ABSTRACT:Investor, we are interested in selectingbest mutual fund company that not only help in saving tax but also providehandsome return with least risk. This research paper primarily focuses onselecting the best scheme offered by five best performing mutual fund companiesoperating in India on the basis of asset under management. In order to identifythe best scheme from these companies, we have applied statistical parameterssuch as Jensen Alpha, Beta, standard deviation, Sharpe ratio, Treynor ratio.These statistical parameters helped us in evaluation of risk and return offeredby these schemes. It is found that Franklin India Tax Shield performed best inthe class among the selected mutual fund schemes. Keywords:Beta, Equity LinkedSavings Schemes, Jensen’s Alpha, Sharpe Ratio, Standard Deviation, mutual fund I.
INTRODUCTIONThesustained economic development of an economy depends on capital formation andits allocation. Capital formation arises out of the investment of savings. Suchallocation of savings can either be into risky assets or riskless assets. Theinvestment into risky assets provides what is termed as risk capital. Riskcapital also known as equity capital is a major and important source of financefor organized businesses. Mutual funds are one of the important means ofpooling small amount of savings from a large number of people and investingthem into diversified pool of assets with varying degrees of risk. Moreparticularly, equity mutual funds are a good source of accumulating largeamounts of risk capital.
In order to encourage and incentivize small investorsto invest into equity mutual funds, the Government of India in the year 1992introduced the Equity Linked Savings Scheme (ELSS). ELSS is a type of diversifiedequity mutual fund which provides an income tax incentive to the investor forthe investment made. The incentive currently is in the form of a deduction fromincome, U/s 80 C of the Income Tax Act, up to an amount of Rs 150000, towardsthe investment made during the financial year.
ELSS mutual funds as theyprovide a tax deduction, are subject to certain regulatory restrictions, whichmake them distinct from the regular diversified equity mutual funds. Theregulatory restrictions that make ELSS funds distinct from regular DiversifiedEquity funds are as follows: 1. The investments into ELSS funds aresubject to a lock in period of 3 years, from the date of investment. In otherwords, investors cannot redeem, transfer or pledge the units for 3 years. Investmentinto regular diversified equity funds do not attract any lock in period2. The ELSS fund’s investment into equity andequity related securities should be a minimum of 80% of the assets undermanagement.
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On the other hand, regular equity funds into order to qualify asequity funds( for tax benefits relating to dividend and capital gains) , arerequired to invest a minimum of 65% of the assets under management into equityand equity related securities. Theabove two regulatory restrictions, one from the point of view of the investorand other from the point of view of the investment manager, apparently makesinvestment into ELSS funds more risky for the investor as compared to otherdiversified equity funds. II. REVIEW OF LITERATURE Alarge number of studies have been done on the growth and financial performanceof mutual funds.2.1Treynor (1965) presents a new way of viewingperformance results.
He attempted to rate the performance of mutual funds on acharacteristics line graphically. The steeper the line, the more systematicrisk or volatility a fund possesses. By incorporating various concepts, hedeveloped a single line index, Tn, called Treynor index. 2.2Sharpe (1966) explains in a modern portfolio theorycontext that the expected return on an efficient portfolio and its associatedrisk (unsystematic risk) are linearly related. By incorporating variousconcepts he developed a Sharpe index. In this paper he attempted to rate the performanceon the basis of the optimal portfolio with the risky portfolio and a risk-freeasset is the one with the greatest reward-to-variability .The unsystematic riskis related to particular security due to inefficient management.
2.3Jenson, Michal C. (1967), The Performance of MutualFunds in the Period 1945 – 1964, The Journal of Finance, Vol 23, No. 2, pp.389– 416. The research paper indicates the past performance of the fund, predictthe future demand of the fund, investors attract to invest in Mutual Fund.
2.4Fama (1972) developed methods to distinguishobserved return due to the ability to pick up the best securities at a givenlevel of risk from that of predictions of price movements in the market. Heintroduced a multi-period model allowing evaluation on a period-by-period andon a cumulative basis. He branded that, return on a portfolio constitutes ofreturn for security selection and return for bearing risk. His contributionscombined the concepts from modern theories of portfolio selection and capitalmarket equilibrium with more traditional concepts of good portfolio management.
2.5Gupta Ramesh (1989) evaluated fund performance inIndia comparing the returns earned by schemes of similar risk and similarconstraints. An explicit risk-return relationship was developed to makecomparison across funds with different risk levels. His study decomposed totalreturn into return from investors risk, return from managers risk and targetrisk.
Mutual fund return due to selectivity was decomposed into return due toselection of securities and timing of investment in a particular class ofsecurities. 2.6Shome (1994)based on growth schemes examined theperformance of the mutual fund industry between April 1993 to March 1994 withBSE SENSEX as market surrogate. The study revealed that, in the case of 10schemes, the average rate of return on mutual funds were marginally lower thanthe market return while the standard. 2.7Gupta and Sehgal (1998) evaluated performanceof 80 mutual fund schemes over four years (1992-96). The study tested theproposition relating to fund diversification, consistency of performance,parameter of performance and risk-return relationship.
