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Performance Evaluation of Mutual Funds: A study of Selected Researches

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Vol 4, Issue I, Jan.-June 2014 ISSN 2249-4103 GGGI Management Review
A Bi-annual Refereed International Research Journal

Performance Evaluation of Mutual Funds: A study of Selected Researches

Prof. (Dr.) Madhur Jain
Promod Kr. Singal
Dr. Ajay Dwivedi
ABSTRACT
Mutual fund in Indian context is a challengeable phenomenon. It has attained commanding heights in the financial scenario of
India. The main focus of this study is, to review about the mutual fund investment policies and strategies used in previous years by
various researchers. For this purpose 14 studies on mutual fund review in this paper. The previous studies have taken, which
conducted in between 1965 to 2012. The main aim of the paper is to concentrate on the various studies conducted on mutual funds
in India and outside India.
Keywords: Mutual Fund, Sharpe, Investor, Portfolio, Decomposition, Ratio

Introduction: methodologies to be used, estimation procedures and

A mutual fund is an entity that pools the money of many analytical tools, interpretation of results. This chapter,
investors and invests in different securities. Investments may therefore, focuses on both theoretical and empirical literature
be in shares, debt securities, money market securities or a to understand the need for regulation, the form of regulation,
combination of these. Those securities are professionally approaches to risk and performance assessment of funds and
managed on behalf of the unit-holders, and each investor holds also estimating cost functions. Mutual funds play a crucial role
a pro-rata share of the portfolio i.e. entitled to any profits when in reducing risk and transaction cost while investing in the
the securities are sold, but subject to any losses in value as stock markets. The pioneering work on the mutual funds in
well. There are lots of benefits in investing in mutual funds U.S.A. was done by Friend, et al., (1962) in Wharton School of
like; professional investment management, diversification, Finance and Commerce for the period 1953 to 1958.
low cost, convenience, flexibility, liquidity and transparency Friend, et al., (1962) made an extensive and systematic study
etc. Mutual funds are ideal vehicles for individual investor of 152 mutual funds and found that mutual fund schemes
who don't have the time, willingness or ability to manage their earned an average annual return of 12.4 percent, while their
own portfolio of bonds and stock. composite benchmark earned a return of 12.6 percent. Their
Mutual Fund industry today, is one of the most preferred alpha was negative with 20 basis points. Overall results did not
investment avenues in India. However, with a plethora of suggest widespread inefficiency in the industry. Comparison
schemes available for option, the retail investor faces of funds returns with turnover and expense categories did not
problems in selecting fund's. In addition to qualitative reveal a strong relationship.
measures like investment strategy, management style etc., the Irwin, Brown, FE (1965) analyzed issues relating to
funds record is an important indicator too. Though past investment policy, portfolio turnover rate, performance of
performance alone cannot be indicative of future performance, mutual funds and their impact on the stock markets. The
it is, frankly, the only quantitative way to judge how good a research work identified that mutual funds had a significant
fund is at present. The impressive growth of mutual funds in impact on the price movement in the stock market. On an
India has attracted the attention of Indian researchers, average, the funds did not perform better than the composite
individuals and institutional investors during past ten years. market and there was no persistent relationship between
The mutual fund industry is currently in the phase of portfolio turnover and fund performance.
consolidation and growth stage of the product life cycle. The Treynor (1965) used 'characteristic line' for relating expected
competition would intensify in the coming years as it rate of return of a fund to the rate of return of a suitable market
happened in other industries. Hence, it is appropriate and average. He coined a fund performance measure taking
relevant to focus our attention as to how the Indian mutual investment risk into account. Further, to deal with a portfolio,
industry would emerge in the coming few years to ascertain 'portfolio-possibility line' was used to relate expected return to
what kind of products (mutual fund schemes) would be able to the portfolio owner's risk preference.
win the investor's confidence and survive in the market place.
The most prominent study by Sharpe (1966) developed a
Literature Review: The review of literature is to guide us in the composite measure of return and risk. He evaluated 34 open-

