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The persistence of

  2. 2. DECLARATIONI, T.DIVYA SREE from TPS (2010-2012) of SIVA SIVANI INSTITUTE OF MANAGEMENT(SSIM), hereby declare that I have successfully completed this project on “PerformancePersistence of GROWTH FUNDS” as a part of my „Specialization Project‟. Theinformation incorporated in this project is true and original to the best of my knowledge. ii
  3. 3. ACKNOWLEDGMENTI thank my project guide Dr. K.SASI KUMAR from SIVA SIVANI INSTITUTE OFMANGEMENT for spending his valuable time and helping me with the topic and also for hisgenerosity and honesty in showing interest in my project and guiding me throughout thedevelopment of the project and critically evaluating the project from time to time.To end with, I thank the people who helped me indirectly, without which this project was notpossible. I also wish to express sincere gratitude to all the respondents of the project and the kindof co-operation of whom without this work would not have been possible. iii
  4. 4. CONTENTSS.No TOPIC PAGE NO1 Introduction 12 Mutual Funds – 4 Theoretical Framework3 Performance Persistence - 21 Theory4 Measuring Performance 25 Persistence5 Conclusion 37 iv
  5. 5. INTRODUCTIONThis study examines the persistence performance of growth funds in the India through the use ofwinner-loser contingency table methodology. The persistence tests are applied to a database ofvarying numbers of funds of 5 using weekly returns over the 5 years from 2008 to 2011. Theoverall conclusion is that the growth funds in India show little evidence of persistence in theshort-term (weekly) or for data over a considerable length of time. In contrast, the results arebetter for annual data with evidence of significant performance persistence. Thus at this stage, itseems that an annual evaluation period, provides the best discrimination of the winner and loserphenomenon in the real estate market. This result is different from equity and bond studies,where it seems that the repeat winner phenomenon is stronger over shorter periods of evaluation.These results require careful interpretation, however, as the results show that when only smallsamples are used significant adjustments must be made to correct for small sample bias andsecond the conclusions are sensitive to the length of the evaluation period and specific test used.Nonetheless, it seems that persistence in performance of the growth funds in India does exist, atleast for the annual data, and it appears to be a guide to beating the pack in the long run.Furthermore, although the evidence of persistence in performance for the overall sample of fundsis limited, we have found evidence that two funds were consistent winners over this period,whereas no one fund could be said to be a consistent loser.OBJECTIVES OF THE STUDY  The purpose of this paper is to examine the performance persistence of a large sample of mutual funds over time  To see whether mutual fund performance from one year to the next basically a random event or not  The persistence of growth funds is short term or long term in natureHypothesis 1|Page
  6. 6. This study will test the hypothesis that actively managed mutual funds show significantperformance persistence over our study period, 2008 through 2011. This analysis includes fivedifferent growth mutual funds, including categories of equity funds, bond funds, and balancedfunds.MethodologyPersistence in performance refers to the ability of a fund to attain returns above the median,relative to comparable funds, for consecutive time periods. Such persistence in fund performanceis particularly attractive to investors as it suggests the choosing funds that will perform well inthe future is as simple as looking at those that performed well in the past. Consequently, mucheffort has been expended recently to determine if such a rule exists in the equity and bondmarkets. However, the performance persistence literature is characterized by a number of studiesthat, although using generally similar methodology, have produced apparently inconsistent, andin some cases contradictory, results. For instance, a number of studies identify a tendency formutual funds to provide consistent returns performance over time relative to other funds. Performance persistence can be examined in various ways with a number ofmethodologies. For instance, studies have investigated performance persistence through the useof regression analysis, in which future performance is regressed against a measure ofperformance in the past, a significant and positive slope coefficient indicating performancepersistence while a significantly negative slope coefficient indicates performance reversal. Analternative approach is to sort funds based on returns over previous periods and evaluate theperformance of the resulting portfolios. Another common approach is to rank funds by pastperformance to examine whether the rankings are consistent over time. A further approach is toevaluate persistence through the use of contingency tales. Of the various methodologies used toevaluate persistence the one used here is the winner-loser contingency table approach for threereasons. First, contingency tables are more appropriate where there is doubt as to thedistributional assumptions of the sample. Second, the application of contingency tables isrelatively straightforward and so easier to understand by everyday investors, especially if rawreturns are used. Third, contingency tables are preferred to the alternative methods when thesample of funds is limited. 2|Page
  7. 7. Winner/Loser Contingency TableThe contingency table approach is used to identify the frequency with which funds are defined aswinners and losers over successive time periods. If the same number of funds in existence is thesame in each period the definition is quite simple. In this approach each fund is either a winner(W) or a loser (L), where a winner is defined as a fund with returns above the median. Aloser fund is thus one with returns below the median. If a loser (L) in the first period is also aloser (L) in the future period, it is defined as a loser-loser (LL). In a similar way a winner (W) inthe first period that remains a winner (W) in the future period is defined as a winner-winner(WW). If a fund shifts from a loser (L) to a winner (W) it is a loser-winner (LW) and a fund thatmoves from being a winner (W) to a loser (L) is a winner-loser (WL). However, if funds enter orleave the database the problem is more complex. For instance, suppose there are M funds inperiod t but N funds enter the data set in the next period; M+N funds need to be ranked in periodt+1. Thus, in order to maintain the consistency of fund rankings through time only funds withreturns in both periods are analyzed in t+1. The frequencies with which funds are defined aswinners and losers over successive time periods are then calculated. To test for the independencein the results three statistical criteria are used each of which tests for different forms ofpersistence. 3|Page
  8. 8. MUTUAL FUNDS – THEORITICAL FRAMEWORKOrganization of a Mutual Fund Three key players namely sponsor, mutual fund trust, and assetManagement Company (AMC) is involved in setting up a mutual fund. They are assisted byother independent administrative entities like banks, registrars, transfer agents, and custodians(depository participants).SponsorSponsor means any person who acting alone or with another body corporate establishes a mutualfund. The sponsor of a fund is akin to the promoter of a company as he gets the fund registeredwith SEBI. SEBI will register the mutual fund if the sponsor fulfills the following criteria: The sponsor should have a sound track record and general reputation of fairness andintegrity in all his business transactions. This means that the sponsor should have been doingbusiness in financial services for not less than five years, with positive net worth in all theimmediately preceding five years. The net worth of the immediately preceding year should bemore than the capital contribution of the sponsor in AMC and the sponsor should show profitsafter providing depreciation, interest, and tax for three out of the immediately preceding fiveyears. The sponsor and any of the directors or principal officers to be employed by the mutualfund, should not have been found guilty of fraud or convicted of an offence involving moralturpitude or guilty of economic offences. The sponsor forms a trust and appoints a Board ofTrustees. He also appoints an Asset Management Company as fund managers. The sponsor,either directly or acting through the Trustees, also appoints a custodian to hold the fund assets.The sponsor is required to contribute at least 40% of the minimum net worth of the assetmanagement company.Mutual Funds as TrustsA mutual fund in India is constituted in the form of a public Trust created under the Indian TrustsAct, 1882. The sponsor forms the Trust and registers it with SEBI. The fund sponsor acts as thesettler of the Trust, contributing to its initial capital and appoints a trustee to hold the assets ofthe Trust for the benefit of the unit- holders, who are the beneficiaries of the Trust. The fund theninvites investors to contribute their money in the common pool, by subscribing to „units‟ issued 4|Page
