Evaluating Large-Cap and Mid-Cap

Mutual Funds in India

By
Naman Jolly – 23103012
Harshit Garg – 23103030
Kanishk Raghav – 23103029
Akshat Gupta – 23103041
Shweta Kumari – 23103025
CSE (G1)

Essentials of Finance (MHN3003) – Project

Dr. Anju Singla

14 Oct, 2024
 Abstract

This report analyzes the performance of large-cap and mid-cap mutual funds in India, focusing
on risk-reward dynamics through the Treynor ratio, Jensen's alpha and Sharpe ratio. Large-cap
funds offer stability and consistent returns for conservative investors, while mid-cap funds are
more volatile but potentially rewarding for risk-takers. The literature reveals mixed performances
in the Indian mutual fund sector, highlighting market inefficiencies and management limitations,
thus advocating for comprehensive evaluation methodologies.

The study identifies research gaps, particularly in long-term fund performance over market
cycles, and emphasizes the need for improved investor education and industry transparency to
enhance decision-making. It underscores diversified investment strategies and aggregate
performance assessment, guiding investors, fund managers, and policymakers towards
sustainable growth in the Indian capital market. The report aims to raise awareness of risk-
adjusted returns and promote informed investment approaches in the complex mutual fund
landscape.
 Introduction

Mutual funds have become a popular investment choice for both individual and institutional
investors seeking diversification and superior returns. These funds pool resources from various
investors and allocate them across a wide range of assets. Large-cap and mid-cap funds, in
particular, have attracted significant attention due to their distinct characteristics and
performance dynamics. This report examines the performance of these funds in India, utilizing
insights from academic studies.

Performance evaluation in mutual funds is crucial due to market volatility and unpredictability.
Understanding the risk-return relationship is essential for investors, and previous research
highlights the importance of performance persistence. Studies by Barua and Verma, and Friend
et al. emphasize assessing mutual fund performance using metrics like the Treynor ratio, Jensen's
alpha and Sharpe ratio, which provide a framework for evaluating returns that are risk-adjusted
and making informed decisions based on historical data.

In recent decades, the mutual fund industry in India has undergone remarkable expansion and
transformation, largely fueled by regulatory improvements and a rise in investor awareness. The
formation of the Securities and Exchange Board of India (SEBI) has created a more transparent
and efficient framework for mutual fund activities. As a result, there has been a surge in the
number of mutual fund schemes, each tailored to cater to the varied preferences and needs of
investors. However, the wide range of available options demands thorough performance analysis
to assist investors in choosing funds that match their financial objectives and risk tolerance.
 Review of Literature

Research Paper 1: Analysis of Liquidity- Study on Indian Mid-Cap Stocks

Gaurav Kumar & Arun Kumar Misra

The research paper "Analysis of Liquidity- Study on Indian Mid-Cap Stocks" by Gaurav Kumar
and Arun Kumar Misra examines the liquidity dynamics of mid-cap stocks on India's National
Stock Exchange (NSE). Liquidity, a key aspect of market efficiency, is central to the study,
offering insights for investors and researchers in emerging markets like India. The study reveals
significant liquidity variations across sectors, with the Pharma & Chemicals sector showing the
highest liquidity and Consumer Goods the lowest. Using both high-frequency intraday and low-
frequency day-end data, the study identifies an L-shaped intraday liquidity pattern, where
liquidity decreases as the trading day progresses, a trend consistent with global markets.

The research identifies four critical factors influencing liquidity in Indian mid-cap stocks: Price-
Earnings (PE) Ratio, Price-Book (PB) Ratio, Dividend Yield, and the Index of Industrial
Production (IIP). The study's fixed-effects regression analysis shows that the P-B ratio and IIP
positively impact liquidity, while the P-E ratio and Dividend Yield negatively affect it.

Fig: Liquidity pattern as per spread (obtained from research paper)

The study introduces the concept of liquidity beta, measuring stock returns' sensitivity to
liquidity changes. It finds liquidity beta stable across sectors but with time-varying volatility.
Granger non-causality tests reveal that in some sectors, liquidity beta influences CAPM beta,
while in others, they are independent. GARCH modeling shows that the Change in Trading
Volume and Relative Strength Index (RSI) significantly affect liquidity beta volatility.

The paper further explores the role of liquidity premium in asset pricing, revealing that mid-cap
stocks tend to carry a liquidity premium, which impacts asset pricing along with size, value, and
momentum factors. Granger non-causality tests indicate a notable causal link between liquidity
and stock returns across most sectors, with the exception of Financial Services, where stock
returns Granger cause liquidity instead.

Fig: Liquidity premium and return (obtained from research paper)

The study concludes that liquidity is crucial for Indian mid-cap stocks' performance,
emphasizing its importance in asset pricing and investment decisions. It calls for further
exploration of liquidity’s role in investment strategies, contributing to understanding liquidity
dynamics in emerging markets.

Research Paper 2: Sector Wise Analysis of Selected Mutual Funds of India:

With Special Reference to Large & Mid Cap Funds

Ajay Kumar. D. Goswami; Dr. Ity Patni

The research paper analyzes sector-wise allocation strategies of mutual fund managers in India,
focusing on large-cap and mid-cap equity funds from April 1, 2017, to March 31, 2018. It aims
to help investors understand investment distributions and strategies employed by fund managers
across different sectors. The study uses descriptive analysis of monthly fact sheets from four
prominent AMCs: Bank of Baroda, ICICI Prudential, HDFC, and SBI Mutual Funds,
categorizing data into sectors ranked by their portfolio proportions. It also distinguishes
investments between large-cap, mid-cap, and small-cap stocks.

