A COMPARATIVE ANALYSIS OF PERFORMANCE OF MUTUAL FUNDS BETWEEN PRIVATE AND PUBLIC SECTOR

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A COMPARATIVE ANALYSIS OF PERFORMANCE OF MUTUAL FUNDS BETWEEN PRIVATE AND PUBLIC SECTOR

TABLE OF CONTENT:

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

1.2 Statement of the Research Problem

1.3 Objectives of the Study

1.4 Significance of the Study

1.5 Research Questions

1.6 Research Hypothesis

1.7 Conceptual and Operational Definition

1.8 Assumptions

1.9 Limitations of the Study

CHAPTER TWO

LITERATURE REVIEW

2.1 Sources of Literature

2.2 The Review

2.3 Summary of Literature Review

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research Method

3.2 Research Design

3.3 Research Sample

3.4 Measuring Instrument

3.5 Data Collection

3.6 Data Analysis

3.7 Expected Result

CHAPTER FOUR

DATA ANALYSIS AND RESULTS

4.1 Data Analysis

4.2 Results

4.3 Discussion

CHAPTER FIVE

SUMMARY AND RECOMMENDATIONS

5.1 Summary

5.2 Recommendations for Further Study

References

ABSTRACT

The financial market particularly capital market in Nigeria is playing a vital role in the mobilization of household savings from the investing public. In this context, it is observed that mutual funds are becoming the major channel for the mobilization of the savings. It was felt that mutual funds could be an effective vehicle for channelizing larger shares of household savings to productive investments in the corporate sector.

The performance of mutual fund schemes is dependent on the right strategy adopted by the fund managers in designing the portfolio. The issues related to the choice of schemes among the public and private sector funds on the one hand and on the other hand high risk associated with schemes have become an important point of every investor. Return alone is not considered as the basis of measurement of the performance of a mutual fund scheme, it should also consider risk involved in the investment. Because different funds will have different levels of risk attached to them. The researcher has set two objectives for the study: (1) to analyze the risk-return profile of equity linked growth and balanced funds. (2) To make a comparative analysis of public and private-sector mutual funds.

The study finds that there is a significant difference in terms of mean return between public and private sector schemes. However, there is no significant difference between public and private sector schemes in terms of excess return per unit of risk under Sharpe, Treynor and Jensen models.

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

The financial market particularly capital market in Nigeria is playing a vital role in the mobilization of household savings

from the investing public. In this context, it is observed that mutual funds are becoming the major channel for the mobilization of the savings. The concept of mutual fund was emerged in Nigeria with the establishment of Unit Trust of Nigeria (UTI) in July 1964. The UTI was set up with the two main objectives viz. mobilizing household savings and investing the funds in the capital market for industrial growth. It was felt that mutual funds could be an effective vehicle for channelizing larger shares of household savings to productive investments in the corporate sector. Because, an ordinary investor does not have the time, expertise and patience to take independent investment decisions on his own.

The performance of mutual fund schemes is dependent on the right strategy adopted by the fund managers in designing the portfolio. Since the investors invest their money in different schemes offered by the two sectors which are public and private sector, their risk and return associated with the type of investment will also vary. The issues related to the choice of schemes among the public and private sector funds on the one hand and on the other hand high risk associated with schemes have become an important point of every investor. Return alone is not considered as the basis of measurement of the performance of a mutual fund scheme, it should also consider risk involved in the investment. Because different funds will have different levels of risk attached to them.

Treynor (1965)[1] used ‘characteristic line’ for relating expected rate of return of a fund to the rate of return of a suitable market average. He coined a fund performance measure taking investment risk into account. Further, to deal with a portfolio, ‘portfoliopossibility line’ was used to relate expected return to the portfolio owner’s risk preference.

