chapter – iv performance of selected mutual...
TRANSCRIPT
143
CHAPTER – IV
PERFORMANCE OF SELECTED MUTUAL FUNDS
Objective: - The objective of this chapter is to analyze the Performance of mutual funds
comparing their returns, risk, NAV using secondary data from various companies’
websites.
INTRODUCTION:
The first and foremost issue concerning Mutual Funds is its’ performance.
Mutual Funds, being an instrument for investment, needs to meet high standards of
performance. Hence, the need of the hour is to evaluate the performance of different
Mutual Funds in India and keep the Mutual Fund investors fully aware,( A Khorana and
H Servaes, 2005).
Indian mutual funds (MFs) have rewarded their investors better than any other
funds in world. According to a report by Lipper, a leading market research agency,
Indian funds have grabbed eight of the top 10 ranks over a 10-year period. If one takes
the last five years, they account for seven of the top 10 and over a 3-year period, six of
the 10 best performing mutual funds are from India. Hence the need of the hour is to
The performance analysis is in order to judge the performance of
mutual fund schemes with an objective to offer investors an easy way to identify funds
that have performed better. The excessive growth of Mutual Fund industry is liable to
inflate stock prices and makes the market more vulnerable, since it does not have enough
capacity to anticipate high inflows (Grinblatt M. &M.Keloharj, 2000). In this chapter, an
attempt has been made to study the performance of selected schemes of mutual funds.
There are many techniques employed over the years in research to analyze and predict
the performance of mutual funds, (Diane Del Guercio and Paula A. Tkac , 2002 ). The
business of evaluating Mutual Funds performance has evolved into an industry in itself.
These rating systems can provide investors with relative guidance and direction that can
lead to the decent returns. The rating companies can add much value here, as it is not a
good idea to leave style analysis even to the fund manager.
144
evaluate the performance of different Mutual Funds in India and keep the Mutual Fund
investors fully aware of this.
PERFFORMANCE:
The past performance of a fund is important in analyzing a mutual fund.
(Chander Ramesh, 2002), “But, at the same time past performance is not everything”. It
just indicates the fund’s ability to clock returns across market conditions. And, if the
fund has a well-established track record, the likelihood of it performing well in the
future is higher than a fund which has not performed well. The reference period for the
study is 5 years from January 2006-2011. Shankar (1996) points out that the Indian
investors do view Mutual Funds as commodity products and AMCs, to capture
the market should follow the consumer product distribution model. The main resources of
the data are the various rating agencies’ published data, business newspapers especially
financial express and the economic times.
Tool Analysis of computations:
“Statistical tools applied in comparing performance of different schemes are standard
deviation and Sharpe, used as measuring devices. “,Henriksson, R. & Merton (1981). Under
the performance comparison, returns, risk, standard deviation, Sharpe ratio, fund
managers’ strategies, etc., of selected five funds, are considered.
Returns compared with its Benchmarks:
A fund’s performance in isolation does not indicate anything. Hence, it is crucial
to compare the returns of different periods with its benchmark index and its peers, so as
to deduce a meaningful inference, comparing the peers the same category must be
chosen. Comparing apples with oranges doesn’t make any sense.
145
BANKING FUNDS Vs. BSE BANKEX: Here the average of the three/four selected
banking sector funds returns in the past 6 months, one year, two years, three years and
five years are compared with its benchmark BANKEX for the same period. The data is
as per the statistical figures/ tables given by ACE Mutual fund, personal FN Research.
TABLE 4.1: BANKING SECTOR FUNDS
Scheme Name 6-Mth (%)
1-Yr (%)
2-Yr (%)
3-Yr (%)
5-Yr (%)
Reliance Banking (G) -14.8 19.5 28.7 20.1 26.4 UTI Banking Sector (G) -13.8 16.1 24.8 14.6 21.9 ICICI Pru Banking & Fin Serv (G) -12.5 15.6 24.2 - -
Religare Banking (G) -13.7 15.4 27.7 - - Category Average* -13.7 16.7 26.4 17.4 24.2 BSE BANKEX -11.9 16.7 22.0 10.5 19.3
FIGURE: 4.1 BANKING SECTOR FUNDS
Return% of Sector Vs. Benchmark Fund
-20
-15
-10
-5
0
5
10
15
20
25
30
-13.7 15.4 27.7 - -
-12.5 15.6 24.2 - -
-13.8 16.1 24.8 14.6 21.9
-14.8 19.5 28.7 20.1 26.4Period
Retu
rns Category
Average*BSE BANKEX
The above table shows that mutual funds are performing better than the banking equity.
It infers that one instead of investing directly in stock it is always to choose the sector
146
fund, expecting the sector will fetch good future returns, especially when the period of
investment is more than one year.
ENERGY & POWER FUNDS AVERAGE Vs. POWER INDEX: When Power sector
funds are compared with its relative index the returns are as shown in the following table
and figure:
TABLE: 4.2 ENERGY & POWER FUNDS
Scheme Name 6-Mth
(%)
1-Yr
(%)
2-Yr
(%)
3-Yr
(%)
5-Yr
(%)
Reliance Diver Power
Sector (G) -19.1 -11.8 8.4 0.4 19.9
UTI Energy (G) -10.5 -4.3 9.2 -3.1 -
undaram Energy
Opportunities (G) -12.1 -3.6 6.0 -4.0 -
Category Average* -13.9 -6.6 7.9 -2.2 19.9
BSE POWER -14.1 -13.6 -2.7 -8.4 7.9
FIGURE: 4.2 ENERGY & POWER FUNDS
In spite the company funds are giving negative returns, sector funds are giving positive
and high returns. It is evident that Power sector funds average returns are better than
Power Sector Vs. BSE Power
-13.9-6.6
7.9-2.2
19.9
-14.1 -13.6-2.7 -8.4
7.9
-20-10
0102030
-12.1 -3.6 6 -4 -
-10.5 -4.3 9.2 -3.1 -
-19.1 -11.8 8.4 0.4 19.9Period
Ret
urns
%
CategoryAverage*
BSE POWER
147
stock investment in Power sector, especially when the period of investment is more than
one year.
