a comparative analysis of growth & … comparative analysis of growth & dividend tax...

Asia Pacific Journal of Marketing & Management Review__________________________________________ISSN 2319-2836

Vol.1 (4), December (2012)

Online available at indianresearchjournals.com

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A COMPARATIVE ANALYSIS OF GROWTH & DIVIDEND TAX

ORIENTED MUTUAL FUND SCHEMES IN INDIA

DR. RUPEET KAUR

Lecturer, Department of Business Studies,

Higher College of Technology,Muscat,

Oman.

ABSTRACT

This study aims to examine the comparative performance of open-ended tax oriented growth and

dividend schemes in India. To evaluate the performance of funds a sample of 18 schemes has

been selected on the basis of monthly returns compared to benchmark returns. For this purpose

statistical tools average, standard deviation, beta, co-efficient of determination, systematic and

unsystematic risk and the risk adjusted performance measures suggested by Treynor, Sharpe,

Jensen and Fama‟s measures are employed. The return analysis reveals that growth schemes

performed better as compared to dividend schemes when evaluate to the benchmark. Whereas

the dividend schemes are more volatile as compared to the growth schemes. The beta value of

almost all the schemes is less than one which indicates that these are defensive schemes in nature

and less sensitive to the market forces. It is found that only 44 percent growth schemes

performed better according to Sharpe, Treynor and Jensen measures. On the basis of R2, the

schemes are well diversified which reduced the unsystematic risk. However, the funds are found

to be poor in earning better returns either adopting marketing or in selecting under priced

securities.

KEYWORDS: Beta, Co-efficient of determination, Standard deviation, Systematic risk,

Unsystematic risk.

INTRODUCTION:

Generally, investors have set objective during the time of making their investment

decision. Each investor wants to have added on to funds with safe and secure investment at very

low risk. In present scenario a number of investment options are available in the market. Some

people want to invest for tax savings, some want to invest for long term by which they can have

source of fixed income and some are interested in short term gains. Like investment in form of

real estate, regular or fixed deposits, shares, bonds, securities etc. one of them in vogue is

popular with the name of mutual fund investment. Here, investors invest in the capital market

with the help of professionals who are managing the fund houses. It‟s slightly different as

compared to the share market. Mutual fund investment is less risky as compared to the stock

market investment due to the diversification feature. For mutual fund investment a layman can

also invest because his/ her funds are going to be invested by trained professional managers who

are solely indulged to choose the right diversification. Funds manager‟s efficiency depends on lot




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of factors like timely decision, selectivity of funds, awareness of current market situations,

forecasting etc.

In this article a comparative study has been done about growth and dividend tax oriented

schemes. Basically, mutual funds are structured under open-ended, close-ended and interval

funds. Further, the mutual fund structure is categorized under equity, debt, balanced and tax

oriented schemes. Dividend and growth are the ancillary categories in the former mentioned

schemes. In the growth schemes, profits made by the scheme are invested back into it. This

results in the net asset value (NAV) of the scheme intensifying over time. When the scheme

gains, the NAV rises and in case of loss, it goes down. Growth funds don‟t entirely adopt

speculative strategies but invest in those companies that are expected to post above average

earnings in the future. The only option to realize the profit is to sell or redeem the investment.

The dividend schemes don‟t reinvest the profits made by the funds. Profits or dividends are

distributed to the investor from time to time in the form of dividend. However, the time and

frequency of the dividend is never guaranteed. Dividends are declared only when the scheme

makes profit and it is at the discretion of the fund manager. The dividend is paid from the NAV

of the unit.

REVIEW OF LITERATURE:

Review of literature is a brief description about mutual funds research work conducted in

India as well as in abroad. Some of these studies have been reviewed in the following paragraphs

in order to establish the research gap and need for the present study. Treynor (1965) developed a

methodology for evaluating mutual fund performance that is popularly referred to as reward to

volatility ratio. Sharpe (1966) carried out a well acknowledged and widely quoted work on

performance evaluation. He also developed a composite measure of performance evaluation that

considers both return & risk. Jensen’s (1968) classic studies developed an absolute measure of

performance based upon the Capital Asset Pricing Model. The excess fund returns were

regressed upon the excess market returns to estimate the characteristics line of the regression

model. J. Williamson (1972) made an effort on the study of measuring and forecasting of

mutual funds performance and test the hypothesis that a fund‟s performance affected by net new

money. There is a popular belief that the availability of net new money tends to increase

performance. Williamson, however, found no correlation. He also sought to determine if net new

money was related to past performance with the result that no correlation was found. Kun and