*Professor & HOD, Faculty of Management, Galaxy Global Group of Institutions, Dinarpur, Ambala.
**Assistant Professor, Faculty of Management, Galaxy Global Group of Institutions, Dinarpur, Ambala.
***Associate Professor, Financial Studies, VBS Purvanchal University, Jaunpur.
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Vol 4, Issue I, Jan.-June 2014 ISSN 2249-4103 GGGI Management Review
A Bi-annual Refereed International Research Journal

end mutual funds for the period 1944-63, and found that. modified Jensen's measure based on estimating equation and
Reward to variability ratio for each scheme was significantly slope coefficient.
less than DJIA and ranged from 0.43 to 0.78. Expense ratio M. Swaminathan and V. Buvanmeswaran (2006) have
was inversely related with the fund performance, as conducted a study on investor's preference towards mutual
correlation coefficient was 0.0505. The results depicted that funds with special reference to Thiruchirapali Town, Tamil
good performance was associated with low expense ratio and Nadu. The investors of Thiruchirapali become more cautious
not with the size. Sample schemes showed consistency in risk after they lost their saving with incorporated bodies. They are
measure. now turning more to mutual funds because of more safety,
Treynor and Mazuy (1966) evaluated the performance of 57 liquidity, capital gains and transparency. They wish to route
fund managers in terms of their market timing abilities, and their investments through mutual funds. Soumya Guha Deb
found that fund managers had not successfully outguessed the (2008) has suggested that in her evaluation of fund managers
market. The results suggested that the investors were performance found that Indian equity fund managers have not
completely dependent on fluctuations in the market. been able to beat their style benchmarks (William Sharpe
Improvement in the rates of return was due to the fund ratio) on the average and pointed out the weaknesses of fund
managers' ability to identify under-priced industries and managers.
companies. The study adopted Treynor's (1965) methodology Khurana A. & Panjwani K. (2010) studied the performance
for reviewing the performance of mutual funds. of Hybrid mutual funds on the basis of Arithmetic Mean,
Jensen (1968) developed a composite portfolio evaluation CAGR, standard deviation and beta. Key ratios like Sharpe
technique concerning risk-adjusted returns. He evaluated the ratio and Treynor ratio are used for Risk-Return analysis.
ability of 115 fund managers in selecting securities during the Funds are compared with a benchmark, industry average, and
period 1945-66. Analysis of net returns indicated that 39 funds analysis of volatility and return per unit to find out how well
had above average returns, while 76 funds yielded abnormally they are performing with respect to the market Value at Risk
poor returns. Using gross returns, 48 funds showed above analysis can be done to find out the maximum possible losses
average results and 67 funds gave below average results. He in a month given the investor had made an investment in that
further found that very little evidence that funds were able to month. J.S. Yadav and O.S. Yadav (2012) in their analysis of
perform significantly better than expected as fund managers comparison between Mutual Funds and Foreign Institutional
were not able to forecast securities' price movements. Investors, it was found that though the India is an attractive
Posner (1969) discussed exhaustively the regulating destination for investment by Foreign Institutional Investors,
monopolies, although dealing with the issue of regulating investments made by the mutual funds were greater than
'natural monopolies' or more specifically 'utilities' reforms investment made by FII's, during the recession MF industry
questioned the traditional basis and of regulating monopolies. has played a vital role in pushing the economy upward while
The traditional 'dead weight loss' of monopoly profit FII's withdrew their investment, showing the importance of
maximizing price is questioned. He maintained that price need MF's in Indian economy.
not be to maximize short term profits. He pointed out other Research Methodology:
managerial objectives which may lead to lower price. For the review large number of papers required, on the
Preventing potential entrants from entering and developing concerned topic. The papers are collected with the help of E-
good reputation were two such reasons. journals and print journals. After that papers were listed
Smith and Tito (1969) examined the inter-relationships according to publication year. In the first column title of the
between the three widely used composite measures of paper, in second column author name, third column year of
investment performance, and suggested a fourth alternative, publication, fourth column data period, fifth column include
identifying some aspects of differentiation in the process. the techniques used in research. Papers from 1965 to 2012
While ranking the funds on the basis of ex-post performance, were included in the reviews. 14 researches were included in
alternative measures produced little differences. However, this review paper. These researches were very important from
conclusions differed widely when performance were the tools point of view.
compared with the market. In view of this, they suggested

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Vol 4, Issue I, Jan.-June 2014 ISSN 2249-4103 GGGI Management Review
A Bi-annual Refereed International Research Journal