  9. 9. by various schemes established by the Trust as evidence of their beneficial interest in the fund.Thus, a mutual fund is just a „pass through‟ vehicle. Most of the funds in India are managed bythe Board of Trustees, which is an independent body and acts as protector of the unit -holders‟interests. At least, 50% of the trustees shall be independent trustees (who are not associated withan associate, subsidiary, or sponsor in any manner). The trustees shall be accountable for and bethe custodian of funds/property of respective scheme.Asset Management CompanyThe trustees appoint the Asset Management Company (AMC) with the prior approval of SEBI.The AMC is a company formed and registered under the Companies Act, 1956, to manage theaffairs of the mutual fund and operate the schemes of such mutual funds. It charges a fee for theservices it renders to the mutual fund trust. It acts as the investment manager to the Trust underthe supervision and direction of the trustees. The AMC, in the name of the Trust, floats and thenmanages the different investment schemes as per SEBI regulations and the Trust Deed. TheAMC should be registered with SEBI. The AMC of a mutual fund must have a net worth of atleast Rs 10 crore at all times and this net worth should be in the form of cash. It cannot act as atrustee of any other mutual fund. It is required to disclose the scheme particulars and base ofcalculation of NAY. It can undertake specific activities such as advisory services and financialconsultancy. It must submit quarterly reports to the mutual fund. The trustees are empowered toterminate the appointment of the AMC and may appoint a new AMC with the prior approval ofthe SEBI and unit-holders. At least 50% of the directors of the board of directors of AMC shouldnot be associated with the sponsor or its subsidiaries or the trustees.Obligations of an AMCAn AMC has to follow a number of obligations. They are:  The AMC shall take all the reasonable steps and exercise due diligence to ensure that any scheme is not contrary to the Trust deed and provisions of investment of funds pertaining to any scheme is not contrary to the provisions of the regulations and Trust deed.  The AMC shall exercise due diligence and care in all its investment decisions. The AMC shall be responsible for the acts of commission or commissions by its employees or the 5|Page
  10. 10. persons whose services have been procured. An AMC shall submit to the trustee‟s quarterly reports.  The trustees at the request of an AMC can terminate the assignments of the AMC.  An AMC shall not deal in securities through any broker associated with a sponsor or a firm which is an associate of sponsor beyond 5% of the daily gross business of the mutual fund.  No AMC shall utilize services of the sponsor or any of its associates, employees, or their relatives for the purpose of any securities transaction and distribution and sale of securities, unless disclosure is made to the unit-holders and brokerage/commission paid is disclosed in half-yearly accounts of the mutual fund.  No person, who has been found guilty of any economic offence or involved in violation of securities law, should be appointed as key personnel. . The AMC shall abide by the code of conduct specified in the fifth schedule. The registrars and share transfer agents to be appointed by AMC are to be registered with SEBI. SEBI regulations (2001) provide for exercise of due diligence by asset managementcompanies (AMCs) in their investment decisions. For effective implementation of the regulationsand also to bring about transparency in the investment decisions, all the AMCs are required tomaintain records in support of each investment decision, which would indicate the data, facts,and other opinions leading to an investment decision. While the AMCs can prescribe broadparameters for investments, the basis for taking individual scrip-wise investment decision inequity and debt securities would have to be recorded. The AMCs are required to report itscompliance in their periodical reports to the trustees and the trustees are required to report toSEBI, in their half-yearly reports. Trustees can also check its compliance through independentauditors or internal statutory auditors or through other systems developed by them. Theunclaimed redemption and dividend amounts can now be deployed by the mutual funds in callmoney market or money market instruments and the investors who claim these amounts during aperiod of three years from the due date shall be paid at the prevailing net asset value. After aperiod of three years, the amount can be transferred to a pool account and the investors can claimthe amount at NAV prevailing at the end of the third year. The income earned on such funds canbe used for the purpose of investor education. The AMC has to make a continuous effort to 6|Page
  11. 11. remind the investors through letters to take their unclaimed amounts. In case of schemes to belaunched in the future, disclosures on the above provisions are required to be made on the offerdocuments. Also, the information on amount unclaimed and number of such investors for eachscheme is required to be disclosed in the annual reports of mutual funds. SEBI issued a directiveduring 2000-01 that the annual report containing accounts of the asset management companiesshould be displayed on the websites of the mutual funds. It should also be mentioned in theannual report of mutual fund schemes that the unit-holders, if they so desire, can request for theannual report of the asset management company. Mutual funds earlier were required to get prior approval of the board of trustees andAMCs to invest in un-rated debt instruments. In order to give operational flexibility, mutualfunds can now constitute committees who can approve proposals for investments in un-rateddebt instruments. However, the detailed parameters for such investments must be approved bythe AMC boards and trustees. The details of such investments are required to be communicatedby the AMCs to the trustees in their periodical reports and it should be clearly mentioned as tohow the parameters have been complied with. However, in case a security does not fall under theparameters, the prior approval of the board of the AMC and trustees is required to be taken.SEBI issued guidelines for investment/trading in securities by employees of AMCs and mutualfund- trustee companies, so as to avoid any conflict of interest or any abuse of an individual‟sposition and also to ensure that the employees of AMCs and trustee companies should not takeundue advantage of price sensitive information about any company. SEBI issued directives thatthe directors‟ of AMCs should file with the trustees the details of their purchase and saletransactions in securities on a quarterly basis. As in the case of trustees, they may report onlythose transactions which exceed the value of Rs 1 lakh. Following representations from AMFI,SEBI notified the Mutual Funds (Amendment) Regulations, 2002, whereby the requirement ofpublishing of scheme-wise annual report in the newspapers by the mutual funds was waived.However, mutual funds shall continue to send the annual report or abridged annual report to theunit -holders. Further, all mutual funds were advised to display the scheme-wise annual reportson their websites to be linked with AMFI website so that the investors and analysts can accessthe annual reports of all mutual funds at one place. To provide the investors an objective analysis of the performance of the mutual fundsschemes in comparison with the rise or fall in the markets, SEBI decided to include disclosure of 7|Page
