PERFORMANCE EVALUATION OF ELSS

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1 PERFORMANCE EVALUATION OF ELSS What benefits can an investor wish from any tax saving instrument? In a model world, he may wish for highest returns possible, full safety of his money, 100% tax deduction under Income Tax Act 1961 and no lock-in period. But that s possible only in his hallucinations because such an instrument in all the economies of the world combined does not exist. But closest if anything which comes to this definition of a perfect tax saving option is the ELSS. For amateur middle class and upper middle class people, nothing else could be superior than putting their hard earned savings in an Equity Linked Saving Scheme (ELSS) that offers tax saving as well as a possibility of higher return. An ELSS is a type of a mutual fund and is quiet parallel to any other equity mutual fund in many ways. An ELSS gives tax benefit but comes with a lock in period of 3 years. The portfolio of any ELSS is a combination of range of asset categories including equity, debt, gold and real estate. Initially a three year lock-in period may sound irrational to the prospective investor. But then to be rational he should consider the fact that all investment options under Section 80C have a lock-in period clause attached to them. In fact, ELSS has the shortest lock-in period (see Table below). Investment Alternatives Lock-in period National Savings Certificates 5Years Public Provident Fund 15 Years Institutional Bonds e.g. those issued by IDBI 3 Years Equity Linked Savings Schemes 3 Years Source: But despite this NSC, PPF and bonds are more trusted by the investors. Major advantage of this three year lock in period is that it controls the withdrawal of money hence allowing your investment to grow with the passage of time. And this is an unwritten rule that long term investments in equities always yields increasing returns as compared to any other investment instrument available. By compelling the investor to wait for three years, it makes

2 him to take a long term vision of the market, which injects investing order to a definite degree. The actual caliber of a portfolio in generating returns from equities can be realized only if the money stays invested for at least a few years. Moreover if the fund manager knows that the investment would not be withdrawn in the next three years he will be able to plan and formulate a line of attack that will ultimately do good to the investor only. (Source: Then a tax deduction for people in the higher tax brackets plus the elasticity to invest miniature amounts via a Systematic Investment Plan (SIP) which acts as the icing on the cake makes ELSS more suitable. It is like putting in a set sum every month for a year and then getting tax breaks on it at the end of the financial year. For example: you invest ` 2000 every month (` 24,000 p.a.) in an Equity Linked Saving Schemes (ELSS). The monthly saving lightens the load of investing a huge amount at the end of the financial year. And since we can invest up to ` 1, 00,000 it becomes more important to save in installments. Above all if one invests in any ELSS, there will be two major legal bodies on investor s side to protect his interest; Association of Mutual Funds in India (AMFI) and Securities and Exchange Board of India (SEBI). The asset allocation is almost preset and is in harmony with SEBI guidelines and also depending upon the tax incentives and liquidity. Money market instruments contribute the minimum portion of the total amount invested in any ELSS. Maximum is the input of equities, cumulative convertible preference shares and fully convertible debentures and a bit of bonds of companies. This portion is around 80-90%. (Source: This bifurcation shows an incline towards equities which has the maximum chances for providing first-rate proceeds. Besides this allocation the choice of industry and company, mid-cap or large cap is in the hands of the individual fund manager. A positively growing performance in the past and a diversified portfolio spread across various sectors and companies are the two main features which an investor should look for when short listing particular ELSS for putting in his money. This is significant, as the lock-in means he cannot make a mid-way exit. Among all investment avenues available under Income Tax Act 1961, ELSS has the scope for highest returns. National Savings Certificates and Institutional Bonds give returns at a flat percentage and nothing more than that. In contrast, ELSS being an equity based 146

