ABSTRACT: from regular Diversified Equity funds are as

ABSTRACT:

Investor, we are interested in selecting
best mutual fund company that not only help in saving tax but also provide
handsome return with least risk. This research paper primarily focuses on
selecting the best scheme offered by five best performing mutual fund companies
operating in India on the basis of asset under management. In order to identify
the best scheme from these companies, we have applied statistical parameters
such as Jensen Alpha, Beta, standard deviation, Sharpe ratio, Treynor ratio.
These statistical parameters helped us in evaluation of risk and return offered
by these schemes. It is found that Franklin India Tax Shield performed best in
the class among the selected mutual fund schemes.

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Keywords:

Beta, Equity Linked
Savings Schemes, Jensen’s Alpha, Sharpe Ratio, Standard Deviation, mutual fund

 

 

 

 

I.  INTRODUCTION

The
sustained economic development of an economy depends on capital formation and
its allocation. Capital formation arises out of the investment of savings. Such
allocation of savings can either be into risky assets or riskless assets. The
investment into risky assets provides what is termed as risk capital. Risk
capital also known as equity capital is a major and important source of finance
for organized businesses. Mutual funds are one of the important means of
pooling small amount of savings from a large number of people and investing
them into diversified pool of assets with varying degrees of risk. More
particularly, equity mutual funds are a good source of accumulating large
amounts of risk capital. In order to encourage and incentivize small investors
to invest into equity mutual funds, the Government of India in the year 1992
introduced the Equity Linked Savings Scheme (ELSS). ELSS is a type of diversified
equity mutual fund which provides an income tax incentive to the investor for
the investment made. The incentive currently is in the form of a deduction from
income, U/s 80 C of the Income Tax Act, up to an amount of Rs 150000, towards
the investment made during the financial year. ELSS mutual funds as they
provide a tax deduction, are subject to certain regulatory restrictions, which
make them distinct from the regular diversified equity mutual funds. The
regulatory restrictions that make ELSS funds distinct from regular Diversified
Equity funds are as follows:

 

1.     
The investments into ELSS funds are
subject to a lock in period of 3 years, from the date of investment. In other
words, investors cannot redeem, transfer or pledge the units for 3 years. Investment
into regular diversified equity funds do not attract any lock in period

2.  The ELSS fund’s investment into equity and
equity related securities should be a minimum of 80% of the assets under
management. On the other hand, regular equity funds into order to qualify as
equity funds( for tax benefits relating to dividend and capital gains) , are
required to invest a minimum of 65% of the assets under management into equity
and equity related securities.

 

The
above two regulatory restrictions, one from the point of view of the investor
and other from the point of view of the investment manager, apparently makes
investment into ELSS funds more risky for the investor as compared to other
diversified equity funds.

 

II.  REVIEW OF LITERATURE

 

A
large number of studies have been done on the growth and financial performance
of mutual funds.

2.1
Treynor (1965) presents a new way of viewing
performance results. He attempted to rate the performance of mutual funds on a
characteristics line graphically. The steeper the line, the more systematic
risk or volatility a fund possesses. By incorporating various concepts, he
developed a single line index, Tn, called Treynor index.

 

2.2
Sharpe (1966) explains in a modern portfolio theory
context that the expected return on an efficient portfolio and its associated
risk (unsystematic risk) are linearly related. By incorporating various
concepts he developed a Sharpe index. In this paper he attempted to rate the performance
on the basis of the optimal portfolio with the risky portfolio and a risk-free
asset is the one with the greatest reward-to-variability .The unsystematic risk
is related to particular security due to inefficient management.

 

2.3
Jenson, Michal C. (1967), The Performance of Mutual
Funds in the Period 1945 – 1964, The Journal of Finance, Vol 23, No. 2, pp.389
– 416. The research paper indicates the past performance of the fund, predict
the future demand of the fund, investors attract to invest in Mutual Fund.

 

2.4
Fama (1972) developed methods to distinguish
observed return due to the ability to pick up the best securities at a given
level of risk from that of predictions of price movements in the market. He
introduced a multi-period model allowing evaluation on a period-by-period and
on a cumulative basis. He branded that, return on a portfolio constitutes of
return for security selection and return for bearing risk. His contributions
combined the concepts from modern theories of portfolio selection and capital
market equilibrium with more traditional concepts of good portfolio management.

