Performance Analysis of Growth Oriented Equity Diversified Mutual Fund Schemes Using Sortino Ratio

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1 Performance Analysis of Growth Oriented Equity Diversified Mutual Fund Schemes Using Sortino Ratio 1 Dr. S. Poornima, Associate Professor, Department of Business Management, P.S.G.R. Krishnammal College for Women, Coimbatore. 2 Mrs.R.K.Sudhamathi, Associate Professor, Department of Management Studies, Dr. N.G.P. Institute of Technology, Kalapatti Road, Coimbatore ABSTRACT The mutual fund industry in India was started in the year 1963 with the formation of Unit Trust of India. This industry was privatised in the year This led to growth of mutual fund companies from 1 to 42 companies in number. The wide variety of schemes floated by these mutual fund companies gave wide investment choice for the investors. Among wide variety of funds equity diversified fund is considered as substitute for direct stock market investment. In this research paper an attempt is made to analyse about the performance of the growth oriented equity diversified schemes by using Sortino ratio. 102 growth oriented equity diversified schemes which were performing during the period April 2006 to March 2011 were selected for the study. The analysis using Sortino ratio depicts that out of 102 funds, 97 funds were able to produce return more than minimum acceptable rate of return. Whereas 5 funds were found to produce return less than minimum acceptable rate of return. This research paper clearly reveals the fact that careful evaluation using appropriate performance measure will lead the investor in selecting the best funds. Key words for the paper: Equity diversified mutual fund, Sortino ratio, Minimum acceptable return, downside risk. INTRODUCTION The mutual fund industry in India was started in the year 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. This industry was privatised in the year 1993; Privatisation of mutual fund industry in India had brought dynamism through professionalism and product innovation. New fund offers, growing transactions of mutual fund companies in stock market clearly depicts that prospects for mutual fund industry is increasing. Tax saving funds provides shelter from income tax, for booming middle income group investors. Sector specific funds, which provide high return by investing in booming sectors, could also attract voluminous funds. Equity diversified funds have proved itself to be the close substitute for the direct stock market investment. Growth and development of various mutual funds products in Indian capital market have proved to be one of the most catalytic instruments in generating momentous investment growth in the capital market (Debasish, 2007). In this context, close monitoring and evaluation of mutual funds has become essential. In the above perspective an attempt is made 27

2 in this research article to analyse about the performance of the growth oriented equity diversified mutual fund using Sortino ratio. OBJECTI VES OF THE STUDY To analyze the performance of the growth oriented equity diversified mutual fund schemes. RESEARCH METHODOLOGY Research Design The research design used for the study is descriptive and analytical in nature. Funds Choosen for the Study Open-ended growth oriented equity diversified mutual funds which have been operating for greater than five years and performing during the period of study (i.e. April March 2011) and for which the data is available on continuous basis is taken for the study. One hundred and two funds were selected for the study based on the above criteria. Period of study The period of study is for five years from April 2006 to March This period has been chosen as it is recent and has witnessed both boom and recession. Data Source Secondary source of data is used for the study. Monthly Net Asset Value (NAV) of the selected schemes which used for performance measure is collected from various websites of various asset management companies, mutual funds India.com, value research online.com, money control.com Benchmark indices value is obtained from the Bombay Stock Exchange and National Stock Exchange websites. Framework of analysis Return: The returns for the various mutual funds selected for the study is computed on the basis of the Net Asset Value (NAV) of the schemes using the formulae (S.Kevin, 2011) Rp = (NAV t - NAV t-1 ) / NAV t-1 Where Rp = Return on the fund NAV t & NAVt -1 are the net assets values for the time period t and t-1 respectively. Mean return of mutual fund scheme is calculated as (Khatri, 2008): N R p = Ʃ R pt / N t =1 N= total number of time period studied 28

3 Market Return of benchmark index is calculated as (Khatri, 2008): Rm = (M t - M t-1 )/M t-1 Where Rm = Market return M t & M t-1 are the market indices values for the time period t and t-1 respectively. Mean Market Return is calculated as (Khatri, 2008): N R m = Ʃ R mt /N t =1 N= total number of time period studied Risk-free rate of return (Rf): In this study, post office time deposit rate of 1 year i.e. is 6.25% per annum is choosed as risk free rate. Since monthly average rate of return is used to study mutual fund performance the monthly risk free rate of return is arrived at, which is 0.52 [(30/360)*6.25] (Khatri, 2008). Performance measure used for the study Sortino Ratio The Sortino ratio, associated with Dr. Frank Sortino is a modification of the sharpe ratio but penalizes only those returns falling below a required rate of return. The required rate of return is often taken to be the risk free rate of return and was originally known as the minimum acceptable return. Sharpe ratio penalize both upside and downside volatility equally, where Sortino ratio penalizes only downside volatility. The Sortino ratio is measured by using the formula: Sortino Ratio = (R - R f ) / SD d Where: R = Mean return, R f = risk-free return (or Minimum Acceptable Return: MAR) SD d = downside risk: SD d 2 = (1/n) Σ (r - R f ) 2 where the sum (or average) includes only returns for which r < R f. RESULTS AND DISCUSSIONS The funds selected for the study is analyzed using Sortino ratio. This ratio penalizes only those returns falling below a required rate of return. The required rate of return is often taken to be the risk free rate of return and was also known as minimum acceptable return. Higher the ratio better is the performance of the fund. Lower and negative ratio denotes that the fund 29

