Mutual Fund Performance:

An Evaluation of Select
Growth Funds in India
Madhumita Chakraborty*, P K Jain** and Vinay Kallianpur ***

This study attempts to evaluate the performance of mutual funds on the hasis of rate of
retum as well as risk-adjusted methods. The performance of tlie mutual funds are compared
with the risk'free returns as well as the henchmark index (BSE 100), which is taken as a
proxy for market returns. T/xe rate of retum analysis performed on the sample of equity funds
showed that all the mutual funds except one in the sample, earned returns in excess of tlie
risk-free rate of retum offered Í7)r 364'day Treasury Bill (Thill). The comparison of rates of
retum of the henchmark index and üie sample of mutual funds indicates that majority of the
equity mutual funds (included in the sample) have outperformed the henchmark. However,
when the mean retum of the entire sample is corisidered, it does not show significantly different
retum from that of the henchmark BSE 100 index. An analysis hased on risk-adjusted
performance, however, shows a different picture where most of the funds (around 70%) in
the sample have posted positive and hetter Sharpe as well as Treynor's ratio compared to tJie
herichmark BSE 100 index. The study, thus, although provides some evidence of satisfactory
performance in terms of returns generated per unit of risk, yet, a conclusive statement regarding
the capahilities of mutual fund managers is still elusive.

T
he performance of mutual funds portfolios are equal. Therefore,

has evoked a great deal of interest expenditures on research and trading are
in academic circles. The common wasted in which securities prices reflect
belief in a segment of the academia is that all information. However, a vast literature
mutual funds cannot beat the market with contradicts this view and to date there is
their active fund management endeavors no consensus about the ability of fund
as it is in sharp contrast to the efficient managers to earn abnormal returns. It is
market hypothesis. The hypothesis simply therefore, extremely critical for investors
means that securities prices already to know whether the mutual fund
include all available information, implying managers are able to deliver better
that Assistant
returnsProfossdr,
acrossFinance
activeandand passiveIIM
Accoiintinfi, returns,
Lucknow, InJin' thereby justifying
E-mail:jnaJhiimi!a$_MÍml.ac.in the
Professur of Finance, Department of Manai;ement Studies, ilT Delhi, India. E-mail: pkjainfi dms.iitJ.ac.in
MBA Student, Department of Management Studies, IlT Delhi, India. E-mail: kallianpur.vinayCfVnmail.com
 SOUTH ASIAN JOURNAL OF MANAGEMENT

management fees they charge. In other
words, would the investors do better
simply by investing in a market portfolio
and following a passive strategy. This study
throws some light on this subject in the
context of India by evaluating the
performance of a sample of mutual funds,
which are growth-oriented and by
covering a recent time period.
The reniainder of the paper proceeds as
follows: Firstly, it provides a brief review
of past studies on portfolio performance
and develops the objectives and
hypotheses for the present study. Then it
discusses the data and methodology.
Further, it provides empirical findings and
winds up with concluding remarks.
REVIEW OE LITERATURE
Friend et al. (1962) made the first
extensive study of mutual funds by
evaluating the performance of 152 mutual
funds with annual data from 1953 to 1958.
They found that over the period of their
study, mutual funds earned an average
annual return of 12.4%, while the
benchmark index earned a return of
12.6%. Because the mutual funds in their
sample nearly matched the market index,
after subtracting expenses, the authors
concluded that the overall results do not
suggest \yidespread inefficiency in the
industry.
Treynor (1965) made the first attempt
to suggest a measure of portfolio
performance which considers the risk
involved in a portfolio. According to the
author, managed portfolios carry market
risk, i.e.; the aggregate value of the
portfolio is dependent on the market
trends. During bull phase, the value may
go up and during bear phase, the portfolio
value may go down. He introduced the
concept of 'beta'' parameter. Beta value
represents the degree of variation in the
portfolio lvalue compared to the market
portfolio. I Hence, according to the author,
the appropriate measure of portfolio
performance is risk premium per unit of
'market risk' generated by the portfolio.
Risk premium is defined as excess portfolio
return over risk-free return. Higher value
of Treynor's index indicates better
performance of portfolio and vice versa.
The Treynor's measure of portfolio
performance is a relative measure that
ranks the funds in terms of risk
(market risk) and return. The index is
also termed as reward to volati ity ratio.
Soon thereafter, Sharpe (1966)