FMCG FUNDS AVERAGE vs. BSE FMCG: FMCG funds are the funds invested in
only FMCG stocks. The average of selected four FMCG funds is compared with its
benchmark.
TABLE: 4.3 FMCG FUNDS AVERAGE vs. BSE FMCG
Scheme Name 6-Mth
(%)
1-Yr
(%)
2-Yr
(%)
3-Yr
(%)
5-Yr
(%)
Franklin FMCG (G) 0.2 24.5 39.9 19.6 14.4
ICICI Pru FMCG (G) 4.8 31.7 42.2 12.1 12.4
SBI Magnum FMCG 3.8 30.0 47.3 22.5 16.4
Category Average* 3.0 28.7 43.1 18.1 14.4
BSE FMCG 5.5 33.7 34.0 14.7 13.5
FIGURE: 4.3 FMCG FUNDS AVERAGE vs. BSE FMCG
When the same fund is invested for just 6 months or one year, the returns of equity is
better than mutual funds.
PHARMA FUNDS vs. BSE HEALTH CARE: The most famous four Pharma funds
average is compared to its relative index.
FMCG FUNDS AVERAGE vs. BSE FMCG
0
20
40
60
1 2 3 4 5
PERIOD
RET
UR
NS
CategoryAverage*
BSE FMCG
148
TABLE 4.4: PHARMA FUNDS vs. BSE HEALTH CARE
Scheme Name 6-Mth
(%)
1-Yr
(%)
2-Yr
(%)
3-Yr
(%)
5-Yr
(%)
Franklin Pharma (G) -2.8 15.4 53.3 28.3 18.1
UTI Pharma &
Healthcare (G) -4.7 16.5 40.0 18.5 12.8
SBI Magnum Pharma
(G) -3.8 14.5 43.5 10.2 4.1
Reliance Pharma (G) -3.6 14.6 44.2 18.4 4.5
Category Average* -3.4 14.8 48.6 22.0 14.8
BSE HEALTH CARE -7.2 15.7 36.8 12.2 11.7
FIGURE 4.4 PHARMA FUNDS vs. BSE HEALTH CARE
Mutual funds, Pharma sector funds are giving higher returns than direct investment in the
company’s shares except when the investment is just one year.
PHARMA FUNDS vs. BSE HEALTH CARE
-20
0
20
40
60
1 2 3 4 5 6
PERIOD
RET
UR
NS
149
TABLE: 4.5 IT SECTOR FUNDS vs. BSE IT:
Scheme Name 6-Mth (%)
1-Yr (%)
2-Yr (%)
3-Yr (%)
5-Yr (%)
Franklin Infotech(G) 1.0 19.7 45.4 13.0 10.5 ICICI Pru Technology(G) 0.1 27.4 53.0 8.5 10.1
DSPBR Technology.com(G) -4.0 1.0 32.5 3.1 13.6
SBI Magnum IT 1.2 16.9 42.7 3.0 6.3 Category Average* -0.4 16.3 43.4 6.9 10.1 BSE IT 2.2 18.4 45.3 10.4 10.0 (Source: ACE MF, Personal FN Research)
FIGURE 4. 5 IT SECTOR FUNDS vs. BSE IT
The returns of both direct investment in IT stock and the same sector funds are giving
almost the same returns unlike other sector funds. The reason may be that the investment
in both IT stock as well as IT sector fund mutual fund was very less during the last three
to five years.
SECTOR FUNDS VS. BENCH MARKS: In fact the above tables make it evident that,
investors especially those in the energy & power sector funds haven't been able to
generate wealth over a 3-Yr time frame, and even in long term. Most of the power &
energy sector funds have eroded wealth for investors. However, the Banking & Financial
Service Sector Funds managed to deliver luring returns over a 3-Yr time frame and in
long term, due to prudent policy measures taken by the RBI, to scuffle the impact of
global meltdown - especially the Lehman Brother's bankruptcy on the Indian economy.
IT Sector Average VS. BSE IT
-20
0
20
40
60
1 2 3 4 5
Period
Ret
urns
CategoryAverage*
BSE IT
150
But FMCG funds despite luring returns generated by them, faltered when India
consumption was hurt during the recessionary times of 2008 and early 2009.
Risk (Standard Deviation)
The standard deviation essentially reports a fund's
volatility, which indicates the
tendency of the returns to rise or fall drastically in a short period of time. A stock that is
volatile is also considered higher risky because its performance may change quickly in
either direction at any moment, (Ravi Shukla and Charles Trzcinka, 2005), The standard
deviation of a fund measures the risk by measuring the degree to which the fund
fluctuates in relation to its average return of a fund over a period of time. Standard
deviation is also known as historical volatility and is used by investors as a gauge for
measuring the risk.
COMPARISON OF STANDARD DEVIATION OF SECTOR FUNDS WITH
STOCK MARKET:
Average Standard deviation of selected four sector funds is compared with the
concerned index standard deviation.
151
TABLE 4.6 COMPARISON OF STANDARD DEVIATION OF SECTOR FUNDS
WITH STOCK MARKET:
STANDARD DEVIATION
Funds
Average
SD
Stock
index
SD
BANKING & FINANCIAL
SERVICES FUNDS 10.27 12.85
ENERGY & POWER FUNDS 9.48 10.94
FMCG FUNDS 6.35 6.25
INFRASTRUCTURE FUNDS 9.7 10.2
PHARMA FUNDS 7.62 7.41
IT FUNDS 9.44 9.07 Standard Deviation is calculated over a 3Yr period.
