Final Summer Project1

Tracking mutual fund scheme performance

Tracking Mutual Fund Scheme Performance in INDIA

Submitted by Rahul Kundanmal Bapana Roll no.34 Institute of Financial Market (IFM 08-09)

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Tracking mutual fund scheme performance

Contents Sr.No. 1 Executive Summary

Particulars

Pg.No. 4

2 Introduction

5

3 History of Mutual Fund in INDIA

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4 Terminology associated with MUTUAL FUNDS

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5 Benefits of Investing in MUTUAL FUND

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6 Drawback of Investing in MUTUAL FUND

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7 Structure of MUTUAL FUND

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8 Types of MUTUAL FUND Schemes

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9 Performance Evaluation of Mutual Fund Scheme a.) Concept of Return b.) Concept of Risk c.) Risk adjusted return d.) Statement of the problem e.) Objective of the Analysis f.) Scope of Study g.) Fund Features h.) data Interpretation i.) Performance Evaluation of Scheme for Different Period

21 21 28 30 33 33 33 34 34 37

10 Conclusion

41

11 References

42

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Tracking mutual fund scheme performance

Acknowledgement

I take this opportunity to acknowledge my indebtedness to all those who helped and encouraged me to complete this project. I would like to express my greatest regards to my mentor Mr. Manoharlal sir (professor of ITM), who guided me at every step. He was always ready with his valuable and constructive suggestions, keen and sustained interest, and constant encouragement in the development, planning and execution of the task provided to me during the project and I would also like to thank other faculty and friends for their continuous support.

I thank my B-school also who felt the need of a summer internship program and helped me in learning some important concepts. I believe this training will definitely be helpful in shaping my career.

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Tracking mutual fund scheme performance

Executive Summary Each and every stock market in the world goes through the risk associated with the investment. This project is about Mutual funds, their structure in India, different types of scheme offered by different fund houses, the Risk and Return associated with the portfolio and how an investor should take decision in regards to the asset in his portfolio to minimize Risk and increase Return. This is project is all about how to evaluate the performance of mutual fund scheme and investor can make wise decision based on that. The main issue in performance measurement is coupling a measure of risk with Return. it also include Risk-adjusted measure designed by Sharpe, Treynor, Jensen and Appraisal Ratio. Benchmarking and peer group analysis of Mutual fund scheme help the investor to understand the performance in more meaningful terms. Investor are advised to monitor the performance of their mutual fund investment on a regular basis. The topic end with a small note on tracking the fund’s performance.

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Tracking mutual fund scheme performance


Introduction A mutual fund is a trust that pools the saving of a number of investors who share a common financial goal. The money thus collected by mutual fund is invested by fund manager in different types of securities depending upon the objectives of the scheme. The securities can be Shares and Bond or Money market instrument. The income earned & capital appreciation realized by the scheme is shared by unit holders in proportion to number of unit owned by them. The mutual fund is professionally managed and gives the opportunities to common man to invest in a diversified portfolio at a low cost. The small saving of all investors are put together to increase the buying power & hire a professional manager to invest and monitor the money. All mutual fund schemes have their defined investment objective and strategy depending on this the investors chooses the mutual fund scheme. The profit and loss are shared by the investors in proportion to their investment. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates the securities markets, before it can collect funds from the public.

Growing popularities of MUTUAL FUNDS: The mutual fund has become more popular in India. The number of such fund is increasing and getting popular among investors. Investors prefer to give their savings to mutual funds for the safety of their fund and also for securing the benefit of diversified investment. Mutual funds are also popular as they have introduced various open-ended schemes in order to offer convenience to all categories of investors. Small investors do not have substantial amount to invest, sufficient time to study various avenues available for investment and finally necessary knowledge, experience and skills to find out the most secured and profitable avenue for investment. However, these problems can be solved by investing money in the mutual funds. In these sense, mutual fund acts as a boom to investors in general and small investors in particular.

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Tracking mutual fund scheme performance


History of Mutual Fund In INDIA The mutual fund industry started in India with the formation of the Unit Trust of India under the UTI Act, 1963. Over a period of 25 Years this grew fairly successfully and gave investors a good return and therefore in 1987-93, as the next logical step, public sector banks and financial institution were allowed to introduce their mutual fund scheme. SBI was first non UTI mutual fund set up in 1987 and going further in 1993 the success of the public sector mutual fund encouraged the government to allow private sector players to introduce their fund. In the year 1992, Securities and Exchange Board of India (SEBI) Act was passed. The objectives of SEBI are to protect the interests of investors in securities and to promote the development of the securities market and to regulate it. As far mutual funds are concerned, SEBI formulates policies and regulates the mutual fund to protect the interest of investors. SEBI notified regulation for the mutual fund in 1993. Thereafter, mutual funds sponsored by private sector entities Were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interest of investors. All mutual funds whether private sector or public sector or entities which are promoted by foreign company are governed by the same set of regulations In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

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Tracking mutual fund scheme performance


Terminology associated with MUTUAL FUNDS There is lot of terminology associated with mutual fund that one needs to know before one can start investing in them. These concepts are an important of mutual fund investments.