  12. 12. performance of benchmark indices in case of equity-oriented schemes and subsequentlyextended to debt-oriented and balanced fund schemes in the format for half-yearly results. Incase of sector or industry specific schemes, mutual funds may select any sectoral indicespublished by stock exchanges and other reputed agencies. In pursuance with the proposals in theUnion Budget 2002-03, SEBI allowed the mutual funds to invest in foreign debt securities in thecountries with full convertible currencies and with highest rating (foreign currency credit rating)by accredited/ registered credit rating agencies. They were also allowed to invest in governmentsecurities where the countries are AAA rated. To bring, uniformity in calculation of NAVs ofmutual fund schemes, SEBI issued guidelines for valuation of unlisted equity shares. SEBIclarified that the service charge of five% on the management fees of AMCs imposed in theUnion Budget 2002-03 can be charged to the schemes as an item of general expenditure withoutimposing an additional burden on unit-holders. SEBI advised mutual funds that the non-performing or illiquid assets at the time of maturity/closure of schemes but realized within twoyears after the winding up of the scheme, should be distributed to the old investors if the amountis substantial. In case the amount is not substantial or it is realized after two years it may betransferred to the Investor Education Fund maintained by each mutual fund.Mutual funds can enter into transactions relating to government securities only in dematerializedform. SEBI clarified that the SEBI (Insider Trading) (Amendment) Regulations, 2002, should befollowed strictly by the trustee companies, AMCs and their employees and directors.Objectives of AMFITo define and maintain high professional and ethical standards in all areas of operation of mutualfund industry  To recommend and promote best business practices and code of conduct to be followed by members and others engaged in the activities of mutual fund and asset management, including agencies connected or involved in the field of capital markets and financial services.  To interact with the SEBI and to represent to SEBI on all matters concerning the mutual fund industry.  To represent to the government, Reserve Bank of India and other bodies on all matters relating to the mutual fund industry. 8|Page
  13. 13.  To develop a cadre of well trained agent distributors and to implement a programme of training and certification for all intermediaries and others engaged in the industry.  To undertake nationwide investor awareness programme so as to promote proper understanding of the concept and working of mutual funds.  To disseminate information on mutual fund industry and to undertake studies and research directly and! or in association with other bodies.AMFI continues to play its role as a catalyst for setting new standards and refining existing onesin many areas, particularly in the sphere of valuation of securities. Based on therecommendations of AMFI, detailed guidelines have been issued by SEBI for valuation ofunlisted equity shares. A major initiative of AMFI during the year 2001-02 was the launching ofregistration of AMFI Certified Intermediaries and providing recognition and status to thedistributor agents. More than 30 corporate distributors and a large number of agent distributorshave registered with AMFI. The AMFI Guidelines and Norms for Intermediaries (AGNI)released in February 2002, gives a framework of rules and guidelines for the intermediaries andfor the conduct of their business. AMFI maintains a liaison with different regulators such asSEBI, IRDA, and RBI to prevent any over -regulation that may stifle the growth of the industry.AMFI has set up a working group to formulate draft guidelines for pension scheme by mutualfunds for submission to IRDA. It holds meetings and discussions with SEBI regarding mattersrelating to mutual fund industry. Moreover, it also makes representations to the government forremoval of constraints and bottlenecks in the growth of mutual fund industry. AMFI recently launched appropriate market indices which will enable the investors toappreciate and make meaningful comparison of the returns of their investments in mutual fundsschemes. While in the case of equity funds, a number of benchmarks like the BSE Sensex andthe S&P CNX Nifty are available, there was a lack of relevant benchmarks for debt funds. AMFItook the initiative of developing eight new indices jointly with and ICICI Securities.These indices have been constructed to benchmark the performance of different types of debtschemes such as liquid, income, monthly income, balanced fund, and gilt fund schemes. Theseeight new market indices are Liquid Fund Index (Liqui fex), Composite Bond Fund Index(Compbex), Balanced Fund Index (Balance EX), MIP Index (MIPEX), Short Maturity Gilt Index(Si-Bex), Medium Maturity Gilt Index (Mi-Bex), Long Maturity Gilt Index (Li-Bex) and the 9|Page
  14. 14. Composite Gilt Index. In the case of liquid funds, the index comprises a commercial paper (CP)component with a 60% weightage and an inter-bank call money market component with a 40%weightage. The CP component of the index is computed using the weighted average issuanceyield on new 91 days CPs issued by top rated manufacturing companies. In the case of bondfunds, the index comprises a corporate bond component with a 55% weightage, gilts componentwith a 30% weightage call component with 10% weightage and commercial paper with 5%weightage. The index‟s 55% bond component is split based on a 40 point share of AA ratedbonds, and 15 points share of AA rated bonds. Mutual funds have now to disclose also theperformance of appropriate market indices along with the performance of schemes both in theoffer document and in the half-yearly results. Further, the trustees are required to review theperformance of the schemes on periodical basis with reference to market indices. These indiceswill be useful to distribution companies, agents/brokers, financial consultants, and investors.AMFI conducts investor awareness programmes regularly. AMFI also conducts intermediary‟scertification examination. As of July 2002, 2,140 employees and 3,200 distributors have passedthe certification examination conducted by AMFI. AMFI is in the process of becoming a self-regulatory organisation (SRO). It has set up a committee to set the norms for AMFI to become anSRO.Unit Trust of IndiaUnit Trust of India (UTI) is India‟s first mutual fund organisation. It is the single largest mutualfund in India, which came into existence with the enactment of UTI Act in 1964. The economicturmoil and the wars in the early sixties depressed the financial markets, making it difficult forboth existing and new entrepreneurs to raise fresh capital. The then Finance Minister, T TKrishnamachari, set up the idea of a Unit Trust which would mobilise savings of the communityand invest these savings in the capital market. His ideas took the form of the Unit Trust of India,which commenced operations from July 1964 „with a view to encouraging savings andinvestment and participation in the income, profits and gains accruing to the Corporation fromthe acquisition, holding, management and disposal of securities‟. The regulations passed by theMinistry of Finance (MOF) and the Parliament from time to time regulated the functioning ofUTI. Different provisions of the UTI Act laid down the structure of management, scope of 10 | P a g e
  15. 15. business, powers and functions of the Trust as well as accounting, disclosures, and regulatoryrequirements for the Trust. UTI was set up as a trust without ownership capital and with an independent Board ofTrustees. The Board of Trustees manages the affairs and business of UTI. The Board performsits functions, keeping in view the interest of the unit-holders under various schemes. UTI has awide distribution network of 54 branch offices, 266 chief representatives and about 67,000agents. These Chief representatives supervise agents. UTI manages 72 schemes and has aninvestor base of 20.02 million investors. UTI has set up 183 collection centres to serve investors.It has 57 franchisee offices which accept applications and distribute certificates to unit-holders.UTI‟s mission statement is to meet the investor‟s diverse income and liquidity needs by creationof appropriate schemes; to offer best possible returns on his investment, and render him promptand efficient service, beyond normal customer expectations. UTI was the first mutual fund tolaunch India Fund, an offshore mutual fund in 1986. The India Fund was launched as a close-ended fund but became a multi-class, open-ended fund in 1994. Thereafter, UTI floated the IndiaGrowth Fund in 1988, the Columbus India Fund in 1994, and the India Access Fund in 1996.The India Growth Fund is listed on the New York Stock Exchange. The India Access Fund is anIndian Index Fund, tracking the NSE 50 index.UTI’s AssociatesUTI has set up associate companies in the fields of banking, securities trading, investorservicing, investment advice and training, towards creating a diversified financial conglomerateand meeting investors‟ varying needs under a common umbrella. UTI Bank Limited UTI Bankwas the first private sector bank to be set up in 1994. The Bank has a network of 121 fullycomputerized branches spread across the country. The Bank offers a wide range of retail,corporate and forex services. UTI Securities Exchange Limited UTI Securities Exchange Limitedwas the first institutionally sponsored corporate stock broking firm incorporated on June 28,1994, with a paid-up capital of Rs 300 millions wholly owned by UTI and promoted to providesecondary market trading facilities, investment banking, and other related services. It hasacquired membership of NSE, BSE, OTCEI, and Ahmedabad Stock Exchange (ASE). UTIInvestor Services Limited UTI Investor Services Limited was the first institutionally sponsoredRegistrar and Transfer agency set up in 1993. It helps UTI in rendering prompt and efficient 11 | P a g e
