LITERATURE REVIEW

Literature on mutual fund performance evaluation is enormous. A few research studies that have influenced the preparation of this paper substantially are discussed in this section. Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance. Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has suggested a new predictor of mutual fund performance, one that differs from virtually all those used previously by incorporating the volatility of a fund's return in a simple yet meaningful manner. Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance (Jensens alpha) that estimates how much a managers forecasting ability contributes to funds returns. As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the portfolio over the return of the benchmark index, where the portfolio is leveraged to have the benchmark indexs standard deviation. S.NarayanRao , et. al., evaluated performance of Indian mutual funds in a bear market through relative performance index, risk-return analysis, Treynors ratio, Sharpes ratio, Sharpes measure , Jensens measure, and Famas measure. The study used 269 open-ended schemes (out of total schemes of 433) for computing relative performance index. Then after excluding funds whose returns are less than risk-free returns, 58 schemes are finally used for further analysis. The results of performance measures suggest that most of mutual fund schemes in the sample of 58 were able to satisfy investors expectations by giving excess returns over expected returns based on both premium for systematic risk and total risk. Bijan Roy, et. al., conducted an empirical study on conditional performance of Indian mutual funds. This paper uses a technique called conditional performance evaluation on a sample of eighty-nine Indian mutual fund schemes .This paper measures the performance of various mutual funds with both unconditional and conditional form of CAPM, Treynor- Mazuy model and Henriksson-Merton model. The effect of incorporating lagged information variables into the evaluation of mutual fund managers performance is examined in the Indian context. The results suggest that the use of conditioning lagged information variables improves the performance of mutual fund schemes, causing alphas to shift towards right and reducing the number of negative timing coefficients. Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In this paper, measures of evaluating portfolio performance based on lower partial moment are developed. Risk from the lower partial moment is measured by taking into account only those states in which return is below a pre-specified target rate like risk-free rate. KshamaFernandes(2003) evaluated index fund implementation in India. In this paper, tracking error of index funds in India is measured .The consistency and level of tracking errors obtained by some well-run index fund suggests that it is possible to attain low levels of tracking error under Indian conditions. At the same time, there do seem to be periods where certain index funds appear to depart from the discipline of indexation. K. Pendaraki et al. studied construction of mutual fund portfolios, developed a multi- criteria methodology and applied it to the Greek market of equity mutual funds. The methodology is based on the combination of discrete and continuous multi-criteria decision aid methods for mutual fund selection and composition. UTADIS multi-criteria decision aid method is employed in order to develop mutual funds performance models. Goal programming model is employed to determine proportion of selected mutual funds in the final portfolios. ZakriY.Bello (2005) matched a sample of socially responsible stock mutual funds matched to randomly selected conventional funds of similar net assets to investigate differences in characteristics of assets held, degree of portfolio diversification and variable effects of diversification on investment performance. The study found that socially responsible funds do not differ significantly from conventional funds in terms of any of these attributes. Moreover, the effect of diversification on investment performance is not different between the two groups. Both groups underperformed the

Domini 400 Social Index and S & P 500 during the study period.

Barua, Raghunathan and Varma (1991)[2]evaluated the performance of Master Share during the period 1987 to 1991 using Sharpe, Jensen and Treynor measures and concluded that the fund performed better that the market, but not sowell as compared to the Capital Market Line.

Sethu (1999)[5] conducted a study examining 18 open-ended growth schemesduring 1985-1999 and found that majority of the funds showed negative returns andno fund exhibited any ability to time the market.

Arnold L. Redman, N.S. Gullett and Herman Manakyan (2000) examinesthe risk-adjusted returns using Sharpes Index, Treynors Index, and Jensens Alpha for five portfolios of international mutual funds and for three time periods: 1985through 1994, 1985-1989, and 1990-1994. The benchmarks for comparison were theU. S. market proxied by the Vanguard Index 500 mutual fund and a portfolio of fundsthat invest solely in U. S. stocks. The results show that for 1985 through 1994 theportfolios of international mutual funds outperformed the U. S. market and theportfolio of U. S. mutual funds under Sharpe s and Treynor s indices. During 1985-1989, the international fund portfolio outperformed both the U. S. market and thedomestic fund portfolio, while the portfolio of Pacific Rim funds outperformed bothbenchmark portfolios. Returns declined below the stock market and domestic mutualfunds during 1990-1994. Srisuchart (2001)[6 ]measures Thai mutual fund performance regarding toselectivity and market timing ability. He applied several models which were Jensenmodel (1968), Treynor and Muzay (1966), Henriksson and Merton model (1981), Konand Jen model (1979), and Kon model14 (1983) to 144 funds from Jan 1990 to May2000. He discovered that for market timing ability, equity funds showed better performance than fixed income funds but for selectivity ability, fixed income fundsshowed better performance than equity funds. For overall abilities, fixed incomefunds still showed better performance from fixed return. The reason is that the period of study includes recession period where the fixed return is a good investmentstrategy while market returns are highly volatile and continuously declining.

Muthappan, P. K., Damondharan, E. The objective of this paper is toevaluate the performance of Indian Mutual Fund schemes in the framework of risk and return during the period April 1, 1995 to March 31, 2000. Performance measuresused are Sharpe ratio, Treynor ratio, Jensen measure, Sharpe differential returnmeasure and ModiglianiMillertheorem 's components of performance. The resultsindicate that the risk and return of mutual fund schemes are not in conformity withtheir stated investment objectives. Further sample schemes are not found to beadequately diversified. The funds are able to earn higher returns due to selectivity,however the proper balance between selectivity and diversification is not maintained.The analysis made by the application of ModiglianiMiller theorem 's measureindicates that the returns out of diversification are very less. Based on the empiricalinvestigation, it is observed that the Indian Mutual Funds are not properly diversified. Muthappan, P. K., Damondharan, E. (2006)[4

]The objective of this paper is toevaluate the performance of Indian Mutual Fund schemes in the framework of risk and return during the period April 1, 1995 to March 31, 2000. Performance measuresused are Sharpe ratio, Treynor ratio, Jensen measure, Sharpe differential returnmeasure and ModiglianiMillertheorem 's components of performance. The resultsindicate that the risk and return of mutual fund schemes are not in conformity withtheir stated investment objectives. Further sample schemes are not found to beadequately diversified. The funds are able to earn higher returns due to selectivity,however the proper balance between selectivity and diversification is not maintained.The analysis made by the application of ModiglianiMiller theorem 's measureindicates that the returns out of diversification are very less. Based on the empiricalinvestigation, it is observed that the Indian Mutual Funds are not properly diversified.

Bessler, Wolfgang, Zimmermann, Heinz (2009)[3 ]investigate the conditionalperformance of a sample of German equity mutual funds over the period from 1994 to2003 using both the beta-pricing approach and the stochastic discount factor (SDF)framework. On average, mutual funds cannot generate excess returns relative to their benchmark that are large enough to cover their total expenses. Compared tounconditional alphas, fund performance sharply deteriorates when we measureconditional alphas. Given that stock returns are to some extent predictable based onpublicly available information, conditional performance evaluation raises the benchmark for active fund managers because it gives them no credit for exploitingreadily available information. Underperformance is more pronounced in the SDFframework than in betapricing models. The fund performance measures derived fromalternative model specifications differ depending on the number of primitive assetstaken to calibrate the SDF as well as the number of instrument variables used to scaleassets and/or factors.