Open-end funds: Most mutual fund schemes are open-ended. The reason that these funds are “open-ended” is because there is no limit to the number of new units that they can issue. These funds are open for sale and repurchase throughout the year expect during the book closure period. New and existing unit holders may add as much money to the fund as and whenever they want; the fund will simply issue new units to them Open-ended funds also redeem or buy back unit from unit holders at prevailing NAV. A person may redeem his holding any time from an open-ended fund.

Close-ended funds: Close-ended funds issue a fixed number of unit to the public during the new fund offer (NFO) after which unit are either listed in a stock exchange or mutual fund gives investors an exit option at frequent intervals. Unlike open-ended funds, close-ended funds are not obliged to issue new unit or redeem outstanding unit. The price of unit in a close-ended fund is determined entirely by market forces so unit can either trade below their NAV (at a discount) or above it (at a premium). Most funds are issued with an exit option to investors: therefore there is no need for the scheme to be listed on a stock exchange. All mutual fund fall into one of two broad categories

Net Asset Value: The performance of a particular scheme of a mutual fund is denoted by the net asset value. Mutual fund invests money collected from the investors in the securities market. Since the market value of securities changes every day, the NAV of a scheme also varies on a day to day basis.

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Tracking mutual fund scheme performance

The open-ended mutual funds price their unit in terms of a net asset value. This is calculated by adding the market value of all the fund underlying securities, subtracting all of the funds liabilities, and then dividing this by the number of outstanding unit in the fund. The resulting NAV per unit is the price at which unit in the fund are purchased and sold (plus or minus any load). On other hand close-ended mutual fund NAV are determined by the market forces. They also have to calculate the NAV similarly as it is calculated in open-ended scheme and you can see that the traded NAV may be above (trading at premium) or below (trading at discount) calculated NAV. Open-ended schemes have to calculate the NAV of all the schemes daily and post it on the website of AMFI by 8.00 pm. Close-ended fund have to calculate the NAV every Wednesday and post it on the website of AMFI by 8.00 pm.

Entry Load and Exit Load: Every investment of a mutual fund whether in debt or equity instrument have to bare some cost, Which is generally passed on to the investors. This cost is the load born by the investors. Entry load is charged to recover the expenses of the fund such as brokerage, marketing expenses, documentation cost. Etc. load is charged on the NAV of the scheme. With entry load, the sales price become higher than the NAV. Exit load reduces the purchase price to below the NAV. A no-load fund is one that does not charge an entry or exit load. This means that the investors can enter the fund at the NAV and exit at the NAV. Mutual fund can increase or decrease loads on the schemes but they have to amend their offer document so that new investors are aware of loads at the time of investments and till the time offer document is amended, they have to send this information in the form of addendums to the offer document. Any change in the load is applicable only to prospective investment and not to the original investments. Note: From August 1, 2009, as per a recent SEBI diktat Entry load has been eliminated.

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Tracking mutual fund scheme performance

Sale price: Sales price is the price which a prospective investor has to pay per unit while buying units of a mutual fund scheme. Sale price will be equal to the NAV when there is no load charged by the fund and if any entry load is charged the sale price will be higher than NAV.

Repurchase/redemption price: Repurchase or redemption price is the price at which open-ended scheme purchase or redeems its unit from the unit holders. When an exit load is charged, the purchase price becomes less than the present NAV.

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Tracking mutual fund scheme performance


Benefits of Investing in MUTUAL FUND Professional Management : Mutual fund provide service of experienced and skilled professionals backed by a dedicated investment research team that analysis the performance and prospects of companies and select suitable investments to achieve the objectives of the scheme were as small investors can do all such think, so it provide opportunities to invest in a professionally managed and diversified portfolio.

Diversification : Mutual fund invests in a number of companies across a broad cross-section of industries and sectors. The diversification reduces the risk because all the stocks will not decline at the same time and in same proportion; some may do well at a same time that others are not. You achieve this diversification through mutual fund with far less money than you can do your own.

Saving Taxes: Tax saving scheme of mutual fund offer investors a tax rebate under section 88 of income tax Act. Under this section, an investor can invest up to Rs. 10,000 per year in a tax saving scheme

Convenient Management: Investment in a mutual fund reduces paperwork and helps you to avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual fund saves time and makes investing easy and convenient. You may not have the expertise or the time to manage your own portfolio.

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Tracking mutual fund scheme performance

Low Costs: Mutual funds are relatively less expensive way to invest compared to directly investing in the capital market because the benefits of economics of scale in brokerage, custodian and other fees translate into lower costs to investors.

Return Potential: Over a medium to long-term, mutual fund have the potential to provide a higher return as they invest in a diversified basket of selected securities. The experience of many mutual fund schemes indicate that if the fund manager is capable of managing the portfolio efficiently, than over a medium to long-term the return will be considerably more than the level of inflation. You have to be cautious while investing in a mutual fund and study the previous return history and the sectors selected by the scheme.

