Chapter 32 Mutual Fund Performance and Investor’s Perception: An Indian Perspective
Anindita Adhikary
Sikkim Manipal Institute of Technology, India
Bedanta Bora
Sikkim Manipal Institute of Technology, India
Jitendra Kumar
Sikkim Manipal Institute of Technology, India
ABSTRACT
The Indian mutual fund industry is playing a significant role in the development of capital market and in the growth of the Indian economy.
It is considered to be a better opportunity where savings are collected from investors and diverted to the capital market to generate better returns for them with lower risk and volatility. Hence, it is of utmost significance to understand the mutual fund industry in India. As such, this chapter makes an attempt to review the various literatures available in regard to mutual funds to evaluate the performance of various mutual fund schemes and to study the investor’s perception in selection of a mutual fund. The study shows that mutual funds have failed to offer advantages of diversification and professionalism to the investors and hence could not fulfil their scheme’s objectives. It is also found that retail investors are still confused about the mutual funds as an investment avenue. In order to attain sustained profitable growth, the industry should focus on developing distribution networks, increasing retail participation and expanding the reach of mutual funds by conducting awareness programs and extending financial literacy.1. INTRODUCTION
A mutual fund is a mechanism of pooling together the savings of a large number of investors for collective investments with the objectives of
DOI: 10.4018/978-1-4666-6268-1.ch032
attractive yields and appreciation in their value. It mobilises the savings, particularly of the small and household sectors, for investment in financial market instruments such as shares, debentures and other government securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proposition to the number of units owned by them.
The Securities and Exchange Board of India (Mutual Funds) Regulation Act, 1993 defines a mutual fund as “a fund established in the form of a trust by a sponsor, to raise money by the trustees through the sales of units to the public, under one or more schemes, for investigating in securities in accordance with these regulations” (Gurusamy, 2007). Retail investors are steadily banishing from the stock market and diverting savings into mutual fund sector. They acquire stocks or bonds through mutual funds at lower trading costs and get the benefit of diversification and risk minimization (Khare, 2007)..
The mutual fund industry in India made its debut in 1964 with the establishment of Unit Trust of India (UTI), the largest public sector mutual fund in the world. The first unit scheme offered by UTI was the US-64. The main purpose behind introduction of UTI was effective mobilizing as well as channeling of small savings into productive sectors for economic acceleration of the country. Non-UTI mutual funds debuted in India in 1987 with the establishment of SBI Mutual Fund, bringing an end to UTI’s monopoly in this sector. It was followed by many other public sector mutual fund set up by public sector banks, LIC and GIC. A tremendous growth has been witnessed in India in the financial market since 1991 with liberalization in India economy. Consistent with this evolution, Indian mutual funds industry has also witnessed a rapid growth. Foreign companies were also permitted to start mutual funds in India. The revolution was the outcome of policy proposal taken by the Government of India where by public sector banks, insurance sectors and foreign companies were permitted to enter the fund market (Gupta, 2000). In a short span of less than one decade, India has observed a changed in the investment pattern of small and medium investors. India’s market for mutual fund has witnessed a CAGR of about 29% in a five year period from 2004-2008 as against global average of 4% which accounts as the most rapidly growing market in the world (Gupta, 2011).
India has secured the best position among the top ten globally reputed mutual funds as far as growth of the funds are concerned. It has even moved India from 27th place to 26th place in the recent past. Mutual funds transactions on the stock exchanges have also witnessed an inspiring growth over the years. They indeed have been playing a stabilising role in the ever volatile stock markets (Chary & Masood, 2010-2011).Retail investors face many hardships in stock market investment decision making. They are not familiar with market performance and lack knowledge about maximising returns by proper selection of securities and timing of investment. As such, mutual funds are the secured way for those investors to enter the capital market (Viramgami, 2009). Large market potential, rising income, high saving rate, growing risk appetite, comprehensive regulatory framework by SEBI, favourable tax policies, introduction of new products, increasing awareness etc have made mutual funds a preferred investment option (Rekha, 2012). The reason behind such a considerable attraction towards mutual funds was essentially due to assured returns along with security to investors’ investment (Sanyasi, 2013). The regulating authorities namely Securities and Exchange Board of India (SEBI) and Association of Mutual Funds in India (AMFI) are trying to protect the investors in India by supervising and regulating mutual fund industry (Santhi & Gurunathan, 2011). Penetration of mutual fund market has been only 13.7% unit holders from rural area and 38% from urban area. It portrays a very lethargic escalation in the industry. However, with a booming economy and 32.4% saving rate in India, there are lot of scope for favourable growth of mutual fund industry in India (Pandey, Rathore, & Khare, 2007).
