CHARACTERISTICS AND PERFORMANCE EVALUATION OF SELECTED MUTUAL

FUNDS IN INDIA
Sharad Panwar and Dr. R. Madhumathi
Indian Institute of Technology, Madras

ABSTRACT
The study used sample of public-sector sponsored & private-sector sponsored mutual funds of varied net
assets to investigate the differences in characteristics of assets held, portfolio diversification, and
variable effects of diversification on investment performance for the period May, 2002 to May,2005. The
study found that public-sector sponsored funds do not differ significantly from private-sector sponsored
funds in terms of mean returns%. However, there is a significant difference between public-sector
sponsored mutual funds and private-sector sponsored mutual funds in terms of average standard
deviation, average variance and average coefficient of variation(COV).The study also found that there
is a statistical difference between sponsorship classes in terms of e SDAR(excess standard deviation
adjusted returns)as a performance measure. When residual variance (RV) is used as the measure of
mutual fund portfolio diversification characteristic, there is a statistical difference between public-sector
sponsored mutual funds and private-sector sponsored mutual funds for the study period. The model built
on testing the impact of diversification on fund performance and found a statistical difference among
sponsorship classes when residual variance is used as a measure of portfolio diversification and excess
standard deviation adjusted returns as a performance measure. RV ,however, has a direct impact on
Sharpe fund performance measure.

Keywords: Mutual Funds, performance evaluation, risk-return analysis, Net asset value, residual
variance, fund return
1. INTRODUCTION
Mutual Funds is a topic which is of enormous interest not only to researchers all over the world, but
also to investors. Mutual funds as a medium-to-long term investment option is preferred as a suitable
investment option by investors. However, with several market entrants the question is the choice of
mutual fund. The study focuses on this problem of mutual fund selection by investors. Though the
investment objectives define investors preference among fund types (balanced, growth, dividend etc.) the
choice of fund based on a sponsor’s reputation remains to be probed. Indian mutual fund industry has
two distinct types of sponsors, public-sector and private-sector. The number of funds floated by public-
sector sponsors are minimal compared to private-sector players. There is a hypothetical assumption that
private-sector outperforms public-sector due to several factors such as responsibility, commitment and so
on. We focus on testing this hypothesis on the mutual fund industry. Although many studies document
the investment performance of mutual funds irrespective of whether they are public-sector sponsored or
private-sector sponsored, researchers do not investigate the influence of portfolio characteristics and the
variable effect of diversification on mutual fund performance.

2. OBJECTIVES OF THE STUDY

• To identify differences in characteristics of public-sector sponsored & private-sector sponsored
mutual funds
• To find the extent of diversification in the portfolio of securities of public-sector sponsored and
private-sector sponsored mutual funds
• To compare the performance of public-sector sponsored and private-sector sponsored mutual
funds using traditional investment measures

3. LITERATURE REVIEW
Literature on mutual fund performance evaluation is enormous. A few research studies that have
influenced the preparation of this paper substantially are discussed in this section.
Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance. Drawing on
results obtained in the field of portfolio analysis, economist Jack L. Treynor has suggested a new
predictor of mutual fund performance, one that differs from virtually all those used previously by
incorporating the volatility of a fund's return in a simple yet meaningful manner.
Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance
(Jensen’s alpha) that estimates how much a manager’s forecasting ability contributes to fund’s returns.
As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the portfolio over
the return of the benchmark index, where the portfolio is leveraged to have the benchmark index’s
standard deviation. S.Narayan Rao , et. al., evaluated performance of Indian mutual funds in a bear
market through relative performance index, risk-return analysis, Treynor’s ratio, Sharpe’s ratio, Sharpe’s
measure , Jensen’s measure, and Fama’s measure. The study used 269 open-ended schemes (out of total
schemes of 433) for computing relative performance index. Then after excluding funds whose returns are
less than risk-free returns, 58 schemes are finally used for further analysis. The results of performance
measures suggest that most of mutual fund schemes in the sample of 58 were able to satisfy investor’s
expectations by giving excess returns over expected returns based on both premium for systematic risk
and total risk.
Bijan Roy, et. al., conducted an empirical study on conditional performance of Indian
mutual funds. This paper uses a technique called conditional performance evaluation on a sample of
eighty-nine Indian mutual fund schemes .This paper measures the performance of various mutual funds
with both unconditional and conditional form of CAPM, Treynor- Mazuy model and Henriksson-Merton
model. The effect of incorporating lagged information variables into the evaluation of mutual fund
managers’ performance is examined in the Indian context. The results suggest that the use of
conditioning lagged information variables improves the performance of mutual fund schemes, causing
alphas to shift towards right and reducing the number of negative timing coefficients.
Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In
this paper, measures of evaluating portfolio performance based on lower partial moment are developed.
Risk from the lower partial moment is measured by taking into account only those states in which return
is below a pre-specified “target rate” like risk-free rate. Kshama Fernandes(2003) evaluated index fund
implementation in India. In this paper, tracking error of index funds in India is measured .The
consistency and level of tracking errors obtained by some well-run index fund suggests that it is possible
to attain low levels of tracking error under Indian conditions. At the same time, there do seem to be
periods where certain index funds appear to depart from the discipline of indexation. K. Pendaraki et al.
studied construction of mutual fund portfolios, developed a multi-criteria methodology and applied it to
the Greek market of equity mutual funds. The methodology is based on the combination of discrete and
continuous multi-criteria decision aid methods for mutual fund selection and composition. UTADIS
multi-criteria decision aid method is employed in order to develop mutual fund’s performance models.
Goal programming model is employed to determine proportion of selected mutual funds in the final
portfolios.
Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched
to randomly selected conventional funds of similar net assets to investigate differences in characteristics
of assets held, degree of portfolio diversification and variable effects of diversification on investment
performance. The study found that socially responsible funds do not differ significantly from
conventional funds in terms of any of these attributes. Moreover, the effect of diversification on
investment performance is not different between the two groups. Both groups underperformed the
Domini 400 Social Index and S & P 500 during the study period.