Jen (1978) estimated the systematic risk and performance of 49 mutual funds over the period

1960-71 by utilizing monthly price data. The result indicated that a very substantial fraction of

mutual funds had two level of systematic risk during each of three sub periods. Kane and

Marks (1983) developed conditions under which Sharpe (1966) measure would correctly and

completely capture market timing ability of fund managers. Lee and Rahman (1989) examined

market timing and selectivity performance of selected mutual funds. They concluded that at the

individual level, there was some evidence of superior forecasting ability on the part of fund

manager. Grinblatt and Titman (1994) reported that mutual fund performance evaluation

measures generally yielded similar inferences with the same benchmark. Jayadev (1998)

conducted a study on the performance evaluation of portfolio managers. He examined the

performance of 62 mutual fund schemes using monthly NAV data for the period of April 1987 to

March 1995. The study showed that the Indian mutual funds were not properly diversified. Singh

and Chander (2001) appraised the status of Indian mutual fund industry in pre-liberalisation and




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post-liberalisation era extended over the period from 1963 until August, 2001. Mohanan (2006)

found that Indian mutual fund industry was one of the fastest growing sectors in the Indian

capital and financial markets. Mutual funds assets under management grew by 96 percent

between the end of 1997 and June 2003 and as a result it rose from 8 percent of GDP to 15

percent. Agrawal (2007) examined that since the development of the Indian capital Market and

deregulations of the economy in 1992 it has came a long way with lots of ups and downs. The

study revealed that the performance is affected by saving and investment habits of the people; at

the second side the confidence and loyalty of the fund manager and rewards affects the

performance of the mutual fund industry in India. Parihar et al. (2009) revealed that mutual

funds are financial intermediaries concerned with mobilizing savings of those who have surplus

and the canalization of these savings in those avenues where there is a demand for funds.

NEED OF THE STUDY:

Mutual Fund industry is becoming a good option of investment in Indian Financial Market. It

is quite popular among small and household investors, who mobilize their savings for investment

in the capital market. India has a majority of middle class families who want to yield the

maximum returns on their investment by taking the less risk and also save tax on their income.

The need of present study of mutual funds cater to reduce the past research gap and also to

update the performance of mutual funds in the current scenario. In this study, an attempt has

been made to do the comparative evaluation of the performance of open-ended growth and

dividend tax saving schemes of public sector, private sector, banks and other financial

institutions.

OBJECTIVES OF THE STUDY:

To evaluate the performance of the mutual funds, the following are the main objectives of the

present study:

i) To examine the risk and return component among these mutual funds.

ii) To study the relationship between NAV and market portfolio return (BSE Sensex).

iii) To evaluate the return of these mutual funds according to the Fama‟s model.

iv)

SCOPE OF THE STUDY:

The present study comprises of 18 mutual fund schemes launched by different public sector,

private sector, financial institutions and banks and Unit Trust of India. The time period for the

research work is from 2005 to 2010. The monthly returns are compiled on the basis of NAV.

Then these schemes are compared with Bombay Stock Exchange Sensitive Index to evaluate the

performance of these schemes. An attempt has been made to draw a conclusion which reflects

the clear picture of the mutual fund industry in the current scenario.




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SAMPLE SELECTION:

There are different types of mutual fund schemes available in India which is classified under

different categories. In the present study, 18 open-ended equity tax oriented growth and dividend

schemes have been selected for the study period out of total 36 open-ended equity tax schemes

(source SEBI) which reveals that the sample size is fifty percent. The convenience sampling

method is used for the sample selection.

DATA COLLECTION:

The present study is based on secondary data which is collected from various sources like

published annual reports of the sponsoring agencies, online bulletins, journals, books, magazines,

brochures, newspapers and other published and online material. The monthly data for the

mentioned schemes have been collected from the website www.mutualfundsindia.com. The data

has been collected from 1st January 2005 to 31

st December 2010.

METHODOLOGY:

In the present study an attempt has been made to analyze and interpret the behaviour of

different mutual fund schemes with the market during the period under study. In order to achieve

the pre-determined objectives an analysis has been made to compare these schemes with the

market on the basis of risk and return.