FIGURE : 4.6 STANDARD DEVIATION OF SECTOR FUNDS
AND STOCK MARKET
The standard deviation of mutual funds when compared to the index of stock
market, the risk is almost the same when the period of investment is less, and differs
when the period of investment is high. When three years standard deviations are
considered, it indicates that mutual funds are lesser riskier, especially during the
recession and post-recession period.
STANDARD DEVIATION OF STOCK INDEX AND SECTOR FUNDS
05
1015
BAN
KIN
G&
FIN
ANC
IAL
SER
VIC
ES
FUN
DS
FMC
GFU
ND
S
PHAR
MA
FUN
DS
MED
IA &
ENTE
RT
AIN
MEN
TFU
ND
S
SECTOR FUNDS, STOCK INDEX
STA
ND
AR
D
DEV
IATI
ON
FundsAverageSD
StcokindexSD
152
3. RISK ADJUSTED RETURN (Sharpe Ratio):
The risk adjusted return is normally measured by Sharpe Ratio. It signifies how
much return a fund has delivered vis-à-vis the risk taken. Higher the Sharpe Ratio better
is the fund’s performance. From an investor’s perspective, it is important because they
should choose a fund which has delivered higher risk-adjusted returns. In fact, this ratio
tells us whether the high returns of a fund are attributed to good investment decisions, or
to higher risk.
Sharpe ratio is developed by Nobel laureate William F. Sharpe to measure risk-adjusted
performance. The ratio is calculated by subtracting the risk-free rate – such as that of
bank interest rate - from the rate of return for a portfolio and dividing the result by the
standard deviation of the portfolio returns. The Sharpe ratio formula is:
TABLE : 4.7 SHAR PE RATIOS OF SECTOR FUNDS AND BENCH MARK
INDEX
SECTOR FUND Category Sharp e
Bench mark Index Sharpe
BANKING & FINANCIAL SERVICES FUNDS 0.17 0.1 ENERGY & POWER FUNDS -0.01 -0.06 FMCG FUNDS 0.18 0.13 PHARMA FUNDS 0.21 0.11 IT FUNDS 0.07 0.11
153
All the sector funds’ performance is better than direct stock investment, except in case of
IT funds. The IT sector for the past three years had some disturbance, this may be the
reason. This proves that when both returns and risk wise also mutual funds are
performing better.
FIGURE : 4.7 SHAR PE RATIOS OF SECTOR FUNDS AND
BENCH MARK INDEX:
Comparison of Sharpe ratio of actively manged and passively managed funds: Here ten
selected actively and passively managed funds are compared with the help of Sharpe
ratio.
154
TABLE : 4.8 Diversified Equity (Actively Managed):
Scheme Name Sharpe Ratio
HDFC Top 200 (G) 0.14
HDFC Equity (G) 0.15
Reliance Growth – Ret (G) 0.08
Franklin India Bluechip (G) 0.11
Reliance Reg Savings – Equity 0.09
ICICI Pru Dynamic (G) 0.12
Fidelity Equity (G) 0.11
DSPBR Top 100 Eq;uity – Ret (G) 0.10
Reliance Vision – Ret (G) 0.06
Reliance Equity Oppor _ Ret (G) 0.13
The sharpe ratio of Actively Managed funds ranges between 0.06 and 0.14.
155
TABLE : 4.9 EQUITY EXCHANGE TRADED FUNDS (PASSIVELY MANAGED)
Scheme Name Sharpe Ratio
Nifty BeEs 0.05
Bank BeEs 0.14
MOSt Shares MSO-MOSE TF 0.04
Junior BeEs 0.09
Kotak PSU Bank ETF 0.17
Hang Seng BeEs 0.14
Infra BeEs -0.52
Kotak Sensex ETF 0.09
Kotak NIFTY ETF 0.20
Reliance Bkg. ETF 0.23
In case of Passively Manged funds the Sharpe ratio ranges between -0.52 and 0.23.
Exchange Traded Funds, eventhough they are passively managed are giving higher
returns.
156
5. PERIOD OF INVESTMENT (Holding Period):
It’s very important that investors should go for long term (at least 3-5 years)
horizon if they wish to invest in equity oriented funds. So, it becomes important for them
to evaluate the long term performance of the funds. However this does not imply that the
short term performance should be ignored. Besides, it is equally important to evaluate
how a fund has performed over different market cycles (especially during the downturn).
During a rally it is easy for a fund to deliver above-average returns; but the true measure
of its performance is when it posts higher returns than its benchmark during the
downturn.
Performance of Closed –end Schemes: The CRISIL and Value Research India
generally evaluate short term performance – 3 months, 1 year or 3 years of mutual funds
schemes. Therefore, evaluating long-term performance lies with the academicians and
researchers.
Selected Closed Ended Funds – Period (Last 5 years): Five selected close end
schemes are compared, which are invested for a period of 5 years and also for a period of
3 years.
157
TABLE: 4.10 Selected 5 CLOSED ENDED FUNDS – PERIOD (LAST 5 YEARS)
Rank Scheme Name NAV
(`) Last 5 Years
Since Inception
1 Reliance Pharma Fund - Growth 51.2 21.42 24.21
2 IDFC Premier Equity Fund - Plan A -
Growth
29.27 17.94 18.85
3 Reliance Banking Fund - Growth 78.53 15.79 27.21
4 ING Dividend Yield Fund - Growth 20.4 13.44 12.3
5 UTI Dividend Yield Fund - Growth 28.37 12.98 17.2
TABLE: 4.11 SELECTED 5 CLOSE ENDED FUNDS - PERIOD (LAST 3
YEARS):
Rank Scheme Name NAV
(`)
Last 3
Years
Since
Inception
1 Sundaram Select Small Cap Fund -
Growth
11.22 27.44 2.42
2 Canara Robeco Multicap Fund -
Growth
13.81 22.62 6.85
3 Tata Tax Advantage Fund -1 14.43 20.7 6.58
4 Birla Sun Life Long Term Advantage
Fund - Growth
11.77 19.2 3.19
5 IDFC Tax Saver (ELSS) Fund -
Growth
12.44 18.38 4.69
158
The returns are more in case of three years average than five years average. Therefore,
three years investment is the optimum period in case of close-end funds.
