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Chapter 4 – Performance of Sectoral Funds in India
Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 85
Performance of Sectoral Funds in India
4.1. Introduction
4.2. Performance Review of Various Sector Funds 4.2.1. Banking Funds 4.2.2. FMCG Funds 4.2.3. Infrastructure Funds 4.2.4. Energy Funds 4.2.5. Pharmaceutical Funds 4.2.6. Service Funds 4.2.7. Technology / IT Funds 4.2.8. Other Sector Specific Funds
4.3. Conclusion
4.1. INTRODUCTION
Sectoral mutual funds are those mutual funds that confine their investments portfolio to a
particular segment or sector of the economy. These are also known as thematic funds,
such funds focus on one industry such as Banking, FMCG, Energy, Infrastructure,
Technology, Power, Heath Care, Pharmaceuticals etc. The idea behind such funds is to
allow the investors to invest in specific industries or sectors of economy, which are
expected to have strong future growth potential.
These funds are expected to be more volatile as compared to diversified portfolio of
securities in more than one industry or sector of economy. Such concentrated portfolios
can produce high gains or losses, depending on the condition that the chosen sector is in or
out of the growth trend. Sectoral mutual funds lie in the high risk – high reward category
and are not suitable for investors who have low risk bearing capacity.
Contents
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Chapter 4 – Performance of Sectoral Funds in India
86 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
Generally, these days’ mutual fund houses avoid launching sectoral funds as they are
seasonal in nature and do well only in cycles of growth. As these funds focus on just one
sector of the economy, they have limited diversification options and the fund manager’s
ability to capitalize on other sectors is also limited. Thus if the sector is performing well,
the future perspectives of the funds will be bright.
In a developing country like India, it is easy to identify specific sectors of growth and
promising long term returns for investment. Various sectors such as Technology,
Infrastructure, Banking and FMCG are to name a few for such opportunities. Although
sectoral fund emerged in late 1990s in India but this concept is in its nascent stage even
today. May be the prime reason is the higher risk as compared to other alternatives which
a normal retail investor is not willing to bear.
The performance of various sector funds reveal that few sectors such as Banking, FMCG
and Pharmaceutical have performed over the expectations of the investors while many of
other sectors struggle to provide sufficient returns to the investors.
In this chapter the performance of different sectoral funds is being evaluated on
various parameters such as long term returns on investment, risk adjusted returns, scheme
volatility / risk associated and efficiency level of funds on the basis of Data Envelopment
Analysis (DEA) which is a statistical measure to evaluate fund’s efficiency to generate
returns, keeping in mind certain inputs in terms of associated transaction costs and fund’s
expenses along with outputs in terms of returns, net assets etc.
4.2.1. BANKING FUNDS
The banking and financial services sector plays a vital role in the development of an
economy. Its contribution and importance in promoting trade, commerce and industry in a
country can be easily estimated. In India, banking sector has been an integral part to the
process of economic reforms and growth. Moreover, today with technology being put to
use, transactions have been rather simpler, which in turn has accelerated the pace of
economic reforms.
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Chapter 4 – Performance of Sectoral Funds in India
Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 87
Banking and financial services sector of India is grounded on strong base of a very cautious
policy framework proposed and implemented by the Indian regulator(s). Today, the Indian
economy has grown very rapidly in the last decade especially after liberalization, and
similarly many banking and financial services institutions have also recorded the same
growth rate. In the last couple of years, Indian banks and financial services institutions
have not only enlarged their customer base but they have also achieved the higher
efficiency in their operations (by the help of technology), which has resulted in better
quality of banking and financial services in the country.
With promising investment opportunities offered by the banking and financial services
sector, many mutual fund houses thought of launching sector funds focusing on this
promising sector. In May 2003 Reliance Mutual Fund was the first mutual fund house to
launch the fund on this sector (with the launch of Reliance Banking Fund), followed by UTI
Mutual Fund in August 2005, and the others in the year 2008 afterwards.
In the years gone by market capitalization of the banking sector has gone up
significantly; and today the banking and financial services sector occupies a dominant
weightage in the BSE SENSEX (table 4.1) and also in S&N CNX Nifty.
Table: 4.1
Sector wise Composition of BSE SENSEX
Sector wise composition Weightage (%)
Banking & Finance 24.3
IT 15.8
Oil & Gas 14.0
FMCG 10.6
Transport Equipments 9.6
Metal & Mining 7.7
Capital Goods 7.4
Telecom 3.6
Power 3.2
Healthcare 2.5
Housing Related 1.3
(Data as on October 17, 2011)
(Source: BSE, PersonalFN Research)
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88 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
The given table (table 4.1) reveals that almost a quarter of index (i.e. BSE Sensex) is held by
companies in the banking and financial services space. It clearly indicates the importance
of financial services sector in a market performance indicator.
Not only this, but on the parameter of performance, banking companies have
outperformed as compared to other industry counterparts from BSE Sensex. The chart
given below depicts that so far (for the period January 1, 2002 to October 17, 2011) the
BSE Bankex has accelerated faster than the BSE Sensex. Hence if anyone was to invest a
sum of 100 (on January 1, 2002) each in the BSE Bankex and BSE Sensex; the same today
would have yielded a sum of 1,113 and 524 respectively (on October 17, 2011).96
Figure 4.1
Performance of BANKEX vis-à-vis BSE SENSEX
(Source: ACE MF, PersonalFN Research)
The outperformance of the BSE Bankex over the BSE Sensex, has not only helped the
banking and financial services sector funds to deliver appealing returns, but even
outperformed the category of diversified equity mutual funds. Moreover, they have
controlled their risk well (as revealed by the Standard Deviation), which in turn have
helped them to strike an impressive risk-adjusted return (as revealed by the Sharpe Ratio).
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10-25/Banking_Funds_Are_they_driving_in_top_gear.aspx, (25-Oct-2011) Last accessed May, 2012.
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Chapter 4 – Performance of Sectoral Funds in India
Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 89
By and large the equity diversified funds have been less volatile than the BSE BANKEX and
the banking sector funds. But they have underperformed both - BSE BANKEX as well as
banking funds, on the risk-adjusted return basis.
As far as the individual performance of various banking funds is concerned, it can easily
be noted that the funds have given 33.16%, 16.13% and 24.25% annualized returns for 3, 5
and 7 years respectively which is almost equal for 3 years performance as compared to BSE
Bankex but significantly higher for both 5 and 7 years category.
Not only this, but it can also be observed that half of the banking funds have over
performed the banking benchmark index which itself is an outperformer as compared to
S&P CNX Nifty (another more comprehensive market index as compared to BSE Sensex).
Table 4.2
Banking Funds: Return Analysis
Sl. No. Name of the Fund
Returns
3 years
(%)*
Returns
5 years
(%)*
Returns
7 years
(%)*
1. Goldman Sachs Banking BeES 34.07 12.73 22.62
2. Goldman Sachs PSU Bank BeES 27.81 -- --
3. ICICI Prudential Banking and Financial Services Ret. 31.41 -- --
4. Kotak PSU Bank ETF 29.28 -- --
5. Reliance Banking ETF 35.46 -- --
6. Reliance Banking Retail 37.89 20.34 26.88
7. Religare Banking 33.48 -- --
8. Sahara Banking and Financial Services 40.68 -- --
9. Sundaram Financial Services Opp. Ret. 26.21 -- --
10. UTI Banking Sector Reg. 35.27 15.33 23.24
Category Average 33.16 16.13 24.25
BSE Bankex (Sector Benchmark) 34.21 12.19 22.70
S&P CNX Nifty (Market Index) 25.93 7.47 16.87
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
(*Percentage returns for More than 1year are annualized)
On the parameter of associated risk, most of the funds seem to be less risky as they have
an average standard deviation of 36.78 which is lower than that of BSE Bankex (45.46) and
S&P CNX Nifty (39.54). This clearly indicates that banking funds’ return performances
deviate lesser from the average as compared to sectoral benchmark and market index.
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90 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
Sharpe-Ratio, the Risk adjusted return measure of banking funds is attractive with an
average of 0.57 which is clearly the result of higher returns with lesser standard deviation.
