Pe of Tax Saving Schemes-1

8/9/2019 Pe of Tax Saving Schemes-1

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PERFORMANCEEVALUATIONOF

TAXSAVINGMUTUALFUNDSSCHEMESIN INDIA

S.DURGA,ASSISTANT PROFESSOR

TJPSCOLLEGE,GUNTUR.

CELLNO: [email protected]


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PERFORMANCEEVALUATIONOFTAXSAVINGMUTUALFUNDSSCHEMESIN INDIA

ABSTRACTThe objective of this paper is to evaluate the performance of Indian Mutual

fund tax saving schemes during the period 2003-2007.. 1,3,&5 absolute returns were

calculated. Since the absolute returns does not account for overall market

movements during the period we have calculated Excess returns for 1,3,&5 years.

Performance measures used are Sharpe ratio, Treynor ratio and Jensen measure.

.

INTRODUCTION

Each one of us need finance at various stages of our life and to ensure that we have the

money available at the right time and when needed, financial needs of an individual,

translating the needs into monetarily measurable goals at different times in the future

and planning the financial investments that will allow the financial needs and achieve

his life's goals. With the emergence of capital markets at the centre stage of the Indian

financial system from its marginal role a decade earlier, the Indian capital market also

witnessed during the same period a significant constitutional development in the form

of a diversified structure of Mutual funds. The large amounts of money collected by

mutual funds from 2004 onwards indicates that they have emerged as an important

savings vehicle of investors and with their war chests of money they also became

significant institutional investors in the capital market. The accelerated growth of

mutual funds highlights a need for a study on the performance of Mutual Funds.

I. DATA

The data used for analysis is mainly the secondary data. Data on mutual funds is drawn

from the respective web-sites. The sample is restricted to 19 tax saving funds whose

data is available on a daily basis for the sample period. The schemes considered in the


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study are only those with the growth option as this will not warrant any dividend

adjustments to the published NAV data. The sample period spans over the 2003-2007.

II.METHODOLOGY: 1,3,5 yrs absolute returns were calculated for all the 19 schemes.

1,3,5 yrs Excess returns were also calculated as absolute returns doesn't account for

overall market movements.we then used have used Sharpe's, Treynor's and Jensen's

measures which takes into account not only the market performance but also the

riskiness of the scheme.

III PERFORMANCE ANALYSIS

We started the performance evaluation by looking at raw returns which is defined as

under:

WhereRt = Daily return of a mutual fund in the period t

NAVt = Daily net asset value per unit of the mutual fund in the period t

Since the sample is restricted only to growth oriented schemes there is no

intermediate income and hence no adjustments for dividends are required. Return alone

should not be considered as the basis of measurement of the performance of a mutual

fund scheme, it should also include the risk taken by the fund manager because

different funds will have different levels of risk attached to them. Risk associated with a

fund, in a general, can be defined as variability or fluctuations in the returns generated

by it.

The higher the fluctuations in the returns of a fund during a given period, higher will be

the risk associated with it. These fluctuations in the returns generated by a fund are

resultant of two guiding forces.

First, general market fluctuations, which affect all the securities, present in the market,

called market risk or systematic risk and second, fluctuations due to specific securities

present in the portfolio of the fund, called unsystematic risk. The total risk of the

mutual funds under consideration is measured by the standard deviation of the daily

returns which was calculated as follows: Where,

S = Standard deviation (total risk) of the mutual fund

n = Number of daily returns


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Rt = Daily returns of the mutual fund

= Mean return of the mutual fund

Systematic risk, on the other hand, is measured in terms of Beta, which represents

fluctuations in the NAV of the fund vis--vis market. The more responsive the NAV of

a mutual fund is to the changes in the market; higher will be its beta. Beta is calculated

by relating the returns on a mutual fund with the returns in the market.

