Comparative Study on Performance Evaluation of Large Cap Equity and Debt Mutual Fund Schemes

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1 In Press OPEN JOURNAL OF FINANCE Comparative Study on Performance Evaluation of Large Cap Equity and Debt Mutual Fund Schemes Shipra Bansal*, Yash Pal Taneja Department of Commerce, GGDSD College, Chandigarh, India *Corresponding author: Abstract: This paper attempts to have a comparative study on Performance Evaluation of Large Cap Equity and Debt Mutual Fund Schemes. It consists of data of returns and volatility measures of sample equity and debt mutual funds schemes. The research methodology tools include Standard Deviation, Sharpe ratio, Bata, Alpha, R-squared and Treynor ratio. The results concluded that out of all equity mutual fund schemes, UTI opportunities fund is the best as it has lowest standard deviation, lowest beta, highest value of alpha, highest Sharpe ratio and highest Treynor ratio. But in case of debt mutual fund scheme UTI short term Income fund is not performing so in case of debt schemes as it has highest beta and lowest Sharpe Ratio. The present study will be significant not only for investors but also for the asset management companies so as to evaluate their portfolio and performance. Keywords: Standard Deviation; Sharpe ratio; Bata; Alpha; R-squared; Treynor Ratio 1. INTRODUCTION Financial Market is the indicator of the economic growth and progress of a country. The success of every financial market depends upon the instruments traded in that market. Amongst the various market instruments, mutual fund is one of the most popular and effective investment mechanisms. Now days, mutual funds play an important role in an individuals investment strategy as they are one of the most effective way for investors to participate in the financial market. Through mutual funds, investors are able to diversify the risk by spreading the investment across different type of securities. With the increasing performance of mutual funds, it has become the investors vehicle of choice for long term investment. Due to the increasing preference of investor towards mutual funds, mutual fund companies came up with variety of large cap equity and debt mutual fund schemes. Thus the need arises to study the risk-return dynamics of various mutual fund schemes. Such risk-return dynamics will help investors in selecting the right mutual fund. Various studies had been conducted to evaluate the performance of mutual funds. Sharpe [1] advocated and developed a compound measure of valuation of funds which considers both risks and returns. The performance of 34 open ended mutual fund schemes was valuated for the period of He 1