This clearly shows that the banking funds are capable of giving above average market
returns with reasonable amount of risk in terms of return deviations.
Table 4.3
Banking Funds: Risk Analysis Sl.
No. Name of the Fund
Standard
Deviation
Sharpe
Ratio Beta Alpha
R-
Square
1. Goldman Sachs Banking BeES 40.67 0.47 1 0.05 1
2. Goldman Sachs PSU Bank BeES 39.75 0.44 0.98 0.43 1
3. ICICI Prudential Banking and Financial Services Ret. 33.53 0.51 0.79 0.98 0.97
4. Kotak PSU Bank ETF 40.31 0.46 1 1.37 1
5. Reliance Banking ETF 40.39 0.50 -- -- --
6. Reliance Banking Retail 36.72 0.62 0.86 5.1 0.96
7. Religare Banking 32.55 0.58 0.76 3.28 0.96
8. Sahara Banking and Financial Services 33.38 0.97 0.7 18.03 0.78
9. Sundaram Financial Services Opp. Ret. 35.83 0.53 0.83 2.02 0.93
10. UTI Banking Sector Reg. 34.62 0.56 0.82 2.62 0.98
Category Average 36.78 0.57 0.9 3.76 0.95
BSE Bankex (Sector Benchmark) 45.46 -- -- -- --
S&P CNX Nifty (Market Index) 39.54 -- -- -- --
(Standard Deviation of annualized returns and Sharpe Ratio are calculated as: since inception for the funds
and for last 10 years in case of sector benchmark and market index; data sourced from BSE, NSE India and
Value Research Online)
When the funds were evaluated by statistical measure called Data Envelopment Analysis
(DEA) to identify the efficiency of funds as a decision making unit to generate returns in
terms of annualized returns and net assets for given input costs such as percentage of
cash, turnover & expense ratios along with front and differed load (if any), it was found
that 5 banking funds got the score of 1 i.e. the status of fully efficient portfolios while 1
fund stood with efficiency score of 0.58 which is near to the average of all banking funds
(0.634).
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Chapter 4 – Performance of Sectoral Funds in India
Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 91
Table 4.4
Banking Funds: Data Envelopment Analysis Values Sl.
No. DMU Score %Cash TurnR ExpnR FrontL DfrrdL TRA3Y TRA5Y TRA7Y NetAsst
1. GoldSBB 1 0.25 389 0.5 0 0 34.1 12.73 22.62 278.4
2. GoldSPB 1 0.25 77 0.74 0 0 27.8 -- -- 10.3
3. ICICIBFS 0.232949 4.03 56 2.44 0 0 31.4 -- -- 140.4
4. KOTPSUB 1 0.1 18.65 0.65 0 0 29.3 -- -- 19.2
5. RELBETF 1 2.58 2 0.35 0 0 35.5 -- -- 11.3
6. RELBR 1 8.19 20 1.93 0 0 37.9 20.34 26.88 1707.5
7. RELGRB 0.204592 6.93 93 2.5 0 0 33.5 -- -- 39.2
8. SAHBFS 0.191554 13.18 89.76 2.5 0 0 40.7 -- -- 22.8
9. SUNFSR 0.132221 12.21 120 2.35 0 0 26.2 -- -- 242.7
10. UTIBSR 0.586895 8.04 289.86 2.34 0 0 35.3 15.33 23.24 335.8
Average 0.634821 5.58 115.53 1.63 0 0 33.17 16.13 24.25 280.76
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
The analysis of returns, risk and efficiency values of banking funds proves that such funds
are a good investment avenue for an investor who wishes to achieve reasonable returns
with moderate to high risk bearing capacity. Though banking and financial services sector
funds have accelerated on generating reasonable risk adjusted returns until now, but they
suffer from the risk of portfolio concentration as top five holdings accounts for more than
60% of total assets held (table 4.5) and a single stock accounts for as high as 22% of the
equity portfolio in some cases.
Some banking and financial services sector funds have proved to be more volatile than
the pure diversified equity funds which make some of them a high risk proposition.
Therefore, their return fortunes are closely linked to the performance of banking sector.
May be the one of the major reason of their higher risk lie in the level of portfolio
concentration which ranges from 43.61% to 84.17% for top 5 holding by the funds (see
table 4.5 for details) with an overall category average of 62.75% for all active banking funds
as on the date of analysis.
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Chapter 4 – Performance of Sectoral Funds in India
92 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
Table 4.5
Banking Funds: Portfolio Compositions
Sl. No. Fund Name Top 5 Holdings (%)
1. Goldman Sachs Banking BeES 84.17
2. Goldman Sachs PSU Bank BeES 78.58
3. ICICI Prudential Banking and Financial Services Ret 52.87
4. Kotak PSU Bank ETF 79.70
5. Reliance Banking ETF 82.49
6. Reliance Banking Retail 49.70
7. Religare Banking 63.28
8. Sahara Banking and Financial Services 49.76
9. Sundaram Financial Services Opp Ret 43.61
10. UTI Banking Sector Reg 62.46
Average 62.75
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
4.2.2. FMCG Funds
Despite the down-beat economic data from the U.S. and the situation of a “debt-
overhang” in the Euro zone (especially in countries such as Greece, Ireland and Spain), the
Indian equity markets in the year 2010 delivered appealing returns of 17.4%, as the FIIs
displayed confidence in the Indian economy on account of attractive economic growth
rate. But during the same year (i.e. 2010) interestingly the BSE FMCG Index delivered a
return of 32.0%, thereby outperforming the market index (i.e. BSE Sensex, see figure 4.2)
led by strong domestic consumption and consumer confidence. This wave of consumerism
was also backed up by the job opportunities being created after the recession of 2008 and
early 2009, rising income levels of people and FMCG companies’ attempts to increase their
rural penetration. Moreover the good monsoons experienced by most parts of the country,
also attributed to affordable input costs for most companies in the FMCG space.
In the presence of these green signals for the FMCG sector, the FMCG mutual funds
performed handsomely well vis-a-vis FMCG sector benchmark as well as BSE Sensex and
S&P CNX Nifty, the overall market indices.
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Chapter 4 – Performance of Sectoral Funds in India
Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 93
Figure 4.2
Performance of BSE FMCG vis-à-vis BSE SENSEX
(Base: 10,000; Source: ACE MF, PersonalFN Research)
In fact when analyzed over a 3–Years time period, they (FMCG funds) outperformed some
good performing diversified equity funds by managing their risk well (as revealed by their
low Standard Deviation in table 4.7), and delivered enticing risk-adjusted returns as
depicted by their high Sharpe Ratio. Moreover, the portfolio churning (see turnover ratio:
column 5–TurnR, in table 4.8) too hasn’t been high (38 and 18 percent) due to the
evergreen prospects posed by most companies in the sector. But nonetheless the expense
ratio has been relatively high at 2.47 and 2.50 percent respectively.
Actually FMCG as a sector is quite defensive nature, which limits the wealth erosion
during times of economic slowdown or during the bear phase of the equity markets. In fact
in the figure 4.2 it is evident that during the last bear phase of the Indian equity markets
(i.e. from January 9, 2008 till March 9, 2009) the BSE FMCG index tumbled far lesser(-
24.2%)97, when compared to the broader market index – BSE Sensex (-55.4%). This has also
been displayed in the performance of FMCG funds. The figure also depicts the
defensiveness of the FMCG sector. In the year 2006 & 2007 when the Indian equity
markets (BSE Sensex) were surging, the BSE FMCG lagged during the rally; but the
downside was well arrested, as the consumption story was unhurt.
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“FMCG Funds on a fast track”, http://www.personalfn.com/knowledge-center/FullStory/11-02-07/
FMCG_Funds_on_a_fast_track.aspx, (07-Feb-2011) Last accessed May 2012.
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94 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
If we evaluate the individual returns of the FMCG funds, we can say that in a market which
is indicating the returns of 32.54% for last 3 years (see table 4.6), they have managed to
provide more than 40% returns and similarly have over performed in 5, 7 and 10 years
return segments leaving behind both indices BSE FMCG and S&P CNX Nifty.