IV Empirical results:

1. For one year return analysis we had considered all those schemes that had a track

record of at least one year in existence. Consequently we were left with the

following schemes. Their names and their returns were presented in the followingTable:

TABLE : 1

Fund Name 1-Year Return (%)

3-YearReturn (%)

5-YearReturn (%)

Birla Equity Plan 40.17 50.5 59.26

Birla Sun Life Tax Relief '96 52.53 47.42 50.07

BoB ELSS '96 39.05 35.7 42.97

Canara Robeco Equity Tax Saver 56.5 49.64 43.97

Escorts Tax Plan 45.71 44.66 45.69

Franklin India Index Tax 43.77 43.97 40.46Franklin India Taxshield 37.67 45.12 49.51

HDFC LT Advantage 24.53 40.56 53.96

HDFC Taxsaver 31.26 55.03 59.49

ICICI Prudential Tax Plan 12.9 44.68 54.3

LICMF Tax Plan 29.81 29.38 35.91

Magnum Taxgain 48.12 69.01 69.67

Principal Personal Tax Saver 61.48 47.04 46.89

Principal Tax Savings 51.48 51.55 52.64

Sahara Tax Gain 34.95 41.99 44.27

Sundaram BNP Paribas Taxsaver 50.13 53.99 55.1Tata Tax Saving 34.27 39.87 49.07

Taurus Libra Taxshield 42.69 33.38 37.05

UTI Equity Tax Savings 35.9 39.55 42.8


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0

10

20

3040

50

60

70

80

Birla

BoB

Escorts

Franklin

HDFC

LICMF

Principal

Sahara

TataTax

UTI

1-Year Return (%)

3-Year Return (%)5-Year Return (%)

2. On an absolute return basis it may be observed that ICICI Prudentials tax saving

scheme returned the minimum among all the competing schemes with a return of

12.9% and Principal Tax saver returned a maximum of 61.48% which is the

maximum return from the tax saving schemes over the last one year period (15

June 2006 15 June 2007).

CALCULATIONOF EXCESS RETURNS

Since the absolute return does not account for over all market movements during the

period under consideration we also computed the excess returns defined as under:

ER = SR MR

Where

ER = Excess Returns

SR = Scheme Returns

MR = Market Returns


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CALCULATIONOF 1-YEAREXCESS RETURNS

The following Table presents the Excess Returns Statistics:

TABLE : 2

Fund Name 1-Year Excess returns over

Sensex BSE 100 NiftyBirla Equity Plan 0.2 -2.72 -4.04


BoB ELSS '96 -0.92 -3.84 -5.16



Franklin India Index Tax 3.8 0.88 -0.44

Franklin India Taxshield -2.3 -5.22 -6.54

HDFC LT Advantage -15.44 -18.36 -19.68

HDFC Taxsaver -8.71 -11.63 -12.95

ICICI Prudential Tax Plan -27.07 -29.99 -31.31LICMF Tax Plan -10.16 -13.08 -14.4




Sahara Tax Gain -5.02 -7.94 -9.26

Sundaram BNP Paribas Taxsaver 10.16 7.24 5.92

Tata Tax Saving -5.7 -8.62 -9.94

Taurus Libra Taxshield 2.72 -0.2 -1.52

UTI Equity Tax Savings -4.07 -6.99 -8.31

3. For computing the Excess returns we had used Nifty Total Returns as the proxyfor market returns which is an appropriate measure as it accounts for dividends also,

while other indices like Sensex or BSE 100 were also used for computing the returns

but the inferences will be misleading on an absolute basis since these indices were

only price indices and do not take in to account dividends paid by the underlying

portfolio. As per the excess returns again ICICI Prudentials Tax saving scheme

turned out to be least performer with a negative excess return of 31.31% while

Principal tax Saver was the best performer with an excess return of 17.27%.



TABLE : 3

Fund Name 3-Year Excess returns over

Sensex BSE Nifty


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100


BoB ELSS '96 -11.18 -9.63 -8.46


Escorts Tax Plan -2.22 -0.67 0.5

Franklin India Index Tax -2.91 -1.36 -0.19Franklin India Taxshield -1.76 -0.21 0.96

HDFC LT Advantage -6.32 -4.77 -3.6

HDFC Taxsaver 8.15 9.7 10.87

ICICI Prudential Tax Plan -2.2 -0.65 0.52

LICMF Tax Plan -17.5 -15.95 -14.78




Sahara Tax Gain -4.89 -3.34 -2.17

Sundaram BNP Paribas Taxsaver 7.11 8.66 9.83

Tata Tax Saving -7.01 -5.46 -4.29Taurus Libra Taxshield -13.5 -11.95 -10.78

UTI Equity Tax Savings -7.33 -5.78 -4.61

5. The 3 year excess returns against magnum tax gain turned out to be the best performer

with 24.85% while the LIC MF tax plan turned out to be the least performed with a

negative excess return of 14.78%



TABLE : 4

Fund Name 5 -Year Excess returnsover

Sensex BSE100

Nifty


BoB ELSS '96 -0.03 -1.27 1.47

Canara Robeco Equity TaxSaver

0.97 -0.27 2.47


Franklin India Index Tax -2.54 -3.78 -1.04

Franklin India Taxshield 6.51 5.27 8.01

HDFC LT Advantage 10.96 9.72 12.46

HDFC Taxsaver 16.49 15.25 17.99


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ICICI Prudential Tax Plan 11.3 10.06 12.8

