International Journal of Management (IJM), OF MANAGEMENT (IJM) INTERNATIONAL JOURNAL ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume

me 3, Issue 1, January- April (2012) ISSN 0976 6367(Print) ISSN 0976 6375(Online) Volume 3, Issue 1, January- April (2012), pp. 126-134 IAEME: www.iaeme.com/ijm.html Journal Impact Factor (2011)-1.5030 (Calculated by GISI) www.jifactor.com

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STUDY ON PERFORMANCE EVALUATION OF MUTUAL FUND SCHEMES IN INDIA DURING PRE-RECESSION, RECESSION AND POST-RECESSION PERIOD
A.Vennila Assistant Professor, Department of Management Studies, Sri Krishna College of Technology, Coimbatore ABSTRACT Mutual fund industry is considered as one of the most dominant players in the world economy and is an important constituent of the financial sector and India is no exception. The industry has witnessed startling growth in terms of the products and services offered, returns churned, volumes generated and the international players who have contributed to this growth. Today the industry offers different schemes ranging from equity and debt to fixed income and money market. The market has graduated from offering plain vanilla and equity debt products to an array of diverse products such as gold funds, exchange traded funds (ETFs), and capital protection oriented funds and even thematic funds. In addition investments in overseas markets have also been a significant step. In the pre-recession period, this industry experienced significant growth thanks to the overall growth inGDP, Positive Business Climate and Optimistic Investor sentiment. But in the recession period, the industry witnessed the radical decline in the growth due to reversal of the above said factors .In the post recession period, the industry has been struggling to capture the missed place in the market and in the verge of introducing innovative strategies to overcome the issues being faced. This article deals with the changes occurred in the industry in the pre-recession, recession and postrecession period and its impact in the Indian Financial Market. INTRODUCTION Due credit for this evolution can be given to the regulators for building an appropriate framework and to the fund houses for launching such different products. All
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Dr. R. Nandhagopal Director, PSG Institute of Management Studies, Coimbatore

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 1, January- April (2012)

these reasons have encouraged the traditional conservative investor, from parking fund in fixed deposits and government schemes to investing in other products giving higher returns. It is interesting to note that the major benefits of investing in a mutual funds is to capitalize on the opportunity of a professionally managed fund by a set of fund managers who apply their expertise in investment. This is beneficial to the investors who may not have the relevant knowledge and skill in investing. Besides investors have an opportunity to invest in a diversified basket of stocks at a relatively low price. Each investor owns a portion of the fund and hence shares the rise and fall in the value of the fund. A mutual fund may invest in stocks, cash, bonds or a combination of these. Mutual funds are considered as one of the best available investment options as compare to others alternatives. They are very cost efficient and also easy to invest in. The biggest advantage of mutual funds is they provide diversification, by reducing risk & maximizing returns. RECESSION IN US AND IN INDIA The US officially entered recession in 2007, but by all accounts India got to feel its effects much later, mostly courtesy its lesser dependence on exports as well as its highly regulated and conservative banking and financial system not having exposed itself to the kind of high-risk instruments dreamed up by the US investment banks. In India, the global financial crisis was striking the stock markets down from their all-time highs from early 2008. By mid-September, Sensex had fallen back to their November 2005 levels of just above 8,000 points. Recession is substantial decline in activity across the economy, lasting a longer period which is usually more than a few months. The activity across the economy is reflected by various economic data like, industrial production, employment, gross-income and wholesale-retail trade. From a technical point of view, a recession happens when there are two consecutive quarters of negative economic growth as measure by a particular countrys Gross Domestic Product (GDP). So stock markets falling relentlessly do not mean that the economy is undergoing a recession. But recession, however, is something that cannot be avoided as it is considered as a part of the business cycle. For obvious reason, it is also the most dreaded and hated part of a business cycle. Investing in stocks is really risky and needs a log of study before a decision to go ahead. But several investors claim that its worth the risk. On the other hand, Mutual Fund performs as per their diversification. It could be equity oriented funds which are again very risky and lots of fluctuations can be experienced while debtsfunds ensure balanced and steady refunds even in recession. There had been lessons learned by business during past slumps in the market. One of these is that investing in stocks during a recession may not be good because we do not know how long the recession would be and investors may end up losing their money. But if we really are brave enough to go ahead with investment despite the market downturn, they reputable companies are our best option for returns. These are the industries that have been successful during the storm and fair weather, but as far as the short run prospects are concerned Mutual Funds are at safer side. The mutual fund industry in India suffered a debilitating blow as a result of the global financial collapse too, with returns plummeting across the board. As Indian markets buckled in synch with the US markets, investors in mutual funds panicked and
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 1, January- April (2012)