  16. 16. services to the investors. UTI Institute of Capital Markets UTI Institute of Capital Market wasset up in 1989 as a non-profit educational society to promote professional development of capitalmarket participants. It provides specialized professional development programmes for the variedconstituents of the capital market and is engaged in research and consultancy services. It alsoserves as a forum to discuss ideas and issues relevant to the capital market. UTI InvestmentAdvisory Services Limited UTI Investment Advisory Services Limited, the first Indianinvestment advisor registered with SEC, US, was set up in 1988 to provide investment researchand back office support to other offshore funds of UTI. UTI International Limited UTIInternational Limited is a 100% subsidiary of UTI, registered in the island of Guernsey, ChannelIslands. It was set up with the objective of helping in the UTI offshore funds in marketing theirproducts and managing funds. UTI International Limited has an office in London, which isresponsible for developing new products, new business opportunities, maintaining relations withforeign investors, and improving communication between UTI and its clients and distributorsabroad. UTI has a branch office at Dubai, which caters to the needs of NRI investors based in sixGulf countries, namely, UAE, Oman, Kuwait, Saudi Arabia, Qatar, and Bahrain. This branchoffice acts as a liaison office between NRI investors in the Gulf and UTI offices in India. UTIhas extended its support to the development of unit trusts in Sri Lanka and Egypt. It hasparticipated in the equity capital of the Unit Trust Management Company of Sri Lanka.Promotion of InstitutionsThe Unit Trust of India has helped in promoting/co-promoting many institutions for the healthydevelopment of financial sector. These institutions are: · Infrastructure Leasing and Financial Services (ILFS). · Credit Rating and Information Services Limited (CRISIL). · Stock Holding Corporation of India Limited (SHCIL). · Technology Development Corporation of India Limited (TDCIL). · Over the Counter Exchange of India Limited (OCEI). · National Securities Depository Limited (NSDL). · North-Eastern Development Finance Corporation Limited (NEDFCL). 12 | P a g e
  17. 17. Product RangeUTI offers a wide variety of schemes to investors. Apart from equity, debt, and balancedschemes, UTI offers schemes which meet specific needs like low cost insurance cover (UnitLinked Insurance Plan), monthly income needs of retired persons and women, income andliquidity needs of religious and charitable institutions and trusts, building up of funds to meetcost of higher education and career plans for children, future wealth and income needs of the girlchild and women, building savings to cover medical insurance at old age, a Growth andPerformance of MutualFunds in IndiaThe Indian Mutual Fund industry has grown tremendously in the last decade. There are 34mutual funds with assets under management of around Rs 1 lakh crore. Assets underManagement (AUM) crossed Rs 1,00,000 crore during the year 1999-2000 recording a growthrate of 65%. Besides, vast majority of equity schemes out-performed the market. However, in thesubsequent year, that is, 2000-01, AUM sharply declined by about 20% to Rs 90,587 crore due toextreme volatility in the market and depressed equity market conditions. The mutual fundindustry witnessed such a sharp decline for the first time in the last two decades. There was aturnaround in the year 2001-02. The AUM grew by 11% to Rs 1,00,594 crore. During the year2001-02 while there was an increase in AUM by around 11%, UTI lost more than 11% in AUM.It is evident that UTI is losing out to other private sector players. The AUM of private sectormutual funds rose by around 60% during the year 2001-02. During the year 2001-02, 90 newschemes were launched-74 of which were open ended and 16 close ended. Income schemespredominated with 53 schemes collecting Rs 2,744 crore which accounted for 82% of totalcollection of Rs 3,355 crore from new schemes. Almost 96% of the money raised from newscheme launches was invested in the debt/money market. Sales under Growth, Balanced, andELSS schemes declined during the year. The Indian capital market has been increasing tremendously during last few years. Withthe reforms of economy, reforms of industrial policy, reforms of public sector and reforms offinancial sector, the economy has been opened up and many developments have been takingplace in the Indian money market and capital market. In order to help the small investors, 13 | P a g e
  18. 18. mutual fund industry has come to occupy an important place. The economic development modeladopted by India in the post-independence era has been characterized by mixed economy withthe public sector playing a dominating role and the activities in private industrial sector controlmeasures emaciated from time to time. The industrial policy resolution was introduced by thegovernment in the 1948, immediately after the independence. This outlined the approach toindustrial growth and development. The industrial policy statement of 1980 focussed attentionon the need for promoting competition in the domestic market, technological upgradation andmodernisation. A number of policy and procedural changes were introduced in 1985 and 1986,aimed at increasing productivity, reducing costs, improving quality, opening domestic market toincrease competition and making free the public sector from constraints. Overall, in the seventh plan period (1985-86 to 1989-90), Indian industries grew by animpressive average annual rate of 8.5 percent. The last two decades have seen a phenomenalexpansion in the geographical coverage and financial spread of our financial system. The spreadof the banking system has been a major factor in promoting financial intermediation in theeconomy and in the growth of financial savings. With progressive liberalization of economicpolicies, there has been a rapid growth of capital market, money market and financial servicesindustry including merchant banking, leasing and venture capital. Consistent with this evolutionof the financial sector, the mutual fund industry has also come to occupy an important place.Origin Mutual funds go back to the times of the Egyptians and Phonenicians when they soldshares in caravans and vessels to spread the risk of these ventures. The foreign and colonialgovernment Trust of London of 1868 is considered to be the fore-runner of the modern conceptof mutual funds. The USA is, however, considered to be the mecca of modern mutual funds. Bythe early - 1930s quite a large number of close - ended mutual funds were in operation in theU.S.A. Much latter in 1954, the committee on finance for the private sector recommendedmobilisation of savings of the middle class investors through unit trusts. Finally in July 1964, theconcept took root in India when Unit Trust of India was set up with the twin objective ofmobilizing household savings and investing the funds in the capital market for industrial growth.Household sector accounted for about 80 percent of nation‟s savings and only about one third ofsuch savings was available to the corporate sector, It was felt that UTI could be an effectivevehicle for channelizing progressively larger shares of household savings to productiveinvestments in the corporate sector. 14 | P a g e