3 product can heighten returns way above any other fixed income instrument. These returns could be in any form like dividend or appreciation in the NAV depending upon the option chosen by the investor between dividend or growth. Hence by this we can conclude that risk and return both are high in case of ELSS because higher returns come only at higher levels of risk. But the very grounds that can push up returns of an ELSS can also pull them down. By diverting investor s money towards equities, the fund manager can only pay you returns depending on the performance of the stock market. So if market is going through exhilarating times, this will get reflected in the NAV also. On the contrary, if indexes are down, the NAV will automatically decrease. Equity Linked Saving Scheme (ELSS) is a product with a high risk-high return profile and is suitable for investors who are way under the retirement age. People who have invested in fixed income instruments like PPF, NSC and institutional bonds can deem fit investing in ELSS for a revolution, to increase their returns by adding the spark of risk in their portfolio (Source: We work hard for our money but what we do not realize is that sometimes, our money does not work hard enough for us unless we make it to and perhaps one of the reasons for this is that we are not able to devote enough time to plan our savings. Moreover each passing day tends to lend a new dimension to the world of finance only adding to the prevailing complexities. One such dimension is ELSS which will be discussed in this chapter in detail. This chapter is sub divided into the following sections: 9.1 Number of ELS Schemes. 9.2 AUM of ELS Schemes. 9.3 Percentage Contribution by ELSS. 9.4 Results and Discussion Average annual NAV Total Return Beta (β) of the Scheme R-Square of the Scheme Standard Deviation Sharpe s Ratio Treynor s Ratio 147

4 9.4.8 Compound Annual Growth Rate Risk Adjusted CAGR Expense Ratio Modigliani risk-adjusted performance Jensen's Performance Index Information ratio Statistical testing of significant differences. 9.5 Conclusion. 9.1 NUMBER OF EQUITY LINKED SAVING SCHEMES For the analysis of the status of ELSS in the Indian mutual funds industry no. of ELSS floating in the market should be brought to light. Table 9.1 and Fig. 9.1 reveals the growth of Equity Linked Saving Schemes (ELSS) in terms of number of schemes floating in the market as on 31 st March of every year since 2001 up to Figures for both open ended and close ended type have been given. Table -9.1 ELSS in India in terms of no. of schemes (As on 31 st March) Year Open ended Schemes Close ended Schemes Total Schemes Source

5 In 2001 number of close ended schemes were 44 more than the open ended schemes, this was the highest ever gap between the two types. The total number of schemes was also at its peak this year at 80 which kept on decreasing every year before 2007 when it rose to 40 from its previous Figure of 37. After this there has been a gradual increase except in case of close ended schemes which has stayed stable may be because of the fact that longer lock - in periods attached with them makes them less popular amongst the investors. Open ended schemes has always seen an increase in their number except in the year 2004 when they declined by just 1. In the last decade open ended schemes have seen a growth of 100%, while the close ended schemes have seen a decline of 80%. Figure 9.1 ELSS in India in terms of no. of schemes (As on 31 st March) 9.2 AUM OF EQUITY LINKED SAVING SCHEMES The total value of assets that a mutual fund administers for itself and its customers is known as Assets Under Management or AUM. This very value clearly reflects the position of 149

6 that specific fund in the mutual fund industry as a whole. The amount of AUM is simple and the most prominent factor to determine the success or failure of a single fund or an industry. Table 9.2 and Figure 9.2 reveal the growth of ELSS in terms of their Assets Under Management (AUM) as on 31 st March of every year in the last decade. Table -9.2 ELSS in India in terms of AUM (` Cr) (As on 31 st March) Year Open ended Schemes Close ended Schemes Total % of Total AUM Source- On the basis of Table 9.2, it can be said that both open ended as well as close ended schemes have not shown any definite trend in their progress in last 10 years in terms of AUM. This makes their AUM as a very unpredictable factor which has no correlation with the increase or decrease in the number of schemes offered in the market. Total AUM of close - ended schemes has not shown any extreme changes in the period of study. Whereas on the other hand in the year 2006 and 2010 AUM of open ended schemes showed drastic 150

