INVESTMENT PERFORMANCE OF MUTUAL FUND INCOME

SCHEMES: AN ANALYSIS
Gitanjali Gupta*, Sudha Panwar**, Anand Gupta***

Abstract
During the session of recession every body wants to invest in safest security. There are various
investment modes available with the investors. But according to past experience mutual fund
industry is having a safest image as well as is providing proper returns on the investment. Indian
capital market is growing rapidly since last couple of decades. This research paper shows the
variation in income schemes of mutual funds, NAV and performance of these selected mutual
funds schemes and tells about mutual funds organization. Sharpe, Treynor, Jensen, Standard
deviation and Beta are various methods having different nature and help in determining which
mutual fund scheme is best. The reference period for the study is five years from April 2004 to
March 2009.The results show that Canara Robeco Income Scheme Bonus is having the
maximum return, maximum Sharpe and maximum Alpha and it is having highest Beta also.

INTRODUCTION
A mutual fund is an investment company or trust that pools the resources of thousands of its
shareholders or unit holders and invest these funds on behalf of them in diversified securities,
which in turn achieve income and growth or both for the benefit of the investors. It is easier to
pick an investment strategy, such as growth or income, with mutual funds then buying the
individual securities, since mutual fund companies clearly specify the investment objectives of
each fund that they manage. Mutual fund industry in India started in 1963 with the formation of
Unit Trust of India, at the initiative of the Government of India and Reserve Bank. From 1987-
1992 nine more funds were incorporated. Among them, scheduled commercial banks and one
each by LIC & GIC sponsored seven mutual funds. The central government under its economic
reforms and liberalization policy allowed private sector to enter into mutual fund industry in
February 1992. With the entry of private sector firms into the business the number of mutual
funds in India grew to 27 and number of schemes to 96 in Dec. 1995. The first scheme launched
by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700 crores of assets under
management. The performance of mutual funds in India in the initial phase was not even closer
to satisfactory level. People rarely understood, and of course investment was out of question.

* Gitanjali Gupta, Lecturer- Kedarnath Aggarwal Institute of Management, Charkhi Dadri, Haryana
**Sunha Panwar, Lecturer- Kedarnath Aggarwal Institute of Management, Charkhi Dadri, Haryana
***Anand Gupta, Lecturer- Kedarnath Aggarwal Institute of Management, Charkhi Dadri, Haryana
But yes, some 24 million shareholders were accustomed with guaranteed high returns by the
beginning of liberalization of the industry in 1992. This good record of UTI became marketing
tool for new entrants. The expectations of investors touched the sky in profitability factor.
However, people were miles away from the preparedness of risks factor after the liberalization.

TYPES OF MUTUAL FUNDS

Mutual Fund

On the basis of execution On the basis of yield Others

and operation and investment pattern
Dual fund
Income fund Index fund
Growth fund Off-shore fund
Balance fund Bond funds
Close- Ended Open- ended Specialized fund Property fund
Taxation fund Fund-of-fund

REVIEW OF EXISTING LITERATURE

A large number of studies have been performed on mutual funds till now. Different articles and
research papers have been published on the same.

Sahadevan and Thiripalraju, in their research paper titled “Mutual Funds - Data
Interpretations And Analysis” (1997), analyzed the performance of private sector funds they
compiled and analyzed the monthly average return and standard deviation of 10-selected private
sector funds. The investigation reveals that in terms of the rate of return, 5 funds viz., Alliance
95, ICICI Power, Kothari Prima, Kothari Pioneer Blue Chip and Morgan Stanley Growth Fund
out performed the market, during the period of comparison. The analysis also shows that, by and
large, performance of a fund is not closely associated with its size.