LICMF Tax Plan -7.09 -8.33 -5.59




Sahara Tax Gain 1.27 0.03 2.77Sundaram BNP ParibasTaxsaver

12.1 10.86 13.6

Tata Tax Saving 6.07 4.83 7.57

Taurus Libra Taxshield -5.95 -7.19 -4.45

UTI Equity Tax Savings -0.2 -1.44 1.3

6. In case of 5 year excess returns the principle personal tax ever turned out to be

the best performer with 28.17% while the magnum Taxgain turned out to be theleast performer with the negative excess return of 5.59%

7 .The inferences about excess returns remain the same even if we use Sensex or

BSE 100 index returns as proxy for Market returns however on an absolute basis

the scheme excess returns will be higher than those obtained from using Nifty

Total returns as proxy for market returns.

COMPUTATIONOF SHARPESRATIO

8. We then computed the Sharpes ratio for each scheme which takes in to account

not only the market performance but also the riskiness of the scheme. This is the

most appropriate measure of scheme performance which takes in to consideration

all the dimensions of fund performance market movement and riskiness (proxied

as the standard deviation of the returns of the scheme) of the fund. Sharpes Ratio

is defined as under:

Where

SR = Scheme returns

S

fRSRS

=


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Rf = risk free returns

S = Standard deviation of the returns

9. For computing Sharpes ratio we had taken one year T Bill yield as theproxy or rate and ignored those schemes with out one year of existence

accordingly we are left with only twenty schemes.

The following Table represents the results of the Sharpes ratio for the sample

schemes:

TABLE :5

Fund Name Sharpe Ratio

Birla Equity Plan 1.78

Birla Sun Life Tax Relief '96 1.58

BoB ELSS '96 1.25

Canara Robeco Equity Tax Saver 1.58

Escorts Tax Plan 1.67

Franklin India Index Tax 1.65

Franklin India Taxshield 1.63

HDFC LT Advantage 1.71

HDFC Taxsaver 1.87

ICICI Prudential Tax Plan 1.42

ING Tax Savings 1.57

LICMF Tax Plan 1.1

Magnum Taxgain 2.51

Principal Personal Tax Saver 1.59

Principal Tax Savings 1.73

Sahara Tax Gain 1.55

Sundaram BNP Paribas Taxsaver 1.7

Tata Tax Saving 1.41Taurus Libra Taxshield 0.98

UTI Equity Tax Savings 1.46


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Sharpe Ratio

0

0.5

1

1.5

2

2.5

3

Birla

BoB

Escorts

Franklin

HDFC

ING

Tax

Magnum

Principal

Sundaram

Taurus

Sharpe Ratio

The Sharpes ratio is minimum for Taurus Libra fund at 0.98 and is maximum for

SBIs Magnum Tax gain at 2.51. From Sharpes ratio we can infer that excess

returns per unit risk of the scheme are minimum for Taurus and maximum for

Magnum tax gain.

COMPUTATIONOF TREYNORS RATIO

We also evaluated the performance of the schemes on the basis of Treynors ratio

which is defined as under:

S

fRSRT

=

Where

SR = Scheme returns


S = beta of the returns

Treynors ratio gives us the risk adjusted performance of the scheme on the

assumption that the riskiness of the scheme is proxied by beta the systematic risk

factor.


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TABLE : 6

Fund Name Treynor's Ratio


Birla Sun Life Tax Relief '96 0.381BoB ELSS '96 0.284

Canara Robeco Equity TaxSaver

0.430





HDFC Taxsaver 0.454

ICICI Prudential Tax Plan 0.386

ING Tax Savings 0.420LICMF Tax Plan 0.248

Magnum Taxgain 0.687




Sundaram BNP ParibasTaxsaver

0.417

Tata Tax Saving 0.361

Taurus Libra Taxshield 0.290



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Treynor's Ratio

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Birla

BoB

Escorts

Franklin

HDFC

INGTax

Magnum

Principal

Sundaram

Taurus

Treynor's Ratio

On this performance measure the scheme that is a best performer is again SBIs

magnum tax gain with a Treynors measure of 0.68 while LIC mutual fund is the

worst performer with a Treynors measure of 0.25.