redemptions hit the roof -- debt funds, especially short-term funds, were the ones to suffer the worst on account of heavy redemptions (debt funds invest in fixed-income securities like corporate bonds, government bonds, debentures, commercial paper and certificates of deposits). They make up some three-fourths of the total assets of the MF industry, tallying up to Rs 5.5 trillion. Redemptions in equity were nowhere near that. The industry found itself unable to cope with the crisis as it was not able to source enough money to pay back investors. Many funds were threatened with collapse and it was only the line of credit offered by the Government of India that saved them. Among the various steps taken by the MF industry to escape the worst-case scenario was to hoard cash. Another one was that they shunned stocks that could prove to be a noose around their necks and these mostly fell in the small- and mid-cap range and they also moved out of sectors that were showing too big a weakness like realty. Besides there was a mass-scale migration by funds towards safety and that saw FMCG stocks come to the forefront. The saveyourself features also included putting safety of the money at the forefront by the industry as a whole, followed by ensuring there was always copious amount of liquidity available at short notice and only thereafter were fund managers willing to look at returns. While the strategy paid off for the industry in keeping its collective head above the rapidly rising waters, yet it caught them napping too. When markets started virtually levitating starting March 9, 2009, the industry was caught with too much money in cash and less of it invested. As a result, most of the gains that they could have booked early in the rally were lost to them. By the time they reduced their cash holdings, the initial, and the best part, of the rally was already over. Nevertheless, the strategy still paid off. RECESSION PERIODS Hereon, we would cover our study in three phases. Pre-recession (2006- 2007) Recession (2008-mid 2009) Post-recession (2009-2011) Pre-recession period (2006- 2007) The growth period for mutual fund industry first started during early 2005 with markets appreciating significantly. With 2006 approaching more towards 2007, markets rallied like never before. The financial year 2007-08 was a year of reckoning for the mutual fund industry in many ways. Most stocks were trading in green and all fund houses boasted of giving phenomenal returns with many funds outperforming markets. Equity markets were in the limelight. Investors who were not exposed to equity stocks suddenly infused funds. AUM grew considerably and fund houses were on a spree of launching new schemes.

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 1, January- April (2012)

Below graph shows all AUMs have grown over the period of 2006-2008 growing ~2.5 times of INR 1956 bn in 2006 to ~INR 5000 bn in 2007 end.

GRAPH 1
6000 5000 4000 3000 5.0% 2000 1000 0 Nov-06 Sep-06 May-06 May-07 Sep-07 Mar-06 Mar-07 Nov-07 Jan-06 Jan-07 Jul-06 Jul-07 0.0% -5.0% -10.0% 25.0% 20.0% 15.0% 10.0%

Total Assets

Growth (RHS)

TABLE 1 Below table shows returns of large cap equity based schemes of our coverage of 10 fund houses.
Returns(%) 2006 2007 Fund Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 HDFC Top 200 20.5 -12.8 16.9 9.7 -5.7 20.3 15.8 20.2 SBI Magnum Contra 28.9 -11.7 15.3 12.0 -6.6 22.6 16.3 24.7 Reliance Growth Fund 20.4 -14.9 17.4 13.8 -3.9 22.1 12.5 33.2 DSP BlackRock Top 100 Equity Fund 23.3 -11.6 15.5 13.5 -4.6 22.3 14.4 24.3 Kotak Opportunities Fund 25.8 -14.7 12.0 11.5 -2.7 20.0 16.7 40.6 Principal Large Cap Fund 26.4 -10.9 15.1 11.9 -5.6 24.1 16.0 29.6 Sundaram Select Focus 27.2 -11.6 12.9 14.3 -6.6 17.1 24.8 32.1 Franklin India Bluechip Fund 23.4 -12.6 16.4 12.6 -7.5 20.7 15.6 17.3 Birla Sun Life Frontline Equity Fund 19.3 -9.0 18.8 12.1 -2.8 19.7 15.4 22.9 Tata Equity P/E Fund 16.0 -15.6 15.3 11.3 -5.9 31.0 16.6 28.3 Nifty 20.0 -8.1 14.7 10.5 -3.7 13.0 16.3 22.2

Study of above table suggests that returns from different schemes were in synchronization with the markets. When there was boom in the stock market the funds gave positive returns a little more than what the market had given. It can be easily concluded that most of the fund returns can be attributed to the market that is they were in direct correlation with the market. One should note that when markets were not in good shape & the going was not good, these schemes have underperformed the market. This shows the supremacy of beta effect on these schemes i.e. outperforming when in bull phase and underperforming when in bear phase.
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 1, January- April (2012)

