CHAPTER I

INTRODUCTION AND RESEARCH DESIGN OF THE STUDY

INTRODUCTION

India's economic well-being is greatly recognized by the world bodies and

institutions because of the fact that the country has been growing continually in the
last two decades. This global recognition boosts the country's morale and with this
recognition, the country will soon become super power in the global arena with the
renowned confidence and spirit. The chief reason for this status is being attributed to
the existence of vibrant and transparent financial system in the country. Due to the
existence of this strong and resilient financial system, the country has not at all
affected by external financial shocks and disturbances in the past and it will also not
get affected by such financial imbroglio in the future, though the financial system has
been integrated with the global system since the year 1991. Further, the Indian
financial system supports the people of the country from all strata’s of the society to
increase their standards of living in the areas of business, employment, health and
education, thereby enhancing the total human development in the country. This human
development can be vouched from the fact that India is stood at 130th rank amongst
180 countries in the world.1 Having said that, there are some grey areas in the Indian
financial system, where the government of the day tries to address these areas
vigorously by all its means. These grey areas include mounting non-performing assets
in the balance sheets of public sector banks, frequent frauds and scams indulged by the
officials of the bank, unnecessary political interference by polity in the functioning of
banks and other financial institutions, agriculture and education subsidy waivers by
political bosses from time to time, teeth less regulators of financial and stock markets,
poor financial literacy among even educated urban and rural folks and so on. The
Government of India, with the support of other regulatory agencies and governance
bodies enacted so many laws and chalk out and implement plans and policies to plug
out these grey areas from time to time. The Government of the day succeeded in this
attempt to a great extent in recent times. Discounting these grey areas, the Indian
financial system is so robust, by and large, and commands high respect and
prominence both at the national and international level.

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 In developing countries, the financial system has another more important
function of promoting growth in the economy. Investment in an economy takes the
form of either inventories or fixed capital assets. The economic development of a
country is also based on the growth of fixed capital. The types of financial assets
provided by the financial system would influence the types of capital formation in
the economy and vice versa. Thus, the economic development of a country depends
inter alia on the growth of the financial system. The larger the proportion of
financial assets to real assets, the greater is the scope for development because, as
referred to earlier, growth in the economy requires adequate investment which only
the financial system can facilitate. Finance is an important input in the production
process and as such developed financial system is an important prerequisite for
economic growth.

The financial system should have proper width and resilience so that the rate
of growth of the financial assets and their structure are in tune with the optimal
characteristics of the real capital stock needed for growth. The optimal composition
of wealth in an economy is achieved by the promotion of such financial assets which
provide incentives to savers and the public to hold a growing part of their wealth in
financial form.2

ECONOMIC GROWTH AND FINANCIAL SYSTEM

There exists a positive correlation between financial system and economic

development. In fact, financial system drives the economic growth in almost all the
countries in the world. Indian economic development includes development of
various sectors, such as, agriculture, industry and services. A bird eye view on the
tracking of economic growth indicates that while the developments in industry and
services take front seats, the development of agriculture takes a back seat. That is,
these three sectors of the economy do not always rise in tandem in India. The slow
growth in agriculture might be caused by vagaries of nature and inadequate flow of
funds from the financial system. It is said that India's economic growth depends on
the growth of Indian financial system. But contrast to this premise, India witnessed a
higher growth between the years 2000 and 2014, when lot of chaos and confusion
takes place in the Indian financial system. The reason cited for this situation is that

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there was a heavy flow of funds in the economy. As a result, the economy was over-
loaded with funds. This led to economists and financial experts to draw conclusion
that Indian economy was too rosy then. Subsequently, the reports of RBI and other
surveys indicate that the abnormal growth witnessed in the country between the
years 2000 and 2014 was not a real growth per cent for the economy, such as, India.
Further, these reports state that such a growth was a short-term phenomena. The
reports also point their finger towards the various flaws in the Indian financial
system between these years. The reports mainly indicate that functioning of banks,
financial institutions and financial markets are responsible for such unreal growth in
the economy between the years 2000 and 2014. After change of seat of power in the
centre in the year 2014, a lot of reforms took place in the Indian financial system.
Some of the financial system reforms were demonetization, regulations relating to
financial markets, Securitization and Reconstruction of Financial Assets and
Enforcement of Securities Interest (SARFESI) Act, reforms relating to fiscal and
monetary management etc., This led the country to have a vibrant financial system
and the country's growth safely rest on this financial system and the growth
progresses rapidly with gradual speed.

FIGURE 1.1
INDIAN FINANCIAL SYSTEM

Source: Dr S. Gurusamy, Financial Services.

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 The objective of the financial system is to achieve faster growth of various
financial assets and liabilities which provide incentives to savers and the public
which motivate them to hold a part of their wealth in financial form. Increasing trend
of rate of savings directly influence growth of the economy and the growth of the
financial assets. Investment in the real sector depends on the functioning of the
financial sector, as the latter collects and channels savings into investment which is
necessary for growth. It would be pertinent to note here that economic growth is a
function of the level of investment, capital – output ratio and the state of technology.
Given the state of technology and capital-output ratio in each activity of productive
process, the level of investment determines the increase in output of goods and
services and income in the economy.