COMPUTATIONOF JENSENS DIFFERENTIALRETURN

Sharpes ratio and Treynors ratio measure the performance of the mutual fund on

a relative basis i.e., relative to riskiness of the fund. Another class of performance

measures suggested in the literature (Michael Jensen) were the differential return

measure explained earlier.

The following Table presents the results of the differential return earned by all the

mutual funds during the last one year..

TABLE :7

Fund Name Jensen's Excess return

( )


Birla Sun Life Tax Relief '96 4.73

BoB ELSS '96 -4.25


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Canara Robeco Equity Tax Saver 8.69





HDFC Taxsaver 11.22ICICI Prudential Tax Plan 5.32

ING Tax Savings 7.93

LICMF Tax Plan -7.27

Magnum Taxgain 26.52




Sundaram BNP Paribas Taxsaver 8.41

Tata Tax Saving 2.37

Taurus Libra Taxshield -4.31


Jensen's Excess return (a)

-10

-5

0

5

10

15

20

25

30

Birla

BoB

Escorts

Franklin

HDFC

INGTax

Magnum

Principal

Sundaram

Taurus

Jensen's Excess return(a)

It may be noted that on this performance measure the worst performing fund was

LICMF tax Plan with a negative ratio of 7.27 and the best performing fund was

again SBIs Magnum tax gain scheme with 26.52%.


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FINDINGS OF THE STUDY

1. The sample used to evaluate the performance of Mutual Funds is confirmed to

Tax saving funds with the growth option over the period 2003-07.2. To evaluate the portfolios performance we used the important and widely

measures like the Treynors, Sharpe, Jensen

3. On the absolute return bases it was inferred that ICICI prudential tax saving

scheme returned the minimum with 12.9% and Principal Tax saver returned a

Maximum of 61.48% which is the Max return from the tax saving schemes.

4. Since the absolute return does not account for over all market movement excess

returns have been computed for 1year, 3year, 5years.

5. For 1year excess returns ICICI Prudentials tax saving scheme turned out to be

least performer with a negastive excess returns of 31.31% & Principal Tax

saver was the best performer with excess returns of 17.27%.

6.The 3 year excess returns against magnum tax gain turned out to be the best

performer with 24.85% while the LIC MF tax plan turned out to be the least

performed with a negative excess return of 14.78%.

7. The Sharpes ratio is minimum for Taurus Libra fund at 0.98 and is maximum

for SBIs Magnum Tax gain at 2.51. From Sharpes ratio we can infer that

excess returns per unit risk of the scheme are minimum for Taurus and

maximum for Magnum tax gain.

8. In order to evaluate the fund performance in the light of the overall market

performance along with the risk associated with the scheme, we used Sharpes,

Treynors and Jensons measure.

9. The Sharpes ratio is minimum for Taurus Libra fund at 0.98 and is maximum

for SBIs magnum tax gain at 2.5%

10. Treynors ratio is maximum for SBIs magnum tax gain with a Treynors

measure of 0.68 while LIC mutual fund is the worst performer with a Treynors

measure of 0.25.


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11. Jensons measure of differential return is used and the LICMF tax plan was the

worst performer with a negative return of 7.27% and the best performer was again

SBIs magnum tax gain scheme with 26.52%.

SUMMARY

A mutual fund is a trust that pools the savings of a number of investors who share

a common financial goal. The money thus collected is invested by the fund

manager in different types of securities depending upon the objective of the

scheme. These could range from shares to debentures to money market

instruments. The large amounts of money collected by mutual funds from 2004

onwards indicates that they have emerged as an important savings vehicle of

investors and with their war chests of money they also became significant

institutional investors in the capital market.

In recent decades, mutual funds have been the fastest growing type of financial

intermediary. The global mutual fund industry held assets of $17.8 trillion in 2005

almost doubling those managed in 1998 ($9.6 trillion). Although the growth of the

mutual fund industry started in the U.S., where the mutual fund industry plays an

extremely important role in the economy, the trend has spread more recently to a

significant number of countries around the world. The accelerated growth of

mutual funds highlights a need for a study on the performance of Mutual Funds.