Different statistical and financial tools are used to evaluate the performance of these mutual fund

schemes under the present study. These tools and techniques include percentage method,

arithmetic mean, standard deviation, beta, co-efficient of determination, Sharpe, Treynor, Jensen

Alpha and Fama‟s Measure.

AVERAGE RETURN:

The most common method of calculating the return is average simple return. This method

is easy to compute and understand. Hence, schemes are compared on the basis of average

monthly return generated by the schemes under the study as:

Average Scheme Return has been computed as:

ARp = ∑Rp/n

Where

ARp = Average Portfolio Return

Rp = portfolio return

n = number of observations

Average Market Return has been computed as:

ARm = ∑Rm/n

Where

ARm = Average Market Return

Rm = Market Return

n= number of observations

http://www.mutualfundsindia.com/




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STANDARD DEVIATION:

It is measure of total risk of a fund. It measures the fluctuation of the NAV as compared

to the average returns of the schemes during a particular period. A higher standard deviation

characterize that the returns of the fund have been more unstable and risky than fund having

lower standard deviation. Hence, low standard deviation means low risk in funds return. It has

been calculated with the usage of MS excel 2007 „STDEV” function where the cell range caters

to the monthly fund returns over the period under study.

BETA:

Beta is a measure of systematic risk of a portfolio. It determines the volatility of a fund in

comparison to that of its index or benchmark. Where the beta value of fund is very close to 1, it

indicates that the fund‟s performance closely matches the market index. Beta value of fund less

than 1 indicates less volatility of the fund than the market index. Negative beta reflects an

inverse relationship between the security and the market.

Beta is computed by following formula:

Beta= Covariance (Stock, Index)/ Variance (Index).

Where, Covariance (Stock, Index) means covariance between scheme and market returns, while

Variance (Index) means variance of Index.

CO-EFFICIENT OF DETERMINATION (R-SQUARE):

R-Square of a fund advises investors if the beta (or systematic risk) of a mutual fund is

measured against an appropriate benchmark, thus helps in testing the validity of the comparison.

Funds with the high R-square value indicate that the portfolio is well diversified with low

company specific risk and vice versa. Hence, schemes with high R-square value are preferred. A

low R-square value indicates that the fund has further scope for diversification.

RISK FREE RATE:

Risk free rate is measured by the bank rate prevailing during the period under study. It is

also measured on monthly basis so as to have a compatibility with the monthly returns of the

mutual fund schemes.

SHARPE RATIO:

It is developed by Nobel laureate William F. Sharpe to measure risk adjusted

performance. It is a measure of a fund‟s return per unit of risk assumed. Sharpe ratio is

calculated by deducting the risk free rate of return from the average monthly return for a

portfolio and dividing the result by the standard deviation of the portfolio returns. Higher ratio

indicates the better the fund‟s historical risk-adjusted performance. The Sharpe ratio tells us

whether the portfolio‟s returns are due to smart investment decisions or a result of excess risk.

The greater a portfolio‟s Sharpe ratio, the better is its risk adjusted performance. A negative




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Sharpe ratio indicates that a risk - less asset would perform better than the security being

analyzed. If fund‟s Sharpe ratio is greater than the benchmark, the fund‟s performance is superior

over the market. If it is less than the benchmark, the fund‟s performance is not good in the

market. Sharpe ratio is calculated with the usage of following equation:

Sp = (ARp – ARf) / σp

Where,

ARp = Average Fund Return

ARf = Average risk-free return

σp = Standard deviation of fund returns

The benchmark comparison is Sm = (ARm -ARf) σm

TREYNOR RATIO:

Treynor ratio is developed by Jack Treynor that measures return per unit of systematic

risk. It is similar to the Sharpe ratio, with the difference that the Treynor ratio uses beta as the

measurement of volatility. The scheme with the higher Treynor ratio offers a better risk-reward

equation for the investor. It is also known as the “reward-to-volatility ratio”. It is more

appropriate for diversified funds, where the systematic risks have been eliminated. For a

completely diversified portfolio, one without any unsystematic risk, the two measures give

identical ranking. Alternatively, a poorly diversified portfolio could have a high ranking based

on Treynor ratio and a low ranking based on Sharpe ratio. The difference in rank is because of

the difference in diversification. Hence, both ratios provide complementary yet different

information. Treynor ratio is calculated for various funds as:

