Evaluation of mutual fund performance in the

present market condition

TABLE OF CONTENTS

1. INTRODUCTION ...................................................................................................... 3

1.1. BACKGROUND OF THE STUDY ...................................................................... 3

1.2. SIGNIFICANCE OF THE STUDY ...................................................................... 7

1.3. OBJECTIVES OF THE STUDY........................................................................ 10

2. LITERATURE REVIEW .......................................................................................... 11

3. RESEARCH METHODOLOGY............................................................................... 44

3.1. SAMPLE SIZE DETERMINATION ................................................................... 45

3.2. DATA COLLECTION INSTRUMENTS ............................................................. 45

4. DATA ANALYSIS.................................................................................................... 46

4.1. PRESENTATION OF DATA ............................................................................. 47

5. RECOMMENDATIONS .......................................................................................... 63

6. CONCLUSION ........................................................................................................ 65

7. BIBLIOGRAPHY ..................................................................................................... 68

APPENDIX I .................................................................................................................. 70
1. INTRODUCTION

1.1. Background of the Study

Even in a relatively developing economy like India the importance of marketing as a

profit making activity aimed at facilitating the flow of the required products from the

place of production to the consuming public or users is recognized. To achieve

effectiveness, such activity requires a lot of planning and marketing strategies.

Aware of the fact that, there is a good number of cement producing companies in the

country and the fact that profit, which is one of the objectives of every business

enterprise, can only be realized by selling products rather than merely producing them.

Therefore, business as an act can be seen from a couple of ways. As many as these

ways are not withstanding, business can be summarized as the act of marketing goods

and services geared towards satisfying customers’ or users’ need and wants with the

primary aim of making profit. For this aim to succeed, every business therefore has

several ways and styles of having enough money to operate or stay out of debt. This

can be subsumed to simply mean, business strategy. However, part of any business is

to be competitive. That is, competing against other business set-ups or being competed

against.

Competition can be very interesting, especially when it is healthy and practice within the

rules of the game. Because through healthy competition, business bodies can do self-

assessment, readjust and seek avenues for innovation and development.

Consumer behaviour from the marketing world and financial economics have come

together to bring to surface an exciting area for study and research in the form of
Behavioral Finance and it has been gaining importance over the recent years. With

reforms in financial sector and the developments in the Indian financial markets, Mutual

Funds (MFs) have emerged to be an important investment avenue for retail (small)

investors. The investment habit of the small investors particularly has undergone a sea

change. Increasing number of players from public as well as private sectors has entered

in to the market with innovative schemes to cater to the requirements of the investors in

India and abroad. For all investors, particularly the small investors, mutual funds have

provided a better alternative to obtain benefits of expertise- based equity investments to

all types of investors. So in this scenario where many schemes are flooded in to market,

it is important to analyze needs of consumers and to find out which factors affects

consumers' needs the most.

Mutual funds are that collect money from several sources - individuals or institutions by

issuing 'units', invest them on their behalf with predetermined investment objectives and

manage the same all for a fee. They invest the money across a range of financial

instruments falling into two broad categories -and debt. Individual people and no doubt

can and do invest in equity and debt instruments by themselves but this requires time

and skill on both of which there are constraints. Mutual funds emerged as professional

financial intermediaries bridging the time and skill constraint. They have a team of

skilled people who identify the right stocks and debt instruments and construct a

portfolio that promises to deliver the best possible 'constrained' returns at the minimum

possible cost. In effect, it involves outsourcing the management of money.

More the benefits of investing in and debt instruments are supposedly much better if

done through mutual funds. This is because of the following reasons: Firstly, fund
managers are more skilled. They are trained to identify the best investment options and

to assess the portfolio on a continual basis; secondly, they are able to invest in a

diversified portfolio consisting of 15-20 different stocks or bonds or a combination of

them. For an individual such diversification reduces the risk but can demand a lot of

effort and cost. Each purchase or sale a cost in terms of brokerage or transactional

charges such a demat account fees in India. The need to possibly sell 'poor' stocks

bonds and

I buy 'good' stocks and bonds demands constant tracking of news and performance of

each company they have invested in. Mutual funds are able to maintain and track a

diversified portfolio on a constant basis with lesser costs. This is because of the

pecuniary economies that they enjoy when it comes to trading and other transaction

costs; thirdly, funds also provide good liquidity. An investor can sell her/his mutual fund

investments and receive payment on the same day with minimal transaction costs as

compared to dealing with individual securities, this totals to superior portfolio returns

with minimal cost and better liquidity. This can be represented with the following flow

chart:
Chart 1:

Source: Association of Mutual Funds in India (AMFI)

1.2. Significance of the study

This thesis makes several meaningful contributions to the literature and the practical

perspective. First, it is conducted in a different setting from most previous studies. Thus,

it provides an out-of-sample test for the theories and empirical models so far

established.

Second, this study fills one of the gaps in mutual fund studies by asking whether the

findings in Indian market carry over to India. This is important because, even though

India displays several characteristics which are not found in developed markets, the

literature on mutual funds in India is relatively thin and incomplete.

Third, this study uses an extensive dataset. The high data frequency not only helps to

validate our results, but also allows us to advance some analysis.

Furthermore, this is the first empirical study of an India which includes flexible funds in

the sample. In theory, a flexible fund is in some ways similar to equity funds since its

main assets are also stocks. However, a proportion of its holdings can be more varied

over time, subject to the fund manager’s decision. Thus, this study includes flexible

funds in the sample and puts them into a separate category and it is hoped to provide a

more comprehensive account of portfolio behaviour.

Fourth, this study applies new methodologies which have never been applied to India.

For instance, explores the determinants of risk-adjusted mutual fund performance using

multidimensional regression in addition to the common approach, which is to use a

zero-cost trading strategy. This alternative methodology can explore several factors

simultaneously while controlling the effect between one and another. Using the two
methods allows us to examine determinants of fund performance statistically and

economically and it provides more meaningful results. Moreover, in we apply a model in

the hedge fund literature in measuring the illiquid assets contained in a portfolio in our

mutual fund data. This is the first empirical study to use such a model outside the hedge

fund literature.

Fifth, this study explores new issues which have not hitherto been observed in previous

studies. This is the first study in India which explores the stock selection strategies and

style of fund managers.

We consider a broader range of characteristics than previous studies in India have done

in determining mutual fund performance and also include more new factors, namely

fund longevity and family size, in the analysis. We look at the effect of liquidity on the

mutual fund performance because liquidity is one of the major concerns in India.

Leaving aside India, the liquidity effect is negligible in all mutual fund literature, even

though this issue has been widely documented by writers of asset pricing. The study

also puts forward an auxiliary model based on the liquidity effect in measuring mutual

fund performance.

Sixth, this study can claim several new findings. This is the first mutual fund study to

expose the evidence of a liquidity premium and emphasize the inclusion of including a

liquidity factor in the fund performance measure. This study also provides new findings

about India. The study reveals the style of fund managers in these markets and shows

that they rely on medium capitalization strategy. This chapter also relates the sensitivity
of data frequency to the fund performance. In addition, it gives the first evidence from

the India of short-term persistence in performance among poorly performing funds.

Seventh, the study is the only one which gives important policy implications, reporting

them in turn in each empirical chapter. This is the first study on India which discusses

the effect of the Indian government’s encouragement of individual savings by adopting

special fund styles which give favorable tax treatment. We reveal the policy implications

of this action by assessing these specific funds in a separate group from general funds,

before comparing and discussing the results from the two groups.

Finally, in its practical aspects, this study will, it is hoped, be useful for individuals and

institutional investors in selecting mutual funds. It also helps fund managers to identify

their positions and gives ideas on the strategies which they should follow in order to

maximize returns for their investors.

1.3. Objectives of the Study

• To know the preference of investors and their needs regarding mutual funds

investment.

• To analyze factors that influences most while buying mutual funds.

• To evaluate performance of mutual fund schemes preferred by investors on the basis

of return parameters.
2. LITERATURE REVIEW

This chapter has two main purposes. The first is to review the theories associated with

the research questions in order to provide readers with an understanding of the

theoretical domain. The second purpose is to relate the theories to the research

questions and develop a theoretical framework for analysis. The reason for discussing

the theories is not to produce a comprehensive survey of their richness but rather to

provide a framework within which to facilitate the collection of empirical evidence,

conduct the analysis and, finally, achieve solutions to the research questions.