Gupta & Sehgal, in their research paper “Investment Performance of Mutual Funds: The
Indian Experience” (1998), tried to find out the investment performance of 80 schemes
managed by 25 mutual funds, 15 in private sector and 10 in public sector for the time period of
June 1992-1996. The study has examined the performance in terms of fund diversification and
consistency of performance. The paper concludes that mutual fund industry’s portfolio
diversification has performed well. But it supported the consistency of performance.
Turan and Bodla, in the paper “Performance Appraisal of Mutual funds” (2001) examined
the growth of mutual funds in India in terms of resource mobilization, promotion of various
types of schemes and NAV based risk and return. The study reveals that mutual fund industry
has registered a sharp rise in term of resource mobilization during the period 1990-1991 to 1997-
1998.
Matthew and Hrishikesh, in their paper named “Estimation Risk in Mutual Fund Ratings:
The Case of Morningstar” (May 17, 2001) examined estimation risk in the well-known
Morningstar mutual fund star rating system. As a result, investors can be somewhat less
confident that the ratings of young funds are truly what they are estimated to be.
John A. Haslem, in the paper “A Tool for Improved Mutual Fund Transparency” (2004)
provided a broad treatment of transparency and the specific normative data and information that
are essential to make transparency effective for meeting the normative needs of shareholders.
Shareholders need fund transparency that represents their role as fund owners, and which
provides them with needed online disclosure for informed decision making.
David A. Volkman, in his paper “Market Volatility and Perverse Timing Performance of
Mutual Fund Managers” (Oct., 2006) studied recent volatility in the equity markets; he
investigated performance evaluation methods and the mutual fund managers' ability to select
undervalued investments and time major market movements during the high-market-volatility
period of the 1980s. Specifically, he examined mutual fund managers' stock selection and
market timing abilities.

Bodla and Sunita, in their paper “Emerging Trends of Mutual Funds in India: A Study
Across Category and Type of schemes” (2007) examined the growth of Indian mutual fund
industry in terms of increase in number of schemes and funds mobilized. The analysis has been
carried across nature, type and sector of the schemes. The result shows that the total schemes
have grown to above 1200 and the total purchases during 2006 crossed Rs. 3.5 lakh crores. The
private sector funds and joint ventures have outperformed the public sector funds.

Tetsuya Kamiyama, in the paper “India's Mutual Fund Industry” (2007) provided an
overview of the assets managed within India's mutual fund market, both now and in the past, and
of the legal framework for mutual funds, and then discussed the current situation and recent
trends in financial products, distribution channels and asset management companies.
Prateek Motwani, in his paper “Indian Mutual Fund Industry - The Road Ahead!!!!” (Oct.
25, 2008) examined the evolution of the Indian mutual fund industry and then progresses with
the comparison of the current scenario of Indian Mutual Fund Industry. It also encompasses
certain economic conditions like the savings of the people in the initial phase & what it is today.
And based on the savings how has the change in investment strategies in Mutual fund industry is
been analyzed.
Jennifer C. Huang, Clemens Sialm, in their paper “Hanjiang Zhang Risk Shifting and
Mutual Fund Performance” (Dec. 4, 2008) studied about and concluded that Mutual funds
change their risk levels significantly over time. This paper investigates whether risk shifting has
an impact on fund performance. This result is consistent with risk shifters having inferior ability
or acting opportunistically due to agency conflicts and inconsistent with skilled fund managers
taking advantage of changing investment opportunities.
OBJECTIVES OF THE STUDY AND RESEARCH METHODOLOGY

The purpose of the present study is to compare and evaluate the performance of various income
schemes of mutual funds. The performance criterias undertaken are return, risk, Beta, excess
return per unit of risk and risk adjusted performance. To come to the findings, secondary data has
been used and the same has been taken from amfiindia.com and mutulfundsindia.com. Simple
random sampling has been followed. The study is based on sample size of 25 Income Schemes
of Mutual Funds and the monthly NAV for these schemes has been taken. The period undertaken
for the study is April 2004 to March 2009. Return of various schemes has been compared with
the market return and risk free rate on treasury bills has been taken for Rf i.e. Return on risk free
asset.

PERFORMANCE OF MUTUAL FUND

The performance of a portfolio is measured by combining the risk and return levels with single
value. The differential return earned by a portfolio may be due to the difference in the risk
exposure from that of say, the stock exchange. The difference between the required rate of return
on a mutual fund investment and the risk free rate is the risk premium. This study that is based
on various tools like beta, Sharpe Index, Treynor Index and Jenson method. Analysis is made on
the basis of risk and return taken by investors by investing in various schemes. For this study we
are taking 25 income schemes for last 5 years and we have used primary data about NAV of
schemes from websites of SEBI, AMFI, some mutual funds, newspapers and e-papers.

