1. PERFORMANCE PERSISTENCE
OF
GROWTH ORIENTED MUTUAL FUNDS IN INDIA
SUBMITTED BY
T. DIVYA SREE
ROLL NO: 19074
UNDER THE GUIDANCE OF
Dr K. SASI KUMAR
ASSOCIATE PROFESSOR
SIVA SIVANI INSTITUTE OF MANAGEMENT
KOMPALLY, SECUNDRABAD – 500014.
ACADEMIC YEAR (2010 - 2012)

2. DECLARATION
I, T.DIVYA SREE from TPS (2010-2012) of SIVA SIVANI INSTITUTE OF MANAGEMENT
(SSIM), hereby declare that I have successfully completed this project on “Performance
Persistence of GROWTH FUNDS” as a part of my „Specialization Project‟. The
information incorporated in this project is true and original to the best of my knowledge.
ii

3. ACKNOWLEDGMENT
I thank my project guide Dr. K.SASI KUMAR from SIVA SIVANI INSTITUTE OF
MANGEMENT for spending his valuable time and helping me with the topic and also for his
generosity and honesty in showing interest in my project and guiding me throughout the
development 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 not
possible. I also wish to express sincere gratitude to all the respondents of the project and the kind
of co-operation of whom without this work would not have been possible.
iii

4. CONTENTS
S.No TOPIC PAGE NO
1 Introduction 1
2 Mutual Funds – 4
Theoretical Framework
3 Performance Persistence - 21
Theory
4 Measuring Performance 25
Persistence
5 Conclusion 37
iv

5. INTRODUCTION
This study examines the persistence performance of growth funds in the India through the use of
winner-loser contingency table methodology. The persistence tests are applied to a database of
varying numbers of funds of 5 using weekly returns over the 5 years from 2008 to 2011. The
overall conclusion is that the growth funds in India show little evidence of persistence in the
short-term (weekly) or for data over a considerable length of time. In contrast, the results are
better for annual data with evidence of significant performance persistence. Thus at this stage, it
seems that an annual evaluation period, provides the best discrimination of the winner and loser
phenomenon 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 small
samples are used significant adjustments must be made to correct for small sample bias and
second 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, at
least 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 funds
is 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 nature
Hypothesis
1|Page

6. This study will test the hypothesis that actively managed mutual funds show significant
performance persistence over our study period, 2008 through 2011. This analysis includes five
different growth mutual funds, including categories of equity funds, bond funds, and balanced
funds.
Methodology
Persistence 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 performance
is particularly attractive to investors as it suggests the choosing funds that will perform well in
the future is as simple as looking at those that performed well in the past. Consequently, much
effort has been expended recently to determine if such a rule exists in the equity and bond
markets. However, the performance persistence literature is characterized by a number of studies
that, although using generally similar methodology, have produced apparently inconsistent, and
in some cases contradictory, results. For instance, a number of studies identify a tendency for
mutual funds to provide consistent returns performance over time relative to other funds.
Performance persistence can be examined in various ways with a number of
methodologies. For instance, studies have investigated performance persistence through the use
of regression analysis, in which future performance is regressed against a measure of
performance in the past, a significant and positive slope coefficient indicating performance
persistence while a significantly negative slope coefficient indicates performance reversal. An
alternative approach is to sort funds based on returns over previous periods and evaluate the
performance of the resulting portfolios. Another common approach is to rank funds by past
performance to examine whether the rankings are consistent over time. A further approach is to
evaluate persistence through the use of contingency tales. Of the various methodologies used to
evaluate persistence the one used here is the winner-loser contingency table approach for three
reasons. First, contingency tables are more appropriate where there is doubt as to the
distributional assumptions of the sample. Second, the application of contingency tables is
relatively straightforward and so easier to understand by everyday investors, especially if raw
returns are used. Third, contingency tables are preferred to the alternative methods when the
sample of funds is limited.
2|Page

7. Winner/Loser Contingency Table
The contingency table approach is used to identify the frequency with which funds are defined as
winners and losers over successive time periods. If the same number of funds in existence is the
same 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. A
loser fund is thus one with returns below the median. If a loser (L) in the first period is also a
loser (L) in the future period, it is defined as a loser-loser (LL). In a similar way a winner (W) in
the 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 that
moves from being a winner (W) to a loser (L) is a winner-loser (WL). However, if funds enter or
leave the database the problem is more complex. For instance, suppose there are M funds in
period t but N funds enter the data set in the next period; M+N funds need to be ranked in period
t+1. Thus, in order to maintain the consistency of fund rankings through time only funds with
returns in both periods are analyzed in t+1. The frequencies with which funds are defined as
winners and losers over successive time periods are then calculated. To test for the independence
in the results three statistical criteria are used each of which tests for different forms of
persistence.
3|Page

8. MUTUAL FUNDS – THEORITICAL FRAMEWORK
Organization of a Mutual Fund Three key players namely sponsor, mutual fund trust, and asset
Management Company (AMC) is involved in setting up a mutual fund. They are assisted by
other independent administrative entities like banks, registrars, transfer agents, and custodians
(depository participants).
Sponsor
Sponsor means any person who acting alone or with another body corporate establishes a mutual
fund. The sponsor of a fund is akin to the promoter of a company as he gets the fund registered
with 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 and
integrity in all his business transactions. This means that the sponsor should have been doing
business in financial services for not less than five years, with positive net worth in all the
immediately preceding five years. The net worth of the immediately preceding year should be
more than the capital contribution of the sponsor in AMC and the sponsor should show profits
after providing depreciation, interest, and tax for three out of the immediately preceding five
years. The sponsor and any of the directors or principal officers to be employed by the mutual
fund, should not have been found guilty of fraud or convicted of an offence involving moral
turpitude or guilty of economic offences. The sponsor forms a trust and appoints a Board of
Trustees. 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 asset
management company.
Mutual Funds as Trusts
A mutual fund in India is constituted in the form of a public Trust created under the Indian Trusts
Act, 1882. The sponsor forms the Trust and registers it with SEBI. The fund sponsor acts as the
settler of the Trust, contributing to its initial capital and appoints a trustee to hold the assets of
the Trust for the benefit of the unit- holders, who are the beneficiaries of the Trust. The fund then
invites investors to contribute their money in the common pool, by subscribing to „units‟ issued
4|Page