 

2.5
Gupta Ramesh (1989) evaluated fund performance in
India comparing the returns earned by schemes of similar risk and similar
constraints. An explicit risk-return relationship was developed to make
comparison across funds with different risk levels. His study decomposed total
return into return from investors risk, return from managers risk and target
risk. Mutual fund return due to selectivity was decomposed into return due to
selection of securities and timing of investment in a particular class of
securities.

 

2.6
Shome (1994)based on growth schemes examined the
performance of the mutual fund industry between April 1993 to March 1994 with
BSE SENSEX as market surrogate. The study revealed that, in the case of 10
schemes, the average rate of return on mutual funds were marginally lower than
the market return while the standard.

 

2.7
Gupta and Sehgal (1998) evaluated performance
of 80 mutual fund schemes over four years (1992-96). The study tested the
proposition relating to fund diversification, consistency of performance,
parameter of performance and risk-return relationship. The study noticed the
existence of inadequate portfolio diversification and consistency in
performance among the sample schemes.

 

2.8
Ms. Rajeswari T.R., Prof. V.E. Rama Moorthy (2001)
in the paper ?An Empirical Study on Factors

Influencing
the Mutual Fund Scheme Selection by Retail Investors have expressed that mutual
fund is a retail product designed to target small investors, salaried people
and others who are not intimidated by the mysteries of stock market but,
nevertheless, like to reap the benefits of stock market investing. At the
retail level, investors are unique and are a highly heterogeneous group. Hence,
their fund/scheme selection also widely differs

 

2.9
Roshni Jayam’s (2002) study brought out that
equities had a good chance of appreciation in future. The researcher was of the
view that, investors should correctly judge their investment objective and risk
appetite before picking schemes, diversified equity funds were typically safer
than others and index funds were the best when market movements were not
certain. The researcher suggested Systematic Withdrawal Plan (SWP) with growth
option was more suitable for investors in need of regular cash inflows.

 

 

 

III.   OBJECTIVES

 

 

a).
to measure the return earned by sample ELSS mutual funds schemes and compare
against the

bench
mark market return

b). to study
the performance of selected ELSS

c).
to identify the best open ended ELSS on the basis of risk and return

 

IV.  RESEARCH METHODOLOGY

 

Data:

The study is
based on secondary data. The Secondary data sources include Fact sheets of
Mutual funds, articles, newspapers, AMFI reports and websites

 

Period
of Study:

The
growth oriented ELSS schemes, which have been floated by the selected funds
during the period, from June 2012 to June2017, have been considered for the
purpose of the study. Selected mutual funds scheme are in operation since last
10 years and these schemes faces all ups and downs of market.

 

Benchmark
Index:

For
this study, BSE-100, BSE-200 and NIFTY 500. So it would cover the majority
percentage of different scheme portfolios and therefore is expected to provide
better performance benchmark.

 

Return:

Return on
typical investment consists of two components. The basic is the periodic cash
receipts (or income) on the investment, either in the form of interest or
dividends. The second component is the change in price of the assets-commonly
called the capital gain or loss. This element of return is the difference
between the purchase price and price at which the assets can be sold; therefore
it can be a gain or a loss.

The return can
be calculated as under:

 

 

 

 Portfolio Return =

 

 

 

Market Return =

 

 

Risk

The risk is calculated on the basis
of month-end NAV. The following measures of risks associated with mutual funds
have been for the study:

        Standard Deviation- The total risk is
measured by the standard deviation of the monthly returns which was calculated
using the following formula:

 

 

 

 

 

Where, x

? is the
Standard Deviation of Return.

R is the Return
for the MF scheme for a particular Period,

isthe average return;
N is the Number of years

 

Coefficient
of variation-

Expresses the total risk undertaken
by the mutual funds under consideration per unit of returned achieved. More
specifically, the coefficient of variation was given by:

 

Coefficient of
Variation =

 

 

 

 

Beta (?):

Beta estimate the systematic risk,
is the fund’s volatility as regard market index measuring the extent of co
movement of fund with that of the benchmark index.

 

 

 

Risk
free rate

A risk free rate asset has zero variability of returns. In
this study the average yield of 10 year G- security have been taken as a risk
free rate.