Analysis of Data
Data analysis is the most important part of the research, which ultimately leads to the results and
findings of the present study. There are various methods and techniques of data analysis, which
are as follow:

Portfolio’s return (Rp) is calculated by using the following formula:

Rp = (NAVt - NAVt-1) + Dt + Ct
NAVt-1
The risk is calculated by determining the standard deviation and the formula to calculate standard
deviation is

Standard deviation of the portfolio = (RP - RP) 2

n–1

Systematic risk is that fluctuation which occurs due to the unavoidable or uncontrollable factor
such as interest rate, inflation rate and other market factors. So this risk plays a more important
part in evaluation of the fund performance. This is represented by beta and calculated as follows:
Beta = Cov (RP, RM) / σp2 (RM)
 RP = Portfolio Return
RM = Market Return
σp2= Square of S.D
Sharpe Ratio
It is rewarded to variability ratio given by W. F. Sharpe in 1966. It is expressed as the excess
return per unit of risk, where risk is measured by the standard deviation of the rate of return.
Sp = (Rp – Rf) / σp
Where
Sp = Sharpe’s ratio for fund p,
Rp = Average return on fund p,
σp = Standard deviation of return on fund p, and
Rf = Return on risk free asset.
Treynor’s Ratio
It is reward to volatility ratio given by Jack Treynor in 1965 and is expressed as a ratio of
returns to systematic risk (beta).
In mathematical terms:
Tp = (Rp – Rf) / βp
Where
Tp = Treynor’s ratio for fund p,
Rp = Average return on fund p,
βp = Sensitivity of fund return to market return, and
Rf = Return on risk free asset.

Jensen measure
Jensen model is another risk adjusted performance measure.
In mathematical terms:
Alpha (a) = Rp – E (Rp)
Where
Rp = Average return on fund

Result and Performance

Table 1 (Appendix) shows that the total market return is 28.717. The return of five schemes is
negative and others are positive. Maximum return during the period is of Canara Robeco Income
Scheme Bonus followed by Kotak Income Plus. Minimum return during the period is of
Principal Income Fund-Growth. Table also shows the risk in various schemes. Principal Income
Fund-STP-IP shows the minimum risk out of 25 schemes taken for the study. SBI Magnum
Income Plus Fund-Saving Plan holds the second position. Maximum risk is shown by Principle
income fund Growth Schemes. Beta is showing the systematic risk in the table. It is a measure of
volatility in the market, which is 0.369263. Out of 25 schemes, Canara Robeco Income Scheme
Bonus is having the highest beta. Minimum beta is of Principle Income fund Growth Schemes.
Eight schemes are having positive beta. Table 2 (Appendix) is based on the Sharpe, Treynor and
Jenson which reveals that in Sharpe Index, Canara Robeco Income Scheme Bonus, Kotak
Income Plus, Birla Sun life Income fund are having 1st, 2nd and 3rd position respectively and
minimum Sharpe Index, is shown by Principle Income Fund STP-IP. Treynor Index is explaining
that Tata Income fund appreciation bonus is at top followed by Birla Sunlife Cash Plus and
Tauras Income fund growth. According to Treynor Index minimum return is shown by Tata
Income fund Growth Schemes in the table which further reveals that in Canara Alfha Robeco
Income Scheme Bonus is at 1st place, 2nd position is held by Escort Income Scheme Bonus, and
the third position goes to Birla Sunlife income fund respectively. The above results prove the
claim of financial theorists that higher the risk higher the return. Thus , the equity mutual funds
have beaten the market over the last five years.

Conclusion
In the present scenario, the mutual fund investor in India has so many schemes to choose from
and the decision to invest has become a difficult one. With a rapid increase in the number of fund
houses and schemes, investors face a greater challenge in evaluating a particular fund’s
performance. However, the use of a systematic performance evaluation technique helps the
investors to take wise decisions so that they are able to achieve their investment objectives.
Performance data quoted above represents the past performance. Due to market volatility, current
performance may be less or higher than the figures shown. Investment return and principal value
will fluctuate so that upon redemption, shares may be worth more or less than their original cost.
In the conclusion we can say that Canara Robeco Income Scheme Bonus is having the maximum
return, maximum Sharpe and maximum Alpha and it is having highest Beta also. Theory is
proved that maximum return is followed by maximum risk. The major findings of the study are
listed below:-

Canara Robeco Income Scheme Bonus is having the maximum return, maximum Sharpe
and maximum Alpha and it is having highest Beta also.

