09-09-2014, 11:18 AM
A COMPARATIVE ANALYSIS OF RETURNS OF MUTUAL FUND SCHEMES RANKED 1 BY CRISIL PROJECT REPORT
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Abstract
Mutual fund industry has experienced a drastic growth in the past two decades.
Increase in the number of schemes with increased mobilization of funds in the past few
years notes the importance of Indian mutual funds industry. To fulfill the expectations of
millions of retail investors, the mutual funds are required to function as successful
institutional investors. Proper assessment of various fund performance and their
comparison with other funds helps retail investors for making investment decisions.
The main aim of this paper is to evaluate the performance of mutual fund
schemes ranked 1 by CRISILand compare these returns with SBI domestic term deposit
rates. Considering the interest of retail investors simple statistical techniques like
averages and rate of returns are used.
The results obtained from the study clearly depicts that, in most of the cases the
mutual fund schemes have failed even to provide the return of SBI domestic term
deposits.
INTRODUCTION
Mutual fund is a trust that acts as an investment vehicle, pools the savings of numerous investors to
invest in various financial instruments like stocks, bonds, debentures, etc enabling investors to achieve
their financial goals. SEBI (Mutual Funds) Regulation 1993, defines Mutual Fund as “Mutual Fund means
a fund established in the form of a trust by a sponsor to raise money by the trustee through the sale of units to
the public under one or more schemes for investing in securities in accordance with these regulations”.
Mutual funds are the new financial instruments of savings and investments. The active involvement of
mutual funds in economic development can be witnessed from dominant presence of mutual funds in
financial markets across the globe.
Investors of Mutual Funds need not worry much about the return as mutual funds are managed
professionally by well trained and experienced Managers. The investments in mutual funds are well
diversified and so the investors generally do not run the risk of keeping all the eggs in one basket. The other
advantages of investment in mutual fund are portfolio diversification, low risk, low transaction cost,
liquidity, and choice of schemes, transparency and safety.
Mutual funds are now tailor made to suit the specific needs of the investors. Mutual fund industry
has already entered into the world of exciting innovations where Asset Management Companies (AMCs)
are coming up with new financial products.
CRISILMutual Fund Ranking: APrelude
CRISIL is one among the leading rating agencies in India. CRISIL is a full-service rating agency.
CRISIL rating serves lenders, investors, issuers, market intermediaries and regulators by improving
availability of information and providing benchmarks. CRISIL Rating is used by investors and lenders to
supplement their internal evaluation process and to benchmark credit quality across investment options.
In India, CRISIL has developed a methodology based on global best practices for ranking mutual
funds. In the past decade the mutual fund ranking has gained high acceptance among investors,
intermediaries, and asset management companies.
Only open ended schemes are considered for ranking and the basic criteria for including mutual
fund scheme in the ranking universe are three-year NAV history (one-year for liquid, ultra short-term debt,
short term income and index funds, and five years for consistent performers), assets under management in
excess of cut-off limits and complete portfolio disclosure. The performance criteria covers risk adjusted
returns along with portfolio characteristics like industry concentration, company concentration, liquidity,
etc. to make the analysis forward looking.
The present study was confined to examine and evaluate the return fetched by mutual fund
schemes ranked 1 by CRISILfor the period of 5 years.
REVIEWOFLITERATURE
Ippolito R. A. (1992) concluded that the investors prefer mutual funds which have a record of
positive return in the past [3].
Sapar & Narayan(2003) evaluates the performance of 269 open ended schemes of mutual funds in
a bear market using relative performance index, risk-return analysis, Treynor's ratio, Sharp's ratio, Sharp's
measure, Jensen's measure, and Fama's. The results obtained advocate that most of the mutual fund
schemes in the sample outperformed the investor's expectations by giving excess return over expected
return based on premium for systematic risk and total risk[5].
Sathya Swaroop Debasish (2009) studied the performance of 23 schemes offered by six private
sector mutual funds and three public sector of mutual funds based on risk-return relationship models and
measures it over the time period of 13 years (April 1996 to March 2009). The analysis has been made on the
basis of mean return, beta risk, co-efficient of determination, Sharpe ratio, Treynor ratio and Jensen Alpha.
The overall analysis concludes Franklin Templeton and UTI being the best performers and Birla SunLife,
HDFC and LIC mutual funds showing below-average performance when measured against the risk-return
relationship models [5].
Dhume and Ramesh (2011) conducted a study to analyze the performance of the sector funds. The
sectors considered were Banking, FMCG, Infrastructure, Pharma and Technology. The study used different
approaches of performance measures. Findings of study revealed that all the sector funds have
outperformed the market except infrastructure funds [7].
Gaps Identified
In the above literature very few studies have made an attempt to make a comparative analysis of Mutual
fund return with bank domestic term deposit rates.
In India retail investor hardly understands the performance measure tools like Sharpes, Treynors and
Jensons models. Still very few studies have made an attempt to calculate the return on mutual funds which
can be easily understandable by a retail investor.
RESEARCH METHODOLOGY
Source of Data
The data for this study is mainly collected from Secondary Sources like Books, Journals,
Magazines, and various websites like www.nseindia.com, www.amfiindia.com, www.mutual
fundsindia.com, www.sebi.gov.in and www.moneycontrol.com
Statistical Tools
The simple statistical techniques like averages and rate of returns are used. Considering the
interest of the retail investors the study has been made simple and average rate of return of mutual fund
schemes ranked 1 by CRISILhas been calculated and compared with SBI domestic term deposit rates
Limitations of the study
Mutual fund schemes ranked 1 by CRISILare considered for the period of 2008-2013. Hence, the findings
of the study may not be generalized upon the other mutual fund schemes and for the same schemes for
different periods.
The performance of a scheme can be evaluated on various parameters, but to make the study simple and
understandable by a retail investor only average return of the schemes has been calculated.
Income tax aspects are not considered in this study.
DL FINDINGS OFTHE STUDY
The present study reflects that, in most of the cases mean return on equity mutual fund schemes is
more than the mean return on other mutual fund schemes and SBI domestic term deposit rates. Further
equity mutual fund schemes have shown a remarkable return for the period of 1 year and 5 year.
Hybrid mutual fund schemes provide both income and capital appreciation while avoiding
excessive risk. The mean return on hybrid mutual fund schemes has shown volatility during the study
period, and served the purpose of hybrid funds only during the period of 6 months, 1 year and 5 year.
The mean return on debt mutual fund schemes were less than the SBI domestic term deposit rates for the
period of less than 1 year and more than the SBI domestic term deposit rates for the period of more than 1
year. Further the mean return on money market mutual fund schemes were consistently positive and were
very close to SBI domestic term deposit rates.
CONCLUSION
This paper was an attempt to evaluate the performance of mutual fund schemes ranked 1 by
CRISILand compare the mean returns with the SBI domestic term deposit rates. The performance of all the
schemes seemed volatile during the study period, as such it was quite difficult to earmark one particular
scheme that out performed consistently well during the period of study.
The mutual fund schemes ranked 1 by CRISILwere considered for the study. The results obtained
from the study clearly depicts that, in most of the cases the mutual fund schemes have failed even to provide
the return of SBI domestic term deposits. It can also be concluded that equity mutual fund schemes have the
potential to provide greater returns in long term. The investments in mutual funds is subject to market risk
and the investment decision should be taken carefully, as there is no guarantee of return and the past
performance may or may not be occurred in future.