4 is earning the return less than the minimum acceptable return. This ratio helps in scrutinizing the funds in a very stringent manner. Table-1 depicts the Sortino ratio for all the 102 funds selected for the study. Its value ranges from to The top 5 performing funds in terms of Sortino ratio are: 1. Franklin India Prima Fund-Growth (Sortino ratio = 2.05) 2. Franklin India Bluechip Fund-Growth (Sortino ratio = 1.86) 3. Fidelity India Special Situations Fund-Growth (Sortino ratio = 1.51) 4. Franklin India Flexi Cap Fund-Growth Plan (Sortino ratio = 1.47) and 5. Fidelity Equity Fund-Growth (Sortino ratio = 1.46). The bottom 5 performing funds in terms of Sortino ratio are Birla Sun Life MIDCAP Fund- Growth, BNP Paribas Mid Cap Fund-Growth, Franklin India Smaller Companies Fund-Growth, L&T Contra Fund-Cumulative, and Sundaram S.M.I.L.E.Fund-Growth with Sortino ratio of CONCLUSION The tremendous growth in mutual fund schemes has led to a challenge before the investors in selecting the best performing fund. Sortino ratio is one such a measure which is used to select the best performing fund. This ratio measures the performance of the funds in terms of downside risk, i.e. the funds producing return more than the minimum acceptable rate of return is considered as performing fund, whereas the funds producing return below the minimum acceptable rate of return is said to posses downside risk. The analysis of 102 growth oriented equity diversified schemes shows that only 5 funds has performed below the minimum acceptable return, whereas 97 funds has performed above the minimum acceptable return level. Thus it can be concluded that careful choice of mutual funds after evaluating their associated return and risk using suitable measure will surely provide the investor with attractive return. Table 1 Performance of Growth Oriented Equity Diversified Schemes S. No. Name of the Scheme Average Monthly Return Percent Sortino Ratio 1 Birla Sun Life Advantage Fund-Plan B (Growth) Birla Sun Life Dividend Yield Plus-Plan B (Growth) Birla Sun Life Equity Fund-Plan B(Growth) Birla Sun Life Frontline Equity Fund-Growth Birla Sun Life MIDCAP Fund-Growth Birla Sun Life Top 100 Fund -Growth BNP PARIBAS Equity Fund-Growth Plan BNP PARIBAS Dividend Yield Fund-Growth BNP Paribas Mid Cap Fund-Growth

5 10 Canara Robeco Emerging Equities-GROWTH OPTION 11 Canara Robeco Equity Diversified-Growth DWS Investment Opportunity Fund Reg Plan - Growth 13 DSP BlackRock Opportunities Fund-Regular Plan - Growth DSP BlackRock Top 100 Equity Fund - Regular Plan - Growth 15 Escorts Growth Plan-GROWTH OPTION Fidelity Equity Fund-Growth Fidelity India Special Situations Fund-Growth Franklin India Bluechip Fund-Growth Franklin India Flexi Cap Fund-Growth Plan Franklin India Opportunities Fund Growth Franklin India Prima Fund-Growth Franklin India Prima Plus-Growth Franklin India Smaller Companies Fund-Growth Templeton India Growth Fund-Growth Plan HDFC LONG TERM EQUITY FUND-Growth Market Index S&P CNX Nifty 1.31 Source: Compiled from monthly NAV of respective funds 31