  19. 19. The process of economic liberalization in the eighties not only brought in dramaticchanges in the environment for Indian industries, Corporate sector and the capital market butalso led to the emergence of demand for newer financial services such as issue management,corporate counselling, capital restructuring and loan syndication. After two decades of UTImonopoly, recently some other public sector organisations like LIC (1989), GIC (1991 ), SBI(1987), Can Bank (1987), Indian Bank (1990), Bank of India (1990), Punjab National Bank(1990) have been permitted to set up mutual funds. Mr. M.R. Mayya the Executive Director ofBombay Stock Exchange opined recently that the decade of nineties will belong to mutual fundsbecause the ordinary investor does not have the time, experience and patience to takeindependent investment decisions on his own. Importance of Mutual Fund Small investors face alot of problems in the share market, limited resources, lack of professional advice, lack ofinformation etc. Mutual funds have come as a much needed help to these investors. It is aspecial type of institutional device or an investment vehicle through which the investors pooltheir savings which are to be invested under the guidance of a team of experts in wide variety ofportfolios of corporate securities in such a way, so as to minimize risk, while ensuring safety andsteady return on investment. It forms an important part of the capital market, providing thebenefits of a diversified portfolio and expert fund management to a large number, particularlysmall investors. With the emphasis on increase in domestic savings and improvement in deployment ofinvestment through markets, the need and scope for mutual fund operation has increasedtremendously. The basic purpose of reforms in the financial sector was to enhance thegeneration of domestic resources by reducing the dependence on outside funds. This calls for amarket based institution which can tap the vast potential of domestic savings and channelizethem for profitable investments. Mutual funds are not only best suited for the purpose but alsocapable of meeting this challenge. An ordinary investor who applies for share in a public issue ofany company is not assured of any firm allotment. But mutual funds who subscribe to the capitalissue made by companies get firm allotment of shares. Mutual fund latter sell these shares in thesame market and to the Promoters of the company at a much higher price. Hence, mutual fundcreates the investors‟ confidence. The psyche of the typical Indian investor has been summed upby Mr. S.A. Dave, Chairman of UTI, in three words; Yield, Liquidity and Security. 15 | P a g e
  20. 20. The mutual funds, being set up in the public sector, have given the impression of being assafe a conduit for investment as bank deposits. Besides, the assured returns promised by themhave investors had great appeal for the typical Indian investor. As mutual funds are managed byprofessionals, they are considered to have a better knowledge of market behaviors. Besides, theybring a certain competence to their job. They also maximize gains by proper selection and timingof investment. Another important thing is that the dividends and capital gains are reinvestedautomatically in mutual funds and hence are not fritted away. The automatic reinvestment featureof a mutual fund is a form of forced saving and can make a big difference in the long run. Themutual fund operation provides a reasonable protection to investors. Besides, presently allSchemes of mutual funds provide tax relief under Section 80 L of the Income Tax Act and inaddition, some schemes provide tax relief under Section 88 of the Income Tax Act lead to thegrowth of importance of mutual fund in the minds of the investors. As mutual funds createsawareness among urban and rural middle class people about the benefits of investment in capitalmarket, through profitable and safe avenues, mutual fund could be able to make up a largeamount of the surplus funds available with these people. The mutual fund attracts foreigncapital flow in the country and secures profitable investment avenues abroad for domesticsavings through the opening of off shore funds in various foreign investors. Lastly anothernotable thing is that mutual funds are controlled and regulated by SEBI and hence are consideredsafe. Due to all these benefits the importance of mutual fund has been increasing. Schemes of Mutual Fund Within a short span of four to five years mutual fund operationhas become an integral part of the Indian financial scene and is poised for rapid growth in thenear future. Today, there are eight mutual funds operating various schemes tailored to meet thediversified needs of savers. UTI has been able to register phenomenal growth in the mideighties. Now there are 121 mutual fund schemes are launched in India including UTI‟s schemeattracting over Rs. 45,000 Crores from more than 3 Crore investor‟s accounts Out of this closed-end scheme are offered by mutual fund of India to issue shares for a limited period which aretraded like any other security as the period and target amounts are definite under such security asthe period and target amounts are definite under such schemes. Besides open-end schemes arelunched by mutual fund under which unlimited shares are issued by investors but these shares arenot traded by any stock exchange. However, liquidity is provided by this scheme to theinvestors. In addition to this off shore mutual funds have been launched by foreign banks, some 16 | P a g e
  21. 21. Indian banks, like SBI, Canara Bank etc, and UTI to facilitate movement of capital from cash-rich countries to potentially high growth economics. Mutual funds established by leading publicsector banks since 1987-SBIMF, Can Bank, Ind Bank, PNBMF and BOIMF, emerged since1987-SBIMFo, as major players by offering bond like products with assurance of higher yields.The latest schemes of BOI mutual fund goes to the extent of allowing each individual investor tochoose the date for receiving the income. Besides the bank mutual funds have also floated a fewopen-ended schemes, pure growth schemes and tax saving schemes. The LIC, GIC mutual fundsoffer insurance linked product providing various types of life and general insurance benefits tothe investors. Also the income growth oriented schemes are operated by mutual fund to cater toan investor‟s needs for regular incomes and hence, it distributes dividend at intervals. GrowthTrend of Mutual Fund Opening of the mutual fund industry to the public sector banks andinsurance companies, led to the launching of more and more of new schemes. The mutual fundindustry in India has grown fast in the recent period. The performance is encouraging especiallybecause the emphasis in India has been on individual investors rather in contrast to advancedcountries where mutual funds depend largely on institutional investors, In general, it appears thatthe mutual fund in India have given a good account of themselves so far. UTIs annual sale ofunits crossed Rs.1000 crores mark in 1986 to 87, 2000 crores mark in 1987-88 and reachedRs.5500 crores mark in 1989 to 90. During 1990 to 91 on account of decline of corporateinterest,, sales declined to Rs.4100 crores though individual sales increased over its precedingyear. LICMF has concentrated on funds which includes life and accident cover. GICMFprovide home insurance policy. The bank sponsored mutual fund floated regular income, growthand tax incentives schemes. Together the eight mutual fund service more than 15 millioninvestors with UTI alone hold for 13 million unit holding accounts. Magnum Regular IncomeScheme 1987 assured a return of 12 percent but gave 20 percent dividend in 1993, UTI record 26percent dividend for 1992 to 93 under the unit 1964 scheme. Magnum Tax saving scheme 1988to 89 did not promise any return but declared 14 percent dividend in 1993 and recorded a capitalappreciation of 15 percent in the first year. Equity oriented scheme have earned attractivereturns. Especially since early 1991 there has been a steady increase in the number of equityoriented growth funds. With the boom of June 1990 and then again 1991 due to theimplementation of new economic policies towards structure of change the price of securities in 17 | P a g e
  22. 22. stock market appreciated considerably. The high rate of growth in equity price led to a high rateof appreciation in the net asset value of the equity oriented funds for which investors startedchanging their preferences from fixed income funds to growth oriented or unfixed income funds.That is why more equity oriented mutual funds were launched in 1991. Master share provide arespective dividend of 18 per cent in 1993, Can share earned a dividend of 15 percent in 1993.In general the Unit Trust of India which manages over 28,000 crore under various schemes hasfor its service an excellent reputation Short Comings in Operation of Mutual Fund. The mutualfund has been operating for the last five to six years. Thus, it is too early to evaluate itsoperations. However one should not lose sight to the fact that the formation years of anyinstitution is very important to evaluate as they could be able to know the good or bad systemsget evolved around this time.OPERATIONS OF MUTUAL FUNDS The mutual funds are externally managed. They do not have employees of their own.Also there is no specific law to supervise the mutual funds in India. There are multipleregulations. While UTI is governed by its own regulations, the banks are supervised byReserved Bank of India, the Central Government and insurance company mutual regulationsfunds are regulated by Central Government. At present, the investors in India prefer to invest inmutual fund as a substitute of fixed deposits in Banks, About 75 percent of the investors are notwilling to invest in mutual funds unless there was a promise of a minimum return, Sponsorshipof mutual funds has a bearing on the integrity and efficiency of fund management which are keyto establishing investors confidence. So far, only public sector sponsorship or ownership ofmutual fund organizations had taken care of this need. Unrestrained fund rising by schemeswithout adequate supply of scripts can create severe imbalance in the market and exacerbate thedistortions. Many small companies did very well last year, by schemes without adequateimbalance in the market but mutual funds cannot reap their benefits because they are not allowedto invest in smaller companies. Not only this, a mutual fund is allowed to hold only a fixedmaximum percentage of shares in a particular industry. The mutual funds in India are formed as trusts. As there is no distinction made betweensponsors, trustees and fund managers, the trustees play the role of fund managers. The increasein the number of mutual funds and various schemes has increased competition. Hence it has 18 | P a g e