4. METHODOLOGY USED
These three traditional measures of investment performance are used to compare the public-sector
sponsored & private-sector sponsored mutual funds. These are Jensen’s alpha, α p ; Sharpe information
ratio, Sp; and excess standard deviation adjusted return, e SDAR. Jensen’s alpha relies on beta as a
measure of the risk of a mutual fund portfolio whereas the two other performance measures rely on total
variability of returns. Jensen’s alpha is estimated as:
rpt = α p + β p rmt ………….(1)
Where r p t is the excess return (i.e., the observed return minus the risk-free rate) on mutual fund
portfolio p in month t, rm t is the excess return on the benchmark index in month t(i.e., the observed
return on the benchmark index minus the risk-free rate), βp is mutual fund portfolio’s beta . The risk-
free rate is represented by the monthly return on three-month(91-day) Treasury bills.
If Dt is the difference in return between the fund portfolio and the benchmark ( R pt − Rmt ) in period t,
then Sharpe information ratio is computed as:
−
S p = D/σ D ……………..(2)
−
Where D is the average value of the monthly differences in return between the fund portfolio and the
n
benchmark ,( ∑
t =1
D t )/n , and σ D is the standard deviation of the differential return. As with
Jensen’s alpha, this measure indicates portfolio performance relative to the benchmark portfolio and
lends itself to statistical tests of significance. However, unlike the Jensen’s alpha, the Sharpe
performance measure adjusts for total risk rather than just systematic risk.
The third measure of investment performance is e SDAR (Statman 2000), measured as follows:

eSDAR = f r +(rp −rf )*(Sm / Sp ) −rm ……(3)

where r f =monthly return on three-month Treasury bills,
r p =monthly return on fund portfolio p,
rm =monthly return on the benchmark index,
S p =standard deviation of portfolio p’s return, and
Sm = standard deviation of return on the benchmark index.
Residual variance is also used to evaluate mutual fund performance. It is also called unexplained
variance. In general, it is known as the variance of any residual. In particular, it is the variance 2 (y - Y)
of the difference between any variate y and its regression function Y. Residual variance tends to decrease
as the number of shares held by the mutual fund increases. Therefore, the higher the residual variance,
the less diversified the mutual fund is.
Mutual fund portfolio p ’s residual variance, normalized by the total variance of the fund portfolio (or
RV) is estimated as:
RV = 1 − (β p2σ m2 / σ p2 ) ……..……….(4)
This estimated residual variance is used to compare the levels of unsystematic risk in portfolios of
public-sector sponsored and private-sector sponsored mutual funds.

5. TESTABLE HYPOTHESES
Mutual funds based on the sponsors have been differentiated into three classes. The funds were initially
categorized as public-sector sponsored and private-sector sponsored funds. Private-sector sponsored
funds were further subdivided into Indian and foreign sponsors. Mutual funds could be defined in terms
of the following characteristics: net assets, stock%, holdings, top ten%, market capitalization where
stock% is common stock investments as percentage of the fund’s assets , holdings is the total number of
companies held by the fund, top ten % is the percentage of net assets invested in the fund’s top ten
holdings which is calculated by summing percentage of net assets in top ten holdings. Cap is the median
market capitalization of the companies/securities held by the fund. Median market capitalization is
calculated from the sorted market capitalization of the companies held by the fund. Net assets and market
capitalization are in crores of Indian Rupees. The fund characteristics that can be used to measure
portfolio diversification are capitalization, holdings and top ten %. Besides, residual variance is also an
important measure of fund diversification. Number of companies held by the mutual fund(holdings) and
the percentage of assets in top ten holdings can prove to be very useful in gaining insight into mutual
fund portfolio diversification because when the number of companies held by the mutual fund is lower or
the percentage of assets invested in the top ten holdings is higher, the mutual fund is more concentrated
in a few companies and the mutual fund is more susceptible to “market fluctuations in these holdings”.
To investigate the diversification properties and investment performance of selected mutual
funds, as well as the effect of diversification on investment performance, both parametric and
nonparametric statistical methods like Wilcoxon-two sample rank sum test, k-sample Jonckheere-
Terpstra (J-T)test, correlation and analysis of variance were used. The statistical testing of difference in
fund classes are through the non-parametric J-T Test. The Jonckheere-Terpstra test is a nonparametric
test for ordered differences among classes. It tests the null hypothesis that the distribution of the response
variable does not differ among classes. It is designed to detect alternatives of ordered class differences,

which can be expressed as (or ), with at least one

of the inequalities being strict, where denotes the effect of class i. For such ordered alternatives, the
Jonckheere-Terpstra test can be preferable to tests of more general class difference alternatives, such as
the Kruskal - Wallis test .The Jonckheere-Terpstra test statistic is computed by first forming R(R-1)/2
Mann-Whitney counts Mi,i ', where i < i', for pairs of rows in the contingency table,

………….(5)

where Xi,j is response j in row i. Then the Jonckheere-Terpstra test statistic is computed as

………….(6)

This test rejects the null hypothesis of no difference among classes for large values of J. Asymptotic p-
values for the Jonckheere-Terpstra test are obtained by using the normal approximation for the
distribution of the standardized test statistic.
The standardized test statistic is computed as

……………..(7)

where E0(J) and var0(J) are the expected value and variance of the test statistic under the null hypothesis.

………............(8)
var0(J) = A / 72 + B / [ 36n(n-1)(n-2) ] + C / [ 8n(n-1) ] ...........(9)

where

……..(10)

………..(11)

………..(12)

When the standardized test statistic is greater than its null hypothesis expected value of zero, the right-
sided p-value is computed, which is the probability of a larger value of the statistic occurring under the
null hypothesis. A small right-sided p-value supports the alternative hypothesis of increasing order from
row 1 to row R. When the standardized test statistic is less than or equal to zero, the left-sided p-value is
computed. A small left-sided p-value supports the alternative of decreasing order from row 1 to row R.