The present study has focused on the performance analysis of the tax saving

schemes as these schemes were becoming an important vehicle for the small

savers hence it is imperative to see how these funds are faring. The sample period

spans over the 2003-2007.

The most important and widely used measures of performance are:

1) The Treynor Measure

2) The Sharpe Measure

3) Jenson Model


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Excess returns for 1, 3, & 5 years were calculated and along with these

performance measures we have used style analysis. William Sharpe introduced

Style Analysis and this concept caught the attention of the investment world as

well as with in the academic community. In simple terms Style analysis tells uswhat part of a mutual fund return can be attributable to the asset allocation skills

and to the stock selection skills of the fund manager? From our study it may be

noted that SBIs Magnum tax gain scheme was the best performer on Sharpe,

Jensen and Treynors measures while the worst performer was LICMFs tax saver

on Treynor and Jensens measure while on Sharpes index Taurus stands as the

worst performer.

FUTURESCENARIO

The asset base will continue to grow at an annual rate of about 30 to 35% over the

next few years as investors shift their assets from banks and other traditional

avenues. Some of the older public and private sector players will either close shop

or be taken over.

Out of ten public sector players five will sell out, close down or merge with

stronger players in three to four years. In the private sector this trend has already

started with two merges and one takeover. Here too some of them will down their

shutters in the near future to come.

But this does not mean there is no room for other players. The market will witness

a flurry of new players entering the arena. There will be a large number of offers

from various asset management companies in the time to come. Some big names

like Fidelity, Principal, and Old Mutual etc. are looking at Indian market seriously.

One important reason for it is that most major players already have presence here

and hence these big names would hardly like to get left behind.

In the U.S most mutual funds concentrate only on financial funds like equity and

debt. Some like real estate funds and commodity funds also take an exposure to


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physical assets. The latter type of funds are preferred by corporates who want to

hedge their exposure to the commodities they deal with.

For instance, a cable manufacturer who needs 100 tons of Copper in the month of

January could buy an equivalent amount of copper by investing in a copper fund.For Example, Permanent Portfolio Fund, a conservative U.S based fund invests a

fixed percentage of its corpus in Gold, Silver, Swiss francs, specific stocks on

various bourses around the world, short-term and long-term U.S. treasuries etc.

In U.S.A apart from bullion funds there are copper funds, precious metal funds

and real estate funds (investing in real estate and other related assets as well). In

India, the Canada based Dundee Mutual fund is planning to launch a gold and a

real estate fund before the year-end.

In developed countries like the U.S.A there are funds to satisfy everybodys

requirement, but in India only the tip of the iceberg has been explored. In the near

future India too will concentrate on financial as well as physical funds.

The mutual fund industry is awaiting the introduction of DERIVATIVES.

INDIANSCENARIO

As per Hindu religion, an auspicious start to any event would be an invocation to

the Lord Ganesha. So also, any discussion on the mutual fund sector in India has

to start with Unit Trust of India (UTI).

UTI was constituted under the UTI Act, 1963. It commenced operations in

July1964 with a view to encouraging savings and investment and participation in

the income, profits and gains accruing to the Corporation from the acquisition,

holding, management and disposal of securities.

UTI remained the monopoly player in the mutual fund sector until 1987, when

public sector banks and insurance companies were permitted to enter the fray.

Finally, in 1993, the securities and Exchange Board of India (SEBI) came up with

comprehensive mutual fund regulations, that permitted the private sector to start

mutual fund operations. These were later replaced by the SEBI Mutual fund

Regulations, 1996. In the past, UTI launched several schemes where income for


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the investors was assured. Such assured returns schemes, where the government is

a guarantor, have since been transferred to Specified Undertaking of UTI. Other

schemes of UTI, which are market related, are being managed by UTI Asset

Management Company.

BIBLIOGRAPHY

1. Sharpe, William F. (1992) Asset Allocation: Management Style and Performance

Measurement,Journal of Portfolio Management, vol. 18, No. 2 pp 7-19

2. George P. Artikis, (2003) Performance Evaluation: A Case Study of the Greek

Balanced Mutual Funds Managerial Finance Vol. 29 No. 9 pp 1-8

3. Fischer, E. D. & Jordan, J. R. (1997) Security Analysis and Portfolio

Management; Prentice - Hall of India Private Ltd. New-Delhi 6th Edition.

