Description
mutual fund performance measurement and ROI calculation. It includes various parameters to measure mutual fund performance like sharpe ratio, beta, treynors ratio, dividend yield etc.
Performance Evaluation & Analysis of Mutual Funds
Risk and Return
• Return Methods
– – – – Change in NAV Total Return Total Return with dividend re-investment CAGR
• Risk
– Standard deviation – Beta and Ex-Marks
• Benchmark and comparison
Measuring Mutual Fund Performance
• • Returns (Absolute, Annualized, CAGR): Volatility: – The deviation of the funds returns over the mean give s the volatility of the fund over a given period. Standard deviation is the measure of volatility/risk. The lower the volatility the better the fund Risk Adjusted Return (RAR) or Sharpe ratio – The return given by the fund given the level of the risk/volatility is called risk adjusted return. The higher the RAR the better the fund Corpus size: – The Funds under management for a particular fund. The higher the corpus the more the comfort level Credit Quality: – The credit rating of the papers in the portfolio is called the Credit quality. Maturity Profile / Average Maturity: – The average term to maturity of the securities held in the portfolio
•
•
• •
Computing Returns
• Sources of return
– Dividend – Change in NAV
• Return =
Income earned for amount invested
over a given period of time • Standardize as % per annum
Alternate Methodologies
• Computing return
– Percentage change in NAV. – Simple total return – ROI or Total return with dividend re-investment – Compounded rate of growth
Percentage Change in NAV-Absolute Return
• Assume that change in NAV is the only source of return. • Example: – NAV of a fund was Rs. 23.45 at the beginning of a year – Rs. 27.65 at the end of the year. • Percentage change in NAV = (27.65 – 23.45)/23.45 *100 = 17.91%
Annualizing the Rate of Return
If NAV on Jan 1, 2005 was Rs. 12.75 and the NAV on June 30, 2005 was Rs. 14.35, Percentage change in NAV = (14.35 – 12.75)/12.75 x 100 = 12.55% Annualized return: = 12.55 x 12/6 = 25.10%
Total Return
Investor bought units of a mutual fund scheme at a price of Rs.12.45 per unit. He redeems the investment a year later, at Rs. 15.475 per unit. During the year, he also receives dividend at 7%. The rate of return on his investment can be computed as =((15.475 – 12.45) + 0.70)/12.45 x 100 = (3.725/12.45) x 100 = 29.92%
Total Return or ROI Method
• (Value of holdings at the end of the period - value of
holdings at the beginning of the period)/ value of holdings at the beginning of the period x 100
• Value of holdings at the beginning of the period = number of units at the beginning x begin NAV. • Value of holdings end of the period = (number of units held at the beginning + number of units re-invested) x end NAV. • Number of units re-invested = dividends/ex dividend NAV.
ROI Method: Example
An investor buys 100 units of a fund at Rs. 10.5 on January 1, 2005. On June 30, 2005 he receives dividends at the rate of 10%. The ex-dividend NAV was Rs. 10.25. On December 31, 2001, the fund’s NAV was Rs. 12.25. What is the total return on investment with dividends re-invested?
ROI Method: Solution
• The begin period value of the investment is = 10.5 x 100 = Rs. 1050 • Number of units reinvested = 100/10.25 = 9.756 units • End period value of investment = 109.756 x 12.25 = Rs. 1344.51 • The return on investment is =(1344.51-1050)/1050 x 100 = 28.05%
Compounded Average Growth Rate
• CAGR is the rate at which investment has grown from begin point to the end point, on an annual compounding basis.
V0(1+r)n = V1
r =((V1/V0)1/n)-1 Where n is the holding period in years.
CAGR: Example
An investor buys 100 units of a fund at Rs. 10.5 on January 6, 2001. On June 30, 2001 he receives dividends at the rate of 10%. The ex-dividend NAV was Rs. 10.25. On March 12, 2002, the fund’s NAV was Rs. 12.25. Compute the CAGR.