For large-cap funds, the banking sector consistently dominates across the selected AMCs,
particularly in Bank of Baroda, HDFC, and SBI Mutual Funds. The petroleum products sector is
significant for HDFC, while the software sector is prominent in ICICI Prudential's large-cap
investments. Conversely, sectors like minerals and mining, non-ferrous metals, and telecom
services are less emphasized.

Table: Dominating Industry status of Large Cap Mutual Funds (from research paper)

In mid-cap funds, sector preferences differ. Consumer durables lead the Bank of Baroda Mutual
Fund, while the banking sector remains important for HDFC. Construction projects dominate
ICICI Prudential's mid-cap allocations, whereas hotels, trading, and ferrous metals are least
favored, reflecting a strategic focus on sectors with higher growth potential.
 Table: Dominating Industry status of Mid Cap Mutual Funds (from research paper)

The study finds a strong preference for large-cap stocks among all AMCs, with Bank of Baroda's
allocation to large-cap stocks at 90.65% in April 2017, consistently remaining above 80%. Mid-
cap allocations were lower, with HDFC reaching a peak of 34.94% during the study period.

In terms of diversification, September 2017 saw the highest sector diversification in large-cap
funds, with investments across 19 industries. For mid-cap funds, January and March 2018 had
the most diversification, with representation from 22 industries, indicating broad allocation
across sectors during these periods.

The research concludes that mutual fund managers favor the banking and financial services
sectors in both large-cap and mid-cap categories due to their stability and growth potential in the
Indian economy. Less favored sectors include minerals and mining and telecom services,
suggesting a preference for more stable industries. The findings highlight the importance of
understanding sector allocations in mutual funds, as they significantly impact investment
performance. Investors are encouraged to consider these insights when making mutual fund
investment decisions, as fund managers' allocation strategies directly influence risk and return
profiles.

Research Paper 3: Recent Performance of Mid and Small – Cap Stocks

Dr. K. Prabhakar Rajkumar

The paper by Dr. K. Prabhakar Rajkumar examines the financial performance of mid and small-
cap stocks in India during a period characterized by a global recession. Despite their
underperformance compared to large-cap stocks, the author expresses a bullish outlook on these
segments. The research addresses the challenges faced by investors due to limited research on
mid-cap and small-cap companies, making it difficult for them to make well-informed
investment decisions.

As of January 2008, the Indian stock market hit an all-time high, with the Sensex peaking at
21,206.77. However, mid-cap and small-cap stocks experienced severe declines, falling by
50.58% and 69.34%, respectively, from their peaks. The paper attributes this trend to investor
behavior during market corrections, where large-cap stocks are viewed as safer investments,
leading to sell-offs in smaller stocks. The paper defines large-cap firms as those with a market
capitalization exceeding $10 billion, mid-cap firms as those between $2 billion and $10 billion,
and small-cap firms as those with a market capitalization between $250 million and $2 billion.

The analysis begins by looking at the performance of mid-cap stocks and small-cap stocks from
their all-time highs on January 10, 2008. The research notes that while large-cap stocks attracted
significant foreign institutional investment (FIIs), mid-cap and small-cap stocks remained
undervalued. Nevertheless, many mid-cap and small-cap companies have surpassed large-cap
stocks in terms of sales and profit growth, with growth rates of 32% and 68%, respectively. The
paper also provides sectoral snapshots, revealing significant declines across various sectors.
 Table: Indices Snapshot across various Sectors (from research paper)

The paper discusses investor sentiment, and the slow recovery of mid-cap and small-cap stocks
compared to benchmark indices. The BSE Mid Cap Index had only recovered 0.85%, while the
BSE Small Cap Index barely increased by 0.05% as of March 2008.

The research concludes that although mid-cap and small-cap stocks offer greater possibility for
capital appreciation, they carry higher risks. The valuation gap between large-cap, mid-cap, and
small-cap stocks has widened, with large-cap stocks trading at a premium. The author suggests
that mid-cap and small-cap stocks could offer upside potential if liquidity and market interest
improve, but the current volatility and earnings slowdown make it difficult to determine if these
valuations represent a market bottom.
Research Paper 4: Performance of Indian Midcap Mutual Funds in the
Economic Cycles

Kalpakam Gopalakrishnan
The second research paper evaluates the performance of mid-cap mutual funds in India from
2004 to 2010, focusing on their returns and risk-adjusted returns during different economic
cycles. This period marks the first decade of mid-cap mutual funds in India, during which the
market experienced significant fluctuations. The study analyzes 12 mid-cap mutual funds and
compares their performance against the CNX Midcap Index during three distinct phases: a bull
market (June 2004 to December 2007), a bear market (January 2008 to February 2009), and a
recovery phase (March 2009 to December 2010).

Table: Risk-Return analysis of Midcap funds (from research paper)

During the bull market, mid-cap funds outperformed the CNX Midcap Index, with an average
return of 54.15% compared to 47.04% for the index. In the bear market, however, mid-cap funds
suffered, with an average loss of -83.76%, while the CNX Midcap Index fell by -78.58%. The
recovery phase saw mid-cap funds rebounding, achieving average returns of 61.01%, surpassing
the index’s return of 54.12%. The study also calculates risk-adjusted returns using the Treynor
ratio, which measures returns per unit of market risk. While some funds delivered high returns,
they did so at a higher risk, as seen in the Treynor ratios.

The study identifies top performers, such as Sundaram BNP Paribas Midcap and Reliance
Growth, which consistently delivered high returns across different periods. Conversely, funds
like Tata Midcap and SBI Magnum Midcap ranked low in both returns and risk-modified
performance. The research also explores the correlation between risk and returns in different
market conditions. During the recovery phase, a positive correlation (0.702) between higher risk
and higher returns was observed, while in the bear market, the correlation was negative (-0.745),
indicating that higher risk did not translate into better returns.

