INVESTMENT IN BANKING AND FINANCIAL SERVICES SECTOR: PERFORMANCE EVALUATION OF ETF AND MUTUAL FUNDS

Abstract

An exchange traded fund is an investment vehicle that reflects the PerfOrmance Of an underlying index by hOlding the assets like stOcks, cOmmOdities Or bOnds tO rePlicate the cOmPOsitiOn Of the market index. Whereas a mutual fund is a tyPe Of financial instrument made uP Of a POOl Of mOney gathered frOm numerOus investOrs tO Put in securities such as stOcks, bOnds, mOney market instruments, and Other assets. Mutual funds are OPerated by fund managers, whO attemPt tO PrOduce caPital gains Or incOme fOr the fund's investOrs. This PaPer is an emPirical study Of the PerfOrmance Of exchange traded funds that aim tO PrOvide returns clOsely cOrresPOnding tO Nifty Bank and Nifty PSU Bank Index alOng with mutual funds that invests in equity Of cOmPanies in the banking and financial services sectOr with the benchmark being Nifty Financial Services Index. The PerfOrmance Of the funds is examined based On the fOllOwing Parameters: active returns, Jensen‟s alPha, tracking errOr and SharPe ratiO. The active returns analysis shOwed that ETFs tracking Nifty Bank Index bOth underPerfOrmed and OutPerfOrmed while ETFs tracking Nifty PSU Bank Index underPerfOrmed. AlsO all the mutual funds underPerfOrmed excePt SBI Banking and Financial Services Fund. Jensen‟s alPha is negative fOr majOrity Of the funds bOth ETF and mutual fund which means they have nOt been able tO PrOvide excess return Over the market. The study reveals SBI ETF Nifty Bank has the lOwest tracking errOr amOng the ETFs. vii Again the SBI ETF Nifty Bank was rank first based On SharPe ratiO amOng the ETFs under study and in mutual funds SBI Banking and Financial Services fund was ranked first. Overall active returns analysis shOws that the ETF PerfOrmed better than the mutual funds while the Jensen‟s alPha better fOr the mutual fund than ETF. The study may be useful fOr thOse interested in financial instruments investing in banking and financial sectOr.