2 Comparative Study on Performance Evaluation of Large Cap Equity and Debt Mutual Fund Schemes 2 had developed various measures so as to assess the performance. It was then concluded that that good performance was associated with low expense ratio and only low relationship was discovered between fund size and performance. Saha and Murthy [2] identified that return, liquidity, safety and capital appreciation played a principal role in the preference of the schemes by investors. The preference of the households towards shares and debentures was 7 percent by Mutual funds being an alternative way for direct purchase of stocks should be managed effectively adopting investment analysis, valuation models, and portfolio management techniques. The study suggested that, fund managers could adopt portfolio selection techniques to make more informed judgments rather than making investments on an intuition basis. Jayadev [3] computed the performance level of 62 mutual funds schemes using their net asset values for a period between 1987 and He stated superior performance for greater part of the sample schemes when total risk was measured. In the context of systematic risk, he stated that only 24 out of 44 schemes outperformed the benchmark portfolio. He was not convinced with the diversification of the mutual funds done in the country. Rao [4] studied the financial performance of select open-ended equity mutual fund schemes for the period 1st April st March 2006 pertaining to the two dominant investment styles and tested the hypothesis whether the differences in performance are statistically significant. The study classified the 419 open-ended equity mutual fund schemes into six distinct investment styles. It was found that the growth plans generated higher returns with high risk than that of dividend plans. Sondhi and Jain [5] examined the market risk and investment performance of equity mutual funds in India. For this, study used a model of 36 equity fund for a period of 3 years. It was examined whether high beta of funds produced high returns. The results of the study confirmed with the empirical evidence produced by fama (1992) that high beta funds (market risks) may not necessarily produced high returns. The study revealed that the category, size and ownership have been significantly a prominent determinant of the performance of mutual funds during the study period. Debashish [6] measured the performance of the equity based mutual funds in India. 23 schemes were studied over a period of April 1996 to March 2009 (13 years). The study used various tools like mean return, beta risk, and coefficient of determination, sharpe ratio, Treynor ratio and Jensen alpha for the analysis. The first analysis had been done on the basis of returns, followed by a comparison between market returns and the return on schemes. It was concluded that UTI mutual fund schemes and Franklin Templeton schemes have performed excellently in public and private sectors respectively. Further, on the basis of the parameters like Sharpe ratio, Deutsche, Franklin Templeton, Prudential ICICI (in private sector) and SBI and UTI (in public sector) mutual funds schemes have out-performed the market portfolio with positive values. However, the overall analysis finds Franklin Templeton and UTI being the best performers, and Birla Sun Life, HDFC and LIC mutual funds showing poor below-average performance when measured against the risk-return relationship models and measures. Prajapati and Patel [7] examined the performance evaluation of Indian mutual funds is carried out through relative performance index, risk-return analysis, Treynor s ratio, Sharp s ratio, Sharp s measure, Jensen s measure, and Fama s measure. For this daily closing NAVs for the period is 1st January 2007 to 31st December, 2011had been used. The results of performance measures suggested that most of the mutual fund have given positive return during 2007 to 2011.Anand and Murugaiah [8] suggested that that the mutual funds were not competent enough to compensate the investors for the additional risk that they have taken by financing in the mutual funds. The study states that the market factors influences more when the funds performance is negative whereas the fund managers skill is more influential when the fund is generating good returns and showing improved performance. Famas methodology was used for the purpose of study whereby the performance of mutual funds was studies for a long period between April 1999 and March It thus evaluated the performance of 113 schemes of mutual funds and observed that the market return factors and expected market risk are more closely related with the returns associated with the funds. From the above discussion, it can be concluded that most of the researchers evaluate the performance

3 Table 1. Companies included in the sample Equity Mutual Fund Schemes Debt Mutual fund Schemes UTI opportunities fund (G) UTI Short Term Income Fund (G) Axis equity fund (G) SBI Short Term Debt Fund (G) SBI Blue chip equity fund (G) TATA Short Term Bond Fund (G) ICICI Pru focused blue chip equity fund (G) Religare Invesco Credit Opportunities Fund Retail (G) Kotak 50 (G) ING Short Term Income Fund (G) Principal large cap fund (G) Birla sun life frontline equity fund (G) IDBI Short Term Bond Fund (G) L&T India large cap fund (G) Quantum long term equity fund (G) of equity mutual funds schemes. Very few studies had been conducted to evaluate the performance of debt mutual fund schemes. Therefore the present study attempts to compare and evaluate the performance of both large cap equity and mutual fund schemes. The importance of this research study lies in the understanding and comprehending the performance of various large cap equity investment schemes and short term debt schemes in mutual funds. This is not only significant for investors but also for the asset management companies so as to evaluate their portfolio and performance. 2. OBJECTIVES OF THE STUDY To compare the performance of various large cap equity investment schemes offered by various asset management companies. To compare the performance of debt investment schemes of selected companies vis--vis the market 3. RESEARCH METHODOLOGY 3.1 Data The data consists of returns and volatility measures of sample equity and debt mutual funds schemes. The returns on the investments of the schemes have been collected from the respective fact sheets of the asset management companies which are duly published by them on monthly basis. The values have been taken for the last three years ( ) and CAGR since Inception. The data on all the volatility measures have been collected from the Economic India website. For computing volatility ratio, a monthly return for 3 year is taken in case of equity funds and weekly return of 1.5 years is taken in case of debt funds. 3.2 Sample Table 1 shows the equity and debt mutual fund scheme companies included in the sample selected for the study. 3