2. THEORETICAL BACKGROUND OF MUTUAL FUND
A small investor saves a part of his earnings to meet future expenses as well as some unforeseen expenses. These diverse requirements are expressed in terms of investment purposes as safety and security, liquidity and elevated return.
In fact, mutual funds have designed an extensive range of mutual fund schemes to meet the diverse needs of a multitude of investors. Investors have the option of choosing from the wide range of schemes depending upon their requirements. Schemes are generally classified in many forms. At the most initial phase, mutual funds may be close-ended or open-ended. The subsequent classifications of mutual fund are based on their characteristics with respect to the risk level of the asset invested, nature of asset invested, the fund’s objectives, industry to which the invested assets belong, trading and investment strategies adopted, structure, frequency of dividend payment and so forth. Schemes based on an asset category of investment may be equity funds, debt funds, money market funds, gilt funds, real estate funds and so forth. Growth funds, balanced funds and income funds represent the extent of the combination of different asset categories in the investments. Industry specific funds focus upon specific industries or sector. Funds’ investment portfolios are persistently evaluated and revised by a group of professional managers to closely match the fund’s stated investment objective. In recent years, some innovative mutual funds have been launched in India to provide investors with greater access to markets like the gold market and art market. Thus, mutual funds adopt different strategies to achieve investors’ objectives and accordingly offer different schemes of investments.A mutual is a set up in the form of trust, which has sponsor, trustee, Asset Management Company (AMC) and custodian. Sponsor is the person who acts alone or in combination with another body corporate and establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the investment managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) regulations, 1996. The sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the schemes beyond the initial contribution made by it towards setting up of mutual fund.
The mutual fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. Trustee is usually a company (corporate body) or a board of trustees (body of individuals). The main responsibility of the trustee is to safeguard the interest of the unit holders and also ensure that AMC functions in the interest of investors’ and in accordance with the SEBI regulations, the provisions of the trust deed and the offer document of the respective schemes. The AMC is appointed by the Trustees as the investment manager of the mutual fund. The AMC is required to be approved by SEBI to act as an AMC of the mutual fund. The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to manage the mutual fund. The registrar processes the application form, redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors’ and updates investor records.An AMC is required to calculate the Net Asset Value (NAV) of a fund and publish it in a minimum of two national newspapers. The NAV at any point of time is the sum total of the market value of the assets that comprise its portfolio minus the liabilities at that time. In other words, the NAV of a fund is the amount that all the unit holders will receive if the fund is dissolved or liquidated after paying all its liabilities. For most funds, the NAV is determined daily, after the close of trading but some funds update their NAV multiple times during the trading day. Open-end funds sell and redeem their shares at the NAV and so process orders only after the NAV are determined.
Closed-end funds may be traded at a higher or lower price than their NAV i.e. they are traded at a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV.
3. OBJECTIVES AND METHODOLOGY
Indian mutual fund industry is playing an important role to provide an alternative avenue to the entire gamut of investors in a scientific and professional manner.
It has played a significant role in the development of capital markets and in the growth of the Indian economy. Though it is relatively new, it has grown at a dynamic speed, influencing various sectors of the financial market and the national economy. Thus, in this context, it has become significant to study the mutual fund market in India. The objectives of the study are to evaluate the performance of various mutual fund schemes by considering return and risk and to study the investor’s perception pertaining to mutual fund investment. To fulfill the objectives of the present study, the researcher emphasized on various past literatures.4. DISCUSSION
Mutual funds have attracted the attention of global practitioners and academicians in India and abroad to evaluate the performance of various schemes from time to time by considering return and risk of the investment. Attempt has also been made by researchers to draw sound conclusions on the factors responsible for the selection of mutual funds as an investment option. As there is a vast universe of companies in the field of mutual funds providing unlimited number of schemes, it becomes really hard to evaluate the performance of all companies as well as investors’ perception towards mutual funds in a single study. A few of the studies conducted in this field were pioneered by Treynor (1965), Sharpe (1966), and Jensen (1968). It was followed by numerous other studies that have focused on mutual fund industry.
4.1. Fund Performance
Several researchers have undertaken studies from time to time on mutual funds and their performance evaluation in India. Most of the studies are related to benchmark comparison which is a significant fund performance measure. Benchmark comparison facilitates in signifying the efficiency level of the fund managers in generating better returns of managed portfolios compared to the market or index portfolios. An attempt has been made by the present researchers to provide a few reviews of those studies.