Beta is defined as the measure of sensitivity of the security returns to the market index returns'. If the beta
value of the fund is qreater than one (/? > 1), it implies that for a given change in the market returns, the
relative impact of the fund returns will be much higher than the proportionate change in the market returns.
On the other hand, if the value of fund beta is lower than one {ß < 1), the relative impact on the .fund returns
will be lower than the proportionate change in the market returns. For beta = 1, the market and fund returns
will move in the tandeni. A typical fund having beta equal to 1, will be an index fund.
The formula used to compute the beta tneasure is
ß. = Covariance(K,, K^)A'ariance of {KJ '
where ß = Beta Coefficient, a measure of systematic risk of tiiutual fund
K. = Monthly returns on inutual fund j .
i^ = Monthly returns on market portfolio.

Volume 15 g Q No.4
 MUTUAL HUND PERFORMANCE: AN EVALUATION OF SELECT GROWTH FUNDS IN INDIA
propounded another measure of portfolio
performance evaluation. He replaced
'market risk' (beta parameter) in
Treynor's equation .with the 'total risk'
parameter, i.€., 'standard deviation and
measured performance in terms of risk
premium generated per unit of 'total
risk'. Higher value of Sharpe's index
indicates better performance of portfolio
and vice versa. The Sharpe's measure of
portfolio performance is also a relative
measure that ranks the funds in terms
of risk (total risk) and return. The ratio
is also termed as reward to variability
ratio. Comparing the performance of 34
open-ended mutual funds during the
period from 1954 to • 1963 with
Dow-Jones industrial average (market
portfolio) in terms of reward to variability
ratio, it was concluded that overall
performance of mutual funds in terms of
Sharpe's index was inferior to Dow-Jones
portfolio (market portfolio) during the
period of study. Only 11 out of 34 funds
had posted better performance than the
market portfolio (Dow-Jones industrial-
average).
Another noteworthy study that has
caught the attention of researchers over
the last four decades is by Jensen (1968).
He studied the performance of 54 open-
ended US mutual funds for the period
1945-64 and found that the returns of
mutual funds before the load fees and
after management and other expenses
were on average 1% per annum below the
benchmark return. The benchmark used
for the study was the return on the S&P
500 index. The proxy for the risk-free rate
of return was taken to be the yield on
Volume us g |^ No. 4
one year US Treasury bills. Returns on
more than half of the funds were below
the benchmark.
McDonald (1974) analyzed
performance of 123 mutual funds in the
USA during 1960-69 using New York
Stock Exchange (NYSE), index as
market proxy. He found that 54% of the
funds had posted better performance
than the market in terms of Treynor's
measure, whereas only 32% ofthe funds
performed superior to NYSE index in
terms of Sharpe's measure.
Stopp (1988) had evaluated the
mutual fund schemes (UK) in terms of
the rate of return generated for the
investors for the period ended on
December 31, 1986. He also examined
inter-group performance by regrouping
the sample into four broad categories and
computed the percentage of growth (in
terms of rate of return) during 5-year
period, 3-year period, 2-year period and
1-year period ended on December 31,
1986. He suggested that choosing funds
based on outstanding performance might
be a recipe for disaster as the sectors,
which tend to produce the most
outstanding performance may also carry
the greatest risk. Grinblatt and Sheridan
(1989) evaluated performance in terms of
gross returns of mutual funds for the period
December 31, 1974 to December 31, 1984.
The findings revealed that abnormal
performance (highly superior or inferior
performance compared to the normal
performance as that of market portfolio
or benchmark portfolio or index
portfolio) of the funds based on gross
returns is inversely related to the size.
 SOUTH ASIAN JOURNAL 01- MANAGEMENT
They pointed out that superior
performance may exist for funds with
smallest size of net asset value. But due
to. high expenses, the investors are
unable to take advantage of their
superior performance.
There have been another set of
findings, which contradicted the view
that mutual fund managers are incapable
of generating abnormal returns. Friend
et al (1970) report that the average return
generated by their sample of mutual funds
was 10,7% per annum while that
generated for the market was only 9,9%,
hi the same year, Carlson reported that
his sample has performed much better in
terms of Sharpe ratio, which was about
0,57, compared to 0,43 for the Dow Jones
benchmark, Kon and Jen (1979) in their
study concluded that "on average, the
mutual fund sample is able to predict
security prices well enough to outperform
the naive policy, given their selected levels
