Do Ethical Funds Underperform Conventional Funds? Empirical Evidence from India

Abstract

One of the significant developments in the investing community is the rise of socially responsible or ethical investments during last two decades. Because of the increasing size and importance of ethical mutual funds, this paper seeks to evaluate and compare the performance of ethical mutual funds with general funds and benchmark index (S&P BSE Shariah 500 Equity Index) in the Indian market. The sample comprises six ethical fund schemes and three general fund schemes of Tauras mutual fund over the period 2009-2014 using weekly NAVs. The study uses return, risk, risk-adjusted measures (Sharpe ratio, Treynor ratio, Jensens alpha and information ratio), Famas decomposition measure, paired samples t-test, and growth regression equation to accomplish the objectives. The findings suggest that some of the ethical funds generated significantly higher return than other funds and benchmark index. Despite having higher risk, ethical funds outperformed other funds and benchmark index on the basis of various risk-adjusted measures and net selectivity returns. This indicates that the compromise made with respect to diversification by investing in ethical funds was well rewarded in terms of higher returns in Indian context. Our findings lend support to the case of ethical investing in India. Mutual funds and other investment funds should launch schemes which invest in socially responsible or ethical stocks.

A Performance Evaluation of Ethical Mutual Funds: Evidence from India

“…Tata Ethical Dividend Scheme showed a minimum return of 0.2008. These findings are similar to the findings of Das and Rao (2013), Tripathi and Bhandari (2015), and Traaseth and Framstad (2016). Overall, during the study period, Taurus Ethical Schemes outperformed the benchmark index.…”

“…From the above-discussed literature review, it is clear that various studies are available on ethical fund performance. However, previous studies provide mixed and inconclusive results, for example, outperformance (Consolandi et al, 2008;Gil-Bazo et al, 2010;Statman, 2000;Tripathi and Bhandari, 2015), underperformance (Azmi et al, 2020;Das & Rao, 2013;Jones et al, 2008;Tippet, 2001; ) and neutral performance (Goldreyer et al, 1999;Matallín-Saez et al, 2019;Mill, 2006;Scholtens, 2005).Moreover, all available literature target the developed nations viz. US, UK, Australia, and Spain.…”

“…The empirical analysis consists of risk-return analysis and performance evaluation of ethical mutual fund schemes and benchmark index. Most previous studies on the performance evaluation of mutual funds use the Capital Assets Pricing Model (CAPM), Sharpe ratio, Treynor ratio and Jensen's alpha measure (for example: Goldreyer et al, 1999;Humphrey & Lee, 2011;Lundberg et al, 2009;Sapar & Madava, 2003;Tripathi & Bhandari, 2015). Treynor ratio (Treynor, 1965) uses systematic risk (measured by Beta) for performance evaluation.…”

“…They found that the socially responsible stocks generated higher average returns than market indexes, but these returns were statistically insignificant. In India, Tripathi and Bhandari (2015) examined the performance of ethical funds from 2009 to 2014, utilizing riskadjusted performance measures. The study concluded that ethical funds generated higher returns and outperformed the market index.…”

“…Several studies on the performance of ethical stocks/funds (i.e., whether there is any difference in risk-returns of conventional and ethical investment) have been undertaken by various academics in various markets. Tippet (2001), Lozano et al (2006), Mill (2006), Tripathi and Bhandari (2015), Cortez et al (2009) are examples for such studies In India, ethical investment is in its nascent stage. Bombay Stock Exchange (BSE) introduced two sustainable thematic indices in 2012, namely Greenex and Carbonex, while National Stock Exchange (NSE) introduced two thematic indices which were introduced in 2018: Nifty 100 ESG Index and Nifty 100 Enhanced ESG Index.…”