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 by
the 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 with
an associate, subsidiary, or sponsor in any manner). The trustees shall be accountable for and be
the custodian of funds/property of respective scheme.
Asset Management Company
The 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 the
affairs of the mutual fund and operate the schemes of such mutual funds. It charges a fee for the
services it renders to the mutual fund trust. It acts as the investment manager to the Trust under
the supervision and direction of the trustees. The AMC, in the name of the Trust, floats and then
manages the different investment schemes as per SEBI regulations and the Trust Deed. The
AMC should be registered with SEBI. The AMC of a mutual fund must have a net worth of at
least Rs 10 crore at all times and this net worth should be in the form of cash. It cannot act as a
trustee of any other mutual fund. It is required to disclose the scheme particulars and base of
calculation of NAY. It can undertake specific activities such as advisory services and financial
consultancy. It must submit quarterly reports to the mutual fund. The trustees are empowered to
terminate the appointment of the AMC and may appoint a new AMC with the prior approval of
the SEBI and unit-holders. At least 50% of the directors of the board of directors of AMC should
not be associated with the sponsor or its subsidiaries or the trustees.
Obligations of an AMC
An 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. 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 management
companies (AMCs) in their investment decisions. For effective implementation of the regulations
and also to bring about transparency in the investment decisions, all the AMCs are required to
maintain 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 broad
parameters for investments, the basis for taking individual scrip-wise investment decision in
equity and debt securities would have to be recorded. The AMCs are required to report its
compliance in their periodical reports to the trustees and the trustees are required to report to
SEBI, in their half-yearly reports. Trustees can also check its compliance through independent
auditors or internal statutory auditors or through other systems developed by them. The
unclaimed redemption and dividend amounts can now be deployed by the mutual funds in call
money market or money market instruments and the investors who claim these amounts during a
period of three years from the due date shall be paid at the prevailing net asset value. After a
period of three years, the amount can be transferred to a pool account and the investors can claim
the amount at NAV prevailing at the end of the third year. The income earned on such funds can
be used for the purpose of investor education. The AMC has to make a continuous effort to
6|Page

11. remind the investors through letters to take their unclaimed amounts. In case of schemes to be
launched in the future, disclosures on the above provisions are required to be made on the offer
documents. Also, the information on amount unclaimed and number of such investors for each
scheme is required to be disclosed in the annual reports of mutual funds. SEBI issued a directive
during 2000-01 that the annual report containing accounts of the asset management companies
should be displayed on the websites of the mutual funds. It should also be mentioned in the
annual report of mutual fund schemes that the unit-holders, if they so desire, can request for the
annual report of the asset management company.
Mutual funds earlier were required to get prior approval of the board of trustees and
AMCs to invest in un-rated debt instruments. In order to give operational flexibility, mutual
funds can now constitute committees who can approve proposals for investments in un-rated
debt instruments. However, the detailed parameters for such investments must be approved by
the AMC boards and trustees. The details of such investments are required to be communicated
by the AMCs to the trustees in their periodical reports and it should be clearly mentioned as to
how the parameters have been complied with. However, in case a security does not fall under the
parameters, 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 mutual
fund- trustee companies, so as to avoid any conflict of interest or any abuse of an individual‟s
position and also to ensure that the employees of AMCs and trustee companies should not take
undue advantage of price sensitive information about any company. SEBI issued directives that
the directors‟ of AMCs should file with the trustees the details of their purchase and sale
transactions in securities on a quarterly basis. As in the case of trustees, they may report only
those transactions which exceed the value of Rs 1 lakh. Following representations from AMFI,
SEBI notified the Mutual Funds (Amendment) Regulations, 2002, whereby the requirement of
publishing 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 the
unit -holders. Further, all mutual funds were advised to display the scheme-wise annual reports
on their websites to be linked with AMFI website so that the investors and analysts can access
the annual reports of all mutual funds at one place.
To provide the investors an objective analysis of the performance of the mutual funds
schemes in comparison with the rise or fall in the markets, SEBI decided to include disclosure of
7|Page

