Performance Evaluation of Mutual Funds Himanshu Joshi.

Performance Evaluation of Mutual Funds

Himanshu Joshi

Group 1- Performance Evaluation of Mutual Fund

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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.


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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


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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.

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 Fund5

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


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Treynor Approach

• Treynor Measure = Total Portfolio Return – Risk free rate• Portfolio Beta


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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 Fund8


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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.


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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.


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Mutual Funds: Portfolio Type

Equity Fund

P1 Birla Sun Life Basic Ind. Fund

P2 HDFC Equity Fund

P3 ICICI Pru Growth Fund

P4 Reliance Growth Fund

P5 Tata Growth Fund

Balanced Funds

P6 Birla Sun Life Balance (G)

P7 Magnum Balance Fund (G)

P8 JM Balance Fund (G)

P9 ING Balanced Fund (G)

P10 Baroda Pioneer Balance (G)

Debt Funds

P11 UTI-Liquid Plus Fund (G)

P12 Reliance Income Fund - (G)

P13 Kotak Bond - Deposit Plan (G)

P14 DBS Chola Monthly Income Plan (G)

P15 HDFC Income Fund (G)


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Equity Funds2008 MR1 MR2 MR3 MR4 MR5 AMR(EF)

Feb -3.46 -0.86 0.75 -3.26 -3.78 -2.12

Mar -16.03 -22.57 -10.34 -12.19 -11.64 -14.55

Apr 6.50 7.48 7.70 10.82 6.04 7.71

May -7.02 -4.82 -3.54 -4.39 -3.44 -4.64

Jun -17.89 -14.90 -15.54 -14.68 -16.19 -15.84

Jul 5.68 4.56 -0.28 5.09 1.67 3.35

Aug 2.09 1.95 7.12 0.57 -0.18 2.31

Sep -12.37 -5.30 -8.39 -11.86 -14.46 -10.48

Oct -25.90 -24.30 -22.18 -22.34 -26.05 -24.15

Nov -4.71 -7.74 -3.19 -8.07 -8.31 -6.40

Dec 6.41 8.22 4.55 6.02 7.85 6.61

SD 10.95 11.28 9.46 10.05 10.27 10.17

AMR(%) -6.07 -5.30 -3.94 -4.93 -6.23 -5.29


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Monthly Returns of Equity Funds

-30.00

-25.00

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MR1

MR2

MR3

MR4

MR5


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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.


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Balanced Funds..

2008 MR6 MR7 MR8 MR9 MR10 AMR(BF)

Feb -0.09 0.11 -1.93 -0.21 -1.64 -0.75

Mar -5.48 -9.98 -13.02 -8.45 -10.38 -9.46

Apr 5.90 5.34 8.16 6.00 -0.26 5.03

May -2.89 -4.58 -7.01 -3.76 -0.34 -3.72

Jun -10.03 -13.11 -15.29 -12.13 -13.87 -12.88

Jul 2.71 4.39 2.52 3.56 9.83 4.60

Aug 1.98 1.21 2.93 1.06 0.04 1.44

Sep -5.51 -9.49 -15.22 -9.40 -13.39 -10.60

Oct -11.29 -17.04 -25.64 -18.04 -18.20 -18.04

Nov -2.72 -4.08 -2.55 -5.85 -3.35 -3.71

Dec 7.54 7.62 6.64 4.57 4.92 6.26

SD 6.09 8.09 10.70 7.66 8.65 8.06

AMR(%) -1.81 -3.60 -5.49 -3.88 -4.24 -3.80


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Monthly Returns of Balanced Funds

-30

-25

-20

-15

-10

-5

0

5

10

15

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MR6

MR7

MR8

MR9

MR10


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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.


difference among the returns of 5 Balanced portfolios during last one year.


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Bond Funds..2008 MR11 MR12 MR13 MR14 MR15 AMR(BOF)

Jan

Feb 0.65 -0.31 -0.68 3.26 -0.05 0.57

Mar 0.73 -1.32 -1.28 0.83 -1.42 -0.49

Apr 0.65 0.20 0.20 1.30 0.22 0.51

May 0.65 0.16 0.30 0.00 0.17 0.25

Jun 0.70 -0.82 -0.50 -4.26 -1.21 -1.22

Jul 0.74 -0.24 0.05 1.16 -0.28 0.29

Aug 0.72 1.34 0.50 0.90 0.50 0.79

Sep 0.82 0.35 0.54 -1.37 0.61 0.19

Oct 0.85 1.48 0.84 -2.36 -0.94 -0.03

Nov 0.72 3.25 2.39 0.06 3.52 1.99

Dec 0.76 12.45 13.68 2.41 11.23 8.11

SD 0.07 3.84 4.16 2.15 3.60 2.49

AMR(%) 0.73 1.50 1.46 0.18 1.12 1.00


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Monthly Return of Bond Funds

-6-4-202468

10121416

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MR11

MR12

MR13

MR14

MR15


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Hypothesis for Bond Funds..

• H0: There is no significant difference among the returns of 5 Bond portfolios.



difference among the returns of 5 Bond portfolios during last one year.


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Average Monthly Returns for Equity, Balanced and Bond portfolios.

2008 EF BF BOF

Feb -2.12 -0.75 0.57

Mar -14.55 -9.46 -0.49

Apr 7.71 5.03 0.51

May -4.64 -3.72 0.25

Jun -15.84 -12.88 -1.22

Jul 3.35 4.60 0.29

Aug 2.31 1.44 0.79

Sep -10.48 -10.60 0.19

Oct -24.15 -18.04 -0.03

Nov -6.40 -3.71 1.99

Dec 6.61 6.26 8.11

SD 10.17 8.06 2.49

AMR(%) -5.29 -3.80 1.00


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Average Monthly Returns for Equity, Bond and Balanced Funds..

-30.00

-25.00

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec EF

BF

BOF


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Hypothesis for Equity and Balanced Funds..

• H0: There is no significant difference between the returns of Equity funds and balanced funds.



difference between the returns of Equity funds and balanced funds during the last one year.


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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.


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Hypothesis for Equity funds and Bond Funds..

• H0: There is no significant difference between the returns of Equity funds and bond funds.



difference between the returns of Bond funds and bond funds during the last one year.


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Sharpe Index Model..

Sharpe ratio

RP - RF

S = ---------

P

Performance Criterion

RP - RF RM - RF

--------- > -----------

P M


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SHARPE INDEX MODEL

SHARPE INDEX RATIO of EF -1.06108

SHARPE INDEX RATIO of BF -1.15384

SHARPE INDEX RATIO of BOF -1.81016

SHARPE INDEX RATIO OF BSE -0.85196


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COMPARATIVE ANALYSIS

SHARPE INDEX RATIO of EF (-1.06108 ) < SHARPE INDEX RATIO OF BSE (-0.85196)

SHARPE INDEX RATIO of BF (-1.15384) < SHARPE INDEX RATIO OF BSE (-0.85196)

SHARPE INDEX RATIO of BOF (-1.81016) < SHARPE INDEX RATIO OF BSE (-0.85196)


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Performance Evaluation of Mutual Funds Himanshu Joshi.

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