Tp = AR p – ARf /ßp Where,

AR p = Average fund return

ARf = Average risk- free return

ßp = beta of the fund

The benchmark comparison is (AR m – ARf )

JENSEN’S ALPHA:

Jensen‟s Alpha is a measure of differential return earned by the fund. It helps in

evaluating the ability of the fund manager in identifying the undervalued securities and there by

generating excess returns than the benchmark. Hence, the ability of stock selection can be known

with the help of Jensen‟s Alpha. It is appropriate for portfolios which are fully diversified and

where the non-systematic risk would be zero. Jensen‟s alpha is usually very close to zero. A

positive value of alpha indicates that the portfolio has average return greater than the benchmark

which indicates the superior performance. Alternatively, a negative value of alpha would indicate

that the fund has a return less than the benchmark. In other words, a positive alpha of 1.0 means

the fund has performed well as compared to its benchmark index by 1 percent while a negative

alpha would indicate a poor performance of 1 percent. Expected return from the scheme based on

its beta is calculated as:

ERp = ARf + [ßp * (AR m – ARf )]

Formula for calculating Alpha is as following

αp = (ARp - ARf )- ßp (AR m – ARf )




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Where,

αp = the Jensen measure (alpha), intercept measuring the forecasting ability of the manager

ARp = average portfolio return

ARf = average risk free return

ßp = portfolio beta

AR m = average market return.

FAMA’S SEGREGATION OF RETURNS (FAMA’S COMPONENTS OF INVESTMENT

PERFORMANCE):

The risk adjusted performance measures used above reflects the overall performance of the

sample schemes. According to Fama (1972), portfolio return constitutes four components namely

risk free return, compensation for systematic risk, compensation for inadequate diversification

and returns due to net selectivity. The different components have been worked out as follows:

(i) Risk free return: ARf Risk Free asset is the one where investor purchases the asset in the beginning of the holding

period and knows exactly the terminal value of the asset at the end of the period. It includes

bank deposits, post office savings schemes, government securities, debentures etc. An

investor invests in assets other than risk free assets in the hope of obtaining excess returns for

taking additional risk.

(ii) Compensation for systematic risk: ßp (AR m – ARf )

This measure helps to access returns generated by the fund managers due to their decision to

take risk. They assume risk in the expectations of generating excess returns on their

portfolios.

(iii) Compensation for inadequate diversification: [AR m – ARf ] [ σp / σ m – ßp]

The potential advantage of mutual fund investment to the investor is diversification of the

portfolio. Diversification reduces the unique risk of the portfolio, and thus improves the

performance of the mutual fund schemes. The compensation for diversification measures is

additional return that compensates the portfolio manager for bearing the diversifiable risk.

(iv) Net Selectivity: [AR p – ARf ] - [ σp / σ m ] [AR m – ARf ]

The ability to identify the undervalued securities to earn the excess returns is known as

the ability of net selectivity of the fund managers. A positive net selectivity indicates superior

performance. The investors are benefited out of the selectivity exercised by the fund

managers, which reflects the true stock selection ability of the mutual fund managers.

However, in case of negative net selectivity, it means that fund managers have taken

diversifiable risk which has not been compensated by extra returns.

RETURN ANALYSIS:

The performance of equity tax oriented growth and dividend schemes have been analysed

through averages and these tools are applied to NAV of selected specific schemes. The results of

these applications are shown as per Table 1. The average monthly return is calculated on the

basis of NAV. In case of growth schemes, the performance of 44 percent schemes out of total

selected 9 growth schemes is above the market index whereas in the case of dividend schemes

none of the scheme has been able to compete with the benchmark. It clearly shows that growth




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schemes performed better as compared to the dividend schemes. Among all the selected schemes

HDFC Tax Saver (G) has shown the highest return.

RISK ANALYSIS:

The risk is analysed with the help of standard deviation, beta, co-efficient of

determination, systematic risk and unsystematic risk (Table 1).

