International Journal of Accounting Research

PERFORMANCE EVALUATION OF EQUITY SCHEMES OF SELECTED FUND HOUSES OF INDIA: WITH SPECIAL REFERENCE TO COVID ERA

Vikas Kumar^1* and Shashank Srivastav^{2 1}Assistant Professor, Commerce Government P.G. College, Obra Sonbhadra, UP, India
²Jr Research Scholar, Finance Indian Institute of Management, DAV PG College, BHU, UP, India
^*Correspondence: Vikas Kumar, Assistant Professor, Commerce Government P.G. College, Obra Sonbhadra, UP, India, Tel: 9839762628, Email:

Received: 27-Sep-2021 Published: 19-Oct-2021

Introduction

Equity mutual funds are that category of mutual funds which is inclined towards the equity shares investment. Mutual fund is a pool of savings that channelizes investors’ fund towards the capital market. Equity funds invest particularly and majorly in equity shares of the listed companies. The decision of investment and selectivity is taken by the fund manager. This study covers open ended equity mutual fund schemes with direct plan and growth option only. Open ended schemes all those schemes in which investment can be made at any time and also can be withdrawn without having any fixed term. Direct plan means the investors’ purchase of a scheme is directed by him only and not any agent and therefore the commission rate for investment comes down to its minimum. Growth option means the dividend paid off by the invested companies will be reinvested and not disbursed to the investor. Mitigation of the risk through diversification of the portfolio and to overpass the return of the benchmark through strategic investment is the prime motto of an asset management company. The recently ended year 2020 is no doubt one of the most unpredictable years in the history of world stock markets. The risk exposure enlarged and reached a new depth in this period. The Sensex which was at around 42000 in in Jan-Feb 2020 came to the bottom of about 27000 in April-May 2020. The result was that it hit the perception of mutual fund investors as they were worried of their return and the capital invested. Any investor, who wants to safeguard himself from the innocent risk of the stock market, chooses the path of mutual fund to plan his investment for a better return. But with such a hit and the downgrade many investors started thinking to withdraw their equity investments. Capabilities are examined in adversities. The present study tries to examine the mutual fund houses in terms of their performance in an adversity.

Literature Review

Mishra has performed a study on mutual funds’ performance for four year from 1992 to 1996. The study focused on public sector mutual funds with a sample size of 24 schemes. The tools used were Sharpe, Treynor and Jensen Alpha. The study concluded a dismal return- wise performance [1]. Roy & Deb in their study the researchers evaluated a sample of 89 Indian mutual fund schemes measuring with both unconditional and conditional form of CAPM model. It explains how conditionality improved the performance of mutual fund schemes, causing alphas to shift towards right and reducing the number of negative timings [2].

Kumar Vikas there are evaluated selected 20 schemes of 5 mutual fund companies. The data collected where the monthly NAV from 1st January 2002 to 31st December 2009. This holistic 120 months data were analyzed through the standard deviation, beta, and coefficient of determination, Sharpe, Treynor, and Jensen Alpha. The study concluded that 20 equity schemes showed better return as compared to depth and balance scheme [3]. Anand and Murugaiah in this paper, an attempt has been made to examine the components and sources of investment performance in order to attribute it to specific activities of Indian fund managers. For this purpose, Fama's methodology is adopted here. The study covers the period between April 1999 and March 2003 and evaluates the performance of mutual funds based on 113 selected schemes having exposure more than 90% of corpus to equity stocks of 25 fund houses [4]. Kumar Vikas has examined the sensitivity of the funds to the market fluctuations in the terms of Beta. The researcher used open-ended schemes of mutual funds and analysed their performance with risk-return adjustment, the model suggested by Sharp, Treynor and Jensen [5].

Kumar Vikas and Poddar in this paper the researcher evaluated the performance of HDFC mutual funds open-ended schemes with growth option. The period of the study was from 2008 to 2013 and the benchmark was BSE100. For the analysis of the performance statistical tools like average, standard deviation, beta, coefficient of determination and the risk adjusted performance measures suggested by Treynor and Sharpe were employed [6]. Krishnaprabha has performed a comprehensive study on mutual fund schemes’ performance analysis by using risk-adjusted performance measures and Sharpe ratio, Treynor ratio and Jensen Alpha, which measures the market selectivity of the fund manager [7]. Vikas Choudhary and Preeti Chawla in this paper the researchers tried to examine the performance of equity schemes of mutual funds on the basis of selectivity and market timing abilities of fund managers in security market. Market timing skills relate to the ability of fund managers to correctly assess the direction of the market and position their portfolio accordingly. The study which is based on the Jenson Measure and Treynor-Mazuy Model [8].