The research concludes that mid-cap mutual funds offer substantial returns but come with higher
volatility and risk. Investors are advised to carefully assess market cycles and risks before
investing in these funds, particularly in uncertain market conditions. The charts and tables in the
paper provide visual representations of performance metrics and risk assessments, enhancing the
understanding of mid-cap mutual fund dynamics during different economic phases. In summary,
the paper provides valuable insights into mid-cap mutual fund performance, emphasizing the
need for investors to balance potential returns with associated risks in fluctuating market
environments.

Research Paper 5: Investors' Perception Towards Mid-Cap Equity Oriented

Mutual Funds in India

Prakash Yalavatti, Dr. Bheemanagouda

The research paper explores the perceptions, profiles, and satisfaction levels of investors in mid-
cap equity-oriented mutual funds in India, known for high returns with moderate risk. Based on
primary data from 360 investors in Karnataka, the study provides insights into investor behavior
and satisfaction. Demographically, mid-cap mutual fund investors are predominantly middle-
aged, with 33.33% aged 31-40 and 27.22% aged 41-50. There is a significant gender disparity,
with 80.83% male investors, highlighting the need for increased female participation. Most
investors are employed (52.22%) or businesspersons (22.22%), indicating a preference for stable
income streams. Additionally, 39.17% hold a graduation degree, linking higher education with
greater awareness and participation. Income data shows 44.44% earn above Rs. 60,000 monthly,
suggesting higher income encourages investment. Most respondents save 11-20% of their
income, supporting investment activity.

The study finds that 65.28% of investors allocate less than 11% of their savings to mutual funds,
indicating a cautious approach. The internet is crucial for investment decisions, used by 90.28%
of investors, followed by advertisements (86.94%) and newspapers (80.83%). This underscores
the importance of digital platforms in shaping investment behavior. Additionally, 79.72% prefer
open-ended schemes, and 90% favor existing schemes, showing a preference for funds with
proven track records. Systematic Investment Plans (SIPs) are popular, chosen by 89.72% of
investors, reflecting a trend of disciplined investing. Regarding risk and return, 43.06% expect
moderate risk, while 57.50% anticipate returns above 20%, indicating a strong appetite for high
returns despite risks.

Investor satisfaction is another focus, with moderate scores across factors. The highest
satisfaction is in "reminding next contribution payment time" (average score 4.16), while
"promptness in giving information" scores lowest (2.99). Transparency (3.73), exit load (3.74),
and NAV updating (3.65) contribute to satisfaction, while risk and return expectations show
lower satisfaction.
 Table: Investors satisfaction on Midcap funds (from research paper)

Key findings include the dominance of middle-aged men among investors and the internet as a
critical information source. There is a need to improve awareness among younger and female
investors. While satisfaction is moderate, concerns about risk and return are significant. The
study suggests AMCs develop schemes for young and female investors, enhance communication
on direct investment options, and improve risk management to boost confidence. For investors,
regular investment and vigilance on fund performance are recommended.

In conclusion, the paper highlights the importance of mid-cap equity mutual funds in India,
especially among middle-aged investors. Addressing risk and return concerns could boost
confidence and participation in these funds.

Research Paper 6: Analysis of Performance of Fund Manager of Mutual

Fund: A Study on selected Equity Schemes in India during Pre and Post
Lockdown period

Debashish Biswas

Debasish Biswas's research paper evaluates the performance of mutual fund managers in India,
focusing on selected equity schemes during the COVID-19 pandemic's pre- and post-lockdown
periods. The study highlights mutual funds' essential role in the financial sector, allowing
investors with limited stock market knowledge to benefit from professional management. Mutual
funds significantly contribute to economic development by pooling resources and diversifying
investments.

The study aims to assess the market timing abilities and stock selection of fund managers
overseeing equity-oriented growth schemes in India from April 2019 to March 2021. It provides
insights into how fund managers navigated the volatile market conditions caused by the
pandemic. Several quantitative methods are used to evaluate fund performance: standard
deviation measures risk, Jensen's Alpha assesses stock selection abilities, the Mazuy model
evaluates market timing abilities, and R-squared indicates fund performance correlation with
market benchmarks. The analysis includes 23 equity-oriented diversified mutual fund schemes,
using daily Net Asset Values (NAVs) to calculate returns and risks. The BSE-Sensex serves as
the market benchmark, while 91-day Treasury bills represent the risk-free return.

The study presents a comparative analysis of the returns and risks associated with the selected
mutual fund schemes. It reveals that only a few schemes, such as the Axis Bluechip Fund and
Kotak Emerging Equity Scheme, outperformed the benchmark, while others, including HDFC
and Nippon India funds, underperformed. This indicates that not all fund managers effectively
navigated the challenging market conditions caused by the pandemic.

Jensen's Alpha results show that out of the 23 schemes analyzed, only 9 exhibited positive alpha
values, with only the Union Equity Savings Fund showing statistically significant performance at
the 5% level. In contrast, several funds, including the ICICI Prudential Equity - Arbitrage Fund,
demonstrated negative alpha values, reflecting poor stock selection abilities among the respective
fund managers.
The Mazuy model results indicate that only 6 schemes showed significant positive market timing
abilities, including the Axis Bluechip Fund and HDFC Equity Opp Fund. However, most
schemes had negative timing values, suggesting many fund managers struggled to time the
market effectively during the pandemic period. This underperformance underscores the difficulty
of predicting market trends in a volatile environment.

The research concludes that mutual fund managers' overall performance during the study period
was generally subpar, with many failing to demonstrate effective stock selection or market
timing skills. It emphasizes the importance of evaluating fund manager performance, as investor
returns depend heavily on these abilities, especially during volatile market conditions like those
experienced during the COVID-19 pandemic.