12. performance of benchmark indices in case of equity-oriented schemes and subsequently
extended to debt-oriented and balanced fund schemes in the format for half-yearly results. In
case of sector or industry specific schemes, mutual funds may select any sectoral indices
published by stock exchanges and other reputed agencies. In pursuance with the proposals in the
Union Budget 2002-03, SEBI allowed the mutual funds to invest in foreign debt securities in the
countries 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 government
securities where the countries are AAA rated. To bring, uniformity in calculation of NAVs of
mutual fund schemes, SEBI issued guidelines for valuation of unlisted equity shares. SEBI
clarified that the service charge of five% on the management fees of AMCs imposed in the
Union Budget 2002-03 can be charged to the schemes as an item of general expenditure without
imposing 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 two
years after the winding up of the scheme, should be distributed to the old investors if the amount
is substantial. In case the amount is not substantial or it is realized after two years it may be
transferred to the Investor Education Fund maintained by each mutual fund.
Mutual funds can enter into transactions relating to government securities only in dematerialized
form. SEBI clarified that the SEBI (Insider Trading) (Amendment) Regulations, 2002, should be
followed strictly by the trustee companies, AMCs and their employees and directors.
Objectives of AMFI
To define and maintain high professional and ethical standards in all areas of operation of mutual
fund 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.  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 ones
in many areas, particularly in the sphere of valuation of securities. Based on the
recommendations of AMFI, detailed guidelines have been issued by SEBI for valuation of
unlisted equity shares. A major initiative of AMFI during the year 2001-02 was the launching of
registration of AMFI Certified Intermediaries and providing recognition and status to the
distributor agents. More than 30 corporate distributors and a large number of agent distributors
have 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 and
for the conduct of their business. AMFI maintains a liaison with different regulators such as
SEBI, 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 mutual
funds for submission to IRDA. It holds meetings and discussions with SEBI regarding matters
relating to mutual fund industry. Moreover, it also makes representations to the government for
removal of constraints and bottlenecks in the growth of mutual fund industry.
AMFI recently launched appropriate market indices which will enable the investors to
appreciate and make meaningful comparison of the returns of their investments in mutual funds
schemes. While in the case of equity funds, a number of benchmarks like the BSE Sensex and
the S&P CNX Nifty are available, there was a lack of relevant benchmarks for debt funds. AMFI
took the initiative of developing eight new indices jointly with Crisil.com and ICICI Securities.
These indices have been constructed to benchmark the performance of different types of debt
schemes such as liquid, income, monthly income, balanced fund, and gilt fund schemes. These
eight 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. 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 issuance
yield on new 91 days CPs issued by top rated manufacturing companies. In the case of bond
funds, the index comprises a corporate bond component with a 55% weightage, gilts component
with 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 rated
bonds, and 15 points share of AA rated bonds. Mutual funds have now to disclose also the
performance of appropriate market indices along with the performance of schemes both in the
offer document and in the half-yearly results. Further, the trustees are required to review the
performance of the schemes on periodical basis with reference to market indices. These indices
will be useful to distribution companies, agents/brokers, financial consultants, and investors.
AMFI conducts investor awareness programmes regularly. AMFI also conducts intermediary‟s
certification examination. As of July 2002, 2,140 employees and 3,200 distributors have passed
the 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 an
SRO.
Unit Trust of India
Unit Trust of India (UTI) is India‟s first mutual fund organisation. It is the single largest mutual
fund in India, which came into existence with the enactment of UTI Act in 1964. The economic
turmoil and the wars in the early sixties depressed the financial markets, making it difficult for
both existing and new entrepreneurs to raise fresh capital. The then Finance Minister, T T
Krishnamachari, set up the idea of a Unit Trust which would mobilise savings of the community
and 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 and
investment and participation in the income, profits and gains accruing to the Corporation from
the acquisition, holding, management and disposal of securities‟. The regulations passed by the
Ministry of Finance (MOF) and the Parliament from time to time regulated the functioning of
UTI. Different provisions of the UTI Act laid down the structure of management, scope of
10 | P a g e

15. business, powers and functions of the Trust as well as accounting, disclosures, and regulatory
requirements for the Trust.
UTI was set up as a trust without ownership capital and with an independent Board of
Trustees. The Board of Trustees manages the affairs and business of UTI. The Board performs
its functions, keeping in view the interest of the unit-holders under various schemes. UTI has a
wide distribution network of 54 branch offices, 266 chief representatives and about 67,000
agents. These Chief representatives supervise agents. UTI manages 72 schemes and has an
investor 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 creation
of appropriate schemes; to offer best possible returns on his investment, and render him prompt
and efficient service, beyond normal customer expectations. UTI was the first mutual fund to
launch 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 India
Growth 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 an
Indian Index Fund, tracking the NSE 50 index.
UTI’s Associates
UTI has set up associate companies in the fields of banking, securities trading, investor
servicing, investment advice and training, towards creating a diversified financial conglomerate
and meeting investors‟ varying needs under a common umbrella. UTI Bank Limited UTI Bank
was the first private sector bank to be set up in 1994. The Bank has a network of 121 fully
computerized branches spread across the country. The Bank offers a wide range of retail,
corporate and forex services. UTI Securities Exchange Limited UTI Securities Exchange Limited
was 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 provide
secondary market trading facilities, investment banking, and other related services. It has
acquired membership of NSE, BSE, OTCEI, and Ahmedabad Stock Exchange (ASE). UTI
Investor Services Limited UTI Investor Services Limited was the first institutionally sponsored
Registrar and Transfer agency set up in 1993. It helps UTI in rendering prompt and efficient
11 | P a g e