The one-sided p-value P1 can be expressed as

The two-sided p-value P2 is computed as

Following Null hypothesis is tested:
H0 : µ Pu−RV −µPx−RV = 0………….. (13)
Where RV is the Mutual fund’s residual variance, also referred to as idiosyncratic or company-specific
variance; Pu is public-sector sponsored mutual fund; Px is private-sector sponsored mutual fund which
includes both private-sector Indian sponsored, PvI and private-sector foreign sponsored mutual funds
,PvF. That is, the degree of diversification of a public-sector sponsored mutual fund portfolio is not
different from that of a private-sector sponsored mutual fund portfolio. The null hypothesis is tested
against the alternative:
Ha : µ Pu − RV −µPx− RV > 0 …………..(14)
It is predicted that a significant correlation will exist between residual variance and measures of
investment performance.
H 0 : µ Pu − P − µ Px − P = 0 …………..(15)
Where P is the relevant measure of investment performance . That is, the investment performance of a
public-sector sponsored mutual fund is not different from that of a private-sector sponsored mutual fund.
It is expected that the investment performance of public-sector sponsored mutual funds to be worse than
that of private-sector sponsored mutual funds. Thus, the alternative hypothesis is
Ha : µ Pu−P −µPx−P < 0 …………..(16)
The investment performance of the public-sector sponsored mutual funds and private-sector
sponsored mutual funds, is compared using two alternative statistical methods. Using the first method,
taking two samples at a time (public-sector sponsored and private-sector Indian sponsored mutual funds)
and secondly,(public-sector and private-sector foreign sponsored mutual funds) and finally private-sector
Indian sponsored and private-sector foreign sponsored mutual funds , are compared using the Wilcoxon
two-sample rank-sum test. Using the second method, the two samples are compared again using the
analysis of covariance to investigate the differential impact of residual variance on investment
performance between the three classes of mutual funds. Analysis of covariance combines the
characteristics of both analysis of variance and regression. This statistical method allows to test whether
the means of portfolio performance measures are significantly different between public-sector sponsored
, private-sector Indian sponsored and private-sector foreign sponsored mutual funds and, simultaneously,
to test whether differences in investment performance are attributable to the difference in residual
variance. The model that links investment performance to the two independent variables is:
y = ω 0 + ω1 x1 + ω 2 x2 + ω 3 x1 x 2 + ε ……(17)
where
y = investment performance of the fund portfolio;
x1 = residual variance (the covariate); and
x2 = group(A=Public-sector sponsored mutual funds, B=Private-sector Indian sponsored mutual
funds and C=Private-sector foreign sponsored mutual funds ), where x2 =1 if group A, 2 if group B and
3 if group C.
Because x2 is equal to one, two and three if the mutual fund is public-sector sponsored, private-sector
Indian sponsored, private-sector foreign sponsored mutual fund ,respectively, then the expected values of
investment performance are
E ( y ) = (ω 0 + ω 2 ) + (ω 1 + ω 3 ) x1 ……………..(18)
for the public-sector sponsored funds ,
E ( y ) = (ω 0 + 3ω 2 ) + (ω1 + 3ω 3 ) x1 ……………..(19)
for the private-sector Indian sponsored funds, and
E( y) = (ω0 + 3ω2 ) + (ω1 + 3ω3 ) x1 …………… .(20)
Therefore, ω2 is the difference in intercepts and ω3 is the difference between the slopes of the two
analysis of covariance models.
It can be tested whether there is a difference in the effect of residual variance on investment performance
as a function of group by testing the hypothesis:
H 0 : ω3 = 0 (Kleinbaum, Kupper , and Muller 1988).
The difference in investment performance between public-sector sponsored ,private-sector Indian
sponsored and private-sector foreign sponsored mutual funds can be tested, after adjusting for the effects
of residual variance, by testing the hypothesis: H 0 : ω 2 = 0 . For private-sector Indian and foreign
sponsored mutual funds, a linear relation can be tested between residual variance and investment
performance by testing the null hypothesis : H 0 : ω 1 = 0 .

6. DATA COLLECTION
Net Asset Value(NAV) for the medium-term period May,2002 to May,2005 of selected mutual funds
along with the index value of the two benchmark market indices, namely S &P CNX NIFTY and CRISIL
Balanced Fund Index are taken from the following website:
(1) S &P CNX NIFTY: http://www.nse-india.com
(2) CRISIL Balanced Fund Index : http://www.amfiindia.com
(3) Net Asset Value(NAV): http://www.mutualfundsindia.com
This website gave information on mutual fund’s characteristics like net assets, stock %, holdings, top ten
%, Market capitalization. The sample had six public-sector sponsored mutual funds operating in India.
These have been matched with twelve randomly selected private-sector sponsored mutual funds, of
which seven were private-sector Indian sponsored and five private–sector foreign sponsored mutual
funds operating in India.
Indices: Following two are taken:
• S & P CNX NIFTY Index: It is a market index and is used by funds to benchmark their fund
performance. It is a well diversified 50 stock index accounting for 23 sectors of the economy. It is used
for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds.
It is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture
between NSE and CRISIL. Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million is
0.07%.It is professionally maintained and is ideal for derivatives trading
• CRISIL Balanced Fund Index: consists of tracking the returns on the constituents like the CRISIL
Composite Bond Fund Index and the Nifty Index. The Weighted Average Methodology is used to arrive
at the returns for the Balanced Fund. The Index History is calculated from the base date of 31st March,
2002. An index of this kind, generally serves as an indicator for all the market participants in the
category, to benchmark their performance against the index, find out the attributes for the variation in
their performance vis-a-vis the index and reshuffle their portfolio keeping in mind the risk/reward
tradeoff. Since the resulting Index is a derived Index rather than a Primary Index, it also serves as a
benchmark for non-diversified market participants to evaluate their performance against a diversified
portfolio containing a mix of all the instruments in the universe of non- equity instruments. Finally, it is a
useful tool to track volatility, charting correlation and developing hedging instruments.
Daily Net Asset Values (NAV s) are obtained for each of these eighteen funds and also for each of the
two indices taken. The returns are computed using formula :
return = ( NAVt − NAVt −1 ) / NAVt −1 ………………(21)
Where NAVt is Net asset value of a mutual fund or Index for a day t , NAVt −1 is Net asset value of a
mutual fund or Index for day (t-1). Returns on each of these eighteen mutual funds and also for each of
the two indices is given in the following table.
For the S & P Index, the returns are :
return = ( Indext − Indext −1 ) / Indext −1 ………… ..(22)
 TABLE 1-Mutual Funds return, Standard Deviation, Variance, Coefficient of Variation, CRISIL Balanced Fund Index, S & P CNX NIFTY Index
return (May, 2002 to May, 2005)
CRISIL
Fund Standard Balanced Fund S & P CNX Nifty
Fund Name Type Return Deviation Variance COV Return Return
canbank index- growth plan Pu -0.000484 0.003922 0.000015 -8.098889 0.000717 0.0014
GIC Balanced Fund Pu 0.001069 0.002376 0.000006 2.222040 0.000628 0.0010
LIC G Sec Fund - Dividend Pu 0.000056 0.001152 0.000001 20.639998 0.000561 0.0009
UTI Balanced Fund - Growth Pu 0.000328 0.002871 0.000008 8.753963 0.000561 0.0009
SBI Magnum Balanced Fund - Dividend Pu 0.001095 0.003343 0.000011 3.051424 0.000703 0.0012
Escorts Balanced Fund - Dividend Pu 0.001927 0.075353 0.005678 39.112321 0.000561 0.0009
Prudential ICICI Balanced - Growth PvI 0.001004 0.002900 0.000008 2.888085 0.000418 0.0007
Birla Bond Index Fund - Growth PvI 0.000125 0.000376 0.000000 3.006045 0.000938 0.0017
Chola Growth Fund -Growth PvI 0.000908 0.005401 0.000029 5.951515 0.000418 0.0010
ING Vysya Liquid Fund - Growth PvI 0.000263 0.000338 0.000000 1.284391 0.000561 0.0009
Reliance Growth - Growth PvI 0.010950 0.042239 0.001784 3.857559 0.000761 0.0013
Sahara Taxgain - Growth PvI 0.005880 0.015326 0.000235 2.606292 0.000783 0.0014
Sundaram Money Fund - Growth PvI 0.000642 0.002047 0.000004 3.190220 0.000561 0.0009
JM MIP FUND-Monthly Dividend PvF 0.000035 0.000009 0.000000 0.257009 0.000653 0.0000
Franklin FMCG Fund - Dividend PvF 0.001107 0.002448 0.000006 2.212039 0.000354 0.0007
DSP Merrill Lynch Balanced Fund - Dividend PvF 0.000966 0.002682 0.000007 2.775531 0.000418 0.0007
ABN AMRO Cash Fund - Growth PvF 0.000152 0.000013 0.000000 0.082891 0.000828 0.0016
Grindlays Cash Fund - Growth PvF 0.000203 0.000115 0.000000 0.568048 0.001810 0.0009