4 Comparative Study on Performance Evaluation of Large Cap Equity and Debt Mutual Fund Schemes 3.3 Tools of Research: In the current study, the following research tools have been applied to reach at the results: Beta- Beta coefficient is yet another measure to check the volatility, especially the systematic risk of an investment portfolio in comparison to the market performance. This measure helps in comparison of a funds risk with that of a benchmark and thus depicts the difference between the both. A fund with a beta greater than 1 is considered more volatile than the market, less than 1 means less volatile. The test had been supported by studies conducted by Debashish [6] and Prajapati and Patel [7]. Alpha- It can be calculated as the excess return of a fund in comparison to its benchmark index. It is again a measure of performance on a risk-adjusted basis. It takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund s alpha. Debashish [6] and Prajapati and Patel [7] had used alpha for the same purpose. Sharpe ratio- Sharpe Ratio is a measure to quantify the performance of a fund in respect to the risk associated with it. It is calculated by dividing the excess of fund returns over the returns of assured investment by the standard deviation of such returns. The highest value of Sharpe ratio indicates that the fund is performing good considering the amount of risk involved. The ratio measures the risk adjusted performance. The test had been used by Debashish [6] and Prajapati and Patel [7]. Treynor Treynor ratio is again a risk-adjusted measure of return based on systematic risk. It is quite similar to the Sharpe ratio, with the basic difference being that the Treynor ratio uses beta as the measurement of volatility. It is a measurement of a portfolio s return earned in excess of what would be earned on a risk-free investment. The higher the value of Treynor ratio, the better is the performance of the portfolio of the investment. The same test had been used by Debashish [6] and Prajapati and Patel [7] in their studies. Standard Deviation- The standard deviation of an average is the amount by which the numbers that go into an average deviate from the same. It represents that how closely does the average represents the underlying numbers. In the case of mutual funds, the standard deviation calculates the deviation of fund s recent performance in regard to its long term average. This is one of the most popular measures of risk which surely has a distinct advantage over others, especially beta. On one hand the standard deviation measures the funds recent performances whereas the beta compares the funds returns in comparison to its benchmark and other competitors. R-squared- R-Squared is yet a statistical measure that signifies the percentage of a fund portfolio s or security s movements that can be explained by movements in a benchmark index. The value of R-squared usually ranges from 0 to 1. The mutual fund with R squared value between signifies that the performance record is closely correlated to the index. On the other hand any fund with a value below 0.7 R squared shows that the fund has not been performing on the lines of the benchmark. The other aspect of R squared is also available for interpretation. It states that if a fund has a high R-squared value, then it means that the fund is not an active fund but a passive index fund. 3.4 Limitations of the study: The present study has the following limitations: Only some equity and debt mutual fund schemes have been considered. Study covers only a study of 3 years which is insufficient to get the precise results. The other performance evaluation tools like Sortino ratio, Stutzer index, etc are excluded from the present study. 4

