Pacific Business Review International

Volume 13 issue 2 August 2020

Variation in Mutual Fund Performance: A Comparative Study of Selected

Equity Schemes in India for the Period 1995-2020

Aniruddh Sahai Abstract

Ph.D. Research Scholar, Mutual Funds (through its professional managers) allow retail
Department of Commerce & Business Studies, investors to generate returns in capital markets with small amounts
Jamia Millia Islamia, New Delhi, India while getting the advantage of diversification. Mutual funds perform a
crucial role in promoting the nation's economic &industrial growth by
Prof. (Dr.) Ravinder Kumar channelizing savings for productive purposes. The household sector is
Dean, Faculty of Social Sciences, the most crucial fund supplier for mutual funds. The Indian mutual
Jamia Millia Islamia, New Delhi, India fund industry began in 1963& has been developing over the year in
parameters like the no. of asset management companies (AMCs), total
amount of funds invested, the no. of schemes, &the no. of investors,
etc. In India, the MF industry was opened to the private sector in 1993.
Before privatization, UTI, public sector banks, & insurance companies
used to run mutual funds in the country. Mutual Fund schemes have
offered varying returns over the decades. While some funds have
outperformed the benchmark stock market indices (Nifty, Sensex,
MidCap Index, SmallCap Index, etc.), others have only delivered tepid
returns & have underperformed these Indices. Similarly, the first half
(of the period 1995-2020) delivered superior returns for equity mutual
funds when compared to the latter half. Thus, investors must recognize
the cross-sectional & longitudinal variation in the performance to be
able to effectively deploy their resources & multiply wealth. This study
compares the performance of different equity schemes offered by the
mutual fund industry in India using concepts of risk & returns and
ratios such as Sharpe, Treynor, Jenson, etc.
Keywords: Mutual Fund, Performance, Risk, Returns, Investors,
Equity.

Introduction
The assets management companies (AMCs) provide the advantages of
financial expertise & diversification to the retail investors. Mutual
Funds act like agents to invest the investors' investment in different
securities. It refers to the collective investment of individuals'&
groups' funds by experts (Financial Managers) in different securities
(stock, bonds, money markets & others). The investment is made
keeping the objectives of every scheme in mind. Large projects require
huge investment & MFs allocate the pooled funds for such investment
purposes. "Do not put all your eggs in one basket" concept is at the
center of the MF managers' philosophy. The investors purchase units of

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MF to become shareholders of the Mutual Fund. The MF Fund family related factors (management function &fund
Industry aims to deliver high risk-adjusted returns by family size, etc.)
investing in diversified portfolios. The schemes are
Management related factors (manager skill, knowledge,
operated by financial managers & banks for generating
experience, tenure, etc.);
income (dividend) & capital gain(increasing NAV) for
their interest & investors' benefit. The earnings (dividends, Country based factors (economic & financial development,
capital gains/ losses) are distributed to the investors in political stability, country GDP& per capita incomes,
proportion to their initial investment after deducting the investing behavior of the country, border& geography, etc.)
operating costs. In open-ended mutual funds, the investor
Environmental factors (financial & legal condition)
can buy & redeem units anytime at the ongoing Net Asset
Value (which is announced daily). On the contrary, closed- Many research studies have contributed to evaluating the
ended funds are initially launched with a fixed number of mutual fund performance. Sharp (1964) formulated Capital
units similar to the public companies' IPO& are then sold in Asset Pricing Theory (CAPM), which was used by
the stock exchange. This study explores both traditional & researchers like Lintner (1965), Treynor & Mossin (1966).
modern methods to analyze the performance of selected Treynor examined the market impact on portfolio returns.
Mutual Funds and attempts to fill the gap from the Indian Jensen (1968) studied the association of funds'
perspective. Investing decisions are critical functions of performance to particular benchmarks & concluded that
financial managers of every organization, which also funds with a positive alpha generally beat the market
determines the future of the organization. In India as well, indices. Carleson (1970) investigated returns through
many options for investment are available. The proper regression & established that the majority of funds beat the
selection is governed by the risk-return tradeoffs associated market return. The only method available before 1965 for
with the competing options. MF has become the preferred evaluating MF performance was to compare the fund
choice for long term investments for various individuals returns. Only the Close (1959) study was available during
&organizations as it offers higher returns & lower risk. In that time in which Close compared the close-ended &
order to test the validity of these statements, an in-depth open-ended schemes' performance, & found that the close-
empirical appraisal of MF schemes' performance needs to ended funds performed better than open-ended ones,
be performed. This analysis has been carried out using the despite the three times higher sales of open ended funds.
following statistical tools: Brown & Vickers (1963) explained that every Fund has
different criteria for measuring the performance. John
Sharpe ratio, Treynor Ratio, Jensen ratio, Beta, Standard
McDonald described the connection between the fund
deviation, Average Return
goals, risks, & return. This study established that there was
Review of Related Studies no proof of fund managers consistently outperforming the
market on a risk-adjusted basis based on empirical analysis
The concept of an Investment Company began in Europe
of 123 Funds. Jensen Michael (1968) formulated a
during the late 1700s when Abraham van Ketwitch (Dutch
portfolio evaluation technique using risk-adjusted returns.
Merchant) asked for contributions from small investors.
Analysis of net returns of 115 funds for the period 1945-66
The 'investment pooling' concept spread from England to
demonstrated that 39 funds had outperformed, while 76
the United States in the 1800s. Mutual Funds are ancient
funds had provided poor returns. Using gross returns, 48
investment vehicles that collect the savings of small
funds resulted in above-average returns & 67 funds showed
investors for investing in money market instruments or
below average results. Thus, there was little evidence that
stocks & bonds (Shah & Hijazi, 2005).
funds were able to perform significantly better than the
Many factors influence or determine the performance of benchmarks. James R.F. Fellow (1978) evaluated the
Mutual Funds. Past literature provides evidence of the performance of risk-balanced UK investment trusts
relation between fund size & fund performance. Becker & through the utilization of bid & Jensen measures. He
Vaughan (2001) suggested that most managers are strongly argued that no trust had shown better performance than the
motivated to grow the fund size (because the fund industry London Stock Exchange Index.
remuneration depends on the asset under management),
In the context of the Indian Mutual Fund Industry also
which can affect the returns negatively. Other important
various studies have been conducted. According to Nalini
factors include:
Prava Tripathy (1996), “the Indian capital market has been
Mutual Fund specific factors (fund flow, fund size, fund increasing tremendously during the last few years due to
style, expense ratio, fund age, loading& fund fee, etc.) the reforms of the economy, industrial policy, public sector
&financial sector. The economy was opened & several