Note: Table 1 shows the six public-sector sponsored, seven private-sector Indian sponsored and five private-sector foreign sponsored mutual funds labeled as
Pu, PvI, PvF respectively. Fund returns, Standard deviation of returns, CRISIL Balanced Fund Index returns, S & P CNX Nifty Index returns are also
calculated using the formula depicted above. The square of standard deviation of returns gives the Variance. Coefficient of variation (COV) is found by
dividing standard deviation by mean returns.
 TABLE 2- Characteristics of Mutual Funds during May,2005

Fund Name Net Assets(in Rs crores)Stock % Holdings(in numerals)Top ten%Market cap(in Rs crores)
Canbank Index- Growth Plan 2.81 98.43 50 58.47 0.03
GIC Balanced Fund 47.49 72.85 23 75.60 1.54
LIC G Sec Fund - Dividend 180.3072 0.00 2 85.23 56.65
UTI Balanced Fund - Growth 506.7966 58.81 49 39.21 8.35
SBI Magnum Balanced Fund - Dividend 95.13 68.71 32 45.51 2.87
Escorts Balanced Fund - Dividend 4.37 60.83 28 62.04 0.12
Prudential ICICI Balanced - Growth 167.60 67.28 40 32.38 3.85
Birla Bond Index Fund - Growth 4.20 0.00 4 80.04 0.92
Chola Growth Fund -Growth 37.11 98.05 22 64.00 1.48
ING Vysya Liquid Fund - Growth 729.66 0.00 15 59.77 9.90
Reliance Growth - Growth 1135.44 88.89 37 31.61 19.23
Sahara Taxgain - Growth 2.08 88.94 29 47.15 0.06
Sundaram Money Fund - Growth 472.83 0.00 28 33.54 9.81
JM Auto Sector Fund - Dividend 27.57 94.12 20 66.36 0.62
Franklin FMCG Fund - Dividend 20.74 98.59 19 76.22 1.05
DSP Merrill Lynch Balanced Fund - Dividend235.59 66.32 61 42.59 2.60
ABN AMRO Cash Fund - Growth 532.99 0.00 33 40.92 9.75
Grindlays Cash Fund - Growth 3938.97 0.00 60 14.70 24.82

Note: Net Assets is the mutual fund size ,Stock% is common stock investments as percentage of the fund’s assets, holdings is the total number of companies
held by the fund, top ten % is the percentage of net assets invested in the fund’s top ten holdings, and market cap is the median market capitalization of the
companies held by the fund.
TABLE 3-Fund return and characteristics differentiation among mutual fund classes (May,2002 to
May,2005)
Standard J-T
sample mean statistic
Public (Pu)Private (PvI) Private (PvF) Pu – PvI - PvF sig.
PANEL A : MONTHLY RETURN
Mean return % 0.0007 0.0028 0.0005 -0.3650 0.7150
Avg. standard deviation 0.0148 0.0098 0.0011 -1.9880 0.0470**
Avg. variance 0.0010 0.0003 0.0000026 -1.8480 0.0650*
Avg. COV 10.9468 3.2549 1.1791 -2.3120 0.0210**
PANEL B :PORTFOLIO CHARACTERISTICS
Net Assets(Rs. Crores) 139.4840 364.1314 951.1720 0.9330 0.3510
Common Stock % 59.9383 49.0229 51.8060 0.0000 1.0000
Market Capitalization(Rs.Crores)11.5933 6.4643 7.7680 0.3650 0.7150
Holdings(Numerals) 30.6667 25 38.6 0.3250 0.7450
Top Ten% 61.0100 49.7843 48.1580 -0.8520 0.3940
J-T is Jonckheere-Terpstra test
Note: COV is coefficient of variation.
The Z-scores are from the three-sample Jonckheere -Terpstra test .
* * Jonckheere-Terpstra test Z-score is statistically significant at the 5 % level.
* Jonckheere-Terpstra test Z-score is statistically significant at the 10 % level.