Liquidity: in open-ended schemes the investors can get his money back promptly at NAV related prices on other hand in close-ended schemes the units can be sold on a stock exchange at the prevailing market price or the investors can avail of the facility of direct repurchase at NAV related prices by the mutual fund. In case a close-ended scheme is not listed at a stock exchange, mutual fund offers investors the exit option if they require money, but they have to pay an exit load. The rate of exit load depends on the date of withdrawal. The longer the investor stays with the fund the lesser is the exit load he will have to pay.

Transparency: Regular information is provided on the value of your investment in addition to disclosure on the specific investment made by your scheme, the proportion of their holding in different securities and the fund manager’s investment strategy and outlook.

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Tracking mutual fund scheme performance

Flexibility : Through features such as regular investment plan (SIP), regular withdrawal plan (SWP) and dividend reinvestment plan, you can systematically invest or withdraw funds according to your needs and convenience. A young client will invest money systematically as his financial goals are far away and he has to invest in order to meet the various goals of his life. A retired person has accumulated a lump sum and he may need to withdraw regularly in order to meet his monthly expenses. A younger client will therefore choose for systematic investment plans (SIP) or voluntary accumulation plans (VAP) and the older client will choose for a systematic withdrawal plan (SWP).

Wide Variety of scheme: Mutual fund offer a family of scheme to suit your varying needs over a lifetime and a variety of scheme are available with mutual fund.

Well regulated: All mutual funds are registered with SEBI and they function within the provision of strict regulation designed to protect the interest of investors. The operations of mutual funds are regularly monitored by SEBI. MFs promoted by public or by private sector entities as well as those that are promoted by foreign institutions are governed by these regulations. SEBI approved Asset Management Company (AMC) manages the funds by making investment in various types of securities. A custodian registered with SEBI holds the securities of various scheme of the fund in its custody. All mutual funds are required to be registered with SEBI before they launch any scheme.

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Tracking mutual fund scheme performance


Drawback of investing in MUTUAL FUND Costs despite Negative Returns: Investors must pay sales charges, annual fees and other expenses regardless of how the fund performs. And depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive even if the fund went on to perform poorly after bought shares.

Lack of Control: Investors typically cannot ascertain the exact make up of a fund’s portfolio at any Given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.

No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investor encounters fewer risks when they invest in mutual fund than when they buy and sell stocks on their own.

Management risk: When you invest in a mutual fund, you depend on the fund’s manager to make the right decision regarding the fund’s portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index funds, you forego management risk, because these funds do not employ managers.

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Tracking mutual fund scheme performance


Structure of MUTUAL FUNDS A mutual fund is a trust. The three-tier structure of mutual fund is as follows:

•

Sponsors

•

Trustee company/Board of trustees

•

Asset management company (AMC)

The trustees are appointed by sponsors or more than one sponsors with the approval of SEBI. The sponsors initiate the idea to set up the mutual fund. The sponsors are the promoter of the company. The sponsor establishes the mutual fund and registers it with SEBI. He also appoints the trustees, the custodian and the asset management company in accordance with SEBI regulation. The sponsor has to contribute at least 40% of the net worth of the AMC. The trustees act in the benefit of unit holders. They are the first level regulators of the mutual fund and are governed by the provisions of India Trust Act, 1908.The asset management company (AMC) approved by SEBI. The trustees, on the advice of sponsor usually appoint the AMC. Therefore, the AMC is either appointed by the sponsors or by the trustees on the advice of the sponsors. AMC’s are managing the money of investors, compensates investors through dividends, maintain proper accounting and information for pricing of units, calculated NAV and provide information on listed schemes. An AMC is responsible for operation aspects of mutual fund. They have an investment management agreement with trustees, which are registered with SEBI. Its net worth should be maintained Rs. 10 crore at all times. An AMC cannot have any other business interest and they have a mandatory duty of quarterly reporting to appoint trustees.

Types of AMC’s • AMC owned by financial institution • AMC owned by banks

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Tracking mutual fund scheme performance

• AMC owned by Indian private sector companies • AMC owned by FII’s • AMC owned jointly by Indian and foreign sponsors

The custodian, who is registered with SEBI, holds the physical securities of the various scheme of the fund in its custody. The depositories held the securities which are in electronic form (dematerialized). Its responsibility includes receipt and delivery of securities, collecting income-distributing dividends, safekeeping of the units and segregating assets and settlement between schemes. Custodian can service more than one fund. SEBI regulation requires that at least two-thirds of the directors of the Trustee Company or board of trustees must be independent, i.e they should not be associated with the sponsors. Also 50% of the directors of the AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.