Sarkar and Majumdar (1995) assessed the performance of five close-ended growth funds for the period from February 1991 to August 1993. The performance of the funds has been proved to be statistically insignificant with high risk factor. Hence they concluded that the performance of the funds was below average when compared with the index fund.
Jayadev (1996) attempted to evaluate the performance of two growth oriented mutual funds namely Mastergain and Magnum Express on the basis of monthly returns and compared to benchmark returns. The study was carried out during the period from June 1992 to March 1994 using Jenson, Treynor and Sharpe ratio. The study concluded that the two funds disappointed in earning better returns. Mastergain performance was superior as per Jensen and Treynor measures and on the basis of Sharpe ratio, its performance was unsatisfactory when compared with benchmark. The performance of Magnum Express was unsatisfactory on the basis of all these three measures. Both the growth oriented funds also failed to offer advantages of diversification and professionalism to the investors. Grubber (1996) studied the performance of mutual funds and put forward evidence
Ofpersistence Ofunderperformance. He concluded that there has been a negative performance when compared to the market. He further concluded that in spite of inferior performance of actively managed portfolios there had been a fast growth of mutual funds industry in India.
Gupta and Sehgal (1998) evaluated performance of 80 mutual fund schemes over four years period (1992-96). The study has tested the proposition relating to fund diversification, consistency of performance, parameter of performance and risk-return relationship. The study has noticed the existence of inadequate portfolio diversification and inconsistency in performance among the sample schemes.
Gupta (2001) assessed the outcome of 73 selected schemes with different investment objectives, both from the public and private sector using Market Index and Fundex. NAV of both close-ended and open-ended schemes from April 1994 to March 1999 were also tested. The result depicted that the selected schemes has not been properly diversified and risk and return of schemes could not fulfil their scheme’s objectives.
Ravinderan and Rao (2003) in his study made an attempt to evaluate the performance of Indian mutual funds in a bear market. The study was conducted for the period September 1998 - April 2002 on a sample of 269 open ended schemes by using performance index, risk-return analysis, Treynor’s ratio, Sharp’s ratio, Jensen’s measure and FAMA’s measure. The study observed that most of the sample mutual fund schemes couldn’t generate excess returns over expected returns and further concluded that the funds were not adequately diversified and were not managed optimally.
Elango (2004) undertook empirical study for private sector and public sector schemes. His study indicated that private sector schemes have outperformed public sector schemes in terms of NAV, innovative products and in deployment of funds. However, public sector funds showed low volatility as against greater inconsistency for private sector.
Sondhi and Jain (2004) examined 26 equity schemes drawn from 26 AMCs belonging to public and private sector. They emphasized that equity mutual funds performance were inferior in comparison to risk and return. Sondhi and Jain (2005), in their another paper, made an attempt to study 19 private and 17 public sector mutual fund equity schemes during the period 1993-2002. There existed inconsistency in the performance of the funds. The returns were higher than the BSE 100 index. However, it was lower than the returns on 364 days treasury bills. Private equity schemes had outperformed due to its reputation, professional management, well-researched stock selection and timing skills. The study further underlined that more than three-fourth of public sector schemes couldn’t attain better returns in spite of higher investor confidence and high safety.
Bodla and Garg (2005) reviewed 24 growth oriented schemes of mutual funds. They assessed the funds by applying risk adjusted performance measures as recommended by Sharpe, Treynor and Jensen. The conclusion drawn from the assessment showed that there were insignificant difference between market return and fund return.
Muthappan and Damodharan (2006) analysed 40 schemes for a period of 5 years from April 1995 to March 2000. The study observed that majority of the schemes have achieved superior returns compared to the market but have not performed better than 91 days Treasury bill. They further observed that 23 schemes have outperformed both in terms of total risk and systematic risk. 19 schemes performance were superior while growth schemes earned average monthly return. The average unique risk of 7.45% with an average diversification of 35.01% portrayed that the sample schemes were not adequately diversified.
Guha (2008) determined the return-based style analysis of equity mutual funds in India using quadratic optimization of an asset class factor model proposed by William Sharpe. The study identified the “Style Benchmarks” of each of its sample of equity funds as optimum exposure to 11 passive asset class indexes. A comparative study of the performance of the funds with that of their style benchmarks revealed that the funds’ performance were inferior to their style benchmarks. Bhatt and Patel (2008) observed the performance of 10 mutual fund scheme using Sharpe index method. The study portrayed that fund with high index value has performed better than fund with low index value. Phaniswara and Rao (2008) analysed performance of 60 mutual fund schemes of 29 mutual fund companies operating during 2008. The fund were evaluated using risk adjusted performance measures and observed that there were mismatch of the risk return relationship in some schemes and most of the selected schemes failed to outperform the market.