Table 4.6
FMCG Funds: Return Analysis
Sl.
No. Name of the Fund
Returns
3 years
(%)*
Returns
5 years
(%)*
Returns
7 years
(%)*
Returns
10 years
(%)*
1. ICICI Prudential FMCG 40.13 15.2 29.62 25.34
2. Magnum FMCG 44.22 18.26 21.75 23.42
Category Average 42.18 16.73 25.69 24.38
BSE FMCG (Sector Benchmark) 32.54 15.62 24.46 16.76
S&P CNX Nifty (Market Index) 25.93 7.47 16.87 18.48
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
(*Percentage returns for More than 1year are annualized)
The results of return and risk analysis also indicates that FMCG funds have the capability to
provide fairly high returns at lower amount of risk. This is the result of promising nature of
industry and its potentials to remain green even in the time of global slowdown.
Table 4.7
FMCG Funds: Risk Analysis Sl.
No. Name of the Fund
Standard
Deviation
Sharpe
Ratio Beta Alpha
R-
Square
1. ICICI Prudential FMCG 22.8 0.97 1 5.31 0.8
2. Magnum FMCG 18.36 1.41 0.7 13.7 0.65
Category Average 20.58 1.19 0.8 9.49 0.725
BSE FMCG (Sector Benchmark) 23.75 -- -- -- --
S&P CNX Nifty (Market Index)* 39.54 -- -- -- --
(Standard Deviation of annualized returns and Sharpe Ratio is calculated as: since inception for the funds and
for last 10 years in case of sector benchmark and market index; data sourced from BSE. NSE India and Value
Research Online)
The values of DEA also point out towards the higher efficiencies of the funds as highly
efficient decision making units. It may also because there are only two active funds at the
time of analysis. But risk and return analysis has already confirmed the performance of
such funds even in the bearish market.
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Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 95
Table 4.8
FMCG Funds: Data Envelopment Analysis Values Sl.
No. DMU Score %Cash TurnR ExpR FrontL DefrdL 3YAR 5YAR 7YAR 10YAR NetAss
1. ICIFM 1 14.02 38 2.47 0 0 40.13 15.2 29.62 25.34 106.6
2. MAGFM 1 5.66 18 2.5 0 0 44.22 18.26 21.75 23.42 55.6
Average 1 9.84 28 2.485 0 0 42.175 16.73 25.685 24.38 81.1
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
FMCG funds fairly have a concentrated portfolio of top 5 stocks on account limited stocks
available under its ambit of selection. So if one peeps into the top 5 stocks of the FMCG
funds, they would find ITC Ltd., HUL, Nestle Ltd., Pidilite Industries Ltd., Britannia Ltd.,
while others such as Marico Ltd., Tata Global Beverages Ltd., GSK Consumer Healthcare
Ltd., Asian Paints Ltd. and Eveready Industries (India) Ltd. can also be found commonly in
their portfolio.
Table 4.9
FMCG Funds: Portfolio Compositions
Sl. No. Fund Name Top 5 Holdings
(%)
1. Magnum FMCG 61.89
2. ICICI Prudential FMCG 49.28
Average 52.62
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
While overall the FMCG sector has performed well over the years backed by the strong
consumption story, in a general opinion the fortune of the FMCG funds is closely linked to
its dominant sector holdings (which is 75% of its net assets). Moreover, as the stock
selection universe is restricted, it leaves the fund manager with limitations of reducing the
stock specific risk. Also, if FMCG funds are going to command a higher expense ratio (when
compared to diversified equity funds), then it seems an unpalatable choice because their
net assets are smaller (than diversified equity funds), which thus requires less resources for
them to be managed.
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Chapter 4 – Performance of Sectoral Funds in India
96 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
4.2.3. Infrastructure Funds
The economic reforms with the policies of Liberalization, Privatization and Globalization
started in India way back in 1991, when the Government in majority decided to open up
the doors of economy through such policy initiatives which were aimed to achieve
sustainable and higher economic growth rate. Through integrated efforts, India is able to
manage the growth rate of nearly 9%. However, it was but obvious that to sustain such a
higher economic growth rate, India needed renovation in its basic infrastructure.
On the second round of reforms, some of the Indian mutual funds identified the
investment opportunities in the specific sectors of infrastructure such as power, roads,
ports, irrigation along with infrastructure financing services and thus launched
infrastructure specific funds in the mid of 2005-2006. But if we evaluate their performance
today, it is a mixed kind and not very attractive as it was expected to be in 2005-06. While
the Indian economy was on growth track since August 200598, until the U.S. sub-prime
mortgage crisis emerged in the U.S and hit India in January 2008, fund houses focused on
acquiring more Assets Under Management (AUM) through infrastructure funds, and the
performance was also quite good. But during the bear cycle hit by the U.S. sub-prime
mortgage crisis and the bankruptcy of Lehman Brother, many of these funds were declined
considerably, and even today while the Indian equity markets have shown a smart
economic recovery, the infrastructure sector of India failed to gain the highs of its glory
again.
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“Infrastructure Funds: Are they a damp squib?”, http://www.personalfn.com/knowledge-center/FullStory/
11-10-12/Infrastructure_Funds_Are_they_a_damp_squib.aspx, (12-Oct-2011) Last accessed May 2012.
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Figure: 4.3
Performance of CNX Infrastructure vis-à-vis BSE-200 & S&P CNX Nifty
(Source: BSE, NSE, PersonalFN Research)
Thus even as far as the performance of infrastructure funds is concerned, they haven’t
delivered very appealing returns. The mean annualized returns for 3, 5 and 7 years stand at
20.98, 6.53 and 18.52 percent respectively (table 4.10). In fact fund houses following
strong investment processes and systems too have delivered unsatisfactory returns as their
portfolios felt the turbulence of sub-prime mortgage crisis in the U.S., Lehman Brothers
bankruptcy and anti-inflationary monetary policy stance adopted by RBI.
It is noteworthy that growing emphasis on the infrastructure development and the
euphoria generated during the exuberant bull phase – prior to sub-prime mortgage crisis
and Lehman Brothers bankruptcy made infrastructure a favorite theme in the year 2005.
Many key sectors in infrastructure such as construction and power, witnessed tremendous
growth in activity as companies chalked out aggressive expansion plans, and investors too
gave an encouraging response to the capital raising plans of such companies. Holding some
of these sectors and stocks therein Infrastructure funds certainly generated delighted
returns during 2006 and early 2008, but later these same stocks were hammered during
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Chapter 4 – Performance of Sectoral Funds in India
98 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
the downside of the Indian equity markets (specifically from January 9, 2008 until March 9,
2009, see Figure 4.3).
Table 4.10
Infrastructure Funds: Return Analysis
Sl.
No. Name of the Fund
Returns
3 years
(%)*
Returns
5 years
(%)*
Returns
7 years
(%)*
1. AIG Infrastructure and Economic Reform Inst 28.26 -- --
2. AIG Infrastructure and Economic Reform Reg 27.39 -- --
3. Birla Sun Life Infrastructure 25.59 5.48 --
4. Canara Robeco Infrastructure 33.77 10.95 --
5. DSPBR T.I.G.E.R. Inst 24.36 -- --
6. DSPBR T.I.G.E.R. Reg 23.64 6.41 20.12
7. Escorts Infrastructure 2.66 -- --
8. HDFC Infrastructure 24.99 -- --
9. ICICI Prudential Infrastructure 22.93 9.13 --
10. ICICI Prudential Infrastructure Inst I 23.97 -- --
11. L&T Infrastructure 8.46 -- --
12. LIC Nomura MF Infrastructure 18.13 -- --
13. Religare Infrastructure 21.08 -- --
14. SBI Infrastructure Fund Series 1 17.2 -- --
15. Sahara Infrastructure Fixed Pricing 19.18 5.99 --
16. Sahara Infrastructure Variable Pricing 20.13 6.8 --
17. Tata Growing Economies Infrastructure Plan B 20.54 -- --
18. Tata Indo Global Infrastructure 12.86 -- --
19. Tata Infrastructure 19.58 5.22 --
20. Taurus Infrastructure 32.72 -- --
21. UTI Infrastructure 13.18 2.26 16.92
Category Average 20.98 6.53 18.52
S&P CNX Nifty (Market Benchmark) 25.93 7.47 16.87
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
(*Percentage returns for More than 1year are annualized)
It can also be observed that infrastructure funds have underperformed in comparison to
S&P CNX Nifty during last 3 and 5 years segments (Table 4.10).
