A Descriptive Study on Fund Analysis and Selection

1
A Sai Manideep, 2G. Visalakshmi, 3Y. Mani Sahithi
Assistant Professor, Department of Management Studies, Vignan’s foundation for
Science Technology Deemed to be University, Guntur (Dt), Andhra Pradesh.
sn8820@gmail.com, Ph: 9000652592.
II MBA, Vignan’s foundation for Science Technology Deemed to be University,
Guntur (Dt), Andhra Pradesh.
II MBA, Vignan’s foundation for Science Technology Deemed to be University,
Guntur (Dt), Andhra Pradesh.

Abstract
Every person try to earn best from their savings by investing in different options according to
their capacity. But in this era, it is risky to invest entire savings in single asset class. Then
comes mutual funds, exchange traded funds. But there are numerous number of schemes in
fund and countless number of possible portfolios. Problem is to choose correct portfolio for
the investor based on his objectives. This paper uses Sharpe, treynor and Jensen’s ratio to
choose best portfolio.
Keywords: Mutual fund, Sharpe ratio, Treynor ratio, Jensen ratio
INTRODUCTION
In present era, investing entire savings in single asset is not profitable. So, careful
investigation of various asset classes (equity, debt, real estate etc.) is required before
investment decision is made. Portfolio analysis plays a vital role in achieving investor’s long
term and short term goals. In this article, main focus is on mutual fund as it is emerging
investment option (Asset under Management (AUM) of mutual fund industry grew from 600
crores in 1984 to 23.8 trillion by March 31, 2019). Numbers of investors for mutual fund are
increasing year by year. A Mutual fund is a financial instrument in which pool of money
collected from investors will be invested in various asset classes by fund manager and returns
obtained will be distributed to investors. Mutual funds are best because they are
professionally managed; reduce risk through diversification and offers different schemes
based on investor’s objective.

Source: Medium.com
History of Mutual Fund: Can be explained in six phases
Phase 1: In India, first mutual fund was set in 1963 as UTI by Reserve bank of India. UTI
launched first unit scheme in 1964 and later provided different schemes to meet investor’s
criteria. India fund (first off-shore fund) was evolved in 1986. In 1984, AUM of UTI is 600
crores and in 1987-88, it was 6700 crores.
Phase 2: In this phase, public sector funds (SBI Mutual fund, LIC Mutual Fund, PNB Mutual
Fund, Canbank Mutual Fund etc.) came into existence. In 1992-93, AUM has grown to 47004
crores. Investors started showing much interest in mutual funds.
Phase 3: New era began after the introduction of private sector funds in 1993. Different fund
families were introduced and competition began between foreign and Indian companies.
Phase 4: Mutual funds regulation act introduced in 1996 has set some regulations to all
mutual fund schemes in India. Investor awareness programs were launched by SEBI and
Association of mutual funds of India (AMFI) for educating investors.
Phase 5: UTI act was cancelled in 2003. AUM between 1999 and 2005 has gone from 68000
crores to 1, 50,000 crores.
Phase 6: Mergers and Acquisitions started taking place. International players started entering
India.
Structure of MF