of risk, and to recoup' all management
fees and brokerage commissions", Ippolito
(1989) examined 143 mutual funds for
the period 1965-84 and found that on an
average, mutual funds provided 0,83%
higher returns per year over the
benchmark before load fees but after
management expenses and other fee.
The benchmark was taken to be tbe
risk-adjusted return on the S&P
500 portfolio and the risk-free returns
were taken to be the yield on one year
US T-bills,
Thus, the above discussion provides no
consensus regarding the performance of
mutual funds in the west. In the hidian
context, Gupta (1981) laid the foundation
Volume 15
82 No, 4
of performance evaluation with the study
of performance of Indian equities.
Immediately thereafter, Jain (1982) had
pioneered the work on financial
performance of investment schemes of
Unit Trust of India (UTI) during the
period 1964-65 to 1979-80, His work is
considered as the first notable work on
performance evaluation of mutual funds
in India, In 1986, UTI had floated first
equity fund in India, namely, Mastershare
under the banner of its subsidiary; UTI
(Mutual Fund) subsidiary, 1986, Thereafter
considerable interest has been shown by
the analysts, academicia ns and
researchers to examine the financial
performance of equity mutual funds in
India from the perspective of investors and
fund managers, Barua and Verma (1991)
had provided empirical évidence of equity
mutual fund performance in India by
studying the performance of India's first
7-year ¿lose-end equity mutual fund,
Mastershare, They concluded that the
performance of the fund was satisfactory
for large investors in terms of rate of
return.
Gupta and Sehgal (1997) evaluated
mutual fund performance over a four-year
period from 1992-96, The sample consisted
of 80 !mutual- fund schemes. They
concluded that mutual fund industry
faired r,easonably well during the period
of study, Mishra (2001) evaluated the
performance over the period, April 1992
to December 1996, The sample size was
24 public sector sponsored mutual funds.
The study concluded dismal performance
of PSU mutual funds in India, i n general.
during the period 1992-96, Sondhi and Jain
 MUTUAL FUND PEREORMANCE; AN EVALUATION OF SELECT GROWTH FUNDS IN INDIA
1(2006) examined the performance of 36
mutual funds for the period 1993 to 2002
and concluded that performance of their,
sample funds remained far from
satisfactory in terms of rates of return and
risk-adjusted returns.
All these studies except Gupta and
Sehgal (1997) have reported less than
satisfactory performance of mutual funds
it! India.
There have been many studies in the
west as well as in Itidia showing the
performance of mutual fund portfolios.
However, any study investigating the
performance of a, very recent period has
not heen available. The latest period
examined by previous studies in Iridia is
up to,2002 (Sondhi and Jain, 2006).
An extrapolation of findings made in the
distant past may not be appropriate given
the changing economic and business
environment and this is the motivation
for this study, which humbly attempts to
plug the gap by evaluating the
performance of growth funds in India in
the recent past.
Hence, the objective of the present
study is to evaluate the performance of a
sample of growth-oriented mutual funds
and this shall be met by addressing the
following specific issues:
• Whether the returns in absolute
terms generated by the growth
mutual funds are higher than the
risk-free return.
• Whether the returns in absolute
terms generated by the growth
Tlio Indian mutual fund industry comprises 32 Asset Mannf;ement Cimipanies mana^infi assets close tn US$
100 lin: (Rs. 4,00S bn.) under 772 different mutual fund schemes ns at the end of June 2007. The hreak-up o(
Volume 15
83 No. 4
mutual funds are higher than the
market return.
• Whether the risk-adj usted
performance of the actively
managed growth funds, is hetter
than that of the passive market .
portfolio.
Mutual funds are managed by
professional matiagers (equipped with
sound knowledge of investment
management, selection and supervision
of securities/portfolio). Therefore,
ex-hypothesis, it is expected that they will ,
demonstrate performance superior to the
average market performance.
Giveii the above objectives, the
major hypotheses of the study are as
follows;
HJ.- Equity mutual funds have
generated higher rates of return
than those of the conventional risk-
free investments (364'day T-bills)
during the period of study frorn
2005 to 2007.
H,: Equity funds have generated
higher rates of return than the
market portfolio (Bombay Stock
Exchange 100 National Index).
Hy Equity funds liave generated high
excess returns for every wiit of risk.
The study has practical as well as
academic significance. Large amount
(US$31,140 bn as on June 30, 2007),- of
savings has been invested in equity
 SOUTH ASIAN JOURNAL OF MANAGEMENT