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Tracking mutual fund scheme performance




Types of MUTUAL FUND Schemes • By Structure  Open-ended schemes  Close-ended schemes  Interval schemes

• BY Investment objectives  Growth schemes/fund  Income schemes/fund  Gilt fund  Floating rate fund  Fixed maturity plan  Balanced schemes – equity or debt oriented balanced fund  Money market schemes

• Other Schemes  Index funds  Tax saving funds  Exchange traded funds  Gold exchange traded funds  Sector funds  Value funds  Hedge funds  Arbitrage funds  Fund of funds

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Tracking mutual fund scheme performance

• Schemes according to investment objectives A scheme can also be classified as a growth scheme, an income scheme, or a balanced scheme depending on its investment objectives. Such scheme may be open-ended or close-ended schemes, as explained earlier. They are classified as follows.

Growth/Equity Oriented scheme: The main objective of growth fund is to provide capital appreciation over medium to long-term. Such schemes normally invest a major part of their corpus in equities and have comparatively high risk. These schemes provide different options to investors such as dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences.

Income/Debt Oriented schemes: The aim of income fund is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debenture, government securities and money market instrument and are less risky compared to equity schemes. These fund are not affected by fluctuation in equity market. The NAV of such funds are affected because change in interest rate in the country.

Gilt fund: These funds invest exclusively in government securities that have no default risk. Gilt fund do not suffer from default risk but other risks such as interest rate risk, reinvestment risk, liquidity risk, inflation risk, etc. are part of all debt investments whether through mutual fund route or directly.

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Tracking mutual fund scheme performance

Floating rate funds: Floating rate funds are those fund which pay floating rate of interest. The rate is pegged to a benchmark rate. When interests are likely to come down, money should be invested in long term debt funds.

Fixed maturity plans: Fixed maturity plans are short-term debt instrument where investment is made for a fixed period say 12 months or 13 months and investors cannot withdraw money during that period.13 months plan are very common because investors get double indexation benefit. They will pay long-term capital gain tax by taking advantages of the cost inflation index of two years.

Equity Oriented balanced funds: Equity oriented balanced funds invest less than 65% of the corpus in equity and equity related instrument and the remaining in debt instruments. The benefit of investing in balanced funds is that investors will not have to do any re-balancing in asset allocation if the asset allocation changes due to stock market movements. The re-balancing will be done by the fund manager.

Money market fund: These schemes invest exclusively in safer short-term instrument such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc.

Index funds: The fund manager will select one of the indices as benchmark and invest the amount mobilized, only in those company which form part of that index and in same proportion.

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Tracking mutual fund scheme performance

Tax saving (ELSS) scheme: These scheme offer tax rebates to the investors under specific provisions of the income tax Act, 1961.as the government offers tax incentives for investment in specific schemes example- equity linked savings schemes (ELSS), pension schemes launched by the mutual fund also offer tax benefit. An investment of up to Rs. 100000 will give the investors a tax exemption under section 80C of the income tax act. There is lock-inperiod of three years in the case of ELSS.

Exchange traded funds (ETF): ETFs are a basket of securities that are traded like individual stocks on an exchange. These funds invest in the securities that are mentioned in offer document. Like index fund these fund are also passively managed funds. Unit can be bought and sold directly on the exchange. These fund have all the advantages of diversification, low cost and transparency.

Gold Exchange traded funds: Gold ETF is typically, an exchange traded mutual fund scheme listed and traded on a stock exchange. Gold is the underlying asset for the units of that fund. Every gold ETF unit represents a definite quantum of pure gold say, one gram (0.5 gram) of gold.

Sector fund: Sector fund are mutual fund schemes that restrict their investment to a particular segment or sector of the economy. These funds concentrate on one industry such as infrastructure, health care, utilities, IT, etc.

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Tracking mutual fund scheme performance

Value funds: A value fund is the scheme of a mutual fund that hold value stocks or stock deemed to be undervalued in price. Every mutual fund has value fund scheme that search for stocks that are undervalued by the market. The premise of value investing is that the market has inherent inefficiencies that enable companies to trade at levels below what they are actually worth. Once the market corrects these inefficiencies the value investor will see the stock price rise.

Hedge funds: These funds like mutual fund collect money from investors and use the proceeds to buy stocks and bonds. Unlike mutual fund however, hedge funds Typically take long and short position in asset to lower portfolio risk arising from broad market movements. A hedge fund may take long position in certain stocks and short position in certain others so that their portfolio beta is close to zero. A beta close to zero means that the portfolio will remain relatively unchanged due to the board market movement.

Arbitrage funds: Arbitrage is a strategy, which involves simultaneously purchase and sale of identical or equivalent instrument in two or more market in order to benefit from a discrepancy in pricing. The returns from arbitrage funds would typically be much lower than those of equity funds.