Research Gap

After the study of above literatures, it was found that there is a need of study on the performance evaluation of Indian mutual funds in the Corona Crisis of last year. There are seven parameters upon which all these schemes have been tested in this study and this provides a very fine picture of performance of mutual funds and their fund managers at the time when it was really a big challenge to retain the returns earned by the investors.

Significance of this study

The basic objective of an investor while investing in a mutual fund is to have a better return and minimal risk in comparison to the market. Covid-19 was as an absolute challenge for every fund manager and therefore it becomes important to evaluate the performance of those fund houses and managers that whether they have been able to sustain the basic objective of mutual fund investing or they have underperformed in the period of market outbreak. This will be helpful for both the investor and the financial advisors to have a better overview over the performance of some highest rated mutual fund houses of India.

Limitations of the study

The study covers only 30 schemes of the renowned and reputed fund houses of India for a period of only 12 months ranging from 1st January 2020 to 31st December 2020. All the selected schemes are open-ended equity schemes with Direct Plan and Growth Option only. The benchmark selected is Nifty50 [9].

Scope for further research

Evaluating the performance of mutual funds is an ongoing process and a never-ending task. The present study focuses on measuring and evaluating the performance of 30 selected equity schemes of mutual fund companies. The period of study is only 12 months which can be increased further for an extensive study over mutual fund performance. The tools used are standard deviation, beta, Sharpe, Treynor, Jensen Alpha and M2. More tools can be further used for analysis. The benchmark is taken Nifty50. More research can be done by using other benchmarks also. The study is strictly focused on equity mutual funds with direct plan and Growth option. Further research can be done by using other classes of mutual funds also [10].

Research Methodology

Collection of data

The monthly NAV of the selected 30 open ended equity schemes have been collected and compiled in MS-Excel. The source of NAVs is the data available from the Association of mutual funds of India (AMFI).

Period of study

The period of history ranges from 1st January 2020 to 31st December 2020.

Benchmark index

Since all the schemes are open ended equity schemes therefore Nifty50 has been used as the benchmark index for evaluating the performance of the selected mutual fund schemes.

Risk free rate

Risk free rate of return is that minimum return that an investor may get without having any risk. For the purpose of the present study, 10-year government bond yield has been selected as risk free asset on the average rate of 1st January 2020 up to 31st December 2020. The monthly average yield came to 0.506375 which is taken as 0.5 in the paper.

Tools Used

For the purpose of measuring risk standard deviation and beta has been used. For assessing the returns using its adjusted measures Sharpe ratio, Treynor ratio and Jensen Alpha measure has been used and in order to go deeper into the analysis M2 measure has also been included in the study. The definition, description and interpretation of every tool has been given in their respective tables. All the figures in tables given below have been approximated to the fourth digit after decimal.

Analysis and Interpretation

Table-1 shows the different schemes under study. As per the objective of the study, a total of 30 schemes have been selected from 11 different Mutual Fund houses operating in India.

Table 1: Source: Compiled data.

All the selected schemes’ monthly data (NAV) has been collected and returns have been calculated.

Table-2 shows the average monthly return (AMR) earned by all the selected schemes in a hierarchical order. The average monthly return of Nifty50 was 1.648%. The top performer in the terms of AMR was UTI equity fund followed by ICICI Prudential focused equity and Canara Robeco blue chip equity. Of the 30 analyzed schemes, 14 schemes performed above than the market index in the terms of average monthly returns, while the return of SBI focused equity came exactly as the market and the rest were below the market. The performance of Axis dynamic equity fund, DSP equity savings and HDFC equity savings was least in the category and lowest in comparison to the benchmark.

Table 2: Average Monthly Returns.

Table-3 shows the Standard Deviation (SD) of the selected schemes. Standard deviation denotes the total risk measure of the fund. It means higher the value of the standard deviation the higher will be the total risk carried by the fund. The standard deviation of Nifty50 came to 10.0025. Out of all the selected schemes 21 schemes performed better than the market in this category. It means these 21 schemes were less risky in comparison with the benchmark. The top performers were Axis dynamic equity fund, HDFC equity savings fund and Axis equity saver fund, while the performance of HDFC equity fund, UTI core equity fund and Aditya Birla Sun Life equity advantage fund was the lowest among the selected schemes because of having high SD. It may also be noted that the top funds in this parameter had SD much below than the benchmark, while those lowest performers didn’t had SD much higher than the market. It means that among the sample of 30 schemes, good funds are exceptionally good and bad are not much bad in comparison to the benchmark.