4. Christopherson, J. 1995. "Equity Style Classifications," Journal of Portfolio

Management, 21, 32-43.

5. Schwob Robert (2000) Style and style analysis from a practitioners perspective:

What is it and what does it mean for European Equity investors? Journal of Asset

Management Vol. 1, 1, 39-59

6. Juan Carlos Matall n Sa ez (2000) Style analysis and performance evaluation of

Spanish mutual funds Journal of Asset Management Vol. 1, 2, 151171

7. Sharad Panwar and R. Madhumathi Characteristics and Performance Evaluation

of Selected Mutual Funds in India Working Paper SSRN-Id876402

8. S. Narayan Rao , M. Ravindran Performance Evaluation of Indian Mutual Funds

Working paper http://papers.ssrn.com/sol3/papers.cfm?abstract_id=433100.

9. H. Sadhak , Mutual Funds in India, Marketing Strategies and Investment

Practices, Second Edition, Response Books, A division of Sage Publications IndiaPvt. Ltd , 2003.

10. Corporate finance Theory and practice by Viswanath S.R

11. Indian mutual funds handbook by sundar sankaran

12. Performance evaluation of mutual funds in India by Lalith K Bansal


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NOTES

MEASURESOF PERFORMANCE EVALUATION

For the calculation of the systematic risk, as it is measured by the beta coefficient, the capital

asset pricing model was used (Elton, and Gruber 1995). Namely:

Ri = i +i Rm +i

Where,

Ri = Daily return of the mutual fund i

i = Return of the mutual fund i when the market is constant

i = Systematic risk of the mutual fund i

Rm = Daily returns of the market portfolio (CNX 500 index is taken as the proxy)

i = Impact of non systematic factors that are independent from the market fluctuations

While unsystematic risk can be diversified through investments in a number of instruments,

systematic risk can not. By using the risk return relationship, we try to assess the competitive

strength of the mutual funds vis--vis one another in a better way.

In order to determine the risk-adjusted returns of investment portfolios, several eminent authors

have worked since 1960s to develop composite performance indices to evaluate a portfolio by

comparing alternative portfolios within a particular risk class. The most important and widely

used measures of performance are:

A.The Treynor Measure

BThe Sharpe Measure

C.Jenson Model

A.THE TREYNORMEASURE

The development of portfolio theory and especially capital market theory, and the capital

asset pricing model provided the foundation for risk adjusted performance analysis. Jack

Treynor (1965) presented the first formal technique to combine both risk and returns in a single

performance measure. This performance measure evaluates funds on the basis of Treynor's

Index. This Index is a ratio of return generated by the fund over and above risk free rate of

return (generally taken to be the return on securities backed by the government, as there is no

credit risk associated), during a given period and systematic risk associated with it (beta).

Symbolically, it can be represented as:

Treynor's Index (Ti) =


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Where, SR represents average return on the scheme, Rf is risk free rate of return and s is beta

of the scheme. All risk-averse investors would like to maximize this value. While a high and

positive Treynor's Index shows a superior risk-adjusted performance of a fund, a low and

negative Treynor's Index is an indication of unfavorable performance

B.THE SHARPE MEASURE

Shortly after Treynor's technique was published, William Sharpe (1966) introduced an

alternative technique for performance evaluation and illustrated the technique in evaluating the

performance of a large number of mutual funds. Specifically, Sharpe's measure is the ratio of

the risk premium of the portfolio, divided by the standard deviation of the portfolio's return: In

this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of

returns generated by the fund over and above risk free rate of return and the total risk associated

with it. According to Sharpe, it is the total risk of the fund that the investors are concerned

about. So, the model evaluates funds on the basis of reward per unit of total risk.

Symbolically, it can be written as:

Sharpe Index (Si)

Where

SR = Scheme returns


S = Standard deviation of the returns

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a

low and negative Sharpe Ratio is an indication of unfavorable performance.

C.JENSON MODEL

Following Treynor and Sharpe, Michael Jensen (1968) developed a third measurement

technique. Like Treynor's technique, Jensen's measure is based on the capital asset pricing

model. This approach uses certain time series variables in a regression: This measure was

developed by Michael Jenson and is sometimes referred to as the Differential Return Method.

This measure involves evaluation of the returns that the fund has generated vs. the returns

actually expected out of the fund given the level of its systematic risk. The surplus between the

two returns is called Alpha, which measures the performance of a fund compared with the

actual returns over the period.