Source: www.slideshare.net
Sponsor is either an entity or any person who can set up mutual fund Company with SEBI
regulations. For a person to be sponsor, he must have experience in Banking or financial
services for not less than 5 years, he must contribute 40% of net worth of asset management
company (AMC).
The second layer includes trust and trustees. The trust is formed in the favor of trustees by
sponsor. The trustees take care of policies and regulations related to the fund. They need to
report to SEBI every six months regarding the activities of AMC.
Asset Management company is responsible for carrying out the activities of the fund. It
comprises of fund managers, RTA’s, brokers, auditors, and distributors. Sponsor will pay the
fee required to carry out the AMC.
Custodian is nowhere related to AMC/ sponsor. It safeguards the securities of AMC such as
gold, money, physical documents etc.
Register and transfer agents will be responsible for performing KYC, entering details online,
processing of mutual funds. Karvy, CAMS, sundaram are the examples of famous RTA’s.
Mutual fund distributors are persons who will explain all the schemes to customers and who
will specify the apt scheme suitable to his objectives.
Types of Mutual Funds
Mutual Funds are classified into 7 types. They are
1. Money Market Fund:
Money market instruments are having maturity period of less than one year. Money market
fund will invest in securities like treasury bills, commercial papers, and certificate of deposits,
banker’s acceptance and short term bonds. They provide less return and these are less risky.
2. Fixed Income Funds:
These funds will invest in fixed income securities like high yield corporate bonds and
government bonds. These funds are also less risky and provide constant return. These funds
are usually preferred by those who do not want to take risks, i.e. retirement people.
3. Equality Funds:
These funds invest inequity shares of companies. These are highly risky as well as assure high
return. Investment is done in mid-cap stocks, small-cap stocks, growth stocks, income funds
or mix of these.
4. Balanced Funds:
These funds are invested in combination of fixed income securities and equities. Main aim is
to achieve higher returns in spite of high risk. Based on investor’s objective and his risk
taking ability, amount to be invested in equity and debt are decided. Risk will be less, if more
amount of debt is present in the fund.
5. Index Funds:
Mutual Fund value will fluctuate proportional to the index. These funds will be having lower
administrative costs as fund managers need not do any analysis. It is passively managed fund.
6. Specialty Funds:
These funds are invested in securities such as real estate, commodities or social responsible
investing. These are having certain aim.
7. Fund of funds:
These funds are close to balanced funds. Diversification and asset allocation are made easier
by these funds for the investor.
Sharpe ratio:
It was developed by William Sharpe. It is a ratio which specifies the average return in excess
of risk free rate that can be achieved from an investment in relation to the risk. By this we can
able to predict the profit.
𝑅𝑝 −𝑅𝑓
Sharpe ratio for the portfolio= 𝜎𝑝
(1)
𝑅𝑚 −𝑅𝑓
Sharpe ratio for the market= 𝜎𝑚
(2)
Where,
𝑅𝑝 = Return of portfolio
𝑅𝑓 = Risk free rate= 6.38(taken)
𝜎𝑝 = Standard deviation of the portfolio
𝜎𝑚 = Standard deviation of the market index
Treynor ratio:
This ratio is named after Jack. L. Treynor. Treynor assumed that as portfolio consists of
different securities, diversification is done which will result in zero unsystematic risk. Total
risk of the portfolio now becomes systematic risk which cannot be eliminated. This ratio
specifies the additional return gained by the portfolio in excess of risk free rate in relation to
the risk.
𝑟𝑖 −𝑟𝑓
Treynor ratio of the portfolio= (3)
𝛽𝑖
Treynor ratio of the market index=𝑟𝑚 − 𝑟𝑓 (4)
Where,
𝑟𝑖 = Return of the portfolio
𝑟𝑓 = Risk free rate
𝛽𝑖 = beta of the portfolio
𝑟𝑚 = Return of the market index
Jensen ratio:
This ratio which is named after Michael Jensen is calculated using capital asset pricing
model. This ratio concept is based on the fact that riskier assets return will be higher than risk
less assets return. Abnormal returns are generated if portfolio return is higher than risk
adjusted return.
Jensen alpha= 𝑅𝑖 − (𝑅𝑓 + 𝛽𝑖𝑚 (𝑅𝑚 − 𝑅𝑓 ) (6)
Preference of a portfolio depends on higher the positive value of these ratios.

LITERATURE REVIEW
Portfolio Selection, Harry Markowitz, the Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp.
77-91 explains efficient way of selecting an portfolio by calculating expected return( based on
past data) and risk of all possible portfolios and based on investor’s requirement, efficient
portfolio can be selected. But this does not apply well to mutual funds as if fund manager uses
incorrectly priced securities; it results in an inefficient diversification portfolio.