Table 3: Standard Deviation.

Risk Return Grid: A One-View Glimpse

Now in order to make the above analysis simple and to provide one view glimpse of how the fund have provided returns and how they have deviated, the following is the risk return grid where in all the schemes have been divided under 4 broad categories-

Category-1 Low Return Low Risk

This category consists of schemes whose average returns as well as standard deviation are lower than the benchmark.

Category-2 High Return Low Risk

This category consists of schemes whose average returns are higher than the market while the standard deviation is lower than that. Actually, this is the prime moto of any mutual fund house and this category suggests those mutual funds schemes that have succeeded in that.

Category-3 High Return High Risk

This category consists of those schemes whose average returns as well as the standard deviation are higher than the market indexed.

Category-4 Low Return High Risk

Here those schemes are listed whose average monthly returns are lower than the market while the standard deviation is higher than that. This is absolutely against the prime moto of any mutual fund house.

Table-4 presents the risk return grid of the selected mutual fund schemes. After the classification, it was found that 11 schemes fall under the Category-1, 10 schemes fall under the Category-2, 5 schemes under Category-3, while 4 schemes under Category-4. These 10 schemes that fall under the category 2 actually fulfilled the basic objective of mutual funds as compared to the capital market while those 4 schemes under Category-4 went opposite the objective [11-13].

Table 4: Risk Return Grid of Mutual Funds Schemes compared to Nifty50.

Table-5 shows rank wise listed schemes in the terms of beta. Beta is a measure of systematic risk. If a scheme has beta greater than one, then that scheme or fund is considered as riskier than the market. On the other hand, if a scheme has beta less than one then it is concluded that the fund is less risky than the market. So, from this interpretation we can observe from Table-5 that out of all the selected schemes, 21 schemes have proved more or less a better beta, i.e., less than one. Axis Dynamic Equity and HDFC equity savings are the best performers in this parameter, although these top performers in this category had not performed well as per AMR. In other words, top-seven funds under this parameter have actually reduced the systematic risk to half or even lower than the benchmark.

Table 5: Beta.

Table-6 shows the Sharpe ratio of all the selected schemes. Sharpe ratio is the Reward to Variability Ratio, which is calculated as the excess return earned over a risk-free rate for one unit of total risk involved. It was developed by William Forsyth Sharpe, an American Economist in the year 1966. The Sharpe greater than 3 is considered as excellent and greater than 2 is good. The Sharpe greater than 1 but less than 2 is generally not acceptable while the Sharpe of less than 1 is considered bad.

Now as the Table-6 shows the Sharpe ratio of all the selected schemes is less than one which is not a good measure. UTI equity fund performed the best in terms of Sharpe ratio followed by ICICI Prudential focused equity and Canara Robeco bluechip equity, while the performance of HDFC equity fund, DSP top 100 equity fund and DSP equity savings fund was the lowest among the selected schemes. The Sharpe ratio of the market index was calculated 0.1148 and thus we see that 20 out of 30 schemes, surpassed the market and provided, more or less, higher Sharpe then the benchmark index.

Table 6: Sharpe.

Table-7 shows the calculated Treynor ratio of all the selected schemes. Treynor ratio is the Reward to Volatility ratio and is calculated as excess return earned over the risk-free rate per unit of systematic risk, i.e., Beta. It was propounded first in the year 1965 by Jack Lawrence Treynor, an American Economist. Under this parameter, UTI equity fund came to the best followed by ICICI Prudential focused equity and Canara Robeco blue-chip equity. These three schemes had Treynor more than 2. While HDFC equity fund came to the bottom [14]. 21 schemes have Treynor, more or less, better than the benchmark. Higher Treynor ratio as compared to the market indicates that investor who has invested in a mutual fund to form well diversified portfolio did receive adequate return per unit of systematic risk undertaken.

Table 7: Treynor.