Review Table
Paper Title Author Published Data Techniques Results
A Study of Irwin, 1965 1939- Ratio and The schoolwork identified that mutual funds
Mutual Funds: Brown, correlation had a significant impact on the price
1942
Investment FE techniques used. movement in the stock market. The cram
Policy and concludes that, on an average, funds did not
Investment perform better than the composite markets and
Company there was no persistent relationship between
Performance portfolio turnover and fund performance.
Can Mutual Treynor 1966 57 fund Treynor's The results show that, investors were
Funds Outguess and managers Technique completely dependent on fluctuations in the
The Markets Mazuy market. Improvement in the rates of return was
due to the fund managers' ability to identify
under-priced industries and companies.
Mutual Fund Sharpe, 1966 34 open-end Variability ratio Developed a composite measure of return and
Performance William F mutual risk. Reward to variability ratio for each
funds for scheme was significantly less than DJIA and
the period ranged from 0.43 to 0.78.
1944-63.
The Jensen 1968 115 fund Ratio Analsis Analysis of net returns indicated that, 39 funds
Performance of Managers had above average returns, while 76 funds
Mutual Funds during the yielded abnormally poor returns. Using gross
period returns, 48 funds showed above average
1945-66. results and 67 funds below average results.
Mutual Fund M. 1996 Growth oriented mutual funds are expected to
72 Actively Analysis of data
Performance: Jayadev offer the advantages of Diversification,
traded is planned with
An Analysis of Market timing and Selectivity. In the sample,
securities, the help of mean,
Monthly Magnum Express is found to be highly
Returns chi-square
diversified fund and because of high
technique and
diversification it has reduced total risk of the
analysis of portfolio.
variance.
Investment Joyjit 2005 1997- Jensen measure The study, has revealed that majority of the
Management of Dhar and Fama criteria. fund managers possess superior selectivity
2003
Mutual Funds: skills based on Fama criterion. However, in
Evidence of terms of Jensen criterion, they failed to show
Timing and superior stock selection ability. This difference
Selectivity from in performance between these two criteria may
India. be due to lack of diversification of the sample
portfolio. The study has also noted that while
fund managers of open-end schemes are
superior performers than their closed-end
counterpart.

An evaluation Rajesh R. 2010 2000 to Treynor, Sharpe 17 funds have outperformed the market in
of equity Duggimp 2009, and Jensen terms of their performance with higher returns
diversified udi covering 17 techniques used. for a given unit of risk. Furthermore, as to the
mutual funds: Hussein mutual ranking of different funds, both Treynor and
A. Abdou funds Jensen techniques have a relatively have a
the case of the
Mohamed relatively similar ranking over the study period
Indian market
Zaki

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Vol 4, Issue I, Jan.-June 2014 ISSN 2249-4103 GGGI Management Review
A Bi-annual Refereed International Research Journal

Hybrid Mutual Dr. Ashok 2010 15 mutual For the purpose of These funds have also outperformed the Crisil
Funds: An Khurana fund analysis, Balance Fund Index over the period of last 5
Analysis & Kavita schemes appropriate years. Canara Robeco Balanced Growth
Panjwani statistical and Scheme is relatively more volatile with highest
financial tools, standard deviation, Beta as well as Treynor
ratio. The study observed that Canara Robeco
i.e., arithmetic
Balance Growth is the most aggressive hybrid
mean, standard mutual fund whereas Escort Balance Fund -
deviation, Growth is relatively least a more defensive
correlation, Beta, fund.
Treynor ratio,
Sharpe ratio,
Fama, Alpha have
been applied.

Effect of Fund Ms. 2011 1st April Correlation The standard deviation of the performance
Size on the Sarika 2007 to 31st coefficients variables are found to be significantly low,
Performance of Keswani March 2010 between fund size implying that the fund size did not
Balanced and the four significantly related with the performance of
Mutual Funds: parameters of Balanced funds. The ANOVA of performance
An Empirical variables of Micro-, Small-, Medium-, and
performance
Study in Indian Large Balanced Funds indicated that these
(Return, Risk, variables are not significantly different from
Context
Return/Risk, and each other.
Sharpe Ratio) and
ANOVA.
Performance Sumninde 2011 1st April After comparing the Sharpe's ratio of all the
Sharpe Ratio selected schemes it can be concluded that
Evaluation of r Kaur 2000 upto
Income Bawa & 31st March public sector income schemes are the most risk
Schemes of 2010 attuned schemes.
Mutual Funds Smiti
In India - A Brar
Public Private
Comparison

