Performance Analysis of Mutual Funds in India


By

Prof. P. Aranganathan
MBA, PhD
H.O.D. of Management Studies
Mr. M. Arun Kumar
MBA
Dept. of Management Studies
MIET Engineering College
Trichy - Tamil Nadu
 


ABSTRACT

In a growing country like India, capital market plays an important role to stabilize the Economic growth, strengthen industrial performance, and provide various investment avenues to the investors to help the various industries and to ensure the profitable return.  Among various financial products, mutual fund ensures the minimum risks and maximum return to the investors, its having own policies, terms conditions that are different from other products, so the market volatilization will not make more effect in return.  According to the Global Asset Management 2006 Report from Boston Consulting Group, India-managed assets will exceed more than $1 trillion by 2015. This means an annual growth rate of 21% for the next nine years. The Indian mutual funds industry has been growing at a healthy pace of 16.68 per cent for the past eight years and the trend will move further as has been emphasized by the report. With the entrance of new fund houses and the introduction of new funds into the market, investors are now being presented with a broad array of Mutual Fund choices. The total asset under management of Mutual Fund industry rose by 9.45% from Rs.309953.04 crores to 339232.46 crores in November, 2006 as published by AMFI. In 1987, its size was Rs.1,000 crores, which went up to Rs. 4,100 crores in 1991 and subsequently touched a figure of Rs.72,000 crores in 1998. Since then this figure has been increasing tremendously and thus revealing the efficiency of growth in the mutual fund industry. It has generally been observed that as the GDP.  Here the author discussed about performance measures of mutual funds.

INTRODUCTION

There are a lot of investment avenues available today in the financial market for an investor with an investable surplus. He can invest in Bank Deposits, Corporate Debentures, and Bonds where there is low risk but low return. He may invest in Stock of companies where the risk is high and the returns are also proportionately high. The recent trends in the Stock Market have shown that an average retail investor always lost with periodic bearish tends. People began opting for portfolio managers with expertise in stock markets who would invest on their behalf. Thus we had wealth management services provided by many institutions. However they proved too costly for a small investor. These investors have found a good shelter with the mutual funds.

The Indian mutual funds industry is witnessing a rapid growth as a result of infrastructural development, increase in personal financial assets, and rise in foreign participation. With the growing risk appetite, rising income, and increasing awareness, mutual funds in India are becoming a preferred investment option compared to other investment vehicles like Fixed Deposits (FDs) and postal savings that are considered safe but give comparatively low returns, according to "Indian Mutual Fund Industry". Mutual fund industry has seen a lot of changes in past few years with multinational companies coming into the country, bringing in their professional expertise in managing funds worldwide. In the past few months there has been a consolidation phase going on in the mutual fund industry in India. Now investors have a wide range of Schemes to choose from depending on their individual profiles. In this research paper the authors have discussed the growth of mutual funds in India, latest trends, global scenarios and also analyzed top ten prominent mutual funds schemes.

What is mutual fund?

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.

Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.

GROWTH OF MUTUAL FUNDS IN INDIA

The Indian Mutual Fund has passed through three phases. The first phase was between 1964 and 1987 and the only player was the Unit Trust of India, which had a total asset of Rs. 6,700 crores at the end of 1988. The second phase is between 1987 and 1993 during which period 8 Funds were established (6 by banks and one each by LIC and GIC). The total assets under management had grown to 61,028 crores at the end of 1994 and the number of schemes was 167.

The third phase began with the entry of private and foreign sectors in the Mutual Fund industry in 1993. Kothari Pioneer Mutual Fund was the first Fund to be established by the private sector in association with a foreign Fund.

As at the end of financial year 2000(31st march) 32 Funds were functioning with Rs. 1, 13,005 crores as total assets under management. As on august end 2000, there were 33 Funds with 391 schemes and assets under management with Rs 1, 02,849 crores.

The securities and Exchange Board of India (SEBI) came out with comprehensive regulation in 1993 which defined the structure of Mutual Fund and Asset Management Companies for the first time. Several private sectors Mutual Funds were launched in 1993 and 1994. The share of the private players has risen rapidly since then. Currently there are 34 Mutual Fund organizations in India managing 1,02,000 crores.

Major types of mutual funds

Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments and investment strategies. At the fundamental level,there are three varieties of mutual funds:

1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds

All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in companies of the same sector or region are known as specialty funds.

Let's go over the many different flavors of funds. We'll start with the safest and then work through to the more risky.

Money Market Funds

The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD).

Bond/Income Funds

Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cash flow to investors. As such, the audience for these funds consists of conservative investors and retirees.

Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down.

Balanced Funds

The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class.

A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle.

Equity Funds

Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities. A great way to understand the universe of equity funds is to use a style box, an example of which is below.


Factors to be considered before invest in mutual funds:

1. Market risk
2. Inflation rate
3. Credit risk
4. Interest rate risk
5. Stability of the political environment
6. The diversification in the portfolio
7. Returns in the NAV after risk adjustment
8. Size of the asset
9. Liquidity offered.

RESEARCH DESIGN OF THE STUDY

PERIOD OF STUDY

The growth oriented schemes, which have been floated by the selected funds during the period March 2011 to February2012, have been considered for the purpose of the study. Monthly Net Asset Value (NAV) as declared by the relevant mutual funds from March 2011 of a particular scheme to February2012 has been used for the purpose. Any missing value for the scheme and for the index series has been excluded to equalise the two.