The growth of investments in mutual funds around the world has widely increased

during the past few decades, leading to fierce competition in the industry. Investors now

have a wide range of products to choose from, which makes their investment decision

more complicated than before. Although there are many factors in their decisions,

performance still seems to be a determining factor (see Ippolito, 1992; Capon et al.,

1996; Sirri and Tufano, 1998). As a result, from the investors’ point of view, it is

important not only to know how the portfolio managers perform, but also to understand

their investment policies. Similarly, at the macro level, it is worth examining the

performance of fund managers as a whole to see whether they provide value added to

portfolios or they are just sweeping benefits from investors.

However, superior performance in the past does not necessarily mean that it will

continue into the future. This is because superior performance may be due to either a

manager’s skill or good luck. Therefore, it is interesting to understand the characteristics

of funds and to know what caused the performance; this helps investors to understand

how to select their fund manager.

This literature survey chapter is organized as follows. Section 2.2 surveys the writings

related to performance measures and empirical evidence to do with them in the

developed markets. Section 2.3 surveys the literature on persistence in mutual fund

performance.

Section 2.4 surveys the literature on flows and their relation to performance. Section 2.5

surveys the literature on style analysis. Section 2.6 gives empirical evidence on India

and, finally, section 2.6 draws some conclusions and makes suggestions for further

research. At the end of this chapter, Tables 2.1 and 2.2 summaries the main theoretical

and empirical studies related to mutual fund performance in developed and India, in

turn.

Performance measures

It is typical that when one has made a decision, one wonders what its consequences

will be. Therefore, once an investor has given money to a fund manager to invest on

his/her behalf, he/she should have the right to know what sort of performance they have

obtained. Does the fund manager offer superior or inferior performance? How does the

fund manager perform compared to peers? And what sort of strategy is used?

Performance evaluation measures the skill of an asset manager and its principal idea is

to compare the returns with an alternative appropriate portfolio to that which was

obtained in a particular case. The emergence of modern portfolio theory (MPT) by

Markowitz (1952), who quantifies how rational investors make decisions based on

expected return and risk, has brought much development to portfolio performance

measurement. It moves performance measurement from crude measures toward more

precise, risk-adjusted measures. Up to now, many researchers have proposed various

methods for evaluating portfolio performance in order to find a model which could give a

precise and reliable measure (e.g. Jensen, 1968; Grinblatt and Titman, 1993; Ferson

and Schadt, 1996; Cahart, 1997; Daniel et al., 1997). Although these researchers use

different methods to evaluate portfolio performance, they all aim to provide an

appropriate method by which to distinguish superior managers from others. However, it

is difficult for a user to decide which model is the best suited for the performance

evaluation is a given case. Therefore, while many researchers have proposed different

methods for performance evaluation, some researchers also enquire which model gives

the best evaluation technique. (e.g. Grinblatt and Titmann, 1994; Kothari and Warner,

2001; Fletcher and Forbes, 2002; Otten and Bams, 2004). An appropriate model

depends not only on the method used for measurement, but also depends on the

appropriateness of the measure to the data and the market being evaluated. This

section will first introduce various methods of portfolio performance measurement which

have been discussed in the literature, partially following Grinblatt and Titman (Jarrow

etal., 1995). We divide performance measures into three classes: first, performance

measures in the early stage (Section 2.2.1), second, measures which require

benchmark returns (Section 2.2.2 - 2.2.4) and, third, measures which evaluate portfolios

based on their composition and do not necessarily require a benchmark portfolio

(Section 2.2.5). Following this, we highlight empirical evidence of fund performance in

developed markets in Section 2.2.6.

The early stage of performance measurement

In the early stage, the past few decades, performance evaluation was made by focusing

fund performance on the returns of the portfolio. The two methods which can measure

the return on a portfolio are the ‘money-weighted return method’ and the ‘time-weighted

return method’. The money-weighted return (otherwise called the internal rate of return)

is the discount rate which makes the final value of portfolio equal the sum of initial value

and cash flows occurring during the period. Alternatively, the time-weighted return

method is the geometric mean return of the portfolio’s sub periods. This measure

assumes that all distributed cash flows, such as dividend, are reinvested. As return is

the key aspect of performance measurement, some criticisms can be made of the

choice of method when measuring return. For example, Sharpe and Alexander(1990)

suggest that the time-weighted return method is preferable because this method is not

strongly influenced by the size and timing of cash flows, which managers are unable to

control. Spaulding (2003) reveals that when a portfolio is measured in a short period

and has few cash flows, the choice of return method is not different. Campisi (2004)

argues that the money-weighted return method is more appropriate for measuring active

investments. Nevertheless, the time-weighted return method is still widely used in

practice in the investment fund industry and it is believed that increasing the

measurement interval improves the precision of the calculation.

In term of risk measurement, there are two possible choices for measuring risk, namely,

‘total risk’ and ‘systematic risk’. Total risk is the overall risk of a portfolio including both

systematic and unsystematic risk and is measured by the portfolio’s standard deviation

of portfolio. In contrast, systematic risk (or market risk) is measured by the portfolio’s
beta coefficient, which is the sensitivity of the portfolio’s return to changes in the return

on the market portfolio. The choice of risk measures depends on the way in which the

portfolio is diversified. If the portfolio is well diversified, then using systematic risk is

preferable. Thus, it is advisable in the early stages of mutual fund performance

evaluation to use the basic approach, directly comparing the return on portfolios to other

portfolios with the same risk (benchmark portfolio). This evaluation technique is

straightforward and still widely used among investors and practitioners. However, it

could potentially be misleading and biased, because to be truly comparable it requires

the benchmark portfolio to have same risks and constraints.

In India one can gain additional benefit by investing through mutual funds tax savings.

Investment in certain types of funds such as Equity Linked Tax Savings Schemes

(ELSS) allows for certain amount of income tax benefits.

Mutual Funds are one form of Collective Investment Vehicles (CIV's) in India. The other

forms being Collective Investment Schemes (CIS's) and Venture Capital Funds

(VCF's).The organization of mutual funds in India (excepting for Unit Trust of India)2 is

dictated by the Securities and Exchange Board of India - SEBI (Mutual Funds)

Regulations, 1996, (henceforth termed as 'regulations'). Bank-owned mutual funds are

also supervised by the Reserve Bank of India (RBI). This does not overlap with SEBl's

supervision. Besides, the Indian Companies Act of 1956 and Indian Trust Act of 1882

also govern funds.

The SEBI regulations stipulate a three tier structure. The constituents of a mutual fund

include the Sponsors, the Mutual Fund, the Trustees and the Asset Management

Company (AMC).

The Sponsor as an individual or along with another corporate body initiates the process

by approaching the SEBI for registration of a mutual fund. There are certain eligibility

criteria which the sponsor has to fulfill [as laid out in Chapter II, clause 7 of the

regulations). Broadly speaking it requires a sound financial track record over the past

five years, a sound reputation with respect to integrity and a minimum of 40 percent

stake in the AMC by the sponsor. For instance, Tata Mutual

1. Section 80 C of the Indian Income Tax Act allows for Income Tax exemptions upto a

maximum of Rs. 100000

2. Unit Trust of India (UTI) is governed by the Government of India UTI Act of 1963

Fund set up in 1995 is sponsored by Tata Sons Limited and Tata Investment

Corporation Limited

The Mutual fund is itself set up in the form of a trust under the Indian Trust Act of 1882.

The instrument of the trust is executed by the sponsor in favour of trustees and is

registered under the Indian Registration Act, 1908. The investor subscribes to the 'units'

of the fund and, the collected funds/assets are held by the trustee for the benefit of the

investor.

The Sponsor then appoints the Trustees, AMC and Custodian [Chapter II, clause 7 (e),

(I), (g) of the regulations]. A Trustee holds the fiduciary responsibility of protecting the

interest of the investor. The trustees themselves are to be of impeccable personal

credentials [Chapter II, clause 16 (2)]. Two thirds of them have to be independent

persons and should not be associated with the sponsors in any manner'. No employee

of the AMC is to be a part of the Trustee. The Trustee has the duty of ensuring that the

AMC carries out its activities in accordance with the regulations and prevent conflict of

interest between the investors and the AMC. The trustee could be either a group of

individuals or a Trust Company. Most funds prefer a board of trustees. The Trustee for

Tata Mutual Fund is Tata Trustee Company Pvt. Ltd.

The AMC consists of the fund managers who manage the investments

Regulations are laid down [Chapter IV] with regard to their eligibility and obligations.

The AMC takes decisions with respect to investment/sales, computing asset values,

declaring dividend and providing investor information, regularity. An AMC cannot

www.tatamutualfund.comlrisk-factors.asp

Earlier only 50 percent were required to be independent members. This was amended

in 2006 by the SEBI (mutual funds) (Fifth Amendment) regulations. Act for any other

fund. The AMC for Tata mutual fund is Tata Asset Management Ltd. In addition to the

above three principal constituents there is the custodian (Chapter IV, clause 26)

predominant duties includes stock keeping of securities and settlement between funds.