16. services to the investors. UTI Institute of Capital Markets UTI Institute of Capital Market was
set up in 1989 as a non-profit educational society to promote professional development of capital
market participants. It provides specialized professional development programmes for the varied
constituents of the capital market and is engaged in research and consultancy services. It also
serves as a forum to discuss ideas and issues relevant to the capital market. UTI Investment
Advisory Services Limited UTI Investment Advisory Services Limited, the first Indian
investment advisor registered with SEC, US, was set up in 1988 to provide investment research
and back office support to other offshore funds of UTI. UTI International Limited UTI
International Limited is a 100% subsidiary of UTI, registered in the island of Guernsey, Channel
Islands. It was set up with the objective of helping in the UTI offshore funds in marketing their
products and managing funds. UTI International Limited has an office in London, which is
responsible for developing new products, new business opportunities, maintaining relations with
foreign investors, and improving communication between UTI and its clients and distributors
abroad. UTI has a branch office at Dubai, which caters to the needs of NRI investors based in six
Gulf countries, namely, UAE, Oman, Kuwait, Saudi Arabia, Qatar, and Bahrain. This branch
office acts as a liaison office between NRI investors in the Gulf and UTI offices in India. UTI
has extended its support to the development of unit trusts in Sri Lanka and Egypt. It has
participated in the equity capital of the Unit Trust Management Company of Sri Lanka.
Promotion of Institutions
The Unit Trust of India has helped in promoting/co-promoting many institutions for the healthy
development 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. Product Range
UTI offers a wide variety of schemes to investors. Apart from equity, debt, and balanced
schemes, UTI offers schemes which meet specific needs like low cost insurance cover (Unit
Linked Insurance Plan), monthly income needs of retired persons and women, income and
liquidity needs of religious and charitable institutions and trusts, building up of funds to meet
cost of higher education and career plans for children, future wealth and income needs of the girl
child and women, building savings to cover medical insurance at old age, a Growth and
Performance of Mutual
Funds in India
The Indian Mutual Fund industry has grown tremendously in the last decade. There are 34
mutual funds with assets under management of around Rs 1 lakh crore. Assets under
Management (AUM) crossed Rs 1,00,000 crore during the year 1999-2000 recording a growth
rate of 65%. Besides, vast majority of equity schemes out-performed the market. However, in the
subsequent year, that is, 2000-01, AUM sharply declined by about 20% to Rs 90,587 crore due to
extreme volatility in the market and depressed equity market conditions. The mutual fund
industry witnessed such a sharp decline for the first time in the last two decades. There was a
turnaround in the year 2001-02. The AUM grew by 11% to Rs 1,00,594 crore. During the year
2001-02 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 sector
mutual funds rose by around 60% during the year 2001-02. During the year 2001-02, 90 new
schemes were launched-74 of which were open ended and 16 close ended. Income schemes
predominated with 53 schemes collecting Rs 2,744 crore which accounted for 82% of total
collection of Rs 3,355 crore from new schemes. Almost 96% of the money raised from new
scheme launches was invested in the debt/money market. Sales under Growth, Balanced, and
ELSS schemes declined during the year.
The Indian capital market has been increasing tremendously during last few years. With
the reforms of economy, reforms of industrial policy, reforms of public sector and reforms of
financial sector, the economy has been opened up and many developments have been taking
place in the Indian money market and capital market. In order to help the small investors,
13 | P a g e

18. mutual fund industry has come to occupy an important place. The economic development model
adopted by India in the post-independence era has been characterized by mixed economy with
the public sector playing a dominating role and the activities in private industrial sector control
measures emaciated from time to time. The industrial policy resolution was introduced by the
government in the 1948, immediately after the independence. This outlined the approach to
industrial growth and development. The industrial policy statement of 1980 focussed attention
on the need for promoting competition in the domestic market, technological upgradation and
modernisation. A number of policy and procedural changes were introduced in 1985 and 1986,
aimed at increasing productivity, reducing costs, improving quality, opening domestic market to
increase competition and making free the public sector from constraints.
Overall, in the seventh plan period (1985-86 to 1989-90), Indian industries grew by an
impressive average annual rate of 8.5 percent. The last two decades have seen a phenomenal
expansion in the geographical coverage and financial spread of our financial system. The spread
of the banking system has been a major factor in promoting financial intermediation in the
economy and in the growth of financial savings. With progressive liberalization of economic
policies, there has been a rapid growth of capital market, money market and financial services
industry including merchant banking, leasing and venture capital. Consistent with this evolution
of 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 sold
shares in caravans and vessels to spread the risk of these ventures. The foreign and colonial
government Trust of London of 1868 is considered to be the fore-runner of the modern concept
of mutual funds. The USA is, however, considered to be the mecca of modern mutual funds. By
the early - 1930s quite a large number of close - ended mutual funds were in operation in the
U.S.A. Much latter in 1954, the committee on finance for the private sector recommended
mobilisation of savings of the middle class investors through unit trusts. Finally in July 1964, the
concept took root in India when Unit Trust of India was set up with the twin objective of
mobilizing 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 of
such savings was available to the corporate sector, It was felt that UTI could be an effective
vehicle for channelizing progressively larger shares of household savings to productive
investments in the corporate sector.
14 | P a g e

19. The process of economic liberalization in the eighties not only brought in dramatic
changes in the environment for Indian industries, Corporate sector and the capital market but
also 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 UTI
monopoly, 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 of
Bombay Stock Exchange opined recently that the decade of nineties will belong to mutual funds
because the ordinary investor does not have the time, experience and patience to take
independent investment decisions on his own. Importance of Mutual Fund Small investors face a
lot of problems in the share market, limited resources, lack of professional advice, lack of
information etc. Mutual funds have come as a much needed help to these investors. It is a
special type of institutional device or an investment vehicle through which the investors pool
their savings which are to be invested under the guidance of a team of experts in wide variety of
portfolios of corporate securities in such a way, so as to minimize risk, while ensuring safety and
steady return on investment. It forms an important part of the capital market, providing the
benefits of a diversified portfolio and expert fund management to a large number, particularly
small investors.
With the emphasis on increase in domestic savings and improvement in deployment of
investment through markets, the need and scope for mutual fund operation has increased
tremendously. The basic purpose of reforms in the financial sector was to enhance the
generation of domestic resources by reducing the dependence on outside funds. This calls for a
market based institution which can tap the vast potential of domestic savings and channelize
them for profitable investments. Mutual funds are not only best suited for the purpose but also
capable of meeting this challenge. An ordinary investor who applies for share in a public issue of
any company is not assured of any firm allotment. But mutual funds who subscribe to the capital
issue made by companies get firm allotment of shares. Mutual fund latter sell these shares in the
same market and to the Promoters of the company at a much higher price. Hence, mutual fund
creates the investors‟ confidence. The psyche of the typical Indian investor has been summed up
by Mr. S.A. Dave, Chairman of UTI, in three words; Yield, Liquidity and Security.
15 | P a g e