7. RESULTS
Mutual Fund Portfolio Performance
There is a wide variation among the sample funds ranging from a minimum net asset of
Rs.2.08 crores to a maximum of Rs.3,938.97 crores. The funds selected have a mix of debt, equity and a
combination of debt and equity. The holdings also varied from 2 to 61. Top Ten % indicating non-
diversification to the extent of 85.23 % was represented in the sample along with a diversified fund
represented by only 14.7 % held by top ten securities. The market cap also varied from Rs. 0.03 crores to
Rs. 56.65 crores.
Table 2 shows various portfolio characteristics of public-sector sponsored funds , private-
sector Indian sponsored and private-sector foreign sponsored funds.
Table 3 summarizes the results of a statistical test of the differences between the classes of
funds. Panel A of Table 3 shows that the average return for the public-sector sponsored funds is 0.07 % ,
compared with 0.28% for the private-sector Indian sponsored funds, 0.05% for the private-sector foreign
sponsored mutual funds for the study period. The three-sample Jonckheere-Terpstra test indicates that the
mean returns are not significantly different at the 5% level.
However, the standard deviations of the 3-year returns are significant, as indicated by a -
1.988 Z-score(significance=0.047) from the three-sample Jonckheere-Terpstra test. The variance (Z-
score =-1.848, sig.=0.065) and coefficient of variation(COV) are also significant (Z-score=
-2.312,sig.=0.021),indicating that though in terms of mean returns, there is no statistical difference
between sponsored classes though there is a statistical difference in terms of fund risk over the study
period .
Also, considering portfolio characteristics like net assets, common stock %, capitalization,
holdings, top ten% ; using the three-sample Jonckheere-Terpstra test, it is found that since the Z-score of
all of these characteristics is negative and non-significant at 5% level of significance, hence , there is no
statistical difference between public-sector sponsored and private-sector sponsored mutual funds in terms
of portfolio characteristics.
Table 4 shows the estimated traditional measures of investment performance of the mutual
funds like Jensen’s alpha, portfolio beta which are estimated using the two alternative benchmark indices
, S & P CNX NIFTY Index and CRISIL Balanced Fund Index. It can be seen that S & P CNX NIFTY
Index is a better measure compared to CRISIL Balanced Fund Index. S & P CNX NIFTY Index is able
to give more statistical significance in terms of portfolio alpha and beta as compared to CRISIL Balanced
Fund Index. Generally, S & P CNX NIFTY Index is used as the benchmark index by the Indian mutual
fund managers to evaluate the performance of a mutual fund operating in India.
 When CRISIL Balanced Fund Index is used as the benchmark index, for public-sector
sponsored mutual funds, the Jensen’s alpha is significant and negative for two out of six funds, i.e.,
33.33 % of the sample funds in this class(underperformers). However, for Indian private-sector
sponsored funds, Jensen’s alpha is significant and positive for two out of seven funds, i.e., 28.57 % of
sample(overperformers), and also significant and negative for three out of seven funds, i.e. ,42.86 % of
the sample(underperformers). Private-sector foreign sponsored mutual funds have statistical under
performance for three out of five funds,i.e.,60 % of the sample and over performance for one fund, i.e.,
20 % of the sample.
When S & P CNX NIFTY Index is used as the benchmark index, then for public-sector
sponsored mutual funds, Jensen’s alpha is significant and negative(underperformance) for five out of six
funds, i.e.,83.33% of the sample at 5 % level of significance. However, Jensen’s alpha is significant and
positive(overperformance) for one out of six funds, i.e.,16.67 % of the sample .For private -sector Indian
sponsored mutual funds, Jensen’s alpha is significant and negative (underperformance) for four out of
seven funds,i.e.,57.14 % of the sample. For private-sector foreign sponsored mutual funds, the entire
sample has shown statistical underperformance in terms of Jensen’s alpha.
From Table 5, it is found that in terms of e SDAR (excess standard deviation adjusted return) ,
the three classes of funds are statistically different. Also, private-sector Indian sponsored and private-
sector foreign sponsored mutual funds are statistically different in terms of e SDAR (excess standard
deviation adjusted return) ( Two sample Wilcoxon rank-sum test Z-score= 0.028,significance=0.03)at
5% level.
In terms of portfolio diversification (residual variance, RV), public-sector sponsored and
private-sector Indian sponsored mutual funds are statistically different (Two sample Wilcoxon rank-sum
test Z-score= -1.857, significance=0.063) at 10% level.
It is concluded that during May,2002 to May,2005 period, neither the investment performance
represented by Jensen’s alpha, Sharpe information ratio, nor the level of mutual fund portfolio
diversification(portfolio beta) of public-sector sponsored mutual funds differs from those of private-
sector Indian and private-sector foreign sponsored mutual funds of varied fund characteristics. However,
in terms of e SDAR, there is a statistical difference between public-sector sponsored, private-sector
Indian and private-sector foreign-sponsored mutual funds of varied fund characteristics. In terms of
portfolio diversification(residual variance, RV), it is found that there is a statistical difference between
public-sector sponsored and private-sector Indian sponsored mutual funds when S & P CNX NIFTY
Index is used as a benchmark index.
Results of Pearson correlation between investment performance and measures of mutual fund
portfolio diversification show that when CRISIL Balanced Fund Index is used as the benchmark index,
then for the public-sector sponsored funds, the performance measure e SDAR alone has a significant
correlation with capitalization. In the private- sector sponsored funds( both Indian and foreign), Jensen’s
alpha has a significant correlation with holdings while Sharpe’s measure has a significant correlation
with RV. For private-sector foreign sponsored funds, Sharpe information ratio has a significant
correlation with residual variance. The private-sector Indian sponsored funds show significant correlation
between holdings with both Sharpe information ratio and e SDAR as well as top ten % with both Sharpe
information ratio and e SDAR. However, top ten % has a negative correlation with holdings implying
that the diversification performance is poor.
When S & P NIFTY Index is used as the benchmark index, for public-sector sponsored mutual
funds, e SDAR is significantly correlated with capitalization, holdings, top ten %. Holdings is correlated
with residual variance (RV), capitalization and top ten . For private-sector sponsored funds, Jensen’s
alpha is correlated with residual variance. Top ten % is correlated with holdings. For private-sector
Indian sponsored funds, Jensen’s alpha is correlated with residual variance. Sharpe information ratio is
correlated with top ten %. Sharpe information ratio, e SDAR and top ten % are correlated with holdings.
For private-sector foreign sponsored funds, Jensen’s alpha and Sharpe information ratio are correlated
with residual variance. Capitalization and holdings are correlated with top ten %. For combined sample,
top ten% is correlated with holdings.
So, wherever Pearson correlation is negative, it implies that diversification performance is poor.
Conversely, wherever Pearson correlation is positive, it implies that diversification performance is good.
 TABLE 4-Performance of Mutual Funds: May 2002 to May 2005
Fund Name CRISIL Balanced Fund Index S & P CNX NIFTY Index
αp βp αp βp
sig sig Sharpe,Sp e SDAR sig sig Sharpe,Sp e SDAR
Canbank Index-Growth Plan -0.1720 0*** -2.1500 0*** -0.2116 0.0289 -0.118 0*** -1.161 0*** 0.1122290.888633
GIC Balanced Fund -0.0050 0.5850 0.8990 0*** 0.2494 0.0137 -0.0278 0*** 0.483 0*** 1.21E-05 -2.3406
LIC G Sec Fund - Dividend -0.0420 0*** 0.2370 0.0230** -0.2887 -0.0305 -0.0487 0*** 0.114 0.036** -0.2654 -10.222
UTI Balanced Fund - Growth 0.0101 0.3040 1.1900 0*** -0.1208 0.0199 -0.0204 0*** 0.634 0*** -0.269733.437173
SBI Magnum Balanced Fund - Dividend 0.0142 0.3020 1.2540 0*** 0.1553 0.0256 -0.0157 0.022** 0.709 0*** -0.04077 -0.10898
Escorts Balanced Fund - Dividend 0.91600.0120** 17.82400.0080*** 0.0183 0.0531 0.442 0.018** 9.1630.009*** 0.0135164.841854
Prudential ICICI Balanced - Growth 0.02190.0160** 1.3910 0*** 0.3400 0.0220 -0.01470.002*** 0.722 0*** 0.193368 -0.84818
Birla Bond Index Fund - Growth -0.0500 0*** 0.0887 0.0300** -0.4796 -0.2124 -0.0525 0*** 0.0423 0.052* -0.47656 -39.1223
Chola Growth Fund -Growth 0.04940.0240** 1.9050 0*** 0.1057 0.0358 -7E-05 0.995 1 0*** -0.020991.707046
ING Vysya Liquid Fund - Growth -0.0531 0*** 0.0283 0.2830 -0.1657 -0.2380 -0.0538 0*** 0.0156 0.3520 -0.1917 -47.4198
Reliance Growth - Growth 0.0728 0.7680 2.1580 0.6360 0.2420 0.0522 -0.0514 0.6890 -0.14 0.9530 0.226417 -5.04288
Sahara Taxgain - Growth -0.0730 0.3960 -0.4420 0.7790 0.3282 0.0483 -0.0626 0.1670 -0.254 0.2600 0.28363.808473
Sundaram Money Fund - Growth -0.0701 0*** -0.2920 0.1250 0.0265 0.0064 -0.0636 0*** -0.173 0.0750* -0.06285 -3.59539
JM MIP Fund-Monthly Dividend -0.0549 0*** -0.0002 0.8720 -0.3392-11.1737 -0.0549 0*** -2E-05 0.9720 -0.33091 -1829.91
Franklin FMCG Fund - Dividend 0.0026 0.8260 1.0340 0*** 0.5152 0.0127 -0.02440.002*** 0.5420.001*** 0.174021 -2.18772
DSP Merrill Lynch Balanced Fund - Dividend 0.0102 0.2880 1.1770 0*** 0.3115 0.0193 -0.0207 0*** 0.613 0*** 0.1445853.830639
ABN AMRO Cash Fund - Growth -0.0547 0*** 0.0007 0.9430 -0.3954 -0.9586 -0.0547 0*** 0.0007 0.8930 -0.46312 -1287.98
Grindlays Cash Fund - Growth 0.0546 0*** 0.0025 0.8310 -0.1985 -0.8063 -0.0546 0*** 0.0018 0.0720* -0.20778 -149.284
Table 4: Note: Jensen’s alpha, α p , is the measure of mutual fund portfolio p ’s investment performance, using the CRISIL Balanced Fund Index and S & P CNX NIFTY
Index as the two benchmark indices. β p is mutual fund portfolio p ’s beta. Sp is Sharpe information measure. e SDAR is excess standard deviation adjusted return. Statistical
significance relative to α p and β p is indicated in this table. Jensen’s alpha and portfolio beta are significant for Bold entries.
*** significance at 1 % level
** significance at 5 % level
*significance at 10 % level
 TABLE 5-Differences in Performance of Mutual Funds: May,2002 to May,2005
sample mean
Wilcoxon Wilcoxon Wilcoxon
Pu Pv PvI PvF J-T Test(Pu-PvI-PvF) sig(2-tailed) Z-score(Pu-PvI) sig(2-tailed) Z-score(Pu-PvF) sig(2-tailed) Z-score(PuI-PvF) sig(2-tailed)
Performance relative to CRISIL Balanced Fund Index
αp
0.1202 -0.0120 -0.0146 -0.0084 -0.2030 0.8390 -0.2860 0.7750 -0.1830 0.8550 -0.0810 0.9350
Sp -0.0330 0.0242 0.0567 -0.0213 0.2030 0.8390 -0.8570 0.3910 -0.1830 0.8550 -0.4060 0.6850
eSDAR 0.0185 -1.0994 -0.0408 -2.5813 -2.0690 0.039** 0.7750 0.8360 0.0280 0.03** -1.8680 0.062*

