1. Performance Evaluation of Mutual Funds Himanshu Joshi

2. Group 1- Performance Evaluation of Mutual Fund 2 CONCEPT OF MUTUAL FUND A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. – The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. –The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. –Most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

3. Group 1- Performance Evaluation of Mutual Fund 3 ADVANTAGES OF MUTUAL FUNDS The advantages of investing in a Mutual Fund are:  Professional Management  Diversification  Return Potential  Low Costs  Transparency  Flexibility  Choice of schemes  Tax benefits  Well regulated  Liquidity

4. Group 1- Performance Evaluation of Mutual Fund 4 Net Asset Value (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

5. Measurement of Return in Relation to Risk In examining the performance of fund managers, the return measure commonly used is excess returns. Excess Return = Total Portfolio Return – Risk Free Rate. Once computed excess returns are then compared with risk. We look at three different approaches to comparing excess returns to risk: Sharpe, Treynor and Jensen. Group 1- Performance Evaluation of Mutual Fund 5

6. Sharpe Approach Sharpe Measure = Total Portfolio Return – Risk free rate Portfolio Standard Deviation If a portfolio has a return of 10 percent, and the rf = 6%, and the standard deviation of the portfolio is 18%. If there is a 9% total market return, and market Standard deviation is 12%. Sharpe Measure > Market Measure Group 1- Performance Evaluation of Mutual Fund 6

7. Treynor Approach Treynor Measure = Total Portfolio Return – Risk free rate Portfolio Beta Group 1- Performance Evaluation of Mutual Fund 7

8. Jenson Approach In the third approach, Jensen emphasizes using certain aspects of the capital asset pricing model to evaluate portfolio managers. He compares excess actual returns (total portfolio return – risk free rate) with what should be required in the market, based on the portfolio beta. If beta is zero, the investor should expect to earn no more trhan the risk free rate. Group 1- Performance Evaluation of Mutual Fund 8

9. 9 Assumptions.. There is no significant difference among the returns within various portfolios. (Equity, Bond, Balanced). Return of Equity, Balanced Funds and Bond Funds are significantly different from each other. Bond fund returns should outperform the returns of Equity and Balanced Funds in bearish market. According to Sharpe Index Model for portfolio performance measurement: Bond Returns should outperform all other portfolio’s returns as well as market returns in the bearish market. Equity funds returns and Market returns are not significantly different from each other.

10. Group 1- Performance Evaluation of Mutual Fund 10 Performance Evaluation … In this Project the performance evaluation of Indian mutual funds in a bear market is carried out through; – relative performance index, – risk-return analysis, –Sharpe's ratio Data have been used is monthly closing NAVs. Source of data –Website of Association of Mutual Funds in India (AMFI). Study period is January 2008-December 2008 (bear period). Started with a sample of 15 open ended schemes (out of total schemes of 592) for computing relative performance index. We have taken 5 mutual funds in each category equity, debt and balanced funds.

11. Group 1- Performance Evaluation of Mutual Fund 11 Mutual Funds: Portfolio Type Equity Fund P1Birla Sun Life Basic Ind. Fund P2HDFC Equity Fund P3ICICI Pru Growth Fund P4Reliance Growth Fund P5Tata Growth Fund Balanced Funds P6Birla Sun Life Balance (G) P7Magnum Balance Fund (G) P8JM Balance Fund (G) P9ING Balanced Fund (G) P10Baroda Pioneer Balance (G) Debt Funds P11UTI-Liquid Plus Fund (G) P12Reliance Income Fund - (G) P13Kotak Bond - Deposit Plan (G) P14DBS Chola Monthly Income Plan (G) P15HDFC Income Fund (G)

12. Group 1- Performance Evaluation of Mutual Fund 12 Equity Funds 2008MR1MR2MR3MR4MR5AMR(EF) Feb-3.46-0.860.75-3.26-3.78-2.12 Mar-16.03-22.57-10.34-12.19-11.64-14.55 Apr6.507.487.7010.826.047.71 May-7.02-4.82-3.54-4.39-3.44-4.64 Jun-17.89-14.90-15.54-14.68-16.19-15.84 Jul5.684.56-0.285.091.673.35 Aug2.091.957.120.57-0.182.31 Sep-12.37-5.30-8.39-11.86-14.46-10.48 Oct-25.90-24.30-22.18-22.34-26.05-24.15 Nov-4.71-7.74-3.19-8.07-8.31-6.40 Dec6.418.224.556.027.856.61 SD10.9511.289.4610.0510.2710.17 AMR(%)-6.07-5.30-3.94-4.93-6.23-5.29

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14. Group 1- Performance Evaluation of Mutual Fund 14 Hypothesis for Equity Funds. H0: There is no significant difference among the returns of 5 equity portfolios. Test of Hypothesis: The statistical test of ANOVA indicates that F Value (0.0868) is not significant at 5% level. Therefore Null Hypothesis is not rejected. It also reveals that there is no significant difference among the returns of of 5 equity portfolios in bearish market.