20. The mutual funds, being set up in the public sector, have given the impression of being as
safe a conduit for investment as bank deposits. Besides, the assured returns promised by them
have investors had great appeal for the typical Indian investor. As mutual funds are managed by
professionals, they are considered to have a better knowledge of market behaviors. Besides, they
bring a certain competence to their job. They also maximize gains by proper selection and timing
of investment. Another important thing is that the dividends and capital gains are reinvested
automatically in mutual funds and hence are not fritted away. The automatic reinvestment feature
of a mutual fund is a form of forced saving and can make a big difference in the long run. The
mutual fund operation provides a reasonable protection to investors. Besides, presently all
Schemes of mutual funds provide tax relief under Section 80 L of the Income Tax Act and in
addition, some schemes provide tax relief under Section 88 of the Income Tax Act lead to the
growth of importance of mutual fund in the minds of the investors. As mutual funds creates
awareness among urban and rural middle class people about the benefits of investment in capital
market, through profitable and safe avenues, mutual fund could be able to make up a large
amount of the surplus funds available with these people. The mutual fund attracts foreign
capital flow in the country and secures profitable investment avenues abroad for domestic
savings through the opening of off shore funds in various foreign investors. Lastly another
notable thing is that mutual funds are controlled and regulated by SEBI and hence are considered
safe. 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 operation
has become an integral part of the Indian financial scene and is poised for rapid growth in the
near future. Today, there are eight mutual funds operating various schemes tailored to meet the
diversified needs of savers. UTI has been able to register phenomenal growth in the mid
eighties. Now there are 121 mutual fund schemes are launched in India including UTI‟s scheme
attracting 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 are
traded like any other security as the period and target amounts are definite under such security as
the period and target amounts are definite under such schemes. Besides open-end schemes are
lunched by mutual fund under which unlimited shares are issued by investors but these shares are
not traded by any stock exchange. However, liquidity is provided by this scheme to the
investors. In addition to this off shore mutual funds have been launched by foreign banks, some
16 | P a g e

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 public
sector banks since 1987-SBIMF, Can Bank, Ind Bank, PNBMF and BOIMF, emerged since
1987-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 to
choose the date for receiving the income. Besides the bank mutual funds have also floated a few
open-ended schemes, pure growth schemes and tax saving schemes. The LIC, GIC mutual funds
offer insurance linked product providing various types of life and general insurance benefits to
the investors. Also the income growth oriented schemes are operated by mutual fund to cater to
an investor‟s needs for regular incomes and hence, it distributes dividend at intervals. Growth
Trend of Mutual Fund Opening of the mutual fund industry to the public sector banks and
insurance companies, led to the launching of more and more of new schemes. The mutual fund
industry in India has grown fast in the recent period. The performance is encouraging especially
because the emphasis in India has been on individual investors rather in contrast to advanced
countries where mutual funds depend largely on institutional investors, In general, it appears that
the mutual fund in India have given a good account of themselves so far. UTI's annual sale of
units crossed Rs.1000 crores mark in 1986 to 87, 2000 crores mark in 1987-88 and reached
Rs.5500 crores mark in 1989 to 90. During 1990 to 91 on account of decline of corporate
interest,, sales declined to Rs.4100 crores though individual sales increased over its preceding
year.
LICMF has concentrated on funds which includes life and accident cover. GICMF
provide home insurance policy. The bank sponsored mutual fund floated regular income, growth
and tax incentives schemes. Together the eight mutual fund service more than 15 million
investors with UTI alone hold for 13 million unit holding accounts. Magnum Regular Income
Scheme 1987 assured a return of 12 percent but gave 20 percent dividend in 1993, UTI record 26
percent dividend for 1992 to 93 under the unit 1964 scheme. Magnum Tax saving scheme 1988
to 89 did not promise any return but declared 14 percent dividend in 1993 and recorded a capital
appreciation of 15 percent in the first year. Equity oriented scheme have earned attractive
returns. Especially since early 1991 there has been a steady increase in the number of equity
oriented growth funds. With the boom of June 1990 and then again 1991 due to the
implementation of new economic policies towards structure of change the price of securities in
17 | P a g e

