Description
on evaluation, measurement of Mutual Fund Performance and it contains topics like measuring and evaluating mutual fund performance, different performance measures, performance measurement, evaluating fund performance, tracking mutual fund performanc
Measuring & Evaluating Mutual Fund Performance
• Need for measuring fund performance
– To make right investment decisions
• Depends upon
– Type of fund – Investment objective – Current financial market conditions
Different Performance Measures
• Change in NAV
– Change in NAV between the two dates in absolute and percentage terms.
– Absolute terms• NAV at the end-NAV at the beginning – Percentage terms • (Absolute change / NAV at the beginning) * 100
• Easily understood & applies to any type of fund • Does not take into account interim dividend declared by the Scheme • Suitable for evaluating Growth funds & accumulation plans of debt & equity funds.
Different Performance Measures
• 2) Total Return
– Takes into account the dividends distributed by the fund – [(Distribution+Change in NAV) / NAV at the beginning] * 100 – Suitable for all categories of funds, more accurate than the first method – Ignores the possibility of reinvestment of dividend
Different Performance Measures
• 3) Return on Investment (R.O.I)
– Computes the total return with reinvestment of dividends in the fund at ex-dividend date. – [(Units held + div./ex-d NAV)*end NAV] - begin NAV /begin NAV*100 – Accepted by MF tracking agencies (Credence and Value research) – Suitable for accumulation plans, monthly / quarterly income schemes, debt funds distributing interim dividend.
Useful Concepts
• Compare the same time periods since returns over different time periods vary due to different market conditions. • Annualised returns applicable only to periods greater than 1 year. • Returns to be computed since the inception of the scheme (Rs.10 as the base amount).
Useful Concepts
• Expense Ratio
– Total expenses / Average Net assets of the fund – Excludes brokerage commissions – Average of 3 to 5 years to be used to judge the performance of the fund. – Evaluated in the light of fund size and portfolio composition.
Useful Concepts
• Income Ratio
– Net investment income/Net Assets – Useful for evaluating debt funds
• Portfolio Turnover Rate
– Amount of buying / selling in the market – Indicates higher transaction costs – Useful in analysis of equity & balanced funds
Useful Concepts
• Transaction costs
– Includes brokerage commission,stamp duty,registrars’ fees,custodian fees,dealers’ spreads.
• Cash Holdings • Borrowing by MF
Performance Measurement
(cont’d)
• Sharpe Ratio measure fund performance in terms of total risk • Sharpe index = rt - r* / sdt • rt = average return on portfolio t • r* = risk less rate of return • sdt= standard deviation of the returns of the portfolio t
Treynor Ratio measure the fund performance in term of market risk :
Treynor index = rn
- r* / beta n
rn = average return on portfolio n r* = risk less rate of return beta n = beta coefficient of portfolio
Alpha as measure the performance of the fund manager:
•It is the difference between a security’s expected return and its equilibrium expected return •positive alpha indicates undervalued securities •negative alpha indicate over valued securities
Price / Earning multiple is also another risk measure:
Fund P/E ratio = Weighted average of P/E ratios of all the stocks held in the portfolios
P/E = Market price per share / Earnings per share
Evaluating Fund Performance
• Benchmarks available
• 1) Relative to the Market
– Index funds
• Tracking Error
– Active Equity funds – Debt funds – Money Market funds
Evaluating Fund Performance
• 2) Relative to other similar MFs
– Investment objective & Risk Profile – Portfolio Composition – Credit quality & Average Maturity – Fund size – Expense ratios – Compare average annualised returns over the same periods only,after tax returns.