5 Table 2. Annualized returns of large cap equity cap schemes Large cap equity cap Schemes Average CAGR since inception UTI opportunities fund (G) 4.79% 4.84% 14.23% 7.95% 15.23% Axis equity fund (G) 17.10% -4.37% 6.06% 6.26% 7.75% SBI Blue chip equity fund (G) 16.10% -5.40% 3.30% 4.67% 27.80% ICICI Pru focused blue chip equity fund (G) 10.76% -2.52% 13.47% 7.24% 12.22% Kotak 50 (G) 12.18% -6.31% 9.81% 5.23% 20.35% Principal large cap fund (G) 16.51% 3.60% 6.83% 8.98% 15.21% Birla sun life frontline equity fund (G) 15.84% -5.13% 6.76% 5.82% 23.35% L&T India large cap fund (G) 7.92% -5.89% 7.62% 3.22% 4.07% Quantum long term equity fund (G) 9.76% 0.05% 8.97% 6.26% 12.92% Source: Authors Own Work 4. DATA ANALYSIS 4.1 Analysis of Large cap equity schemes- Objective 1 The Funds/schemes which invest a greater proportion of their corpus in equity of companies with large market capitalization are called as large cap funds or large cap equity schemes. The large cap company usually means the companies with huge market capitalization. These are also called as Blue-chip companies in the investment community ANNUAL RETURNS Table 2 shows the annualized returns of large cap equity cap mutual fund scheme for the period The highest mean returns are generated by Principal Large Cap fund scheme followed by UTI opportunities fund. The analysis of Table 2 clearly reveals that compounded annualized percentage return since inception ranges between 4.07% and 27.80%. The highest CAGR since inception is given by SBI Blue chip equity fund (G). In the year , performance of all the all schemes was found to be poor with the exception of UTI opportunities fund, Principal large cap fund and Quantum long term equity fund. But in year 2013, all the schemes generated positive returns Beta The lowest value of beta is of UTI opportunities fund which is 7.2. On the other hand, the highest value is of Birla sun life frontline equity fund which is The lowest value depicts that the degree of risk associated with the fund is less, thus suitable for conservative investors. Whereas the funds with a high value of beta relates to high degree of risk. High risk makes the fund more unpredictable in nature Alpha The highest value of Alpha for the above schemes is of UTI opportunities fund which is 3.64%. On the other hand the lowest value is of Principal large cap fund which is -2.88%. It means that UTI opportunities 5

6 Comparative Study on Performance Evaluation of Large Cap Equity and Debt Mutual Fund Schemes Figure 1. shows the beta value of large cap equity mutual fund scheme Figure 2. shows the alpha of large cap equity mutual fund scheme fund has been outperforming its benchmark by 3.64% which shows a good performance on the behalf of fund whereas the Principal large cap fund has been underperforming in respect to its benchmark. Figure 3. shows the sharpe ratio of large cap equity mutual fund scheme 6

7 Figure 4. shows the Treynor ratio of large cap equity mutual fund scheme Sharpe Ratio Figure 3 shows the highest value of Sharpe Ratio is of UTI opportunities fund which is It indicates that the fund is performing well in respect to the risk associated with it. On the other hand the lowest amount of Sharpe Ratio is of Principal large cap equity fund which is This shows that the fund is not performing well in response to the risk involved hereby Treynor In this analysis, the highest value of Treynor is of UTI Opportunities fund (G) which is It means that the funds performance in accordance to systematic risk is high. Whereas the lowest value of Treynor in this case is of Principal Large Capital Fund (G) which is It can interpret that the funds performance has not been satisfactory when calculated in respect of systematic risk Standard deviation Figure 5 shows the highest value of standard deviation is of Birla sun life frontline equity fund which is 17.13% whereas the lowest value is of UTI opportunities fund which is 14.63%. This means that the most volatile fund amongst them is Birla sun life frontline equity fund, i. e. it has the highest amount of risk associated with it. On the other hand UTI opportunities fund has the least amount of risk involved. The average standard deviation value of these funds is % R squared In the above analysis, the highest value of R-Squared is of ICICI Pru focused blue chip equity fund (G), Birla sun life frontline equity fund (G) and L&T India large cap fund (G) which is It indicates that these three funds are closely related with their respective benchmarks. On the other hand, the least 7

8 Comparative Study on Performance Evaluation of Large Cap Equity and Debt Mutual Fund Schemes Figure 5. shows the standard deviation of large cap equity mutual fund scheme Figure 6. shows the value of R-squared of large cap equity mutual fund scheme value of R-squared is of UTI opportunities fund (G) which is It shows that the funds performance is relatively less correlated with that of its benchmark. The analysis shows that if the value of R-squared is high it means that these above three funds are more passive in nature. 4.2 Analysis of Debt Mutual Fund schemes- Objective Beta The highest value of Beta is of UTI short term Income fund, TATA short term bond fund and ING short term income fund with the value of Contrary, the lowest value is of Religare Inveso Credit Opportunities fund retail is of The lowest value depicts that the degree of risk associated with the fund is less, thus suitable for conservative investors. Whereas the funds with a high value of beta relates to high degree of risk. High risk makes the fund more unpredictable in nature. 8