22. stock market appreciated considerably. The high rate of growth in equity price led to a high rate
of appreciation in the net asset value of the equity oriented funds for which investors started
changing 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 a
respective 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 has
for its service an excellent reputation Short Comings in Operation of Mutual Fund. The mutual
fund has been operating for the last five to six years. Thus, it is too early to evaluate its
operations. However one should not lose sight to the fact that the formation years of any
institution is very important to evaluate as they could be able to know the good or bad systems
get 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 multiple
regulations. While UTI is governed by its own regulations, the banks are supervised by
Reserved Bank of India, the Central Government and insurance company mutual regulations
funds are regulated by Central Government. At present, the investors in India prefer to invest in
mutual fund as a substitute of fixed deposits in Banks, About 75 percent of the investors are not
willing to invest in mutual funds unless there was a promise of a minimum return, Sponsorship
of mutual funds has a bearing on the integrity and efficiency of fund management which are key
to establishing investor's confidence. So far, only public sector sponsorship or ownership of
mutual fund organizations had taken care of this need. Unrestrained fund rising by schemes
without adequate supply of scripts can create severe imbalance in the market and exacerbate the
distortions. Many small companies did very well last year, by schemes without adequate
imbalance in the market but mutual funds cannot reap their benefits because they are not allowed
to invest in smaller companies. Not only this, a mutual fund is allowed to hold only a fixed
maximum percentage of shares in a particular industry.
The mutual funds in India are formed as trusts. As there is no distinction made between
sponsors, trustees and fund managers, the trustees play the role of fund managers. The increase
in the number of mutual funds and various schemes has increased competition. Hence it has
18 | P a g e

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 of
accounts their investments but mutual funds have not published any profit and loss Account and
balance sheet even after its operation. The mutual fund have eroded the financial clout of
institution in the stock market for which cross transaction between mutual funds and
financial institutions are not only allowing speculators to manipulate price but also
providing cash leading to the distortion of balanced growth of market. As the mutual fund is very
poor in standard of efficiency in investor‟s service; such as dispatch of certificates, repurchase
and 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 have
right to know and asset management companies have an obligation to inform where and how his
money 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 global
average of 4 percent. The increase in revenue and profitability, however, has not been
commensurate with the AUM growth in the last five years. Low share of global assets under
management, low penetration levels, limited share of mutual funds in the Household financial
savings and the climbing growth rates in the last few years that are amongst the highest in the
world, all point to the future potential of the Indian mutual fund industry. Challenges and Issues
Low customer awareness levels and financial literacy pose the biggest challenge to channelizing
household Savings into mutual funds. Further, fund houses have shown limited focus on
increasing retail penetration and building retail AUM. Most AMCs and distributors have a
limited focus beyond the top 20 cities that is manifested in limited distribution channels and
investor servicing. The Indian mutual fund industry has largely been product-led and not
sufficiently customer focused with limited focus being accorded by players to innovation and
new product development. Further there is limited flexibility in fees and pricing structures
currently.
Distributors and the mutual fund houses have exhibited limited interest in continuously
engaging with Customers post closure of sale as the commissions and incentives have been
largely in the form of upfront fees from product sales. Limited focus of the public sector network
19 | P a g e

24. including public sector banks, India Post etc on distribution of mutual funds has also impeded the
growth of the industry. Further multiple regulatory frameworks govern different verticals within
the 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 commission
structures among others.
20 | P a g e

25. PERFORMANCE PERSISTENCE - THEORY
APPROACHES
REPEAT WINNER APPROACH
The first statistical test is the repeat winner approach of Malkiel (1995). This test shows the
proportion repeat winners (WW) to winner-losers (WL). Malkiel (1995) arguing that if p is the
probability that a winner in one period continues to be a winner in the subsequent period a value
of p less than or equal to ½ indicates no persistence. Thus, a binomial test of p>1/2 can be used
to 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 and
winner/losers (WW+WL). The test statistic is approximately normally distributed with zero
mean 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 performance
persistence, while a percentage value below 50% and a Z-statistic above zero indicates a
reversal 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 statistic
is the ratio of the product of repeat winners (WW) and repeat losers (LL) divided by the product
of winner-losers (WL) and loser-winners (LW), i.e. (WW*LL)/(LW*WL). A CPR of one would
support the hypothesis that the performance in one period is unrelated to that in another. A CPR
greater than one indicates persistence, while a value below one indicates that reversals in
performance dominate the sample. The statistical significance of the CPR can then be determined
by using the standard error of the natural logarithm of the CPR given by the square root of the
sum of reciprocals of the cell counts1. For large samples the test statistic is normally distributed
with mean log odds-ratio, however, where the sample size is small conclusions about the
significance of the results can only be considered tentative.
21 | P a g e