  23. 23. been remarked by Senior Broker “mutual funds are too busy trying to race against each other”.As a result they lose their stabilizing factor in the market. While UTI publishes details ofaccounts their investments but mutual funds have not published any profit and loss Account andbalance sheet even after its operation. The mutual fund have eroded the financial clout ofinstitution in the stock market for which cross transaction between mutual funds andfinancial institutions are not only allowing speculators to manipulate price but alsoproviding cash leading to the distortion of balanced growth of market. As the mutual fund is verypoor in standard of efficiency in investor‟s service; such as dispatch of certificates, repurchaseand attending to inquiries lead to the detoriation of interest of the investors towards mutual fund.Transparency is another area in mutual fund which was neglected till recently. Investors haveright to know and asset management companies have an obligation to inform where and how hismoney has been deployed. But investors are deprived of getting the information India has been amongst the fastest growing markets for mutual funds since 2004,witnessing a CAGR of 29 Percent in the five-year period from 2004 to 2008 as against the globalaverage of 4 percent. The increase in revenue and profitability, however, has not beencommensurate with the AUM growth in the last five years. Low share of global assets undermanagement, low penetration levels, limited share of mutual funds in the Household financialsavings and the climbing growth rates in the last few years that are amongst the highest in theworld, all point to the future potential of the Indian mutual fund industry. Challenges and IssuesLow customer awareness levels and financial literacy pose the biggest challenge to channelizinghousehold Savings into mutual funds. Further, fund houses have shown limited focus onincreasing retail penetration and building retail AUM. Most AMCs and distributors have alimited focus beyond the top 20 cities that is manifested in limited distribution channels andinvestor servicing. The Indian mutual fund industry has largely been product-led and notsufficiently customer focused with limited focus being accorded by players to innovation andnew product development. Further there is limited flexibility in fees and pricing structurescurrently. Distributors and the mutual fund houses have exhibited limited interest in continuouslyengaging with Customers post closure of sale as the commissions and incentives have beenlargely in the form of upfront fees from product sales. Limited focus of the public sector network 19 | P a g e
  24. 24. including public sector banks, India Post etc on distribution of mutual funds has also impeded thegrowth of the industry. Further multiple regulatory frameworks govern different verticals withinthe financial services sector, such as differential policies pertaining to the PAN card requirement,mode of payment (cash vs cheque), funds management by insurance companies and commissionstructures among others. 20 | P a g e
  25. 25. PERFORMANCE PERSISTENCE - THEORYAPPROACHESREPEAT WINNER APPROACHThe first statistical test is the repeat winner approach of Malkiel (1995). This test shows theproportion repeat winners (WW) to winner-losers (WL). Malkiel (1995) arguing that if p is theprobability that a winner in one period continues to be a winner in the subsequent period a valueof p less than or equal to ½ indicates no persistence. Thus, a binomial test of p>1/2 can be usedto test the significance of the proportion of WW to (WW+WL) as follows: Z = (y - np) / np (1- p)Where: y is the number of repeat winners (WW), n is the number of repeat winners andwinner/losers (WW+WL). The test statistic is approximately normally distributed with zeromean and standard deviation one, when n is reasonably large. Thus, a percentage of WW to(WW+WL) above 50% and a Z-statistic above zero is indicative of performancepersistence, while a percentage value below 50% and a Z-statistic above zero indicates areversal in performance.THE ODDS RATIO/ THE CROSS PRODUCT RATIO:In the second approach Goetzmann and Ibbotson (1994) calculate the Odds Ratio (Christensen,1990), also referred to as the Cross-Product Ratio (CPR) (Fienberg, 1980). The CPR test statisticis the ratio of the product of repeat winners (WW) and repeat losers (LL) divided by the productof winner-losers (WL) and loser-winners (LW), i.e. (WW*LL)/(LW*WL). A CPR of one wouldsupport the hypothesis that the performance in one period is unrelated to that in another. A CPRgreater than one indicates persistence, while a value below one indicates that reversals inperformance dominate the sample. The statistical significance of the CPR can then be determinedby using the standard error of the natural logarithm of the CPR given by the square root of thesum of reciprocals of the cell counts1. For large samples the test statistic is normally distributedwith mean log odds-ratio, however, where the sample size is small conclusions about thesignificance of the results can only be considered tentative. 21 | P a g e
  26. 26. CHI-SQUARE STATISTICThe final test of independence is the Chi-square statistic, as used by Kahn and Rudd (1995).The Chi-square statistic is calculated as: Chi = (WW-D1)2/D1 + (WL-D2)2/D2 + (LW-D3)2/D3 + (LL-D4)2/D4where D1 = (WW+WL)*(WW+LW)/N D2 = (WW+WL)*(WL+LL)/N D3 = (LW+LL)*(WW+LW)/N D4 = (LW+LL)*(WL+LL)/Nwhere: N is the number of funds.The associated p-value can then be used to test for performance persistence. The Chi-squarevalue, however, is only valid asymptotically 1 Goetzmann and Ibbotson (1994) square thereciprocals, which is only valid for large sample sizes and needs to be adjusted for possible smallsample bias. The modification chosen is Yates‟s continuity correction. In summary we have anumber of different tests of significance of the independence of the contingency tables eachconcentrating on different aspect of persistence. The approach by Malkiel (1995) concentrates ononly one quadrant of the contingency table, the repeat winners (WW). The CPR ratio tests thepersistence of both repeat winners (WW) and repeat losers (LL), while the Chi-square testconsiders the persistence of the contingency table as a whole. The latter, though, has thedisadvantage of not being able to detect reversals in performance, since it is always positive. Incontrast, a repeat winner percentage below 50 or a CPR calculation below one will indicatereversals in performance. Despite this Carpenter and Lynch (1999) find the Chi-square test iswell specified, powerful and more robust than other tests of performance. Furthermore, the Chi-square test is more appropriate for testing the performance persistence of individual funds.However, as there is no compelling reason to prefer one test as opposed to another all three testsare considered.Nonetheless, whichever methodology is used three issues need to be addressed:(1) Survivorship bias(2) The extent to which performance persistence depends on the period of evaluation(3) Whether any risk-adjustment should be made to the raw returns and of what kind 22 | P a g e
