Financial Performance of Selected Indian Mutual Funds Schemes

European Journal of Social Sciences ISSN 1450-2267 Vol.29 No.3 (2012), pp. 450-457 © EuroJournals Publishing, Inc. 2012 http://www.europeanjournalofsocialsciences.com Financial Performance of Selected Indian Mutual Funds Schemes B. Sathish Kumar Faculty – MBA,Sri Krishna College of Technology Kovaipudur, Coimbatore – 641042 E-mail : sathish_inbox@yahoo.co.in A. Elgin Faculty – MBA,Sri Krishna College of Technology Kovaipudur, Coimbatore – 641042 V. R. Nedunchezhian Professor – MBA, Kumaraguru College of Technology Coimbatore Abstract Development of the Indian capital Market had a major structural change after deregulations of the economy in 1992. Mutual funds which are major source of capital flows to emerging economies have also gone through ups and downs after deregulation. This article provides an overview of Indian mutual fund industry. The study analysis the performance of most active type of funds that is ELSS scheme. Using various financial tools the selected fund have been evaluated and ranked. 1. Introduction 1.1. About Indian Mutual Fund Industry Mutual funds have been a significant source of investment in both government and corporate securities. Decades it has been the monopoly of the state with UTI being the key player, with invested funds exceeding Rs.300 bn. The state-owned insurance companies also hold a portfolio of stocks. Presently, numerous mutual funds exist, including private and foreign companies and mainly state-owned Banks. Foreign participation in mutual funds and asset management companies (AUM) is permitted on a case-by-case basis. UTI, the government in 1964 set up the largest mutual fund in the country, to encourage small investors in the equity market, presently having extensive marketing network of over 35, 000 agents spread over the country. The UTI scrip’s have performed relatively well in the market, as compared to the Sensex trend. However, the same cannot be said of all mutual funds. All MFs are allowed to apply for firm allotment in public issues. SEBI regulates the functioning of mutual funds, and it requires that all MFs should be established as trusts under the Indian Trusts Act. The actual fund management activity shall be conducted from a separate asset management company (AMC). The minimum net worth of an AMC or its affiliate must be Rs.50 million to act as a manager in any other fund. MFs can be penalized for defaults including non-registration and failure to observe rules set by their AMCs. MFs dealing exclusively with money market instruments have to be registered with RBI. All other schemes floated by MFs are required to be registered with SEBI. 450 European Journal of Social Sciences – Volume 29, Number 3 (2012) In 1995, the RBI permitted private sector institutions to set up Money Market Mutual Funds (MMMFs). They can invest in treasury bills, call and notice money, commercial paper, commercial bills accepted/co-accepted by banks, certificates of deposit and dated government securities having unexpired maturity up to one year. 1.2. Meaning of ELSS Equity Linked Saving Scheme (ELSS) is an open-ended equity growth scheme that is offered by mutual funds in line with existing ELSS guidelines. The investments under this type of scheme are subject to a lock-in period of 3 years and, as per the Finance Act 2005, are allowed the benefit of income deduction up to Rs. 1,00,000. ELSS offers the benefits of tax saving and capital gains. Instead of spreading your investments across different instruments such as PPF, ELSS, NSC and infrastructure bonds, you can now invest the entire limit of Rs. 100,000 available under Sec 80C in ELSS. 1.3. Advantages of ELSS  Lock-in for three years prevents unnecessary withdrawals and allows your money to grow over a period of time  Investments in equity over a long-term delivers better returns than that of other savings instruments and similar to other equity schemes  Tax savings and high returns Flexibility to Invest in small amounts through a Systematic Investment Plan 2. Literature Review Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance (Jensen’s alpha) that estimates how much a manager’s forecasting ability contributes to fund’s returns. Sharpe, William F.(1994) suggested the ‘Sharp- Ratio technique for the measurement for the performance measurement of the MF. Michael K. Berkowitz et, (1997), supports the argument& states that, past fund performance influences individual investment decisions along with implying strong incentives for managers increase the performance of Mutual funds. Mishra et, al (2000) measured MF performance using lower partial moment Risk from the lower partial moment is measured by taking into account only those states in which return is below a pre-specified “target rate” like risk-free rate. Graciela L. Kaminsky, el,al,(2001), Due to large redemptions and injections, funds` flows are not stable. Withdrawals from emerging markets during recent crises were large, which is consistent with the evidence on financial contagion. Bala Ramasamy et,(2003), agreed that Three elements consistent past performance, size of funds & cost of transaction effects the performance. Prof. S. Rao, et,al evaluated performance in a bear market through Relative Performance Management index & risk – return analysis. Sharad Panwar et (2005). uses Residual Variance (RV) as the measure of MF portfolio diversification. RV has a direct impact on shape fund performance measure. Marcin T. Kacperczyk,et,al (2005)demonstrated that unabsorbed information create values for some funds. Return gap helps to predict future fund performance & investors should use additional measures to evaluate the performance. Bijan Roy, et,al used conditional performance evaluation on a sample of 89 Indian MF schemes measuring with both unconditional and conditional form of CAPM model. The results suggest that the use of conditioning lagged information variables improves the performance of mutual fund schemes, causing alphas to shift towards right and reducing the number of negative timing coefficients. 