Mehta (2010) evaluated the performance of 10 funds of the both UTI and SBI mutual fund schemes. The study was accomplished on the basis of portfolio evaluation techniques using Sharpe, Treynor and Jensen Index and FAMA during 2006-07 and 2007-08. The study depicted that SBI mutual fund schemes has outperformed UTI schemes in both the years and UTI and SBI mutual funds have superior returns in 2007-08 as compared to 2006-07.
Dharmraja and Santhosh (2010) conducted a study for a period of two years - Bull Run period from January 2007 to December 2007 and Bear Run period from January 2008 to February 2009 to examine 5 balance mutual fund and 5 Income mutual funds. The findings revealed that there was generation of maximum return accompanied by high rate of risk during Bull Run period. However, the performance of the balance mutual fund was inferior to the market during the same period. During the Bear Run period, income mutual fund has lesser risk compared to stock market. On comparing balance mutual funds and income fund, it was concluded that income funds have performed better than the balance mutual fund during Bear Run period and mutual fund investment were relatively risk free than stock market as the investment being managed by the professionals. Devi and Kumar (2010) focused on the performance of Indian and foreign equity mutual funds and has observed that among Indian equity funds, the returns are highest for equity tax savings funds (55.87%) followed by diversified funds (54.73%) whereas it is just the reverse in case of foreign mutual fund as equity diversified funds are the toppers in return (57.57%) followed by equity tax savings funds (55.82%). They have further identified that there was not much difference in the returns between Indian and foreign equity index funds and equity tax savings funds.
Dhume and Ramesh (2011) made an attempt to analyse the performance of the few sector specific mutual funds using different approaches of performance measures. The sectors considered for the study were banking, FMCG, infrastructure, pharma and technology. The study highlighted that all the sector funds have better performance than the market except infrastructure funds. Bawa and Brar (2011) identified a few selected growth mutual funds schemes of both public sector and private sector schemes during the period 1st April 2000 to 31st March 2010 to evaluate their performance. The study concluded that the returns of private sector growth schemes have been better than public sector growth schemes.
Sukhwinder, Batra, and Bimal (2012) examined 10 equity schemes for the period of two years and observed that out of all sample schemes only 4 schemes were able to give more reward to volatility than benchmark. Mannar (2012) conducted a study to evaluate the performance of the four equity funds during the period from 2002-03 to 2011-12. Two funds houses namely HDFC and ICICI Prudential were selected for the study. The funds selected were HDFC Top 200 (G), HDFC Capital Builder (G), ICICI Prudential Top 200 (G) and ICICI Prudential Top 200 (G). The study identified that the average performance of the HDFC top 200 scheme has been inferior by a large factor when compared to the other schemes under study. The Performance of all the funds was to an extent better than the market with only a few rare exceptions. Inder (2012) attempted to examine the performance of index funds in comparison to market index. The study showed that index funds have been replica of the market index as they always try to capture the market sentiment.
4.2. Investment Perception of Mutual Fund Investors
The researcher further made an attempt to review a few of the studies that have been focused on the investment perceptions of mutual fund investors. Singh and Chander (2003) pointed out that occupational status and age have immaterial influence on the choice of scheme. However, the important factors in the selection of schemes for retail investors were attributed to the past track record, safety and future growth prospects. Investors also expected prompt service, reliable information and also repurchase facility from the companies.
Devasenathipathi, Saleendran, and Shanmuga- sundaram (2007) in their study disclosed that 30% of the respondents in the sample group of 200 has awareness of mutual funds through consultant’s advisory services, 46% respondents in the age group of 25-35 years has interest in mutual funds with substantial investments in the same and 31% of the respondents has invested in mutual funds for meeting future requirements. The study further unfolded that 49% of the respondents has given high preference for investment in equity fund when compared to debt and balanced fund. The study also disclosed that dividend has been the most preferred investment option for the respondents.
Parihar, Sharma, and Parihar (2009) focused their study on investment decisions of retail investors and revealed that majority of retail investors were still reluctant towards mutual fund investments
Rao and Parashar (2010) in his study made an attempt to identify the factors affecting the perception of investors regarding mutual funds investment. The study was conducted in three states namely Rajasthan, Gujarat and Madhya Pradesh. They concluded that tax incentive was one of the important factors affecting the retail investors while investing in mutual fund.