Out of the 25 income schemes undertaken for the study 5 schemes having the negative
returns during the specified period.

It is also found out that there is a huge gap between the market return and the return
provided by the 20 income schemes.

On the basis of Jenson’s model of risk adjusted performance measurement 12 schemes
are showing the negative performance.

According to Sharpe ratio, it is analyzed that 24 out of 25 income schemes have been
failed in providing excess return per unit of risk.
REFRENCES

Sahadevan, K.G. and Thiripalraju (1997), “Mutual Funds - Data Interpretations And
Analysis”, Prentice Hall of India Private Limited, New Delhi, (1997).

Gupta O.P. and Sehgal Sanjay (1996), “Investment Performance of Mutual Funds:
The Indian Experience”, ICFAI Journal of Applied Finance, Vol. No 2, April, pp.25-36.

Turan and Bodla (2001), “Performance Appraisal of Mutual funds” First Edition
Excel Books Publications, New Delhi.

R. Morey Matthew and D. Vinod Hrishikesh, Pace University - Lubin School of
Business - Department of Finance and Economics, Fordham University - Department of
Economics, “Estimation Risk in Mutual Fund Ratings: The Case of Morningstar”
May 17, 2001.

Narsimhan, M.S. and Vijayalakshmi S., “Performance Analysis of Mutual funds in
India”, Finance India, Vol. XV, No.1, March 2001, PP. 155-174.

Bodla, B.S. and Sunita (2007), “Emerging Trends of Mutual Funds in India: A Study

Across Category and Type of schemes” A paper accepted for publication in a journal

published by Department of Management, Vaishnov Devi University, Jammu.

Dr Singh Jaspal, “Mutual funds Growth, Performance and Prospects” Deep & Deep

Publications Pvt. Ltd.2006.

“Measuring mutual fund performance” Portfolio Organizer the ICFAI University

Press, April2008, pp 30-34

“Emerging issues in Indian mutual fund industry” Portfolio Organizer the ICFAI

University Press March 2008, pp 51-56

Gordon E., Dr. Natarajan K., Financial Markets And Services, Himalaya Publishing

House, Edition 4th, pp 294-319.

Abhinav Jain, “Mutual Fund industry on a consolidation spree” Chartered Financial

analyst May 2003.


Dr. Subhash Chander, Dr. Jaspal Singh – “Performance of Mutual Fund in India–An

Empiricial Evidence”, The ICFAI Journal of APPLIED FINANCE, June 2004.

Singh, H.K. Singh, Meera, Mutual funds and Indian capital market – Performance and

Profitability, 2001-2002.

www.amfiindia.com

www.sebi.com

www.mutualfundsindia.com

www.ssrn.com

www.kotakmutual.com

www.licmutual.com

www.hdfcfund.com

www.reliancemutual.com

www.taurasmutualfund.com
 Appendix
TABLE 1: AVERAGE MONTHLY RETURN AND RISK STATISTICS OF VARIOUS
INCOME SCHEMES FROM APRIL 2004 TO MARCH 2009
Sr.
FUND NAME RETURN RANKING RISK RANKING BETA RANKING
No
1 Birla Sun Life Cash Plus-IP -4.943 24 0.099 22 -0.049 16