βp
3.2090 0.5876 0.6910 0.4428 -0.9330 0.3510 0.7750 0.8360 0.2730 0.3290 -0.5680 0.5700
RV 0.5397 0.7796 0.8042 0.7451 1.4200 0.1560 0.0860 0.1010 0.3610 0.4290 -0.0810 0.9350
Wilcoxon Wilcoxon Wilcoxon
Pu Pv PvI PvF J-T Test(Pu-PvI-PvF) sig(2-tailed) Z-score(Pu-PvI) sig(2-tailed) Z-score(Pu-PvF) sig(2-tailed) Z-score(PvI-PvF) sig(2-tailed)
Performance relative to S & P CNX NIFTY Index
αp
0.0352 -0.0423 7.9748 -0.042 -1.095 0.273 -0.857 0.391 -1.095 0.273 -0.244 0.808
Sp -0.075 -0.061 -0.007 -0.137 -0.284 0.776 -0.571 0.568 -0.183 0.855 -1.056 0.291
eSDAR -0.584 -279.67 -12.93 -653.1 -1.825 0.068* -1.143 0.253 -1.461 0.144 -1.056 0.291

βp
1.657 0.1975 0.1733 0.2315 -0.852 0.394 -0.857 0.391 -1.095 0.273 -0.244 0.808
RV 0.5247 0.7779 0.7974 0.7505 1.582 0.114 -1.857 0.063* -0.913 0.361 -0.244 0.808
Note:
J-T stands for Jonckheere-Terpstra test
** significant at 5 % level
* significant at 10% level
 TABLE 6 –Relationship between Investment Performance and Portfolio Diversification

CRISIL Balanced Fund Index S & P CNX NIFTY Index

Measure of Diversification αp Sharpe, Sp eSDAR αp Sharpe, Sp eSDAR
Public-sector sponsored funds
RV 0.552 0.104 -0.281 0.568 -0.459 -0.374
significance 0.256 0.844 0.589 0.24 0.36 0.466
Capitalization -0.238 -0.605 -0.895 -0.24 -0.695 -0.858
significance 0.649 0.203 0.016*** 0.647 0.126 0.029**
Holdings -0.122 0.011 0.645 -0.124 0.337 0.788
significance 0.818 0.983 0.167 0.815 0.514 0.063*
Top ten% -0.004 -0.14 -0.579 -0.008 -0.014 -0.752
significance 0.993 0.792 0.229 0.988 0.98 0.084*

Private-sector sponsored Funds αp Sharpe, Sp eSDAR

αp Sharpe, Sp eSDAR

RV -0.348 -0.615 -0.263 -0.88 -0.46 -0.368

significance 0.268 0.033** 0.409 0*** 0.133 0.239
Capitalization 0.451 -0.182 0.194 0.459 -0.086 0.102
significance 0.141 0.571 0.545 0.133 0.791 0.753
Holdings 0.505 0.302 0.172 0.142 0.344 0.122
significance 0.094* 0.34 0.592 0.66 0.274 0.705
Top ten% -0.353 -0.134 -0.237 0.194 -0.247 -0.13
significance 0.26 0.678 0.459 0.547 0.438 0.688

Private-sector Indian sponsored Funds

αp Sharpe, Sp eSDAR
αp Sharpe, Sp eSDAR

RV -0.412 -0.243 -0.206 -0.861 -0.13 -0.323

significance 0.358 0.599 0.658 0.013** 0.782 0.48
Capitalization 0.374 0.141 0.095 -0.311 0.218 -0.06
significance 0.409 0.762 0.84 0.497 0.639 0.898
Holdings 0.465 0.931 0.826 0.193 0.913 0.77
significance 0.293 0.002*** 0.022** 0.678 0.004*** 0.043**
Top ten% -0.249 -0.785 -0.687 0.093 -0.783 -0.622
significance 0.59 0.037** 0.088* 0.843 0.037** 0.136
αp αp
Private-sector Foreign sponsored Funds Sharpe, Sp eSDAR Sharpe, Sp eSDAR
RV
-0.265 -0.974 -0.465 -0.995 -0.937 -0.697
significance 0.667 0.005** 0.43 0*** 0.019** 0.191
Capitalization 0.599 -0.407 0.325 -0.521 -0.344 0.229
significance 0.286 0.496 0.594 0.368 0.57 0.711
Holdings 0.689 0.034 0.49 0.118 0.175 0.541
significance 0.198 0.957 0.402 0.85 0.779 0.347
Top ten% -0.536 0.407 -0.364 0.384 0.304 -0.233
significance 0.352 0.497 0.547 0.523 0.619 0.307