mutual funds. The study provides
empirical evidence regarding the extent
up to which fund managers of equity
mutual funds have succeeded in making
available benefits of equity investment to
the large number of investors, by providing
a better rate of retum than is available on
risk-free rate of returri/provided by the market
portfolio. The subject-matter is vital for all
the agencies connected to the mutual funds
industry, i.e., the investors, the practicing
fund managers, the capital market, the
policy-makers at the center and industry
level as well as the researchers and the
academicians as mutual iunds are engaged
in all important functions of economic value
addition.
DATA AND METHODOLOGY
The most commonly applied tool for
evaluating financial performance of a
mutual fund is to track the Net Asset
Value (NAV) of the fund.^ Silice mutual
funds issue units (akin to shares issued by
a company) to get the subscribers, the
aggregate market value of invested
portfolio is marked against the toi:al
number of units issued and outstanding
by the mutual funds in the books of
accounts of mutual funds at any given
time. NAV per unit at any given time is
computed by dividing the market value
of fund's invested portfolio and cash in
hand by the total number of outstanding
units at that point of time (Thomset, 1989).
In this study, month-end values form
the basis of NAV'' p'er unit.
Monthly returns have been based on
month-end NAV per unit. The monthly
returns for each of the computed single
periods I (month) have been compounded

the Assets Under Management as given in Table helow shows thut Income (BonJ) has the highest level of assets
under management followed hy Growth (equity).
The NAV can he defined as the aggregate market value of the invested portfolic of mutual funds plus the 'cash'
or 'its equivalent' in handless total external liahilities.

The Break-Up of the Assets Under Management, June 2007

Type of Schemes Assets Under Management (US$ bn) Percentage to Total (%)
Income (Bond) 37,189 38
Growth (Equity) 31,140 31
Balanced 2,660
Liquid/Money Market 22,474 23
Gilt 484 Negligihie
Tax Savings 3,039
Gold ETPs 63 NecliL'ihic
Other ETFs 1,728 2
Total 98,778 100
Note: Exchange Rate as on June 30, 2007. US $ 1 = 40.58 INR.
Source; htt¡)://wwin.anbid.com

Net Asset Values' have heen ohtained from the records of respective asset management companies, i.e., their
monthly hulletins, hooks of accounts and wehsites.
A negative heta simply means that the fund is inversely correlated with the market.

Volume 15 84 N,lo.4
 MUTUAL FUND PERFORMANCE: AN EVALUATION OF SELECT GROWTH FUNEiS !N INDIA

to get single compounded rate of return adequate for the peer group's comparison
on the mutual fund portfolio as per of rate of return. From the investors' point
Equation (1). of view, the track record of three years is
significantly a long period to judge the
R._^ = NAV„/NAV„.| .'..(1) performance of mutual' fund for
where, R, = Single period rate of investment purpose.
return on fund j for The rate of return on 364-day treasury
n''' month. bills has been taken as surrogate measure
NAV - Net asset value at the for risk-free return in this study and the
n
Bombay Stock Exchange (BSE 100)
end of the n''' month.
National Index has been used as surrogate
NAV^ , = Net asset value at the measure for market portfolio in this study.
end of the (n - I)'*" The rationale for the same is that the
month. index is broad based, consisting of 100
The monthly returns so computed for actively traded equity shares listed in the
different single periods have been BSE, and it represents around 67% of total
compounded to get the compounded market capitalization as on May, 2008.
monthly rate of return on mutual funds
The expression for calculating the
(Lee et aL, 2000).
monthly returns for BSE 100 index is
Equation (2) has been used to compute similar to that used for calculating the
monthly compounded rate of return, R, monthly compounded returns for sample
for the fund j . funds.

