1. REVIEW OF LITERATURE
Friend et al., (1962) had done an extensive and systematic study of mutual funds. The study
considered 152 mutual funds with annual data from 1953-1958. Using their own benchmark, the
author found that mutual funds earned an (unweighted) average annual return of 12.4 percent
while their composite benchmark earned a return of 12.6 percent. Their alpha –of –sorts was a
negative 20 basis points .on the whole, it was revealed that overall results did not suggest
widespread in efficiency in the industry. The study also compared returns of the funds across
turnover categories and expenses categories. The analysis did not reveal a strong relationship
between turnover rates and performance. The same was found to be true in respect of expenses.
The Wharton study on the performance of mutual funds was followed by trey nor, (1965) when
he devised a satisfactory way to measure the performance of a fund with the help of the
characteristics line and the portfolio possibility line .The characteristics line contains information
about expected rate of return and risk. The slope of the line measures volatility .the purpose of
the portfolio possibility line is to relate the expected return of a portfolio containing the fund to
the portfolio owner’s risk preferences. He found that relative quantitative performance rankings
could be read directly from the characteristic line despite market fluctuations and different risk
policies.
Another study was conducted by Sharpe (1966) to develop a composite measure that considers
return and risk. He evaluated the performance of 34 open ended mutual funds during the period
1954-63 by the measure so developed. He found that the performance of 11 funds were superior
to that of Dow Jones industrial Average’s (DJIA).His reward to variability ratio for each fund
was significantly less than the same measure applied to the DJIA over the study period .Based on
this evidence Sharpe concluded that on an average mutual fund performance was distinctly
inferior to an investment in the DJIA.An analysis of relationship between fund performance
and its expenses ratio indicated that good performances was associated with low expenses
ratio. On the other hand ,omnly a low relationship was discovered between size and
performance .Notably, there was some consistency in the risk measure over time for alternative

2. funds.His study concludes that out of 34 funds selected 19 had out performed the benchmark in
term of total risk.
Levy (1968)4 pondered upon importance to develop an accurate and complete measure of
investment performance. In an attempt to develop theoretically sound measures of risk and
return in portfolio evaluation , he focused on Sharpe measure and put forward some
modification in the Sharpe methodology for calculation of risk and return .The advocated the
use of geometric mean against simple arithmetic mean of sub-period return and vulnerability
for variability as used by Sharpe (1966).
Jenson (1968)5 analysed the performance on two dimension s. First on the ability of the
portfolio manager or security analyst to increase returns on the portfolio through successful
prediction of future security price .Secondly on the ability of the portfolio manager to minimize
(through efficient diversification ) the amount of insurable risk borne by the holder s of the port
folio. The author analyzed only the predictive ability of the managers to earn excess return over
the expected return. The analysis was done on 115 open – ended mutual funds in the period
1945-1964. It is only an absolute measure. The evidence indicated that these 115 mutual funds
managers were on average not able to predict security prices well enough to outperform a buy –
the- market-and –hold policy. The study was limited to open –ended schemes.
In a further attempt by Smith and Tito (1969)6 a comparison of the composite performance
measure of Sharpe ,Jensen & Treynor was made and a modified Jensen measure was devised
.They applied all the measures in ranking the 38 mutual funds, by taking the 40 quarter period
from 1959 to 1967. They have found out that Treynor’s volatility measures provide a much more
favourable view of fund performance than does the Sharpe’s Variability Index. They were of the
view that even the unsystematic risk was the important factor in determining whether the funds
outperform market portfolios. They recommended for the modified Jensen measure because it
was based on estimating equation .finally much attention has been given to the problem of
whether or not portfolio managers have performed well enough to justify their management
fees.

3. Friend and Blume (1970)7 commented on the one parameter risk adjusted measures of portfolio
performance of Sharpe ,Trey nor and Jensen as biased and suggested that improved measures
of portfolio performances for any period could be obtained by adjusting the earlier measures
depending on the degree of risk , they were of the opinion that traditional two parameter
measures would be more useful.
Carlson (1970)8 examined the overall performance of mutual funds for the period 1948-1967
with emphasis on analyzing the effect of market series used over different time periods. The
analysis of performance relative to the market indicated that result s were heavily dependent on
the market series used , namely ,S&P500, NYSE composite, or DJIA.For the total period
almost all fund group out performed DJIA but only a few had gross returns that were better
than those for S&P 500 or NYSE composite ,although there was consistency in the risk adjusted
performances measures . Carlson also analyzed performances relative to size or expense-ratio,
and a new –fund factor. The results indicated no relationship with size or expenses ratio,
although there was a relationship between performance and a measure of new cash into funds.
Arditti (1971)9 attempted to add an important dimension to the Sharpe (1966) study and showed
that when the third moment of fund annual rate of return was introduced, Sharpe’s conclusion
got altered. As a measure of direction and size of distribution tail, the third moment provided
significant information .Thus, contraty to Sharpe’s observation; it was found that average fund
performance could no longer be judged inferior to the performance of DJIA. Yet important
fallout was that either fund managers were willing to forgo return at a given level of risk or were
tempted to opt more variability in exchange for larger annual returns.
Klemosky (1973)10 analysed investment performance of mutual fund based on quarterly returns
for 40 funds during the period 1966-1971. The analysis identifies bias in Sharpe, Trey nor and
Jensen measures, which could be removed by using mean absolute deviation and semi –standard
deviation as risk surrogates. The resultant performance measure was claimed to be a better risk
adjusted performance measures than composite measures derived from the capital asset pricing
models.
Mc Donald (“1974) 11 examined performance of 123 mutual funds relating it to the stated
objective of each fund. The results indicated a positive relationship between objectives and risk

4. measures that is risk increasing with the objective becoming more aggressive. Rate of return
generally increased with aggressiveness and as expected, there was a positive relationship
between return and risk. The relationship between objectives and risk-adjusted performance
indicated that more aggressive funds experienced better results, although only one-third of the
fund did better than aggregate market.
Gupta (1974)12 evaluated the performances of mutual fund industry by differentiating several
subgroups by their broad investments goals and objectives for the period 1962-71.the
performances model s devised by Sharpe ,Trey nor and Jensen were used .The study evaluated
results by using both DJIA and S&P500 as market indices .The results obtained indicated that
these performance model led to identical results .Also that almost all mutual fund subgroup
outperformed the market using DJIA, except and income and balanced group s which based on
S&P 500. It also shows that returns per unit of risk varies with the level of volatility assumed
and that funds having higher volatility exhibited superior performance than the others . It has
also shown that all fund types outperformed the market irrespective of choice of market index
and performance measure.