CAGR: Solution
• The begin period value of the investment is = 10.5 x 100 = Rs. 1050 • Number of units reinvested = 100/10.25 = 9.756 units • End period value of investment = 109.756 x 12.25 = Rs. 1344.51 • Holding period = 6/01/01 - 12/3/02 = 431 days • The CAGR is =(1344.51/1050)365/431 - 1 x 100 = 23.29%
Other Forms of Returns
• Point to point Return
– Comparing NAV on a point to point basis
• NAV of 10/03/11 v/s 10/03/12 - 1 yr point to point return • NAV of 10/03/10 v/s 10/03/12 - 2 yr point to point return
• Rolling Returns
– Calculating daily returns
• • • • • NAV of 10/03/12 v/s 10/03/12 – 1yr point to point return NAV of 11/03/12 v/s 11/03/12 – 1yr point to point return NAV of 12/03/12 v/s 12/03/12 – 1yr point to point return NAV of 13/03/12 v/s 13/03/12 – 1yr point to point return NAV of 14/03/12 v/s 14/03/12 – 1yr point to point return Avg. of point to point return
Other Measures of Performance
• Tracking error – Tracking error for index funds should be nil. • Credit quality – Rating profile of portfolio should be studied • Expense ratio – Higher expense ratios hurt long term investors • Portfolio turnover – Higher for short term funds and lower for longer term funds. • Size and portfolio composition
Risk Adjusted returns
• Sharpe Ratio • Average Return of the Fund – Risk Free Returns / Standard Deviation of the Fund • Sharpe ratio is a relative ratio
– Numerator gives you the excess returns – Denominator the risk at which excess returns have been delivered – Ratio gives returns relative to risk
• Higher the Sharpe ratio the better the fund
Risk Adjusted returns
• Treynors • Average Return of the Fund – Risk Free Returns / Beta of the Fund • Treynors ratio is a relative ratio
– Numerator gives you the excess returns – Denominator the risk at which excess returns have been delivered – Ratio gives returns relative to risk
• Higher the Treynors ratio the better the fund
Standard Deviation
• Measure of volatility • Measures deviation around the mean of the data series • Higher the standard deviation higher the volatility
Beta
• Measure of volatility • Measures deviation in comparison with market benchmark. • Higher the Beta higher the volatility
Other terms we should know
• • • • • Dividend Yield PE(Price to Earning) Multiple EPS(Earning per share) Indexation R Square - A statistical measure that represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index. For fixed-income securities, the benchmark is the T-bill. For equities, the benchmark is the S&P 500.
Other terms we should know
• • • • • • Alpha YTM Modified Duration Accrual OMO(Open Market Operations) LAF(Liquidity Adjustment Facility)
In the end
Thanks & keep asking
doc_840368762.pptx
mutual fund performance measurement and ROI calculation. It includes various parameters to measure mutual fund performance like sharpe ratio, beta, treynors ratio, dividend yield etc.
Performance Evaluation & Analysis of Mutual Funds
Risk and Return
• Return Methods
– – – – Change in NAV Total Return Total Return with dividend re-investment CAGR
• Risk
– Standard deviation – Beta and Ex-Marks
• Benchmark and comparison
Measuring Mutual Fund Performance
• • Returns (Absolute, Annualized, CAGR): Volatility: – The deviation of the funds returns over the mean give s the volatility of the fund over a given period. Standard deviation is the measure of volatility/risk. The lower the volatility the better the fund Risk Adjusted Return (RAR) or Sharpe ratio – The return given by the fund given the level of the risk/volatility is called risk adjusted return. The higher the RAR the better the fund Corpus size: – The Funds under management for a particular fund. The higher the corpus the more the comfort level Credit Quality: – The credit rating of the papers in the portfolio is called the Credit quality. Maturity Profile / Average Maturity: – The average term to maturity of the securities held in the portfolio
•
•
• •
Computing Returns
• Sources of return
– Dividend – Change in NAV
• Return =
Income earned for amount invested
over a given period of time • Standardize as % per annum
Alternate Methodologies
• Computing return
– Percentage change in NAV. – Simple total return – ROI or Total return with dividend re-investment – Compounded rate of growth
Percentage Change in NAV-Absolute Return
• Assume that change in NAV is the only source of return. • Example: – NAV of a fund was Rs. 23.45 at the beginning of a year – Rs. 27.65 at the end of the year. • Percentage change in NAV = (27.65 – 23.45)/23.45 *100 = 17.91%
Annualizing the Rate of Return
If NAV on Jan 1, 2005 was Rs. 12.75 and the NAV on June 30, 2005 was Rs. 14.35, Percentage change in NAV = (14.35 – 12.75)/12.75 x 100 = 12.55% Annualized return: = 12.55 x 12/6 = 25.10%
Total Return
Investor bought units of a mutual fund scheme at a price of Rs.12.45 per unit. He redeems the investment a year later, at Rs. 15.475 per unit. During the year, he also receives dividend at 7%. The rate of return on his investment can be computed as =((15.475 – 12.45) + 0.70)/12.45 x 100 = (3.725/12.45) x 100 = 29.92%
Total Return or ROI Method
• (Value of holdings at the end of the period - value of
holdings at the beginning of the period)/ value of holdings at the beginning of the period x 100
• Value of holdings at the beginning of the period = number of units at the beginning x begin NAV. • Value of holdings end of the period = (number of units held at the beginning + number of units re-invested) x end NAV. • Number of units re-invested = dividends/ex dividend NAV.