Fund of Funds: A Fund of Funds (FOF) is an investment fund that uses an investment strategy of holding a portfolio of other investment funds rather than directly in shares, bonds or other securities. This type of investing is often referred to as multi-manager investment

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Tracking mutual fund scheme performance


Performance Evaluation of Mutual Fund Scheme An investor who is investing in mutual fund is willing to know the performance of the particular scheme and can judge the capability of fund manager. Moreover, an investment manager, by evaluating his or her own performance, can identify his strength or weakness and accordingly take further decision. Superior performance in the past may have resulted from good luck, in which case such performance should not be expected to continue in future. On other hand, superior return in the past may have resulted from the actions of a highly skilled investment manager, so to know the fund manager is consistently efficient even in good or bad market condition the performance should evaluated. So performance evaluation is a continuous process. Many investors often measure the performance in terms of return; they don’t consider the risk which they are undertaking to achieve those return.

Proper

performance should involve recognition of both, the return and the riskiness of the investment. So we will also look at risk adjusted measures designed by Sharpe, Treynor, Jensen and Appraisal ratio.

Tools for Analysis: Concept of Return The most important statistical tool in measuring the performance of mutual fund is the rate of return. Rate of return has no single definition which can be applied to all the purposes but there is one possible definition for all purposes. So it is important to have clear definition for each purposes for which the performance is to measure and then select an appropriate return to measure the performance.

Before going any further it would be appropriate to define some performance measures:

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Holding Period Return (HPR): The simple percent change in a portfolio’s total market value over a given period. It is a single-period version of Rupee-weighted Return.

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Tracking mutual fund scheme performance

•

Rupee-Weighted Return (RWR): Rate of return that measures change in total Rupee value, treating any addition or withdrawals of capital as a part of return. RWR is also called as Internal Rate of Return (IRR).

•

Time –Weighted Return (TWR): Rate of return that eliminates the effect of additions and withdrawals of capital as a part of return. The time-weighted return is also called the geometric return or the compounded annual growth rate.

Let’s look at some equation which will help in clear understanding of each return

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Holding Period Return (HPR): The most straight forward rate of return is the Holding Period Return. It equals the income generated by an investment plus change in price of the investment during the period the investment is held, all divided by beginning price. For example, if an investment has purchased an unit of a mutual fund scheme on 1 April, 2002, for Rs.10.00, received Rs.2.00 as dividend, and redeemed the unit on 31 march, 2003, for Rs.12.00.he achieved the HPR of 40%.

HPR= [I + (E-B)]/B Where, I = Income E= Ending price B= Beginning price

The only limitation of this measure is that it does not take into consideration the impact of reinvestment. It assumes that all distributions (of Income) are made at the end of the year. In spite of this limitation HPR is widely used and generally accepted indicator of performance measurement

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Tracking mutual fund scheme performance

•

Rupee-Weighted Return (RWR): A multi-period rupee-weighted return is also referred to as the internal rate of return (IRR), because it will generate a discount rate where the present value of cost of an investment equals the present value of return on the investment. suppose that mutual fund schemes generated the following annual holding period return from 2004 to 2008.

Year

Return

2004

-5.00%

2005

-15.00%

2006

3.10%

2007

30.75%

2008

17.65%

Suppose that you had invested Rs. 75000 in this scheme by making contribution at the each year according to the following schedule:

Investment Year

in Rs.

2004 5000 2005 10000 2006 15000 2007 20000 2008 25000

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Tracking mutual fund scheme performance

By the end of 2008, his investment would have grown in value to Rs.

Value

of

the investment Investment Year

at the end

in RS

Return

of the year

2004 5000

-5.00%

4750

2005 10000

15.00% 12508

2006 15000

3.10%

2007 20000

30.75% 632321.7

2008 25000

17.65% 103804.6

28360.75

By discounting the ending value of our investment and the interim cash flows back to our initial contribution, we can determine the rupee-weighted rate of return also known as internal rate of return:

5000 =

- 10000 (1+R)^1

15000

-

20000

(1+R)^2 (1+R)^3

RWR= 14.25%

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-

25000 + 103805 (1+R)^4

(1+R)^5

Tracking mutual fund scheme performance

What if we make contribution reverse?

Value

of

the investment Investment Year

in RS

2004 25000

at the end Return

of the year

-5.00%

23750

2005 20000

15.00% 37100

2006 15000

3.10%

2007 10000

30.75% 83307.49

2008 5000

17.65% 103893.8

25000 = -25000 1+R)^1

-

15000 (1+R)^2

53715.1

-

10000

-

5000 + 103894

(1+R)^3 (1+R)^4

(1+R)^5

RWR= 9.12%

As we have seen that such cash flow are not under the control of the fund manager and vary considerably from fund to fund, RWR is not a suitable statistic for comparison between different funds.

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Tracking mutual fund scheme performance

•

Time –Weighted Return (TWR): To assist in inter fund comparison the timeweighted return is calculated as this measure removes the impact of different cash flows. We can compute the time-weighted rate of return by first adding one to each year’s holding-period return to determine the return’s wealth relative. Then we multiply the wealth relatives together, raise the product to the power 1 divided by the numbers of years in the measurement period, and subtract 1.