SAVINGS

Savings is refraining from current consumption for a future. Savings are

sometimes independent coming from households as a matter of practice. But bulk of
the savings come for specific objectives, like interest income, future needs,
contingencies, precautionary purpose, or growth in future wealth, leading to rise in
the standard of living etc.,

Investors are savers but all savers cannot be good investors, as investment is
a science and an art. Savings are sometimes autonomous and sometimes induced by
the incentives like fiscal concessions or income or capital appreciation.3

Multi-dimensional roles such as consumer, investor, entrepreneur etc are

played by each and every household. The investment of household is around one-
tenth of GDP and more than half of GDP takes the form of household consumption.
The role of households as entrepreneurs is in the form of self-employed workers or
sole proprietors by investing in buildings, machinery, and equipment associated to
their business. They enjoy positive net-worth as they are naturally net savers and net
lenders at a collective level.

The following chart exhibits savings of the public. The household savings
increased gradually in the given period.

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 FIGURE 1.2
INDIAN HOUSEHOLD SAVINGS

Source: Ministry of Statistics and Programme Implementation ( MOSPI)

INVESTMENT

Investment brings some unexpected reward in the future by sacrificing

certain amount of present value. It is also understood as upsurge in the actual stock
of capital goods. The economy gets number of positive effects with the help of
investment, that is the reason investment is always considered as vital for the
economy. Firstly, an investment creates lot of job opportunities where people of the
country get a chance to work and at the same time these opportunities increase their
income as well as the national income. Secondly, goods are supplied with superior
quality at economical rate which the people can enjoy due to increased global
competitiveness which is a result of increased investment. Lastly, the total
production of the country is increasing with the help of the investment which rises
the economic growth of the country. Investment is one kind of catalysts for growth
in aggregate wealth. Without increasing aggregate saving, cannot increase
investment. Increasing individual saving will not increase aggregate saving unless
they increase investment.4

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Objectives of Investment
Savings are converted into investments with the following objectives:
(a) Income
(b) Appreciation of capital
(c) Safety
(d) Liquidity
(e) Hedge against inflation

The structure of Indian Economy consists of three sectors. The primary

sector consists of Agriculture, Forestry, Fishing, Mining and Quarrying. The
secondary sector comprises Manufacturing, Construction, and Electricity etc. The
tertiary sector encompasses the rest of the economy, viz., Transport,
Communication, Trade, Finance, Real Estate, and other Services.

INVESTMENT INSTITUTIONS

Apart from the banking institutions, the investment institutions play an

important role in the Indian Financial System. They mobilize the savings of the people
and invest them in different types of securities. Thus, they provide varied investment
avenues to the investing public. These institutions are depicted in the following chart:

FIGURE 1.3
CLASSIFICATION OF INVESTMENT INSTITUTIONS

Source: Gupta K. Shashi, (2006), Financial Institutions and Markets

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SAVINGS – INVESTMENT – ECONOMIC DEVELOPMENT

More investment and production helps a country to achieve economic

development. This is possible where there is a facility to bring adequate savings in
the country. These savings are invested in various avenues which then channelized
into productive resources. To extract savings from the hands of public by inducing
them to save by offering attractive interest rates, the role of financial institutions is
huge. The financial institutions use these savings in the forms of investment and
loans to various industries and businesses which are involved in production and
distribution. Ample funds are required by the primary sector, secondary sector and
tertiary sector for their progress. Growth in all these sectors brings a balanced
growth which is the basic requirement for the development of the economy. The
financial system in the country will be geared up by the authorities in such a way
that the available funds will be distributed to all the sectors in such a manner, that
there will be a balanced growth in industries, agriculture and service sectors.

MUTUAL FUND

Mutual fund is considered as the sector which is growing at a faster rate and
plays the most important role in the financial market of the country. Mutual fund is a
special type of financial instrument that pools the funds of investors who seek to
maximize return on investment. Mutual funds play an active role in organizing
savings by issuing units and directing the funds in the capital market into dynamic
investment. The investors share the profits or losses in direct proportion to their
investments. The professional investment managers are managing and helping
thousands of investors to save their funds with proportional ownership of diversified
portfolios. With the emergence of the capital market at the center stage of the Indian
financial system, the financial services industry nationally and internationally is
growing leaps and bounds and contributing significantly to the health of global
economy as well as that of individual investors. The investors do not want to take
risk; but they should take risk and find solutions for the issues caused by risk. A
significant institutional development in the form of a diversified structure of mutual
funds and different investment avenues are available to investors. A mutual fund is
one of the good investment avenues available for the investors. The investors should

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compare the risk and expected yields of various instruments while taking investment
decision. The investors may seek advice from experts and consultants including
agents.5