ROI Method: Example
An investor buys 100 units of a fund at Rs. 10.5 on January 1, 2005. On June 30, 2005 he receives dividends at the rate of 10%. The ex-dividend NAV was Rs. 10.25. On December 31, 2001, the fund’s NAV was Rs. 12.25. What is the total return on investment with dividends re-invested?
ROI Method: Solution
• The begin period value of the investment is = 10.5 x 100 = Rs. 1050 • Number of units reinvested = 100/10.25 = 9.756 units • End period value of investment = 109.756 x 12.25 = Rs. 1344.51 • The return on investment is =(1344.51-1050)/1050 x 100 = 28.05%
Compounded Average Growth Rate
• CAGR is the rate at which investment has grown from begin point to the end point, on an annual compounding basis.
V0(1+r)n = V1
r =((V1/V0)1/n)-1 Where n is the holding period in years.
CAGR: Example
An investor buys 100 units of a fund at Rs. 10.5 on January 6, 2001. On June 30, 2001 he receives dividends at the rate of 10%. The ex-dividend NAV was Rs. 10.25. On March 12, 2002, the fund’s NAV was Rs. 12.25. Compute the CAGR.
CAGR: Solution
• The begin period value of the investment is = 10.5 x 100 = Rs. 1050 • Number of units reinvested = 100/10.25 = 9.756 units • End period value of investment = 109.756 x 12.25 = Rs. 1344.51 • Holding period = 6/01/01 - 12/3/02 = 431 days • The CAGR is =(1344.51/1050)365/431 - 1 x 100 = 23.29%
Other Forms of Returns
• Point to point Return
– Comparing NAV on a point to point basis
• NAV of 10/03/11 v/s 10/03/12 - 1 yr point to point return • NAV of 10/03/10 v/s 10/03/12 - 2 yr point to point return
• Rolling Returns
– Calculating daily returns
• • • • • NAV of 10/03/12 v/s 10/03/12 – 1yr point to point return NAV of 11/03/12 v/s 11/03/12 – 1yr point to point return NAV of 12/03/12 v/s 12/03/12 – 1yr point to point return NAV of 13/03/12 v/s 13/03/12 – 1yr point to point return NAV of 14/03/12 v/s 14/03/12 – 1yr point to point return Avg. of point to point return
Other Measures of Performance
• Tracking error – Tracking error for index funds should be nil. • Credit quality – Rating profile of portfolio should be studied • Expense ratio – Higher expense ratios hurt long term investors • Portfolio turnover – Higher for short term funds and lower for longer term funds. • Size and portfolio composition
Risk Adjusted returns
• Sharpe Ratio • Average Return of the Fund – Risk Free Returns / Standard Deviation of the Fund • Sharpe ratio is a relative ratio
– Numerator gives you the excess returns – Denominator the risk at which excess returns have been delivered – Ratio gives returns relative to risk
• Higher the Sharpe ratio the better the fund
Risk Adjusted returns
• Treynors • Average Return of the Fund – Risk Free Returns / Beta of the Fund • Treynors ratio is a relative ratio
– Numerator gives you the excess returns – Denominator the risk at which excess returns have been delivered – Ratio gives returns relative to risk
• Higher the Treynors ratio the better the fund
Standard Deviation
• Measure of volatility • Measures deviation around the mean of the data series • Higher the standard deviation higher the volatility
Beta
• Measure of volatility • Measures deviation in comparison with market benchmark. • Higher the Beta higher the volatility
Other terms we should know
• • • • • Dividend Yield PE(Price to Earning) Multiple EPS(Earning per share) Indexation R Square - A statistical measure that represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index. For fixed-income securities, the benchmark is the T-bill. For equities, the benchmark is the S&P 500.
Other terms we should know
• • • • • • Alpha YTM Modified Duration Accrual OMO(Open Market Operations) LAF(Liquidity Adjustment Facility)
In the end
Thanks & keep asking
doc_840368762.pptx