SELECTION OF FUNDS FOR PERFORMACE EVALUATION

Following funds have been selected to study the performance of mutual funds:

S.NO

Selected mutual funds

1

Reliance Gold Exchange Traded Fund - Dividend

2

SBI Gold Exchange Traded Scheme

3

UTI Gold Exchange Traded Fund

4

Quantum Gold Exchange Traded Fund - Growth

5

Kotak Gold ETF

6

Religare Gold Exchange Traded Fund

7

HDFC Gold Exchange Traded Fund

8

Axis Gold ETF

9

ICICI Prudential Gold Exchange Traded Fund

10

GS Gold BeES


SCHEME SELECTION

For the purpose of this study, only growth schemes of the funds selected for which NAV values are available have been considered for studying the performance.

ANALYSIS OF MUTUAL FUNDS SCHEMES

Basis for Analysis

Net Asset Value (NAV) is the best parameter on which the performance of a mutual fund can be studied. We have studied the performance of the NAV based on the compounded annual return of the Scheme in terms of appreciation of NAV, dividend and bonus issues. WE have compared the Annual returns of various schemes to get an idea about their relative standings.

VALUATION OF MUTUAL FUND

The net asset value of the Fund is the cumulative market value of the assets Fund net of its liabilities. In other words, if the Fund is dissolved or liquidated, by selling off all the assets in the Fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the Fund. It is calculated simply by dividing the net asset value of the Fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention.

Calculation of NAV

The most important part of the calculation is the valuation of the assets owned by the Fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the net asset value is given below.
The net asset value is the actual value of a unit on any business day. NAV is the barometer of the performance of the scheme.

The net asset value is the market value of the assets of the scheme minus its liabilities and expenses. The per unit NAV is the net asset value of the scheme divided by the number of the units outstanding on the valuation date.

TABLE-1 Showing list of mutual fund schemes studied for the study

Rank

Scheme Name

Date

NAV (Rs.)

Last 12 Months

1

Reliance Gold Exchange Traded Fund - Dividend 

Feb 13 , 2012  

2620.37

36.18 

2

SBI Gold Exchange Traded Scheme 

Feb 13 , 2012  

2743.9

36.17 

3

UTI Gold Exchange Traded Fund 

Feb 13 , 2012  

2692.31

36.11 

4

Quantum Gold Exchange Traded Fund - Growth 

Feb 13 , 2012  

1339.03

36.09 

5

Kotak Gold ETF 

Feb 13 , 2012  

2690.9

36.08 

6

Religare Gold Exchange Traded Fund 

Feb 13 , 2012  

2766.17

36.05 

7

HDFC Gold Exchange Traded Fund 

Feb 13 , 2012  

2745.87

35.78 

8

Axis Gold ETF 

Feb 13 , 2012  

2743.81

35.49 

9

ICICI Prudential Gold Exchange Traded Fund 

Feb 13 , 2012  

2762.94

35.48 

10

GS Gold BeES 

Feb 13 , 2012  

2680.38

35.46 


Top 10   Funds - Period (Last 12 Months) NAV VALUE


Since the inception rate the NAV has been increased upto78.85rs in ICICI Prudential FMCG - Growth because, ICICI is having 65% of online trading through icicidirecttrading.com, followed by Reliance Gold Exchange Traded Fund - Dividend  stands in 2nd rank comparing in last 12 months.  But ICICI Prudential Gold Exchange Traded Fund  stands in last rank, because it only have increased small level from inception point.

Calculation of risk and return

Risk and return has to be calculated and measured by company and concerned board to provide proper instructions, guidelines about mutual funds schemes to investors to help them to avoid unnecessary risks.  Here the risk and return have been analyzed on leading mutual schemes with the help of statistical tools such as mean, standard deviation, sharpie ratio, beta, and correlation.

RISK AND RETURN

Inception
Date

Scheme Name

Type

Mean

SD

Sharpie Ratio

BETA

Correlation

Nov 21, 2011

Reliance Gold Exchange Traded Fund - Dividend 

Open ended

0.44

2.71

0.12

1.06

1.10

May 18,2009

SBI Gold Exchange Traded Scheme 

Open ended

0.49

2.12

0.19

1.02

0.87

April 10,2007

UTI Gold Exchange Traded Fund 

Open ended

0.45

2.72

0.13

1.06

1.11

Feb 22,2008

Quantum Gold Exchange Traded Fund - Growth 

Open ended

0.45

2.70

0.13

1.06

1.10

July 27,2007

Kotak Gold ETF 

Open ended

0.47

2.70

0.14

1.06

1.09

March 12, 2010

Religare Gold Exchange Traded Fund 

Open ended

0.59

2.21

0.22

1.01

0.91

Aug 13, 2010

HDFC Gold Exchange Traded Fund 

Open ended

0.59

2.29

0.21

1.00

0.93

Nov 10,2010

Axis Gold ETF 

Open ended

0.58

2.48

0.19

1.10

1.03

Aug 24, 2010

ICICI Prudential Gold Exchange Traded Fund 

Open ended

0.56

2.33

0.20

1.00

0.95

March 8, 2007

GS Gold BeES 

Open ended

0.45

2.71

0.13

0.00

NA


CALCULATION OF BETA



*here the  SBI Magnum Sector Fundsscheme has been  ranked as leading scheme because all the measures shown a positive results, followed by HDFC balanced fund scheme, which plays 2nd leading  with a mean of 0.39.  IDFC nifty fund scheme is in dangerous because all the measures show a negative result.
 

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Source: E-mail April 9, 2012

          

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