9 Figure 7. shows value of beta of debt mutual fund schemes Figure 8. shows value of alpha of debt mutual fund schemes Alpha The highest value of Alpha is of UTI Short term Income fund which is 3.05%. On the other hand, the lowest value of Alpha is of Religare Inveso Credit Opportunities Fund Retail which is 1.61%.It means that UTI short term Income fund has been outperforming its benchmark by such percentage which shows a worthy performance on the behalf of fund. The Religare Inveso Credit Opportunities Fund Retail has been outperforming its benchmark but relatively lessto its contenders Sharpe Ratio The highest value of Sharpe Ratio is of Religare Invesco Credit Opportunities Fund Retail which is 8.56 whereas the lowest value is of UTI Short Term Income Fund (G) which is High value of Sharpe indicates that the fund is performing well in respect to the risk associated with it. On the other hand the lowest amount of Sharpe Ratio shows that the fund is not performing well in response to the risk involved herein. 9

10 Comparative Study on Performance Evaluation of Large Cap Equity and Debt Mutual Fund Schemes Figure 9. shows Sharpe ratio of debt mutual fund schemes Figure 10. shows Treynor ratio of debt mutual fund schemes Treynor The highest value of Treynor is of Religare Invesco Credit Opportunities fund which is 55.44% whereas the lowest value is of ING Short Term Income Fund (G) which is 26.91%. High value of Treynor indicates that the funds performance in accordance to systematic risk is high. On the other hand the lowest values can be interpreted that the funds performance has not been relatively satisfactory when calculated in respect of systematic risk Standard deviation The highest value of Standard Deviation is of UTI Short term Income Fund is 1.11%, whereas the lowest value is of Religare Invesco Credit Opportunities Fund Retail (G) is of 0.19%. %. This means that the most volatile fund amongst them is UTI short term income fund, i. e. it has the highest amount of risk associated with it. On the other hand Religare Invesco Credit Opportunities Fund Retail has the least amount of risk involved with it. 10

11 Figure 11. shows standard deviation of debt mutual fund schemes Figure 12. shows value of R-Squared of debt mutual fund schemes R squared The highest value of R-Squared is of UTI short term income fund which is 0.2. It shows that this fund is closely related with its respective benchmark. The lowest value is of TATA short term bond fund which has a zero value of R-squared. It means that this fund is not at all related with its benchmark. 4.3 Suggestions The present study has the following suggestions: More equity and debt mutual fund schemes can be considered to get more appropriate results. Time period can be extended to get the precise results. The other performance evaluation tools like Sortino ratio, Stutzer index, etc can be considered so that more appropriately comparative study can be done. 5. CONCLUSION 5.1 For large cap equity mutual fund Scheme From the above analysis, it can be concluded that the highest value of standard deviation is of Birla sun 11