India's asset management sector offers significant growth potential. Ongoing

improvements to financial inclusion mean that there is a growing consumer base
with access to savings and investment services. The market is now home to a
relatively diverse range of asset management companies and the product range
available is expanding, leading to ongoing growth in terms of the volume of assets
under management. In the longer term, improving consumer awareness will enable
asset managers to tap into a fast growing middle class with greater disposable
income and capacity for investment. Between 44 fund houses in India, there are
more than 1,200 schemes on offer. There are around 400 equity funds, 300 debt
schemes, 426 hybrid schemes, 800 fixed maturity plans and 60 international funds,
sector funds and arbitrage funds. India's ratio of Assets Under Management (AUM)
to GDP is very low in international terms, at around 7%. Lack of financial
awareness in the population means that mutual funds represent only a small portion
of investment. Investment is estimated at around 3.4% of total investment in
financial assets by individual investors. Asset Management Companies (AMCs) in
India are broadly categorized into three types: bank-sponsored mutual funds, mutual
fund institutions and private sector mutual funds. In 2017, there were 44 AMCs in
India, of which 35 are part of the private sector. The public sector entered the market
in 1987 with SBI Mutual Fund, which is the oldest public sector-managed AMC.
The first private sector AMC to enter the mutual fund market was Kothari Pioneer,
which merged with Franklin Templeton. Unit Trust of India (UTI) maintained its
dominance until 2001, when a market rigging scam operated by Ketan Parekh, from
whom UTI bought large amounts of inflated stock, generated scepticism as to
whether UTI could meet obligations to investors. The crisis led to the repeal of the
UTI Act and the UTI was split into two parts: the UTI Mutual Fund and the
Specified Undertaking of UTI (SUUTI). The UTI Mutual Fund, run by UTI Asset
Management Company Limited (UTI AMC), operates like any other mutual fund,
while the SUUTI took over the assets and liabilities that were the target of a
government bailout. Following the reforms, UTI's market dominance dwindled. The

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government has sought to rehabilitate UTI with a focus on newly emerging investor
groups and changes in funds management, and this has gone some way in bolstering
the mutual fund. Besides running domestic mutual fund schemes, UTI AMC is also
a registered portfolio manager under the SEBI (Portfolio Managers) Regulations,
and has tied up with Japan-based Shinsei Bank to run a large India-focused portfolio
for Japanese investors. In spite of opening up to greater private sector involvement,
the industry is dominated by large financial services firms, which also have interests
in banking and insurance businesses. The top 10 AMCs control more than 80% of
AUM in 2017, with the top five controlling over half. Small and medium-sized
mutual funds have failed to challenge the market leaders due to rising costs and
declining revenues. Foreign AMCs have also failed to grow and have not risen above
10% of AUM. Allowing the entry of private players has brought in capital and product
innovation to fuel growth. Securities and Exchange Board of India (SEBI) has
introduced reforms that have increased mutual fund penetration and moved towards
international norms. Current trends are towards increased retail investment and growth
in equity mutual funds, and away from debt. In March 2018, equity represented 35.1%
of mutual fund AUM, a rise of around 4% over a year, while balanced funds rose by
more than 3% to 8.1% of total AUM. Growth in these areas was stimulated by
expansion of capital markets and were at the expense of debt (down nearly 6% to
36.9%) and money markets (down over 2% to 15.7%). According to the latest figures
from Mutual Fund India, Kotak Standard Multicap Fund has emerged as the largest
mutual fund, followed by two HDFC funds, Aditya Birla Sun Life Frontline Equity
Fund, SBI Bluechip fund and ICICI Prudential Bluechip Fund. There are eight fund
managers currently managing pension assets. One is sponsored by a bank (State Bank of
India), three by mutual fund houses (UTI Asset Management, Kotak Mahindra Asset
Management and Reliance Capital Asset Management) and four by insurance
companies (Life Insurance Corporation of India, HDFC Standard Life Insurance, ICICI
Prudential Life Insurance and Birla Sun Life Insurance).6

MARKET TRENDS OF MUTUAL FUNDS

The revival in Indian capital markets has fuelled a surge in equity funds since
2015, with retail investors supporting investment. Retail investors have become

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interested in mutual funds as growth in returns from real estate and gold has
declined. However, a barrier to growth is the plethora of mutual fund schemes in the
debt and equity classes, causing confusion. It is likely that the regulator will seek to
consolidate and rationalize the schemes by forcing a decline in the issuance of new
fund offers in order to improve investor understanding and confidence. Another
restraint on growth is the cost of expenses in equity funds, with an average of over
2% of asset-weighted expenses for allocation funds. SEBI has capped the Total
Expense Ratio (TER) at 2.5% for equity schemes and 2.25% for debt schemes, but
looks set to reduce this. The lowering of the TER would boost small investment in
the mutual fund market. Other areas of growth are Alternative Investment Funds
(AIFs) targeted at high net worth individuals, and Exchange-Traded Funds (ETFs).
These are still at a nascent stage on the Indian market, but, if developed, could
stimulate investment in a range of areas, with AIFs targeting real estate, private
equity and hedge funds, and ETFs geared towards equities, gold and debt. Gold
ETFs have declined in line with international gold prices, while lower margins in
ETFs based on equity indices have deterred interest. However, the government is
promoting non-gold ETFs in order to foster a culture of long-term equity
investment, which has bolstered AUM, but it still remains a negligible asset class.
Pension funds have a strong potential for growth due to the low level of coverage,
estimated at around 10% of the population. Nearly 90% of the workforce is in the
informal sector, where pension coverage is less than 5%. Indians are looking for a
steady retirement income that Public Provident Fund and Employees' Provident
Fund schemes do not provide. The government is looking to build retirement funds,
with the expansion of the Atal Pension Scheme targeted at the informal sector.7

THE ROLE OF MUTUAL FUNDS IN SHAPING INDIAN ECONOMY

The successful history of mutual funds in India started a long back, when the
Government of India and the Reserve Bank of India established Unit Trust of India
in the year 1963. Number of public and private sector players came into mutual fund
market in the next two decades, which was then booming. The two most important
turning points, how these mutual funds were more palatable to the public, were the
income from mutual funds were exempted from income tax and also the enactment

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of the SEBI Regulations in 1996. Mutual funds have moved towards the stage of
constant growth and consolidation in the past 15 years. The awareness among the
investors about the positive aspects of investment in mutual funds and also the
mergers of well-known private sector fund houses contribute to the growth of the
mutual funds market in India. The investment decisions of the shareholders were
influenced by lot of trends which took place in the mutual funds market. As the
capital was invested with the policy of diversification, the mutual funds, throughout
this period, play a significant role in bringing the Indian economy to a shape. For
instance, in the early 1990s, UTI was the most popular option for investing in
mutual funds, given its history and stability. The popularity of income/debt-based
schemes were high in the 2000s, as it is due to the tendency of average Indian who
prefer a low-risk investment due to a conventional outlook. The age, occupation,
place of residence, and gender of the investor have also influenced investment
decisions to a large extent.