TWR = [(1 + r1)*(1 + r2)]1/n – 1

Where, r1 = HPR of period 1 r2 = HPR of period 2

• Which Performance Measure to Use? We have seen that RWR captures the effect of intermediate cash flows. TWR ignores the effect of intermediate cash flows. When mutual fund manager has no control on intermediate cash flows, TWR represents his performance better. As this is general situation in a mutual fund TWR is preferred. The time-weighted return is also called the geometric return or the compounded annual growth rate. Although the geometric return and the compounded annual growth rate are often used interchangeably, technically the geometric return pertains to a population whereas the compounded annual return pertains to a sample. We use the term geometric return to refer to both. It is the rate of return that, when compounded annually, determines the ending value of our initial investment assuming there are no interim cash flows.

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Tracking mutual fund scheme performance

Only TWR works for managed accounts TWR is used throughout the money management industry, because it is the only appropriate performance measure to use on managed accounts. The reasoning behind this is Firstly, a money manager may not directly control the timing or the amount of client contribution and withdraws from their portfolio. Since the manager cannot control cash flows and the total dollars invested in the portfolio it would be inappropriate to use a measure like DWR that skews returns based on dollar amount size. Remember that TWR gives a rate of return that eliminates the effects of cash flows.

Secondly, TWR is used by the money management industry because it measures how the money was managed. It shows the investor how well their money was managed, whether the portfolio was worth $1,000 or $1,000,000. The TWR number can then be used in direct comparison with other managers TWR’s for the same period. This allows investors to find where their money has been managed the best. As a result, use TWR when evaluating managed portfolios.

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Tracking mutual fund scheme performance

Concept of Risk Risk is also the key factor in determining fund performance measurement and fund manager’s skills. One cannot judge the fund manager skills only on the basis of return so risk is also equally important factor in determining fund managers skills.

For a mutual fund the following factor cause variability of the investment performance.  The kind of securities in the portfolio, Ex., small cap stocks may be more volatile than large cap stock.

 The degree of diversification. Ex., a portfolio of only 6 stocks may be more volatile than portfolio comprising of 15 stocks.

 The extent to which the portfolio manager times the market. Ex, and index fund tend to be less volatile than an aggressive growth fund.

•

Standard Deviation: Standard Deviation is a tool which measures the variability of the data set. It is the square root of the square of the mean deviations from the arithmetic mean of a data series. It is calculated to measure the riskiness of a fund, stock or portfolio. Higher the standard deviation means higher the risk and higher the returns of the asset and a low standard deviation mans that the asset is less risky and will generate less returns. Standard deviation which measures variability and extent of dispersion from data, expresses the volatility of the fund. It mainly indicates the total risk associated with the given fund. Standard deviation allows portfolio’s with similar objectives to be compared over a particular time frame. It can also be used to measure how much more risk a fund in one category has versus the other. The Standard Deviation of the fund returns were calculated with the following formula:

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Tracking mutual fund scheme performance

Where, S = Standard Deviation, N = number of weeks in the period, X = mean of the period, xi = return of the corresponding week.

• Beta βa Beta captures the market risk. Beta is the measure of volatility of a stock, fund, portfolio, etc with respect to the market. If the beta is positive then the fund returns are directly proportional to the market returns and if the beta is negative then the fund returns are inversely proportional to the market. The Capital Asset Pricing Model (CAPM) assumes that risk consists of systematic component and a specific component. Risk that is specific to individual securities can be diversified away hence an investor should not accept compensation for bearing this type of risk. Therefore when a portfolio is evaluated in combination with other portfolio, its excess return should be adjusted by its systematic risk rather than by its total risk

Beta of a fund is calculated with the following formula:

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Tracking mutual fund scheme performance

Risk-Adjusted Return The differential return earned by the fund manager may be due to difference in the exposure to risk. Hence it is essential to adjust the return for the risk. For this purpose there are essentially two major methods of assessing risk-adjusted performance:



Return per unit of risk



Differential return

Return per unit of risk: The first of the risk adjusted performance measure is the type that assesses the performance of a fund in terms of return per unit of risk. There are two measure to adjust return per unit of risk which are Sharpe Ratio and Treynor Ratio.

• Sharpe ratio Sharpe index measures risk premium of a portfolio, relative to the total amount for risk in the portfolio, which is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the model evaluates funds on the basis of reward per unit of total risk. It is also known as REWARD TO VOLATILITY. The larger the Sharpe Index the portfolio over performance the market and vice versa. Sharpe Index (Si) = (Ri - Rf)/Si

Where, Ri represents annualized return on portfolio for a given period, Rf represents the annualized risk free rate for the given period, Si is the st€andard deviation for a given period.

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Tracking mutual fund scheme performance

• Treynor ratio Treynor index measures risk premium of a portfolio, relative to the systematic risk in the portfolio, which is a ratio of returns generated by the fund over and above risk free rate of return and the market risk associated with it. It assumes that investor should be rewarded only for systematic risk not for unsystematic risk as it can be diversified. Treynor index (Ti) = (Ri - Rf)/Bi. Where, Ri represents annualized return on portfolio for a given period, Rf represents the annualized risk free rate for the given period, Bi is the Beta for a given period.