12 Comparative Study on Performance Evaluation of Large Cap Equity and Debt Mutual Fund Schemes life frontline equity. This means that the most volatile fund amongst them is Birla sun life frontline equity fund, i. e. it has the highest amount of risk associated with it. On the other hand UTI opportunities fund has the least amount of risk involved. The highest value of Sharpe Ratio is of UTI opportunities fund which is It indicates that the fund is performing well in respect to the risk associated with it. The lowest value of beta is of UTI opportunities fund which is 7.2. On the other hand, the highest value is of Birla sun life frontline equity fund which is The lowest value depicts that the degree of risk associated with the fund is less, thus suitable for conservative investors. Whereas the funds with a high value of beta relates to high degree of risk. High risk makes the fund more unpredictable in nature. The highest value of Alpha for the above schemes is of UTI opportunities fund which is 3.64%. On the other hand the lowest value is of Principal large cap fund which is -2.88%. It means that UTI opportunities fund has been outperforming its benchmark by 3.64% which shows a good performance on the behalf of fund whereas the Principal large cap fund has been underperforming in respect to its benchmark. The highest value of R-Squared is of ICICI Pru focused blue chip equity fund (G), Birla sun life frontline equity fund (G) and L&T India large cap fund (G) which is It indicates that these three funds are closely related with their respective benchmarks. On the other hand, the least value of R-squared is of UTI opportunities fund (G) which is The highest value of Treynor is of UTI Opportunities fund (G) which means that the funds performance in accordance to systematic risk is high. In nutshell, it can be said that the out of all equity mutual fund schemes, UTI opportunities fund is the best as it has lowest standard deviation, lowest beta, highest value of alpha, highest sharpe ratio and highest Treynor ratio. Thus UTI opportunities fund has lowest risk as compared to all other equity mutual fund schemes. 5.2 For Debt Schemes Mutual fund schemes The highest value of R-Squared is of UTI short term income fund and this fund is closely related with its respective benchmark. The highest value of Treynor is of Religare Invesco Credit Opportunities fund which is 55.44% whereas the lowest value is of ING Short Term Income Fund (G) which is 26.91%. High value of Treynor indicates that the funds performance in accordance to systematic risk is high. On the other hand the lowest values can be interpreted that the funds performance has not been relatively satisfactory when calculated in respect of systematic risk. The highest value of Sharpe Ratio is of Religare Invesco Credit Opportunities Fund Retail which is 8.56 whereas the lowest value is of UTI Short Term Income Fund (G) which is High value of Sharpe indicates that the fund is performing well in respect to the risk associated with it. On the other hand the lowest amount of Sharpe Ratio shows that the fund is not performing well in response to the risk involved herein. The highest value of Alpha is of UTI Short term Income fund which is 3.05%. On the other hand, the lowest value of Alpha is of Religare Inveso Credit Opportunities Fund Retail which is 1.61%. It means that UTI short term Income fund has been outperforming its benchmark by such percentage which shows a worthy performance on the behalf of fund. The Religare Inveso Credit Opportunities Fund Retail has been outperforming its benchmark but relatively less to its contenders. The highest value of Beta is of UTI short term Income fund, TATA short term bond fund and ING short term income fund with the value of Contrary, the lowest value is of Religare Inveso Credit Opportunities fund retail is of The lowest value depicts that the degree of risk associated with the 12

13 fund is less, thus suitable for conservative investors. Whereas the funds with a high value of beta relates to high degree of risk. High risk makes the fund more unpredictable in nature. From the above it can be concluded that UTI short term Income fund is not performing so in case of debt schemes as it has highest beta and lowest Sharpe Ratio. References [1] W. F. Sharpe, Mutual fund performance, Journal of business, pp , [2] A. Saha and R. M. Y, Managing mutual funds: Some critical issues, Journal of Social and Management Science, vol. 12, no. 1, [3] M. Jayadev, Mutual fund performance: An analysis of monthly returns, Finance India, vol. 10, no. 1, pp , [4] R. N. Dabbeeru, Investment styles and performance of equity mutual funds in india, [5] H. Sondhi and P. Jain, Market risk and investment performance of equity mutual funds in india: Some empirical evidence., Finance India, vol. 14, no. 2, [6] S. Debasish, Investigating performance of equity-based mutual fund schemes in indian scenario, KCA Journal of Business Management, vol. 2, no. 2, [7] K. P. Praja and M. K. Patel, Comparative study on performance evaluation of mutual fund schemes of indian companies., Researchers World: Journal of Arts, Science & Commerce, vol. 3, no. 3, [8] S. Anand and V. Murugaiah, Analysis of components of investment performance-an empirical study of mutual funds in india, in 10th Indian Institute of Capital Markets Conference,