Research Paper 7: Performance Evaluation of Selected Equity Mutual Funds

in India

Shivam Tripathi, Dr. Gurudutta P. Japee

Evaluating the performance of mutual funds is crucial for investors who want to make well-
informed decisions. Mutual funds collect money from different investors to invest in a broad
range of securities, such as stocks, bonds, and money market instruments. These funds are
managed by professional fund managers with the goal of achieving either capital appreciation or
income generation, depending on the specific investment objectives detailed in the fund’s
prospectus. Assessing the performance of a mutual fund allows investors to compare its returns
to the risks taken and relevant market benchmarks.

Mutual funds come in many types, such as fixed income funds, equity funds, balanced funds,
index funds, and money market funds, catering to different investor needs and risk appetites.
Performance is evaluated using metrics like Net Asset Value (NAV), Beta, Standard Deviation,
Sharpe Ratio, and Jensen’s Alpha. NAV per unit reflects the total value of securities held by the
fund, minus liabilities, divided by outstanding shares, and is used to track performance over time.
Beta measures fund volatility relative to the market, and its value greater than 1 indicates higher
volatility and value less than 1 suggests lower volatility. Standard Deviation (SD) indicates how
much the fund’s returns deviate from average returns, with a higher SD pointing to higher risk.
The Sharpe Ratio measures risk-adjusted return, considering the fund’s returns relative to the risk
taken, with a higher ratio implying better performance. Jensen’s Alpha assesses the fund’s returns
relative to its benchmark, adjusting for risk, with a positive alpha indicating outperformance.

Large-cap funds typically invest in stable companies with consistent performance. The Axis
Bluechip Fund performed exceptionally well with a Sharpe ratio of 0.96 and a high alpha of
8.23, indicating strong risk-adjusted returns. In contrast, ICICI Prudential Bluechip Fund had a
low beta (0.87) but a negative alpha (-0.63), showing underperformance. Mid-cap funds,
investing in medium-sized companies, offer higher growth potential but increased risk. Axis
Midcap Fund showed low volatility (beta = 0.64) and strong performance with a Sharpe ratio of
0.78 and an impressive alpha of 12.1.

Performance evaluation using tools like Beta, Standard Deviation, Sharpe Ratio, and Alpha helps
investors understand returns and risks. Large and mid-cap funds differ in risk profiles, and these
factors are essential when making investment decisions.

Research Paper 8: Performance Analysis and Risk Assessment of Indian

Mutual Fund through SIPs: A Comparative Study of Small, Mid, and Large
Cap Funds

Komal Bansidhar Sharma, Shivam Tripathi

This paper studies the risk and performance of mutual fund schemes in India across Small, Mid,
and Large Cap funds using Systematic Investment Plans (SIPs) and financial risk metrics like
Standard Deviation (SD), Sharpe Ratio, Treynor's Ratio, Beta and Jensen's Alpha to evaluate
risk-adjusted returns. Covering investment periods from 1 to 10 years, it provides insights into
risk and growth potential for investors, financial advisors, and fund managers.
Mutual funds offer professional management and diversification, making them attractive for
investors in India. Small Cap, Mid Cap, and Large Cap mutual funds invest in companies of
varying market capitalizations, influencing their risk-return profiles. This study emphasizes SIPs,
which allow investors to contribute periodically, benefiting from rupee-cost averaging. The goal
is to analyze the performance and risk characteristics of each category to help investors align
their financial goals with the most appropriate mutual funds.

The study analyzed SIP performance using data from sources like the NSE, BSE, SEBI, and
AMFI. Purposive sampling selected the top five funds in each category based on past
performance, including the Nippon India Small Cap Fund, HDFC Small Cap Fund, and Kotak
Small Cap Fund for Small Cap funds, along with comparable Mid Cap and Large Cap funds.

SIP returns were analyzed over 1 to 10 years. Small Cap funds generally deliver the highest
returns over extended periods, followed by Mid Cap and Large Cap funds.

Small Cap Fund Returns: Nippon India Small Cap Fund (18%-253%), HDFC Small Cap Fund
(21%-241%), Kotak Small Cap Fund (14%-221%).

Mid Cap Fund Returns: HDFC Mid-Cap Opportunities Fund (14%-161%), Nippon India Growth
Fund (12%-154%).

Large Cap Fund Returns: Nippon India Large Cap Fund (11%-105%), HDFC Top 100 Fund
(9%-99%).

Risk metrics, including Standard Deviation and Beta, assessed volatility and market sensitivity.

Small Cap Funds: Highest volatility and market sensitivity. Nippon India Small Cap Fund had a
Beta of 1.2, Standard Deviation of 20%, Sharpe Ratio of 0.90, and Jensen’s Alpha of 5.5%.

Mid Cap Funds: Moderate volatility. HDFC Mid-Cap Opportunities Fund had a Beta of 1.1,
Standard Deviation of 17%, Sharpe Ratio of 0.85, and Jensen’s Alpha of 4.8%.
Large Cap Funds: Lower volatility and risk. HDFC Top 100 Fund had a Beta of 0.9, Standard
Deviation of 12%, Sharpe Ratio of 0.72, and Jensen’s Alpha of 2.5%.

Table: List of all formulas used for analysis

Small Cap and Mid Cap funds generally offer higher returns and better risk-adjusted
performance over longer periods compared to Large Cap funds. Small Cap funds, particularly the
Nippon India Small Cap Fund, outperformed across all time frames, suitable for higher risk
tolerance. Mid Cap funds like HDFC Mid-Cap Opportunities Fund also delivered strong returns.
Large Cap funds were less volatile but provided more modest returns. Investment decisions
should be guided by individual risk tolerance, investment horizon, and financial goals, with
professional guidance recommended.

