Performanace of tax saving

sehemes in mutual funds

INTRODUCTION
Mutual Fund is a trust that pools the savings of a number of
investors who share a common financial goal. Mutual funds are
one of the best investments ever created because they are very
cost efficient and very easy to invest in. Investors in India opt for
the tax-saving mutual fund schemes for the simple reason that it
helps them to save money. The tax-saving mutual funds or the
equity-linked

savings

schemes

(ELSS)

receive

certain

tax

exemptions under Section 80C of the Income Tax Act. That is one
of the reasons why the investors in India add the tax-saving
mutual fund schemes to their portfolio. The tax-saving mutual
fund schemes are one of the important types of mutual funds in
India that investors can opt for. The present study is carried out to
find out the returns of funds thereby studying the performance of
the tax saving funds in the market. The investor invests the funds
based on the returns, net asset value and also the trend
prevailing in the market. Since the market being high volatile
there is a need to study the performance and comparative
statement of various tax saving funds performing in the market.

NEED FOR THE STUDY

Generally, most of the investors investing in mutual funds in order
to avail tax benefits and also to earn returns, in this connection
they would park their funds in the tax saving schemes. A study
required to analyze the performance of selected tax saving
schemes to fulfill the objectives of the investors. Hence the study
has been undertaken

SCOPE OF THE STUDY

The study is all about understanding the customers perception to
the tax benefit in mutual fund. The purpose of this study of
performance evaluation of tax saving mutual funds by taking five
selected companies which are ICICI, HDFC, SBI, Relince and
Franklin is to employ the resources in such a manner as to afford
for the investors combine benefits of low risk, steady returns, high
liquidity and capital appreciation through diversification and
expert management.

OBJECTIVES OF THE STUDY

The main objective of the study is to make investors aware of
performance and provide information on the comparison of tax
saving funds of selected asset management companies. The
specific objectives are:
To understand the organisation of mutual fund industry.

To employ performance evaluation measure using risk return models.

To compare the performance of selected tax saving schemes in comparison
with market portfolio.
To measure the comparative beta analysis of selected AMC.
To offer suggestion based on the finding arrived from the study.

RESEARCH METHODOLOGY
The following research methodology has been adopted for
assessing the

performance of tax saving funds of selected

Asset Management Companies in the market.

Sources of data
The present study is purely based on secondary data. Top five
ELSS schemes were as per their AUM as on 30th June 2012. The
sample ELSS schemes are HDFC Tax Saver, ICICI Prudential Tax
Plan, Reliance Tax Saver, SBI Magnum Tax Gain and Franklin
India Tax shield. The data is collected from the fact sheets,
reports, websites, magazines, books and journals etc. are
considered. The deviations are properly analyzed. For each of
the scheme, the risk ratios (Average return, Beta, Standard
Deviation, Correlation, Coefficient of Determination, Sharpe
Ratio, Treynors Ratio and Jensen Model) were also observed
carefully and correlated with the returns. Accordingly, proper
findings were found out and conclusions were drawn about the
best performance scheme among all.

TOOLS FOR PERFORMANCE MEASURES

In this study, the tools used for the analysis are Standard
Deviation, Beta, Correlation, Coefficient of Determination,
Treynors Ratio, Sharp Ratio and Jensen Measure for a period of
5 years from 2011 to 2015.
Average Mean: The most popular & widely used measure
for representing the entire data by one value is what most
layman call an average & what the statistician call the
arithmetic mean. It is obtained by adding together all the
items & by dividing this total by the number of items.
X

X
N

Where:
X

= Average Mean

X = Sum of the frequency

N = Total number of frequency.
Standard Deviation: The degree that a single value in a
group of values varies from the mean (average) of the
distribution. Standard deviation is a statistical measure that
uses past performance of an investment or portfolio to
determine the potential range of future performance and
assess the probability of that performance. Standard

deviations can be calculated for an individual security or for

the entire portfolio.

Beta: It describes the relationship between the stocks return and the index
returns. The beta value may be interpreted in the following manner, a 1%
change in Nifty index would cause a 1.042% (beta) change in the particular
fund. It is the slope of characteristic regression line. It signifies that a fund
with a beta of more than 1 will rise more than the market and also fall more
than market.
Where,