High value of standard deviation shows high degree of risk. In dividend schemes, all

selected schemes have higher standard deviation as compared to the benchmark i.e. market

index, whereas in growth schemes 33 percent schemes‟ standard deviation is less than the market

index and are less risky. It reveals that dividend schemes are more volatile as compared to the

market. Overall, variability in return of portfolio of schemes is more than variability in return of

the market. Standard deviation allows portfolios with similar objective to be compared over a

particular time frame.

The beta value on the basis of NAV is more than one in ING Tax Saving Fund (G) which

indicates that only this scheme is more sensitive and volatile than market. Whereas beta value of

the remaining selected schemes are less than one and manifest that these are defensive schemes

in nature and less sensitive to the market forces.

The value of R2

is high in almost all growth schemes except one scheme i.e. Sahara Tax

Gain(G) which indicate that most of the schemes are well diversified and the unsystematic risk is

low in these schemes whereas the systematic risk is high. Thus most of the schemes offer the

advantages of diversification which resulted into reduction of total risk. Whereas in dividend

schemes the unsystematic risk is high it means that the securities are not properly diversified and

have less scope to earn better returns among the schemes under study.




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TABLE NO. 1: RETURN & RISK ANALYSIS

Growth Schemes:

Sr.

No. Name of the Scheme Average

Portfolio

Return

Standard

Deviation

(σ)

Beta (β) R Square

(R2)

Systematic

Risk

Unsystematic

Risk

1 Escorts Tax Plan (G) 0.014427 0.083695 0.885061

0.787772

0.005518

0.001487

2

Franklin India Tax

Shield (G)

0.020111 0.076364

0.873034

0.920748

0.005369

0.000462

3 HDFC TaxSaver (G) 0.022760 0.081421 0.910199

0.880354

0.005836

0.000793

4

ICICI Prudential

Tax Plan (G)

0.021518 0.089803

0.955277

0.797140

0.006429

0.001636

5

ING Tax Saving

Fund (G)

0.018123 0.094700

1.020259

0.817670

0.007333

0.001635

6

LIC Nomura Tax

Plan (G)

0.012724 0.085796

0.984955

0.928445

0.006834

0.000527

7 Sahara Tax Gain (G) 0.008281 0.133330

0.923559

0.338010

0.006009

0.011768

8

Sundaram Tax Saver

(G)

0.021544

0.084620

0.929420

0.849832

0.006085

0.001075

9

UTI Equity Tax

Saving Plan (G)

0.015244

0.075892

0.868034

0.921578

0.005308

0.000452

Dividend Schemes:

Sr.

No. Name of the Scheme Average

Portfolio

Return

Standard

Deviation

(σ)

Beta (β) R Square

(R2)

Systematic

Risk

Unsystematic

Risk

1 Escorts Tax Plan (D) 0.002112 0.098826 0.928237

0.621477

0.006070

0.003697

2

Franklin India Tax

Shield (D)

0.008681

0.086916 0.896775

0.749936

0.005665

0.001889

3 HDFC TaxSaver (D) 0.012089 0.086794 0.884995

0.732412

0.005517

0.002016

4

ICICI Prudential

Tax Plan (D)

0.007730 0.099068

0.970330

0.675808

0.006633

0.003182

5

ING Tax Saving

Fund (D)

0.009412 0.105953

0.971406

0.592148

0.006647

0.004579

6

LIC Nomura Tax

Plan (D)

0.000970 0.089814

0.939088

0.770153

0.006212

0.001854

7 Sahara Tax Gain (D) -0.003490 0.137916

0.991184

0.363858

0.006921

0.012100

8

Sundaram Tax Saver

(D)

0.001322

0.099415

0.984470

0.670732

0.006629

0.003254

9

UTI Equity Tax

Saving Plan (D)

0.004214 0.086916

0.826979

0.637737

0.004818

0.002737

Market Index 0.019601 0.082750 1.000000

Source: www.mutualfundsindia.com





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The systematic risk on the basis of NAV is lowest in case of UTI Equity Tax Saving Plan

(D) followed by UTI Equity Tax Saving Plan (G), Franklin India Tax Shield (G), HDFC Tax

Saver (D) and Escorts Tax Plan (G) which means that these schemes are better in comparison to

ING Tax Saving Fund (G), Baroda Pioneer ELSS 96, Sahara Tax Gain (D), LIC Nomura Tax

Plan (G) and ING Tax Saving Fund (D) schemes in which systematic risk is highest. The

systematic risk is undiversifiable and unavoidable.

