PERFORMANCE EVALUATION OF GROWTH SCHEMES OF MUTUAL FUNDS IN INDIA - A PUBLIC PRIVATE COMPARISON

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1 74 PERFORMANCE EVALUATION OF GROWTH SCHEMES OF MUTUAL FUNDS IN INDIA - A PUBLIC PRIVATE COMPARISON ABSTRACT SUMNINDER KAUR BAWA*; SMITI BRAR** *Senior Lecturer, Department of Commerce & Business Management Guru Nanak Dev University, Amritsar , Punjab, India. **Research Student, Department of Commerce & Business Management Guru Nanak Dev University, Amritsar , Punjab, India. Using various statistical measures the present study aims to evaluating the performance of a few selected Growth mutual funds s of India on the basis of their daily NAV recorded in the period starting from 1 st April 2000 to 31 st March The paper also compares the results of public sector sponsored s with that of private sector s. Popularity of s has only increased in the last decade, in terms of AUM as well as in terms of number. of s. The scrutiny shows that private sector s are ahead in giving the investors higher returns which is why their AUM is much higher than the others. Also public sector s are the most risk prone towards the market variations. Market state is more a descriptive variable for the Net Asset Value (NAVs) of private sector s. All the private sector funds under study are giving returns more or less in close proximity to their average returns. Therefore it seems that public sector s are more unstable and unsystematic as compared to private sector s in terms of their returns. In particular it can be held that in terms of protecting investor s money from the market fluctuations public sector s have advantages over the private sector s. KEYWORDS: Growth Schemes, Investment, Performance Evaluation, Mutual Funds. 1. INTRODUCTION Growth s or equity s of mutual funds primarily invest in the stock markets. It will be important to mention here that stock markets give stable proceeds over the long term preferably if the money stays invested for five years of more and this is reflected in s. If we suppose that we are going to create astonishing returns in just a few months of investing then we are going to be disillusioned. If we initiate at the beginning of our jobs and career and keep putting in money at a steady rate, s have the ability to generate the best returns possible over the period of time. Investors should always choose dividend reinvestment option when they invest in such s as it gives compounding results. In case a person always intended to invest in the stock market but never had the time, patience and knowledge for doing the research and analysis part then these types of mutual funds are the ones for you. Within the s we have s which invest in those companies which are by and large alleged to be the best in their fields (large cap) and companies which are small in terms of scale of operation but have the potential to become blue chips (mid cap) The mutual fund s can also focus on sectors or themes like gold or infrastructure etc.

2 75 A significant thing to note is that the level of risk increases as specialization of the fund in a specific sector narrows. A sector may be doing well now and can get affected due to interest rates or political risks. Certain sectors are also seasonal in nature. Mid-caps and small caps are more prone to interest rate fluctuations and competitive pressures. There a lot of s currently floating in the market but for this specific study following have been short-listed as a representative sample of the Indian mutual funds industry. Following table gives the basic features of the same. Growth s open ended types in India have seen almost a three times in the last decade in terms of no. of s (Chart1.1) floating in the market on 31 st March of every year. And in case of close ended the was two times. Open ended have never even once seen a fall in their number in the period starting from 1 st April 2000 upto 31 st march This means that it was at its best in the last year of the decade i.e on 31 st march 2010 at 267 s. Open ended s are more popular in all types of mutual funds as they are easier to trade in. It started from 91 on 31 st march In case of close ended s the no. of them floating in the market was the least on 31 st march of 2004 and 2005 at only 2. It started with 19 (31st march2001) and was at 38 at the end of the study (31 st march 2010). With regard to total no. of s floating in the market the performance was best on 31 st march 2010 at 305 Assets Under Management or AUM is the basic criteria for judging the reliability of any mutual fund. AUM refers to the total money invested in the fund by the investors. Chart 1.2 shows the contribution of s in the total AUM of the Indian mutual funds industry. It has only increased tremendously from a significant percentage of 15% to a more significant proportion of 28%. This proves the importance of s in the stock markets of India CHART DEVELOPMENT OF GROWTH SCHEMES IN INDIA IN TERMS OF NO. OF SCHEMES Source-

3 76 CHART -1.2: BALANCED SCHEMES AS % OF TOTAL AUM OF INDIAN MUTUAL FUND INDUSTRY Source- GRAPH -1.3: DEVELOPMENT OF BALANCED SCHEMES IN INDIA IN TERMS OF AUM (As on 31 st March) Source-