R^ = IV„/IV„_, . ...(3)

where, R = Compounded monthly rate where R^ = Return on Market

of return on the fund j. Portfolio (BSE 100 Index)
for n''' month.
R. = Monthly rate of return
from fund j for n''' month. IV — Bombay Stock Exchange
100 National Index at
n = Number of months. time, n''' month end.
For the purpose of this study, 40 mutual
IV^^ _ I = Bombay Stock Exchange
funds with growth options have been
100 National Index at
picked randomly and their performance
time, (n - I)'*" month end.
have been studied for the period spanning
over three years froni 2005 to 2007. One With this data, attempt has been made
criterion for selection was that all the to assess the performance of the funds
sample funds have been in operation for under consideration. While simple
more than 3 years as on December 31, measures of return are calculated and
2007. The period may be considered projected, investors with their increasing

Volume 15
85 N'lo. 4
 SOUTH ASIAN JOURNAL OF MANAGEMENT
awareness are not interested in returns of
a mutual fund in isolation, but in
comparison to some alternative
investment.. For example, a fund should
meet some minimum hurdle, such as a
return on a completely safe, liquid
investment available at the time. Such a
return is referred to as the risk-free rate
and usually taken to be tbe rate on
Treasury bills. Comparing a fund's return
to a risk-free investment is not the only
relevant comparison. Domestic equity
funds are often compared to a benchmark
index, say for example, the BSE 100 index.
The returns also need to be analyzed from
the perspective of riskiness' of the funds,
i.e., whether a fund is able to generate
better return per unit of risk. The market
portfolio, which is available with the
investor, is a passive portfolio for a given
level of risk and whether there is any
additional advantage in terms of lower risk
or higher returns by investing in mutual
funds, which are actively managed, need
to be addressed. The risk-adjusted
performance measures are used to
evaluate the funds from such perspective.
The risk is generally equated with
variability of returns and investors
generally expect a higher return for higher
variability. The well-known Sharpe
measure, which divides average portfolio
excess return over the risk-free rate during
the sample period by the standard
deviation of returns over that period ranks
mutual funds based on reward per unit of
variability of return and thus aids in
performance evaluation. This method,
however, presumes that the entire portfolio
of an investor is invested in the fund and
it is fully diversified. However, as investors
Volume IS
86 N°-'
typically do not invest their entire wealth
in one single fund and hold fund shares
as a part oí diversified total wealth,
standard deviation, which measures the
total risk without distinguishing
diversifiable risk and un-diversifiable risk,
may not be appropriate. Therefore,
Treynor (1965) has used the beta of a
fund, wbich represents only the
non-diversifiable risk, to assess portfolio
performance. His measure assesses risk
adjusted returns in terms of "returns per
unit of systematic risk". Treynor's ratio
ignores the unsystematic risk or security
specific risk element and assumes that the
portfolio is perfectly diversified. In this
study, both the Sharpe's measure and
Treynor's measure have been used for
performance evaluation.
EMPIRICAL FINDINGS
Monthly returns have been computed for
all the 40 mutual funds in the sample, for
BSE 100 index and for 364-day T-bills
(Table I).'It can be observed that all the
individual funds (except ICICI, very
cautious fund growth) have provided
better returns than the returns of 0.56%
provided by T-bills. Table 1 also gives an
estimate of the percentage of funds
that have outperformed as well as
underperformed the BSE 100 index.
The majority of the sample mutual funds
(57%, 23 in number) have generated
higher returns than the BSE 100 index
while 43% (17 ifi number) have yielded
returns lower than the BSE 100 index
during the period 2005-07.
I
In order to test whether the mean
returns generated by the sample funds
and the benchmark index are significantly
 MUTUAL FUND PERFORMANCE: AN EVALUATION OF SELECT GROWTH FUNDS IN INDIA