Research Paper 9: A Study on Risk Adjusted Performance of Open-Ended

Equity Mid Cap and Multi Cap Mutual Fund Schemes in India by Sharpe
Ratio: Pre Covid-Scenario

Noel Daliwala

Investing in capital markets is a proven way to grow wealth, but market volatility makes
predicting outcomes challenging. The Efficient Market Hypothesis (EMH) suggests it's nearly
impossible to consistently outperform the market, leading many to mutual funds for
diversification and professional management. In India, mutual funds are integral to the capital
market, operating in both primary and secondary markets, and benefiting from robust regulations
by the Securities and Exchange Board of India (SEBI).

Mutual funds in India have evolved significantly, especially in the secondary market, enhancing
investment opportunities and market efficiency. This section reviews literature on mutual fund
performance, covering studies in Indian and international contexts. Performance analysis in
various markets includes Santos et al. (2005) on Brazilian funds, finding performance linked to
manager skills, and Drew et al. (2005) on Australian funds, noting limited positive alpha
generation. In India, Tripathy (2006) found Indian managers struggled with market timing, while
Prasad & Srinivas (2012) noted some funds exceeded market returns. Roy & Ghosh (2012)
observed minimal impact of stock selection and timing during the 2008-2009 recession.

The literature reveals varied mutual fund performance outcomes, with success depending on
risk-adjusted return measures. Despite extensive research, inconsistencies remain in measuring
and comparing fund success. Risk-adjusted return, represented by metrics like alpha, beta, R-
squared, standard deviation, and the Sharpe ratio, is crucial for informed investment
comparisons.

Developed by William F. Sharpe in 1966, the Sharpe Ratio is commonly used to measure an
investment's performance relative to a risk-free asset, adjusted for its risk. It is calculated as:

Fig: Sharpe ratio formula

This chapter analyzes the risk-adjusted returns of open-ended mutual fund programs in India
from 2009 to 2019, using the Sharpe ratio and comparing against the BSE SENSEX.
Monthly returns for mutual fund schemes and the benchmark index are calculated using the
following formulas:

Fig: Formulas used for analysis

Standard deviation measures unsystematic risk. The formula for calculating unsystematic risk of
the ith mutual fund scheme is:

Fig: Formula used for calculating Unsystematic Risk

Table 3.4 shows the Invesco India Multicap Fund leading with a Sharpe ratio of 0.558, followed
by Kotak Standard Multicap Fund (0.536) and UTI Equity Fund (0.524). The LIC MF Multicap
Fund had the lowest performance with a Sharpe ratio of 0.223.
This analysis lays the foundation for understanding risk-reward dynamics in Indian mutual
funds, highlighting the importance of risk-adjusted performance measures like the Sharpe ratio
for investment decisions.

Research Paper 10: Risk, Return & Performance Evaluation of Selected

Mutual Fund Schemes – A Study on Large & Mid Cap Funds

Krunal K Bhuva, Ashok R. Bantwa

This research paper investigates the consistency of mutual fund returns over time, focusing on
large-cap and mid-cap mutual fund schemes in the mutual fund industry of India during the
period from 2007 to 2011. The study assesses these schemes based on average returns,
systematic and unsystematic risk, and several performance metrics, including Sharpe, Jensen,
Treynor, and Fama measures. The results show that the majority of the sampled schemes
outperformed the market, with higher-risk schemes delivering better performance, reinforcing
the high-risk, high-return principle. Additionally, the research highlights that most of the
schemes were well-diversified, with around 60% surpassing the market due to fund managers'
effective stock selection strategies.

The methodology includes the use of the Treynor Measure, Jensen’s Alpha, Sharpe Ratio and
Fama’s Selectivity Model to assess performance. The Sharpe Ratio evaluates risk-adjusted
performance using total risk, while Treynor Measure focuses on systematic risk. Jensen’s Alpha
measures the fund's performance against expected returns based on systematic risk, and Fama’s
Model assesses performance against total risk. The study also examines diversification and
systematic risk, using beta as a measure of volatility.

Empirical findings show that during the study period, all large cap schemes and three mid cap
schemes recorded positive average returns. The correlation between returns and total risk was
positive for better-performing schemes, while the correlation with systematic risk was negative.
The study finds that the sampled schemes generally had lower risk than benchmark markets, with
a negative correlation between diversification and unique risk, indicating successful risk
reduction through diversification.
 Table: Return comparison of large and midcap funds (from research paper)

The paper also tests hypotheses regarding the returns and risks of large and mid cap mutual funds
compared to market risks and returns. It concludes that there is no major difference between
long-term returns of large-cap and mid-cap mutual funds, and that mutual funds generally have
lower risks than market risks.

Table: Risk comparison with large and midcap funds (from research paper)

In conclusion, the study emphasizes the importance of fund managers' stock selection skills and
diversification in achieving superior mutual fund performance. It identifies several top-
performing funds, including ING Dividend Yield Fund, Tata Dividend Yield Fund, and UTI
MNC Fund, among others. The research underscores that mutual funds, despite some
underperformance in specific years, generally outperform the market and carry less risk, making
them a viable investment option for risk-averse investors.
 Need of the Study

The need for a comprehensive study of how large-cap and mid-cap mutual funds perform in
India is driven by several critical factors affecting investors, financial analysts, and the mutual
fund industry. As mutual funds become a preferred investment vehicle, understanding their
performance dynamics is crucial for informed decision-making.

Growing Popularity of Mutual Funds

Mutual funds have gained recognition among Indian investors due to their professional
management, diversification and liquidity. The rise in retail investor participation has led to
various schemes catering to different risk appetites and goals, necessitating performance
evaluation to help investors align their choices with financial objectives.