7 increases to ` 5091 crores and to ` crores respectively. Looking at the figures of total AUM it can be said that ELSS have seen a tremendous increase from ` 2532 crores to ` crores. Figure -9.2 ELS Schemes in India in terms of AUM (` Cr) (As on 31 st March) 9.3 PERCENTAGE CONTRIBUTION Fig. 9.3 below shows the contribution of all the ELS Schemes towards the total AUM of the Indian mutual funds industry in percentage form. The Figures mentioned are on 31 st March of every starting from 2001 upto The contribution of ELSS towards the pool of total AUM of the mutual funds industry has always varied from 1% to 3% except for the year 2010 when it was 4% i.e. the highest ever in the last decade. The least contribution was in the year 2004 and 2005 at only 1%. 151

8 Considering the variety of schemes available for the investors, 4% is a significant number and taking in mind the advantages of ELSS it can be deduced that there is a lot of scope for the 4% to increase Figure ELSS as % of total AUM of Indian Mutual Fund Industry (As on 31 st March) 9.4 RESULTS AND DISCUSSION A brief introduction to the characteristics of the selected ELS schemes for the study have been given in Table 9.3. All the ELSS aims at providing investors the opportunity to participate in the reasonable growth in the value of investments in equities & equity linked securities, over a period of time, in addition to tax benefits. In addition to it one more common feature of these schemes is that minimum investment required to enter them is `

9 Table 9.3 Key features of the selected schemes G = growth option D = dividend option Date Of NAV on 1 st April NAV on 31 st March Scheme Name Inception/ Type D G D G HDFC Tax Saver ICICI Prud. Tax Plan 31/03/1996 Open-Ended 09/07/1999 Open-Ended Reliance Tax Saver SBI Magnum Tax Gain UTI Equity Tax Saver Plan 22/09/2005 Open-Ended 31/03/1993 Open-Ended 15/11/1999 Open-Ended 9.95* 9.95* *As on 22/09/2005: Source: Average Annual NAV The funds have been compared on the basis of their average annual NAVs and their growth over and above the previous year values in Table 9.4. NAV of dividend option and growth option of all the schemes have been mentioned separately. The percentage growth rates in all the NAV, over and above the previous year s average NAV are also given. 153

10 Table 9.4 Comparative Table for Annual Average NAV of the schemes G = growth option D = dividend option (% = % growth over the previous year NAV) Year HDFC Tax Saver ICICI Prudential Tax Plan Reliance Tax Saver* SBI Magnum Tax Gain UTI Equity Tax Savings G % D % G % D % G % D % G % D % G % D % *Introduced on 22/09/2005

11 Table 9.4 depicts that the ELSS have seen a steady escalation in the last decade in terms of their NAV except in the years and when a negative growth was recorded. The worst effecting were the subprime crisis of the U.S in the year 2008 which were caused due to excess lending provided by reputed American banks to people with low or poor credit worthiness. Firms like Bear Sterns, Lehman Brothers, and Meryl Lynch had gone broken and many others were finding it tremendously tricky to balance on their feet. In order to strengthen their balance sheets, these banks wrapped up positions in developing markets which led to a losing swing in markets like India. A simple case in point was the intra day 1400 points fall on the BSE in January 2008 that was brought about by Citi Bank unwinding its position in many front line stocks in India. In these testing times all the ELSS gave negative growth in the range of % (UTI Equity Tax Savings growth option) upto % (SBI Magnum Tax Gain dividend option). The highest average NAV in a year recorded in the period of study was by HDFC Tax Saver growth option in the year This scheme has also given highest growth of 89.48% in While the least average NAV in a year was of 8.87 by UTI Equity Tax Savings and least growth rate of % was by SBI Magnum Tax Gain in A fashion which comes to light after studying the table is that initially when the fund is launched the NAV of its growth and dividend option remains more or less closer but gradually huge differences between the two values can be seen which is due to intensive ploughing back of profits by growth options which leads to appreciation in the value of investments. Besides being almost at par in the year , private sector ELSSs have shown tremendous amplification in their average NAVs till reaching the year In a nut shell it can be said that in terms of NAV, private sector ELSSs are obvious champions including Reliance Tax Saver which regardless of being a late entrant is giving almost equivalent growth rates at present to its competitors Total Return Next parameter for comparing the chosen tax saver schemes is their return over the period of study. The return values of S&P CNX 500 index has also been mentioned as a benchmark for more effective interpretation of the results. In Table 9.5 total returns earned in the last decade ending on 31 st March 2010 by the chosen ELSS is mentioned. A strong conclusion which can be derived from the return values is that public sector sponsored mutual funds are nowhere near private sector mutual funds when it comes to giving returns to their investors. ICICI Prudential Tax Plan growth option leads all other 155