Table 1: The Monthly Returns for the Sample Mutual Funds, BSE-100 Index and
364-Day Treasury Bills Arranged in Descending Order of Size of Returns, 2005-07
Monthly Returns
BSE 100 0,0311900
364-day T-biU 0,0056000
1 DSP Tiger Reg 0,0396800
2 Tauras Starshare . • 0,0395900 •
3 SBI Magnum Sector Umbrella - Contra Fund - Growth 0,0395100
4 SBI Magnum Multiplier Plus 93 - Growth 0,0394400
5 Reliance Growth - Growth 0,0382600
6 SBI Magnum Global Fund 94 Growth •(:f,0381500
7 Sundaram BNP Paribas Select Mid-Gap Growth 0,0372700
8 • Birla Sunlife Equity Fund Growth 0,0356600
9 Reliance Vision - Growth 0,0349700
10 HDFG Tax Saver Growth 0,0344900
11 HDFC Equity Funds 0,0343400
12 Birla Mid-Gap Fund - Growth 0,0343000
13 Birla Mid Gap 0,0339800
14 DSP Top 100 0,0337400
15 IGIGI Emerging Star Fund 0,0335400
16 HDFG Top 200 Funds 0,0333800
17' TATA Pure Equity Fund - Growth 0,0333500
18 DSP Opportunity Funds 0,0330700
19 HDFG Growth Fund 0,0330000
20 BOB Growth 0,0326200
21 DBS Ghola Opportunities Fund 0,0317700
22 HSBG Equity Fund Growth 0,0314100
23 IGIGI FMGG Fund 0,0312200
24 HSBG Equity Fund Growth . 0,0310200
25 HDFG Gore and Satellite Fund 0,0308700
26 HSBG India Oppotunites Fund Growth 0,0305700
27 Franklin India Tax Shield Growth 0,0302000
28 IGIGI Very Aggre.ssive Fund 0,0298100
29 Birla Advantage Fund - Growth 0,0288800
30 Morgan Stanley Growth Fund 0,0286800 •
31 DBS Ghola Multi Gap Fund 0,0285900
32 Bob Diversified Growth 0,0261500
33 IGIGI Discovery Fund Growth 0.0252400
34 Birla Sun Life Buv India Fund 0,0246800
35 IGIGI Aggressive Fund 0,0244800
36 IGIGI Technology Fund 0,0223300
37 LIG MF Growth Fund 0,0208900
38 SBI Magnum Tax Gain Scheme 93 - Growth 0,0185616
39 IGIGI Gautious Fund Growth 0,0108400
40 IGIGI Very Gautious Fund Growth 0,0051900
Mean 0,0305900
Maximum 0,0396800
Minimum 0,0051900

Volume 15
87 N°-
 SOUTH ASIAN JOURNAL OF MANAGEMENT

different from each other; a t-test has been
used to examine the following.hypothesis:
Hp — Rate of return of equity.
Funds = Rate of return given by
the benchmark.
Hj = Rate of .return of equity
funds < > Rate of return-
given by the benchmark.
We also test whether the mean sample
returns are significantly different from the
risk-free rate and the results are
summarized iti Table 2.
However, the above analysis based on
absolute returns may riot represent
performance adequately as the returns
may not be iti synchronization with the
degree of risk assumed by the fund
manager. Futid manager may assume an
extra risk to provide returns that may
be lower than the expected returns for
that level of risk. Hence, performance
evaluation without reckoning the fund
risk profile may not be sufficient to
convincingly establish the financial

Table 2: Testing for Equality of Mean of Sample Monthly Returns With that of
BSE 100 and 364-Day t-Bills
Item Details Value Mean of, Mean M ean of
Sample i of BSE 100 3í 4-Day
Index , T-BiU
Mean 3.059% ¡ 3.118% D.56%
T-Test for Equality of
Sample Mean with Mean
Returns of BSE-100 -0.51
T-Test for Equality of Sample
Mean with Mean Returns
of 364-Day T-Bills 21.867

T h e m e a n of t h e sample m u t u a l f u n d s performance by funds. The analysis tries

(3.059%) is less ( b u t t-iot significantly)
than the return provided by the
benchmark itidex (3.118%). Table 2 also
reveals that the mutual funds have
outperformed the return on 364-day T- bill
by a significant margin for the period of
the study. Thus, although the sample
selected for the study has been able to
generate higher returns over and
above the risk-free rate, it has failed
to outperform the benchmark
(BSE 100 Index) on an average.
to assessi the performance on the basis
of risk-adjusted rates of return, for
which use measures of Sharpe (1966)
and Treynor (1965) are used.
Table 3 presents both the Sharpe's ratio
and the Treynor's index. The Sharp e s
ratio in the table shows that Sundaram
BNP Paribas Select Mid Cap-Growth has
produced the highest return according to
the risk adjusted performance measure
while the lowest risk adjusted measure has