 

Sharpe
technique

Sharpe 11 devised an index of
portfolio performance measure, referred to as reward o variability ratio. The
Sharpe ratio provides the reward to volatility trade-off. It is the ratio of
the fund portfolio’s average excess return divided by the standard deviation of
the return and is given by:

 

 

Sharpe
Index=

 

 

Treynor
Ratio

It
is also the measure of risk adjusted return. Here we are taking Beta as risk of
portfolio rather than total risk measured by standard deviation. It is
generally observed that if we invest in 10 to 15securities than we can able to
eliminate the unsystematic risk in the portfolio. Our portfolio risk is subject
only to systematic risk. It is a market risk which cannot be eliminated with
the diversification of the securities. Higher the Treynor ratio better it is
for investment. This concept is developed by Jack Treynor

 

 

 

 Treynor Index=

 

 

 

 

Jensen’s
Alpha

It
tells us whether the return earned on the portfolio is in excess of return
calculate through capital asset pricing model. The portfolio that generates
excess return is said to have positive alpha and negative alpha for portfolio
that is generating less return than its theoretical value calculated through
capital asset pricing model.

This
concept is developed by Michael Jensen.

Alpha
(?) = Rp- Rf + ? (Rm – Rf)

 

 

 

Limitations of the Study:

a) Studied only open ended schemes and close ended schemes were
ignored.

b) The data is collected is
for limited period i.e., five years

c)
The study has been conducted and analyzed based on set of available
information, which is governed by time factor.

V.   DATA, DATA ANALYSIS AND INTERPRETAION

 

TABLE 1 – Mutual funds and
benchmark index taken as sample. Code is given to all the scheme and benchmark
index for the convenient in analysis and interpretation.

 

 

Fund name

Option

Code

Bench mark

Code

Reliance tax saver fund

Growth

A1

BSE 100

M1

Birla sl tax relief fund 96

Growth

A2

BSE 200

M2

Axis long term equity fund

Growth

A3

BSE 200

M2

DSR BR tax saver fund

Growth

A4

NIFTY 500

M3

Franklin India tax shield fund

Growth

A5

NIFTY 500

M3

 

 

Table 2:
Net asset values of scheme and benchmark

Source: Historical NAV
report from 1-jun-2012 to 01-jun-2017, association of mutual funds in India
(amfi.)

Date

A1

A2

A3

A4

A5

M1

M2

M3

01-06-12

19.99

9.32

11.86

14.93

198.04

4856.04

1969.54

3851.95

03-06-13

22.94

11.59

15.18

18.56

238.22

5956.48

2397.14

4659.30

02-06-14

35.08

15.51

21.58

25.13

310.15

7482.40

3006.11

5911.70

01-06-15

47.17

21.15

30.37

32.04

426.69

8536.13

3527.98

6957.45

01-06-16

44.03

22.02

31.10

33.16

433.78

8284.23

3444.16

6815.45

01-06-17

57.16

27.88

36.21

42.72

508.81

9926.73

4168.90

8367.15

 

Table
3: Compound growth performance of the sample mutual
funds scheme and benchmark index

Year

A1

A2

A3

A4

A5

M1

M2

M3

2012-13

14.75

24.35

27.99

24.31

20.28

22.66

21.71

20.96

2013-14

52.92

33.82

42.16

35.39

30.19

25.61

25.40

26.87

2014-15

34.46

38.68

42.40

27.49

37.57

14.08

17.36

17.68

2015-16

-6.65

2.37

1.20

3.49

1.66

-2.95

-2.37

-2.04

2016-17

29.82

26.61

16.43

28.82

17.29

19.82

21.04

22.76

 

Table
4: risk and return analysis of schemes

 

RF
risk free rate of return based on 10 year G securities

 

Mutual Fund

RP

?p

?

Rm

?m

Rf

Bench mark

A1

25.06

19.99

1.55

15.84

10.13

7.49

M1

A2

26.16

12.49

1.07

16.63

9.83

7.49

M2

A3

26.03

12.00

1.22

16.63

9.83

7.49

M2

A4

23.9

10.82

1.05

17.25

10.08

7.49

M3

A5

21.34

12.22

0.87

17.25

10.08

7.49

M3

 

 

Table
5: Ranking
of fund according to 3 performance ratio.