6. COMPARISON OF RETURNS AND NAV:
NAV is obviously one of the important parameters that one must look at while
evaluating a fund. Although it is one of the most important, it is not the only parameter.
Many investors simply invest in a fund because it has very high NAV. Such an approach
for making investments is incomplete. In addition to NAV, investors must also look at
returns also. Here the selected six funds’ NAV is compared with returns of funds.
TABLE: 4.12 COMPARISONS OF RETURNS AND NAV
HDFC KOTAK RELIGARE SBI UTI BENCHMARK
NAV as on 11/03/2011
2066 2020 1966 2059 2021 2022
Returns since launch (CAGR)
10.56% 25.84% 21.78% 19.94% 21.3% 21.08%
According to the latest NAV, HDFC stands first, followed by SBI and the third position
goes to Benchmark. When the returns since inception is considered ranks changes.
HDFC stands last instead of first and also the rank last but the first rank goes to SBI.
Therefore, the rank differs according to the current value (NAV) and total returns
(NAV+Dividend), which may be understood with the help of the following table:
159
TABLE: 4.13 CHANGE IN RANKS AS PER NAV AND TOTAL RETURNS
NAME OF THE
COMPANY
RANK ACCORDING TO NAV(11/03/2011)
RANK ACCORDING TOTAL RETURNS
HDFC 1 6
SBI 2 5
UTI 4 3
BENCHMARK 3 4
RELIGARE 6 2
KOTAK 5 1
NAV Vs. Total returns ranks
02468
HDFC UT
I
RELI
GAR
E
Name of the company
Rank
s
RANKACCORDING TONAV(11/03/2011)RANKACCORDING TOTALRETURNS
It is observed that the ranks are completely in contrast in case of HDFC which has gone
from 1st rank to 6th
rank. Similarly Religare which stands last according to the latest
NAV stands in the second position when total returns are taken into consideration. It
infers that an investor cannot simply invest according to the latest NAV but also total
returns since its inception must be also taken into consideration. In the above table UTI
and Benchmark may be considered as standard one which stands in the same position,
both NAV wise and also total returns wise
160
7. RISK AND RETURN COMBINATION:
SD signifies the degree of risk the fund has exposed its investors to. From an
investor’s perspective, evaluating a fund on risk parameters is important because it will
help to check whether the fund’s risk profile is in line with their risk profile or not.
For example, if two funds have delivered similar returns, then a prudent investor will
invest in the fund which has taken less risk i.e. the fund that has a lower SD.
The curve forms from a graph plotting return and risk indicated by volatility, which is
represented by standard deviation. According to the modern portfolio theory, funds lying
on the curve are yielding the maximum return possible given the amount of volatility.
FIGURE 4.8 MPT: RISK- RETURNS COMBINATION
It can be noticed that as standard deviation increases, so does the return. In the
above chart, once expected returns of a portfolio reach a certain level, an investor must
take on a large amount of volatility for a small increase in return. Obviously portfolios
that have a risk/return relationship plotted far below the curve are not optimal as the
161
investor is taking on a large amount of instability for a small return. To determine if the
proposed fund has an optimal return for the amount of volatility acquired, an investor
needs to do an analysis of the fund's standard deviation. The modern portfolio theory and
volatility are not the only means investors use to determine and analyze risk, which may
be caused by many different factors in the market.
8. FUND MANAGERS’ STRATEGIES:
The success of Mutual Funds is essentially the result of the combined efforts of
competent Fund Managers. The performance of a mutual fund scheme is largely linked
to the fund manager and his team. Hence, it’s important that the team managing the fund
should have considerable experience in dealing with market ups and downs. “Investors
should avoid funds that owe their performance to a ‘star’ fund manager. Simply because
if the fund manager is present today, he might quit tomorrow, and hence the fund will be
unable to deliver its ‘star’ performance without its ‘star’ fund manager”, Wermers, R.,
(1997). Therefore, the focus should be on the fund houses that are strong in their systems
and processes. It is typical that when one has made a decision, one wonders what its
consequences will be therefore, once an investor has given money to a Fund Manager to
invest on his/her behalf, he/she should have the right to know what sort of performance
they have obtained.
A large corpus may force fund managers to spread their investments to less liquid mid-
and small cap stocks. This could be fatal in the case of a sudden fall in the market. Apart
from getting stuck in illiquid stocks, a larger fund corpus can drag down fund
performance. Even if the fund manager invests in a small but promising stock, the
investment would be too small to leave an impact on the overall fund. On the contrary,
investments in small-caps yield better results in small-sized funds.
162
Strategies of a few Top Fund Managers are analysed according to their strong and
weak points: (Wermers, R., 1997), Top Fund managers strategies is the most important
factor which reflects the overall performance of the mutual funds.
SUNIL B SINGHANI, Head-equities, Reliance Mutual Fund is adept at picking mid-
cap stocks and is known to be a value player. Sunil is not good when it comes to picking
short-term winners and his biggest weakness is that he fails to exit stocks at the right
time.
JAYASH SHROFF, Senior fund manager, SBI Mutual Fund, believes in holding a
smaller number of stocks in his portfolio. He is known to place large bets on top
companies and index front liners. He is in love of infrastructure stocks. Exposure to a
smaller number of stocks is his main weakness.
R SRINIVASAN, Head-equities, SBI Mutual Fund is known in fund manager circles
for his relatively higher portfolio churn rate. He is adept at picking mid-cap stocks. A
relatively higher exposure to small-cap stocks — which according to him is to generate
higher returns — makes him a very aggressive fund manager.