Volume I 5 ; No. 4
 MUTUAL FUND PERFORMANCE: AN EVALUATION OF SELECT GROWTH FUNDS IN INDIA

Table 3: Sharpe's Ratio and Treynor's Ratio for the BSE 100 and Sample Mutual
Funds, 2005-07
Monthly Returns
BSE 100 and Mutual Funds Sharpe Treynor'.s
Ratio Ratio
BSE.100 0.3703 0.0255
1 Birla Advantage Fund Growth 0.4012 0.0304
2 Birla Mid-Cap 0.4228 0.0356
3 Birla Mid-Cap Fund - Growth 0.4735 0.0405
4 Birla Sun Life Buy India Fund 0.3314 0.0294
5 Birla Sunlife Equity Fund Growth 0.4710 0.0372
6 BOB Diversified Growth 0.2618 0.0210
7 BOB Growth - Growth 0.4268 0.0362
8 DBS Chola Multi Cap Fund 0.3601 0.0300
9 DBS Chola Opportunities Fund 0.3939 0.0373
10 DSP Opportunity Funds 0.4056 -0.7067
11 DSP Tiger Reg 0.4567 -1.4540
12 DSP Top 100 0.4180 0.0301
13 Franklin India Tax shield Growth 0.3830 0.0283
14 HDFC Core and Satellite Fund 0.3742 0.0286
15 HDFC Equity Funds 0.4627 0.0342
16 HDFC Growth Fund 0.4259 0.0319
17 HDFC Tax-Saver Growth 0.4527 0.0361
18 HDFC Top 200 Funds 0.4367 0.0317
19 HSBC Equity Fund Growth 0.3938 0.0303
20 HSBC Equity Fund Growth 0.3677 0.0272
21 HSBC India Oppotunites Fund Growth 0.3367 -0.2665
22 ICICI Aggressive Fund Growth Plan 0.4222 0.0313
23 ICICI Cautious Fund Growth 0.3813 0.0288
24 ICICI Discovery Fund Growth 0.2798 • 0.0241
25 ICICI Emerging Star Fund 0.3684 0.0331
26 ICICI FMCG Fund 0.4282 0.0453
27 ICICI Technology Fund 0.2295 0.0291
28 ICICI Very Aggressive Fund 0.3986 0.0296
29 ICICI Very Cautious Fund Growth -0.4189 -0.3072
30 Lie MF Growth Fund 0.2196 0.0172
31 Morgan Stanley Growth Fund 0.3494 0.0267
32 Reliance Growth - Growth 0.4956 0.0425
33 Reliance Vision - Growth 0.4574 0.0353
34 SBI Magnum Global Fund 94 - Growth 0.4977 0.0496
35 SBI Magnum Multiplier Plus 93 - Growth 0.5175 0.0420
36 SBI Magnum Sector Umbrella - Contra Fund - Growth 0.5161 0.0416
37 SBI Magnum Tax Gain Scheme 93 - Growth 0.1439 0.0201
38 Sundaram BNP Paribas Select Mid-Cap - Growth 0.5625 0.0557
39 Tata Pure Equity Fund - Growth 0.4249 0.0323
40 Tauras Starshare 0.4104 • 0.0368

