. x. The result of various risk measuring tools on selected mutual fund schemes is same as CRISIL mutual fund ranking. 8. Conclusion From the study we can conclude that equity funds are performing better than debt funds. There is a dependent relationship between risk and return because if funds have high risk then it generates high return but if funds have low risk then it generates low return. Fund managers can adopt Calmar ratio and safety first ratio to analyze the risk of selected funds because these funds explain the market uptrend which is more prominent for investment purpose. Safety ratio is same as Sharpe ratio which provides the same conclusion because both tools do the comparison among funds and then identify then which funds is providing maximum return at a given level of risk. The present study states that no fund is risk free every fund has an average risk. Investors should invest in equity and equity related instruments to diversify the risk. The result of various risk measuring tools on selected mutual fund schemes is same as CRISIL mutual fund ranking. Now a day s Multinational companies are also booming investors can invest in different sectors like FMCG, IT, Automobile, etc. Mutual fund 1257

industry is growing rapidly with providing various opportunities to Indian investors and attracts foreign investors to invest in Indian mutual fund which also help to raise the economies of scale. In further research researcher can use other risk measuring tools and compare among them that which is appropriate to measure risk. Researcher can do the comparison among equity, debt and hybrid fund and the study is done on two years which is the basic limitation of the study. References [1] Dr. Rupeet Kaur 2013, An Empirical Study on the Performance Evaluation of Oryx Mutual Fund in Oman, International Journal of Marketing, Financial Services & Management Research, Vol.2, No. 9, pp. 25-34. [2] Ons Bouslama and Olfa Ben Ouda 2014, International Portfolio Diversification Benefits: The Relevance ofemerging Markets, International Journal of Economics and Finance, Vol. 6, No. 3, pp. 200-215. [3] Saeed Mirza Mohammadi 2014, Value at Risk as a Tool for Mutual Funds Performance Evaluation, International Business Research, Vol. 7, No. 10, pp. 16-21. [4] Nevi Danila 2012, Estimating the Risk of Mutual Funds in Indonesia by Employing Value at Risk (VaR), Asian Journal of Business and Accounting, Vol. 5, No. 2, pp. 99-118. [5] Jelena Vidovic 2011, Performance of Risk Measures in Portfolio Construction on Central and South- East European Emerging Markets, American Journal of Operations Research, Vol.1, No. 1, pp. 236-242. [6] Heng Hsing Hsieh 2013, A Review of Performance Evaluation Measures for Actively-Managed Portfolios, Journal of Economics and Behavioral Studies,Vol. 5, No. 12, pp. 815-824. [7] Hussein A. Abdou 2010, An Evaluation of Equity Diversified Mutual Funds: The case of the Indian market, Investment Management and Financial Innovations, Vol. 7, No. 4, pp. 77-84. [8] Dr. Saiful Hafizah Jaaman and Weng Hoe Lam 2012, Mean-Variance and Mean-Gini Analyses To Portfolio Optimization in Malaysian Stock Market, Economics and Finance Review, Vol. 2, No.2, pp. 60 64. About Author: **Dr. Sunita Malhotra (Second Author) Served at IITM-Gwalior (under collaborative program in International Business with University of Greenwich, London), Aryan Institute of Management, Agra, ICFAI (Agra Center). Received Ace Performer Award at IITM-Gwalior. Member - NAAC Committee, Website Manager of Dept. of Management, D.E.I. Research interest spans over Finance with special reference to micro finance and Indian perspective, Stock Exchange Operations, Financial Modelling. Published 4 papers in international journals and presented papers in national and international conferences. Written books on Management Accounting, Financial Accounting and Quantitative Techniques for Decision Making published by Distance Education Program, D.E.I. 1258