  27. 27. The potential for survivorship bias exists because in studies of performance persistencethe data set is truncated as funds disappear from the sample. However, the impact of such a biason studies of performance persistence is open to considerable debate. On the one hand, the extentthat the market disciplines poor performing funds will mean that in studies of persistence onlygood funds are evaluated. Indeed, based on simulations show that the extent of persistence isdirectly related to the degree of truncation in the sample. In other words, studies that only havesurviving funds in their sample are likely to overstate persistence. However, survivorship biasdepends on the ability and willingness of investors to penalise fund managers for poorperformance. Since there is no evidence that investors do so, survivorship bias should not be amajor issue. On the other hand, Grinblatt and Titman (1992) argue that performance persistenceis more likely to appear in poor performing funds. This implies that the proportion of funds in thesample with inconsistent performance (i.e. reversals) will increase and so the bias favours non-persistence. Finally, Garcia and Gould (1993) argue that there is no answer to any survivorshipbias in the data as there is no rule telling us how to correct for it even if it exists. Indeed, Biltzer(1995) suggests that any attempt to adjust the results for survivorship bias may create even moreerrors. Thus, while it is agreed that survivorship bias is an important issue facing studies ofperformance persistence, the impact survivorship bias as on studies of performance persistence isunresolved. A second issue in studies of performance persistence is whether the length of theevaluation periods influences the chance of correctly predicting performance. In other words, isthe pattern of overall persistence within the sample consistent for shorter and longer periods?Finally, there is a great deal of debate over the question of whether raw returns should beadjusted for risk and what form of risk-adjustment should be made. Studies in the equity markethave typically used risk-adjustments measures based on the Capital Asset Pricing Model(CAPM), especially Jensen‟s alpha. However, in applying the Jensen alpha several assumptionshave to be made, for instance, the unconditional mean-variance efficiency of the benchmarkportfolio; the existence of a riskless asset and no binding constraints on investors all of whichare unlikely to be observable in reality. In addition, studies by Grant (1977) and Fama (1972)argue that Jensen‟ alpha is biased in the face of market timing by fund managers. Thus, it isunclear whether Jensen‟s alpha represents a legitimate and meaningful benchmark to evaluate thefund manager‟s performance. Moreover, Hendricks et al (1993) and Sirri and Tufano (1992)show that investors base their decisions on raw returns rather than on risk-adjusted returns. 23 | P a g e
  28. 28. The potential for survivorship bias is a real problem for studies in the equity mutual fundsbecause of the large number of funds that have closed down. In the UK real estate market, thisproblem does not exist to a material extent, since none of the funds covered in the database usedhere have as yet closed down. In addition, any survivorship bias will be partially mitigated as wecompare surviving fund with surviving funds and not against some overall benchmark ofperformance. The issue as to whether the length of the time period is important in the study ofperformance persistence is addressed by testing a wide variety of evaluation periods. Theremaining issue, namely whether persistence exists once the returns are adjusted for risk is notaddressed in this study, for a number of reasons. First, there is a good deal of controversy as howto define risk-adjusted performance. Secondly, the funds evaluated here are all of a similar natureand organizational structure so that they can be considered to have the same level of risk.Third, it is unclear which benchmark of performance to use, as a large number of indices areavailable in the UK. Finally, Capon et al (1996) and Lawrence (1998) argue that investors paymore attention to performance rankings reported by consultants and in periodicals, which arebased on raw returns. Hence, from an investor‟s point of view it is the consistency of raw returnsthat is the most important criteria for testing persistence. 24 | P a g e
  29. 29. DATA AND RESULTS The database used in this study has been taken for the one of the famous mutual fundswebsites AMFI India. This website consists of all the historical data required for the all theavailable mutual funds in India. The data set is especially useful to studies of persistence as thereturns are calculated on a consistent basis and covers a reasonably long enough time period tomake substantive conclusions. The data set consists of the historical NAV values of the 5 MutualFunds taken. In this data set the returns of the SENSEX are also considered in order to comparethe returns of the mutual funds with the SENSEX. The NAV‟s of the funds are taken and weeklyreturns are calculated by taking the average of the week returns. The returns in each evaluation period were analyzed and funds classified as a winner (W)or loser (L), relative to the median fund. The winner/loser performance of the 6 fund inconsecutive time periods (of the same length) is then concatenated to identify whether the fundwas a WW, WL, LW or LL. The frequencies of these winner-losers proportions were then testedfor significance using the three criteria discussed above. 25 | P a g e
  30. 30. FIGURE: 1The above figure gives the values of the probabilities of the Z – statistic which is obtained in theanalysisOverall Performance Persistence: Weekly EvaluationsThe TABLE 1 shows that based on the results of the Chi-square statistic (0.13), for the weeklydata, there is good evidence of performance persistence (p=0.7). In addition, the proportion ofrepeat winners is only 49%, i.e. less than half, and a CPR of 0.94, i.e. less than one, which showsthat if any persistence is present it is due to repeated losing performance (p=0.06 and 0.03respectively). The half-yearly results are slightly more encouraging with the repeat winner andCPR criteria indicating some evidence of positive persistence. Although, only the CPR indicatesthat this persistence is significant. 26 | P a g e
  31. 31. OVERALL PERFORMANCE PERSISTANCE WEEKLY No. of WW 218 No. of WL 225 No. of LW 222 No. of LL 217 TOTAL 882 Repeat Winners% 0.492099 Z - Test -0.33258 P - Value 0.0694 CPR 0.947067 Z - Test 0.009272 P - Value 0.0357 CHI - SQUARE 0.137261 P - Value 0.7 Yates Correction 0.091873 P - Value 0.7 TABLE 1 FUND WW WL LW LL N RW% REPE WINNER CHI- AT Z- P- SQUARE TEST VALUE YATES P- VALUE SENSEX 36 37 37 37 147 49.32 -0.119 .49602 0.0067 .95 HDFC 35 38 38 36 147 47.95 -0.356 .3631 0.0615 .8FRANKLIN 36 38 36 37 147 48.65 -0.232 .409 0.0070 .95 27 | P a g e
  32. 32. TEMPLETON SBI 38 36 36 37 147 51.35 0.229 0.0871 0.0067 .95 TATA 38 37 37 35 147 50.67 0.117 .0438 0.006 .95 HSBC 35 39 38 35 147 47.30 -0.251 0.4012 0.1696 .7 TOTAL 218 225 222 217 TABLE 2The above table gives the detailed data about the different funds. The small sample size for thefour and six year data conclusions about the significance of the results can only be consideredtentative. These results require careful interpretation; however, as the contingency table tests areonly valid asymptotically and may need adjustment for possible small sample bias. To test forthis the last two rows of Table 2 show the use of Yates‟s continuity correction to the Chi-squaretest. An examination of the adjustment leads us to conclude that small sample bias is indeedpresent. For instance, in all cases the p-values are worse than without the correction, especiallyfor those periods with few data points. Nonetheless, since the Chi-square statistics for thequarterly, half-yearly and one-year data as a whole have reasonable frequencies the correction isminor and the conclusions are still consistent with the results above.Individual Fund PerformanceThe results above show there is only weak evidence of persistence in performance for the growthfunds as a whole. However, individually, some funds may exhibit characteristics of superior orinferior persistence. We next present and analyze the contingency tables of performancepersistence of individual funds. We report results for only quarterly, semi-annually and annualperiods of measurement because of the statistical difficulties of providing reliable results withlimited data over longer evaluation periods. Also, in presenting the results only the repeat winnerand the Chi-square tests are shown, as the CPR test is inappropriate for testing the persistence ofindividual funds. In addition, the results for only those real estate funds with more than 40quarterly data are shown. This limits the sample to 5 funds. 28 | P a g e
  33. 33. CONTINGENCY TABLE OF INDIVIDUAL FUNDS FUND WW WL LW LL SENSEX 36 36 37 37 HDFC 35 38 38 36 FRANKLIN 36 38 36 37 TEMPLETON SBI 38 36 36 37 TATA 38 37 37 35 HSBC 35 38 39 35 TOTAL 218 225 222 217 Table 3From the above table SENSEX and other five funds are considered and according to thecontingency table classification the above funds have been classified and the frequencies arecalculated. It is evident from the above table that 29 | P a g e
  34. 34. CONTINGENCY TABLE 226 225 224 222 222 220 218 218 217 216 214 212 number of WW number of WL number of LW number of LL CHART -1The above chart depicts about the contingency table of the funds where the sensex and the other5 funds are categorized as winner/loser considering them the median for the particular fund. Thenumber of WW for all the funds is 216, WL = 224, LW = 222 and LL = 217. Therefore from theabove chart it is evident that the funds we winner – losers for the given period of time. Thisshows that the funds selected are not that consistent. 30 | P a g e