 
Scheme Name

Sharpe Ratio

Treynor ratio

Jension

 

Fund

Rank

Fund

Rank

Fund

Rank

A1

0.87

5

11.33

5

4.62

5

A2

1.41

3

16.51

1

7.89

1

A3

1.54

1

15.19

4

7.38

2

A4

1.51

2

15.62

3

6.16

3

A5

1.13

4

15.91

2

5.35

4

 

 

 

 

 

VI. 
 INTERPRETATION:

a) The rate of return from the
Equity link saving scheme is higher when compared to the other investment
options. Thus, mutual funds ELSS are a better investment avenue to trade-off
between risk and return

b) Investment in Fund A1 is seems
to be risky because the Beta of the fund is 1.55, which have higher value than
other fund

c) The A2 fund has a high
Portfolio return of 26.16% and A5 fund and has a low portfolio return of
21.34%.

d) Based on Sharpe method A3
scheme has obtained 1st rank when compared with other mutual fund schemes

e) Based on Trenor method A2
scheme has obtained 1st Rank when compared with other mutual fund schemes

f) 
Based on Jensen’s measure A2 fund has obtained 1st rank when
compared with other mutual fund schemes

 

VII.   CONCLUSION:

In this paper we analyzed of ELSS
funds in India and analyzed their performance with respect to benchmark
indexes. The study conducts a comparative performance between ELSS mutual fund
schemes and benchmark indexes over the five economic periods. It is observed
that influence of market factor is closely effected behavior of mutual funds
returns. The correlation is found between mutual funds and benchmark index
returns are significantly high. The beta coefficient in most of the sample
schemes was higher than one indicates that these mutual funds followed
aggressive investment policy. Beta of fund A5 has value lower than
one so it indicates that this mutual fund follow defensive investment policy.
The result shows that performances of the majority of sample mutual fund
schemes are outperform the market benchmark indexes in term of Treynor and
Sharpe ratio based on historical monthly returns. The reasons of outperformance
of the funds that fund managers are efficient. They are diversifying the funds
in different stocks which are generating higher returns. Mutual fund managers
also outperform the Market through their superior security selection and
timing. The analysis shows that Indian Asset Management Company has been able
to beat their benchmarks on the average. One of the lacunas of this study is that
only open ended growth oriented ELSS schemes have been analyzed for the sample
mutual funds. Future research may attempt to investigate and compare the
dividend oriented ELSS schemes.

 

VIII.  REFERENCES:

1 Prasanna
Chandra: Security Analysis & Portfolio Management pp 355-444

2 Dr.
S.Gurusamy; Financial services and system pp 268; 277.

3 V.K.Bhalla;
Security analysis and portfolio management pp 141; 149

4
Sathyaswaroopdebasish; ?Investigating performance of equity based mutual fund
schemes in Indianscenario? pp.2,3

5 Dr.
GeetaKesavaraj; – A Study on Customer Perception Towards Various Types of
Mutual Funds inChennai, Asia Pacific Journal Of Research October 2013, Volume:
I, Issue: X

6
Dr.B.Nimalathan; Mr.R.Kumar Gandhi; ?Mutual fund financial performance
analysis? (A Comparativestudy on equity diversified schemes and equity mid cap
schemes) , excel international journal of multidisciplinary management studies,
vol 2 pp 91,96.

7 Sharpe, W.
F. (1966). “Mutual Fund Performance”. Journal of Business, Pg-39

8 Jayadev, M
(1996), ?Mutual Fund Performance: An Analysis of Monthly Returns?, Finance
India, 10(1)March, pp 73-84:

9
Dr.R.Narayanasamy; V. Rathnamani; – Performance Evaluation of Equity Mutual
Funds (On SelectedEquity Large Cap Funds), International Journal of Business
and Management Invention, Volume 2 Issue4 ? April. 2013? Pg.18-24

10
http://businesstoday.intoday.in/story/indis-best-mutual-funds-2012-money-today rankings/1/184733.html

11

12
http://www.editgrid.com/user/philip/Calculate_Portfolio_Sharpe_Ratio

13
https://www.amfiindia.com/nav-history-download

14
http://www.freepatentsonline.com/article/Asia-Pacific-Business-Review/198667812.html

15

Mutual Funds Performance vs Benchmark Performance

16
http://mutualfunds.about.com/od/analyzingamutualfund/a/How-To-Analyze-Mutual-Fund-

Performance.htm

17
www.bseindia.com

18
www.nseindia.com

19
www.valueresearchonline.com

20

21 http://shodhganga.inflibnet.10603/2160/8/08_chapter%201.pdf22https://www.rbi.org.in/Scripts/BS_NSDPDisplay.aspx?param=4