The constant development of the economy of India is the reflection of stable

growth in the investment of mutual funds. Mutual funds are financial intermediaries
that support to improve four critical aspects of the financial system such as stability,
efficiency, transparency, and inclusion and thus it contributes to financial progress
of the nation. The economic function of mutual funds, thus, is their financial
intermediation. The test of their economic efficiency lies in the extent to which they
are able to mobilize additional savings and channelise them to the growth sector.8

In every economy, there are economic units which have surplus fund to
invest and units which need funds for their day-to-day operations or capital budget.
On the other hand, there are intermediaries which provide indirect finance. They
pool the funds of investors and channelise them to the need sector in their own way.
The more popular among such intermediaries are the banks, financial institutions
and investment companies. The economic function of mutual funds, thus, is their
financial intermediation. The test of their economic efficiency lies in the extent to
which they are able to mobilize additional savings and channelise them to the
growth sector. In an economy like ours, whether untapped savings are overflowing
and investment needs are glaringly pronounced, the necessity for an efficient and

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active financial intermediation through the private entrepreneurs need not be
emphasized.

TABLE 1.1
Ratios of MF AUM as per cent of GDP and Net Mobilization by
MFs as per cent of Gross Domestic Savings

Net Mobilization
MF AUM by MFs as % of
Year
% of GDP Gross Domestic
Savings
2011-12 6.7 -0.7
2012-13 7.1 2.3
2013-14 7.3 1.5
2014-15 8.7 2.6
2015-16 9 3.1
2016-17 11.5 7.5
2017-18 12.7 -
Source: www.rbi.org.in

MF: Mutual Fund, GDP: Gross Domestic Product, AUM: Asset Under
Management

The table 1.1 describes that contribution sectors in nation development

indicators. The trend of household savings in India was increased gradually in the
recent years (in 2018-19 – 39% increase from the year 2015-16) and disposable
income also increased. In India 1.3 billion people, less than 2% invest in mutual
funds; whereas in developed economies like US this figure is much higher.
Compared to developed and developing countries like US, UK and Brazil, the AUM
as a percentage of GDP rests significantly low in India. The share of mutual funds in
the savings of India is only around 6% and AUM perforation stands at half
percentage of GDP or one third of other developed countries like US, Canada & UK
and developing countries like Brazil. It is understood that the mutual industry has to
travel a lengthy way. The contribution to individuals and institutions by the mutual
fund industry is significant. It has brought small ticket investors into the fold of
investing and is also enabling an increased sense of financial security, with its focus

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on long term savings. Numerous benefits have been brought to the larger economy
by the growing mutual fund sector. The share of financial savings in gross
household savings has reached 60% in the financial year 2018 from 52% in the
financial year 2014. The mutual funds are providing alternate source of funds for the
growth of corporate sector. Mutual funds have been a key enabler in deepening
India’s bond market. Further, a larger share of the AUM of individuals and domestic
institutions has provided sustainability to the capital markets by reducing the bearing
of volatility in foreign flows.9

SIGNIFICANCE OF MUTUAL FUNDS

Mutual funds are pooling the savings of the people who have more income
than expense and this surplus amount is taken to those avenues where there is a
demand; that is why mutual funds are considered as financial intermediaries. The
fund managers of these mutual funds provide collective benefits of low risk, stable
return, high liquidity and capital appreciation to their investors by employing their
resources efficiently through diversification and expert management.

Savers of moderate in the underdeveloped regions are generally reluctant to

invest in corporate securities because of their lack of adequate knowledge about
complicated investment affairs. Moreover, their resources being small, they can at
best hold securities of one or two or just a few industrial concerns only and as such
the fate of their savings and prospects of earnings therefrom are tied to the fate of
such unit or units. Investment in securities of mutual funds takes care of both these
problems, for such investment, in effect, represents a part of the funds' entire
portfolio diversified in terms of securities, units, industries and geographic regions.
These institutions employ expert investment analysts and thus professional
knowledge and expertise go into the selection and supervision of their investment
portfolio. Diversification and expert investment knowledge ensure steady and
regular earnings to the funds and a share in the general prosperity. Accordingly,
investors in the shares of mutual funds are assured of low risk, steady return,
liquidity and capital appreciation. By taking upon themselves the problem which
confront the small savers in investing their savings and dealing with them
affectively, mutual funds help mobilize savings of the people and promote thrift.10

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 Savings pooled by mutual funds are invested largely in industrial securities.
They usually finance long-term business requirements largely by way of direct
subscription to share capital of industrial enterprises. Mutual funds, while
themselves raising resources from a large number of small savers, make funds
available to industrial concerns in relatively bigger lots and thus reduce their burden
and botheration involved in raising finance directly from individual savers.

