Performance on net selectivity

After accounting for diversification, the residual performance on selectivity is attributed to net selectivity and it will be equal to (or less than) that on selectivity. A positive net selectivity indicates superior performance. It means that portfolio manager did a good job. However, in case net selectivity is negative, than it means that fund manager have taken diversifiable risk, that has not been compensated by the extra return.

It can be observed from the table 4.24 that in case of four schemes the selectivity measure is positive. Thus these four funds reflect the superior stock selection ability on the part of their fund managers. This is true also for net selectivity measures where four funds have positive value which means that these funds have performed on count of the stock selection ability of the fund managers. Hence it can be concluded that 80 percent of

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the fund managers were able to generate extra return on count of their diversifiable risks undertaken.

Table -4.24

Performance on net selectivity

S.No. Fund

return Risk

free Risk

premium Diversification Net

selectivity Selectivity 1 0.015146 0.001551 0.022379 -0.01127 0.002489 -0.00878

2 0.027109 0.001551 0.015793 0.000127 0.009638 0.009765

3 0.028283 0.001551 0.003401 0.025848 -0.00252 0.023328

4 0.027389 0.001551 0.015013 0.001396 0.009429 0.010825

5 0.027908 0.001551 0.015942 0.000121 0.010294 0.010415

Note: The serial Number represents the names of the funds which are in the same order as given in table- 4.18. Compiled on the basis of table 4.19

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3 Jensen Differential Measure 4(80%)

4 Sharpe differential measures 4(80%)

5 Fama's Components of Investment

Performance

a Performance on risk 5 (100%)

b Performance on diversification 4(80%)

c Performance on net selectivity 4(80%)

Source: Compiled on the basis of table : 4.19, 4.20, 4.21, 4.22, 4.23& 4.24.

4.8.10 Inference

The present study is aimed at testing the investment performance of HDFC mutual funds during eight year period from 31, October 2000 to March 31, 2008, using monthly returns, based on NAVs for five funds. The summary of results reported in table 4.25 indicates that fund manager have been successful in outperforming the relevant benchmark during the study period. A snapshot of the results is given in table 4.25. The funds

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earned an average return of 2.51 percent per month against the average market return of 1.8 percent. The average risk free rate was 0.155 percent per month indicating that the sample funds have earned more than both the market and the risk free rate. Therefore the alternate hypothesis second, the investment performance of HDFC mutual fund is superior to the relevant benchmark portfolio is accepted. The sample funds are too not adequately diversified with diversification of about 69 percent. Due to inadequate diversification a substantial part of the variation in fund return is not explained by the market. The funds are also exposed to large diversifiable risk. Thus on the basis of empirical results the third null hypothesis, the schemes of HDFC mutual fund are not well diversified is accepted, as the average diversification is only 69percent.

In terms of Sharpe ratio four funds outperformed the relevant benchmark, while only four funds outperformed the relevant benchmark in case of Treynor ratio. In terms of Jensen differential measures, four funds reflected superior performance. For Sharpe differential measures four of the fund showed superior performance. In terms of Fama‟s component of investment performance all the funds have positive value thereby indicating that all the funds gained on account of risk taken by the fund manager. Four out of five funds showed positive value for diversification indicating gain due to diversification. In term of performance on selectivity four funds showed positive value as it can be observed form the table thereby indicating superior stock selection of the fund managers. When seen in conjunction with Jensen measure it appears that the 4/5^th of fund manger of HDFC mutual fund schemes appear to posses stock selection skills. Thus on the basis of summary table no. 4.25,

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panel B it can be concluded that there is a relationship between the HDFC mutual funds schemes investment objectives and their risk characteristics.

Thus the fourth alternate hypothesis is accepted.

Conclusion

HDFC mutual fund is one of the most successful private sector asset management companies of India. It has made enormous progress since its establishment. It is at present second largest fund house in terms of asset under management .The researcher has carried out an exhaustive study to find out the impact of liberalization on net resource mobilization. On the basis of the empirical work, the first alternate hypothesis that there is significant impact of policy reforms on net resource mobilized by the mutual funds since 1993-94 is accepted. Similarly the second alternative hypothesis , the investment performance of HDFC mutual funds scheme is superior to the relevant bench mark portfolio is accepted as the average monthly fund return is 2.5 percent, is significantly higher than the monthly average market return of 1.8 percent. The third null hypothesis of the study is accepted on the ground that the average diversification of the fund is 69 percent. Finally the fourth alternate hypothesis that there is a relationship between HDFC mutual fund schemes investment objectives and their risk characteristic is accepted on the basis of summary table no 4.25 result. The next chapter is related to the findings, suggestions and scope for further research.

175 References

1. Annual Reports of HDFC Mutual Fund 2. Ibid

3. Statement of Additional Information.(2009,June). HDFC Mutual Fund, 4.