Differential Return The second category of risk-adjusted performance measure is referred to as differential return measure. The underlying objective of this category is to calculate the return that should be expected of the fund scheme given its realized risk and to compare that with the return actually realized over the period.

• Jensen alpha It measures the difference between the return the portfolio and expected return. It helps to know the capability and skill of fund manager. The Jensen measure is also suitable for evaluating a portfolios because it is based on systematic risk rather than total risk.

α = Average return of the portfolio – Ex where,

α represents Jensen alpha Ex represents expected return

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Tracking mutual fund scheme performance

• Appraisal ratio If we wish to determine whether or not an observed alpha is due to skill or chance we can compute appraisal ratio by dividing alpha by the standard error of the regression. This ratio helps to ascertain whether the return’s generated by the fund are purely attributable to market movement or individual fund performance. Appraisal ratio =

α/ σc

Where,

α represents alpha σc represents the standard error of the regression To interpret this ratio notice that the

α

in the numerator represents the fund

manager’s ability to use his skill and information to generate a portfolio return that differs from the benchmark against which his performance is being measured. Thus this ratio can be viewed as a benefit to cost ratio that assess the quality of fund manager’s skill.

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Tracking mutual fund scheme performance

• Statement of the problem: “ANALYSIS Of Performance Of Mutual Fund Scheme”

• Objective of the ANALYSIS: The main objective of study are as follows  To evaluate fund performance in terms of Risk and Return.  To examine fund sensitivity to the market fluctuation in terms of Beta..  To find out appropriate measure of Return and Risk.  To find out whether such performance was due to Skill or luck.  To compare schemes based on Sharpe ratio, Treynor’s ratio , Jensen, Appraisal ratio and find out which scheme is best for investors.

• Scope of study  The Mutual fund scheme which has been selected for the study are randomly chosen from Indian fund house which are open ended equity diversified growth fund and those are HDFC equity fund, Franklin India blue-chip fund, Sahara growth fund, Birla Sun Life Frontline Equity Fund, and sundaram BNP Paribas growth fund.  For evaluating fund performance NIFTY a market index has been selected for only reason that is India’s most widely and commonly used Benchmark index.  All data used for Analysis are taken from 1st july, 2006 upto 30th june, 2009.  For this study three interval period are included i.e 2006-2007, 2006-2008, 20062009  For evaluating return daily NAV has been selected.  Risk free rate is calculated by taking weighted average of yield on Treasury bill.

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Tracking mutual fund scheme performance

• Fund Features Name of scheme

HDFC Growth fund

Type of scheme

open-ended

Nature

Equity diversified

Option

Growth

Inception date

1-Jan-95

Face value

10/unit

Minimum investment

5000

Name of scheme

Franklin india blue chip fund

Type of scheme

open-ended

Nature

Equity diversified

Option

Growth

Inception date

1-Jan-97

Face value

10/unit

Minimum investment

5000

Name of scheme

sahara Groth fund

Type of scheme

open-ended

Nature

Equity diversified

Option

Growth

Inception date

30-Aug-02

Face value

10/unit

Minimum investment

3000

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Tracking mutual fund scheme performance

Name of scheme

Birla Sun Life Frontline Equity Fund

Type of scheme

open-ended

Nature

Equity diversified

Option

Growth

Inception date

30-Aug-02

Face value

10/unit

Minimum investment

5000

Name of scheme

sundaram BNP Paribas growth fund.

Type of scheme

open-ended

Nature

Equity diversified

Option

Growth

Inception date

15-Feb-97

Face value

10/unit

Minimum investment

2000

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Tracking mutual fund scheme performance

• Data Interpretation

RETURN

BETA

Standard deviation

Standard error

Risk free rate

2006-2007 2006-2008 2006-2009

HDFC 44.26 11.78 14.69

Franklin 41.19 11.43 14.51

Sahara 39.56 16.79 17.70

Birla 49.85 18.32 19.53

Sundaram 32.95 14.78 7.51

2006-2007 2006-2008 2006-2009

HDFC 0.83 0.81 0.80

Franklin 0.91 0.88 0.85

Sahara 0.81 0.90 0.79

Birla 0.86 0.71 0.78

Sundaram 0.94 1.00 0.91

2006-2007 2006-2008 2006-2009

HDFC 1.14 1.52 1.94

Franklin 1.24 1.61 1.99

Sahara 1.12 1.65 1.87

Birla 1.17 1.65 2.01

Sundaram 1.27 1.89 2.18

2006-2007 2006-2008 2006-2009

HDFC 0.0038 0.0048 0.0063

Franklin 0.0034 0.0040 0.0043

Sahara 0.0035 0.0044 0.0052

Birla 0.0034 0.0107 0.0095

Sundaram 0.0035 0.0064 0.0069

2006-2007 2006-2008 2006-2009

7.0651 7.0972 6.7479

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NIFTY 37.05 13.24 10.84

Tracking mutual fund scheme performance

• Performance Evaluation of Schemes for the period of 2006-2007.