Evaluating Fund Performance
• 3) Relative to other investment options
– Convert cumulative returns to average annualised returns
• Evaluate the Fund manager / AMC
– Long term perspective – Avoid excessive trading – Consistent performance
Tracking Mutual Fund Performance
• • • • • MF Annual & Periodic reports Financial press Fund tracking agencies Newsletters Prospectus
doc_380688389.ppt
on evaluation, measurement of Mutual Fund Performance and it contains topics like measuring and evaluating mutual fund performance, different performance measures, performance measurement, evaluating fund performance, tracking mutual fund performanc
Measuring & Evaluating Mutual Fund Performance
• Need for measuring fund performance
– To make right investment decisions
• Depends upon
– Type of fund – Investment objective – Current financial market conditions
Different Performance Measures
• Change in NAV
– Change in NAV between the two dates in absolute and percentage terms.
– Absolute terms• NAV at the end-NAV at the beginning – Percentage terms • (Absolute change / NAV at the beginning) * 100
• Easily understood & applies to any type of fund • Does not take into account interim dividend declared by the Scheme • Suitable for evaluating Growth funds & accumulation plans of debt & equity funds.
Different Performance Measures
• 2) Total Return
– Takes into account the dividends distributed by the fund – [(Distribution+Change in NAV) / NAV at the beginning] * 100 – Suitable for all categories of funds, more accurate than the first method – Ignores the possibility of reinvestment of dividend
Different Performance Measures
• 3) Return on Investment (R.O.I)
– Computes the total return with reinvestment of dividends in the fund at ex-dividend date. – [(Units held + div./ex-d NAV)*end NAV] - begin NAV /begin NAV*100 – Accepted by MF tracking agencies (Credence and Value research) – Suitable for accumulation plans, monthly / quarterly income schemes, debt funds distributing interim dividend.
Useful Concepts
• Compare the same time periods since returns over different time periods vary due to different market conditions. • Annualised returns applicable only to periods greater than 1 year. • Returns to be computed since the inception of the scheme (Rs.10 as the base amount).
Useful Concepts
• Expense Ratio
– Total expenses / Average Net assets of the fund – Excludes brokerage commissions – Average of 3 to 5 years to be used to judge the performance of the fund. – Evaluated in the light of fund size and portfolio composition.
Useful Concepts
• Income Ratio
– Net investment income/Net Assets – Useful for evaluating debt funds
• Portfolio Turnover Rate
– Amount of buying / selling in the market – Indicates higher transaction costs – Useful in analysis of equity & balanced funds
Useful Concepts
• Transaction costs
– Includes brokerage commission,stamp duty,registrars’ fees,custodian fees,dealers’ spreads.
• Cash Holdings • Borrowing by MF
Performance Measurement
(cont’d)
• Sharpe Ratio measure fund performance in terms of total risk • Sharpe index = rt - r* / sdt • rt = average return on portfolio t • r* = risk less rate of return • sdt= standard deviation of the returns of the portfolio t
Treynor Ratio measure the fund performance in term of market risk :
Treynor index = rn
- r* / beta n
rn = average return on portfolio n r* = risk less rate of return beta n = beta coefficient of portfolio
Alpha as measure the performance of the fund manager:
•It is the difference between a security’s expected return and its equilibrium expected return •positive alpha indicates undervalued securities •negative alpha indicate over valued securities
Price / Earning multiple is also another risk measure:
Fund P/E ratio = Weighted average of P/E ratios of all the stocks held in the portfolios
P/E = Market price per share / Earnings per share
Evaluating Fund Performance
• Benchmarks available
• 1) Relative to the Market
– Index funds
• Tracking Error
– Active Equity funds – Debt funds – Money Market funds
Evaluating Fund Performance
• 2) Relative to other similar MFs
– Investment objective & Risk Profile – Portfolio Composition – Credit quality & Average Maturity – Fund size – Expense ratios – Compare average annualised returns over the same periods only,after tax returns.
Evaluating Fund Performance
• 3) Relative to other investment options
– Convert cumulative returns to average annualised returns
• Evaluate the Fund manager / AMC
– Long term perspective – Avoid excessive trading – Consistent performance
Tracking Mutual Fund Performance
• • • • • MF Annual & Periodic reports Financial press Fund tracking agencies Newsletters Prospectus
doc_380688389.ppt