Beta

()

n XY ( X Y )
n X 2( X )2

n Number of year
x Returns of the index
y Returns of the fund
Correlation: These correlation values indicate the degree to which the fund's
performance is related to its market (using the benchmark as a proxy for the
market). A high correlation to its benchmark is generally considered to be
favorable for the fund if their investment thesis closely follows the
benchmark.
r=

dxdy
d x 2 d y 2

 Cefficent of Determination: the coefficent of determination is useful

because it gives the proportion of the variance (fluctuation) of one variable
that is predictable from the other variable.
It is a measure that allows us to determine how certain one can be in making
prediction from the certain model/graph.
The coefficent of is the ratio of the explained variation to total variation for
e.g: if r = 0.922, then r2 = 0.850, which means 85% of the total variation in y
can be explained by the linear relationship between x and y. the other 15% of
the total variation are remain unexplained.
Coefficent of Determination = r2
Treynors Ratio: The Treynor Ratio, named after Jack L. Treynor, one of
the fathers of modern portfolio theory, helps analyze returns in relation to the
market risk of the fund. The Ratio, also known as the reward-to-volatility
ratio, provides a measure of performance adjusted for market risk. Higher
the Treynor Ratio, the better the performance under analysis. It is a ratio that
helps the portfolio managers to determine the excess return generated as the
difference between the funds return and the risk free return. The excess
return to beta ratio measures the additional return on a fund per unit of
systematic risk. Ranking of the funds is done based on this ratio.
Treynors Ratio =
Where,

R pR f
p

Avarage return on portfolio.

Rf Risk free rate of return.

p Beta on portfolio
Sharpe ratio: The Sharpe index measures the risk premium of the portfolio
relative to the total amount of risk in the portfolio. The Sharpe measure
should only be used for portfolios but not for single securities. The sharpe
ratio tells us whether the returns of a portfolio are because of smart
investment decisions or a result of excess risk. This risk premium is
difference between the portfolios average rate of return & the riskfree rate of
interest dividing the result by the standard deviation of the portfolio return.
Thus,
Where,

Sharp ratio =

R pR f
p

Avarage return on portfolio.

Rf Risk free rate of return.
p

Standard deviation on portfolio

Jensens Model: Jansens model proposes another risk adjusted performance
measure. Michael Jenson developed this measure and is something referred
as the differential return method. This measure involves evaluation of
returns that the fund has generated Vs the return actually out of the fund
given at that level of systematic risk. The surplus between the two returns in
called Alpha, which measures the performance of a fund compared with the
actual returns over the period. Required rate of return on fund at a given
level of Beta.

Jensen model=R

R m R f
Rf + p
p

Where:
p

= Portfolio beta

Rp

= Average return of portfolio

Rf

= Risk free rate of return

Rm = Average market return

LIMITATIONS OF STUDY
The study was limited by the time constraint; hence extent
to study is not possible.
The study was limited to 5 companies only.
The policy and application are applicable to the particular
assessment year only.
The analysis and interpretation purely based on the data
collected

from

various

website.

The

accuracy

interpretation depends upon the accuracy of these data.

of

 The return from the mutual fund depends upon the returns
of the securities involved in the portfolio. The return from
the market depends upon the efficiency of the market and
other various factor affecting the fund and economy as a
whole. So the researcher doesnt claim the 100% accuracy
of the result conducted from the study.

INDUSTRY PROFILE
The origin of mutual fund industry in India is with the introduction
of the concept of mutual fund by UTI in the year 1963. Though the
growth was slow, but it accelerated from the year 1987 when nonUTI players entered the industry.
In the past decade, Indian mutual fund industry had seen a
dramatic improvement, both qualities wise as well as quantity
wise. Before, the monopoly of the market had seen an ending
phase; the Assets under Management (AUM) was Rs. 67bn. The
private sector entry to the fund family rose the AUM to Rs. 470 bn

in March 1993 and till April 2004, it reached the height of 1,540
bn. Putting the AUM of the Indian Mutual Funds Industry into
comparison, the total of it is less than the deposits of SBI alone,
constitute less than 11% of the total deposits held by the Indian
banking industry.
The main reason of its poor growth is that the mutual fund
industry in India is new in the country. Large sections of Indian
investors are yet to be intellectual with the concept. Hence, it is
the prime responsibility of all mutual fund companies, to market
the product correctly abreast of selling.

COMPANY PROFILE
ABOUT ICICI PRUDENTIAL ASSET MANAGEMENT COMPANY
ICICI Prudential Asset Management Company Ltd. (IPAMC/ the
Company) is the joint venture between ICICI Bank, a well-known
and trusted name in financial services in India and Prudential Plc,
one of UKs largest players in the financial services sectors. IPAMC
was incorporated in the year 1993. The Company in a span of

over 18 years since inception and just over 13 years of the Joint
Venture has forged a position of preeminence in the Indian Mutual
Fund industry as the third largest asset management company in
the country, contributing significantly to the growth of the Indian
mutual fund industry.