4 77 In the graph 1.3 the AUM of the s in India on 31st march of each year of the study has been divided into open ended and close ended categories. In case of open ended type s had a total AUM of Rs crores on 31st march 2001 and on 31st march 2010 i.e. at the end of the study it was Rs crores. This shows the in the investor s interest in these s over the period of time. Even close ended s have flourished but not at the same scale as the open ended types due to the clause of lock in period attached with them. When we look at the figures of the total AUM the same story seems to be repeating. The total AUM of s has increased from Rs crores (31 st amrch 2001) to Rs crores (31 st march 2010). 2. METHODOLOGICAL FRAMEWORK The period of study selected is because of the availability of the data. The criterion for the scrutiny of Growth Funds is their assets under management, net asset value, returns, Sharpe s ratio, Treynor s ratio, Risk adjusted CAGR. Source of data is purely secondary in nature which will include journals, websites and factsheets of the selected mutual funds. Growth s of those AMCs have been selected that have maintained highest levels of AUM throughout the study period in their respective fields. Two s from public sector two from private sector and one purely private have been studied. Depending upon these criterion following five mutual funds are under scrutiny in this study: 1) Growth Fund PRIVATE SECTOR FUND 2) HDFC Growth Fund PRIVATE SECTOR FUND 3) Growth Fund - PURELY PRIVATE SECTOR FUND 4) SBI Magnum Growth Fund - PUBLIC SECTOR MUTUAL FUND 5) UTI Bond Fund -- PUBLIC SECTOR MUTUAL FUND The point to be noted here is that the AUM of all these five s has always ranged between % of the total AUM of the entire Indian mutual funds industry during all the years of our study starting from up to This makes the selection of these s as representatives of public and private sector funds for the study more compelling. Table below gives the basic features of the selected s, i.e. their dates of inception, minimum investment required, options available, investment objective.

5 78 KEY FEATURES OF THE SELECTED SCHEMES Scheme Name Options Available Date Of Inception Min Investment Investment Objective NAV on 3 rd April 2000 D G NAV on 31 st March 2010 D G HDFC Growth Plan -Dividend -Growth Sept Aims to generate long term capital appreciation from a portfolio that is invested predominantly in equity and equity related instruments. 9.94* 9.94* *20/9/ Prudential Growth Pl. -Dividend -Growth June A focus on strong stories, largely in the mid-cap space. A reasonable exposure is also maintained in the large-cap space to provide liquidity Growth Plan -Dividend -Growth Oct Aims to generate long term capital appreciation from a portfolio that is invested predominantly in equity and equity related securities

6 79 SBI Magnum Equity -Dividend -Growth Nov This fund seeks to achieve long-term capital appreciation from a portfolio of equity and equity-related instruments UTI Equity Plan -Dividend -Growth May It seeks to achieve capital appreciation through investments in equities and equity related instruments, convertible debentures, derivatives in India and also in overseas markets Source:

7 80 3. RESULTS AND ANALYSIS TABLE 3.1 COMPARATIVE TABLE FOR YEARLY AVERAGE NAV OF THE SCHEMES G option D dividend option (% = % over the previous year NAV) Year HDFC Growth Scheme* Prudential Growth Scheme Growth Scheme SBI Magnum Equity Scheme UTI Equity Scheme G % D % G % D % G % D % G % D % G % D % *Introduced on 20/09/2000. Source: authors own calculation. Table 3.1 shows the values of average annual NAV and its percentage for the study period starting from 1 st April 2000 upto 31 st March 2010 of the selected mutual funds s. The highest NAV recorded by a private sector was by

8 81 ( option) in the year And in case of public sector it was just by UTI Equity Plan ( plan) in the year If the minimum average annual NAVs are considered then both public and private sector sponsored s are almost at par as HDFC plan ( and dividend option) recorded the least value of 7.32 and SBI Magnum Equity plan ( and dividend option) recorded 8.23 which was the minimum by any private sector under study. In terms of percentage in the value of average annual NAV over the previous year ( option) again topped the chart by achieving a of 91.91% in the year Whereas in public sector UTI Equity plan ( option) achieved maximum of 53.66% in the same year. If we look at the most negative percentage then SBI Magnum Plan ( plan) is leading % in the year during which all other plans had also seen negative. During the economic slowdown of HDFC plan ( option 11.70%) was the least effected and during the economy crash of UTI Equity plan (dividend option -6.23%) was the least affected. To end with it can be summarized that private sector mutual funds have performed better in terms of NAV and its percentage.