Rehman, Shaikh, and Kalkundrika (2011) assessed the investment decisions of retail investors with respect to mutual funds. Their study highlighted that the behaviour of retail investors were based on various demographic factors like age, gender, marital status, level of market knowledge, educational qualification of retails investors and the number of dependents. Shanmugsundaram and Balakrishnan (2011) determined the investors’ behaviour on result announcement. It was observed that when there was announcement of favourable consequence by the company, 38% of the respondents inclined to invest substantially, 40% of the respondents desired to hold the securities and remaining 22 % of investor inclined to book the profit. Kandavel (2011) investigated the factors which influenced the retail investors regarding preference for investment in the mutual funds. He identified that investment behaviour of retail investors do not have a high level of consistency due to the influence of different purchase factors. He further opined that negative perceptions about mutual funds can be overcome through proper induction of investor awareness programme. It was also recommended that proper segmentation and positioning of products by mutual fund companies are of utmost importance.
Rekha (2012) observed that even though there were encouraging factors contributing to the expansion of the industry, there were a few factors inhibiting its growth. The factors have been endorsed to low levels of customer awareness and lack of knowledge about mutual funds, limited innovation in product offerings, unwillingness to undertake even minimum risk, inaccessibility in smaller towns and cities due to lack of efficient distribution network and abysmal financial literacy. Singh (2012) argued that the majority of the respondents lack knowledge of the functioning of mutual funds. He further argued that demographic factors, gender, income and qualification have significantly influenced the investors’ attitude towards mutual funds. However, two demographic factors namely age and occupation have not been found influencing the attitude of investors’ towards mutual funds. As far as the benefits provided by mutual funds are concerned, return potential and liquidity have been perceived to be most attractive by the invertors’ followed by flexibility, transparency and affordability.
5. CONCLUSION
Mutual fund industry in India is gradually marching towards upward phase. It is found that most of the studies have focused on estimation of the risk exposure and return of portfolios, estimation of NAV and comparison of fund with a benchmark. It is found that high competitions among the private and public players in the industry have affected its performance. Mutual fund has failed to offer advantages of diversification and professionalism to the investors and hence could not fulfil their scheme’s objectives.Despite of the fact, there have been positive returns generated by mutual funds investments where private sector has outperformed public sector. Most of the funds in the market provided the returns equal to risk free rate. Moreover, over the last few years level of awareness and interest of investors on mutual funds has increased. But level of awareness has not yet reached to mass investors. The past studies have shown that retail investors are still confused about the mutual funds and have refrained themselves from considering mutual funds as an investment avenue. The important factors in the selection of schemes for retail investors were attributed to the past track record, safety and future growth prospects, tax incentive and also various demographic factors like age, gender, marital status, level of market knowledge, educational qualification of retails investors and the number of dependents. Chary and Masood (2010-2011) suggested that SEBI has to inspire the culture of mutual fund investment in the minds of the investors and even focused that asset managers should develop the forecasting skills in order to manage the portfolio of the fund effectively. There is an urgent need to streamline the regulation of mutual fund industry. Capital market itself is a complex activity regulated by SEBI. So, a separate regulatory body to regulate the operation and management of mutual funds should be set up (Pandey, Rathore, & Khare, 2007). In order to attain sustained profitable growth, the focus should be on developing distribution networks, increasing retail participation and expanding the reach of mutual funds to every nook and corner by conducting awareness programs and extending financial literacy (Rekha, 2012). Investment decision of retail investors in mutual funds can be encouraged by introducing special investment schemes and providing many offers or attractive prices (Mathivannan & Selvakumar, 2011).
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KEY TERMS AND DEFINITIONS
Mutual Fund: A type of professionally managed collective investment scheme that pools money from many investors to purchase securities. While there is no legal definition of the term “mutual fund,” it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as “investment companies” or “registered investment companies.” Most mutual funds are “open-ended,” meaning investors can buy or sell shares of the fund at any time. Hedge funds are not considered a type of mutual fund.
Retail Investor: An individual investor who buys and sells securities for their personal account and not for another company or organization.
Risk and Return: The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost.
This work was previously published in Handbook of Research on Strategic Business Infrastructure Development and Contemporary Issues in Finance, edited by Nilanjan Ray and Kaushik Chakraborty, pages 351-361, copyright 2014 by Business Science Reference (an imprint of IGI Global).