6 Table 1 (Continued) Performance of Growth Oriented Equity Diversified Schemes S. No. Name of the Scheme Average Monthly Return Percent Sortino Ratio 26 HDFC Capital Builder Fund - Growth HDFC Core and Satellite Fund - GROWTH HDFC Equity Fund - Growth HDFC Growth Fund - Growth HDFC Premier Multi-Cap Fund-Growth HDFC Top 200 Fund - Growth HSBC Equity Fund - Growth HSBC India Opportunities Fund - Growth HSBC Midcap Equity Fund - Growth ICICI Prudential Discovery Fund-GROWTH OPTION 36 ICICI Prudential Dynamic Plan-Growth ICICI Prudential Top 100 Fund-Growth ICICI Prudential Top 200 Fund - Growth IDFC Classic Equity Fund-Plan A- Growth IDFC Imperial Equity Fund-Plan A - Growth IDFC Premier Equity Fund_Plan A - Growth ING Core Fund -Growth ING Dividend Yield Fund-Growth ING Large Cap Equity Fund-Growth ING Midcap Fund-Growth JM Equity Fund-Growth Kotak 50 - Growth Kotak Contra Scheme---Growth Kotak Opportunities---Growth Kotak-Mid-Cap-Growth L&T Contra Fund-Cumulative L&T Growth Fund-Cumulative Market Index S&P CNX Nifty 1.31 Source: Compiled from monthly NAV of respective funds 32

7 Table 1 (Continued) Performance of Growth Oriented Equity Diversified Schemes S. No. Name of the Scheme Average Monthly Return Percent 33 Sortino Ratio 53 L&T Mid Cap Fund-Cumulative L&T Opportunities Fund-Cumulative LIC NOMURA MF Equity Fund-Growth LIC NOMURA MF Growth Fund - Growth LIC NOMURA MF Opportunities Fund-Growth Morgan Stanley Growth Fund-Growth Principal Dividend Yield Fund-Growth Plan Principal Growth Fund-Growth Plan Principal Large Cap Fund-Growth Reliance Equity Fund-Growth Plan-Growth Reliance Equity Opportunities Fund-Growth Plan- Growth Reliance Growth Fund-Growth Plan-Growth Reliance NRI Equity Fund-Growth Plan-Growth Reliance Regular Savings Fund-EQUITY OPTION-Growth Reliance Vision Fund-GROWTH PLAN-Growth Sahara Growth Fund-Growth Sahara Midcap Fund-Growth Plan Sahara Wealth Plus Fund-Fixed Pricing - Growth Sahara Wealth Plus Fund-Variable Pricing - Growth Magnum Equity Fund- Growth SBI BLUE CHIP FUND-GROWTH SBI MAGNUM GLOBAL FUND 94 - GROWTH SBI Magnum MIDCAP FUND - GROWTH SBI Magnum Multicap Fund - Growth SBI Magnum Multiplier Plus Scheme Growth Market Index S&P CNX Nifty 1.31 Source: Compiled from monthly NAV of respective funds

8 Table 1 (Continued) Performance of Growth Oriented Equity Diversified Schemes S. No. Name of the Scheme Average Monthly Return Percent Sortino Ratio 78 SBI MSFU CONTRA-GROWTH SBI MSFU EMERGING BUSINESS FUND - GROWTH Sundaram Growth Fund-Growth Sundaram India Leadership Fund-Growth Sundaram S.M.I.L.E.Fund-Growth Sundaram Select Focus-Growth Sundaram Select Midcap-Growth Tata Contra Fund - Growth Tata Equity Opportunities Fund - B Growth Tata Growth Fund - Bonus (Growth) Tata Growth Fund - Growth Tata Mid Cap Fund - Growth Tata Pure Equity Fund - Growth Taurus Bonanza Fund-Growth Taurus Discovery Fund - Growth UTI - Equity Fund-Growth UTI - Master Index Fund-Growth UTI - Master Plus Unit Scheme-Growth UTI - Master Share-Growth UTI - Master Value Fund-Growth UTI Contra Fund-Growth-Growth UTI Leadership Equity Fund-Growth-Growth option UTI Mid Cap Fund-Growth UTI Opportunities Fund-Growth UTI-Dividend Yield Fund.-Growth Market Index S&P CNX Nifty 1.31 Source: Compiled from monthly NAV of respective funds 34

9 REFERENCES: August 2013, Volume: I, Issue: VIII Debasish, D. S. (2007). Performance Evaluation Choice of Mutual Funds, SCMS Jorunal of Indian Management, pp Khatri, D. K. (2008). Investment management and security analysis. Chennai: Macmillan India Ltd. P.224 S.Kevin. (2011) Security Analysis and Portfolio Management, Delhi, PHI Learning Private Limited. p.219 Vangapandu Rama Devi, N. L. (2010, JUNE). Performance Evaluation of Equity Mutual Funds, JIMS 8M, pp Zabialla (2010, March). Measuring Risk- adjusted Mutual Fund Performance: A Study of Select Sector Funds in India, PRERANA, pp Muthappan P.K., D. E. (2006). Risk-Adjusted Performance Evaluation of Indian Mutual Fund Schemes, Finance India, Volume 10, Issue 3, pp