The study noticed theexistence of inadequate portfolio diversification and consistency inperformance among the sample schemes. 2.8Ms. Rajeswari T.
R., Prof. V.E. Rama Moorthy (2001)in the paper ?An Empirical Study on FactorsInfluencingthe Mutual Fund Scheme Selection by Retail Investors have expressed that mutualfund is a retail product designed to target small investors, salaried peopleand others who are not intimidated by the mysteries of stock market but,nevertheless, like to reap the benefits of stock market investing. At theretail level, investors are unique and are a highly heterogeneous group.
Hence,their fund/scheme selection also widely differs 2.9Roshni Jayam’s (2002) study brought out thatequities had a good chance of appreciation in future. The researcher was of theview that, investors should correctly judge their investment objective and riskappetite before picking schemes, diversified equity funds were typically saferthan others and index funds were the best when market movements were notcertain. The researcher suggested Systematic Withdrawal Plan (SWP) with growthoption was more suitable for investors in need of regular cash inflows. III.
OBJECTIVES a).to measure the return earned by sample ELSS mutual funds schemes and compareagainst thebenchmark market returnb). to studythe performance of selected ELSS c).to identify the best open ended ELSS on the basis of risk and return IV. RESEARCH METHODOLOGY Data:The study isbased on secondary data.
The Secondary data sources include Fact sheets ofMutual funds, articles, newspapers, AMFI reports and websites Periodof Study:Thegrowth oriented ELSS schemes, which have been floated by the selected fundsduring the period, from June 2012 to June2017, have been considered for thepurpose of the study. Selected mutual funds scheme are in operation since last10 years and these schemes faces all ups and downs of market. BenchmarkIndex:Forthis study, BSE-100, BSE-200 and NIFTY 500. So it would cover the majoritypercentage of different scheme portfolios and therefore is expected to providebetter performance benchmark. Return:Return ontypical investment consists of two components. The basic is the periodic cashreceipts (or income) on the investment, either in the form of interest ordividends. The second component is the change in price of the assets-commonlycalled the capital gain or loss. This element of return is the differencebetween the purchase price and price at which the assets can be sold; thereforeit can be a gain or a loss.
The return canbe calculated as under: Portfolio Return = Market Return = RiskThe risk is calculated on the basisof month-end NAV. The following measures of risks associated with mutual fundshave been for the study: Standard Deviation- The total risk ismeasured by the standard deviation of the monthly returns which was calculatedusing the following formula: Where, x ? is theStandard Deviation of Return.R is the Returnfor the MF scheme for a particular Period,isthe average return;N is the Number of years Coefficientof variation-Expresses the total risk undertakenby the mutual funds under consideration per unit of returned achieved. Morespecifically, the coefficient of variation was given by: Coefficient ofVariation = Beta (?):Beta estimate the systematic risk,is the fund’s volatility as regard market index measuring the extent of comovement of fund with that of the benchmark index. Riskfree rateA risk free rate asset has zero variability of returns.
Inthis study the average yield of 10 year G- security have been taken as a riskfree rate. SharpetechniqueSharpe 11 devised an index ofportfolio performance measure, referred to as reward o variability ratio. TheSharpe ratio provides the reward to volatility trade-off. It is the ratio ofthe fund portfolio’s average excess return divided by the standard deviation ofthe return and is given by: SharpeIndex= TreynorRatioItis also the measure of risk adjusted return.
Here we are taking Beta as risk ofportfolio rather than total risk measured by standard deviation. It isgenerally observed that if we invest in 10 to 15securities than we can able toeliminate the unsystematic risk in the portfolio. Our portfolio risk is subjectonly to systematic risk.
It is a market risk which cannot be eliminated withthe diversification of the securities. Higher the Treynor ratio better it isfor investment. This concept is developed by Jack Treynor Treynor Index= Jensen’sAlphaIttells us whether the return earned on the portfolio is in excess of returncalculate through capital asset pricing model. The portfolio that generatesexcess return is said to have positive alpha and negative alpha for portfoliothat is generating less return than its theoretical value calculated throughcapital asset pricing model.Thisconcept is developed by Michael Jensen.
Alpha(?) = Rp- Rf + ? (Rm – Rf) Limitations of the Study: a) Studied only open ended schemes and close ended schemes wereignored. b) The data is collected isfor limited period i.e., five years c)The study has been conducted and analyzed based on set of availableinformation, which is governed by time factor. V. DATA, DATA ANALYSIS AND INTERPRETAION TABLE 1 – Mutual funds andbenchmark index taken as sample. Code is given to all the scheme and benchmarkindex for the convenient in analysis and interpretation.
