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Performance Evaluation of Mutual Funds. Himanshu Joshi. CONCEPT OF MUTUAL FUND. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.
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Performance Evaluation of Mutual Funds Himanshu Joshi
CONCEPT OF MUTUAL FUND • A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. • The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. • The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. • Most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Group 1- Performance Evaluation of Mutual Fund
ADVANTAGES OF MUTUAL FUNDS • The advantages of investing in a Mutual Fund are: • Professional Management • Diversification • Return Potential • Low Costs • Transparency • Flexibility • Choice of schemes • Tax benefits • Well regulated • Liquidity Group 1- Performance Evaluation of Mutual Fund
Net Asset Value (NAV) • Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. Group 1- Performance Evaluation of Mutual Fund
Measurement of Return in Relation to Risk • In examining the performance of fund managers, the return measure commonly used is excess returns. • Excess Return = Total Portfolio Return – Risk Free Rate. • Once computed excess returns are then compared with risk. We look at three different approaches to comparing excess returns to risk: Sharpe, Treynor and Jensen. Group 1- Performance Evaluation of Mutual Fund
Sharpe Approach • Sharpe Measure = Total Portfolio Return – Risk free rate • Portfolio Standard Deviation • If a portfolio has a return of 10 percent, and the rf = 6%, and the standard deviation of the portfolio is 18%. • If there is a 9% total market return, and market Standard deviation is 12%. • Sharpe Measure > Market Measure Group 1- Performance Evaluation of Mutual Fund
Treynor Approach • Treynor Measure = Total Portfolio Return – Risk free rate • Portfolio Beta Group 1- Performance Evaluation of Mutual Fund
Jenson Approach • In the third approach, Jensen emphasizes using certain aspects of the capital asset pricing model to evaluate portfolio managers. • He compares excess actual returns (total portfolio return – risk free rate) with what should be required in the market, based on the portfolio beta. • If beta is zero, the investor should expect to earn no more trhan the risk free rate. Group 1- Performance Evaluation of Mutual Fund
Assumptions.. • There is no significant difference among the returns within various portfolios. (Equity, Bond, Balanced). • Return of Equity, Balanced Funds and Bond Funds are significantly different from each other. • Bond fund returns should outperform the returns of Equity and Balanced Funds in bearish market. • According to Sharpe Index Model for portfolio performance measurement: • Bond Returns should outperform all other portfolio’s returns as well as market returns in the bearish market. • Equity funds returns and Market returns are not significantly different from each other. Group 1- Performance Evaluation of Mutual Fund
Performance Evaluation … • In this Project the performance evaluation of Indian mutual funds in a bear market is carried out through; • relative performance index, • risk-return analysis, • Sharpe's ratio • Data have been used is monthly closing NAVs. • Source of data • Website of Association of Mutual Funds in India (AMFI). Study period is January 2008-December 2008 (bear period). • Started with a sample of 15 open ended schemes (out of total schemes of 592) for computing relative performance index. We have taken 5 mutual funds in each category equity, debt and balanced funds. Group 1- Performance Evaluation of Mutual Fund
Equity Funds Group 1- Performance Evaluation of Mutual Fund
Hypothesis for Equity Funds. • H0: There is no significant difference among the returns of 5 equity portfolios. • Test of Hypothesis: The statistical test of ANOVA indicates that F Value (0.0868) is not significant at 5% level. • Therefore Null Hypothesis is not rejected. • It also reveals that there is no significant difference among the returns of of 5 equity portfolios in bearish market. Group 1- Performance Evaluation of Mutual Fund
Balanced Funds.. Group 1- Performance Evaluation of Mutual Fund
Hypothesis for Balanced Funds.. • H0: There is no significant difference among the returns of 5 Balanced portfolios. • Test of Hypothesis: The statistical test of ANOVA indicates that F Value (0.2773) is not significant at 5% level. • Therefore Null Hypothesis is not rejected. • It also reveals that there is no significant difference among the returns of 5 Balanced portfolios during last one year. Group 1- Performance Evaluation of Mutual Fund
Bond Funds.. Group 1- Performance Evaluation of Mutual Fund
Hypothesis for Bond Funds.. • H0: There is no significant difference among the returns of 5 Bond portfolios. • Test of Hypothesis: The statistical test of ANOVA indicates that F Value (0.34105) is not significant at 5% level. • Therefore Null Hypothesis is not rejected. • It also reveals that there is no significant difference among the returns of 5 Bond portfolios during last one year. Group 1- Performance Evaluation of Mutual Fund
Average Monthly Returns for Equity, Balanced and Bond portfolios. Group 1- Performance Evaluation of Mutual Fund
Hypothesis for Equity and Balanced Funds.. • H0: There is no significant difference between the returns of Equity funds and balanced funds. • Test of Hypothesis: The statistical test of ANOVA indicates that F Value (0.14466) is not significant at 5% level. • Therefore Null Hypothesis is not rejected. • It also reveals that there is no significant difference between the returns of Equity funds and balanced funds during the last one year. Group 1- Performance Evaluation of Mutual Fund
Hypothesis for Balanced Funds and Bond Funds.. H0: There is no significant difference between the returns of Balanced funds and bond funds. Test of Hypothesis: The statistical test of ANOVA indicates that F Value (3.5609) is not significant at 5% level. Therefore Null Hypothesis is not rejected. It also reveals that there is no significant difference between the returns of Balanced funds and bond funds during the last one year. Group 1- Performance Evaluation of Mutual Fund
Hypothesis for Equity funds and Bond Funds.. • H0: There is no significant difference between the returns of Equity funds and bond funds. • Test of Hypothesis: The statistical test of ANOVA indicates that F Value (3.9689) is not significant at 5% level. • Therefore Null Hypothesis is not rejected. • It also reveals that there is no significant difference between the returns of Bond funds and bond funds during the last one year. Group 1- Performance Evaluation of Mutual Fund
Sharpe Index Model.. Sharpe ratio RP - RF S = --------- P Performance Criterion RP - RF RM - RF --------- > ----------- P M Group 1- Performance Evaluation of Mutual Fund
SHARPE INDEX MODEL Group 1- Performance Evaluation of Mutual Fund
COMPARATIVE ANALYSIS Group 1- Performance Evaluation of Mutual Fund