Required return of a fund at a given level of risk (Bi) can be calculated as:

Ri = Return of the security (mutual fund) i

Rf= Risk free return

i = Risk adjusted excess return of the mutual fund i


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i = Beta of the mutual fund i

Rm = Return of the market portfolio

i = Deviation or errors around the regression line

Jensen argued that an indication of a portfolio's performance is or the risk adjusted excess return.

Essentially, if >0 and is significantly different from 0 in a statistical test, then the portfolio had

superior performance. If < 0 and is statistically significant, then the portfolio demonstrated poor

performance. Finally, if is not statistically different from 0, the portfolio did not provide a risk-

adjusted excess return. Jensen's alpha can be interpreted simply as the additional return (or loss)

earned by the portfolio after adjusting for systematic risk.

Brief Description of Style Indices used in this study

S&P CNX Nifty: It is a well diversified 50 stock index accounting for 21 sectors of the

economy. It is used for a variety of purposes such as benchmarking fund portfolios, index

based derivatives and index funds. S&P CNX Nifty is computed using market

capitalization weighted method, wherein the level of the index reflects the total market

value of all the stocks in the index relative to a particular base period. The method also

takes into account constituent changes in the index and importantly corporate actions

such as stock splits, rights, etc without affecting the index value. The medium capitalized

segment of the stock market is being increasingly perceived as an attractive investment

segment with high growth potential.

Nifty Midcap 50 Index: The primary objective of the Nifty Midcap 50 Index is to

capture the movement of the midcap segment of the market. It can also be used for index-

based derivatives trading. Nifty Midcap 50 is computed using market capitalisation

weighted method, wherein the level of the index reflects the total market value of all the

stocks in the index relative to a particular base period. The method also takes into account

constituent changes in the index and importantly corporate actions such as stock splits,

rights, etc without affecting the index value.

CNX Nifty Junior: The next rung of liquid securities after S&P CNX Nifty is the CNX

Nifty Junior. It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior

as making up the 100 most liquid stocks in India. As with the S&P CNX Nifty, stocks in

the CNX Nifty Junior are filtered for liquidity, so they are the most liquid of the stocks


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excluded from the S&P CNX Nifty. The maintenance of the S&P CNX Nifty and the

CNX Nifty Junior are synchronised so that the two indices will always be disjoint sets;

i.e. a stock will never appear in both indices at the same time. Hence it is always

meaningful to pool the S&P CNX Nifty and the CNX Nifty Junior into a composite 100

stock index or portfolio. CNX Nifty Junior is computed using market capitalisation

weighted method, wherein the level of the index reflects the total market value of all the

stocks in the index relative to a particular base period. The method also takes into account

constituent changes in the index and importantly corporate actions such as stock splits,

rights, etc without affecting the index value.

i-BEX: is a family of bond indices that act as a metric to measure the performance of the

government securities market. Launched in 1994, it has emerged as the preferred

benchmark across all classes of market participants. Recommended by Association of

Mutual Funds in India (AMFI), the index is used by fund managers to measure market

performance, benchmark the performance of their portfolios, and also as a tool for

quantifying risks in the sovereign bond market. It has also been extensively used by

academia in India as a proxy representative of the bond markets.

i-BEX consists of an umbrella index covering the entire market and sub-indices catering

to three contiguous maturity buckets. The three sub-indices are Si-Bex (1 to 3 years), Mi-

Bex (3 to 7 years) and Li-Bex (more than 7 years). The indices measure the total andprincipal returns of the respective maturity segments and are updated daily. The selection

of maturity segments and individual securities in each segment along with their

respective weightings reflects the opportunities available to investors in the sovereign

bond market. Together, the family covers the government bond market from one-year

bonds to the longest available maturity bonds. For each constituent security, the weighted

average price of Negotiated Dealing System (NDS) trades (excluding all trades below Rs

1 cr face value) as reported by RBI is used for index computation. The index measures

the changing value of an index portfolio by weighting the total return on each constituent

bond by the market value on the previous day. Each weight is equal to the amount

outstanding with the market at the beginning of each month multiplied by the securitys

gross price (net price plus accrued interest). For principal return calculations, the weights

do not reflect accrued interest and only the net price is used. The index assumes that


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coupons received are immediately reinvested back into the bond index in proportion to

the latest market values of the constituents. The index is fully invested at all times, which

is only possible with daily indices.

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