Thus, by playing the role of financial intermediation, mutual funds provide a

convenient and effective link between saving and investment. Well managed mutual
funds would be mutually beneficial arrangement. While, on the one hand, they help
the investing community by offering a share of corporate growth, on the other, they
have a salutary impact on the stock markets. By blending caution with aggression
and analysis with intuition, the funds can successfully convert market opportunities
into lucrative returns for the investors.

SECTOR FUNDS - INFRASTRUCTURE FUNDS

The infrastructure facility in the country plays a vital role in the economic
development of that country. The development of many industries has been troubled
if key industries such as coal, power and oil are absent in the nation. The role of
financial sector for the growth of infrastructure industries by providing huge funds is
a remarkable one. Earlier, it was difficult for the private sector to raise huge funds
for establishing infrastructure industries; therefore, most of the industries in this
sector were started by the Government of India for a long time. Whereas now, the
liberalization of economic policy permits private sector to come forward to start
such type of industries. These industries could raise their capital with the help of the
Development Banks and the Merchant Banks. Infrastructure funds are those sector
funds which invest in companies that are either directly or indirectly involved in the
infrastructure development in India. Companies that are involved in the industry like
energy, power, metals, estate, etc., are a part of infrastructure segment.11

Infrastructure funds are sectorial funds and thus are riskier than other types
of mutual funds. With sectorial funds, a lot more research is required before
investing. If investors have a good understanding of this sector, can invest in
infrastructure funds. Carefully chosen infrastructure funds perform very well over a

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long period of time. There are four public sector companies and 14 private sector
companies have been traded equity based infrastructure mutual fund schemes in
India.

STATEMENT OF THE PROBLEM

The economic performance is reflected in the growth of income or Gross

Domestic Product and growth refers to a rise in output and income. The rate of
growth of income and the distribution of income are the factors which influence the
savings and investment process. As the economy develops, production of goods and
services would increase, leading to a rise in the consumption and the standard of
living of the people. But the development is a wider term, which includes both
growth and qualitative improvement in the standard of living of the people and a
better distribution of income.

Investment is the main source of employment creation and revenue generation.

Investment helps to stabilize optimum capital structure in the business. The ultimate
advantage of investment is to increase the national income of the country.

Mutual fund is the main source to make an investment. Because, it is the

powerful instrument to collect savings of ordinary investors in the form of
investment. The following formula translates the importance of mutual funds:

Savings – Investment – Production – Consumption - Capital appreciation -

Revenue generation - Standard of living - Savings.

Financial markets channelize the savings of the people to the investment. To

mobilize the savings and convert into investments, the efficient financial instrument
is needed. Among the various alternative investment schemes, a mutual fund plays a
significant role in mobilizing savings of retail investors. The Asset Under
Management of Mutual fund Industry stood at Rs. 22,262.03 Billion as on 31st
March 2020.12

Evaluating the performance of infrastructure sector mutual fund schemes in

India is to see whether the infrastructure sector mutual fund schemes are

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outperforming or underperforming than the benchmark and to recommend
investment in those funds based on the competency of each scheme.

The study investigates the performance of open-ended growth oriented

infrastructure schemes. The success of any scheme depends upon the effective
management and its soundness. Evaluating the historical performance of mutual
funds is important for investors, portfolio managers, government and regulatory
bodies. It assists an investor to make a calculation concerned with the level of risk
the portfolio manager faced to generate the return which they earned on such
investment. The thorough understanding about the operations, management,
regulations, growth and performance, relations with capital market and risk and
return involved of the mutual funds have not yet reached the part of the society. This
study is expected to fill this gap. Hence, the researcher in this study has made an
attempt to provide guidance to the investors by analyzing the risk and return level of
open-ended growth oriented infrastructure schemes.

SIGNIFICANCE OF THE STUDY

People always look at making loads of money. One way to make money is
through investments. Generally, investors have set objective during the time of
making their investment decision. Each investor wants to have added on to funds
with safe and secure investment at very low risk. In the present scenario a number of
investment options are available in the market. People have different perception
towards their investment, some want short term gains; some are interested to have a
source of fixed income; some want to invest to make savings in their tax payment
and some are interested in long term gains. Like investment in the form of real
estate, regular or fixed deposits, shares, bonds, securities etc., the mutual fund
investment is also popular. Here, investors invest in the capital market with the help
of professionals who are managing the fund houses. It is slightly different as
compared to the share market. Due to the nature of diversification, investment in
mutual fund is considered as less risky in comparison with the stock market
investment.

Mutual funds are raising resources from a large number of small savers,
make funds available to industrial concerns in relatively bigger lots and thus reduce

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their burden and botheration involved in raising finance directly from individual
savers. Mutual Funds provide a convenient and effective link between savings and
investment. An investor community should have the knowledge related to risk and
return relationship of their investments. This study helps to analyze the risk and
return of the funds and give guidance to investors for effective portfolio
construction. Therefore, there is a need to assess the volatility of infrastructure funds
to know which fund is the most profitable investment avenue.