15. Group 1- Performance Evaluation of Mutual Fund 15 Balanced Funds.. 2008MR6MR7MR8MR9MR10AMR(BF) Feb-0.090.11-1.93-0.21-1.64-0.75 Mar-5.48-9.98-13.02-8.45-10.38-9.46 Apr5.905.348.166.00-0.265.03 May-2.89-4.58-7.01-3.76-0.34-3.72 Jun-10.03-13.11-15.29-12.13-13.87-12.88 Jul2.714.392.523.569.834.60 Aug1.981.212.931.060.041.44 Sep-5.51-9.49-15.22-9.40-13.39-10.60 Oct-11.29-17.04-25.64-18.04-18.20-18.04 Nov-2.72-4.08-2.55-5.85-3.35-3.71 Dec7.547.626.644.574.926.26 SD6.098.0910.707.668.658.06 AMR(%)-1.81-3.60-5.49-3.88-4.24-3.80

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17. Group 1- Performance Evaluation of Mutual Fund 17 Hypothesis for Balanced Funds.. H0: There is no significant difference among the returns of 5 Balanced portfolios. Test of Hypothesis: The statistical test of ANOVA indicates that F Value (0.2773) is not significant at 5% level. Therefore Null Hypothesis is not rejected. It also reveals that there is no significant difference among the returns of 5 Balanced portfolios during last one year.

18. Group 1- Performance Evaluation of Mutual Fund 18 Bond Funds.. 2008MR11MR12MR13MR14MR15AMR(BOF) Jan Feb0.65-0.31-0.683.26-0.050.57 Mar0.73-1.32-1.280.83-1.42-0.49 Apr0.650.20 1.300.220.51 May0.650.160.300.000.170.25 Jun0.70-0.82-0.50-4.26-1.21-1.22 Jul0.74-0.240.051.16-0.280.29 Aug0.721.340.500.900.500.79 Sep0.820.350.54-1.370.610.19 Oct0.851.480.84-2.36-0.94-0.03 Nov0.723.252.390.063.521.99 Dec0.7612.4513.682.4111.238.11 SD0.073.844.162.153.602.49 AMR(%)0.731.501.460.181.121.00

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20. Group 1- Performance Evaluation of Mutual Fund 20 Hypothesis for Bond Funds.. H0: There is no significant difference among the returns of 5 Bond portfolios. Test of Hypothesis: The statistical test of ANOVA indicates that F Value (0.34105) is not significant at 5% level. Therefore Null Hypothesis is not rejected. It also reveals that there is no significant difference among the returns of 5 Bond portfolios during last one year.

21. Group 1- Performance Evaluation of Mutual Fund 21 Average Monthly Returns for Equity, Balanced and Bond portfolios. 2008EFBFBOF Feb-2.12-0.750.57 Mar-14.55-9.46-0.49 Apr7.715.030.51 May-4.64-3.720.25 Jun-15.84-12.88-1.22 Jul3.354.600.29 Aug2.311.440.79 Sep-10.48-10.600.19 Oct-24.15-18.04-0.03 Nov-6.40-3.711.99 Dec6.616.268.11 SD10.178.062.49 AMR(%)-5.29-3.801.00

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23. Group 1- Performance Evaluation of Mutual Fund 23 Hypothesis for Equity and Balanced Funds.. H0: There is no significant difference between the returns of Equity funds and balanced funds. Test of Hypothesis: The statistical test of ANOVA indicates that F Value ( 0.14466 ) is not significant at 5% level. Therefore Null Hypothesis is not rejected. It also reveals that there is no significant difference between the returns of Equity funds and balanced funds during the last one year.

24. Group 1- Performance Evaluation of Mutual Fund 24 Hypothesis for Balanced Funds and Bond Funds.. H0: There is no significant difference between the returns of Balanced funds and bond funds. Test of Hypothesis: The statistical test of ANOVA indicates that F Value ( 3.5609 ) is not significant at 5% level. Therefore Null Hypothesis is not rejected. It also reveals that there is no significant difference between the returns of Balanced funds and bond funds during the last one year.

25. Group 1- Performance Evaluation of Mutual Fund 25 Hypothesis for Equity funds and Bond Funds.. H0: There is no significant difference between the returns of Equity funds and bond funds. Test of Hypothesis: The statistical test of ANOVA indicates that F Value ( 3.9689 ) is not significant at 5% level. Therefore Null Hypothesis is not rejected. It also reveals that there is no significant difference between the returns of Bond funds and bond funds during the last one year.

26. Group 1- Performance Evaluation of Mutual Fund 26 Sharpe Index Model.. Sharpe ratio R P - R F S = ---------  P Performance Criterion R P - R F R M - R F --------- > -----------  P  M

27. Group 1- Performance Evaluation of Mutual Fund 27 SHARPE INDEX MODEL SHARPE INDEX RATIO of EF-1.06108 SHARPE INDEX RATIO of BF-1.15384 SHARPE INDEX RATIO of BOF-1.81016 SHARPE INDEX RATIO OF BSE-0.85196

28. Group 1- Performance Evaluation of Mutual Fund 28 COMPARATIVE ANALYSIS SHARPE INDEX RATIO of EF (-1.06108 ) < SHARPE INDEX RATIO OF BSE (-0.85196) SHARPE INDEX RATIO of BF (-1.15384) < SHARPE INDEX RATIO OF BSE (-0.85196) SHARPE INDEX RATIO of BOF (-1.81016) < SHARPE INDEX RATIO OF BSE (-0.85196)

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