A custodian can service more than one fund but not a fund promoted by a sponsor who

has 50 percent stake or more in the custodian.

For Tata Mutual Fund, ABN AMRO Bank N.U and Deutche Bank are the custodians.

Apart from these there are the depositories, transfer agents and distributors who

complete the organizational chain for mutual funds in India. The study firstly reviews the
Ories of regulation. The works of Stigler (1971) and Posner (1969) discuss the general

theoretical approaches to regulation. The justification of mutual fund regulations stems

from asymmetric information leading to possible investor - manager conflict of interest.

To control for such behaviour in 'public interest' the regulator might seek to use different

approaches including direct price control and or disclosure norms.

The study reviews literature relating to measure of risk in the case of equity returns. It

looks at both the Mean-Variance (M-V) approach and the lower partial movement

(LPM), while the M-V approach assumes that preferences are based only on the mean

returns and the variance of the fund portfolio. It is appropriate only if the returns are

normally distributed. During the 70s a semi variance measure of risk known as LPM

was developed. It gave a better approach towards measuring the risk-return

combination.

Writings on the single factor capital asset pricing model (CAPM) which uses the M-V

approach to risk and a Hemative multi-factor models used to measure portfolio

performance are also reviewed. In the process it looks at the efficient market hypothesis

and the theoretical impossibility of earning more returns than an informational efficient

market.

The study then moves on to theories of regulations and the necessity for the same to

tackle Principal-Agent problems that arise due to information asymmetries.

Regulation ought to be dynamic changing according to market conditions as the fund

industry gets competitive the necessity of regulations might wane. In fact it might be a

bane as regulations have an impact on performance and increase costs.

Posner speaks of the costs of regulations generally. To sum up, the basis of regulating

mutual funds appears to be from a public interest perspective to control hazards to

investors arising from market imperfections. Further the need to have appropriate risk-

reward measures emerges clearly.

Empirical studies pertaining to mutual fund performance can be grouped into single

factor CAPM which uses a single benchmar1< and multiple factor CAPM. Some of the

predominant single factor CAPM studies were those of Sharpe (1966), Treynor and

Mazuy (1966), Jensen.M (1968). But, Ross (1976) argued that systematic risk need not

be explained by a single factor and that there could be 'K' factors. Hence the basis for

multi factor models for assessing performance.

Several factors such as return of small cap stocks, large cap stocks, midcap stocks,

growth stocks, value stocks and momentum are included in various studies. For

instance, Fama and French (1993) used multifactor model with the market return, the

return of small less big stocks (SMB) and the return of high market, less low market

stocks (HML) as three important factors. Using multiple factors eliminates the error that

arises out of the assumption of homogeneity of assets held by different portfolios or

funds. The multiple factor models recalculate the Jansen alpha which measured

superior performance. Apart from these two broad approaches to performance,

empirical work on other special factors influencing performance analysis is reviewed.

Studies on the influence of size on performance such as Grinblatt and Titman (1989),

Indro et al (1999) and Chen et al (2003) are some who examine the role of size and

diseconomies of scale/all in the U.S context). The results are however mixed with no

clear consensus on diseconomies of scale. With respect to India there has been no
attempt to study the possibilities of size affecting returns. Another factor which has been

found important is the style of a fund. Sharpe (1992), Grinblatt et al (1995), and Bogle. J

(1998) discusses the role of style. Style describes the asset class of the portfolio of a

fund. This explains a large part of the funds return variability. Studies evolved from the

holdings based style analysis (HBSA) method (categorization of funds on the basis of

average market capitalization and average price-to-earnings of the fund portfolio) to the

returns based style analysis (BSA) classification (compares fund returns to returns of a

number of selected indexes)

While taking samples of funds for assessing their performance the survivor bias has to

be considered. Funds tend to close or merge with others, at times this covers up for

poor performance. So choosing funds which survive might tend to bias performance

analysis. Several funds in India had been terminated or merged and hence this factor

has to be considered while assessing performance.

Since the overwhelming emphasis of regulations in India is on direct controls on fees

and expenses that are charged to fund, investors' empirical studies relating to this issue

have been reviewed. In the relationship between fund expenses and performance

Sharpe (1966) and Ippolito (1989) throw up different conclusions.

On the relationship between fund size and expenses or economies of scale and scope

Baumol et al (1989), Rea (1999), Latke (1998) establish economics of scale and

Baumol also finds economics of scope. The Indian context regulatory caps on fund

manager fees and expenses and impact on constraining fund expenses has not been

dealt with so far.

Studies on Indian mutual fund performance by Sahadevan and Thiropol Raju (1997)

and Sadhak (1997) focus on general trends in the mutual fund performance, regulation

and expenses from 1990-91 to 1996. Their focus was not on the evolved risk return

analysis. Madhu S Panigrahi (1996) and Bijan Roy et al (2003) have attempted risk-

return analysis and using traditional CAPM and conditional performance evaluation

techniques respectively.

The review of empirical literature points out to the role of benchmarks and style of funds

in deciding fund performance. Studies also cover fund behaviour in terms of

management fee and expenses. These help point to the general issues of focus

concerning mutual funds. The Indian studies, it is found, tend to focus on using evolving

techniques to study of fund performance. But there is no attempt to study the impact of

regulations on fund behaviour in terms of expenses, fees and performance. This gap in

Indian studies needs to be seriously considered. It gives us the motivation for our study.

We need to study the past implications of fund regulations before we go ahead with

further changes in the same. Have the costs of regulations exceeded the benefits? Can

we improve regulations to ensure better governance? Do we notice tendencies of price

competition between funds? Do they deliver more than what regulations demand in

terms of cost charged to investors?

The organization conceived as above has is emphasis on eliminating moral hazards

that could arise out of post contractual opportunistic behaviour on the part of fund

managers. It aims at ensuring arms length transactions between the sponsor and the

AMC.

Types of Mutual Funds

A mutual fund, say, Tata Mutual Fund, can have several 'funds' [called 'schemes' in

India) under its management. These different funds can be categorized by structure,

investment objective and others. It would be well illustrated by the following flow chart:
Chart 3:

Source: Association of Mutual Funds in India (AMFI)

Is match of stocks in the equity and derivative (Mures and options) segments of the

stock market (Value Research Inc). They invest predominantly in equities 'Money

Marker. Funds invest only in short term debt such as call money, treasury bills and

commercial paper. In the case of these funds the Net Asset Value is simply the interest

accrued on these investments on a daily basis. Their NAV does not fall below the initial

investment value, unlike bond funds which are marked to market.

Tax saving funds give an investor tax benefits under section 80 C of the Income Tax

Act. Such funds also termed as Equity Linked Saving Schemes (ELSS), have a lock in

period of three years. By investing in such funds a person can avail of a maximum of

rupees one hundred thousand in tax deductions. ELSSs are normally diversified equity

funds. Index funds invest in securities of a particular index such as the Bombay Stock

Exchange (BSE) sensex in the same proposition. They provide returns which are close

to that of the benchmark index with similar risks as well. It is a passive investment

approach with lower costs.

Sector specific funds focus their investments on specific sectors which the fund

manager feels would do well. For instance, Franklin FMCG fund invests only in shares

of companies that produce fast moving consumer goods. Exchange Traded Fund's

(ETF) are relatively a new concept in India. Such funds are essentially index funds that

are listed and traded on the stock markets.

There are also commodities ETFs such as Reliance hold ETF.

The Mutual Funds Industry in India

The beginning of mutual funds in India was laid by the enactment of the Unit Trust of

India (UTI) Act in 1963. The objective was to provide investors from the middle and

lower income groups with a route to invest in the equity market. It was also meant to

encourage savings. UTI brought out its first fund, Unit Scheme (US) 64 in 1964. It called

an amount of Rs.246.7 millions. UTI remained a monopoly in the mutual fund industry

till 1987. By then US 64 had grown to Rs.32.69 billion and the overall asset base of UTI

was RS.67.38 billion with 25 different schemes·. In 1987 other public sector banks were
allowed to offer mutual funds. The State Bank of India (SBI) set up the SBI Mutual Fund

and Canara Bank Mutual Fund. Other public sector banks such as Bank of India,

Punjab National Bank, Indian Bank entered the fray by 1990. Two public sector

insurance companies -Life Insurance Corporation of India (LlC) and General Insurance

Corporation of India (GIC) also started their own mutual fund companies. But during this

period only public sector companies were permitted to enter the mutual fund market.

The collective assets under management continued to grow and by the end of 1993 it

was Rs.470 billion with UTI alone accounting for RS.390 billion>' There were 44.7

million investors in mutual funds".