12 ELSS, by earning exceptionally high return rate of %. In case of public sector sponsored ELSS maximum return is recorded by UTI Equity Tax Savings growth option (205.29%). Table 9.5 Comparative Table for Total Return (%) G growth option D dividend option S & P CNX 500 HDFC Tax Saver ICICI Pru Tax Plan Reliance Tax Saver* SBI Magnum Tax Gain UTI Equity Tax Savings G D G D G D G D G D *Introduced on 22/09/2005 In fact SBI Magnum Tax Gain dividend option is even showing a negative return of % and its growth option shows the least return of 9.69%. Reliance Tax Saver growth option is giving only double digit return unlike its other counterparts from private sector, which is completely justified as it was a late entrant in the mutual funds industry of India Beta (β) of the Schemes Beta is a measure of risk which, when applied to a fund provides functional statistical information. It indicates a fund's precedent price volatility relative to a particular stock market index. Table 9.6 Comparative Table for Beta (β) G growth option D dividend option (As on 31 st March 2010) HDFC Tax Saver ICICI Pru Tax Plan Reliance Tax Saver* SBI Magnum Tax Gain UTI Equity Tax Savings G D G D G D G D G D *Introduced on 22/09/

13 Table 9.6 reveals the Beta value of fund returns of the chosen ELSS as on 31 st March 2010 calculated on the basis of daily returns of the last ten years. The table illustrates that the values are in the range of (Reliance Tax Saver growth option) to (SBI Magnum Tax Gain dividend option) with an exception of SBI Magnum Tax Gain growth option whose Beta value comes out to be which shows that it is maximum in line with the changes in the market. The fund which is least affected by the market risk is Reliance Tax Saver. As regards this risk measure is concerned it can be concluded that public sector sponsored ELS schemes are more risk prone towards the market fluctuation. Contrary to this private sector mutual funds hold less risky portfolios. One more thing which is visible is that except in case of SBI Magnum Tax Gain and ICICI Prudential dividend s options of all other ELSS have captured more of the changes in the market as compared to their counterpart growth options R-Square of the Schemes R-square measures a fund's movements against its particular benchmark index on a scale. In Table 9.7 below R - square values of the selected ELSS has been given as on 31 st March 2010 which have been calculate using the daily returns in the last ten years. Here r 2 has been calculated between fund return and S&P CNX 500 index return. Table 9.7 Comparative Table for R - Square G growth option D dividend option (As on 31 st March 2010) HDFC Tax Saver ICICI Prudential Tax Plan Reliance Tax Saver* SBI Magnum Tax Gain UTI Equity Tax Savings G D G D G D G D G D *Introduced on 22/09/2005 The highest R-square was noted to be that of Reliance Tax Saver growth option with the value of which implies that 57% of the change in the NAV of this fund is due to the fluctuations in the market. The fund which is most adequately diversified is found to be SBI Magnum Tax Gain dividend option with an R-square of for dividend option and