OM KUCKIAN, Fund manager-equities, Reliance Mutual Fund is known to manage
portfolios very aggressively. He hunts for a new stock on a daily basis. He is one of the
few fund managers who can create a portfolio alpha on a regular basis.
KENNETH ANDRADE, Head-investments, IDFC Mutual Fund is the 'master of
mid-caps'. However, Kenneth has a reputation of having built a huge exposure to illiquid
stocks. "He is one fund manager who does not really care about macro-economics. He
picks stocks on their merit.
163
APOORVA SHAH, Executive vice-president, DSP Blackrock Mutual Fund
APOORVA, is an avid stock picker. He holds 85-95 stocks in each fund portfolio,
making it difficult for quick market alignment. He is a firm believer in macro-economic
factors. He adopts a 'top-down strategy' while picking stocks. He does not take many
cash calls, and at any point of time is 95-98% invested in the market.
9. COSTS COMPARISON: To compare the performance of Funds one should also
compare the expense it incurs which can be done by comparing the Expense ratio. If two
funds are similar in most contexts, it might not be worth buying the high cost fund if it is
only marginally better than the other. Simply put, there is no reason for an AMC to incur
higher costs, other than its desire to have higher margins. Annual expenses involved in
running the mutual fund include administrative costs, management salary, overheads etc.
Expense Ratio is the percentage of assets that go towards these expenses. Every time the
fund manager churns his portfolio, he pays a brokerage fee, which is ultimately borne by
investors in the form of an Expense Ratio.
Expense Ratio of Mutual Fund varies greatly from one investment category to another.
The expense ratio excludes sales charges.
Examples:
The average expense ratio for an actively-managed fund is 1.25%, and this is less for an
index fund. The expense ratio may be higher or lower based on the size of the fund and
the style of the fund. For instance, the expense ratio is generally less for large company
funds than for emerging market funds.
164
TABLE: 4.14 COMPARISON OF TRANSACTION COSTS IN EQUITY AND DEBT BASED MUTUAL FUNDS
Equity Fund @ 10% Long term debt fund @ 7%
1 year 5 Years 1 year 5 Years
Initial investment 1,00,000 1,00,000 1,00,000 1.00,000
Maturity Value @ 7/10% 1,10,000 1,61,051 1,07,000 1,40,255
On redemption :
Exit Load @ 1% 1,078 0.0 0.00 0.00
STT 1.35 1.82 0.00 0.00
DDT 0.00 0.00 0.00 0.00
Table showing Comparison of transaction costs in equity and debt based Mutual funds
It is very clear that with the same initial investment of `
1, 00,000 in Equity fund and
Long term debt fund with different rates of interest at 10% and 7% respectively Maturity
value of Equity Fund is very huge comparatively. On redemption, the amount excluding
Capital gains also the amount of Equity Fund is higher than Long term debt. In case of
one year holding the redemption value of Long term Fund is more than Equity Fund.
Exit load On redemption on Equity fund is payable whereas there is no Exit Load on
debt fund.
COMPARATIVE PERFORMANCE OF EQUITY FUNDS:
This is a unique class of mutual funds that receives capital only from individuals
and reinvests this contributed capital in private companies as opposed to traditional
mutual funds that invests in publicly traded companies. The results also show that the
selectivity performance for sector funds is significantly higher than for equity funds.
165
FIGURE: 4.9 COMPARISION OF ANNUAL RETURNS OF DIFFERENT EQUITY FUNDS
Performance of different types of funds are compared on the basis of their annual
returns. Some specific funds like Equity, Money Market, Debt, Balanced, Gold ETFs,
MIPS & SIPs are compared under different periods.
Mutual Funds come under both Money Market and Capital Market. Money Market
Funds are the instruments which come under purely Money Market. Other funds may be
classified either in any of the market according to the Portfolio of that particular Fund.
COMPARISON OF MONEY MARKET MUTUAL FUNDS DURING THE LAST
THREE YEARS (during and after recession):
Money market funds are considered as less risky with an objective of minimum assured
return. Money market funds are very liquid, and hold very short term debt like
commercial papers and Treasury bills. Money markets are essentially a “cash” position.
In times of high uncertainty, investors tend to park their money in a money market.
166
When other markets are perceived as a better bet, investors shift from money market
funds to those markets, like stocks.
FIGURE: 4.10
Investment Company Institute (2011) mentioned a mutual fund company pointed out
that three of the five largest mutual funds are money markets and the largest is a bond
fund. That’s not an unusual comment from a mutual fund company. They don't seem to
appreciate the value of controlling exposure to loss in falling markets, which is called
active risk management. (Eugene F. Fama and Kenneth R. French, 1999) Even though
these are less risky, money market mutual funds total net assets is decreased during and
after recession.
167
TABLE: 4.15 SELECTED FIVE EQUITY FUNDS PERFORMANCE UNDER
DIFFERENT HOLDING PERIODS
Name of the Company 6 months
returns
1 year
returns
3 years
returns
ICICI Pru FMCG (G) 2.3 23.2 35.2
SBI Mag SFU 0.7 15.5 40.0
Sundaram India Leadership 8.3 8.3 9.1
SBI Magnum SFU – Emerging
Business
5.7 6.1 41.6
UTI – MNC Fund (G) 7.1 3.1 31.9
Source: Derived from MPT Statistics
Top equity funds when compared for different periods of 6 months, one year and
three years returns, the returns are maximum in longer period and ranges between 9%
and 40%.
COMPARATIVE PERFORMANCE OF ALL TYPES TOP FUNDS:
Anjan Chakarabarti and Harsh Rungta (2000) stressed the importance of brand
effect in determining the competitive position of the AMCs. Their study reveals that
168
brand image factor, though cannot be easily captured by computable
performance measures, influences the investor’s perception and
hence his fund/scheme selection.