451 European Journal of Social Sciences – Volume 29, Number 3(2012) 2. Objective The objective of this article is to analysis the performance of Indian ELSS schemes and to rank them based on risk and return. 3. Methodology The data collected from secondary source, NAV of selected ELSS schemes and market index (NSE Nifty) for a period of one year (1st April 2009 – 31st March 2010) is collected. For the purpose of study Equity Linked Saving schemes (ELSS) have been taken, There are 48 schemes under ELSS in India 1. ICICI Pru Tax Plan 2. L&T Tax Advtg - Sr I 3. HDFC Tax Saver 4. Religare Tax Plan 5. Quantum Tax Saving Fund 6. Can Robeco Eqty TaxSaver 7. Fidelity Tax Advantage 8. DSP-BRTax Saver Fund 9. Reliance ELSF - Series 1 10. HDFC Long Term Advantage 11. Reliance Tax Saver (ELSS) 12. ING Tax Saving 13. IDFC Tax Saver Fund 14. Sahara Taxgain 15. Franklin India Tax Shield 16. IDFC Tax Advantage (ELSS) 17. Birla SL Tax Relief 96 18. JP Morgan Tax Advantage 19. HSBC Tax Saver Equity Fund 20. Principal Personal Tax Saver 21. Tata Tax Advantage Fund-1 22. UTI Long Term Advantage S2 23. Bharti AXA Tax Advtg -Eco 24. Bharti AXA Tax Advtg -RP 25. Principal Tax Savings 26. Kotak Tax Saver 27. Tata Tax Saving Fund 28. DWS Tax Saving Fund 29. UTI Long Term Advantage 30. ING Opti Retireinvest-Sr I 31. Tata Infra Tax Saving Fund 32. Fortis Tax Advantage Plan 33. SBI Magnum Tax Gain 34. Escorts Tax Plan 35. UTI Equity Tax Saving 36. L&T Tax Saver Fund 37. Taurus Tax Shield 38. Baroda Pioneer ELSS 96 39. Sundaram Tax Saver 40. SBI Tax Advantage Sr-1 452 European Journal of Social Sciences – Volume 29, Number 3 (2012) 41. Edelweiss ELSS Fund 42. JM Tax Gain Fund 43. Birla Sun Life Tax Plan 44. Religare AGILE Tax 45. LIC MF Tax Plan 46. Axis Tax Saver Fund 47. ICICI Pru R.I.G.H.T. Fund 48. JM Equity Tax Saver - Sr I Out of this for the study a sample of 10 ELSS schemes of different AMC were selected. For convince only growth funds are selected. The ten funds are selected based on Asset Under Management (AUM). Top ten schemes having greater AUM were considered for the study. The list of ELSS schemes taken for the study are as below:  SBI MAGNUM TAX GAIN SCHEME 1993  HDFC TAX SAVER-GROWTH PLAN.  RELIANCE TAX SAVER (ELSS) FUND  BIRLA SUN LIFE RELIF 96  SUNDRAM BNP PARIBAS TAX SAVER  FIDELITY TAX ADVANTAGE FUND  ICICI PRUDENTIAL TAX PLAN  DSP BLACK ROCK TAX SAVER FUND  FRANKLIN INDIA TAX SHIELD  KOTAK TAX SAVER SCHEME Only growth options of the respective schemes are taken for analysis. 4. Tools used 4.1 The following tools are used for analysis:  Standard deviation.  Beta. In finance, the beta (β) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole. An asset with a beta of 0 means that its price is not at all correlated with the market. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up and vice versa. The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset`s statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because it is correlated with the return of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index. Some of the financial models used in the process of Valuation, stock selection, and management of portfolios include:  The Jensen Index.  The Treynor Index.  The Sharpe Diagonal (or Index) model. 4.2. Jensen Index The Treynor ratio (sometimes called the Treynor measure), named after Jack L. Treynor, is a measurement of the returns earned in excess of that which could have been earned on an investment 453 European Journal of Social Sciences – Volume 29, Number 3(2012) that has no diversifiable risk (e.g., Treasury Bills or a completely diversified portfolio), per each unit of market risk assumed. The Treynor ratio relates excess return over the risk-free rate to the additional risk taken; however, systematic risk is used instead of total risk. The higher the Treynor ratio, the better the performance of the portfolio under analysis. T = r −rf i where T = Treynor ratio, r portfolio i`s return, rf risk free rate i portfolio i`s beta It is a ranking criterion only. A ranking of portfolios based on the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic risk, but different total risk, will be rated the same. But the portfolio with a higher total risk is less diversified and therefore has a higher unsystematic risk which is not priced in the market. 4.3. The Sharpe Ratio The Sharpe Ratio goes further: it actually helps you find the best possible proportion of these securities to use, in a portfolio that can also contain cash. The definition of the Sharpe Ratio is: S(x) = ( rx - Rf ) / StdDev(x) where x is some investment rx is the average annual rate of return of x Rf is the best available rate of return of a "risk-free" security (i.e. cash) StdDev(x) is the standard deviation of rx. The Sharpe Ratio is a direct measure of reward-to-risk. 4.4. Jensen Model The absolute risk adjusted return measure was developed by Michael Jensen and commonly known as Jensen’s measure. It is mentioned of absolute performance because a definite standard is set and against that the performance is measured. The standard is based on the manager’s predictive ability. Successful prediction of security price would enable the manager to earn higher returns than the ordinary investor expects to earn in a given level of risk. Rp = α + βi ( Rm – Rf) Rp = average return of portfolio Rf = riskless rate of interest α = the intercept βi = a measure of systematic risk Rm = average market return The return of the portfolio varies in the same proportion of beta to the difference between the market return and riskless rate of interest. Beta is assumed to reflect the systematic risk. The fund’s portfolio beta would be equal to one if it takes a portfolio of all market securities. The beta would be greater than one if the fund’s portfolio consists of securities than are riskier than a portfolio of all market securities. 454 ... - tailieumienphi.vn