14 for growth option. In case of ICICI Prudential Tax Plan growth option it can be accomplished that market is a good factor to explain the changes in the performance of the fund as the R- square value is significantly high at In private sector schemes the range of R-square is from to Whereas in case of public sector sponsored schemes the range is from to This clearly shows that market condition is more a descriptive variable for the NAVs of private sector ELSS. In a nutshell it can be said that portfolios of public sector sponsored ELSS are effectively distributed. One more thing which comes to light is that R- square of every fund is high in case of its growth option as compared to its dividend option Standard Deviation Standard deviation is almost certainly used more often than any other measure to estimate a fund's risk. It simply quantifies how much a fund s return, varies around its mean. In Table 9.8 standard deviations of fund returns of all the chosen ELSS are given as on 31 st March 2010 which have been calculated using the daily return values of the schemes. For better analysis of the data standard deviation of the benchmark index i.e. S&P CNX 500 has also been mentioned. Table 9.8 Comparative Table for Standard Deviation (%) G growth option D dividend option (As on 31 st March 2010) S&P CNX 500 HDFC Tax Saver ICICI Prudential Tax Plan Reliance Tax Saver* SBI Magnum Tax Gain UTI Equity Tax Savings 1.51 G D G D G D G D G D *Introduced on 22/09/2005 In our study the highest Standard Deviation (S.D) is that of SBI Magnum Tax Gain scheme (2.33% for growth option and 2.37% for dividend option). This means that this fund gives the most unpredictable returns. The other public sector sponsored fund, UTI Equity Tax Savings also has S.D on a higher side. Looking at S.D values it can be said that all the private sector funds under study are giving returns more or less in close proximity to their average 158

15 returns. By this it can be concluded that public sector sponsored ELSS are more volatile and random as compared to private sector ELSS in terms of their returns. S.D of Reliance Tax Saver growth option is the nearest to S.D of the S&P CNX 500 index which is also the minimum Sharpe s Ratio This model evaluates funds on the basis of reward per unit of total risk. A high and positive Sharpe s ratio is an indication of a finer risk adjusted performance. Here the Sharpe s Ratios have been calculated on the basis of Standard Deviation of the fund in the last decade and 91 day Treasury Bill return (risk free rate of return). In Table 9.9 Sharpe s ratios of all the selected ELSS as on 31 st March 2010 are given. For more effective analysis of the data Sharpe s ratio of the S&P CNX 500 index has also been mentioned as the benchmark. Table 9.9 Comparative Table for Sharpe s Ratio G growth option D dividend option (As on 31 st March 2010) S&P CNX 500 HDFC Tax Saver ICICI Prudential Tax Plan Reliance Tax Saver* SBI Magnum Tax Gain UTI Equity Tax Savings G D G D G D G D G D *Introduced on 22/09/2005 In the above table it is clearly visible that all the schemes have posted negative values including the benchmark index. This proves the point that satisfactory return against the level of total risk attached has not been earned. So now the basic point for evaluation of the data will be that lesser negative ratio would mean a better performance. All the funds have atleast given better outcomes than the market. SBI Magnum Tax Gain fund can be adjudged as the best amongst equals being the only fund giving Sharpe s ratio in the range of -2. Amongst the private players all the funds are showing above -3 Sharpe s ratio and the worst of them is Reliance Tax Saver Fund growth option with the most negative value of

16 So it can be concluded that here public sector sponsored Equity Linked Saving Schemes (ELSS) have managed to provide superior domino effects as compared to their challenger private sector Equity Linked Saving Schemes (ELSS) Treynor s Ratio Treynor s Ratios have been calculated on the basis of Beta of the fund in the last decade and 91 day Treasury Bill return as the risk free rate of return. For more useful analysis of the data Treynor s ratio of the S&P CNX 500 index has also been mentioned as the benchmark. In Table 9.10 Treynor s ratios of all the selected ELSS as on 31 st March 2010 are given. Table 9.10 Comparative Table for Treynor s Ratio G growth option D dividend option (As on 31st March 2010) S&P CNX 500 HDFC Tax Saver ICICI Pru Tax Plan Reliance Tax Saver* SBI Magnum Tax Gain UTI Equity Tax Savings G D G D G D G D G D *Introduced on 22/09/2005 In the study all the values of Treynor s ratio for all the schemes have come out to be negative in the range or (SBI Magnum Tax Gain growth option) to (Reliance Tax Saver dividend option). This means they were unable to give sufficient returns at the level of risk taken. ICICI Prudential Tax Plan and SBI Magnum Tax Gain have outperformed the market in terms of Treynor s ratio. Higher negative values would mean depressing performances. Therefore it can be deduced that HDFC Tax Saver, and UTI Equity Tax Savings have given poor results and the worst hit fund is Reliance Tax Saver Fund dividend option (-8.67) with its Treynor s ratio crossing the second highest mark of recorded by its growth option. 160