Year Measures 2006-2007 Sharpe 2006-2007 Treynor ratio 2006-2007 Jensen Alpha 2006-2007 Appraisal ratio

HDFC 32.49 45.09 12.46 32.83

Franklin 27.57 37.50 6.84 20.37

Sahara 29.00 39.95 8.11 23.27

Birla 36.48 49.88 17.07 50.55

Sundaram 20.32 27.64 -2.20 -6.36

Interpretation: As per study and analysis above mentioned table and chart shows the performance of 5 different schemes.It is seen that, in the year 2006-07 as per Sharp Ratio Birla sun life frontline equity fund has given highest reward to volatility among other MF schemes. The second best performance is of HDFC growth fund while the lowest is Sundaram BNP paribas growth fund and while Franklin India blue chip fund and Sahara growth fund are on an average. It indicates that some funds are not able to perform well because of total risk involved in the funds. The treynor ratio indicates return componseted for bearing systematic risk so on this basis the Birla sun life frontline equity fund has given highest return the second one is HDFC growth fund while the lowest is Sundaram BNP paribas growth

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Tracking mutual fund scheme performance

fund and while Franklin India blue chip fund and Sahara growth fund are on an average. The fund manager capability to manage fund can be evaluated by jensen ratio. It helps us to evaluate whether the fund manager has made more return than expected return. So in our selected fund Birla sun life frontline equity fund has given 17% excess return than expected return so we can say that its management team is efficient. The second rank goes to HDFC growth fund while the lowest is Sundaram BNP paribas growth fund and while Franklin India blue chip fund and Sahara growth fund are on an average. To know whether the above alpha is due to luck or skill of fund manager we can use appraisal ratio (it componseate for unsystematic risk which the fund has undertaken). So we can say that among the the 5 fund, Birla sun life frontline equity fund has got skilful and talented manager, whereas Sundaram BNP paribas growth fund cannot componsete for unsystematic risk, this means the fund unsystematic risk was not totally diversified. While the remaining fund has performed well.

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Tracking mutual fund scheme performance

• Performance Evaluation of Schemes for the period 2006-2008.

Year Measures 2006-2008 Sharpe 2006-2008 Treynor ratio 2006-2008 Jensen Alpha 2006-2008 Appraisal ratio

HDFC 3.09 5.77 -0.30 -0.63

Franklin 2.70 4.93 -1.07 -2.67

Sahara 5.87 10.78 4.17 9.52

Birla 6.79 15.73 6.84 6.42

Sundaram 4.06 7.64 1.51 2.35

Intepretation: Similairly for the period 2006-2007 we evaluate the performance of the scheme shown above. The annualized return for the period 2006-2008 has gone down because all the funds have shown negative return in the year 2007-2008. Despite of negative return when we evaluate the performance of the schemes by applying all measures it reveal that Birla sun life frontline equity fund has performed well. While sundaram Sundaram BNP paribas growth fund has also shown good performance comparing to different rest of fund and last year performance. While Franklin India blue chip fund and HDFC growth fund manager has not been able to manage portfolio because the decline in the market in the year 2007-2008.

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Tracking mutual fund scheme performance

• Performance Evaluation of Schemes for the period 2006-2009

Year Measures 2006-2009 Sharpe 2006-2009 Treynor ratio 2006-2009 Jensen Alpha 2006-2009 Appraisal ratio

HDFC 4.09 9.87 4.65 7.35

Franklin 3.90 9.12 4.28 9.89

Sahara 5.85 13.89 7.72 14.77

Birla 6.37 16.47 9.60 10.14

Sundaram 0.35 0.84 -2.95 -4.30

Interpretation While evaluating the performance for the period 2006-2009 we can see that all funds have performed well except Sundaram BNP paribas growth fund in the contest of this above measure. The Birla sun life frontline equity fund has remain almost on top among all the fund in all the year based on this measures. It should be noted that this is not only the measure on which decision should be made. There are many more factor, among those this are some of the factor which investor should look up.

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Tracking mutual fund scheme performance


Conclusion Portfolio evaluation is the science, because it lies in the measure of portfolio accurately.

Ready

availability

of

securities

data

and

current

computer/information technology are useful in this matter. The performance evaluation is also known as art, because it lies in assessing the performance number and the multiplicity of factors involved in managing a portfolio. It necessitates a blending of both qualitative and quantitative judgments to reach the conclusion regarding the acceptability of the performance. Though, there is numerous creative evaluation techniques, the human aspect of judgment cannot be entirely eliminated in the portfolio evaluating process.

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Tracking mutual fund scheme performance


References Investment Analysis & Portfolio Management “N. G. KALE” Investment “WILLIAM F. SHARPE” Mutual Fund Products and Services “TAXMANN”

Websites: WWW.Google.com www.amfiindia.com www.nseindia.com www.rbi.org.in www.mutualfundindia.com www.valueresearchonline.com http://money.rediff.com/money/jsp/markets_home.jsp

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