TABLE: 4.16 TOP FUNDS RETURNS’ OF ALL TYPES
IN DIFFERENT HOLDING PERIODS
Top Companies in all sectors 6 months returns
1 year returns
3 years returns
ICICI Prudential FMCG(G) 2.3 23.2 35.2
Canara Robeco indigo(D) 9.4 16.2 19.4
Templetion India low duration (Bl)
4.7 10.0 13.4
SBI Gold Exchange Traded(other)
21.0 36.5 42.4
Source: Derived from MPT Statistics
When all sectors are considered for comparing in different periods, their returns are
higher in 3 year period than 6 months or one year. The returns are with a minimum and
maximum range of13.4% and 35.2%
All types Top funds returns
0204060
6mo
nths
retur
ns
3 yea
rsre
turns
Period
Retu
rns
ICICI pruFMCG(G)
Canararobecoindigo(D)
TempletionIndia leruduration(Bl)
169
TABLE: 4.17 TOP DEBT FUNDS RETURNS IN
DIFFERENT HOLDING PERIODS:
Name of the company 6 months
returns
One year
returns
3 years
returns
Canara Robeco Indigo Fund
(G)
9.4 16.2 18.0
SaharaShorttermBond
Fund(G)
4.6 14.1 15.0
Escorts Income Plan (G) 9.5 14.0 8.3
Peerless Short term fund (G) 5.0 13.1 14.0
Tata Fixed Income Portfolio 4.3 13.1 7.8
Source: Derived from MPT Statistics
Debt funds returns range between 7.8% and 18% for a period of 3 years investment.
Top 5 Debt Funds
05
101520
Can
araR
obec
oIn
digo
Fund
(G)
Esco
rtsIn
com
ePl
an (G
)
Tata
Fixe
dIn
com
ePo
rtfol
io
Name of the Company
Ret
urns
6 months returns
One year returns
3 years returns
170
TABLE: 4.18 TOP BALANCED FUNDS RETURNS
ACCORDING TO HOLDING PERIODS:
Name of the company 6 months
returns
One year
returns
3 years
returns
Templeton India Low Duration
Fund
4.7 10.0 11.2
HDFC Multiple Yield Fund(G) 3.1 9.1 13.3
Sahara Classical Fund 4.5 9.1 7.6
Taurus MIP Advantage (G) 4.5 8.3 9.7
Birla Sunlife MIP 2 Saving 3.9 8.1 7.0
Source: Derived from MPT Statistics
In case of balanced funds, three years returns are higher than when invested for 6 months
or one year. The minimum and maximum range of the returns are 7%and 11.2%.
Top 5 Balanced Funds
05
1015
Tem
plet
on
Indi
aLo
wD
urat
ion
Fund
Saha
raC
lass
ical
Fund Birla
Sunl
ifeM
IP 2
Savi
ng
Name of the Company
Ret
urns
6 months returns
One year returns
3 years returns
171
TABLE: 4.19 TOP 5 GOLD EXCHANGE TRADED FUNDS
IN DIFFERENT HOLDING PERIODS
Name of the company 6 months returns One year returns 3 years returns
SBI Gold ETF 21.0 36.5 35.4
Quantum Gold Fund(G) 21.0 36.5 27.5
UTI Gold ETF 21.0 36.4 27.5
Kotak Gold ETF 21.0 36.4 27.5
HDFC Gold ETF 20.8 36.1 26.8
Source: Derived from MPT Statistics
It’s observed that Gold Exchange Traded Funds are performing even in downtrend of
stock market, which is giving higher returns in the past three years even after recession.
Its performance is not only higher than other types, but also steadily increasing at a
tremendous rate. The next best fund is Growth fund with higher returns and steady
improvement in rate of return. Compared to Balanced Fund, Debt Funds are performing
better during last six months, one year and also three years.
Top Gold ETFs
010203040
SBI
Gol
dET
F
UTI
Gol
dET
F
HD
FCG
old
ETF
Name of the Company
Ret
urns 6 months returns
One year returns
3 years returns
172
PERFORMANCE OF SIPS:
SIP is an effective strategy for long term wealth creation. SIP is ideal for those
who are too busy to manage investment, not expertise to follow the trends of stock
market and do not have enough cash to invest. SIP is simple, effective and convenient.
As low as `500/- may be contributed at regular intervals towards mutual funds.
Systematic investing can help in achieving one’s financial goals. It encourages the habit
of saving regularly and gives returns in two ways –Rupee cost Averaging and Power of
Compounding. The longer the period of investment the more can be accumulated,
because of the power of compounding. It makes sense to start investing early. Post-dated
cheques may be issued for the same amount i.e. `500/- for at least 12 months
`1, 000/- for at least 6 months. The cheque dates should be or be 1st or 7th or 10th or 20th
or 25th
Returns (%)
of each month.
Power of Compounding: Compounding ensures that even a small difference in returns
results in investment growing at a faster pace.
TABLE: 4.21 POWER OF COMPOUNDING OF SIPs
1 year 5 years 10 years
10% 1.10 1.61 2.59
15% 1.15 2.01 4.05
20% 1.20 2.49 6.19
25% 1.25 3.05 9.31
173
TABLE: 4.22 COMPARISONS OF SIP AND NON-SIP RETURNS:
Scheme Name
SIP RETURNS (ANNUALISED)
SIP RETURNS (ANNUALISED
NON-SIP RETURNS (ANNUALISED)
NON-SIP RETURNS (ANNUALISED)
3 YEARS 1 YEAR 3 YEARS 1 YEAR Reliance Equity - Growth
21.88 98.48 8.78 85.50
SBI Magnum Global - Growth
15.96 103.47 2.18 94.76
Franklin India Prema (Growth)
17.60 96.40 3.42 86.61
When SIPs and Non SIPs are compared, the returns, especially in three years
investment period, are very high, even 5 to 8 times. It infers that investors should
make them understand the advantage of CAGR in SIP.
