This paper evaluates the performance of actively managed UTI Retired Benefit Pension fund against passively managed CNX 100 index as the benchmark index for the period January 2008 to December 2012 by employing traditional measures of performance evaluation. This is broadly divided into two categories: stock selectivity and market timing ability. The former is evaluated by employing measures like Sharpe’s Ratio and Treynor’s Ratio and the latter by Jenson’s Alpha. The objective of the paper is to find out whether the UTI RBP has been successful in outperforming the chosen benchmark index. Some results show some over/under-performance, but it is also subject to certain limitations. Once these caveats are taken into account in calculating the risk-adjusted returns, the results may be altered.
Financial Intermediation help in channeling of funds from suppliers to fund users. Thus it enables efficient allocation of resources leading to overall macroeconomic development. Mutual Funds are second largest financial institutions after commercial banks .They have evolved over years as one of the most important financial institutions in the financial sector. “Mutual Funds embody the American Ideal, whereby individual is treated to the privileges of the elite” (Don Phillips, in Morningstar Mutual Funds, 1992)
It is a non-depository financial intermediary that allows investors and households to pool money together with a predetermined investment goal. Money that is pooled is thus invested in a diversified and well managed portfolio at a low cost. Mutual Funds are suitable for investments in equity shares, bonds, real estate, derivatives and fixed income instruments. Unit holders receive the income earned from investments in proportion to the number of units owned by them. The following chart shows the functioning of mutual fund:
Figure 1.1- Functioning of Mutual Funds
Mutual Funds give an opportunity to individual investors to invest money in capital markets through a fund manager as they lack necessary skills and knowledge. Fund managers charge a nominal fee in exchange of service provided which is much lower than transaction costs incurred had they dealt directly. Mutual Funds generally have 3 objectives: growth, income and balanced. UTI RBP is an open ended hybrid mutual fund with growth investment style from the UTI mutual fund family .It was established on 26 December 1994.Its asset allocation is 40%(max) assets to equity and the remaining goes to fixed income instruments.(60% min).The following table gives the asset allocation of the fund:
Instruments| Indicative allocation (% of total debts)| Risk Profile| Debt instruments(including securitized debt)| 60-100%| Low to Medium| Equity and equity related instruments| 0-40%| High|
Table 1.1 Asset Allocation of UTI RBP
UTI RBP has an objective to provide regular pensions to low income group particularly self employed after they have attained age of 58 years in the form of periodical cash flows upto the extent of repurchase value of their holding through a systematic withdrawal plan. It requires a minimum investment of Rs.500 (upto the sum of Rs.10000).It helps individuals to save early and regularly for their retirement. CNX 100 is a diversified 100 stock index accounting for 38 sectors of the economy. CNX 100 is owned and managed by India Index Services & Products Ltd. (IISL) which is a joint venture between CRISIL & NSE. The index was launched on December 1 2005 taking January 1 2003 as its base year (=1000 points).It is a combination of S&P CNX Nifty and CNX Nifty Junior.