  35. 35. INDIVIDUAL FUND CONTINGENCY TABLE 39 39 38 38 38 38 38 38 37 37 37 38 37 37 37 36 3737 36 36 36 36 36 36 35 35 35 35 35 WW 34 33 WL LW LL CHART -2The above table shows the data of the individual funds contingency tables. As the chart showsthat SENSEX was losing more number of times having LW = 37, LL = 37. HDFC is one of thefunds which seemed to be volatile as the WL = 38, LW = 38. It seems to be one of the leastperformers from the range of funds selected as its WW is low compared to other funds. HSBC isone of the best performers from the selected range of funds and also seemed to be highly volatileas its WL = 39. SBI is a fund which was constantly winning and losing showing no consistentperformance WL = 36 and LW = 36. 31 | P a g e
  36. 36. MEDIAN 0.0018 0.0016 0.001636048 0.0014 0.0012 0.001238709 0.001119596 0.001 0.000900216 0.0008 0.000755101 0.0006 0.000548479 0.0004 0.0002 0 FRANKLIN SBI TATA SENSEX HDFC TEMPLETO MUTUAL MUTUAL HSBC N FUND FUND Series1 0.001636048 0.001119596 0.000548479 0.001238709 0.000900216 0.000755101 CHART – 3The above chart shows the values of the medians of the different funds selected. With the help ofthe value of the median the funds are categorized into a winner or a loser. A fund‟s weekly returnis said to be higher than the median of that particular fund then it is said to be a winner and itsweekly return is below the value of the median then is it said to be a loser. 32 | P a g e
  37. 37. AVERAGE WEEKLY RETURNS OF SENSEX AND FUNDS 0.06 sensex 0.04 HDFC 0.02 FRANKLIN TEMPLETON 0 28 63 98 7 14 21 35 42 49 56 70 77 84 91 133 WEEK 105 112 119 126 140 147 SBI -0.02 TATA -0.04 HSBC -0.06 -0.08 CHART- 4The above chart depicts about the average weekly returns of the funds and sensex. The purposeof doing this is to know the correlation between the sensex and the other 5 funds. The averageweekly returns are taken in order to know the performance persistence of the funds. From theabove charts it shows that sensex have gone down low in the week 98 where as the other fundshad positive returns. HSBC is one of the funds which seem to be highly volatile during theconsidered period. SBI is one of the funds which was performing consistently and is stable forthe period. FRANKLIN TEMPLETON, HDFC and TATA are the other mutual funds which areconsidered and also seem to be giving consistent returns and are not much volatile in the market. 33 | P a g e
  38. 38. REPEAT WINNERS RW% 52.00% 51.00% 50.00% 49.00% 48.00% 51.35% 50.67% 47.00% 49.32% 48.65% 47.95% 46.00% 47.30% 45.00% TATA FRANKLIN SBI MUTUAL SENSEX HDFC MUTUAL HSBC TEMPLETON FUND FUND RW% 49.32% 47.95% 48.65% 51.35% 50.67% 47.30% CHART – 5The above chart depicts about the repeat winner approach. This is one of the statistical test usedto see the performance persistence of the growth mutual funds. This test shows the proportions ofrepeat winners (WW) to winner-losers (WL). If the proportion‟s percentage is greater than 50%then it is said to be performance persistence and if it is less than 50% it is said to be reversal inperformance persistence. Therefore from the above chart it is evident that the funds SBI, TATAare said to be performing persistently where as the other funds HDFC, HSBC, FRANKLINTEMPLETON which have below 50% are said to be reversal in performance persistence. 34 | P a g e
  39. 39. Repeat Z-Test -8.602 HSBC TATA MUTUAL FUND 2.165 SBI MUTUAL FUND 4.301 FRANKLIN TEMPLETON -4.301 -6.408 HDFC -2.136 SENSEX -10.000 -8.000 -6.000 -4.000 -2.000 0.000 2.000 4.000 6.000 TATA FRANKLIN SBI MUTUAL SENSEX HDFC MUTUAL HSBC TEMPLETON FUND FUND Series1 -2.136 -6.408 -4.301 4.301 2.165 -8.602 CHART – 6The above chart depicts the values of the Z-Test derived from the funds. It is said that if repeatwinners ratio is greater than 50% and Z-Statistic is greater than zero then the respective fund issaid to be performance persistence and if it the ratio is less than 50% and the Z- statistic isgreater than zero then the respective fund is said to reversal in performance persistence.Therefore from the charts 4 and 5 it is evident that SBI and TATA mutual funds are performancepersistent from the range of 5 funds. 35 | P a g e
  40. 40. CONCLUSIONIn India, mutual funds have a lot of potential to grow. Mutual fund companies have to create andmarket innovative products and frame distinct marketing strategies. Product innovation will beone of the key determinants of success. The mutual fund industry has to bring many innovativeconcepts such as high yield bond funds, principal protected funds, long short funds, arbitratefunds, dynamic funds, precious metal funds, and so on. The penetration of mutual funds can beincreased through investor education, providing investor oriented value added services, andinnovative distribution channels. Mutual funds have failed during the bearish market conditions.To sell successfully during the bear market, there is need to educate investors about risk-adjustedreturn and total portfolio return to enable them to take informed decision. Mutual funds need todevelop a wide distribution network to increase its reach and tap investments from all cornersand segments. Increased use of internet and development of alternative channels such asfinancial advisors can play a vital role increasing the penetration of mutual funds. Mutual fundshave come a long way, but a lot more can be done. The performance of managed funds has been the subject of intense study in both theacademic and practitioner communities for many years. In particular, the identification ofpersistence in performance has received considerable recent attention. Using non-parametriccontingency tables, which are robust under non normality of the fund, return distribution, thisstudy tests the performance persistence of Growth funds in the India over various evaluationperiods. Several criteria are used to test for persistence; the repeat winner methodology ofMalkiel (1995), the CPR test of Goetzmann and Ibbotson (1994) and the Chi-square statistic asused by Kahn and Rudd (1995). The overall conclusion is that the Growth funds in the Indiashow little evidence of persistence in the short-term (weekly data) or for data over a considerablelength of time. In contrast, the results are better for annual data with evidence of significantperformance persistence. Thus at this stage, it seems that an annual evaluation period, providesthe best discrimination of the winner and loser phenomenon in the Growth market. The repeatwinner phenomenon is stronger over shorter periods of evaluation. Nonetheless, it seems thatpersistence in performance of growth funds in the INDIA does exist and it appears to be a guideto beating the pack in the long run. Furthermore, although the evidence of persistence in 36 | P a g e
  41. 41. performance for the overall sample of funds is limited, we have found evidence that two funds (3and 4) were consistent winners over this period, whereas no one fund could be said to be aconsistent loser. These results require careful interpretation, however, as the results are sensitiveto the length of the evaluation period and specific test used. Finally, as with all performanceevaluation studies, a few concerns about the results or the methods used to obtain the results canbe raised. In this paper we examine the performance persistence of a large sample of mutual fundsover time. Five mutual funds in 5 equity categories over the time period 2008 through 2011. Weutilize the non-parametric Odds-Ratio and Chi-Square tests to examine significance inperformance persistence. We find that there is significant performance persistence in mutualfund returns. This outcome is true for both the lowest performing and highest performing mutualfunds. The tests demonstrate this result for all fund categories, except government bond andcorporate bond funds. These results are very important to individual investors when selectingmutual funds. Investors should be cognizant of previous returns for any funds underconsideration. If a 5 fund performed poorly during the past year, it is likely the fund willcontinue to perform poorly in the next year. Likewise if a fund performed well during the pastyear, it is likely the fund will perform well during the next year. Note that persistence appears toexist for the best and worst performing fund categories. Therefore, an investor selecting funds inthe middle performance categories is not likely to see the same persistence in returns. As acaveat we understand that there is survivorship bias when performing mutual fund research. Thiswould actually bias against finding significant performance persistence for the worst performingquintile of funds. 37 | P a g e
  42. 42. LIMITATIONS Small sample size The question as to whether risk adjustment materially affects the results The influence of fund characteristics such as size, management tenure and investment style have on persistence. Investigations of these issues will, therefore, provide future areas of research. 38 | P a g e