Dynamic Market Environment

The period from 2007 to 2011 included significant economic events like the 2008 global
financial crisis, impacting capital markets worldwide, including India. Studying how large-cap
and mid-cap funds navigated this period is vital for assessing their resilience and performance,
offering insights into fund reactions to economic challenges and informing future strategies.

Performance Measurement Challenges

Despite extensive research, inconsistencies in measuring and interpreting mutual fund

performance persist due to varied methodologies and metrics. This study aims to clarify these
issues by using established performance indicators like the Sharpe ratio, Treynor ratio, and
Jensen’s alpha, addressing gaps in literature and enhancing understanding of mutual fund
performance in India.
Diverse Investor Needs

Investors have varied risk appetites and horizons, influencing their choices between large-cap
and mid-cap funds. Large-cap funds invest in established companies, appealing to risk-averse
investors, while mid-cap funds target growth potential, attracting those accepting higher risk for
potential returns. Examining these categories helps investors align choices with risk profiles and
goals.

Role of Fund Management and Strategy

Mutual fund success is influenced by fund managers' skills and strategies, affecting performance
through stock selection and market timing. This research investigates how fund managers' skills
impact large-cap and mid-cap funds' risk-return profiles, highlighting active management's
importance in achieving favorable outcomes and aiding investor decisions.

Regulatory Framework and Investor Protection

The Indian mutual fund industry is overseen by SEBI, which protects investor interests and
promotes transparency. As regulations evolve, investors must understand their impact on fund
performance and management practices. This study provides insights into regulatory changes'
effects on mutual fund performance, contributing to a more informed investor base.

Future Research Directions

This study addresses current literature gaps and sets the stage for future research on mutual fund
performance. By establishing a robust evaluation framework and analyzing historical data, it
informs inquiries into recent trends and developments, fostering understanding of
macroeconomic factors, investor behavior, and regulatory changes on performance.
 Research Gap

Despite the rising number of studies on mutual fund performance, several significant gaps
remain that this study aims to address. These gaps are critical for enhancing the understanding of
mutual fund dynamics, particularly concerning large and mid cap funds in India. The following
points delineate these research gaps:

1. Inconsistencies in Performance Measurement

Many existing studies employ varying methodologies and performance metrics to evaluate
mutual fund performance, leading to inconsistent conclusions. While some studies utilize the
Sharpe ratio, others might focus on Jensen’s alpha or Treynor ratio. This lack of standardization
complicates the comparative analysis of fund performance across different studies. This research
aims to establish a unified framework for evaluating performance metrics to provide a clearer
understanding of how large-cap and mid-cap funds perform in similar market conditions.

2. Limited Focus on Mid-Cap Funds

While extensive research exists on large-cap funds, the analysis of mid-cap funds is often limited
or overshadowed. Mid-cap funds are crucial for understanding the dynamics of the Indian equity
market, especially during periods of economic growth and recovery. This study strives to fill this
gap by providing a detailed analysis of mid-cap funds, comparing them with their large-cap
counterparts over a significant time frame (2007-2011), which includes periods of volatility and
recovery.

3. Short-Term vs. Long-Term Performance Analysis

Much of the existing literature focuses on short-term performance metrics, often disregarding the
long-term implications of mutual fund performance. Studies may overlook how funds perform
over extended periods, particularly through market cycles that include downturns and recoveries.
This research will emphasize long-term performance analysis, assessing the resilience and
recovery of both large cap and mid cap funds during and after the global financial crisis.
4. Impact of Economic Events on Fund Performance

There is a dearth of studies specifically analyzing the impact of macroeconomic events, such as
the 2008 financial crisis, on the performance of mutual funds in India. While some studies touch
upon economic conditions, a focused examination of how such events affect large-cap and mid-
cap funds is limited. This research will address this gap by investigating how funds navigated
this period and how their performance metrics changed in response to the evolving economic
landscape.

5. Role of Fund Management Strategies

While some literature addresses the importance of fund managers in influencing performance,
comprehensive studies specifically linking management strategies to performance outcomes are
scarce. This research intends to explore how the stock selection and market timing strategies of
fund managers impact the risk-return profiles of large-cap and mid-cap funds, providing insights
into the effectiveness of active management.

6. Need for Comparative Analysis Between Fund Categories

Few studies offer a systematic comparative analysis of large-cap and mid-cap funds in India,
particularly regarding their risk-adjusted performance. Understanding the differences and
similarities between these categories is crucial for investors aiming to construct balanced
portfolios. This research will fill this void by directly comparing the performance of these two
fund types using consistent performance metrics.

7. Influence of Investor Behavior on Fund Performance

The existing literature often neglects the influence of investor behavior and sentiment on mutual
fund performance. Understanding how investor psychology impacts fund inflows, outflows, and,
consequently, performance is an area that requires further exploration. This study will consider
investor behavior as a contextual factor, potentially enriching the analysis of mutual fund
performance.
Data Utilization

To address these research gaps, this study utilizes a robust dataset comprising:

1. Historical NAV Data: Selected data for particular large cap and mid cap mutual fund schemes.
This data will provide a foundation for calculating performance metrics like returns, standard
deviations, and risk-adjusted measures.

2. Market Index Data: Performance data for relevant benchmark indices, such as the BSE
SENSEX, will be used to compare fund performance against market averages.

3. Economic Indicators: Macroeconomic data, including GDP growth rates, inflation, and interest
rates, will be considered to understand the broader economic context during the study period and
its impact on fund performance.

4. Managerial Data: Information regarding fund managers' strategies and management styles will
be incorporated, allowing for an assessment of how these factors influence fund performance.