Table-8 shows the measure of Jensen Alpha. The higher positive value of Alpha indicates the better performance of the fund. It is the regression of excess return of the schemes with excess return of the market acting as dependent and independent variables respectively. It was developed by Michael Jensen, an American Economist in the year 1968. Alpha decades good market timing ability of fund managers as regard investment in the securities. Here also UTI equity fund shows the highest value of alpha, followed by ICICI prudential and Canara Robeco. Among all the 30 selected schemes, 9 schemes showed the negative Alpha which means that their fund managers were not able to earn enough returns for the amount of risk taken. Since the alpha of benchmark remains 0, top- 4 funds under this category reported a significantly higher alpha.

Table 8: Jensen Alpha.

Table-9 shows the M2 measure of all the selected schemes. The Modigliani Risk-Adjusted Performance (RAP) (M2 or Modigliani- Modigliani) measure was developed by Nobel Laureate Franco Modigliani along with his granddaughter Leah Modigliani (that’s why it is called M2) in the year 1997. This measure depicts the risk adjusted return of the portfolio. It is an extension of Sharpe ratio and makes it more intuitive to interpret. M2 is calculated by multiplying Sharpe with standard deviation and then adding riskfree rate.

Under this parameter also, UTI equity fund performed the best, followed by ICICI Prudential focused equity and Canara Robeco blue chip equity fund, while HDFC equity fund’s performance again came at the bottom among the selected sample. M2 of the benchmark came 1.6479 and thus we can say that 20 out of 30 schemes outperformed the market index by more or less margin.

Table 9: Modigliani Risk Adjusted Measure (M2).

Table 10 shows the overall result of all the analysis performed. It ranks all the schemes from 1 to 30. All the schemes have been ranked firstly on the grounds of all the seven parameters used, i.e., Average Monthly Return (AMR), Standard Deviation (SD), Beta, Sharpe Ratio, Treynor Ratio, Jensen Alpha and M2. A scheme which stood at first position in any of the parameter was given the marks 30. For coming second in the same parameter, it was given 29 and for third position 28 and so on. The scheme that came at 30th position in a parameter was given 1 mark. The same procedure is followed in all the seven parameters. Then for every scheme its total marks in all the seven parameters were calculated and thus final marks has been drawn. The scheme that got highest final marks was given the Final rank 1 and a scheme with the lowest final marks was given the overall rank 30. In this way all the selected 30 equity mutual fund schemes have been ranked from 1 to 30. In the case of a tie where two or more schemes got the same final marks, the ranking has been done on the basis of its average monthly returns. If the return is higher the scheme is given higher rank than the scheme having same final marks [15].

Table 10: Overall Rankings of the Selected Schemes.

Conclusion

The entire conducted analysis can be bifurcated under two broad heads- Risk analysis on the basis of SD and Beta, and Return analysis on the basis of AMR, Sharpe, Treynor, Alpha and M2. SD shows that there are very few schemes among the given sample that had SD higher than the benchmark. Top-20 schemes under SD analysis have been more or less, successful in lowering down the risk in comparison to the entire market, as their SD was much below than the market index. On the parameter of average monthly returns, UTI equity fund performed the best followed by ICICI prudential focused equity. Although UTI equity fund came at first position in the terms of average monthly returns, Sharpe, Treynor, Jensen Alpha and M2; the overall final rank 1 is awarded to ICICI prudential focused equity, for the reason UTI equity fund did not perform well in terms of risk whereas ICICI prudential focused equity performed better than UTI equity in terms of risk. In the terms of standard deviation which is a measure of total risk, UTI equity came at 15th rank while ICICI prudential focused equity stood at 9th rank. Rank 1 in terms of standard deviation and beta was received by Axis dynamic equity fund but it's return was much disappointing and it stood at the bottom at 28th position. So, it can also be inferred that the scheme which received highest rank in terms of monthly returns did not perform well in terms of risk, whereas those schemes which performed good in terms of standard deviation and beta (risk) did not perform well in terms of average monthly returns. There are very few schemes that have remained moderate in both the parameters. The funds like HDFC equity, DSP Top100 and UTI Core equity were the least performers among the selected sample according to the above analysis. They had higher risk exposure and very disappointing returns.

Overall, we can conclude that the funds which gave high returns were mostly not consistent, and those who were consistent and had lesser deviations couldn’t provide attractive returns in this period. “Mutual fund investments are subjected to market risk...” therefore, it cannot be said for any fund that it had protected the returns on the corpus, as the Covid period was definitely not good for any economy or any stock exchange of the globe and the dent in the economy was felt during the mid of 2020. But today when we have come over and moved on in the era of 2021 the analysis of equity mutual fund schemes gives us a better idea to plan our investments in the future.

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