This indicates that the diversified portfolios (e.g. Nifty 50 shares index) have generated
more returns for last 5 years while due to sectoral restrictions and poor performance of
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infrastructure companies, the infrastructure funds were bound to fall short of the market
index.
As far as the associated risk and risk adjusted returns are concerned, the infrastructure
funds’ performance deviated less as compared to S&P CNX Nifty. The average standard
deviation for funds remained at 32.11 as compared to 39.54 in case of Nifty (table 4.11).
Table 4.11
Infrastructure Funds: Risk Analysis Sl.
No. Name of the Fund Standard
Deviation
Sharpe
Ratio Beta Alpha R-Square
1. AIG Infrastructure and Economic Reform Inst 30.93 0.38 1 4.59 0.87
2. AIG Infrastructure and Economic Reform Reg 30.92 0.36 0.9 3.9 0.87
3. Birla Sun Life Infrastructure 35.65 0.28 1.1 1.24 0.92
4. Canara Robeco Infrastructure 33.52 0.44 1.1 6.65 0.91
5. DSPBR T.I.G.E.R. Inst 30.41 0.24 1 -0.21 0.94
6. DSPBR T.I.G.E.R. Reg 30.38 0.22 1 -0.79 0.94
7. Escorts Infrastructure 30.54 -0.25 0.9 -14.5 0.76
8. HDFC Infrastructure 35.13 0.28 1.1 1.55 0.9
9. ICICI Prudential Infrastructure 28.61 0.13 0.9 -3.25 0.94
10. ICICI Prudential Infrastructure Inst I 28.61 0.16 0.9 -2.44 0.94
11. L&T Infrastructure 39.4 -0.05 1.2 -11.7 0.92
12. LIC Nomura MF Infrastructure 30.7 0.04 1 -6.32 0.96
13. Religare Infrastructure 25.7 0.22 0.8 -0.56 0.93
14. SBI Infrastructure Fund Series 1 33.98 0.05 1.1 -6.61 0.93
15. Sahara Infrastructure Fixed Pricing 32.1 0.21 1 -0.72 0.86
16. Sahara Infrastructure Variable Pricing 32.11 0.24 1 0.08 0.86
17. Tata Growing Economies Infrastructure Plan B 28.49 0.22 0.9 -0.62 0.92
18. Tata Indo Global Infrastructure 30.94 0.06 1 -5.64 0.88
19. Tata Infrastructure 32.53 0.1 1 -4.6 0.95
20. Taurus Infrastructure 45.53 0.32 1.4 4.19 0.82
21. UTI Infrastructure 28.19 -0.03 0.9 -7.78 0.95
Category Average 32.11 0.17 1 -2.07 0.90
S&P CNX Nifty (Market Index) 39.54 -- -- -- --
(Standard Deviation of annualized returns and Sharpe Ratio is calculated as: since inception for the funds and
for last 10 years in case of sector benchmark and market index; data sourced from BSE. NSE India and Value
Research Online)
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100 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
Merely lowering down the risk does not satisfy investors and that is clarified by Sharpe
ratio which has very alarming for infrastructure funds. An average ratio of 0.17 which
means less than 20% risk premium returns for taking extra risk on investment, this is not at
all satisfactory.
Although the efficiency of fund managers to manage input costs and outputs such as
cash percentages, turnover, expense ratio and returns along with net assets is been almost
satisfactory as it is confirmed by average of data envelopment analysis values which
remained at 0.72 for the category. This clearly indicates that due sector specific reasons
the performance of infrastructure funds is relatively low while the management of assets
and costs has no severe problems as such.
Table 4.12
Infrastructure Funds: Data Envelopment Analysis Values Sl.
No. DMU Score %Cash TurnR ExpR FrontL DefrdL 3YAR 5YAR 7YAR NetAsst
1. DTR 1 1.62 58 1.88 0 0 23.64 6.41 20.12 1904.8
2. UI 1 3.09 130.54 1.8 0 0 13.18 2.26 16.92 2398.4
3. BSLI 0.763748 9.17 51 2.26 0 0 25.59 5.48 -- 380.5
4. CRI 1 8.56 113 2.43 0 0 33.77 10.95 -- 131.4
5. IPI 0.876723 8.18 89 1.88 0 0 22.93 9.13 -- 2462.2
6. SIFP 0.628322 7.52 71.67 1.2 0 0 19.18 5.99 -- 8
7. SIVP 0.670267 7.52 71.67 1.84 0 0 20.13 6.8 -- 8
8. TI 1 5.4 18 1.91 0 0 19.58 5.22 -- 1355.1
9. AIGIERI 0.752203 6.66 71 1.75 0 0 28.26 -- -- 117.9
10. AIGIERR 0.566885 6.66 71 2.46 0 0 27.39 -- -- 117.9
11. DSPTI 0.835267 1.62 58 1.44 0 0 24.36 -- -- 1904.8
12. ESINFRA -0.02099 2.93 10.4 2.5 0 0 2.66 -- -- 3.2
13. HDINFRA 0.740267 2.11 41.37 1.97 0 0 24.99 -- -- 911.5
14. ICIPII 0.739267 8.18 89 1 0 0 23.97 -- -- 2462.2
15. LTINFRA 1 10.14 128 2.5 0 0 8.46 -- -- 34.9
16. LNMFI 0.762322 4.6 4 2.42 0 0 18.13 -- -- 129.4
17. RGINFRA 0.448503 3.05 56 2.5 0 0 21.08 -- -- 52.6
18. SIFS1 0.319349 9.78 71 2.12 0 0 17.2 -- -- 846
19. TGEIPB 0.670457 35.17 7 2.08 0 0 20.54 -- -- 96.7
20. TIGI 0.878242 35.12 15 1.79 0 0 12.86 -- -- 757
21. TAI 0.478166 8.77 148 2.5 0 0 32.72 -- -- 16.2
Average 0.719476 8.85 65.37 2.01 0 0 20.98 6.53 18.52 766.60
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
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Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 101
The reasons for low standard deviation and average management efficiencies can also be
traced to the fact that the infrastructure funds are highly diversified with in the sector as
the average top 5 holding accounts for nearly 28% of total assets (table 4.13). It is good
example of risk diversification with in the sector when the sector itself is passing through
tough time.
Table 4.13
Infrastructure Funds: Portfolio Compositions
Sl. No. Fund Name Top 5
Holdings (%)
1. AIG Infrastructure and Economic Reform Inst 30.28
2. AIG Infrastructure and Economic Reform Reg 30.28
3. Birla Sun Life Infrastructure 21.09
4. Canara Robeco Infrastructure 28.91
5. DSPBR T.I.G.E.R. Inst 17.29
6. DSPBR T.I.G.E.R. Reg 17.29
7. Escorts Infrastructure 26.06
8. HDFC Infrastructure 35.61
9. ICICI Prudential Infrastructure 29.20
10. ICICI Prudential Infrastructure Inst I 29.20
11. L&T Infrastructure 21.15
12. LIC Nomura MF Infrastructure 35.55
13. Religare Infrastructure 28.42
14. Sahara Infrastructure Fixed Pricing 16.52
15. Sahara Infrastructure Variable Pricing 16.52
16. SBI Infrastructure Fund Series 1 33.22
17. Tata Growing Economies Infrastructure Plan B 21.67
18. Tata Indo Global Infrastructure 21.15
19. Tata Infrastructure 25.10
20. Taurus Infrastructure 28.62
21. UTI Infrastructure 25.58
Average 28.05
(Compiled by the researcher, data sourced from Value Research)
It is also a recognized fact that infrastructure need in India is clearly outpacing the supply.