5. Performance Metrics: This study will apply various performance metrics, including the
Jensen’s alpha, Treynor ratio, Sharpe ratio and Fama’s measure, ensuring a comprehensive
analysis of risk-adjusted returns.

By addressing these research gaps and utilizing relevant data, this study aims to add to the
existing literature on mutual funds’ performance and provide actionable valuable insights for
investors navigating the complexities of the Indian mutual funds landscape.
 Objectives
In light of the preceding analysis, this report aims to achieve the following objectives:

1) Evaluating the risk-adjusted performance of large cap and mid cap mutual funds in
India, using established performance metrics such as the Jensen’s alpha, Treynor
ratio and Sharpe ratio:
 This study analyzes the performance of large-cap and mid-cap mutual funds during
economic volatility, including the 2008 financial crisis. It uses the Sharpe ratio to assess
risk-adjusted returns, the Treynor ratio to evaluate returns relative to systematic risk,
and Jensen’s alpha to measure performance against expected returns. Large-cap funds
are noted for stability and consistent returns, appealing to conservative investors, while
mid-cap funds offer higher growth potential and volatility, attracting those with a higher
risk appetite. The study aims to provide investors with insights into the risk-return
profiles of these funds for informed decision-making.

2) Investigate the impact of diversification and managerial skill on mutual fund

performance, exploring how these factors contribute to the risk and return
dynamics of large cap and mid cap funds:
 This study examines the role of diversification strategies in enhancing the performance
of large-cap and mid-cap mutual funds, focusing on risk mitigation during market stress.
It evaluates how diversification levels influence performance and assesses fund
managers' stock selection and market timing skills. The research considers economic
conditions and market cycles, providing insights into factors driving mutual fund
performance in India. It also explores investor behavior and sentiment, comparing the
stability of large-cap funds with the growth potential of mid-cap funds. Quantitative
analyses, including regression models, are used to statistically assess relationships
between diversification, managerial skill, and performance metrics.
 Research Design

Research Objectives:
1. Evaluating the risk-adjusted performance of large cap and mid cap mutual funds in India,
using established performance metrics such as the Jensen’s alpha, Treynor ratio and Sharpe ratio.

2. Investigate the impact of diversification and managerial skill on mutual fund performance,
exploring how these factors contribute to the risk and return dynamics of large cap and mid cap
funds.

Research Variables:

- Dependent Variables: Risk-adjusted performance measures (Jensen’s alpha, Treynor ratio,

Sharpe ratio), fund returns, volatility.

- Independent Variables: Fund size (large-cap vs. mid-cap), managerial skill (measured by
consistency of alpha generation), level of diversification, market conditions, and macroeconomic
factors (inflation rate, GDP growth).

- Control Variables: Market index performance, benchmark performance, industry-specific

shocks, and fund expense ratios.

Sampling Method:

The study will focus on a purposive sample of large-cap and mid-cap mutual funds operational in
India. Selection will be based on the fund’s availability of historical data and their performance
records. Top-performing funds, based on net asset value (NAV) growth and consistency in
returns, will be selected to represent large-cap and mid-cap categories.

Data Collection:

- The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) for historical prices
and returns.

- Mutual fund data aggregators like Morningstar India and the Association of Mutual Funds in
India (AMFI) for fund-specific details.
- The Reserve Bank of India (RBI) for macroeconomic data, including inflation rates and interest
rates. This study will utilize secondary data for analysis.

Performance Metrics:

1. Sharpe Ratio: Used to assess the risk-adjusted return of each fund by comparing returns to the
risk-free rate and volatility.

2. Treynor Ratio: This metric will focus on the fund’s returns in relation to systematic risk,
measured by beta.

3. Jensen’s Alpha: To measure managerial skill by evaluating whether a fund outperformed its
expected return based on market conditions.

Research Methodology:

The research will use historical data for performance evaluation through risk-adjusted metrics.
Statistical tools, including regression analysis, will be employed to evaluate how much of the
fund performance can be attributed to diversification and managerial skill. The following steps
will be conducted:

- Descriptive Statistics: To summarize the general performance of large-cap and mid-cap funds
over the period.

- Regression Analysis: To assess the relationship between fund returns and managerial skill,
diversification, and market conditions.

- Comparative Analysis: The performance of large-cap and mid-cap funds will be compared to
see which segment delivered better risk-adjusted returns.

Expected Outcomes:

This research aims to provide valuable insights into the factors that drive the risk-adjusted
performance of large-cap and mid-cap mutual funds in India. By examining diversification and
managerial skill, the study hopes to uncover which factors significantly affect the risk-return
tradeoff in these two fund categories, providing valuable knowledge for investors and financial
advisors.
 Data Analysis
We assessed the performance of mid-cap and large-cap mutual funds using three important
financial ratios: the Jensen’s alpha, Treynor ratio and Sharpe ratio. These ratios offer insights into
risk-adjusted returns, market volatility, and the fund’s ability to deliver returns beyond a
benchmark. The analysis includes both mid-cap and large-cap funds from the same companies,
enabling a direct comparison of their performance across these two categories.

1. Sharpe Ratio : Used to assess the risk-adjusted return of each fund by comparing returns to the
risk-free rate and volatility.

2. Treynor Ratio : This metric will focus on the fund’s returns in relation to systematic risk,
measured by beta.

3. Jensen’s Alpha : To measure managerial skill by evaluating whether a fund outperformed its
expected return based on market conditions.

Following is the data showing values of each ratio for both mid cap and large cap mutual funds
for the last 3 years.