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Volume 13 issue 2 August 2020

developments happened in the money market& capital deviation, Beta, Coefficient of determination, Sharpe
market.”M. Vijay Anand (2000) compared the Birla Sun Ratio, Jensen Ratio, & Treynor Ratio. These parameters are
life equity schemes with the competitors' schemes for three compared to other schemes & also to the benchmark
years using SWOT Analysis & Delphi technique. He noted indices. The other important objective is to study the cross
that the selected equity funds had earned higher returns sectional & longitudinal variation of these equity schemes
than benchmarks & that Birla Sun life performed better in order to identify trends.
than the benchmarks & competitors. Gupta & Agarwal's
Research Methodology
(2009) constructed the portfolios using the cluster method,
took industry concentration as a variable & compared the An Empirical Study of 34 mutual fund schemes'
performance of two types of portfolios with benchmarks. performance for the period 1995-2020was undertaken in
Results were found to be encouraging as far as risk which their returns were compared with respective
mitigation was concerned. Prajapati & Patel(2012) benchmark indices. To analyze whether mutual funds
evaluated various diversified equity funds in India from the underperform or outperform the market index, the
period 2007-2011 &concluded that funds had given following statistical techniques were used:
positive returns & that the best performers were HDFC &
For Return Analysis:
Reliance mutual funds.
Average Return
Kale & Panchapagesan (2012) pointed out that the weak
regulatory environment & lack of governance were the For Risk Analysis:
primary reasons for the poor penetration& performance of
Standard deviation (Total Risk), Beta (Systematic Risk) &
the MF industry. Annapoorna & Gupta (2013) examined
Coefficient of Determination
the performance of MF schemes ranked one by CRISIL &
compared their returns with SBI term deposit rates. They Performance Evaluation by Risk-Adjusted Measures:
found that most of the funds failed to provide returns
Sharpe Ratio, Treynor Ratio, Jenson Ratio
comparable to SBI domestic term deposit. Rajput & Singh
(2014) evaluated the performance & risk-return profile of Average Returns
major funds & even studied the impact of stock market
The performance evaluation is done by comparing the
fluctuations (April 2012-March 2013). They considered
returns of a mutual fund scheme with returns of a
120 different open-ended mutual fund schemes (from the
benchmark portfolio.
public sector, private sector, & UTI) & compared them to
the benchmark BSE index. The systematic risk was found Returns = [(NAVt– NAVt-1)/ NAVt-1]* 100
to be higher in tax saving &equity schemes, whereas it was
moderate in balanced schemes& low in income schemes. Standard Deviation (SD)
Tax saving funds had given the best performance, followed The higher the SD, the greater will be the magnitude of the
by balanced &equity funds. Pala & Chandnib (2014) deviation of the values from their mean. Small SD means a
evaluated income & debt MF schemes for the period 2007- high degree of uniformity & homogeneity of a series. The
2012. The study also found that the best equity schemes total risk can be measured using standard deviation.
were HDFC Mid Cap Opportunity, Birla Sun Life MNC
Fund & Quantum Long-Term Equity. Dr. Shri Prakash SD=√ N(X2 ) – (X)2/ N
Soni, Dr. Deepali Bankapue, Dr. Mahesh Bhutada, (2015) Beta
carried out a comparative analysis of schemes offered by
Kotak mutual fund & HDFC mutual fund. The study Beta indicates the volatility of the fund as compared to the
concluded that Kotak schemes were more effective in the benchmark (systematic risk). A beta higher than one means
that the fund is more volatile than the benchmark, while a
Large Cap Equity segment, while HDFC schemes were beta less than one means that the fund is less volatile than
better in the MidCap Equity segment. Both the companies' the index. A fund with a beta close to 1 means the fund's
schemes were well-managed in Debt segments. Kotak performance closely matches the index or benchmark.
Select Focus was the best scheme in Large-cap Equity.
Coefficient of Determination (R2)
Objectives of the Study The R2 is a measure of a security's diversification in relation
This Research Paper aims to conduct a comparative & to the market. The closer the R2 is to 1.00, the more
quantitative analysis of various equity MF Schemes in diversified the portfolio (Reilly and Brown, 2003). An R2 of
India for the period 1995-2020. The performance is 0 means that a fund's returns have no correlation with the
market,& an R2 of 1.00 indicates that a fund's returns are
measured using variables like Average Returns, Standard