1992-93 saw the beginning of economic reforms in India. The reforms aimed at

reducing government control over the economy and allowing for greater play for the

private sector besides others. In keeping with this direction the private sector was

allowed to enter the mutual fund industry in 1993. In keeping with this direction the

private sector was allowed to enter the mutual fund industry in 1993. In the same year

the first mutual fund regulations 1993 SEBI (mutual fund) Regulations came into being.

This was later substituted by a more comprehensive set of regulations - SEBI (mutual

fund) Regulations 1996. However, UTI did not come under these regulations and

continued to be governed under the UTI Act of 1963. By 2003 the total assets under

management (AUM) had increased to Rs.1, 218 billion mutual fund families and 401

funds. UTI alone accounted for Rs.445 billion of the total AUM

In 2003 the public sector UTI, which had faced serious problems in the late 90's and

again during 2002, was into two entities. One was the specified undertaking of UTI

which managed US 64, assured return schemes and others which totaled to Rs.298.4
billion and the other was UTI Mutual Fund Ltd. The latter came under the regulations of

SEBI. Since 2003 the mutual fund industry has also seen a spate of mergers. Hence

this period was marked by consolidation. By March 2007 the total AUM excluding UTI

touched Rs.3, 591 billion showing a phenomenal growth of 47 percent year-on-year

since 2003". During this period only Russia and China did better than India AUM growth

rates of 97 percent and 67 percent, respectively.

The financial savings of the households in India and the savings of the private corporate

sector form the main source of funds for the mutual fund industry. The gross financial

assets of Indian households increased from Rs.l09.6 billion (10.4 percent of the GOP at

CMP) in 1993-94 to Rs.4, 176.8 billion (14.85 percent of GOP at CMP) in 2003-0413.

The gross financial assets include currency held, bank and non-bank deposits, life

insurance, provident and pension funds, claims on the government, shares and

debentures, investments in Unit Trust of India and the net trade debt. Bank deposits

comprised of 42.83 percent of the total financial assets and shares and debentures

(which include mutual fund investments) forming a small 1.81 percent (EPW). The total

AUM at the end of March 2004, Rs.1, 396.16 billion was 4.96 percent of the GOP

(CMP). A comparison of India with other countries is given below:

Data from Investment Company Institute 2004, fact book

•• GDP data from IMF world economic outlook databases

The above table shows the vast potential for growth in the mutual funds industry. A

minuscule 5 percent of the GOP (CMP) was invested in mutual funds as "Economic and

political weekly, Oct. 09, 2004, pp 4487 compared to 67.5 percent in the U.S. The

comparison is to show what the growth potentials are.

In many ways the mutual fund industry can be termed to be still in its infancy. A SEBI

survey of Indian Investors 14 for the period April 01, 1999 to March 31, 2001 revealed

the low household penetration rate for mutual funds. The survey found that 7.4 percent

of Indian households (13.7 percent of urban and 3.8 percent of rural households) had

invested in mutual funds. Even among the urban households most investors were from

the largest cities with a population of 5 million or more. The facts point to a low

household penetration rate by mutual funds and also a very narrow urban bias. For
individual investors direct investment in equity was a risky proposition and an important

deterring factor as per the survey. Mutual funds have potential to offer a safer route to

the vast untapped households that still seem to prefer bank savings. But to use the

mutual fund route there are other concerns which need to be addressed.

Firstly funds have to deliver in terms of performance. Comparisons are bound to arise

particularly between fund return and benchmark indices are to be expected.

Outperforming benchmarks with lower costs is an important factor to attract more

savings into mutual funds. Apart from performance there is the issue of moral hazards.

Once a contract has been entered into with the fund house there are risks of conflicting

interests. These risks could be broadly classified into portfolio selection risks and

management process risks. The former involves 'adverse portfolio selection' which

contradicts the objective of the fund as mentioned in the prospectus. This could mean

higher risk of the fund portfolio on Risk Containment. Opinion, Business Line, 2~

October 2000 or lower risk-weighted returns. There could also be excessive churning of

the portfolio leading to more expenses that would be deducted from the AUM.

Management process risks involve risks arising due to errors in execution of

transactions losses due to counter-party default. It is to protect investors against such

risks that SEBl's (mutual fund) Regulations of 1993 were framed. The same was

substantially amended in 1996.

Given the growth of the mutual fund industry, it's present and potential importance as a

vehicle of financial saving for Indian households, and the development of regulations to

govern fund behaviour we feel it is important to assess the role of regulation in adding
value for the investor. Have the regulations ensured due diligence, transparency and

sound portfolio selection? Have the dynamics of the fund industry led to the necessity

for change in regulations? Is the present form of fund performance information

dissemination adequate? These are some of the questions that the present study

attempts to answer. This is sought to be done by examining the ability of regulations to:

ensure proper performance disclosure; better returns from funds; control costs of

operation; prevent excessive management fees and be proactive in tackling new issues.

The term ‘India’ was first introduced by the World Bank in the 1980s and defined as

countries which are in the transition from developing to developed economies.

More recently, the study of India has become more controversial and a number of

studies reveal several differences between them and developed markets. Harvey (1995)

claims that India exhibit high volatility and low correlation with developed markets.

However, the standard asset pricing model fails to explain cross-section returns in this

market, since India are not integrated with the world economy and there is a time

variation in risk exposure. Bekaert and Harvey(2002, 2003) also argue that India are

inefficient. India usually suffers from infrequent trading; high transaction cost; and

abnormal distribution of returns.

In addition, some researchers investigate the stock selection strategies in India and

reveal that stock returns in India are predictable owing to certain fundamental

characteristics. Claessens et al. (1995) investigate cross-section returns in 19

developing markets over the period 1986-1993 using several variables including, market

returns, earning-to-price, price-to-book value, size, dividend, turnover, and exchange

rate. They reveal that, in addition to market risk, firm size and turnover have explanatory

power in stock returns in many countries, although the signs are reversed in the

evidence from the US.

Conversely, Fama and French (1998) argue that the results in Claessens et al. are due

to the sensitivity to outliers. They examine the value and growth premium in 16 India for

1987-1995. They reveal that the evidence from developed markets is inconsistent with

the value and size premium in India. Nonetheless, they point to the unreliability of their

results, since the sample period is short and the returns are highly volatile. Using a

longer sample period, Rouwenhorst (1999) examines the return factors in 20 India over

the period 1982-1997. In comparison to Fama and French, he concludes that return

factors in India are similar to those in the US and in developed markets in that they

exhibit momentum and small and value premium. Similarly, van der Hart et al. (2003)

survey 32 India. They argue that stock returns can be

Explained by value, momentum and earning revisions but not for size, liquidity and

mean reversion. Nonetheless, Griffin et al. (2003), examining momentum strategy in 39

markets, show evidence of momentum strategy among Asian markets. In addition,

some studies investigate the return factors in some specific India. For instance, Drew

and Veeraraghanvan (2002) find a size and value premium in Malaysia; and Brown et

al. (2008) reveal a momentum and a value premium in Hong Kong and Singapore,

respectively.
In the mutual fund literature, in contrast to the extensive evidence from developed

markets, studies in India are scarce. Details of the empirical evidence in India are

chronologically presented in Table 2.2 and its main details are described below.

For his PhD thesis Elsiefy (2001) investigates the risk and return characteristics of 7

equity funds in Egyptian markets over the period 1996-1999. He employs several

performance measures, including the CAPM-based models; market timing models; and

Fama’s decomposition of returns (Fama, 1972). He reveals that over the period of his

study Egyptian funds do not outperform the market. However, the number of

underperforming funds is different for different measures used in the evaluation. Funds

do not diversify and therefore he suggests that using total risk is more appropriate in the

Egyptian context. In addition, he shows that performance does not change with the

market conditions. Roy and Deb (2003) take 89 Indian mutual funds over4 years, 1999-

2003 and examine the importance of using a conditional performance model which

allows time varying according to the economic conditions. They evaluate mutual fund

performance and market timing models, using both unconditional and conditional single-

factor models. Their conditional model includes 5 lagged information variables, namely,

t-bill, dividend yield, the term structure of interest rates, a dummy variable for the month

of April and a dummy variable for the tech rally. Inconsistently with the evidence from

the US, their results suggest that, as a whole, Indian mutual funds are unable to beat

the market. The conditional version makes funds look better and evidence of negative

market timing is not present. Soo-Wah (2007) explores 40 Malaysian funds over the

period 1996-2000 using single-factor and market timing models. He also tests for

benchmark sensitivity by employing two choices of benchmark: KLCI and the EMAS
index. He finds inferior performance and poor market timing in these Malaysian funds.