9 82 TABLE 3.2 TOTAL RETURN (%) SINCE 1ST APRIL 2000 UP TO 31ST MARCH 2010 G option D dividend option *Introduced on 20/09/2000 BSE HDFC * Pru. SBI Magnum Equity UTI Equity G D G D G D G D G D Source: author own calculation In table 3.2 total returns earned in the last decade ending on 31 st march 2010 by the chosen plans are mentioned. Returns here are the difference between the net asset value of two separate dates divided by the NAV of the preceding date. Here the two dates being considered are 1 st April 2000 and 31 st March BSE index has been taken as a benchmark for analysis of results. In terms of total returns ( option) has performed exceptionally well by posting a return percentage of %. No other mutual fund is anywhere near to such an excellent performance. The second best total return is by HDFC option at %. All the options have given much better results than the BSE (247.02%) accept that of SBI Magnum Equity plan. The least performing dividend option amongst all chosen plans is by Prudential at a total return of only 4.36%. But performance of private sector plans options is so good that it is fact enough to adjudge them as the best in terms of total return. Table -3.3 below reveals the beta value of fund returns of the chosen s as on 31 st march 2010 calculated on the basis of daily returns of the last ten years. It shows a mutual fund's volatility and is supposed to give some sense of the extent of change in the NAV with the change in market. In simple words beta (β) shows the relationship between the market and TABLE 3.3 BETA (β) OF THE FUND RETURNS (AS ON 31 ST MARCH 2010) G option D dividend option *Introduced on 20/09/2000 HDFC * Prudential SBI Magnum Equity UTI Equity G D G D G D G D G D Source: author own calculation

10 83 the mutual fund. s a private sector sponsored mutual fund has the least beta value of ( option) and (dividend option) Which shows that it s much stable as compared to other funds when it comes to handling market risk. In case of public sector s UTI Equity Plan (dividend option) has the least beta value of Looking at the beta values of other s also it can be accomplished that private sector s are better at managing market fluctuations. TABLE 3.4 R - SQUARES OF THE FUND RETURN G option D dividend option *Introduced on 20/09/2000 HDFC * Prudential SBI Magnum Equity UTI Equity G D G D G D G D G D Source: author own calculation R-square value of any variable gives the proportion of it which is affected by a specific factor. Here R-square means that portion of change in NAV which is affected by the change in the market. Market here refers to BSE. From table 3.4, the least R-square value is that of SBI Magnum Equity (0.260), which shows that only 26% of modifications in the value of NAV of this plan is due to the fluctuations in the BSE index. The highest R- square value is of plan ( option) at This means that 47% of the change in its NAV is due to the market factor. Even the R-square values of the other private sector s are on a higher side as compared to public sector sponsored funds. By all this it can be concluded that market ups and downs play a major role in the NAV alterations of private sector s. Table-3.5 shows Standard deviation, which is the variation in NAV of any from its average NAV. In the table below standard deviation of BSE index which is the benchmark has also been mentioned for better interpretation of. The maximum standard deviation is of SBI Magnum equity plan ( option 2.51% and dividend option 2.50 %). Therefore it can be stated that this plan is the most unpredictable in terms of its NAV. The NAV of