26. CHI-SQUARE STATISTIC
The 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/D4
where D1 = (WW+WL)*(WW+LW)/N
D2 = (WW+WL)*(WL+LL)/N
D3 = (LW+LL)*(WW+LW)/N
D4 = (LW+LL)*(WL+LL)/N
where: N is the number of funds.
The associated p-value can then be used to test for performance persistence. The Chi-square
value, however, is only valid asymptotically 1 Goetzmann and Ibbotson (1994) square the
reciprocals, which is only valid for large sample sizes and needs to be adjusted for possible small
sample bias. The modification chosen is Yates‟s continuity correction. In summary we have a
number of different tests of significance of the independence of the contingency tables each
concentrating on different aspect of persistence. The approach by Malkiel (1995) concentrates on
only one quadrant of the contingency table, the repeat winners (WW). The CPR ratio tests the
persistence of both repeat winners (WW) and repeat losers (LL), while the Chi-square test
considers the persistence of the contingency table as a whole. The latter, though, has the
disadvantage of not being able to detect reversals in performance, since it is always positive. In
contrast, a repeat winner percentage below 50 or a CPR calculation below one will indicate
reversals in performance. Despite this Carpenter and Lynch (1999) find the Chi-square test is
well 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 tests
are 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. The potential for survivorship bias exists because in studies of performance persistence
the data set is truncated as funds disappear from the sample. However, the impact of such a bias
on studies of performance persistence is open to considerable debate. On the one hand, the extent
that the market disciplines poor performing funds will mean that in studies of persistence only
good funds are evaluated. Indeed, based on simulations show that the extent of persistence is
directly related to the degree of truncation in the sample. In other words, studies that only have
surviving funds in their sample are likely to overstate persistence. However, survivorship bias
depends on the ability and willingness of investors to penalise fund managers for poor
performance. Since there is no evidence that investors do so, survivorship bias should not be a
major issue. On the other hand, Grinblatt and Titman (1992) argue that performance persistence
is more likely to appear in poor performing funds. This implies that the proportion of funds in the
sample 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 survivorship
bias 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 more
errors. Thus, while it is agreed that survivorship bias is an important issue facing studies of
performance persistence, the impact survivorship bias as on studies of performance persistence is
unresolved. A second issue in studies of performance persistence is whether the length of the
evaluation periods influences the chance of correctly predicting performance. In other words, is
the 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 be
adjusted for risk and what form of risk-adjustment should be made. Studies in the equity market
have typically used risk-adjustments measures based on the Capital Asset Pricing Model
(CAPM), especially Jensen‟s alpha. However, in applying the Jensen alpha several assumptions
have to be made, for instance, the unconditional mean-variance efficiency of the benchmark
portfolio; the existence of a riskless asset and no binding constraints on investors all of which
are 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 is
unclear whether Jensen‟s alpha represents a legitimate and meaningful benchmark to evaluate the
fund 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. The potential for survivorship bias is a real problem for studies in the equity mutual funds
because of the large number of funds that have closed down. In the UK real estate market, this
problem does not exist to a material extent, since none of the funds covered in the database used
here have as yet closed down. In addition, any survivorship bias will be partially mitigated as we
compare surviving fund with surviving funds and not against some overall benchmark of
performance. The issue as to whether the length of the time period is important in the study of
performance persistence is addressed by testing a wide variety of evaluation periods. The
remaining issue, namely whether persistence exists once the returns are adjusted for risk is not
addressed in this study, for a number of reasons. First, there is a good deal of controversy as how
to define risk-adjusted performance. Secondly, the funds evaluated here are all of a similar nature
and 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 are
available in the UK. Finally, Capon et al (1996) and Lawrence (1998) argue that investors pay
more attention to performance rankings reported by consultants and in periodicals, which are
based on raw returns. Hence, from an investor‟s point of view it is the consistency of raw returns
that is the most important criteria for testing persistence.
24 | P a g e

29. DATA AND RESULTS
The database used in this study has been taken for the one of the famous mutual funds
websites AMFI India. This website consists of all the historical data required for the all the
available mutual funds in India. The data set is especially useful to studies of persistence as the
returns are calculated on a consistent basis and covers a reasonably long enough time period to
make substantive conclusions. The data set consists of the historical NAV values of the 5 Mutual
Funds taken. In this data set the returns of the SENSEX are also considered in order to compare
the returns of the mutual funds with the SENSEX. The NAV‟s of the funds are taken and weekly
returns 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 in
consecutive time periods (of the same length) is then concatenated to identify whether the fund
was a WW, WL, LW or LL. The frequencies of these winner-losers proportions were then tested
for significance using the three criteria discussed above.
25 | P a g e

30. FIGURE: 1
The above figure gives the values of the probabilities of the Z – statistic which is obtained in the
analysis
Overall Performance Persistence: Weekly Evaluations
The TABLE 1 shows that based on the results of the Chi-square statistic (0.13), for the weekly
data, there is good evidence of performance persistence (p=0.7). In addition, the proportion of
repeat winners is only 49%, i.e. less than half, and a CPR of 0.94, i.e. less than one, which shows
that if any persistence is present it is due to repeated losing performance (p=0.06 and 0.03
respectively). The half-yearly results are slightly more encouraging with the repeat winner and
CPR criteria indicating some evidence of positive persistence. Although, only the CPR indicates
that this persistence is significant.
26 | P a g e

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 .8
FRANKLIN 36 38 36 37 147 48.65 -0.232 .409 0.0070 .95
27 | P a g e

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 2
The above table gives the detailed data about the different funds. The small sample size for the
four and six year data conclusions about the significance of the results can only be considered
tentative. These results require careful interpretation; however, as the contingency table tests are
only valid asymptotically and may need adjustment for possible small sample bias. To test for
this the last two rows of Table 2 show the use of Yates‟s continuity correction to the Chi-square
test. An examination of the adjustment leads us to conclude that small sample bias is indeed
present. For instance, in all cases the p-values are worse than without the correction, especially
for those periods with few data points. Nonetheless, since the Chi-square statistics for the
quarterly, half-yearly and one-year data as a whole have reasonable frequencies the correction is
minor and the conclusions are still consistent with the results above.
Individual Fund Performance
The results above show there is only weak evidence of persistence in performance for the growth
funds as a whole. However, individually, some funds may exhibit characteristics of superior or
inferior persistence. We next present and analyze the contingency tables of performance
persistence of individual funds. We report results for only quarterly, semi-annually and annual
periods of measurement because of the statistical difficulties of providing reliable results with
limited data over longer evaluation periods. Also, in presenting the results only the repeat winner
and the Chi-square tests are shown, as the CPR test is inappropriate for testing the persistence of
individual funds. In addition, the results for only those real estate funds with more than 40
quarterly data are shown. This limits the sample to 5 funds.
28 | P a g e

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 3
From the above table SENSEX and other five funds are considered and according to the
contingency table classification the above funds have been classified and the frequencies are
calculated. It is evident from the above table that
29 | P a g e

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 -1
The above chart depicts about the contingency table of the funds where the sensex and the other
5 funds are categorized as winner/loser considering them the median for the particular fund. The
number of WW for all the funds is 216, WL = 224, LW = 222 and LL = 217. Therefore from the
above chart it is evident that the funds we winner – losers for the given period of time. This
shows that the funds selected are not that consistent.
30 | P a g e