However, the choice of benchmark does not impact on performance evaluation, which

contradicts the findings in developed markets (e.g. Grinblatt and Titman, 1994).

Similarly, Fauziah and Mansor (2007) study mutual fund performance in Malaysia, using

a longer sample period (1991-2001) than Soo-Wah used in his study; they employ the

measures of Sharpe, Jensen and Treynor. Unlike Soo-Wah, they reveal that funds

perform below the market and find no evidence of persistence in performance.

Another study in Malaysia was conducted by Fikriyahet al. (2007). These writers

observe the difference in performance between conventional and Islamic funds over the

period 1992-2001. Their sample is 65 funds, including 14 Islamic funds. Like the studies

above, they employ standard measures, including the Sharpe, Jensen and Market

timing models. Subsequently, they reveal that Islamic funds are less risky than

conventional funds and perform better in bearish market conditions. Conversely, in

bullish market conditions, conventional funds seem to perform better.

In the Indian market, as far as is known, only a few studies in fund performance have

been published, some being in the form of scholars’ dissertations. Results from these

studies are, for example, those of Plabplatern (1997), who uses the portfolio holdings

method to investigate the performance of Indian mutual funds from 1993 to 1997. He

uses the quarterly data of 63 closed end funds. All funds have superior performance

and half of them bear evidence of market timing. In contrast, Sakranan (1998), who

uses a similar approach and time period, 1995-1997, to examine mutual fund

performance, draws a different conclusion: that only 2 out of 98 funds show selectivity

skills. Pornchaiya (2000) uses Jensen’s single-factor measure to explore 77 funds over
the period 1996-1999. He reveals that only two funds have superior performance, which

is inconsistent with the two Indian studies listed above.

Vongniphon (2002) studies return and risk in 18 equity funds, using a longer and more

up-to-date sample, from 1994 to 2000. He employs Sharpe and Treynor measures and

also confirms the inferior performance of these funds. Likewise, Jenwikai (2005) uses

Sharpe and Treynor measures to compare the performance of 62 equity funds to his

self-constructed buy-and-hold portfolios. He reveals that equity funds perform worse

than portfolios with buy-and-hold strategy.

The most recent and extensive research in mutual fund performance in India is

Nitibhon’s (2004) dissertation. He considers 114 equity funds in India from 2000 to 2004

and investigates performance using various methods including: Jensen’s alpha (1968),

Cahart’s 4-factor model (1996), Ferson and Schadt’s conditional model (1996) and

Daniel’s characteristic-based performance measures (1997). He reveals that Indian

mutual funds perform better than the market but not enough to generate statistically

abnormal returns. However, he reveals that using a conditional approach creates fairly

similar results to those obtained from using unconditional models, which is inconsistent

with the conclusions of Roy and Deb (2003), who examine funds in India,

Furthermore, there are some researchers who concentrate their studies solely on

market timing performance, for example Srisuchart (2001) and Chunhachinda and

Tangprasert (2004), who explore timing ability in the Indian mutual funds. Srisuchart

explores equity and bond funds in the 1990s and Chunhachinda and Tangprasert

examine 65 equity funds over 2001-2003. Both of these studies yield the same
conclusion: that Indian equity fund managers have market timing ability. These results

are also comparable to those of Khanthavit (2001), who employs an alternative

technique in examining market timing ability in Indian closed end funds in the 1990s. He

uses a Markov-switching technique and reveals that fund managers exhibit both

selectivity and market timing abilities, although overall performance is not significant.

However, these find managers tend to use their market timing ability when the market is

up and their selectivity ability when the market is down.

Nonetheless, issues outside mutual fund performance evaluation have received less

attention. Fauziah Md and Mansor (2007) look at the issue of persistence in

performance in the Malaysian context as part of their study of mutual fund performance.

They estimate performance annually over the period 1991-2001 and examine the

correlation between past and current performance. They do not find persistence in

performance for mutual funds in Malaysia. However, this contrasts with the evidence in

India. Watcharanaka (2003) reveals persistence in performance in Indian mutual funds

over the period 1992-2002, using a cross-section regression approach in examining 62

funds. Nitibhon (2004) also examines persistence in performance for the Indian mutual

funds. In his study, he constructs portfolios on the basis of past year returns and

estimates performance using unconditional and conditional single-factor models. He

reveals that only the top docile portfolios (high past returns) show significant positive

performance. Some studies explore mutual fund style in relation to performance. These

include: Ferruz and Ortiz (2005), who investigate whether Indian mutual funds

correspond to their classification. They employ factor analysis and cluster analysis and

conclude that funds are very close to one another. Similarly, Acharya and Sidana (2007)
employ cluster analysis to mutual funds in India over the period 2002-2006 and reveal

the inconsistency between investment style and the returns obtained by mutual funds.

In Malaysia, Lau (2007) applies

Sharpe factor analysis to 43 funds over the period 1996-2000. He reveals that funds

which contain large and high liquidity stocks perform better than others.

Regarding the factors related to fund performance in India, Prasomsak (2001)

investigates 77 mutual funds over the period 1998-2000, using fixed-effect regression of

fund raw returns on market returns size, turnover and fund style. He claims that fund

returns are positively correlated with market returns but negatively related to fund size

and turnover.

This finding is in contrast to the findings of Nitibhon (2004), who employs cross-section

analysis and regress fund performance on size, value and growth factors. He reveals

that fund returns are positively related to size and growth stocks.

In addition, the evidence from Taiwan suggests that large funds perform better than

small funds (Shu et al., 2002). Tng Cheong (2007) explores the effect of fund size and

expenses on mutual fund performance in Singapore over the period 1999-2004. He

reveals that large funds perform insignificantly better than small funds and there is no

difference in fund returns between high and low expenses funds.

A study in the flows of mutual funds was conducted by Shu et al. (2002). They

investigate the investment flows of mutual funds in Taiwan over the period 1996-1990

and reveal the difference of behaviour between small- and large-amount investors. Both
small- and large-amount investors tend to buy funds on the basis of short-term

performance.

However, large-amount investors are more rational and redeem funds on the basis of

performance. In India, Nitibhon (2004) estimates mutual fund flows of docile portfolios

rank on the basis of the past year’s returns. He claims that flows are not induced by the

prior year return and suggests no evidence of a smart money effect in Indian mutual

funds.

Reviewing the evidence from the India makes it clear that: first, mutual fund literature in

this region concentrates mainly on performance evaluation. With various techniques

and different samples, most of these studies claim no abnormal returns in mutual fund

performance. Nevertheless, because these studies tend to use a small number of funds

and survey a short sample period, their results are still questionable. This is also

because, as mentioned above, India is highly volatile and there is a certain amount of

evidence of structural breaks.

Second, the evidence suggests that India is inefficient and display several

characteristics which distinguish them from to developed markets. In addition, there are

other factors outside the market risk which have explanatory in stock returns, for

example, size, and value and momentum premium. Nevertheless, mutual fund studies

in India mostly employ standard CAPM-based measures, such as the Sharpe ratio and

Jensen’s alpha and none of these studies take these effects into consideration.

Third, we know very little about other issues related to mutual fund performance.
Evidence on persistence and flows, as well as other factors related to performance, is

relatively small and still mixed.

Consumer perception and satisfaction towards Mutual Funds

Mutual funds have already attracted the attention of global practitioners and

academicians but most of the existing research available is on either accelerating the

return on funds or comparing it with benchmark fund schemes. In marketing literature,

Service

Quality and Customer Satisfaction have been conceptualized as a distinct, but closely

related constructs. There is a positive relationship between the two constructs (Beerli et

al., 2004). The relationship between customer satisfaction and service quality is

debatable. Some researchers argued that service quality is the antecedent of customer

satisfaction, while others argued the opposite relationship. Parasuraman et al (1988)

defined service quality and customer satisfaction as “service quality is a global

judgment, or attitude, relating to the superiority of the service, whereas satisfaction is

related to a specific transaction”. Jamal and Naser (2003) stated that service quality is

the antecedent of customer satisfaction. However, they found that there is no important

relationship between customer satisfaction and tangible aspects of service environment.

This finding is contrasted with previous research by Blodgett and Wakefield (1999), but

supported by Parasuraman et al (1991). Most of the researchers found that service

quality is the antecedent of customer satisfaction (Bedi, 2010; Kassim and Abdullah,

2010; Kumar et al., 2010; Naeem and Saif 2009; Balaji, 2009; Lee and Hwan, 2005;

Athanassopoulos and Iliakopoulos, 2003; Parasuraman et al 1988). Yee et al (2010)

found that service quality has a positive influence on customer satisfaction. On the other

hand, Bitner (1990) and Bolton and Drew

(1991) pointed out that customer satisfaction is the antecedent of service quality. In

2004, Beerli et al supported this finding. Beerli et al mentioned a possible explanation is

that the satisfaction construct supposes an evaluative judgement of the value received

by the customer. This finding is contrasted with most of the researchers.