APPLICATION OF SHARPE MODEL:

The analysis (Table 2) depicts the excess return of total risk over the risk free rate per unit.

TABLE NO. 2

APPLICATION OF SHARPE MODEL

Growth Schemes

Sr.

No. Name of the Scheme

Sharpe

Ratio Benchmark Performance

1 Escorts Tax Plan (G) 0.052891 0.116029 0

2 Franklin India Tax Shield (G) 0.132403 0.116029 1

3 HDFC TaxSaver (G) 0.156717 0.116029 1

4 ICICI Prudential Tax Plan (G) 0.128254 0.116029 1

5 ING Tax Saving Fund (G) 0.085776 0.116029 0

6 LIC Nomura Tax Plan (G) 0.031744 0.116029 0

7 Sahara Tax Gain (G) -0.012889 0.116029 0

8 Sundaram Tax Saver (G) 0.136425 0.116029 1

9 UTI Equity Tax Saving Plan (G) 0.069102 0.116029 0

Dividend Schemes

Sr.


Sharpe

Ratio Benchmark Performance

1 Escorts Tax Plan (D) -0.079815 0.116029 0

2 Franklin India Tax Shield (D) -0.015180 0.116029 0

3 HDFC TaxSaver (D) 0.002089 0.116029 0

4 ICICI Prudential Tax Plan (D) -0.022909 0.116029 0

5 ING Tax Saving Fund (D) -0.005547 0.116029 0

6 LIC Nomura Tax Plan (D) -0.100546 0.116029 0

7 Sahara Tax Gain (D) -0.097810 0.116029 0

8 Sundaram Tax Saver (D) -0.087294 0.116029 0

9 UTI Equity Tax Saving Plan (D) -0.066570 0.116029 0

Source: www.mutualfundsindia.com Note: 1 stands for good performance and 0 stands for poor

performance.

The performance of these schemes is compared with the benchmark BSE Sensex. The

schemes having more than one value indicate that it has performed well in the market and less

than one value indicates that it has poor performance. On the basis of NAV, 44 percent of growth

schemes have more than one value; therefore, have good performance in the market whereas all

of the dividend schemes have shown poor performance. The top performers are HDFC Tax

Saver (G), Sundaram Tax Saver (G), Franklin India Tax Shield (G) and ICICI Prudential Tax

Plan (G). On the other side LIC Nomura Tax Plan (D), Sahara Tax Gain (D), Sundaram Tax

Gain (D) and Escorts Tax Plan (D) are the poorest performers.





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APPLICATION OF TREYNOR MODEL:

The performance of the schemes on the basis of Treynor‟s index is described in Table 3

which provides the excess return over risk free rate for one unit of systematic risk. The

performance of these schemes is compared with the benchmark portfolio and it is observed that

on the basis of performance indicator i.e. NAV all dividend schemes could not perform well in

the market because their relative index value is less than one. Whereas 44 percent of the growth

schemes were able to outperform the market index.

TABLE NO. 3

APPLICATION OF TREYNOR MODEL

Growth Schemes

Sr.

No. Name of the Scheme Treynor Ratio Benchmark Performance

1 Escorts Tax Plan (G) 0.005002 0.009739 0

2 Franklin India Tax Shield (G) 0.011581 0.009739 1

3 HDFC TaxSaver (G) 0.014019 0.009739 1

4 ICICI Prudential Tax Plan (G) 0.012057 0.009739 1

5 ING Tax Saving Fund (G) 0.007962 0.009739 0

6 LIC Nomura Tax Plan (G) 0.002765 0.009739 0

7 Sahara Tax Gain (G) -0.001861 0.009739 0

8 Sundaram Tax Saver (G) 0.012421 0.009739 1

9 UTI Equity Tax Saving Plan (G) 0.006042 0.009739 0

Dividend Schemes

Sr.

No. Name of the Scheme Treynor Ratio Benchmark Performance

1 Escorts Tax Plan (D) -0.008498 0.009739 0

2 Franklin India Tax Shield (D) -0.001471 0.009739 0

3 HDFC TaxSaver (D) 0.002361 0.009739 0

4 ICICI Prudential Tax Plan (D) -0.002339 0.009739 0

5 ING Tax Saving Fund (D) -0.000605 0.009739 0

6 LIC Nomura Tax Plan (D) -0.009616 0.009739 0

7 Sahara Tax Gain (D) -0.013610 0.009739 0

8 Sundaram Tax Saver (D) -0.008815 0.009739 0

9 UTI Equity Tax Saving Plan (D) -0.006997 0.009739 0

Source: www.mutualfundsindia.com Note: 1 stands for good performance and 0 stands for poor

performance.

