Investment Styles and Performance of Equity Mutual Funds in India
D. N. Rao
August 6, 2006
The study classified the 419 open-ended equity mutual fund schemes into six distinct investment styles, analysed the financial performance of select open-ended equity mutual fund schemes for the period 1st April 2005 - 31st March 2006 pertaining to the two dominant investment styles and tested the hypothesis whether the differences in performance are statistically significant.
The variables chosen for analyzing financial performance are: monthly compounded mean return, risk per unit return and Sharpe ratio. A comparison of the financial performance of the 21 Open-ended Equity growth plans and 21 Open-ended Equity dividend plans was made in terms of the chosen variables.
The analysis indicated that Growth plans have generated higher returns than that of Dividend plans but at a higher risk. Further, 17 Growth plans have generated higher returns than that of corresponding Dividend plans offered by the same Asset Management Companies (AMC) and only one Dividend plan could generate higher return than its corresponding Growth plan. However, three Growth plans and the corresponding Dividend plans had the same returns.
Out of the 21 Growth plans, 4 Growth plans had higher Coefficient of Variation (Risk per unit Return) than the corresponding Dividend plans and 13 Dividend plans had higher Coefficient of Variation (Risk per unit Return) than the corresponding Growth plans offered by the AMC. Three Growth plans and three Dividend plans had almost equal Risk per unit return.
A comparison of the Sharpe ratios of Growth plans and the corresponding Dividend plans indicated that 18 Growth plans out of 21 (approximately 90%) had better risk adjusted excess returns highlighting the fact that Growth plans are likely to reward the investors more for the extra risk they are assuming.
Pearson's correlation coefficient between the returns of the two plans was found to be moderate (0.5290) and F-test (1-tailed test) indicated a low probability (0.3753) of the variances of the returns of the two plans. Further, Student's t-test (1-tailed test) led to the rejection of Null Hypothesis and acceptance of Alternate Hypothesis at confidence levels ranging from 0.40 to 0.0005 implying that Equity Growth funds provide higher returns than that of Equity Dividend funds and the differences were statistically significant.
Number of Pages in PDF File: 30
Keywords: Investment styles, Equity mutual funds, Growth plans, Dividend Plans, Monthly compounded mean returns, risk per unit return, Risk Adjusted Performance Measuresworking papers series
Date posted: August 7, 2006
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