Investor’s satisfaction in case of mutual funds depends upon amount of trust and

dependence that an investor places with AMC and in turn the benefits that are actually

delivered to them. Although fund managers uses their expertise skills and diligence

while investment but still dissatisfaction prevail among the investors and their

experiences show that majority of mutual funds have shown underperformance in

comparison to risk free return and reported that mutual funds were not able to

compensate them for additional risk they have taken by investing in mutual funds

(Anand, S. And Murugaiah, V.2004). Concept of investor satisfaction is gaining

importance for every MF organization because in addition to its contribution in a

dominating way to the overall success of these organizations, it also shows them

roadmap to retain and grow their business.

Zeithaml, V (1993) expressed satisfaction of individual investor comprise of a range of

varied parameters and is not easy to define but in general it means positive

assessment. Where the growing demand of investor’s expectation is following the way

most of researcher admit the fact that working of customer’s mind is a mystery which is

difficult to solve (Dash, 2006). Customer satisfaction is subjective and even difficult to
measure. To draft an accurate picture of customer satisfaction organizations should

diligently use information – collecting tools and market research that will finally enable

an organization to identify critical elements of customer satisfaction and further fine-

tune their operations to achieve incremental improvements. Significant gaps that exist

between service expectations and perceptions is right from the first step where AMCs

are not found capable enough to translate investor’s expectation, reason being financial

intermediaries having inadequate knowledge and training are not able to communicate

the message to each player effectively.

Consumer behavior

The consumer behavior literature has a long history of study of individual purchase

decisions. Anchored by Howard and Sheth's (1969) comprehensive model, consumer

behavior researchers have developed and tested many constructs believed to comprise

the purchase decision process. In this study, we focus on three of the more ubiquitous:

information sources, selection criteria, and purchase. We explore how these constructs

relate to one another in the mutual fund purchase decision.

Consumer behavior researchers have often modeled the purchase decision process in

the following manner. Initially, consumers gather information on the product class of

interest (i.e., mutual funds in this study) from both internal (e.g., memory of previous

experience) and external (e.g., advertising, brochures, newspaper articles) sources (the

two sources may be referred to as information sources). Armed with this information,

they develop a set of product and service attributes (e.g., price, performance, level of

service) that are important to them in assessing the various alternative product
offerings. Ultimately, consumers use this set of attributes (commonly referred to as

selection criteria) to determine which alternative from the set of available products to

purchase.

The two constructs of information source and selection criteria are quite distinct, yet

closely related. For example, three investors (consumers), whose major information

sources were, respectively. The Wall Street Journal, an investment advisor, and

personal experience with an asset management firm, might form very different selection

criteria. A factor complicating the distinction between information sources and selection

criteria in the mutual fund investment decision is that not only may some information

sources (e.g., published performance rankings) also function as selection criteria, a

single information item may serve a different function at each stage of the decision

process. For example, in the information gathering stage a consumer may use

performance rankings to identify the various possible performance measures (e.g., one-

year, five-year, or ten-year return), or to ascertain whether large fund families in general

outperform small fund families. In the selection criteria stage, the consumer may decide

that one-year return is the most important criterion, then use that criterion to

discriminate and choose among alternative mutual funds.

Consumer behavior researchers spend much effort to develop models of construct

interdependencies in order to predict purchase behavior. In a similar vein, we examine

both how information sources and selection criteria relate to each other, and how they

relate both to demographic profiles of investors and to mutual fund purchase. Through

an investigation of these interrelationships, we hope to develop a richer understanding

of the mutual fund investment decision.

Information sources

In the purchase decision process, consumers may receive twotypes of information—

namely, interpersonal and impersonal (mass) communication.

Interpersonal communication is received from both informal (e.g., family and friends)and

formal (e.g., organizations) sources.-^ Research on the relationship between

information sources and other purchase decision constructs is limited (Engel, Blackwell,

and Miniard, 1986, pp. 259-299). A notable exception is the Vinson and McVandon

(1978) study that identified a strong relationship between the subjects' information

sources and their product concept recall. In addition, Murray (1991) related information

source use to product category (goods versus services) and consumer experience;

internal memory was preferred as a source of information by those with greater

experience.

In related research, the degree of personalization of a service encounter has been

shown to impact the level of consumer satisfaction (Surprenant and Solomon, 1987).

Inthe financial services arena, Carroll (1990) argues that a bank's retail customer mix

maybe enhanced through selective information presentation; and Crosby and Stephens

(1987) demonstrate that insurance customers value personal over impersonal

information sources.

For the mutual fund purchase decision, impersonal sources include advertising, direct

mail, and published fund performance statistics; informal interpersonal sources include

family and friends; formal interpersonal sources include planners—fee-based advisors

(who charge a set fee for their services regardless of transaction volume), and
commission-based advisors (who implicitly charge on a per transaction basis).

Unfortunately, little hard data concerning the relative value that investors place on these

various information sources are available, despite their importance for mutual fund

managers who must allocate resources for communication and distribution.

Selection criteria

Selection criteria embrace the set of product or service attributes that consumers

consider when making purchase decisions among alternatives. Such attributes may be

clearly defined physical attributes, such as the scope of a mutual fund family (i.e. the

number of funds), or may be less precise constructs, such as responsiveness or

perceived confidentiality of a mutual fund sales agent. Fishbein and Azjen (1975) is

perhaps the most widely cited attempt by consumer researchers to model the choice

process. In their multi-attribute model, choice is determined by each alternative's sum of

perceived values on multiple (importance-weighted) attributes. The alternative with the

largest score on independently rated, weighted attributes is selected. Lancaster

(1966)presents a multi-attribute model of consumer choice that may be more familiar to

researchers in economics and finance. He suggests that consumer utility resides in the

characteristics that a good possesses, rather than in the good itself. Thus, preference

orderings for goods are rankings of sets of characteristics (i.e., attributes) and are only

indirectly rankings of goods. We attempt to identify those attributes or characteristics of

mutual funds that are important to investors when making investment decisions.
For a given purchase, three sets of variables—individual, brand or product

characterizes, and purchase context—jointly determine the particular selection criteria

employed.

Individual factors encompass a variety of demographic and psychographic

characteristics of decision makers (Maheswaran and Meyers-Levy, 1990). Brand or

product characteristics, including product features or attributes (e.g., price, quality, and

performance: return and risk for the mutual fund purchase) are widely believed to

impact significantly upon the weighting of selection criteria (Gupta, 1988). Finally,

purchase context (e.g., internal and external framing of the purchase decision) has a

significant impact on selection criteria (Kahneman and Tversky, 1974).

Some researchers have investigated the relationship between consumer selection

criteria and demographic variables. For example, Anderson, Cox, and Fulcher (1976)

find that consumer selection criteria for a bank (e.g., convenience versus service

orientation)is related to several demographic variables (e.g., service-oriented customers

were more likely to have a working spouse and higher income).

In examining the mutual fund investment decision, as noted above, previous research

has focused on the attributes of return and risk. Based on the research reviewed above,

we expect to find that investors employ other selection criteria, either in addition to, or

instead of, risk and return.

3. RESEARCH METHODOLOGY

Research methodology is a systematic and objective search for new knowledge of the

subject of study and or application to knowledge to the solution of a novel problem.

Patel (2004) defines research design as “the structuring of investigation aimed at

identifies variables and their relationship to one another”.

This is use for the purpose of obtaining data to enable the research questions. It is an

outline or a scheme that serves as a useful guide to the research in the efforts to

generate data for the study. The design for this research is descriptive in nature. The

research entails collection of data which is used in making a systematic description of

the existing situation.

The present Research will be divided into two different studies:

Primary Research
Primary Research to know the preference of mutual fund investors regarding their

investment

Secondary Research

Secondary Research to evaluate the performance of Mutual funds which are preferred

by most of the investors is based upon Descriptive Research Design. Three mutual fund

sectors viz. tax Volume 5 Issue 3 (September 2012) funds, diversified funds and sector

funds are selected and top 5 companies based on NAV is selected from each sector for

further analysis. The secondary Research is based upon Judgmental Sampling.

Judgmental sampling is a non-probability sampling technique where the researcher

selects units to be sampled based on their knowledge and professional judgment.

Sampling Method and Sampling Frame

The primary research will be based upon convenience sampling.

Convenience sampling

(Sometimes known as grab or opportunity sampling) is a type of non- probability

sampling which involves the sample being drawn from that part of the population which

is close to hand.