Sharpe (1966) [2] developed a composite measure to consider return and risk. Based on this he evaluated the performance of 34 open ended Mutual Fund schemes during the period 1944-63. He observed that 11 funds have outperformed the benchmark. Based on this evidence he concluded that average mutual fund performance was inferior to an investment in stock market. An analysis of relationship between fund performance and its expense ratio indicated that good performance was associated with low expense ratio.

Jensen (1968) [3] developed a composite portfolio evaluation technique that considered return adjusted for risk difference and used it for evaluating 115 open ended mutual fund schemes during the period 1945-66. For the full period Jensen examined net expenses and gross expenses. The analysis of net return indicated that 89 funds have above return adjusted for risk while 76 experienced abnormally poor return. On the basis of this analysis Jensen concluded that for the sample of 115 mutual funds were not able to forecast security prices well enough to recover expenses and fees.

Jayadev (1996)[4] evaluated the performance of two growth oriented mutual funds on the basis of monthly returns compared to benchmark returns over a study period of 21 months (i.e. June 1992 to March 1994). He employed risk-adjusted performance, measures suggested by Jensen, Treynor and Sharpe for evaluation. He found that both the funds were poor in earning better returns either adopting market timing strategy or in selecting under-priced securities. Further, the study concluded that the two growth oriented funds have not performed better in terms of total risk and were not offering advantages of diversification and professionalism to the investors.

Gupta Amitabh (2001)[5] evaluated the performance of selected mutual fund schemes and also tested the market timing abilities of mutual fund managers during the period 1994 to 1999. He has also examined in his study the growth of mutual fund since 1987 to 1989. Two types of bench mark portfolios are used (1) a market index (2) fundex. The result of sample of 73 mutual fund schemes indicate that 38 (i.e. 52%) schemes earned higher return in comparison to the market return while remaining 35 schemes (i.e. 48%) generated lower return than that of market. It is also found that any unique risk of the sample scheme was 2.73 (per week) while the average diversification came to 34.3%. This implies that the sample is not adequately diversified. The result of his study provides no evidence for the market timing of abilities of mutual fund managers.

OBJECTIVES OF THE STUDY:

The researcher has set the following objectives to fulfill the need of the study.

(1) To analyze the risk-return profile of equity linked growth and balanced funds.

(2) To make a comparative analysis of public and private-sector mutual funds.

Scope of the study:

The researcher has adopted five years period from January 1, 2011 to December 31, 2015. The 91-days T-bill rates of interest were used as risk free returns in the study and were compiled from the RBI website. It was conducted among selected private and public institutions

HYPOTHESIS OF THE STUDY:

The researcher has set the following hypotheses which are in line with the said objectives of the study:

Ho1: There is no significant difference in terms of mean return between public and private sector mutual fund schemes.

Ha1: There is a significant difference in terms of mean return between public and private sector mutual fund schemes.

Ho2: There is no significant difference between public and private sector mutual fund schemes in terms of excess return per unit of risk under Sharpe, Treynor and Jenson models.

Ha2: There is a significant difference between public and private sector mutual fund schemes in terms of excess return per unit of risk under Sharpe, Treynor and Jenson models.

The hypotheses have been tested at 95% confidence level with P-value of 0.05.

LIMITATIONS OF THE STUDY:

The study is subject to certain limitations which are beyond the control and purview of the researcher during the study.

• The current study considers only five years period because of the schemes of more than five years may be of little relevance in the present context.

• The sample size is restricted to 80 schemes only. However, the researcher has ensured that the samples chosen for the study are fairly representative of the schemes from every perspective.

• As the study is based on secondary data, there is every possibility of creeping the unauthenticated information.

Significance of the study

This paper mainly helps the investors to choose the schemes between public and private sector schemes to invest in. The present study is aimed at analyzing the comparative analysis of the growth and balanced schemes belonging to both public and private sectors and the researcher feels that the study may be extended to other schemes such as debt schemes, ETFs etc. The researcher also feels that there is a scope for undertaking performance evaluation of the schemes based on cash availability with the fund houses.

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