Infrastructure deficit has been glaring and impeding India’s growth story. And to achieve
and sustain the high growth rate (of above 8%), India needs to show remarkable
improvements in the quality of infrastructure. According to World Economic Forum, “India
requires infrastructure investment of $1 trillion over five years starting in April 2012 as it
aims to boost economic growth to 10%”.
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102 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
4.2.4. Energy Funds
Energy mutual funds offer an attractive opportunity to investors with a long term horizon
since they represent a stable industry with a bright future. The demand for energy
continues to rise steadily and this is particularly true for nations growing at a rapid pace
specially India. Along with this trend, the pressure on natural resources which is harnessed
to provide energy and related services has also increased considerably. With the
advantages of professional management and well diversified portfolios mutual funds are
the most viable route to invest in this sector.
In India, the private Investment in the power sector was allowed the post-liberalization
era after 1991 (after amending the energy laws). At present 100% Foreign Direct
Investment is permitted for projects relating to electricity generation, transmission and
distribution (other than atomic reactor power plants), without refraining them from any
limit on the project cost and quantum of FDI. All these moves fuel power sector reforms in
India and make this sector as promising one. The nature of this sector remained long term
and the companies in this segment have been defensive. A comparison of BSE Power and
BSE Sensex (Figure 4.4) shows that the volatility in the BSE power is less as compared to
BSE Sensex.
Figure: 4.4: Performance of BSE Power vis-à-vis BSE-Sensex
(Compiled by the researcher; data sourced from BSE India and Value Research Online)
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Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 103
The table 4.14 reveals that barring "DSPBR Natural Resource & New Energy Fund", most
energy funds have delivered absolutely uninspiring returns in 3 years time frame. Whereas
on an average these funds have delivered average returns of 21.86, 13.57 and 36.99
percent for last 3, 5 and 7 years respectively. Moreover, this category average has not been
able to outperform broader indices such as S&P CNX Nifty for last 3 years returns.
Table: 4.14
Energy Funds: Return Analysis
Sl. No.
Name of the Fund
Returns
3 years
(%)*
Returns
5 years
(%)*
Returns
7 years
(%)*
1. DSPBR Natural Resources and New Energy Reg 35.07 -- --
2. Escorts Power & Energy 6.47 -- --
3. Reliance Diversified Power Sector Retail 17.61 13.57 26.99
4. Reliance Natural Resources Retail 25.14 -- --
5. Sahara Power & Natural Resources 27.44 -- --
6. Sundaram Energy Opportunities 19.41 -- --
7. UTI Energy 20.00 -- --
Category Average 21.86 13.57 26.99
S&P CNX Nifty (Market Index) 25.93 7.47 16.87
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
(*Percentage returns for More than 1year are annualized)
When the funds are analyzed on their volatility front, Sahara Power & Natural Resources
Fund and Sundaram Energy Opportunities exposed the investors with relatively higher
level of risk as compared to most of other funds (as revealed by their Standard Deviation in
table 4.15), whereas risk-adjusted returns (as revealed by their Sharpe Ratio) generated by
them are also quite unappealing. Only DSPBR Natural Resources and New Energy Fund
managed to provide sufficient risk adjusted returns (Sharpe ration being 0.62).
The overall situation is also not quite good as average risk adjusted returns are 0.25
(table 4.15) which cannot be up to the expectation of any investor. In general, the
economic data encourage the investors about the bright future of energy sector but still
the mutual funds of this sector are not performing up the mark. Probably the main reason
for the underperformance of these energy funds (as many governmental and expert
reports say) is that the companies which they invested in seemed to be suffering with
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104 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
problems such as unavailability of fuel. This in turn has also led some Indian energy sector
companies to look beyond the domestic boundaries for their resources. Moreover, many
companies are also facing problems on the land acquisition and environment clearance
issues. The new Bill relating to land acquisition continues to face political opposition,
where it provides for acquisition by project development agencies to the extent of 70% of
the land required for a project, with the balance to be obtained by the Government. All
these factors (amongst others) are leading to delay in project execution, which is reflecting
on the performance of the stock prices of energy sector companies and therefore causing
lower returns for sectoral funds.
Table: 4.15 (A)
Energy Funds: Risk Analysis
Sl. No. Name of the Fund Standard
Deviation
Sharpe
Ratio Beta Alpha R-Square
1. DSPBR Natural Resources and New Energy Reg 27.1 0.62 0.80 0.84 0.9
2. Escorts Power & Energy -- -- -- -- --
3. Reliance Diversified Power Sector Retail 31.39 0.12 1.0 0.98 0.91
4. Reliance Natural Resources Retail 27.91 0.16 0.9 0.88 0.92
5. Sahara Power & Natural Resources 34.02 0.34 1.1 1.05 0.88
6. Sundaram Energy Opportunities 34.23 0.13 1.0 1.03 0.85
7. UTI Energy 27.61 0.14 0.87 0.87 0.92
Category Average 30.37 0.25 0.90 0.16 0.90
S&P CNX Nifty (Market Benchmark) 39.54 -- -- -- --
(Standard Deviation of annualized returns and Sharpe Ratio is calculated as: since inception for the funds and
for last 10 years in case of sector benchmark and market index; data sourced from BSE. NSE India and Value
Research Online)
Energy funds have failed to power their investors' portfolio on the risk adjusted return
front. While some have fancied on investing in companies beyond the energy theme, they
haven't been able to accentuate their performance. The systemic problems (as seen in
table 4.14 and 4.15) faced by the sector also poses to be risk and hinders capital
appreciation.
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Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 105
Table: 4.15 (B)
Energy Funds: Data Envelopment Analysis Values
Sl.
No. DMU Score %Cash TurnR ExpR FrontL DefrdL 3YAR 5YAR 7YAR NetAsst
1. DNRNER 1 2.08 64 2.3 0 0 35.07 -- -- 141.4
2. EPE 0.368157 4.8 15.35 2.5 0 0 6.47 -- -- 1.4
3. RDPSR 1 5.76 13 1.82 0 0 17.61 13.57 26.99 2,854.40
4. RNRR 0.710777 1.32 54 1.87 0 0 25.14 -- -- 1,992.90
5. SPNR 1 9.03 65.51 2.5 0 0 27.44 -- -- 4.1
6. SEO 0.73592 5.51 129 1.94 0 0 19.41 -- -- 984
7. UE 1 3.95 21.26 1.64 0 0 20 -- -- 411.8
Average 0.83069343 4.64 51.73 2.08 0 0 21.59 13.57 26.99 912.86
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
On the other hand, the scores of data envelopment analysis points out towards the
reasonable efficiency levels of energy funds with category average of 0.83 which is quite
high. Therefore, it can be inferred that the fund managers have managed the ratio of input
costs and output returns considerably well but as the whole sector is suffering from the
lower growth, the funds were bound to perform poor.
4.2.5. Pharmaceutical Funds
Last three years have been quite eventful for the global economy and financial markets.
The economic recovery in the U.S. led by its ballooning debt-to-GDP ratio (of nearly 98%),
dwindling economic growth rate along with a debt-overhang situation in the Euro zone has
impacted the Indian markets. India has escaped relatively unscathed, but many sectors
have suffered severely during the downturn.
Sectors such as real estate, power and capital goods which were the investors’ favorites
in the last few years have been completely gone out of priority lists. However
pharmaceutical sector has been the only sector which has been held up during this
descending trend of the Indian equity markets (see figure 4.5), thereby proving to be
defensive and thus taking care of the health of investors’ portfolio.
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106 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
Figure: 4.5
Performance of BSE Health Care vis-à-vis BSE 100 and BSE Reality
(Base: Rs 100, Source: BSE website, PersonalFN Research)
Actually, over last 3 years time frame, BSE Healthcare index has landed in the top 3
performing indices after encouraging performance by banking and financial services sector
(due to cautious policy measure adopted by Reserve Bank of India) and auto sector (due to
promising consumption story in India). This epic success of pharmaceutical funds is mainly
credited to the intrinsic strengths of the Indian pharmaceutical industry. The Indian
pharmaceutical industry ranks 3rd across the world in terms of volumes and 14th in terms of
value in accordance to the latest data published by departments of Pharmaceuticals,
India.99
Table: 4.16
Pharmaceutical Funds: Return Analysis
Sl.