Fig 1 – mid cap mutual funds data(last 3 yrs)

Fig 2 – large cap mutual funds data(last 3 yrs)

 Mid cap mutual funds

Mahindra Manulife Mid Cap Fund

Tata Mid Cap Growth Fund

Axis Midcap Fund

HSBC Mid Cap Fund

-1 0 1 2 3 4 5

Jension's Alpha Treynor's Ratio Sharpe ratio

Fig 3 – Graph illustrating comparison of different mid cap mutual funds

Large cap mutual funds

Mahindra Manulife Large Cap Fund

Tata Large Cap Growth Fund

Axis Bluechip Fund

HSBC Large cap Fund

-5 -4 -3 -2 -1 0 1

Jension's Alpha Treynor's Ratio Sharpe ratio

Fig 4 – Graph illustrating comparison of different large cap mutual funds

In this analysis, mid-cap funds of the same companies consistently outperform large-cap funds in
terms of Treynor ratio, Jensen’s alpha and Sharpe ratio. Mid-cap funds tend to provide better
risk-adjusted returns, higher compensation for market risk, and greater outperformance relative
to benchmarks, making them a more attractive option for investors looking for superior
performance with manageable risk.
Sources of Data:

 Net Asset Value (NAV) data for selected large cap and mid cap mutual fund schemes
from January 1, 2022, to September 30, 2024. This data provides a foundation for
calculating performance metrics like returns, standard deviations, and risk-adjusted
measures.
 Market Index Data: Performance data for relevant benchmark indices, such as the BSE
SENSEX, is used to compare fund performance against market averages.

Here are the sources of data used for data analysis.

1. [Link]
details
2. [Link]
growth/MCC275
3. [Link]
growth/MAA194
4. [Link]
5. [Link]
[Link]
6. [Link]
[Link]
 Recommendations and Implications
Recommendations

1. For Investors:

 Diversification Strategy: Investors should diversify their portfolios by investing in

both large-cap and mid-cap mutual funds. This strategy can enhance returns while
mitigating risks, as large-cap funds provide stability and mid-cap funds offer
growth potential.

 Periodic Review of Fund Performance: Regularly reviewing mutual fund

performance against benchmarks like the BSE SENSEX is crucial. Investors
should conduct systematic reviews at least annually to make informed decisions
about their investments.

2. For Fund Managers:

 Focus on Risk-Adjusted Performance: Fund managers should aim to improve

risk-adjusted returns using effective strategies that balance risk and reward.
Metrics like the Sharpe and Treynor ratios can guide better decision-making.

 Enhanced Stock Selection Strategies: Fund managers should refine stock selection
processes through rigorous analysis, especially in mid-cap segments, integrating
quantitative models and qualitative assessments.

3. For Regulatory Bodies:

 Promote Transparency in Fund Operations: Regulators like SEBI should enhance

transparency in mutual fund operations and performance metrics, helping
investors understand risks and rewards better.

 Encourage Education and Awareness Programs: Initiatives to educate investors on

fund performance evaluation and risk assessment can empower better investment
decisions.

4. For Future Research:

  Longitudinal Studies on Performance: Future studies should evaluate large-cap
and mid-cap mutual funds over different market conditions to provide insights
into their performance during volatility.

 Impact of Macroeconomic Factors: Research should explore the relationship

between macroeconomic factors and mutual fund performance to offer valuable
insights for investors and fund managers.

Implications

1. For Investors:

 Informed Decision-Making: Understanding mutual fund performance dynamics helps

investors make choices aligned with their goals and risk tolerance, enhancing their
investment strategy.

 Risk Awareness: Awareness of the volatility in mid-cap funds helps investors

align choices with their risk appetite.

2. For the Mutual Fund Industry:

 Enhanced Competitive Landscape: Mutual fund companies are encouraged to

differentiate offerings through superior performance metrics, fostering healthy
competition.

 Innovation in Fund Management: Innovation in managing mid-cap funds is

crucial for gaining a competitive edge.

3. For Policymakers:

 Policy Formulation: Insights can aid in designing regulations that support mutual
fund sector growth and stability.

 Market Stability: Promoting sound investment practices and transparency

contributes to market stability.
 Conclusion

This study of large-cap and mid-cap mutual funds in India provides critical insights into mutual
fund performance, emphasizing on the complexities of risk and reward. While the value of the
Sharpe ratio, the Treynor ratio, and Jensen's alpha is calculated using the techniques of time
variance analysis, the report emphasizes grasping the concept of both potential returns as well as
accompanied risks in different fund categories.

Findings indicate that large-cap funds offer stability and consistent returns, suitable for
conservative investors, while mid-cap funds, despite higher volatility, present growth
opportunities for those with a higher risk appetite. This duality underscores the necessity for a
diversified investment strategy combining both fund categories to balance risk and reward.

The literature reviewed shows a mixed performance narrative in the Indian mutual fund industry.
Some studies highlight certain funds outperforming benchmarks, while others point to challenges
from market inefficiencies and management limitations. This highlights the need for robust
performance evaluation methodologies, as inconsistencies in previous research suggest
challenges in determining effective models for assessing mutual fund performance.

Recommendations stress investor education and awareness to enhance decision-making.

Regulators, fund managers, and investors must prioritize transparency and credibility in the
mutual fund sector, fostering an informed investor base and encouraging investment strategies.

The study identifies gaps in existing literature, particularly regarding long-term performance
across market cycles. Future research should address these by analyzing more data and
examining macroeconomic factors' influence on mutual fund performance. Such inquiries will
provide a comprehensive understanding of variables affecting mutual fund returns, guiding
stakeholders in informed investment decisions.

In summary, understanding risk-adjusted returns, adopting diversified strategies, and fostering

transparency can enhance mutual fund investments' efficacy. These insights are invaluable for
navigating mutual fund performance complexities, leading to informed investment choices and
promoting sustainable growth in financial markets.
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