17 So precisely it can be said that in terms of protecting investor s money from the market fluctuations public sector sponsored Equity Linked Saving Schemes (ELSS) are better off than private sector Equity Linked Saving Schemes (ELSS) Compound Annual Growth Rate Compound Annual Growth Rate is the year-over-year growth rate of an investment is for a specified period of time. The CAGR is an improved version of the total percentage growth rate. Table 9.11 shows the Compound Annual Growth Rate (CAGR) of the selected ELS Scheme calculated on the basis of average annual return of the year and Table 9.11 Comparative Table for CAGR (%) G growth option D dividend option (As on 31st March 2010) S & P CNX 500 HDFC Tax Saver ICICI Pru Tax Plan Reliance Tax Saver* SBI Magnum Tax Gain UTI Equity Tax Savings CAGR G D G D G D G D G D t- values *Introduced on 22/09/2005 Table 9.11 shows that Reliance Tax Saver dividend option is giving least CAGR of 0.58% which is very much different from the least CAGR of a public sector sponsored fund (UTI Equity Tax Savings dividend option at 5.61%). HDFC Tax Saver growth option being the exceptionally good performer has given a double digit positive CAGR (35.20%) i.e. it can be assumed that it has grown with every compounding cycle. This growth is even higher than the growth experienced by our benchmark index (22.91%). The best CAGR value by a public sector sponsored ELSS is of UTI Equity Tax Savings growth option at 17.24%. Here the level of significance has been taken to 0.05 and accordingly calculated values have been compared with tabulated values (1.833 for n 1 = 9 years). All the calculated values divided by 100 are coming out to be less than tabulated values. Doing this the results show that null 161

18 hypothesis is rejected in case of all the schemes under consideration. Hence it can be concluded that average annual returns of all the schemes for all the 10 years of the study have varied significantly. Hence it can be concluded that in terms of CAGR of Equity Linked Saving Schemes (ELSS) private sector has outshined Risk Adjusted CAGR Higher is the Risk Adjusted CAGR of a mutual fund better is its capability to take more risks and still give returns. Table 9.12 shows the Risk Adjusted Compound Annual Growth Rate of the selected tax saver schemes 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 i.e. S&P CNX 500 also. Table Comparative Table for Risk Adjusted CAGR (%) G growth option D dividend option (As on 31st March 2010) S & P CNX 500 HDFC Tax Saver ICICI Pru Tax Plan Reliance Tax Saver* SBI Magnum Tax Gain UTI Equity Tax Savings G D G D G D G D G D *Introduced on 22/09/2005 The Risk Adjusted CAGR of the S&P CNX 500 is 16.04%, and when compared with the benchmark only HDFC Tax Saver growth option (21.92%) and ICICI Prudential Tax Plan growth options (20.16%) have given better results. Both are private sector sponsored mutual funds. This shows that despite being at higher levels of risks they have made the investments of their unit-holders grow satisfactorily. The worst performer here can be adjudged as the Reliance Tax Saver dividend option with a Risk Adjusted CAGR of just 0.43%. From the public sector sponsored the maximum Risk Adjusted CAGR achieved is by UTI Equity Tax Savings growth option (13.10%). Therefore it can be accomplished that private sector is more able to take risks and still make the money grow. 162