Recession period (2008-mid 2009) The mutual fund industry in India suffered a debilitating blow as a result of the global financial collapse, with returns plummeting across the board. As Indian markets buckled in synch with the US markets, investors in mutual funds panicked and redemptions hit the roof - debt funds, especially short-term funds, were the ones to suffer the worst on account of heavy redemptions (debt funds invest in fixed-income securities like corporate bonds, government bonds, debentures, commercial paper and certificates of deposits). They make up some three-fourths of the total assets of the MF industry, tallying up to Rs 5.5 trillion. Redemptions in equity were nowhere near that. The industry found itself unable to cope with the crisis as it was not able to source enough money to pay back investors. Many funds were threatened with collapse and it was only the line of credit offered by the Government of India that saved them. Among the various steps taken by the MF industry to escape the worst-case scenario was to hoard cash. Another one was that they shunned stocks that could prove to be a noose around their necks and these mostly fell in the small- and mid-cap range and they also moved out of sectors that were showing too big a weakness like realty. Besides there was a mass-scale migration by funds towards safety and that saw FMCG stocks come to the forefront. GRAPH 2 Below graph shows how the AUMs having not grown at all with INR 5473 bn in Jan-08 and ending in Jun-09 at INR 5826 bn. Startling thing to see is that almost in 9 months out of 18 months period, negative growth has been witnessed.
7000 6000 5000 4000 3000 2000 1000 0 Nov-08 Jan-08 Jun-08 Jul-08 Jan-09 May-08 Oct-08 May-09 Dec-08 Feb-08 Feb-09 Mar-08 Aug-08 Sep-08 Mar-09 Jun-09 Apr-08 Apr-09 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0%

Total Assets

Growth (RHS)

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 1, January- April (2012)

TABLE 2 Below table shows returns of large cap equity based schemes of our coverage of 10 fund houses during the recession period.

The performance of the funds were different from each other, though a few firm had common attributes which can be seen from the clusters that they make, a few funds didnt fall into any cluster at all. HDFC Top 200 and DSP Blackrock Top 100 was the outlier and gave positive returns varying as compared to the other funds. Conservative nature of save-yourself features also included putting safety of the money at the forefront by the industry as a whole, followed by ensuring there was always copious amount of liquidity available at short notice and only thereafter were fund managers willing to look at returns. While the strategy paid off for the industry in keeping its collective head above the rapidly rising waters, yet it caught them napping too. When markets started virtually levitating starting March 9, 2009, the industry was caught with too much money in cash and less of it invested. As a result, most of the gains that they could have booked early in the rally were lost to them. By the time they reduced their cash holdings, the initial, and the best part, of the rally was already over. Nevertheless, the strategy still paid off. Surprisingly, much of the MF industry has recovered and this is evident in the returns generated by many funds over the 1-year period (since the collapse of Lehman Brothers). And these gains are nothing to sneeze at.

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 1, January- April (2012)

Post-recession period (Mid 2009-2011) GRAPH 3 Below graph shows how the AUMs have not grown at all with INR 7218 bn in Jul-09 and ending in Jun-11 at INR 6731 bn.
8500 8000 7500 7000 6500 6000 5500 5000 Nov-09 Nov-10 Jan-10 May-10 Sep-09 Jan-11 Jul-09 Jul-10 May-11 Growth (RHS) Sep-10 Mar-10 Mar-11 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0%

Total Assets

TABLE 3 Below table shows returns of large cap equity based schemes of our coverage of 10 fund houses post recession period

Between Q4 CY2009-Q1 CY2010, mixed performance has been displayed as some schemes remained flat with no gains at all. The sluggishness was over by Q2 CY2010 and continued good performance till Q3. Range bound markets from Q4 CY2010 have taken the toll from MFs as well. Mutual funds performance has been lackluster for the past 3 quarters in line with nifty.
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 1, January- April (2012)

TABLE 4 Below table shows annualized performance of the different schemes under universe of 10 fund houses.

GRAPH 4 All 10 fund schemes have given negative returns in CY2008 and have performed outstandingly in 2009. Below id the table displaying equity curve for all the 10 schemes.
280 260 240 220 200 180 160 140 120 100 2006 2007 2008 2009 2010
HDFC Top 200 Reliance Growth Fund Kotak Opportunities Fund Sundaram Select Focus Birla Sun Life Frontline Equity Fund Nifty SBI Magnum Contra DSP BlackRock Top 100 Equity Fund Principal Large Cap Fund Franklin India Bluechip Fund Tata Equity P/E Fund

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 1, January- April (2012)

REFERENCES 1. Mutual Fund Year Book (2000) A joint publication of Association of Mutual Funds in India (AMFI) and Unit Trust of India Institute of Capital Markets (UTIICM). 2. CRISIL Mutual Fund Year Book 2010 3. H SADHAK, MUTUAL FUNDS IN INDIA,2E Marketing Strategies and Investment Practices: Second Edition. 4. Sankaran, Sundar Indian Mutual Funds Handbook 5. Austin Murphy. Scientific Investment Analysis Page no : 48 6. S. P. Umamaheswar Rao , Mutual Fund Performance during Up and Down Market Conditions, in Review of Business. 7. www.valueresearchonline.com 8. www.moneycontrol.com 9. www.amfiindia.com

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