APPLICATION OF JENSEN’S ALPHA:

Jensen‟s alpha measures differential return earned by the scheme while beta measures the

systematic risk of the scheme. The parameters of the model have been estimated by standard

regression techniques. Positive and significant alpha reflects superior performance.





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TABLE NO. 4

APPLICATION OF JENSEN’S ALPHA MODEL

Growth Schemes

Sr.


Actual

Return

Expected

Return

Jensen

Alpha

1 Escorts Tax Plan (G) 0.014427 0.018498 -0.004071

2 Franklin India Tax Shield (G) 0.020111 0.018382 0.001728

3 HDFC TaxSaver (G) 0.022760 0.018739 0.004021

4 ICICI Prudential Tax Plan (G) 0.021518 0.019172 0.002346

5 ING Tax Saving Fund (G) 0.018123 0.019796 -0.001673

6 LIC Nomura Tax Plan (G) 0.012724 0.019457 -0.006733

7 Sahara Tax Gain (G) 0.008281 0.018867 -0.010586

8 Sundaram Tax Saver (G) 0.021544 0.018924 0.002621

9 UTI Equity Tax Saving Plan (G) 0.015244 0.018334 -0.003090

Dividend Schemes

Sr.


Actual

Return

Expected

Return

Jensen

Alpha

1 Escorts Tax Plan (D) 0.002112 0.018912 -0.016800

2 Franklin India Tax Shield (D) 0.008681 0.018610 -0.009930

3 HDFC TaxSaver (D) 0.012089 0.018497 -0.006408

4 ICICI Prudential Tax Plan (D) 0.007730 0.019317 -0.011586

5 ING Tax Saving Fund (D) 0.009412 0.019327 -0.009915

6 LIC Nomura Tax Plan (D) 0.000970 0.019017 -0.018047

7 Sahara Tax Gain (D) -0.003490 0.019517 -0.023006

8 Sundaram Tax Saver (D) 0.001322 0.019452 -0.018131

9 UTI Equity Tax Saving Plan (D) 0.004214 0.017940 -0.013726


Table 4 gives the results pertaining to Jensen measure. Out of total 9 schemes, alpha

value for four schemes (44 percent) is positive thereby indicating superior performance.

Whereas, the alpha value is negative for all dividend schemes. In other words these schemes

have generated returns less than the equilibrium returns. Equilibrium return is a return that is

expected to be earned by a fund with a given level of systematic or market risk. These are the

results of alpha when market returns are calculated on the basis of BSE Sensex.

APPLICATION OF FAMA’S SEGREGATION OF RETURNS MODEL:

Table 5 presents break up of portfolio returns with the help of Fama‟s decomposition

measures. All selected growth and dividend schemes have positive growth rate except one

dividend scheme i.e. Sahara Tax Gain (D) has negative growth rate in its NAV during study

period. Further eighty nine percent of growth schemes have more return than risk free rate

whereas it is only twenty two percent in case of dividend schemes. Due to net selectivity 4

growth schemes and only one dividend scheme performed better while the remaining schemes

have shown poor performance. The positive values of return on systematic and unsystematic risk

imply that both dividend and growth schemes were able to cover both the risk involved during

the period of study. The return from stock selectivity was negative (except four growth schemes)





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implying that the sample schemes had earned poor return due to stock selectivity. The fund

managers were found to be incompetent in selecting the undervalued securities.

TABLE NO. 5

APPLICATION OF FAMA'S SEGREGATION OF RETURN MODEL

Growth Schemes Sr. No.