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 -2
The above table shows the data of the individual funds contingency tables. As the chart shows
that SENSEX was losing more number of times having LW = 37, LL = 37. HDFC is one of the
funds which seemed to be volatile as the WL = 38, LW = 38. It seems to be one of the least
performers from the range of funds selected as its WW is low compared to other funds. HSBC is
one of the best performers from the selected range of funds and also seemed to be highly volatile
as its WL = 39. SBI is a fund which was constantly winning and losing showing no consistent
performance WL = 36 and LW = 36.
31 | P a g e

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 – 3
The above chart shows the values of the medians of the different funds selected. With the help of
the value of the median the funds are categorized into a winner or a loser. A fund‟s weekly return
is said to be higher than the median of that particular fund then it is said to be a winner and its
weekly return is below the value of the median then is it said to be a loser.
32 | P a g e

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- 4
The above chart depicts about the average weekly returns of the funds and sensex. The purpose
of doing this is to know the correlation between the sensex and the other 5 funds. The average
weekly returns are taken in order to know the performance persistence of the funds. From the
above charts it shows that sensex have gone down low in the week 98 where as the other funds
had positive returns. HSBC is one of the funds which seem to be highly volatile during the
considered period. SBI is one of the funds which was performing consistently and is stable for
the period. FRANKLIN TEMPLETON, HDFC and TATA are the other mutual funds which are
considered and also seem to be giving consistent returns and are not much volatile in the market.
33 | P a g e

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 – 5
The above chart depicts about the repeat winner approach. This is one of the statistical test used
to see the performance persistence of the growth mutual funds. This test shows the proportions of
repeat 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 in
performance persistence. Therefore from the above chart it is evident that the funds SBI, TATA
are said to be performing persistently where as the other funds HDFC, HSBC, FRANKLIN
TEMPLETON which have below 50% are said to be reversal in performance persistence.
34 | P a g e

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 – 6
The above chart depicts the values of the Z-Test derived from the funds. It is said that if repeat
winners ratio is greater than 50% and Z-Statistic is greater than zero then the respective fund is
said to be performance persistence and if it the ratio is less than 50% and the Z- statistic is
greater 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 performance
persistent from the range of 5 funds.
35 | P a g e

40. CONCLUSION
In India, mutual funds have a lot of potential to grow. Mutual fund companies have to create and
market innovative products and frame distinct marketing strategies. Product innovation will be
one of the key determinants of success. The mutual fund industry has to bring many innovative
concepts such as high yield bond funds, principal protected funds, long short funds, arbitrate
funds, dynamic funds, precious metal funds, and so on. The penetration of mutual funds can be
increased through investor education, providing investor oriented value added services, and
innovative 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-adjusted
return and total portfolio return to enable them to take informed decision. Mutual funds need to
develop a wide distribution network to increase its reach and tap investments from all corners
and segments. Increased use of internet and development of alternative channels such as
financial advisors can play a vital role increasing the penetration of mutual funds. Mutual funds
have 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 the
academic and practitioner communities for many years. In particular, the identification of
persistence in performance has received considerable recent attention. Using non-parametric
contingency tables, which are robust under non normality of the fund, return distribution, this
study tests the performance persistence of Growth funds in the India over various evaluation
periods. Several criteria are used to test for persistence; the repeat winner methodology of
Malkiel (1995), the CPR test of Goetzmann and Ibbotson (1994) and the Chi-square statistic as
used by Kahn and Rudd (1995). The overall conclusion is that the Growth funds in the India
show little evidence of persistence in the short-term (weekly data) or for data over a considerable
length of time. In contrast, the results are better for annual data with evidence of significant
performance persistence. Thus at this stage, it seems that an annual evaluation period, provides
the best discrimination of the winner and loser phenomenon in the Growth market. The repeat
winner phenomenon is stronger over shorter periods of evaluation. Nonetheless, it seems that
persistence in performance of growth funds in the INDIA does exist and it appears to be a guide
to beating the pack in the long run. Furthermore, although the evidence of persistence in
36 | P a g e

41. performance for the overall sample of funds is limited, we have found evidence that two funds (3
and 4) were consistent winners over this period, whereas no one fund could be said to be a
consistent loser. These results require careful interpretation, however, as the results are sensitive
to the length of the evaluation period and specific test used. Finally, as with all performance
evaluation studies, a few concerns about the results or the methods used to obtain the results can
be raised.
In this paper we examine the performance persistence of a large sample of mutual funds
over time. Five mutual funds in 5 equity categories over the time period 2008 through 2011. We
utilize the non-parametric Odds-Ratio and Chi-Square tests to examine significance in
performance persistence. We find that there is significant performance persistence in mutual
fund returns. This outcome is true for both the lowest performing and highest performing mutual
funds. The tests demonstrate this result for all fund categories, except government bond and
corporate bond funds. These results are very important to individual investors when selecting
mutual funds. Investors should be cognizant of previous returns for any funds under
consideration. If a 5 fund performed poorly during the past year, it is likely the fund will
continue to perform poorly in the next year. Likewise if a fund performed well during the past
year, it is likely the fund will perform well during the next year. Note that persistence appears to
exist for the best and worst performing fund categories. Therefore, an investor selecting funds in
the middle performance categories is not likely to see the same persistence in returns. As a
caveat we understand that there is survivorship bias when performing mutual fund research. This
would actually bias against finding significant performance persistence for the worst performing
quintile of funds.
37 | P a g e

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