Volume 15
89 No. 4
 SOUTH ASIAN JOURNAL. OF MANAGEMENT
been produced by ICICI Very Cautious
Eund. Table 3 also indicates that 70% (28
in number) of the sample mutual funds
have outperformed the BSE 100 index
when their Sharpe Indices are compared.
30% of the sample mutual funds have
shown lower risk adjusted returns than that
of the market portfolio (BSE 100) index.
A look at Treynor's ratio reveals that
32 of the sample mutual funds selected
for the study in the period 2005-2007
have posted a Treynor's ratio, which
is better than that of the benchmark
BSE 100 index. This is in line with
the observation made for the other
measure of risk adjusted return, i.e.,
Sharpe's ratio where 70% of the sample
funds have posted better returns.
The present study states that out of
the sample, only one fund (2.5%) has
posted negative ratio as per the Sharpe's
measure and four funds have posted
negative ratios as per the Treynor's
measure during the period 2005-2007.
The negative return as per Sharpe's
measure arises because of lower returns
posted by ICICI Very Cautious Eund
compared to risk-free rate. On the
other hand, apart from ICICI Very
Cautious Eund, three other funds, DSP
TIGER Eund, DSP Opportunity Eunds
and HSBC India Opportunities
Eund Crowth, which show negative
Treynor's ratio have earned positive
excess returns, but their betas have
been negative' during the period under
study. It may be pointed out here
that those funds (four in our sample)
which have shown better performance
Volume 15
90
in terms of Treynor's ratio, but not in
terms of Sharpe ratio may diversify the
portfolio in such a way as to reduce the
unique risk oí the portfolio.
CONCLUSION
The study evaluated the performance of
mutual funds on both the rate of return
as well as the risk-adjusted methods.
The .performance of the mutual funds was
compared with the risk-free returns that
the investor would have gained had he
invested his corpus in a risk-free asset such
as a T-bill. The performance is also
compared with the benchmark index (BSE
100), which is taken as a proxy for market
returns.
The rates of return analysis performed
on the sample of- equity funds clearly
showed that all except one of the mutual
funds iii the sample earned returns in
excess of the risk-free rate of return offered
by 364^day Treasury bill for the period
2005-2007. The t-test performed on the
sample indicates that the mean return
provided by the sample is significantly
higher than that of the T-bills. The
comparison of rates of return of the
benchmark index and the sample of
mutual funds indicates that majority of
the equity mutual funds included in the
sample have outperformed the
benchmark. However, when the mean
return of the entire sample is considered,
it does not show significantly different
return from that of the benchmark BSE
100 index.
No.4
 MUTUAL FUND PERFORMANCE; AN EVALUATION OF SELECT (iROWTH FUNDS IN INDIA

While the performance based on returns that could be generated to

absolute returns do not sbow investors could not be analyzed.
• commendable performance, an analysis
The study, thus, although provides
based on risk-adjusted perforniance
some evidence of satisfactory
presents a better picture. Performance of
performance in terms of returns
funds as per Sharpe and Treynor's ratio
generated per unit of risk, yet, a .
has shown marginal variation primarily due
conclusive statement regarding the
to the fact that total risk and market risk
capabilities of mutual fund mangers is
exposures of each ofthe funds is different.
still elusive. This also puts the proponents
However, on an aggregative basis, both
of Efficient Market Hypothesis in a
the measures show virtually similar
dilemma. Under the circumstances, we
performance of equity mutual funds, in can only say that market efficiency is a
terms of risk-adjusted returns. Most ofthe matter of neither black nor white, but
funds (around 70%) in the sample have shades of grey. This only supports
posted positive and better Sharpe as well Malkiel's (2003) contention that market
as Treynor's ratio compared to the cannot be perfectly efficient; then there
benchmark BSE 100 index. The results would be no incentive for professionals to
have to be interpreted from the view that • uncover information that gets quiclcly
the study has been conducted for the reflected in market prices, A lot of issues
period 2005-2007 when the economy was for further research seem to deserve much
growing at a rapid rate (8% GDP growth). attention to throw more light on the
The potential for investment and high subject-matter. For example, studies can
returns were higher during this period, be made on comparative performances
which led to a surge in equity valuation between public sector funds and a private
thus benefiting investors. The mutual sector fund, open-ended funds and close-
funds thus were able to produce ended funds, bull phases and bear phases
significantly higher returns than the risk etc. With more and more research and
free rate and also to an extent could beat dissemination of knowledge about the
the market portfolio. It also has to be kept performance of mutual funds, the
in mind tbat the study has a limitation in investors will be able to make more
that the transaction costs, management educated investment choices, thereby
fees, etc. could not be considered because ultimately channelizing savings to the best
of paucity of data and tberefore, the net possible direction.

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Volume 15 9 1 No.i .4
 SOUTH ASIAN JOURNAL OF MANAGEMENT

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