Combined Sample
αp Sharpe, Sp eSDAR
α p Sharpe, Sp eSDAR
RV 0.122 -0.362 -0.273 0.056 -0.396 -0.373
significance 0.629 0.14 0.273 0.825 0.104 0.127
Capitalization -0.111 -0.299 0.117 -0.169 -0.262 0.084
significance 0.661 0.228 0.643 0.502 0.294 0.74
Holdings 0.011 0.228 0.14 -0.05 0.332 0.099
significance 0.965 0.362 0.58 0.844 0.178 0.696
Top ten% -0.132 -0.155 -0.132 0.114 -0.201 -0.027
significance 0.603 0.538 0.603 0.653 0.424 0.915
Note: *** Significant at 1 % level, ** Significant at 5 % level , * Significant at 10 % level
 TABLE 7-Covariance Analysis
CRISIL Balanced Fund Index S & P CNX NIFTY Index
Degrees
Degrees of SS a of SS a
Source freedom F-value Prob.>F Source freedom F-value Prob>F
Panel A: Dependent Variable: Panel A: Dependent Variable:
αp αp
RV 1 0.0564 1.096 0.312 RV 1 0.00974 0.679 0.424
Group 2 0.07006 0.646 0.539 Group 2 0.02407 0.839 0.453
RV * Group 3 0.126 0.778 0.526 RV * Group 3 0.0338 0.785 0.522

βp
Panel B: Dependent Variable: Panel B: Dependent Variable:
βp
RV 1 15.084 0.819 0.381 RV 1 3.18 0.649 0.434
Group 2 40.281 1.093 0.362 Group 2 11.516 1.175 0.338
RV * Group 3 42.751 0.773 0.528 RV * Group 3 11.71 0.796 0.516
Panel C: Dependent Variable: Panel C: Dependent Variable: Sp
Sp
RV 1 0.287 3.536 0.081* RV 1 0.2 4.091 0.063*
Group 2 0.03086 0.19 0.829 Group 2 0.05 0.509 0.612
RV * Group 3 0.318 1.305 0.312 RV * Group 3 0.25 1.703 0.212

Panel D: Dependent Variable: e SDAR Panel D: Dependent Variable: e SDAR

RV 1 7.077 1.15 0.302 RV 1 473073 2.729 0.121
Group 2 23.823 1.936 0.181 Group 2 1506879 4.347 0.034**
RV * Group 3 30.9 1.674 0.218 RV * Group 3 1979952 3.807 0.035**
Note: This table shows the results of covariance analysis using a general linear model. The response variable is investment performance measured by Jensen’s
alpha, α p ;Sharpe performance measure, S p ; or excess standard deviation adjusted return, e SDAR, all calculated using CRISIL Balanced Fund Index and S & P CNX
NIFTY Index as the benchmark indices. Residual variance, RV, is the covariate. Group is equal to 1 if public-sector sponsored mutual fund, 2 if private-sector Indian
sponsored mutual fund, 3 if private-sector foreign sponsored mutual fund. The RV * Group interaction term indicates difference in the relation between residual variance and
performance as a function of group.
a
Type III sum of squares (SS) for Panel B, and Type I SS for Panels A, C, and D.
** Significant at the 5 % level
* Significant at the 10 % level
 Residual variance has a significant correlation for private-sector sponsored mutual funds. The
effect of diversification on investment performance have fund as control group can be tested
through analysis of covariance. In Table 7, the effect of diversification on investment performance is
tested as a function of fund sponsorship class using H 0 : ω3 = 0 . The Hypothesis of the relation
between fund sponsorship class and investment performance is tested using H 0 : ω2 = 0 .For CRISIL
Balanced Fund Index, when Jensen’s alpha is used as a measure of investment performance, the RV *
Group interaction term shown in Panel A of Table 7 indicates that there is no significant difference in the
effect of diversification on investment performance as a function of group. Similarly, when e SDAR is
used as measure of investment performance, the RV * Group interaction term does not indicate any
significant effect of diversification as a function of group. However, when Sharpe information ratio, Sp,
is used as a dependent variable in covariance analysis in Panel C, then residual variance is significant at
10 % level implying that there is an impact of residual variance on Sharpe information measure.
However, there sums to be no sponsorship class effect on fund performance. However, RV as a function
of fund sponsorship class influences certain portfolio performance measures.
Linking performance fund diversification in terms of S &P CNX NIFTY Index, there is no
statistical model of Jensen’s alpha and portfolio beta. There is a statistical impact in terms of Sharpe
information ratio, Sp when RV is taken as covariate. When e SDAR is taken as dependent variable, in
terms of group and in terms of RV*Group, there is a statistical impact at 5 % level of significance.
To determine the relation between residual variance and investment performance for private-sector
sponsored mutual funds, the Hypothesis H 0 : ω1 = 0 is tested. Residual variance is not linearly related
to investment performance in terms of Jensen’s alpha and portfolio beta, regardless of the benchmark
index used.