11 84 TABLE 3.5 STANDARD DEVIATIONS (%) OF FUND RETURN G option D dividend option *Introduced on 20/09/2000 BSE HDFC * Prudential SBI Magnum Equity UTI Equity 1.47 G D G D G D G D G D Source: author own calculation SBI Magnum equity plan can vary upto 2.51%. This percentage change may be positive or negative depending upon the market condition. Index of BSE has varied upto 1.47% of its average in the period of our study. Standard deviations of all the public sector s are on a higher side as compared to their counterparts private plans. The maximum from the private sector side is by Prudential plan (dividend option) at 2.06%. By this it can be summarized that NAVs of private sector s are more predictable. Sharpe s index is a ratio of returns generated by the fund over and above risk free rate of return and the total risk related with it. Higher the ratio betters is the capacity of the fund to deal with total risk. But here since the Sharpe s ratio (table 3.6) of all the funds is coming out to be negative hence the least negative would be a considered better. The Sharpe s ratio of the BSE index (benchmark) is 4.34 this means that there was a possibility of better management of total risk if the funds were at the efficiency level of an index. TABLE 3.6 SHARPE S RATIOS OF THE SCHEMES (AS ON 31ST MARCH 2010) G option D dividend option *Introduced on 20/09/2000 BSE HDFC * Prudential SBI Magnum Equity UTI Equity 4.34 G D G D G D G D G D Source: author own calculation Table-3.6 shows that public sector s are better at dealing with total risk attached with mutual funds as compared to their competitors. Amongst them SBI Magnum Equity plan is giving the least negative Sharpe s ratio of ( option) and -2.56

12 85 (dividend option). Even UTI Equity plan which is another public sector fund under consideration is performing well in terms of this parameter. The least by a private sector is by plan (dividend option) at Hence it can be summarized that in regards to Sharpe s ratio public sector plans are ahead. TABLE 3.7 TREYNOR S RATIOS OF THE SCHEMES (AS ON 31ST MARCH 2010) G option D dividend option *Introduced on 20/09/2000 BSE HDFC * Prudential SBI Magnum Equity UTI Equity G D G D G D G D G D Source: author own calculation Table 3.7 shows Treyno s index, which is a ratio of return generated by the fund over and above risk free rate of return, during a given period and market risk. Higher the Treynor s ratio is a good performance indication. All the plans which are being studied seem to be almost at par in terms of this ratio. All are giving negative results in the rage of -7 to -9. plan (dividend option) is giving maximum Treyno s ratio of This shows that it is giving the least risk adjusted returns. The minimum Treyno s ratio is of SBI Magnum equity plan ( option = and dividend option= -7.42) which means that returns of this fund are upto an extent risk attuned. The ratio posted by the benchmark index i.e. BSE is exceptionally good (8.23) and hence unparalleled. One thing which needs to be mentioned here is that all the above plans are almost at par and have given very unfortunate results in case of this specific parameter. Although CAGR sounds technical, its significance is much uncomplicated. It is the rate of a value expressed on an annualized basis. Such value can be the performance of a company, an investment or a portfolio. This also takes into consideration the effect of compounding. Table 3.8 shows the Compound Annual Growth Rate of the selected Growth Schemes calculated on the basis of average annual return of the year and

13 86 TABLE 3.8 COMPARATIVE TABLE OF CAGR (%) OF ALL THE GROWTH SCHEMES (AS ON 31 ST MARCH 2010) G option D dividend option *Introduced on 20/09/2000 BSE HDFC * Prudential SBI Magnum UTI G D G D G D G D G D Source: author s own calculation The intention of the plans being the increase in the value of the fund, their CAGR seems to be satisfactorily at higher levels as compared to other types of mutual fund s. Growth Plan (private sector sponsored) option has achieved the maximum CAGR of 30.32%. Therefore it can be suggested that it is worth holding the fund of this particular AMC. In case of public sector plans the highest CAGR is 13.97% by UTI Growth Plan option. In case of Growth mutual funds also private sector s have outperformed public sector funds under this parameter. The regular measure used for describing a rate is Compound Annualized Growth Rate, or CAGR and if risk factor is attached with it is known as risk adjusted CAGR which as improved version of the simple CAGR. TABLE 3.9 RISK ADJUSTED CAGR (%) OF THE SCHEME (AS ON 31 ST MARCH 2010) G option D dividend option *Introduced on 20/09/2000 BSE HDFC * Prudential SBI Magnum UTI G D G D G D G D G D Source: author own calculation Table-3.9 shows the risk adjusted Compound Annual rate of the selected s calculated on the basis of the daily NAV starting from 1 st April 2000 upto 31 st march The same has been calculated for the benchmark index also i.e. for SENSEX, which comes out to be 15.04%. Growth option (a private sector sponsored fund) has performed exceptionally well by giving a risk adjusted CAGR of 17.96% which is even higher than the benchmark under consideration. On the other hand the best from the public sector category UTI Growth Scheme option made its investments