SCOPE OF THE STUDY

The growth of Mutual Funds Sector is remarkable in the present scenario. In

the earlier days, the choices were few as the number of mutual funds were limited.
But its scope has grown enormously in the next few years and today the scope has
become so wide and there are number of Asset Management Companies which offer
various types and sectors of mutual fund schemes. The infrastructure sector mutual
fund scheme is considered very important as it provides funds for the development
of the economy. The researcher has undertaken eighteen Infrastructure Sector
mutual fund schemes launched by different Public Sector, Private Sector, Financial
Institutions including banks and Unit Trust of India. NAV is taken as a base for
compiling the monthly returns. Then these schemes are compared with NIFTY 50
Index to evaluate the performance of these schemes. A sincere attempt has been
made to draw a conclusion which reflects the clear picture of the performance of
infrastructure sector fund in the current scenario.

Mutual fund Industry has offered various schemes to cover all categories of
investors. The main aim of the investor is to get more returns from their investments.
The investors prefer the schemes which maintain good market share. To maintain
the market share, the funds need to show good performance. This study identifies the
volatility of funds which have impact on returns and also evaluate the performance
of the Mutual Fund Schemes which will help the investors in the portfolio
construction.

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OBJECTIVES OF THE STUDY

This study focuses on the following objectives:

1. To find out the return of infrastructure sector mutual funds and compare its
performance with benchmark return.

2. To identify the volatility of mutual funds and compare with the benchmark
funds for the study period.

3. To make comparison between Private and Public Sector Infrastructure

Mutual Fund Schemes.

4. To give feasible suggestions in the torch of findings for improving

performance of mutual funds.

HYPOTHESES OF THE STUDY

The specific hypotheses which are tested in the study are:

1. H0: There is no positive trend in the returns of Infrastructure Sector Mutual
Fund-Regular Plan during the period.

H1: There is a positive trend in the returns of Infrastructure Sector Mutual

Fund-Regular Plan during the period.

2. H0: There is no significant difference among the mean ranks concerning the
returns of various infrastructure mutual fund schemes during the period.

H1: There is a significant difference among the mean ranks concerning the
returns of various infrastructure mutual fund schemes during the period.

3. H0: Funds Sharpe Ratio – Benchmark Sharpe Ratio = 0

H1: Funds Sharpe Ratio – Benchmark Sharpe Ratio ≠ 0

4. H0: Funds Treynor Ratio – Benchmark Treynor Ratio = 0

H1: Funds Treynor Ratio – Benchmark Treynor Ratio ≠ 0

5. H0: Funds Jensen alpha value = 0.

H1: Funds Jensen alpha value ≠ 0.

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 6. H0: There is no significant difference among the factors of return and risk
i.e., Sharpe, Treynor, and Jensen Alpha of infrastructure mutual fund
schemes.

H1: There is a significant difference among the factors of return and risk i.e.,
Sharpe, Treynor, and Jensen Alpha infrastructure mutual fund schemes.

PERIOD OF STUDY

The open-ended Infrastructure Sector Mutual Fund Schemes for the period of
10 years from 2011 to 2020 have been taken for the purpose of study. The daily Net
Asset Value of 18 growth oriented open-ended Infrastructure Sector Mutual Fund
Schemes have been collected from AMFI reports.

RESEARCH METHODOLOGY

Methodology is an attempt to validate the rationale behind the selection of

research design and provide justification of why it is appropriate in solving the
selected research problem. The policy measures are based on critical appreciation of
pertinent literature and analysis of research findings.

The economic development of any country depends on the efficient and

effective management of infrastructure development in the country. There are
number of schemes offered by the Mutual Fund companies for the development of
infrastructure in the name of Infrastructure Sector Mutual Fund Schemes. These
infrastructure funds provide the opportunity to invest in essential public assets. In
order to evaluate the performance of growth oriented Infrastructure Sector Mutual
Fund Schemes, this study was undertaken and a systematic and organized
methodology was used for the research study.

RESEARCH DESIGN

Research is the conceptual structure within which research is conducted. It

constitutes the blue print for the collection, measure and analysis of data. It is a
detailed outline of how an investigation is taken place. A research design normally
includes how data is to be collected, what instruments are to be employed and how
the instruments are to be used for analyzing the data collected. Research design is

19
the framework that has been created to seek answer to research question. The
present study is to evaluate the performance of Infrastructure Sector mutual funds in
India. Thus, the present study is descriptive in nature.

SOURCES OF DATA

The study is a nature of fact – finding, based mainly on secondary data and it
is an extension work of pertinent literature compiled from the published and
documented sources. All the growth oriented Infrastructure Mutual Fund Schemes
were considered for the study. Post office savings deposit schemes (Interest rate)
return has been taken as the proxy for the risk free asset. NIFTY 50 returns have
been used as the market benchmark. The secondary data have been collected from
various sources such as official publications of SEBI, AMFI, Reserve Bank of India
(RBI) and National Stock Exchange (NSE), newspapers such as The Economic
Times, The Financial Express, The Business Line and research papers and articles
from various Journals and Periodicals such as Mutual Fund Insight, Dalal Street etc.
for the purpose of analysis and for building strong conceptual background including
Review of Literature for the study.

FRAMEWORK OF ANALYSIS

The data collected on the performance of growth oriented schemes of

Infrastructure Sector Mutual Fund Schemes were analyzed by using appropriate
statistical tools such as Return, Standard Deviation, Sharpe ratio, Beta, Treynor
ratio, Jensen’s Alpha, Sortino ratio and Fama’s Measures etc. The tools are briefly
described in the following paragraphs:

RATE OF RETURN METHOD

The monthly returns for the appropriate time period are taken and the
average is calculated to find out the mean returns. Net Asset Value return is the
change in the net asset value of mutual fund over a given time period.