No. Name of the Fund
Returns
3 years
(%)*
Returns
5 years
(%)*
Returns
7 years
(%)*
Returns
10 years
(%)*
1. Magnum Pharma 34.88 5.16 12.88 20.97
2. Reliance Pharma 49.61 23.01 25.66 --
3. UTI Pharma & HC 33.01 13.76 15.14 18.37
Category Average 39.17 13.98 17.89 19.67
BSE-HC (Sector Benchmark) 30.42 11.2 13.28 17.43
S&P CNX Nifty (Market Index) 25.93 7.47 16.87 18.48
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
(*Percentage returns for More than 1year are annualized)
99
“The anti-ageing formula of pharma mutual funds”, http://www.personalfn.com/knowledge-center/FullStory/
11-09-20/ The_anti-ageing_formula_of_pharma_mutual_funds.aspx, (20-Sep-2011) Last accessed May 2012
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Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 107
When we judged the individual performance of Pharma funds, they were found
accelerated on the return front across all time frames. The average performance over 3, 5,
7 and 10 years time frame was above the sector benchmark as well as market index (table
4.16). Reliance Pharma Fund has topped the category by delivering returns of 49.61%,
23.01% and 25.66% over the 3, 5 and 7 years time frame, followed by Magnum Pharma at
the second position. UTI Pharma & Healthcare however have been average performers,
especially over 5 and 7 years time frame.
Interestingly while most funds have delivered appealing returns, so far they haven’t
exposed their investors to a very high risk (as revealed by their Standard Deviation) thereby
leading them to provide luring risk-adjusted returns (as revealed by their Sharpe Ratio).
Funds’ standard deviation varies between 22.04 and 32.55 (table 4.17), which is good and
less risky than BSE-Health Care and S&P CNX Nifty. The risk adjusted performances are also
remarkable as compared to other sectoral funds. Reliance Pharma stands again the top
fund with medium standard deviation (28.75) and highest Sharpe ratio (1.02). While UTI
Pharma & HC along with Magnum Pharma, also did well as compared to other sectoral
counterparts.
Table: 4.17
Pharmaceutical Funds: Risk Analysis
Sl.
No. Name of the Fund
Standard
Deviation*
Sharpe
Ratio* Beta Alpha R-Square
1. Magnum Pharma 32.55 0.52 1.2 0.03 0.80
2. Reliance Pharma 28.75 1.02 1.0 14.7 0.76
3. UTI Pharma & HC 22.04 0.73 0.9 3.58 0.95
Category Average 27.78 0.76 1.0 6.09 0.84
BSE-HC (Sector Benchmark) 37.30 -- -- -- --
S&P CNX Nifty (Market Index) 39.54 -- -- -- --
(Standard Deviation of annualized returns and Sharpe Ratio is calculated as: since inception for the funds and
for last 10 years in case of sector benchmark and market index; data sourced from BSE. NSE India and Value
Research Online)
Being sector funds, Pharma funds have followed a top-down approach, but the market cap
bias is different in each fund. For instance Reliance Pharma Fund which has accelerated on
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Chapter 4 – Performance of Sectoral Funds in India
108 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
the returns has maintained a balance between allocating towards large caps and midcaps
and diversified to a great extent, keeping its top 5 holding percentage as low as 43.01%.
Whereas UTI Pharma & Healthcare Fund adopted a more defensive stance by
predominantly holding their top 5 assets in the large cap domain with allocation rate of
52.76%.
Table: 4.18
Pharmaceutical Funds: Analysis of Portfolio Compositions
Sl. No. Fund Name Top 5 Holdings
(%)
1. Magnum Pharma 53.47
2. Reliance Pharma 43.01
3. UTI Pharma & Healthcare 52.76
Average 46.78
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
Because of their high performance on the scale of annualized returns, lower standard
deviation and higher risk adjusted returns, the higher level of portfolio efficiency rate was
expected. And this came to be as per the data envelopment analysis values, which came
out to be 1 for all three prevailing funds as on date (table 4.19).
Table: 4.19
Pharmaceutical Funds: Data Envelopment Analysis Values
Sl.
No. DMU Score %Cash TurnR ExpR FrontL DefrdL 3YAR 5YAR 7YAR 10YAR NetAsst
1. MP 1 4.08 31 2.5 0 0 34.88 5.16 12.88 20.97 41.56
2. RP 1 2.05 9 2.23 0 0 49.61 23 25.66 -- 603.2
3. UPH 1 7.38 60.47 2.09 0 0 33.01 13.8 15.14 18.37 95.6
Average 1 4.51 33.49 2.27 0 0 39.17 13.99 17.89 19.67 246.79
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
The Pharma funds are attributed to be lower on the scale of turnover ratio and moderate
on the part of expense ratio. Hence it can be expected that while an investor may want to
take opportunities present in the Pharma sector, he/she should choose such funds to be an
essential part of his investment portfolio.
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Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 109
4.2.6. Service Funds
In laws few months, Indian telecom industry has been in limelight for possibly all wrong
reasons. But by such news, nothing can be taken away from the success it has achieved by
growing rapidly in relatively a short period of time. With a subscriber base of 865.71million
as per the records of telecom regulator – Telecom Regulatory Authority of India (TRAI),
India ranks second in terms of number of telephone users in the world. Similarly, the IT
industry also, which has been a leading industry in India’s growth story, which has earned
immense respect for itself over last two decades across the globe. But Moreover, because
the services industries theme is far broad and comprises of many other sectors such as
Banking, Non-Banking Financial Companies (NBFCs), Financial Services firms, Information
Technology, Telecom Services, Power, Shipping, Media, and Education & Training are few
to quote.
Figure 4.6
Sector wise constituents of CNX Service Sector index
(Data as on September 30, 2011; Representation to hotels is miniscule 0.46%)
(Source: NSE, PersonalFN Research)
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Chapter 4 – Performance of Sectoral Funds in India
110 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
While population has always been interpreted as major threat, interestingly this growing
population has played a vital role in the growth of services industries theme. It is
remarkable that India’s demographic study reveals that the country has a large young
population (as compared to developed economies), where large pool of young talented
population works in the aforementioned services industries theme. As a result, the services
industry theme has shown a stable growth of 6.7% in the span of last 10 years. Moreover,
in post liberalization era- i.e. for the period 1993 to 2003, the growth rate posted by the
theme has accelerated to 8.2% and thereafter until recently has recorded a double-digit
growth of 10% year-on-year as per the records of Ministry of Finance.
Initially (at the time of inception) in 2001, while most fund houses acquired large AUMs
under this theme, the recessionary phase witnessed in 2008 until March 2009, forced
many investors to exit from the theme in difficult situation thus resulting in AUMs decline.
After witnessing a high in AUM of 1,918 (for all the aforementioned 4 funds) as on
December 31, 2007100, the same stands at barely 588 Crores as on September 30, 2011,
as panic selling led to investors exit from their investments.
The figure (4.7) below reveals that the CNX Service Sector Index which is used to
benchmark the performance of the companies in the services industries theme, over a
decade’s time period has not only outperformed broader index S&P CNX Nifty by a good
margin, but also it has fall down in the bearish equity markets. Moreover, in the recovery
phase of the Indian equity markets it accelerated much faster than the S&P CNX Nifty
index.
100
“Service Industry MFs: Have they served you well?”, http://www.personalfn.com/knowledge-center/FullStory/
11-11-14/Service_Industry_MFs_Have_they_served_you_well.aspx, (14-Nov-2011), Last accessed May 2012
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Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 111
Figure: 4.7
S&P CNX Nifty vs. CNX Service Sector
Data as on September 30, 2011 (Source: ACE MF, PersonalFN Research)
As far as the performance of services sector industries funds is concerned, the return
generated by them over 3 years time frame are quite attractive as the average
performance of the funds is just equal to that of market index. Whereas in last 5 years
category, most of the funds have given disheartening results at 4.02% of average returns
which is quite below the market index. On the volatility front too, all services industries
funds have kept their risks in moderate to high level category (as revealed by their
Standard Deviation), which have helped by them to maintain just below average risk-
adjusted returns (as revealed by their Sharpe Ratio) which are not too attractive but also
not too disappointing.