19 Expense Ratio Expenses are the decisive measure of how superior the returns of a mutual fund will be. In the investing world, usually we don t get what we pay for. In fact there's a lot of indication to suggest the opposite. The more we pay for a mutual fund scheme, the less we get in return. In Table 9.13 average Expense Ratios of the selected tax saver schemes 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. Table 9.13 Comparative Table for Expense Ratios (%) SCHEME NAME HDFC Tax Saver ICICI Pru Tax Plan Reliance Tax Saver* SBI Magnum Tax Gain UTI Equity Tax Savings Average Maximum Minimum SBI Magnum has been the most misers during the study period with an expense ratio of merely 1.79%. The extravagant was Reliance Tax Saver Plan. It diverted 2.50% of the returns earned towards the operational expenses which included items like fund manager s fee, audit fee etc. Two of the private sectors ELSS are giving similar highest average expense ratios of 2.29% (ICICI Prudential Tax Plan and Reliance Tax Saver Plan) and the least average expense ratio is of SBI Magnum Balanced Plan at only 2.08%. Hence it can be concluded that public sector sponsored ELS schemes are better performers than the private sector in terms of expense ratio. This may be because private sector funds have to make extra efforts to build a brand name as strong as the public sector s name. 163

20 Modigliani Modigliani measure M 2 or M2 or Modigliani Modigliani measure is a measure of the risk-adjusted returns of an investment portfolio. It measures the returns of the portfolio relative to that of some benchmark, after adjusting its deviations also known as its risk Table 9.14 shows the M square values of the selected ELSS as on 31 st March Table Comparative Table for M Square (%) G growth option D dividend option (As on 31st March 2010) HDFC Tax ICICI Pru Tax Reliance Tax SBI Magnum UTI Equity Saver Plan Saver* Tax Gain Tax Savings G D G D G D G D G D *Introduced on 22/09/2005 A higher M 2 value indicates that the portfolio has outperformed the benchmark. Here the benchmark is S&P CNX 500 Index. It can be clearly seen in the table that the best amongst all ELSS in terms of M 2 is SBI Magnum Tax Gain Scheme (dividend option = 2.342% and growth option = 2.283%) which is a public sector sponsored fund. Amongst the private players HDFC Tax Saver dividend option has given best results (1.568%). Hence it can be interpreted that Reliance Tax Saver Plan growth option could not give equivalent results to that of the market at same levels of risk. Therefore the conclusion is that under this parameter for evaluating performance of mutual funds public sector ELSS have given shining results Jensen s Alpha Jensen s Measure or Alpha is the most commonly used method of determining the return that should have been earned by the schemes at a given level of risk. 164

21 Table Comparative Table for Jensen s Alpha G growth option D dividend option (As on 31st March 2010) HDFC Tax ICICI Pru Tax Reliance Tax SBI Magnum UTI Equity Tax Saver Plan Saver* Tax Gain Savings G D G D G D G D G D *Introduced on 22/09/2005 In other word it shows the abnormal return of a security or portfolio of securities over the theoretical expected return. Table 9.15 gives the values of Alpha for the five ELSS as on 31 st march Here risk free rate of return considered is 91 day Treasury bill. A higher and positive Alpha means that the returns tend to be higher than the expected beta statistics. All the values so calculated in the table above are negative. Hence it can be analyzed that all the ELSS will not be giving expected returns at set standard of risks. The best amongst the worst is SBI Magnum Tax Gain Plan (dividend option = and growth option = ). And the fund which has underperformed is Reliance Tax Saver (dividend option = and growth option = 1.702). For these reasons it can be pointed out that public sector sponsored ELSS are better off as compared to private sector sponsored ELSS under Jensen s Measure Information Ratio The information ratio is similar to Sharpe ratio but, whereas the Sharpe ratio is the excess return of an asset over the return of a risk free asset divided by the variability or standard deviation of returns, the information ratio is the active return to the most relevant benchmark index divided by the standard deviation of the "active" return or tracking error. In table 9.16 Information Ratios of all the selected ELSS are given as on 31 st March Higher the IR higher is the active return given the amount of risk taken. 165