14 87 grow at the rate of 10.52% during the period of the study although of its risk attribute. The least compound after making adjustments for the risk (2.22%) was seen by Prudential Growth dividend option. On the basis of all this it can be concluded that private sector is better of than the public sector because except the Risk adjusted CAGR value of Prudential Growth dividend option all the other values from private sector side are higher as compared to their counterparts. In the table 3.10 Average Expense Ratios of the selected s have been given on the basis of the data for the period starting from 1 st April 2000 upto 31 st March The maximum and the minimum expense ratio during the study period have also been mentioned for better analysis of the results. It s a well known fact that there are no free lunches in money matters. This holds true in case of mutual fund investments also. Mutual funds too charge a fee for making your money grow. All such expenses and charges fall under a single category called expense ratio. Data below shows that the least expense ratio (amongst minimum, maximum and average) of a during the study period is of UTI Equity Scheme. It spent only 1.07% of it returns earned on operational expenses in a specific year. Under the average expense ratio there is a close tie between the public sector s and the private sector s. Since the minimum average position is taken over by UTI Equity Schemes (1.39%), TABLE 3.10 COMPARATIVE EXPENSE RATIOS (%) FOR SELECTED GROWTH SCHEMES SCHEME NAME HDFC * Prudential SBI Magnum Equity UTI Equity Average Maximum Minimum the maximum average expense ratio position is held by another public sector fund SBI Magnum Equity (2.38%). Two of the Private sector s HDFC Growth Scheme (2.20%) and Schemes (2.25%) are also giving somewhat nearby average expense ratios to the maximum value. In case of maximum highest expense ratio in the decade starting from 1 st April 2000 upto 31 st March 2010 SBI Magnum Equity Scheme again holds the spot with 2.51%. Here it can be accomplished that two representative public sector s are giving different results and therefore there category cannot be adjudged as better than the private sector s. And since HDFC Growth Scheme and Schemes are giving similar results as SBI Magnum Equity Scheme and Growth Scheme is giving results almost similar to UTI Equity Scheme, it can be said in a nutshell that private sector and public sector s are at par in case of expense ratio.

15 88 4. SUMMARY AND CONCLUSION The present study is an attempt to analyze and compare the performance of a few selected public sector and private sector Growth s on the basis of their NAVs and returns recorded for the period of ten years starting from 1 st April 2000 up to 31 st March The evidences have clearly revealed the following: 1) Growth s have seen a progress in t5hree major parameters i.e., No. of s floating in the market, percentage contribution towards total AUM if the Indian mutual funds industry and AUM of all the s inclusive. 2) Open ended s are more popular than the close ended s. This may be because investors make quick bucks by investing in them and exit from the market or from that specific fund. 3) Private sector has performed better as compared to its counterpart in case of average annual NAV, percentage, total return, beta, risk adjusted CAGR and CAGR. 4) Public sector has performed better in case of standard deviation, Sharpe s ratio, expense ratio and Treynor s ratio. 5. REFERENCES Andrews. Joshy (2007), A Study on the growing Mutual Funds Industry In India with Special Reference to Equity Mutual Funds The Management accountant, February 2007, p.p Busse. A. Jeffery (2001), Another Look at Mutual Fund Tournaments, Journal of Financial and Quantitative Analysis, Volume 36, No. 1. March 2001, p.p Canner. Niko, Mankiw.N.Gregory and Weil.N.David (1994), The Asset Allocation Puzzle, National Bureau of Economic Research, Working Paper No. W4857, September Carhart. Mark. M (1997) On persistence in Mutual Funds Performance, The Journal of Finance, March 1997, Volume LII, No. 1, p.p Daniel. Kent, Grinblatt. Mart, Titman. Sheridman and Wermers. Russ (1997), Measuring Mutual Funds Performance with Characteristic Based Benchmarks, The Journal of Finance, July 1997, Volume LII, No 3, p.p Dutta. Dipanwati (2009) A Revisit In To Recent Surge in Indian Mutual Funds Industry, Indian Economic Panorama, January 2009, Volume 18 No. 4, p.p Elango. R (2004), Which Funds Yields More Return?, The Management Accountant, April 2004, p.p Eling. Martin (2008), Does The Measure Matter In The Mutual Funds Industry?, Financial Analysts Journal, May / June 2008, Volume 64, No.3, p.p Ghosh. Arindham (2008), Financial Planning Journal, April June 2008, p.p

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