TABLE: 4.23 TOP ELSS SCHEMES FOR SIP
Name of the Scheme 5 years 3 years 1 year
ICICI Prudential Tax Plan 144 41.8 53.7
HDFC Tax Saver 179.4 38.8 48.7
Canara Robeco Equity Tax Saver 255.4 59.5 43.9
Sahara Tax gain 203.7 56.6 40.8
Franklin India Tax Shield 158.9 35.8 32.8
174
TABLE 4.24 TOP EQUITY DIVERSIFIED FUND FOR SIP
Name of the Scheme 5 years 3 years 1 year
Reliance Equity Opportunities 208.1 40.7 61.71
ICICI Prudential Discovery 199.9 57.7 65.74
Birla Sun Life MNC 167.1 53.5 65.77
UTI Master Value 147.9 55.5 70.11
HDFC Top 200 239.4 60.4 35.4
Equity Diversified Funds for SIP is giving very high returns when it is invested
for 5 years. The returns of the top equity fund was 208.1% which is a good sign
for investing in SIP Equity Fund rather than direct investment in equity.
050
100150200250300
ICICIPrudentialTax Plan
HDFC TaxSaver
CanaraRobeco
Equity TaxSaver
Sahara Taxgain
FranklinIndia TaxShield
5 years3 years1 year
050
100150200250300
Relia
nce
Equit
yOp
portu
nities
Birla
Sun L
ifeMN
C
HDFC
Top
200
5 years
3 years
1 year
175
TABLE: 4.25 BEST BALANCED FUNDS FOR SIPs
Name of the Scheme 5 years 3 years 1 year
HDFC Prudence 203.1 56.1 44.8
Tata Balanced 158.2 40.7 33.9
Canara Robeco Balanced 171.8 42.8 31.3
Birla Sunlife 95 164.2 45.1 30.7
When best balanced funds under SIP are compared, the returns under 5 years are
more than 200 times in some companies. The minimum returns are 158% and the
maximum is 203.1%. It infers that balanced funds under SIP plan are also doing
Returns of Balanced Funds under short term as well as long term are very well.
It is also interesting to find that even one year returns are very good compared to
normal debt funds.
PERFORMANCE OF MIP PLANS:
These plans are good for risk averse investors who are looking for a higher
return and this is the best next alternative to Fixed Deposits. These funds are generally
invested in debit-oriented schemes up to 75% and the remaining in equity instruments.
They aim to pay out regular payouts (dividends). When there is increase in the interest
050
100150200250
HDFC Prudence
Tata Balanced CanaraRobeco
Balanced
Birla Sunlife95
5 years3 years1 year
176
rates NAV of MIPs fall, when the equity portion of the portfolio is concerned. MIPs are
ideal for investment horizon of 2-3 years.
TABLE 4.26 PERFORMANCE OF MONTHLY INCOME PLANS
Scheme Name 1 year return 5 years return
HDFC MIP Long - Term 24.80 13.43
HSBC MIP Savings 20.35 11.88
Reliance MIP 18.17 13.52
UTI MIS Advantage Plan 17.63 11.95
Canara Robecco-MIP 17.06 14.32
Source : Data as on April 2010, Value Research
MIP is giving good returns for a period of one year, but not in the long run. The top
schemes under MIP are HDFC, HSBC are giving more than 20% returns per anum.
Therefore, it is advisable to choose MIPs also as one two year’s investment and then
again may shift to other plan or may extend the period year by year.
PERFORMANCE OF MID CAP FUNDS:
Mid cap funds are those mutual funds, which invest in small / medium sized
companies. As there is no standard definition classifying companies as small or medium,
each mutual fund has its own classification for small and medium sized companies.
Generally, companies with a market capitalization of up to Rs 500 crore are classified as
small. Those companies that have a market capitalization between Rs 500 crore and Rs
1,000 crore are classified as medium sized.
177
Big investors like mutual funds and Foreign Institutional Investors are increasingly
investing in mid caps nowadays because the price of large caps has increased
substantially.. Mid cap companies are looked upon as wealth creators and have the
potential to join the league of large cap companies. Such companies are nimble, flexible
and can adapt to the changes faster. One of the challenges that fund managers of mid cap
funds face is to identifying such companies.
But mid cap funds are very volatile and tend to fall like a pack of cards in bad times.
So, caution should be exercised while investing in mid cap mutual funds. Mid cap funds
are a good option in case the investor wants to add some diversity to his portfolio.
Top Mid Cap Funds in India
• Sundaram BNP Paribas Select Midcap
• Franklin India Prima Fund
• HDFC Capital Builder
• Kotak Indian Mid Cap Fund
• HSBC Midcap Equity Fund
Conclusion:
The growing number of Mutual Funds and various schemes in it pose a great difficulty to
the investors in choosing one. At the outset all schemes relatively promise higher and
similar returns, it is only the actual performance that distinguishes the better scheme
from the rest. The evaluation of Mutual Funds has become an important factor now.
With rating agencies rating the AMC as well as the scheme, as a directive from the
governing body, the investors are having one assured tool of assurance.
178
The basic evaluation is done from the past performance of a fund, though it is not the
only criteria, and even the returns for the future are guaranteed, though it gives one a
better overview of the fund’s performance. An investor whose knowledge is minimal in
Mutual Funds should look more into the past performance, NAV, the risk and return
comparision. There are other statistical tools such as Shape and Standard Deviation
which give a better evaluation opportunity, but these are comparatively complex.
The investment in the sector funds outperformed direct investing in the company shares.
Small / midsized companies tend to be under researched thus they present an opportunity
to invest in a company that is yet to be identified by the market. Such companies offer
higher growth potential going forward and therefore an opportunity to benefit from
higher than average valuations. Excellent performance and stringent regulation will
increase the popularity of Mutual Funds in India.