22 Table Comparative Table for Information Ratio G growth option D dividend option (As on 31st March 2010) HDFC Tax ICICI Pru Tax Reliance Tax SBI Magnum UTI Equity Saver Plan Saver* Tax Gain Tax Savings G D G D G D G D G D *Introduced on 22/09/2005 Since all IRs in the above table are coming out to be negative, the least negative would be the best performer. According to this bases Reliance Tax Saver both dividend and growth option are best. The least active returns at a given level of risk is provided by SBI Magnum Tax Gain Plan at IR more than -1. Hence public sector funds are poor performers in terms of active returns Statistical testing of difference between average NAVs of selected ELSS: The data for the ELSS was tested separately for growth and dividend option. To begin with the choice of the five schemes has been justified by trying to know whether there is significant difference between the average NAVs of their ELSS or not. For this ANOVA was applied on the following hypothesis: H o :There is no significant difference between the mean of average NAVs of the five growth schemes selected. For testing the null hypothesis the results and interpretation of ANOVA test are discussed below: 166

23 Table 9.17 ANOVA results for mean of NAVs of ELSS Sum of Squares df Mean Square F Sig. ELSS (Growth) Between Groups Within Groups Total ELSS (Dividend) Between Groups Within Groups Total Table 9.17 shows the output of the ANOVA analysis and whether we have significant difference between our group means. In the case of growth option significance level is and for dividend option, which are less than 0.05 therefore null hypotheses is rejected. Hence null hypothesis which states that there is no significant difference has to be rejected. The interpretation will be that there is significant difference between the selected mutual fund average NAVs. 167

24 Now to check whether there is significant difference between average NAVs of the selected public sector sponsored ELSS and private sector ELSS t test has been used. The hypothesis set for testing is mentioned below: H 0 : There is no significant difference between the mean of average of average NAVs of the public sector sponsored and private sector sponsored ELSS. The results of this test are discussed below. Table 9.18 Group Statistics of ELSS COMPANY N Mean Std. Deviation Std. Error Mean ELSS Private (Growth) Public ELSS Private (Dividend) Public From the above table it is clearly visible that the values of mean and standard deviation are different for public and private ELSS. But the significance of this difference is equally important. Hence to understand whether this difference is significant or not t test results are mentioned in the table given below. 168

25 Table 9.19 Results of Independent Sample t Test Levene's Test for Equality of Variances t-test for Equality of Means F Sig. t df Sig. (2- Mean Std. Error tailed) Difference Difference 95% Confidence Interval of the Difference Lower Upper Equal variances assumed ELSS (Growth) Equal variances not assumed Equal variances assumed ELSS (Dividend) Equal variances not assumed

26 Levene s test indicated by the p value helps us in deciding whether we should assume equal or unequal variances. If p value is < 0.05 the evidence suggests that the variances are unequal. Here the p value of Levene s test is for growth option and for dividend option. So we use the equal variance line for the t test for the means of dividend option and unequal variance line for the t test for the means of growth option. The value of t test is for dividend option and for growth option. Thereby it leads to the rejection of null hypothesis (H 0 ) which states there is no significant difference between the mean of NAVs of public sector sponsored and private sector as far as ELSS are concerned in case of growth option and acceptance of the same hypothesis in case of dividend option. The reason for this is that dividend options do not intend at increasing the NAV value of the funds hence their NAVs do not differ much from their competitors. 9.5 CONCLUSION On the whole taking ELSS as the representative sample for the Indian mutual funds industry it can be summarized by saying that mutual funds are fast becoming the preferred choice of investment for the literate working class as that are capable of providing better returns than the other tax saving options. Despite the decrease in the no. of scheme options available in the market in this category their AUM has increased manifold. But future of mutual funds will be interesting to watch out for as ELSS is not eligible for tax benefits under the DTC (Direct Tax Code), but since the implementation of the new tax regime has been postponed, investors can park their funds in these equity schemes for now. (Source: The analysis of the tax saver ELSS can be put in a nutshell by saying that private sector has given much superior results as compared to the public sector sponsored ELSS. The parameters under which private sector ELSS have recorded better Figures are average annual NAV, percentage growth in NAV, total Return, beta, R Square, standard deviation, CAGR, risk adjusted CAGR and information ratio. 170

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