3.1. SAMPLE SIZE DETERMINATION

Primary research is conducted of 100 educated investors of Mumbai city.

3.2. DATA COLLECTION INSTRUMENTS

The data collection instrument used for primary research is questionnaire. The type of

questionnaire used is open and close ended structured.

4. DATA ANALYSIS

The aim of the discussion is providing the needed foundation for offering useful

recommendations in the next chapter which are thought to be essential for improving

the investors’ returns performance.

This chapter will also deals with the presentation and analysis of data collected, and

testing of the hypothesis formulated earlier in chapter one. It is important in a research

project for data to be analyzed and interpreted in the light of the analysis made. Osuala

(1987), states that “the analysis and interpretation of the raw data of an investigation are

the means by which the research problem is answered and the stated hypothesis

tested”. This means that data collected in its real being willed be meaningless and

useless if there are not analyzed and interpreted in a meaningful way. If this is done, the

data therefore becomes information on which basis, decisions are made and

conclusions are drawn from there.

4.1. Presentation of Data

Findings of Demographics

The above table is self-explanatory. However the following observations can be made

Gender Distribution: Total number of respondents is 100 out of which 93% are male

and 7% are female respondents. Hence we can say that the majority of our respondents

are male and due to this reason No further analysis of the impact of gender as a

dependant (demographic) factor on other independent factors is done.

Age Distribution: This shows that majority of the respondents are young and they have

just started their career. It might be possible that these respondents do not have

complete knowledge of mutual fund and they might be investing in various avenues

according to the advices given by their brokers and agents.

Qualification Distribution: A minor portion of 6% of the respondents are high school

pass out while maximum of them i.e. 46% are graduates while 29% and 19% of the

respondents hold Postgraduate and Professional qualification respectively.

Occupation Distribution: 51% of the respondents are salaried employees which forms

a majority. 33% are business persons 12% are practicing professionals (like Chartered

Accountants, Architects, Lawyers etc.) while a minor portion of 4% of them are retired

employees.

Income Distribution: Majority of the respondent’s i.e.59% lie in the slab of annual

income between Rs. 3-5lakhs. 34% of the respondents have an income ranging from

Rs. 5-15 lakh, while a minor portion of 6% and1% of the respondents have an annual

income of Rs.15-25 lakh and above Rs. 25 lakh respectively.

Preferred Investment Avenue by investors:

Ranking the Kind of investments preferred by the respondents

Factor preferred most while making investment and Age of investors:

The investors who are of the age of less than 30 are more attracted by the high returns

followed by low risk involved and then liquidity or company reputation. Investors in the

age group of 31-40 years of age also give high preference to high return. On the other

hand the investors between the age group of 41-50 are evenly distributed for factors like

liquidity, high return and low risk. Investors above 50years of age prefer low risk more

than any other factor.

Out of total sample of 100 investors, 75 investors are investing in to mutual funds. So

further Analysis is done with sample of 75 investors.

Annual income of the respondent and % investment of mutual fund in total

Investments

The respondents having an annual income of 3-5 lakhs usually prefer to invest less than

Rs. 20000 or between 20000-50000 in mutual fund while investors with anannual

income between 5-15 lakhs usually prefer toinvest between 20000-50000. On the other

handinvestment of more than 100000 in mutual fund is madeonly by the investors

having an annual income rangingbetween 5-15 lakhs. Annual income of the

individualinvestor and annual investment in mutual fund are Independent of each other.
Share of Mutual Funds in your total Investment:

The cross tabulation clearly states that no matter in which income slab the investor

might lie, he would mostly prefer to invest 0-33% of his total investments in mutual

funds. There are around 15 no of investors who would prefer 25-50% of their

investments in mutual fund, while only 5 investors prefer 50-75% investments in mutual

fund. This is the minimum. Moreover the above table also states that annual income

does not have any impact on % investment of mutual fund out of total investment and a

high income does not mean that his investment in mutual fund would also be high.

Share of mutual funds in the total investment and the income of the investors are

independent of each other.

Qualification of the respondent and knowledge about mutual fund

The above cross tabulation shows those investors who are just high school pass out are

mostly aware of the specific scheme in which they have invested. The graduates are

either mostly partially aware of mutual fund or fully aware of the specific scheme. It can

be clearly seen that whatever the qualification maybe the investors are on an average

aware of the scheme in which they have invested and their qualification plays a little role

to determine their knowledge about mutual funds.

Qualification and knowledge about mutual funds have moderate correlation with each

other.

Occupation of the respondent and the feature that allures him the most while

investing in mutual fund

Thus there is no significant relationship between two variables. Occupation of individual

investor and the feature that allures him the most are independent of each other
Preferred mode to receive the returns and frequency to receive the returns from a

mutual fund scheme

The table above shows that there is significant relationship between two variables.

Mode preferred to receive returns yearly and the type of Return expected by the

investors is dependent on each other.

Findings related to Schemes most preferred by the investors:

Investors mostly prefer equity schemes while making investment into mutual funds.

Amongst equity schemes also equity tax savings (ELSS), Equity diversified scheme and

Equity sectoral schemes are mostly preferred by the investors.

Based on this preference top 5 schemes are selected from each of this category and its

Performance is measured on the basis of secondary data analysis and schemes are

identified which have outperformed the market. The analysis is as follows.

Equity Tax Savings Scheme

Risk Analysis:
The Risk analysis of Equity Tax Planning top 5 schemes have a varying attributes such

as Standard deviation, Sharpe, Beta, Treynor and Correlation which measures the

schemes in terms of risk to the portfolio or the individual schemes. For the return

analysis of Equity Tax Planning top 5schemes it can be seen that all the returns of 1

month,3 months, 6 months and 1 year are having negative returns so here investor

have to invest minimum for 3years to get returns in positive value. The returns of such

schemes since inception have shown a growth but on a fluctuating basis as the scheme

Canara Robeco

Equity Tax saver - Growth and Franklin India Tax shield- Growth which is ranked fourth

and third respectively shows the highest return since inception of 32.82 and25.85 while

the schemes such as BNP Paribas Tax Advantage Plan - Growth and Axis Long Term
Equity Fund - Growth which are ranked second and first respectively have the lowest

growth amongst the top 5schemes. So the investors who have invested in the schemes

whose growth has been highest have benefited more than the investors who had

invested in the first two schemes.

Canara Robeco Equity TaxSaver - Growth is considered as a better scheme but with

standard deviation, beta and correlation to also be considered then Axis Long

Term Equity Fund - Growth is considered as a viable investment option.

Amongst the top 5 schemes of Equity Diversified funds, It can be said that UTI Wealth

Builder Fund - Series II

- Growth is said to be the most advisable one irrespective of the ranking giving on the

basis of NAV, so similarly Canara Robeco Large Cap+ Fund -Growth is said to be the

least advisable to the investors.

Hence these schemes are not having the same ranking as per the preference given on

the basis of the risk analysis so it can be said that Standard Deviation,

Sharpe, Beta, Treynor and Correlation are not the only measure of fund ranking

analysis.
Equity Diversified Schemes:

Risk Analysis:
Amongst the top 5 schemes of Equity Diversified funds, it can be said that UTI Wealth

Builder Fund - Series II

- Growth is said to be the most advisable one irrespective of the ranking giving on the

basis of NAV, so similarly Canara Robeco Large Cap+ Fund -Growth is said to be the

least advisable to the investors.

Hence these schemes are not having the same ranking as per the preference given on

the basis of the risk analysis so it can be said that Standard Deviation,

Sharpe, Beta, Treynor and Correlation are not the only measure of fund ranking

analysis.

Return Analysis
The top 5 schemes of Equity Diversified funds are having negative returns for short term

investments that include 1month, 3 months, 6 months and 1 year. But for the investors

who wants to invest for a long term period they will be benefited with the positive return.

The most beneficial scheme is the Edelweiss Absolute Return Fund - Growth but if the

return of the schemes are considered then UTI Wealth Builder Fund - Series II - Growth

and SBI Magnum Sector Funds Umbrella- Emerging Buss Fund - Growth are more

viable from the investment point of view again the investors who have invested in these

schemes since last 3 years have benefited more in comparison with the investors who

have invested in such schemes since inception. So the most profitable period for

investors to invest in the Equity Diversified schemes can be said is of last 3 years.

Again as per the ranking

Equity Sector Funds

Risk Analysis
In the top 5 schemes of Equity Sector funds for risk analysis all the measure have more

or less the same result so there is hardly any difference in the preference. High Sharpe

and Treynor. And SBI Magnum Sector Funds Umbrella - Pharma - Growth can be said

to be least preferred from amongst others in case of risk analysis of top 5 schemes of

equity sector funds.