179
References in performance chapter:
Aigbe Akhigbe ,(2001) ‘Motivation and Performance of Seasoned Offerings by
Closed-End Funds’ , ‘The Financial Review’ August, (Vol-36).
Ajay Khorana, (2001) ‘Performance Changes Following Top Management
Turnover: Evidence from Open-End Mutual Funds’, ‘The Journal of Financial and
Quantitative Analysis’ September (Vol-36).
Anjan Chakrabarti and Harsh Rungta, 2000, “Mutual Funds Industry in India : An
indepth look into the problems of credibility, Risk and Brand”, The ICFAI
Journal of Applied Finance, Vol.6, No.2, April, 27-45.
Chander Ramesh (2002), “Performance Appraisal of Mutual Funds in India”, Finance
India, Vol.XIV, No.4, December.
Dartmouth College - Tuck School of Business; National Bureau of Economic Research
(NBER).
Diane Del Guercio and Paula A. Tkac , (2002),‘The Determinants of the Flow of Funds
of Managed Portfolios: Mutual Funds vs. Pension Funds’ , ‘ The Journal of Financial and
Quantitative Analysis’ ,December (Vol- 37).
Edward.S.O’Neal (2002), ‘Utility Sector Mutual Funds – Sources of Performance
and Dividend policy Implications’ in ‘Managerial Finance’ ,November 12th vol-28 ).
Elizabath.F.Goldreyer and David Diltz (1999)‘The Performance of Socially
Responsible Mutual Funds: Incorporating Sociopolitical Information in Portfolio
Selection’ in ‘Managerial Finance’, Financial Review, (Vol-34).
180
Gordon J. Alexander, Gjergji Cici and Scott Gibson (2007)“Trade Performance?
An Analysis of Mutual Funds” The journal Review of Finance Studies in January,
volume (1) ,Pg 125-150.
Grinblatt, M., and M.Keloharj, 2000, “ The Investment Behavior and Performance of
Various Investor Types: A Study of Finland’s Unique Data Set”, Journal of Financial
Economics, 55, 43-67.
Hsiu‐Lang Chen Review of Financial Studies (2002) Volume15, Issue5 Pp. 1407-1437.
A Khorana and H Servaes, “ The determinants of mutual fund starts”
Rev. Financ. Stud. (1999) 12 (5): 1043-1074. doi: 10.1093/rfs/12.5.1043
Henriksson, R., and Merton, 1981, “On Market Timing and Investment Performance:II”
Statistical procedures for Evaluating forecasting Skills, “Journal of Business, 54, 513-
533.
Jonathan.B.Berk and Richard.C.Green(2004), ‘Mutual Fund Flows and
Performance in Rational Markets’ in ‘Journal of Political Economy’ in the year 2004
,(Vol-112).
Jongmoo Jay Choi and Insup Lee ‘Market segmentation and the valuation of closed-
end country funds: An empirical analysis’ in ‘ Review of Quantitative Finance and
Accounting’ , October 2004 (Vol-7).
Lorie James and Brealy Richard (ED) Modern Developments in Investment Mg.
(Illinots: Dryden Press) pp 442-7.
Migiuel.A.Ferrira and Antonio (2006),‘ The Determinants of Mutual Fund
Performance – A Cross Country Study’ , ‘The Journal of Financial Economist’
November
181
Nicholas. P.B.Bollen and A. Busse ‘ Short Term Persistence in Mutual Fund
Performance’ , ‘ The Review of Financial Studies’ , (Vol-18).
Patel, Jayendu, Richard J. Zeckhauser, and Darryll Hendricks, 1994. “Investment Flows
and Performance: Evidence from Mutual Funds, Cross-Border Investments, and New
Issues”, In: Sato, R., Levich, R. & Ramachanday, R.V.(Eds.), Japan, Europe and
International Financial Markets: An Analytical and Empirical Perspective, Cambridge:
England, PP. 34-38.
Paniyotis.G.Artikis, (2004), ‘Performance Evaluation of the Bond Mutual Funds
Operating in Greece’ in ‘Managerial Finance’ November 10th 2004 (Vol-30).
Philpot, James and Jhonson (2007),‘Mutual Fund Performance and Fund
Prospectus Clarity’ ‘Journal of Financial Services Marketing’ February (Vol-11).
Prequin Based on analysis provided by Preqin an independent provider of private equity
data and information. "The 2011 Private Equity Report. - Fund of Fund Managers Key
Stats and Facts”.
Ravi Shukla and Charles Trzcinka ,‘(2005), Persistent performance in the mutual
fund market: Tests with funds and investment advisers’ , ‘ Review of Quantitative
Finance and Accounting’ February (Vol-4).
Shankar, V., 1996, “Retailing Mutual Funds : A consumer product model”, The
Hindu, July 24, 26.
Thaler, R.D., Kahneman, and Knetsch J, 1992, The Endowment Effect, loss
aversion and status quo bias, in R. Thaler, ed., The Winner’s Curse : Paradoxes and
Anamolies of Economic Life, The Free Press, New York.
182
Vikas Agarwal and Narayan.Y.Naik ,(2003),‘ Risks and Portfolio Decisions
Involving Hedge Funds’ in ‘ The Review of Financial Studies’ , October 15th 2003.
Wermers, R., 1997 “Momentum Investment Strategies of Mutual Funds, Performance
Persistence, and Survivorship Bias”, Working Paper, University of Colarado.
William F. Sharpe., 1978. Adjusting for risk in portfolio performance measurement,
William F. Sharpe. 1996. Mutual Fund Performance. Journal of Business, Vol
XXXiX. Part – 2. Jan pp.119-38.
WEB SITES
http://www.iloveindia.com/finance/mutual-funds/mid-cap-funds.html http://www.investopedia.com/terms/i/internationalfund.asp#ixzz3qGVGNA7J http://www.invLouis K. C. Chan Josef Lakonishok