The Behavior of Stock-Market Prices, Author(s): Eugene F. Fama, The Journal of Business,
Vol. 38, No. 1 (Jan., 1965), pp. 34-105 states that future prices does not reflect past
performances. Under these circumstances selecting a portfolio is done after calculating
interrelationships among the securities. Mutual fund can attain better return if portfolio
contains assets of different industrial classes.

METHODOLOGY
Step 1: Returns of two mutual funds named SBI technology opportunities fund and Aditya
birla sun life pure value fund - growth option are collected for a period of 15 months from
March 2018 to May 2019 from investing.com website. The returns of nifty 50 are also
collected from same website for same period.
Step 2: Sum, Squares, Averages, Standard deviations and Variances of fund and market are
calculated.
Step 3: Beta of funds are calculated and Beta for market index is 1.
Step 4: Sharpe ratio, Treynor ratio and Jenson ratio are calculated for mutual fund and market
are evaluated.
Step 5: Bar diagram is drawn for the ratios calculated.
Step 6: Similar procedure is followed to calculate another fund.
Step 7: Investment in these funds is done by interpreting these results.

RESULTS

Table 1. SBI Technology Opportunities Fund

Sharpe Treynor Jensen

Fund 1.093837 8.362397 4.385529
Market -0.09814 -0.428 0

9
8
7
6
5
fund
4
market
3
2
1
0
-1 sharpe treynor jensen

Figure 1. Comparison between SBI fundand Market Index Return

From the above analysis, we can say that mean return of the portfolio is 10.55 and systematic
risk is 0.49. It indicates below average risk. The Sharpe and Treynor ratios for the portfolio
are 1.09 and 8.36 and for the market are -0.09 and -0.428. Sharpe and treynor ratio for the
fund are greater than the market. Moreover, Jensen ratio is also positive. So, the performance
of SBI technology opportunities fund is satisfactory.
 Table 2. Aditya Birla Sun Life Pure Value Fund - Growth Option

Sharpe Treynor Jenson

Fund 2.5672 12.4149 5.42607
Market 1.7384 8.348 0

14

12

10

8
fund
6 market
4

0
sharpe treynor jenson

Figure 2. Comparison between Aditya Birla and Market Index Return

From the above analysis, we can say that mean return of the portfolio is 22.944 and
systematic risk is 1.33. It indicates above average risk. The Sharpe and Treynor ratios for the
portfolio are 2.56 and 12.41 and for the market are 1.73 and 8.34. Sharpe and treynor ratio for
the fund are greater than the market. Moreover, Jensen ratio is also positive. So, the
performance of Aditya Birla Sun Life pure value fund is satisfactory.
“An investor who capable to take cannot risk can choose SBI fund, if willing to
get more return can go for Aditya Birla Fund”.
CONCLUSION
By comparing portfolio returns with market return, we can able to compare different portfolio
and find the best one. By using these ratios, we can probably able to find the best portfolio.
But, we have done all these work on the past data which may not completely reflect on the
future data. In spite of predicting many factors influencing investment decisions, there are
many more. So choosing the correct fund always is not possible.
BIBLIOGRAPHY
[1] Mutual Fund Performance, William F. Sharpe, The Journal of Business, Vol. 39, No. 1, Part 2:
Supplement on Security Prices (Jan., 1966), pp. 119-138
[2] Portfolio Selection, Harry Markowitz, the Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp. 77-91
[3] The Behavior of Stock-Market Prices, Author(s): Eugene F. Fama, The Journal of Business, Vol. 38, No.
1 (Jan., 1965), pp. 34-105
[4] https://www.moneycontrol.com/news/business/mutual-funds/-1326381.html
[5] https://www.fincash.com/l/structure-mutual-funds
[6] https://medium.com/datadriveninvestor/what-is-mutual-fund-and-how-to-invest1b9d887d8cf9