Current value of units – Previous value of units

NAV Return = --------------------------------------------------------------x 100
Previous value of units

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STANDARD DEVIATION

Standard deviation is a measure of risk and it quantifies the amount of

dispersion or variation from the expected return or mean. A lower standard deviation
means lower risk and higher standard deviation means higher risk. It depends upon
both the systematic risk and unsystematic risk. Systematic risk is a market risk and
unsystematic risk is a company specific risk. Standard deviation is calculated with
the following formula:

SHARPE RATIO

The Nobel laureate William F developed Sharpe ratio in the year 1966. Sharpe
is to measure risk adjusted performance. It is a measure of funds return per unit of risk
assumed. Sharpe ratio is calculated by deducting the risk free rate of return from the
average weekly return for a portfolio and dividing the result by the standard deviation
of the portfolio returns. Higher ratio indicates the better funds historical risk-adjusted
performance. The Sharpe ratio tells whether the portfolio’s returns are due to smart
investment decisions or a result of excess risk. This measurement is very useful
because although one portfolio can reap higher returns than its peers, it is treated as a
good investment if those higher returns do not come with too much additional risk. If
fund’s Sharpe ratio is greater than the benchmark, the fund’s performance is superior
over the market. If it is less than the benchmark, the fund’s performance is not good in
the market. Sharpe ratio is calculated with the following equation:

Sp = (ARp – ARf) / σp
Where,
ARp = Average Fund Return
ARf = Average risk-free return
σp = Standard deviation of fund returns

BETA

The systematic risk of a portfolio is measured by Beta. It determines the

volatility of a fund in comparison to that of its index or benchmark. Where the beta

21
value of fund is very close to 1, it indicates that the fund’s performance closely
matches the market index. The volatility of the fund is less if beta value is less than
1 than the market index. For example, if stock’s beta is 1.3, it is theoretically 30%
more volatile than the market. The inverse relationship between the fund and the
market index can be traced if beta is negative.

Beta is computed by applying the following formula:

Beta = Covariance (Stock, Index) / Variance (Index)

Where, Covariance (Stock, Index) refers to covariance between scheme and

market returns.

TREYNOR RATIO

Jack Treynor, who was an American economist, developed Treynor ratio to

measure the excess return per unit of systematic risk. Both Treynor ratio and Sharpe
ratio are similar, except that Beta value is used in Treynor ratio to measure the
volatility of the fund. The scheme which has higher Treynor ratio offers a better
reward to the investor which is more suitable for the investment. It is also known as
the “reward-to-volatility ratio”. This measure is more suitable for diversified funds
because the systematic risks have been excluded in those funds. These two measures
of Treynor ratio and Sharpe ratio give identical ranking for an entirely diversified
portfolio which is without any unsystematic risk. Alternatively, a poor diversified
portfolio could have a high ranking based on Treynor ratio and a low ranking based
on Sharpe ratio. The variance in diversification brings difference in rank. Hence,
both ratios provide complementary yet different information. Treynor ratio is
calculated for various funds as follows:

Tp = ARp – ARf /ßp

Where,
ARp = Average fund return
ARf = Average risk free return
ßp = Beta of the fund

22
JENSEN’S ALPHA

Jensen’s Alpha is a measure of differential return earned by the fund. It helps

in evaluating the ability of the fund manager in identifying the undervalued
securities and thereby generating excess returns than the benchmark. Hence, the
ability of stock selection can be known with the help of Jensen’s Alpha. This
measure is suitable especially for diversified funds where the non-systematic risk
would be equal to zero. The value of alpha indicates differential return of the
portfolio between the equilibrium return and actual return. Equilibrium return is the
return that the benchmark portfolio is expected to earn within the given level of
systematic risk. The skill of the fund manager in the selection of the securities can
be judged by the additional return earned which is more than the equilibrium return.
The superior performance can be identified with the help of positive value of alpha,
it means the average return of the portfolio is better than the benchmark return. In
contrast, poor performance can be identified with the help of negative value of
alpha, it means the average return of the portfolio is less than the benchmark return.
In simple words, the fund has performed well than the benchmark index with the
positive alpha value of 1.0 by 1 percent and the fund has not performed well with the
negative value of 1 percent.13

Formula for calculating Alpha is as follows:

αp = (ARp - ARf ) - ßp (ARm – ARf )

Where,
αp = the Jensen measure (alpha)
ARp = average portfolio return
ARf = average risk free return
ßp = portfolio beta
ARm = average market return

SORTINO RATIO

Sortino ratio is considered as the modification of Sharpe ratio, which was

termed after Frank A. Sortino. It measures the excess return earned by the fund for
each unit of downside risk. The difference between portfolio return and risk-free rate

23
of return is taken and it is divided by the standard deviation of negative returns.
Always it is better to have higher Sortino ratio. This ratio considers the return to bad
volatility. This ratio helps investors to determine the level of risk that is associated
with the excess returns to total volatility. Generally, a Sortino ratio of greater than 2
is considered good for investment.