2 Birla Sun Life Income Fund 54FA 6.175 3 0.055 19 -0.278 6

3 Canara Robeco Income Scheme Bonus 12.928 1 0.121 24 -0.366 1

4 Escort Income Plan-Bonus 5.225 8 0.021 6 -0.257 7

5 Escort Income Plan-Growth 5.543 7 0.015 4 -0.354 3

6 HDFC Income Fund -0.503 22 0.031 11 -0.234 9

7 ICICI Prudential Income Fund 1.353 19 0.030 10 0.103 20

8 ING Income Fund 1.878 16 0.028 9 -0.251 8

9 JM Income -Bonus 3.210 14 0.027 8 -0.186 12

10 JM Income -Growth 3.515 12 0.022 7 -0.217 10

11 Kotak Income Plus 6.486 2 0.046 15 0.319 23

12 Principal Income Fund-Growth -5.545 25 0.197 25 0.358 25

13 Principal Income Fund-STP-IP -0.208 21 0.004 1 0.348 24

14 Reliance Income Fund-Retail 4.285 10 0.083 21 -0.172 13

15 Sahara Income Fund 2.238 15 0.035 14 0.289 22

16 SBI Magnum Income-ERP-LT 1.326 20 0.011 3 -0.365 2

17 SBI Magnum Income-Growth 3.553 11 0.032 12 -0.146 14

18 SBI Magnum Income Plus Fund-Saving Plan 1.388 17 0.010 2 0.112 21

19 Sundaram BNP Paribas Income Plus Growth 4.483 9 0.019 5 -0.313 4

20 Sundaram BNP Paribas Income Plus 18 13 5

Dividend 1.375 0.033 -0.306

21 Tata Income fund Appreciation-Bonus 5.568 6 0.050 16 0.001 19

22 Tata Income fund Appreciation 5.598 4 0.051 18 -0.001 17

23 Tata Income Fund-Growth 5.573 5 0.051 17 0.001 18

24 Tauras Income Fund-Growth -1.043 23 0.106 23 -0.212 11

25 Tauras Income Fund-Dividend 3.418 13 0.080 20 -0.124 15

Market Return 28.717 0.283 0.369

Source: Data of return and risk is complied from amfiindia.com, and mutualfundsindia.com
 TABLE 2: SHARPE’S, TREYNOR’S AND JENSEN’S INDEX BASED ON THE DATA
FROM APRIL 2004 TO MARCH 2009
Sr.
FUND NAME SHARPE RANKING TREYNOR RANKING JENSON RANKING
No.
1 Birla Sun Life Cash Plus-IP -1.165 15 2.349 2 -0.099 22
2 Birla Sun Life Income Fund 54FA -0.070 3 0.014 16 0.059 3

3 Canara Robeco Income Scheme Bonus 0.525 1 -0.174 19 0.121 1

4 Escort Income Plan-Bonus -0.634 10 0.052 14 0.047 6

5 Escort Income Plan-Growth -0.658 11 0.029 15 0.072 2

6 HDFC Income Fund -2.294 22 0.302 4 -0.002 14

7 ICICI Prudential Income Fund -1.744 21 -0.506 23 -0.080 20

8 ING Income Fund -1.654 20 0.187 7 0.021 9

9 JM Income -Bonus -1.254 17 0.180 8 0.014 11

10 JM Income -Growth -1.415 18 0.140 11 0.024 8

11 Kotak Income Plus -0.016 2 -0.002 17 -0.072 19

12 Principal Income Fund-Growth -0.616 9 -0.338 21 -0.244 25

13 Principal Income Fund-STP-IP -16.358 25 -0.194 20 -0.168 24

14 Reliance Income Fund-Retail -0.275 7 0.133 12 0.019 10

15 Sahara Income Fund -1.234 16 -0.150 18 -0.120 23

16 SBI Magnum Income-ERP-LT -4.983 23 0.144 10 0.048 5

17 SBI Magnum Income-Growth -0.938 13 0.206 6 0.007 12

18 SBI Magnum Income Plus Fund- 24 22 21
Saving Plan -5.105 -0.461 -0.082

19 Sundaram BNP Paribas Income Plus 14 13 4

Growth -1.079 0.066 0.055

20 Sundaram BNP Paribas Income Plus 19 9 7

Dividend -1.567 0.170 0.032
21 Tata Income fund Appreciation-Bonus -0.199 6 -9.301 24 -0.010 17

22 Tata Income fund Appreciation -0.189 4 7.274 1 -0.009 15

23 Tata Income Fund-Growth -0.195 5 -13.559 25 -0.010 16

24 Tauras Income Fund-Growth -0.714 12 0.359 3 -0.013 18

25 Tauras Income Fund-Dividend -0.394 8 0.254 5 0.000 13

Market Return 0.784 0.600 0.222