8. FINDINGS OF THE STUDY

• There is no statistical difference between public-sector sponsored, private-sector Indian sponsored
and private-sector foreign sponsored mutual funds in terms of mean return percentage.
• There is a statistical difference between public-sector sponsored , private-sector Indian sponsored
and private-sector foreign sponsored mutual funds in terms of average standard deviation, average
variance and average coefficient of variation(COV)
• Public-sector sponsored mutual funds do not differ from private-sector Indian sponsored and private-
sector foreign sponsored mutual funds in terms of portfolio characteristics like net assets (fund size
in crores in Indian rupees), common stock %(common stock investments as percentage of the fund’s
assets),Top ten %(percentage of net assets invested in fund’s top ten holdings) ,market
capitalization(median market capitalization of the companies held by the fund), holdings (total
number of securities held by the mutual fund).
• When considering CRISIL Balanced Fund Index as the benchmark index, for public-sector
sponsored mutual funds, the Jensen’s alpha is significant and negative for two funds, significant and
positive for one fund. For private-sector sponsored mutual funds, Jensen’s alpha is significant and
positive for two private-sector Indian sponsored mutual funds, significant and negative for three
private-sector Indian sponsored mutual funds, significant and negative for three private-sector
foreign sponsored mutual funds. In terms of public-sector sponsored mutual funds, degree of
portfolio diversification (fund portfolio beta) is significant and negative for one fund, significant and
positive for five funds. In terms of private-sector Indian sponsored mutual funds, portfolio beta is
significant and positive for three funds and for two private-sector foreign sponsored funds, portfolio
beta is significant and positive.
• When S & P CNX NIFTY Index is used as the benchmark index, then for public-sector sponsored
mutual funds, Jensen’s alpha is significant and negative for five funds, significant and positive for
one fund. However, for private -sector Indian sponsored mutual funds , Jensen’s alpha is significant
and negative for one fund, significant and negative for three funds. For private-sector foreign
sponsored mutual funds, portfolio beta is significant and negative for four funds, significant and
negative for one fund. However, in terms of public-sector sponsored mutual funds, degree of
portfolio diversification (fund portfolio beta) is significant and negative for one fund, significant and
positive for four funds. For private-sector Indian sponsored mutual funds, degree of portfolio
diversification (fund portfolio beta) is significant and positive for four funds. For private-sector
foreign sponsored mutual funds, degree of portfolio diversification (fund portfolio beta) is
significant and positive for three funds.
• Significant correlation is identified between fund performance measures especially excess standard
deviation adjusted return (e SDAR), Jensen’s alpha and Sharpe’s information ratio. They vary
among the various classes of mutual funds when Pearson correlation is used to analyze between
investment performance and measures of mutual fund portfolio diversification using CRISIL
Balanced Fund Index as the benchmark index, it is found that for public-sector sponsored mutual
funds, residual variance (RV) is found to be correlated with holdings; market capitalization(cap) is
found to be correlated with e SDAR(excess standard deviation adjusted return) and holdings(total
number of companies/securities held by the fund). For private-sector sponsored mutual funds, RV is
found to be correlated to Sharpe information ratio, Sp; market capitalization is found to be correlated
with top ten%(percentage of net assets invested in the fund’s top ten holdings);holdings is found to
be correlated with Jensen’s alpha and top ten%. For private-sector Indian sponsored mutual funds,
holdings is found to be correlated with Sharpe information ratio(Sp),e SDAR and Top Ten %;Top
Ten % is found to be correlated with Sharpe information ratio (Sp) and e SDAR. For private-sector
foreign sponsored mutual funds, residual variance (RV) is found to be correlated with Sharpe
information ratio(Sp); market capitalization is correlated with Top Ten %; holdings is correlated
with Top Ten %. For combined sample consisting of public-sector sponsored , private-sector Indian
sponsored and private-sector foreign sponsored mutual funds, holdings is correlated with Top Ten
%.
• When S & P CNX NIFTY Index is used as the benchmark index, then for public-sector sponsored
mutual funds, RV is correlated with holdings; Capitalization is correlated with e SDAR and
holdings; Holdings is correlated with e SDAR and Top Ten %; Top Ten % is correlated with e
SDAR .For private-sector sponsored mutual funds, RV is correlated with Jensen’s alpha;
Capitalization and Holdings are correlated with Top Ten %. For private-sector Indian sponsored
mutual funds, RV is correlated with Jensen’s alpha; Holdings is correlated with Sharpe information
ratio(Sp), e SDAR and Top Ten %; Top Ten % is correlated with Sharpe information ratio, Sp; For
private-sector foreign sponsored funds, RV is correlated with Jensen’s alpha and Sharpe information
ratio, Sp; Capitalization and Holdings are correlated with Top Ten %; For combined sample
consisting of six public-sector sponsored mutual funds, seven private-sector Indian sponsored and
five private-sector foreign sponsored mutual funds; holdings is found to be correlated with Top Ten
%.
• Mutual fund performance index measured in terms of excess standard deviation adjusted return has a
statistically significant impact through diversification and residual variance, RV, as a function of
fund sponsorship class with the help of following equation: X = W1 RV + W2G + W3 ( RV * G ) .
For CRISIL Balanced Fund Index, when Jensen’s alpha is used as a measure of investment
performance, the RV * Group interaction term indicates that there is no significant difference in the
effect of diversification on investment performance as a function of group. When e SDAR is used as
the measure of investment performance, the RV * Group interaction term do not indicate any
significant effect of diversification as a function of group. When Sharpe information ratio, Sp, is
used as a dependent variable in covariance analysis , then residual variance is significant at 10 %
level implying that residual variance can be used by mutual fund managers for evaluating mutual
fund performance.
• When S & P CNX NIFTY Index is used as the benchmark index, then when Sharpe information
ratio, Sp, is taken as the dependent variable, it is found that residual variance is significant when RV
is taken as covariate; when e SDAR is taken as dependent variable, Group and RV*Group are
significant
• Residual variance is not linearly related to investment performance in terms of Jensen’s alpha and
portfolio beta, regardless of the benchmark index used.
9. SUMMARY AND CONCLUSIONS
The study found that public-sector sponsored , private-sector Indian sponsored and private-sector foreign
sponsored mutual funds do not differ statistically in terms of portfolio characteristics such as net assets,
common stock%, market capitalization, holdings, Top Ten %. However, there is a statistical difference
between three classes of public-sector sponsored, private-sector Indian sponsored and private-sector
foreign sponsored mutual funds in terms of average standard deviation, average variance and average
coefficient of variation. Portfolio risk characteristics measured through private-sector Indian sponsored
mutual funds seems to have outperformed both Public- sector sponsored and Private-sector foreign
sponsored mutual funds. Residual variance is not linearly related to investment performance in terms of
Jensen’s alpha and portfolio beta, regardless of the benchmark index used. The general linear model of
analysis of covariance establishes differences in performance among the three classes of mutual funds in
terms of portfolio diversification.

10. SCOPE FOR FUTURE RESEARCH

There is lot of scope for improvement in the research for evaluating mutual fund performances. Various
other multi-criteria decision models could be tested for evaluating mutual fund performances. Testing of
fund performances in the long run can be done. Extended sample of public-sector sponsored, private-
sector Indian sponsored and private-sector foreign sponsored mutual funds can be taken for generating
results. Portfolio risk through the measure of value at risk (VaR) can also be tested for differences in
mutual fund classes.

11. REFERENCES & BIBLIOGRAPHY

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Internet:
http://ww w.amfiindia.com
http://www.sebi.gov.in
http://www.mutualfundsindia.com

12. AUTHOR PROFILE

• Sharad Panwar is B.Tech (Computer Science & Information Technology), I.E.T, M.J.P. Rohilkhand
University, Bareilly(U.P.), PGDIT(I.I.T Kharagpur). He is currently doing M.S. (By research in
Finance) from I.I.T. Madras, Chennai in “ Mutual Funds Performance Evaluation”. He got 44th Rank
in Junior Mathematical Olympiad [JMO,DELHI 1995], conducted by National Board of Higher
Mathematics, Department of Atomic Energy, Govt. of India.
• Dr. R. Madhumathi is Assistant Professor, Department of Management Studies, I.I.T. Madras,
Chennai.