Name of the Scheme Funds Return

Risk Free Return

Net Selectivity

Systematic Risk

Inadequate Diversification

1 Escorts Tax Plan (G) 0.014427 0.010000 -0.005284 0.008498 0.001213

2 Franklin India Tax Shield

(G)

0.020111

0.010000 0.001250 0.008382 0.000478

3 HDFC TaxSaver (G) 0.022760 0.010000 0.003313 0.008739 0.000708

4 ICICI Prudential Tax Plan

(G)

0.021518

0.010000 0.001098 0.009172 0.001248

5 ING Tax Saving Fund (G) 0.018123 0.010000 -0.002865 0.009796 0.001192

6 LIC Nomura Tax Plan (G) 0.012724 0.010000 -0.007231 0.009457 0.000498

7 Sahara Tax Gain (G) 0.008281 0.010000 -0.017189 0.008867 0.006603

8 Sundaram Tax Saver (G)

0.021544

0.010000 0.001726 0.008924 0.000895

9 UTI Equity Tax Saving

Plan (G)

0.015244

0.010000 -0.003561 0.008334 0.000471

Dividend Schemes Sr. No.

Name of the Scheme Funds Return

Risk Free Return

Net Selectivity

Systematic Risk

Inadequate Diversification

1 Escorts Tax Plan (D) 0.002112 0.010000 -0.019355 0.008912 0.002554

2 Franklin India Tax Shield

(D)

0.008681

0.010000 -0.011404 0.008610 0.001474

3 HDFC TaxSaver (D) 0.012089 0.010000 -0.007981 0.008497 0.001573

4 ICICI Prudential Tax Plan

(D)

0.007730

0.010000 -0.013764 0.009317 0.002178

5 ING Tax Saving Fund (D) 0.009412 0.010000 -0.012881 0.009327 0.002967

6 LIC Nomura Tax Plan (D) 0.000970 0.010000 -0.019451 0.009017 0.001405

7 Sahara Tax Gain (D) -0.003490 0.010000 -0.029492 0.009517 0.006486

8 Sundaram Tax Saver (D)

0.001322

0.010000 -0.020213 0.009452 0.002083

9 UTI Equity Tax Saving

Plan (D)

0.004214

0.010000 -0.015871 0.007940 0.002145





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CONCLUSIONS:

From the above analysis, it is concluded that the performance of growth schemes is better

than the dividend schemes. The empirical results show that on the basis of total risk, the dividend

schemes are more volatile than the growth schemes. However, in overall both types of schemes

are more volatile than the market. The value of R2 ranges within 0.34 to 0.93 in case of growth

schemes and 0.36 to 0.77 in case of dividend schemes. It shows that except two schemes i.e.

Sahara Tax Gain (G) and Sahara Tax Gain (D); all other schemes are well diversified and

reduces the unsystematic risk. The beta value of both categories of schemes is less than one

indicates that the schemes are less affected by the market ups and downs. On the basis of

Treynor only four growth schemes have shown good performance. Interestingly the same four

schemes have performed better according to Sharpe and Jensen as well. It reveals that these

schemes performed better as compared to the market risk and total risk. Whereas, the dividend

have shown poor performance as compared to the market. However, in the Fama‟s model the

fund managers are found to be poor in terms of their ability of selectivity even though schemes

have covered both the systematic and unsystematic risk. The fund manager of the schemes can

earn better returns by adopting the market timing strategy and selecting the under priced

securities. Study reveals that the majority of the selected schemes were not able to provide the

good return to the investors as compared to the market. However, four schemes i.e. HDFC

TaxSaver (G), Sundaram Tax Saver (G), ICICI Prudential Tax Plan (G) and Franklin India Tax

Shield (G) have been able to compete with the market and provided good returns as compared to

the benchmark.

References

1) Agrawal, Deepak, (2007), "Measuring Performance of Indian Mutual Funds", Prabhandan

Tanikniqui, Vol I (Issue I), 2007, LNCT-MER, Indore, India.

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5) Kane, Alve and Marks Gay (1983), 'Performance Evaluation of Market Times- Theory &

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9) Parihar, B. B. S., Sharma, Rajeev and Singh Parihar, Deepika (2009), 'Analyzing Investors'

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10) Sharpe, William F. (1966), 'Mutual Fund Performance', Journal of Business, 39, pp. 119-

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11) Singh, Jaspal and Chander, Subhash (2001), "Appraisal of Mutual Funds in India", The

Indian Journal of Commerce, Vol. 54 (No. 4), p.58.

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13) Williamson, J. (1972), 'Measuring and Forecasting of Mutual Fund Performance Choosing

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a comparative analysis of growth & … comparative analysis of growth & dividend tax...

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