Fund name Option Code Bench mark Code Reliance tax saver fund Growth A1 BSE 100 M1 Birla sl tax relief fund 96 Growth A2 BSE 200 M2 Axis long term equity fund Growth A3 BSE 200 M2 DSR BR tax saver fund Growth A4 NIFTY 500 M3 Franklin India tax shield fund Growth A5 NIFTY 500 M3 Table 2:Net asset values of scheme and benchmarkSource: Historical NAVreport from 1-jun-2012 to 01-jun-2017, association of mutual funds in India(amfi.) Date A1 A2 A3 A4 A5 M1 M2 M3 01-06-12 19.99 9.32 11.86 14.93 198.
04 4856.04 1969.54 3851.95 03-06-13 22.94 11.59 15.18 18.56 238.
22 5956.48 2397.14 4659.
30 02-06-14 35.08 15.51 21.58 25.13 310.
15 7482.40 3006.11 5911.70 01-06-15 47.17 21.15 30.
37 32.04 426.69 8536.13 3527.98 6957.45 01-06-16 44.03 22.02 31.
10 33.16 433.78 8284.23 3444.16 6815.45 01-06-17 57.16 27.88 36.
21 42.72 508.81 9926.73 4168.90 8367.15 Table3: Compound growth performance of the sample mutualfunds scheme and benchmark index Year A1 A2 A3 A4 A5 M1 M2 M3 2012-13 14.75 24.
35 27.99 24.31 20.28 22.66 21.71 20.96 2013-14 52.92 33.
82 42.16 35.39 30.19 25.61 25.40 26.
87 2014-15 34.46 38.68 42.40 27.49 37.57 14.08 17.
36 17.68 2015-16 -6.65 2.37 1.
20 3.49 1.66 -2.95 -2.37 -2.04 2016-17 29.
82 26.61 16.43 28.82 17.29 19.82 21.04 22.76 Table4: risk and return analysis of schemes RFrisk free rate of return based on 10 year G securities Mutual Fund RP ?p ? Rm ?m Rf Bench mark A1 25.
06 19.99 1.55 15.84 10.13 7.49 M1 A2 26.
16 12.49 1.07 16.63 9.83 7.
49 M2 A3 26.03 12.00 1.22 16.63 9.83 7.49 M2 A4 23.
9 10.82 1.05 17.25 10.08 7.
49 M3 A5 21.34 12.22 0.87 17.
25 10.08 7.49 M3 Table5: Rankingof fund according to 3 performance ratio. Scheme Name Sharpe Ratio Treynor ratio Jension Fund Rank Fund Rank Fund Rank A1 0.87 5 11.
33 5 4.62 5 A2 1.41 3 16.51 1 7.89 1 A3 1.54 1 15.19 4 7.
38 2 A4 1.51 2 15.62 3 6.16 3 A5 1.13 4 15.91 2 5.35 4 VI.
INTERPRETATION:a) The rate of return from theEquity link saving scheme is higher when compared to the other investmentoptions. Thus, mutual funds ELSS are a better investment avenue to trade-offbetween risk and return b) Investment in Fund A1 is seemsto be risky because the Beta of the fund is 1.55, which have higher value thanother fundc) The A2 fund has a highPortfolio return of 26.16% and A5 fund and has a low portfolio return of21.34%.d) Based on Sharpe method A3scheme has obtained 1st rank when compared with other mutual fund schemes e) Based on Trenor method A2scheme has obtained 1st Rank when compared with other mutual fund schemes f) Based on Jensen’s measure A2 fund has obtained 1st rank whencompared with other mutual fund schemes VII. CONCLUSION:In this paper we analyzed of ELSSfunds in India and analyzed their performance with respect to benchmarkindexes.
The study conducts a comparative performance between ELSS mutual fundschemes and benchmark indexes over the five economic periods. It is observedthat influence of market factor is closely effected behavior of mutual fundsreturns. The correlation is found between mutual funds and benchmark indexreturns are significantly high. The beta coefficient in most of the sampleschemes was higher than one indicates that these mutual funds followedaggressive investment policy. Beta of fund A5 has value lower thanone so it indicates that this mutual fund follow defensive investment policy.The result shows that performances of the majority of sample mutual fundschemes are outperform the market benchmark indexes in term of Treynor andSharpe ratio based on historical monthly returns. The reasons of outperformanceof the funds that fund managers are efficient. They are diversifying the fundsin different stocks which are generating higher returns.
Mutual fund managersalso outperform the Market through their superior security selection andtiming. The analysis shows that Indian Asset Management Company has been ableto beat their benchmarks on the average. One of the lacunas of this study is thatonly open ended growth oriented ELSS schemes have been analyzed for the samplemutual funds. Future research may attempt to investigate and compare thedividend oriented ELSS schemes. VIII.
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