Preference of Chi square test

Dr.Shanta 2012 100 The investment in the top 5 schemes of Equity
Investors for educated and Cramer's Sector Funds advisable for a long term period
nu Mehta,
Indian Mutual investors of V(Testing for the as investment in short term period yields
Charmi
Funds and its Ahmedabad negative returns to the investor. So only those
Shah Strength of
Performance and Baroda investors who are planning to retain the mutual
Evaluation city Categorical
fund investment as their asset for more than a
Relationships ) year invest in such schemes.
An Empirical 2012 15 mutual The various tools, The study shows the performance of top five
Study on Dr. S.
Poornima, fund like arithmetic growth funds and 10 index funds along with
Performance of schemes(20 mean, correlation, their correlation with Sensex and Nifty, thus
Mutual Funds Theivanay 07-2012) correlation is almost perfect positive in many
a ki M, standard
in India of the cases, but the percentage change in the
deviation, are schemes for years is different with market
used to analyze indices.
the data.
Mutual Fund The study examines this relation in a
Investments, Suchismit 2012 2008-2012 Five-day moving
multivariate VAR framework bringing in stock
FII Investments a Bose average values of market returns and daily data of net investment
and Stock FII and flows from these two investor groups for the
Market Returns MFEQTY, post-crisis period between 2008 and 2012.
in India
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Vol 4, Issue I, Jan.-June 2014 ISSN 2249-4103 GGGI Management Review
A Bi-annual Refereed International Research Journal

Performance Gomathy 2012 2002-2007 Sharpe's Ratio This study observes that the Indian mutual
Evaluation of Thyagaraj method of fund industry which started with UTI as its
Indian Mutual an performance only player in 1964 now has 32 funds and the
Fund Industry evaluation industry has not only grown in terms of
from 2002- number of funds but also in terms of Assets
2007 with Under Management which stood at Rs.
Special 1,00,594 crores during 2002 rose to Rs.
Reference to 3.26.292 crores as on December, 2007.
Franklin
Templeton,
HDFC and
ICICI Mutual
Funds

Perception of Vippar & 2013 One Year Chi-square, Perception of investor is independent of
Investor on Margam 2012-13 Factor Analysis Sectors (Public/Private) on liquidity,
Mutual Fund flexibility, tax saving, service quality,
transparency but dependent on income,
security and management fees etc.

Study on Goyal S. 2013 One year Conceptual Professional management required in most of
Mutual Fund & Bansal 2012-13 analysis based on the mutual funds in terms of services and
D. Annual report marketing

Risk Adjusted Rao K.M. 2013 2010-13 Mean Return Beta Maximum funds failed on the given
performance & Rani Risk, Total Risk, parameters and performed badly
evaluation of H.M. Sharpe Risk,
selected Mutual 2008-2013 Treynor and
fund schemes in Jensen ratio and
India Fama
Decomposition

Performance Gupta 2013 Mean Return Beta Performance of Mutual Fund is below the
Evaluation of S.L. and Risk, Total Risk, Market Return.
Selected ETF Garg Sharpe Risk,
Schemes of Meenaksh Treynor and
India i Jensen ratio and
Fama
Decomposition

Conclusion: sectorial funds affect the performance of the mutual funds.

There are lot of researches happened in the area of the mutual References:
funds and its performance evaluation. Contribution of the • Treynor and Mazuy , “Can Mutual Funds Outguess The Markets”
Sharpe, Jensen and Treynor is very important as there Harvard Business Review, Vol. 44, (1966), pp.131-136.
parameter for evaluation of mutual fund becomes standardize • Jensen Michael C, “The Performance Of Mutual Funds In The
tool for evaluation of mutual funds in almost throughout Period 1945-1964”, Journal of Finance, Vol. 23, (1968), pp.389-
world. Very recently some of the researchers start using the 416.
Fama's tool for decomposition, moving average and variance • Irwin, Brown, FE, et al., “A Study of Mutual Funds: Investment
analysis for evaluation of MF. Regression analysis was also Policy and Investment Company Performance” reprinted in
used by the most of the researchers. The few studies show that Hsiu-kwangwer and Alan Jzakon (Ed.) Elements of Investments,
the Indian Mutual Fund industry grown at fast rate in last New York: Holt, Renchart and Winston, (1965), pp.371-385.
decade. Performance of Mutual fund is below the market • Treynor Jack L, “How to Rate Management of Investment
return from 2008-2013. Performance start improving from the Funds”, Harvard Business Review, Vol. 43(1), (1965), pp. 63-75.
2012 onwards as the stock market is also improving. Mostly
• Sharpe, William F “Mutual Fund Performance”, The Journal of

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 Vol 4, Issue I, Jan.-June 2014 ISSN 2249-4103 GGGI Management Review
A Bi-annual Refereed International Research Journal

Business, Vol. 39(1), (1966), pp.119-138. • h t t p : / / r e s e a r c h t r e n d . n e t / p d f /

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0in%20Indian%20context.pdf

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