Table: 4.20 Service Funds: Return Analysis
Sl.
No.
Name of the Fund
Returns
3 years
(%)*
Returns
5 years
(%)*
Returns
7 years
(%)*
Returns
10 years
(%)*
1. ICICI Prudential Services Industries 26.25 4.44 -- --
2. Principal Services Industries 23.58 3.17 -- --
3. Tata Service Industries 26.64 4.47 -- --
4. UTI Services Industries 26.06 4.00 13.81 20.45
Category Average 25.63 4.02 13.81 20.45
S&P CNX Nifty (Market Index)
25.93 7.47 16.87 18.48
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
(*Percentage returns for More than 1year are annualized)
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Chapter 4 – Performance of Sectoral Funds in India
112 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
Table: 4.21 Service Funds: Risk Analysis
Sl.
No.
Name of the Fund Standard
Deviation
Sharpe
Ratio Beta Alpha R-Square
1. ICICI Prudential Services Industries 30.99 0.28 0.99 0.96 0.94
2. Principal Services Industries 26.62 0.3 0.84 1.54 0.92
3. Tata Service Industries 37.10 0.32 1.14 2.91 0.88
4. UTI Services Industries 28.68 0.3 0.90 1.71 0.92
Category Average 30.85 0.3 0.97 1.78 0.92
S&P CNX Nifty (Market Index) 39.54 -- -- -- --
(Standard Deviation of annualized returns and Sharpe Ratio is calculated as: since inception for the funds and
for last 10 years in case of sector benchmark and market index; data sourced from BSE. NSE India and Value
Research Online)
But if we assess the service category funds over the fund management efficiency measure
through data envelopment analysis, it can be concluded that except ICICI Prudential
Services Industries and Tata Service Industries, the other two funds achieved the high score
of 1 which means they are proficient in managing input costs and resulting returns
effectively.
Table: 4.22 Service Funds: Data Envelopment Analysis Values
Sl.
No. DMU Score %Cash TurnR ExpR FrontL DefrdL 3YAR 5YAR 7YAR 10YAR NetAsst
1. IPSI 0.814375 4.15 79 2.38 0 0 26.25 4.44 -- -- 187
2. PSI 1 0.91 52 2.49 0 0 23.58 3.17 -- -- 82.8
3. TSI 0.566885 1.77 28 2.46 0 0 26.64 4.47 -- -- 97.6
4. USI 1 3.61 21.19 1.57 0 0 26.06 4 13.81 20.45 245.5
Average 0.845315 2.61 45.05 2.23 0 0 25.63 4.02 13.81 20.45 153.23
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
Speaking about the portfolio characteristics, being thematic in nature most services
industries funds hold a concentrated portfolio. As per the latest disclosed fund-facts, as on
September 30, 2011 the allocation to top-10 stocks has been in the range of 48.7% to
62.9%, while the allocation to top 5 sectors has ranged from 53.0% to 79.0%. But an
interesting point is that despite having on an average 35 stocks in the portfolio, the
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Chapter 4 – Performance of Sectoral Funds in India
Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 113
churning across schemes has been moderate with a portfolio turnover ratio ranging
between 21 percent to 79 percent (see column 5: TurnR of table 4.22). While services
industries funds so far have delivered average returns around market benchmark, we
believe that the limited domain for stock selection sometimes exposes them to portfolio
concentration risk and even high churning. While many have preferred to invest in services
industries funds to ride the boom but they have suffered because of high portfolio
concentration risk when detrimental economic factors took place which negatively
affected the theme.
4.2.7. Technology / IT Funds
Technology has increasingly become an integral part of our daily lives and the future
prospects of this sector seem to be brighter. However, the boom of technology funds in
the late nineties and their subsequent downfall during the decline has invoked a certain
degree of doubt even among bullish periods on this category. But for investors seeking
aggressive growth in long term, investing in funds that focus on technology and innovation
could be a sensible option in times to come. As of today, after a decade, if we assess the
contribution which the Indian IT industry has made, it has participated immensely to
India’s economic progress. It has witnessed astronomical growth in last two decades and a
few million $ industry is now worth approximately $76 billion.101 Moreover, technological
innovations and ability to execute critical projects has won the respect for Indian software
companies worldwide. Also, it enjoys dominance in the sectoral breakup of BSE SENSEX
and plays an important role in the index movement.
Interestingly, even during downturn of the Indian equity markets in 2008 (until March
2009), the Indian IT sector has displayed good elasticity, along with a smart recovery during
the re-growth of the Indian equity markets, thus leaving investors’ in the IT sector (who
invested even during the high of 21,000 of the market) to earn profits.
101
“Is falling rupee making Tech funds attractive?”, http://www.personalfn.com/knowledge-center/FullStory/
11-11-28/Is_falling_rupee_making_Tech_funds_attractive.aspx, (28-Nov-2011) Last accessed May, 2012.
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Chapter 4 – Performance of Sectoral Funds in India
114 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
Figure: 4.8
BSE IT vs. BSE SENSEX
(Source: BSE India, PersonalFN Research)
However the performance of technology mutual funds reveals that, in all the returns
categories 3, 5, 7 and 10 years they have just performed slightly better than the sector
benchmark BSE-IT. ICICI Prudential Technology performed best in terms of 3 years
annualized returns category while DSPBR Technology.com dominated the rest 5, 7 and 10
years time frame.
Table: 4.23 Technology Funds: Return Analysis
Sl.
No. Name of the Fund
Returns
3 years
(%)*
Returns
5 years
(%)*
Returns
7 years
(%)*
Returns
10 years
(%)*
1. Birla Sun Life New Millennium 21.87 0.83 12.83 20.53
2. DSPBR Technology.com Reg 27.18 8.62 18.27 25.55
3. Franklin Infotech 33.09 4.38 13.83 20.99
4. ICICI Prudential Technology 39.13 6.00 16.12 21.69
5. Magnum IT 30.39 1.68 14.54 18.17
Category Average 30.33 4.30 15.19 21.39
BSE-IT (Sector Benchmark) 29.32 3.79 13.43 18.09
S&P CNX Nifty (Market Index) 25.93 7.47 16.87 18.48
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
(*Percentage returns for More than 1year are annualized)
Being thematic funds in nature they have displayed more or less same volatility as
compared to BSE IT index, and in case of risk-adjusted returns. Two funds ICICI Prudential
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Chapter 4 – Performance of Sectoral Funds in India
Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 115
Technology and Franklin InfoTech provided fair returns while the rest funds remained just
around the category average.
Table: 4.24 Technology Funds: Risk Analysis
Sl.
No. Name of the Fund
Standard
Deviation
Sharpe
Ratio Beta Alpha R- Square
1. Birla Sun Life New Millennium 30.00 0.19 0.9 -9.01 0.64
2. DSPBR Technology.com Reg 29.08 0.35 0.9 -4.58 0.68
3. Franklin InfoTech 27.14 0.68 1 1.8 0.99
4. ICICI Prudential Technology 30.75 0.56 1 1.18 0.74
5. Magnum IT 34.19 0.37 1.1 -5.5 0.75
Category Average 30.232 0.43 0.9 -3.22 0.76
BSE-IT (Market Benchmark) 39.54 -- -- -- --
(Standard Deviation of annualized returns and Sharpe Ratio is calculated as: since inception for the funds and
for last 10 years in case of sector benchmark and market index; data sourced from BSE. NSE India and Value
Research Online)
The study of data envelopment analysis suggests that the Technology funds have not been
too good in managing input and output ratio of funds. Only two funds could achieve the
rating of highly efficient portfolio (ICICI Prudential Technology and Franklin InfoTech).
While rests of the funds were found to less efficient as their efficiency scores were less
than 1 (see table 4.25).
Table: 4.25 Technology Funds: Data Envelopment Analysis Values
Sl.