Sortino Ratio = Rp – Rf / σd

Whereas,
Rp - actual or expected portfolio return
Rf - risk-free rate
σd - standard deviation of negative asset returns (downside deviation)14

FAMA-FRENCH THREE-FACTOR MODEL

University of Chicago professors Eugene Fama and Kenneth French

developed a model in the name of Fama-French Three-factor Model, which is an
addition to the existing Capital Asset Pricing Model (CAPM). The Fama-French
model aims to describe stock returns through three factors: market risk, the
outperformance of small-cap companies relative to large-cap companies and the
outperformance of high book-to-market value companies versus low book-to-market
value companies. The logic behind the application of this model is that the high and
small-cap companies commonly perform well than the market.15 This model used to
find the excess return to measure the performance of funds. The formula,

RPt – RFt = Rf + β (RMt – RFt) + s SMBt + h HMLt + et

Whereas,

RPt – RFt = Excess returns on portfolio

Rf = Risk free return
SMBt = Difference between returns on portfolio of Small
stocks firm and returns on portfolio of Big stocks firm

HMLt = Difference between returns on a portfolio of high-

book-to-market stocks and returns on a portfolio of
low-book-to-market stocks

24
 s and h = Factor sensitivity coefficients for SMB and HML
respectively

et = Error term for period t

TREND ANALYSIS

Trend analysis is a technique which is used in technical analysis to predict

the future stock price movements based on recently observed trend data. Trend
analysis is based on the idea that what has happened in the past gives investors and
fund managers an idea of what will happen in the future.

ANALYSIS OF VARIANCE

Analysis of variance or ANOVA, is a statistical method that separates

observed variance data into different components to use for additional tests. An one-
way ANOVA is used for three or more groups of data, to gain information about the
relationship between the dependent and independent variables.

POST HOC TEST

Duncan's multiple range tests, or Duncan's test, or Duncan's new multiple

range test, provides significance levels for the difference between any pair of means,
regardless of whether a significant F resulted from an initial analysis of variance.

CURVE FITTING

In regression analysis, curve fitting is the process of specifying the model that
provides the best fit to the specific curves in the dataset. Curved relationships
between variables are not as straightforward to fit and interpret as linear
relationships. Sometimes data have curved relationships between variables.

LIMITATIONS OF THE STUDY

The present study was undertaken with the main objective of finding out the
performance of growth oriented schemes of Infrastructure Sector Mutual Fund
Schemes. The researcher has found that there are some limitations in the present
study. They are:

25
 The research is mostly based on secondary data, the negative aspects of pure
secondary data usage is acceptable. The study covers the NAV of growth oriented
mutual fund schemes only to evaluate the performance of Infrastructure Sector
mutual funds. Other schemes are not considered.

To evaluate the performance of mutual funds, NIFTY 50 benchmark is only

used because it is considered as an authentic and reliable. So, other benchmarks
were ignored. Dividend and expenses related to schemes such as brokerage, entry
load were not considered. Findings and suggestions of the study were applicable
only to Infrastructure Sector Growth Oriented mutual fund schemes and these may
not be suitable to other type of mutual fund schemes.

CHAPTERIZATION

The research study has been presented in five chapters according to the
relevance of the study.

CHAPTER I

The first chapter comprises the Introduction to Savings, Investments, Mutual

Funds, Statement of the problem, Significance of the study, Scope of the study,
Objectives of the study, Hypotheses of the study, Period of study, Research
methodology, Limitations of the study and Chapterization of the study.

CHAPTER II

The review of existing literature related to Mutual funds and various other
aspects related to Mutual funds are dealt with in the second chapter.

CHAPTER III

The theoretical concept of Mutual funds such as Mutual Funds in India and
Global market, classification of investors, organization structure of mutual fund,
types of mutual funds, net resource mobilization of mutual funds, Asset Under
Management and Infrastructure fund evolution are described in the third chapter.

CHAPTER IV

The profile of the Infrastructure Sector Mutual Fund schemes are clearly
explained and the risk and return of the select schemes are compared with the

26
benchmark index and performance evaluation of the public and private sector
infrastructure mutual fund schemes were compared and the results are given in the
fourth chapter.

CHAPTER V

The fifth chapter summarizes the findings of the study and offers suggestions
for the improvement of performance of Mutual funds. It also presents the conclusion
of the research work and scope for further research.

27
END NOTES
1. “India ranks 130 in UN's Human Development Index”, The Economic
Times, dated 14th September 2018.
2. Aggarwal Nisha (2006), “Financial Institutions and Markets”, Kalyani
Publishers, New Delhi.
3. Sadak, H., (1996), “Mutual Funds in India”, Sage Publications, New
Delhi.
4. https://economicsgceopastanswers.blogspot.com.
5. Avadhani V.A., (2005), “Investment and Securities Markets in India”,
Himalaya Publishing House, Mumbai.
6. www.amfiindia.com
7. Indian Banking and Financial Services Report (2019 - 4th Quarter).
8. www.amfiindia.com
9. Baboo Ram (1996), “Growth and Development of Mutual Funds in
India”, PhD Thesis, Himachal Pradesh University, Shimla.
10. Gupta, Amitabh (2001), “Mutual Funds in India: A Study of Investment
Management”, Finance India, Volume XV (2), June, pp. 631-637.
11. https://www.fincash.com
12. RBI Bulletin for the year 2018-19.
13. Rupeet Kaur, “A Comparative Analysis of Growth and Dividend Tax
oriented Mutual Fund Schemes in India”, Asia Pacific Journal of
Marketing and Management Review, Vol.1 (4), 2012, pp.26-40.
14. https://www.wallstreetmojo.com
15. Jain, Sakshi, “An Empirical Testing of Contrarian and Momentum
Investment Strategies for Bricks Markets”, PhD Thesis, University of
Delhi, Delhi, 2012.

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