Return Analysis
The investment in the top 5 schemes of Equity Sector

Funds advisable for a long term period as investment in short term period yields

negative returns to the investor. So only those investors who are planning to retain the

mutual fund investment as their asset for more than a year invest in such schemes. The

growth in 3 years investment in higher than the growth in the 5years investment and a

balance growth between the two is for the investors who had invested in the Equity

Sector Fund since inception. As per the ranking the SBI Magnum Sector Fund

Umbrella-Pharma-Growth is the first ranked scheme to invest in but the scheme that

has shown the highest growth in terms of return is the Reliance Pharma Fund - Growth

scheme. Irrespective of the long term period of investment that is 3 years, 5 years or

since inception the Reliance Pharma Fund - Growth have shown the highest growth in

terms of return analysis to the investor. But others schemes in the Equity Sector Fund

also have a good amount of return to the investor as all the schemes have more or less

the similar return to the investors.

5. RECOMMENDATIONS

 One should diversify the investments between a few funds (the actual number

depends entirely on the amount of investment). This strategy ensures that the portfolio

is not dependent on the performance of one single fund. However, one needs to avoid

over-diversification as that would achieve nothing.

 Investor can also plan like one mutual fund of diversified equity plan, second

mutual fund of balanced type and third one you can plan of debt type etc. In this manner
the money will get diversified, risk is reduced and the investor will get excellent profit.

For Example: Rs 20,000 per month, it would be wise to opt for a maximum of three

funds. Consider well rated large-cap funds, mid-cap funds and a balanced fund. The

latter would provide the debt component and reduce the portfolio's downside risk.

 Don't just judge a fund by its NAV only.

 Never judge a fund on the basis of its NAV. Also have a look at the Standard

Deviation, Sharpe ratio, Treynor Ratio, Beta, Correlation, P/E Ratio, P/B

 Ratio and Expense Ratio & also its performance in the bear and the bull phase,

and then invest in it. Only judging a fund by its NAV, is irrelevant while selecting the

fund as it is the percentage gain or loss that matters.

 Also look for past returns, dividend etc. the mutual fund has declared. If the

investor has chosen equity or stock market related mutual fund, then he may go for SIP

(Systematic Investment Plan) method.

 A risk adverse investor should avoid investing in the Sectoral funds.

 AMC's use NFOs to create excitement and push their funds. These schemes are

launched because they are easy avenues to capture management fees and increase

the fund house's asset base. These schemes are usually just clones of existing

schemes, but with new peppy names flaunted to attract investors.

 It is important for investors to understand that NFOs are merely marketing

devices. There are a number of existing funds that have proved their mettle and

investors should opt for them because they have a track record
6. CONCLUSION

We reviewed existing performance measures and empirical results as well as other

relevant issues in mutual fund performance which have been widely discussed over a

decade. The mutual fund performance measures are largely influenced by the modern

portfolio theory.

The criticisms of the validity of the Capital Asset Pricing model and the evidence

suggesting that other variables outside the market risk can also explain stock returns

have amplified more recent models to become richer and more informative. These

models not only help to evaluate performance more efficiently but also allow us to
examine further the style and strategy which a fund manager follows. Empirical

evidence suggests that fund managers adjust portfolios dynamically on the basis of

economic information; invest heavily in small and value stocks; and make use of

momentum strategy. Nevertheless, in most cases, they are unable to outperform the

market, at least, once fees and expenses have been deducted. This indicates that fund

managers do not give value added to investors and this is partly due to the high fees

and expenses charged. The other two crucial concerns which are widely discussed in

the mutual fund literature are persistence in performance and the effect of fund flows on

fund performance. Nevertheless, the results in these studies are still mixed.

With regard to the extensive literature on mutual fund performance, we find that these

studies are concentrated in the US and other developed countries and research within

the emerging regions is still scant, even though they are in many respects unlike the

developed markets. For example, India suffers from infrequent trading, inefficiency and

high volatility and high trading cost. More importantly, the mutual fund industries in India

are distinctive from those in the developed markets in terms of growth, competitiveness,

and organizational structure and information availability. Moreover, it is still questionable

whether the findings in the developed markets carry over to the India. The gap between

the studies in developed and emerging countries is also owing to the sample size and

the models used in the studies. Most studies of the mutual funds in India employ a short

sample period, although these markets provide evidence of structural breaks.

Furthermore, these studies are still based on the prevailing approaches, such as the

Sharpe ratio, Treynor ratio and Jensen’s alpha, which involve many criticisms: for
instance, evidence from both the developed and the India suggests that there are other

factors which can explain stock returns and the risk factor is not constant over time.

In addition, the literature on mutual funds in India reveals that the main concern in this

region lies in performance evaluation. Very little has been written on other issues

related to mutual fund performance, such as style and performance determination.

Hence, these prevent a fuller understanding of the mutual fund business. Thus, this

study chooses to examine mutual funds in India, using India as a case study, and

comes up with three promising research ideas. First, we apply performance measures

in the existing literature to the mutual funds in India and investigate its performance

comprehensively. Second, we examine the factors related to mutual fund performance.

Third, we examine the effect of liquidity, as one of the main concerns in India in regard

to mutual fund performance, and elaborate an auxiliary performance measure.

7. BIBLIOGRAPHY

 Grinblatt, Mark and Sheridan Titman, 1989. "Mutual Fund Performance: An

Analysis of Quarterly Portfolio Holdings." Journal of Business, Vol. 62,No. 3, pp.

393-416

 Sadhak, H., 1991, "The alternate saving media", The Economic Times, April 30,

9.

 Madhusudan V. Jambodekar, 1996, Marketing Strategies of Mutual Funds –

Current Practices and Future Directions, Working Paper, UTI – IIMB Centre for

Capital Markets Education and Research, Bangalore.

 Atmaramani, 1996, "Restoring Investor Confidence", The Hindu Survey of Indian

Industry, 435-437.

 Shankar, V., 1996, "Retailing Mutual Funds : A consumer product model", The

Hindu, July 24, 26.

 Sharma C. Lall, 1991, "Mutual Funds - How to keep them on Right Track",

Yojana, Vol.35, No.23, Dec.18-19

 Anjan Chakrabarti and Harsh Rungta, 2000, "Mutual Funds Industry in India : An

indepth look into the problems of credibility, Risk and Brand", The ICFAI Journal

of Applied Finance, Vol.6, No.2, April,27-45

 Kavitha Ranganathan, Madurai Kamaraj University(2006), A Study of Fund

Selection Behaviour of

 Individual Investors Towards Mutual Funds – with Reference to Mumbai City ,

Indian Institute of Capital Markets 9th Capital Markets Conference Paper

 Dr S Narayan Rao, M Ravindran, Manager (2003),Performance Evaluation of

Indian Mutual Funds, SSRNsearch library.

 Sharad Panwar and R. Madhumathi ,(2006),Characteristics and Performance

Evaluation of Selected Mutual Funds in India , Indian Institute of Capital Markets

9th Capital Markets Conference

 Paper Rajeshwari T.R and Rama Moorthy V.E., (2002)

 Performance Evaluation Of selected Mutual Funds and Investor Behaviour, PhD

Thesis, Sri Sathya Sai Institute of Higher Learning, Prasanthinilayam

 Syama Sundar, P.V., 1998, "Growth Prospects of Mutual

 Funds and Investor perception with special reference to Kothari Pioneer Mutual

Fund" , Project Report, Sri Srinivas Vidya Parishad, And University,

Visakhapatnam

 Vidya Shankar, S., "Mutual Funds - Emerging Trends in India", Chartered

Secretary, Vol.20, No.8, 1990,639-640.

APPENDIX I

COVER LETTER

Dear Respondent,

I am a postgraduate student of the above named Institution involved in a research work

for the partial fulfillment of the requirements for the award of Management Degree. I am

undertaking a research work on the topic: “Evaluation of mutual fund performance in the

present market condition”.

Kindly respond to the following questions either by ticking the correct answer or by filling

the blank spaces. Your response will be treated confidentially.

Yours faithfully,

___________________
QUESTIONNAIRE

1. What is your Gender?

2. What is your Age?

3. What is your Qualification?

4. What is your Occupation?

5. What is your monthly Income?

6. What is your Preferred Investment Avenue?

7. How do you rank the various kinds of investments preferred by the you?

8. What factor is preferred by you most while making investment ?

9. What is the Share of Mutual Funds in your total Investment portfolio?

10. What feature that allures you the most while investing in mutual fund?

11. What is your preferred mode to receive the returns and frequency to receive the

returns from a mutual fund scheme?

12. List the Schemes most preferred by you?

13. List the top schemes preferred by you of Equity Sector?

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