No. DMU Score %Cash TurnR ExpR FrontL DefrdL 3YAR 5YAR 7YAR 10YAR NetAsst
1. BSLNM 0.575114 4.38 18 2.5 0 0 21.87 0.83 12.83 20.53 48.93
2. DTR 0.796602 0.9 98 2.48 0 0 27.18 8.62 18.27 25.55 55.2
3. FI 1 2.11 1.31 1.47 0 0 33.09 4.38 13.83 20.99 115
4. IPT 1 8.3 11 2.49 0 0 39.13 6.00 16.12 21.69 99.5
5. MI 0.618187 5.48 7 2.5 0 0 30.39 1.68 14.54 18.17 40.4
Average 0.797981 4.24 27.06 2.29 0 0 30.33 4.30 15.12 21.39 71.81
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
Although the performance of Technology Funds today is not that attractive as it seemed to
be 5 or 7 years back but still those Indian IT companies which are run by the efficient
managements will find out ways of dealing with challenges faced by the industry and IT
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Chapter 4 – Performance of Sectoral Funds in India
116 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
may still remain a dominant sector in the Index. But a noteworthy point is that the IT
industry derives 90% of its revenues by providing technological services to overseas clients
- majorly from US and Europe, and is thus subject to pitfalls of broader global economic
headwinds such as currency volatility, slowdown in western economies and lesser IT
spending among others.
4.2.8 Other Sector Based Funds
Except the major sectoral funds such as Banking, FMCG, Infrastructure, Energy,
Pharmaceutical, Service and Technology / IT, there are some other thematic funds also
that follow the strategies of sectoral funds. Such funds include Lifestyle, Consumer
Oriented funds, Media and Entertainment, PSU, Rural Focus, Transportation, Life Sciences,
and MNC etc.
Table: 4.26
Other Sector Funds: Return Analysis Sl.
No.
Name of the Fund
Returns
3 years
(%)*
Returns
5 years
(%)*
Returns
7 years
(%)*
Returns
10 years
(%)*
1. Birla Sun Life Buy India 32.95 8.97 21.74 23.74
2. Birla Sun Life India GenNext 29.11 11.37 -- --
3. Birla Sun Life India Opportunities 24.32 -0.93 9.63 --
4. Birla Sun Life MNC 40.74 12.3 20.51 24.38
5. JM Basic 10.72 -7.11 -- --
6. Magnum COMMA 28.48 8.39 -- --
7. Reliance Media & Entertainment 27.2 5.34 14.6 --
8. Sahara R.E.A.L 15.17 -- -- --
9. Sundaram CAPEX Opp Reg-D 15.06 3.12 -- --
10. Sundaram CAPEX Opp Reg-G 14.9 3.38 -- --
11. Sundaram Entertainment Opportunities Ret 9.42 -- -- --
12. Sundaram Rural India Reg 26.1 5.84 -- --
13. Tata Life Sciences & Tech 35.76 8.33 18.19 23.07
14. UTI India Lifestyle 27.48 -- -- --
15. UTI MNC 36.28 12.55 19.59 22.42
16. UTI Transportation and Logistics 41.95 7.47 15.56 --
Category Average 25.98 6.079 17.12 23.40
S&P CNX Nifty (Market Index) 25.93 7.47 16.87 18.48
(Compiled by the researcher; data sourced from AMFI and Value Research Online)
(*Percentage returns for More than 1year are annualized)
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Chapter 4 – Performance of Sectoral Funds in India
Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds 117
Among these funds, in 3 years return category, UTI Transportation and logistics along with
two MNC Funds: Birla Sun Life MNC and UTI MNC have been the top three performers with
41.95%, 40.74% and 36.28% returns respectively. These returns are at par with that of
other major types of funds discussed earlier. While in the longer run (5, 7 and 10 years
time frame), again MNC funds along with Buy India, Gen-Next, Life Sciences funds have
performed significantly better as compared to other funds.
As most of these thematic funds own little wider investment portfolio, their
performance seem to be little similar to diversified market index S&P CNX Nifty (as shown
in figure 4.26). In the 3, 5 and 7 years category the overall average matches the
performance of the index whereas in 10 years category, the average of two MNC funds
along with Buy India and Life Sciences has over performed the index returns.
Table: 4.27
Other Sector Funds: Risk Analysis Sl.
No.
Name of the Fund Standard
Deviation
Sharpe
Ratio Beta Alpha
R-
Square
1. Birla Sun Life Buy India 29.43 0.53 0.92 8.46 0.91
2. Birla Sun Life India GenNext 24.02 0.53 0.74 7.15 0.87
3. Birla Sun Life India Opportunities 31.09 0.27 0.96 1.06 0.88
4. Birla Sun Life MNC 23.88 0.92 0.72 16.3 0.84
5. JM Basic 51.92 -0.14 1.58 -19.3 0.86
6. Magnum COMMA 30.58 0.31 0.97 2.15 0.93
7. Reliance Media & Entertainment 35.16 0.25 1.03 0.80 0.80
8. Sahara R.E.A.L 25.72 0.23 0.71 0.37 0.70
9. Sundaram CAPEX Opp Reg-D 40.31 0.16 1.15 -2.47 0.76
10. Sundaram CAPEX Opp Reg-G 39.51 0.16 1.13 -2.36 0.76
11. Sundaram Entertainment Opportunities Ret 32.06 0.20 0.82 -0.02 0.61
12. Sundaram Rural India Reg 31.39 0.31 0.96 2.39 0.88
13. Tata Life Sciences & Tech 28.42 0.68 0.86 12.7 0.85
14. UTI India Lifestyle 22.96 0.56 0.72 7.16 0.93
15. UTI MNC 20.66 0.98 0.63 15.4 0.86
16. UTI Transportation and Logistics 28.88 0.82 0.76 0.77 0.92
Category Average 31.00 0.42 0.92 3.17 0.84
S&P CNX Nifty (Market Index) 39.54 -- -- -- --
(Standard Deviation of annualized returns and Sharpe Ratio is calculated as: since inception for the funds and
for last 10 years in case of sector benchmark and market index; data sourced from BSE. NSE India and Value
Research Online)
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Chapter 4 – Performance of Sectoral Funds in India
118 Performance Evaluation of Mutual Fund Segments In India: With Special Reference to Sectoral Funds
On the parameters of risk and risk-adjusted returns, MNC funds topped the race for
providing maximum risk adjusted returns. The volatility (standard deviation) is also quite
low, which makes such funds a better choice for an investor who is ready to take only
moderate risk to achieve higher gains. The overall average of risk for all funds is also quite
low at 31.00 as compared to market index at 39.54 percent. The lower standard deviation
and higher alpha values (with the average of 3.17) indicates that these funds carry lower
risk in comparison to market index but provides 3.17% more returns over the index.
4.3 CONCLUSION
After analyzing the sector wise performance of each category of sectoral funds on the
parameter of 3, 5, 7 and 10 years of performance, it can easily be concluded that few
sectors and some specific mutual fund houses have made a mark through such types of
funds. Although it is hard to establish any trend among the performances of specific
sectors or time frame with the sectors but surely few sectors such as Banking, FMCG,
Pharmaceuticals, MNC and Transportation have performed very well in the past. Banking
funds have proved their importance and maintained the significance in the economy and
also in the portfolio of an investor. Their performances in long run (7 to 10 years time
frame) have been superior with lower risk. FMCG and Pharmaceutical funds happen to be
like evergreen sectors and similarly their sectoral funds too. Whether it is the case of short
or medium term performance (3 to 5 years) or long term (7 to 10 years) most of FMCG and
Pharma funds have over performed the sectoral benchmarks and market indices.
On the other hand, the performance of Technology, Lifestyle and Service sector funds
has been just up to the standard. They have not significantly and consistently
outperformed the sectoral benchmarks and market indices over different time frames.
Funds such as Infrastructure, Entertainment, Energy (in short run) and Basic Industry have
really disappointed the investors despite their scope and importance in the economy. Such
funds could not even attain the performance standard set by market indices and respective
industry benchmarks.
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