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entirely in sync with the benchmark. have a negative alpha.

Sharpe Index Jenson's alpha = Portfolio Return – CAPM
Sharpe Index is based on the scheme's total risk and is a where CAPM= risk free rate + â*(expected market return
summary measure of the scheme's performance adjusted – risk free rate)?
for risk. Hence the Sharpe index measure reflects the Higher values of Sharpe, Treynor & Jenson Indices suggest
excess return earned on a fund per unit of total risk
(standard deviation). The risk-free rate of return for the the better risk-adjusted performance of a fund, whereas low
study is considered as 7.95% values of these Ratios reflect poor performance.
Sharpe Index = [(Fund Return – Risk free Rate) /Total Risk Empirical Results
of Fund] i.e. [(Rp-Rf)/óp] The following tables (Table 1 & Table 2) summarize the
Treynor Index findings of the study:
As per the Treynor index, systematic risk or beta is taken as
the appropriate measure of risk. Hence, the Treynor
measure reflects the excess return earned by the fund per
unit of systematic risk (beta).
Treynor Index =[(Fund Return – Risk free Rate)/Beta]
i.e. [(Rp-Rf) / âp]
Jenson Index
The Jensen ratio measures the manager's ability to deliver
above-average risk-adjusted returns. The higher the ratio,
the greater the risk-adjusted returns. A portfolio with a
consistently positive excess return will have a positive
alpha, while a portfolio with a negative excess return will

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Volume 13 issue 2 August 2020

HDFC Equity >Franklin India Equity >Franklin India The performance has been evaluated in terms of return &
Bluechip>Franklin India Prima >HDFC Capital Builder risk analysis & risk-adjusted performance measures such
Value >ICICI Pru Multicap >Canara Robeco Equity Tax as Sharpe ratio, Treynor ratio& Jenson's Alpha. In a nut
Saver >Tata Large & Mid Cap > NIFTY50 shell, 94% of the diversified equity fund schemes have
shown superior average returns compared to the
For the overall period of 25 years (1995-2020), Nifty Index
benchmark indices. In terms of standard deviation, 90% of
multiplied by 13.4 times (CAGR 11.4%) while these
the schemes are less risky than the market. 44% funds have
mutual fund schemes multiplied anywhere between 19.7
a beta less than one & positive, which indicates they were
times (minimum returns - TATA Large & Mid Cap Fund:
less risky than the market,& in terms of coefficient of
CAGR 13.2%) and 94.5 times (maximum returns – HDFC
determination (R2), 85% funds were greater than 0.8,
Equity Fund: CAGR 20.9%). The first half of the period
which implies high diversification of the portfolio. The
(1995-2007) was much better for the markets and delivered
risk-adjusted performance was evaluated using Sharpe,
superior returns compared to the second phase. Nifty Index
Treynor, & Jensen's tools. In the study, the Sharpe ratio &
multiplied more than 6.5 times (CAGR 17.3%) while these
Treynor ratio were greater than 1& Jenson's alpha was
mutual fund schemes multiplied anywhere between 9.2
positive for most schemes, which showed that the funds
times (minimum returns –Canara Robeco Equity Tax Saver
were providing higher returns.
Fund: CAGR 20.3%) and 29.5 times (maximum returns –
HDFC Equity Fund: CAGR 32.6%).However, in the The CAGR offered by these mutual funds during the first
second half (2008-2020), Nifty Index only managed to half of this 25 year period was found to be much greater
double (CAGR 5.9%), and the mutual funds were also only than the latter half. This reflects a shift in the profile of
able to multiply wealth between 2 times (minimum returns Indian stock markets post 2008 and could possibly indicate
– TATA Large & Mid Cap Fund: CAGR 6.4%) to 3.2 times the maturity of the markets with less price discrepancies
(maximum returns – HDFC Equity Fund: CAGR available to the mutual fund managers. Thus, the investors
10.2%).The standard deviation (risk) of these funds is should revise their expectations with respect to the
higher than Nifty, and the standard deviation (risk) is performance of their mutual fund portfolios.
greater in the Second Half when compared to the First Half
CRISIL & AMFI Equity Fund Performance Index was
for the time frame under consideration. These schemes
growing faster than S&P BSE SENSEX (TRI), NIFTY 50
display high correlation with each other and also with Nifty
(TRI), NIFTY 500 (TRI).
(Refer to Appendix C).
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