PERFORMANCE EVALUATION OF EXCHANGE TRADED FUNDS AND MUTUAL FUNDS BASED ON BFSI SECTOR OF INDIA

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 formed using pooled assets gathered from numerous investors to put in capital market securities (stocks and bonds) and money market instruments (T- Bills, commercial papers) and other assets. Mutual funds are managed by fund managers, who attempt to generate regular income or capital gains for the fund's investors This paper is an experimental study done to see the performance of ETFs 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 Bank and Financial Services Fund. Jensen’s alpha tend to be negative for majority of the funds both mutual fund and ETFs which means they have been unable to outperform the market. The study reveals SBI ETF Nifty Bank has shown the lowest tracking error among all the ETFs. Again, the SBI ETF Nifty Bank was rank first based on Sharpe ratio among the ETFs under study and in mutual funds SBI Bank 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.