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Intermediate MF Performance

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Intermediate MF Performance

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Useless Id
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© © All Rights Reserved
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MUTUAL FUND PERFORMANCE

Measuring MF Performance
• Dividends and Capital Gains are the major sources of return
• Investor should track the value of his investments in terms of
 Return on such investments
 Decide whether he needs to switch to another fund
Methods of Measuring / Evaluating MF
Performance
• Absolute Return Method
• Simple Annual Return Method
• Compounded Annual Average Rate Method (CAGR)
• Total Return Method (when Dividend is Reinvested)
• Expense Ratio Method
• Income Ratio Method
• Total Return Method
• Transaction Cost Method
• Fund Size
• Cash Holding Percentage
• Portfolio Turn over Ratio Method
Absolute Return Method

• Absolute returns are returns for a specific period


• Absolute returns are calculated for less than 1 year period
• If NAV Changes from 20 to 22 in 6 months, Absolute
return is 2/20*100=10%
Simple Annual Return Method

• Simple Annual Return Method computes returns as follows


• Lets take the previous example
 NAV changed from 20 to 22 in 6 months period
 Annual return is

(22-20) x 12 x 100 = 20%


20 6
Total Return Method
• Formula for Total Return when dividend is received but not
reinvested:
Dividend distributed + Change in NAV X 100
NAV at the start
• Total Return when Dividend is not received but reinvested
• This method is used to calculate return on investments when
Dividends are declared and reinvested at ex Dividend NAV
price
• See Example as given below for calculating Total Returns

Contd….
Total Return Method (When Dividend
not reinvested at NAV) - An Example
• Assume Units are purchased when NAV is 20
• Assume that Dividend of Rs. 4/- is distributed when NAV
Ex Dividend is 21
• Assume NAV at the end of the year is Rs. 22/-
• Simple Total returns for the year will be as under
(22-20) + 4 x 100 = 30%
20
Total Return or ROI or CAGR Method
Compounded Average Annual Return Method
Formula
A = P x (1+R/100)
P = Principal invested
A = Maturity Value
N = Period of Investment in years
R = Annualized compound interest rate in %
R = [ (Nth Root of A/P) – 1] x 100
Compounded Average Annual Return Method
An Example
• Begin NAV – 100
• End NAV – 200
• Period of Investment – 10 years
• Average Annual Compound Return - Is it 10% or lower ?
• 200 = 100 x (1+R/100)10
• Solving for ‘R’ gives Annualised compound rate of
7.1773% or 7.2%
• Apply thumb rule of 72
• SEBI prescribes Average Annual Compound Return
Method to be followed for advertising Returns for over 1
year Period
Returns impacted by Loads

• The above example assumes a No Load Fund


• If there is an Entry Load, you will be allotted lesser
number of units since you will pay more than NAV
• If there is Exit Load, you will get lesser amount per unit
than NAV
Expense Ratio / Income Ratio
Method of Fund Evaluation
• Evaluation based on Expense ratio and Income ratio
• Expense Ratio: It is the ratio of total expenses to Average
Net Assets of the fund
 It is an important ratio for evaluating Bond Funds
 Expenses do not include brokerage paid since it is
capitalized and therefore expenses may be understated
• Income Ratio = Net Investment Income
Net Assets
 Income ratio is suitable for evaluating Bond Funds
Portfolio Turn Over Rate Method of
Fund Evaluation
• Another Measure of Fund Evaluation is Portfolio Turn Over
Rate
• Portfolio Turnover Rate = Total Sales & Purchases
Net Assets of the Fund
• Higher Turn Over Rate indicates
 More churning of Portfolio
 More transaction costs
• Portfolio turn over ratio relevant for actively managed funds
Importance of Benchmarking in
Evaluating Fund Performance
• Three methods of evaluating Fund Performance
 Evaluating Fund Performance against Benchmarks
 Evaluating Fund Performance against other Peer Group Mutual
Fund Schemes
 Evaluating Fund Performance against other Financial Products
Fund Evaluation against Benchmarks
• Funds Performance can be evaluated against some
‘Performance Indicators’ called Benchmarks
• Mutual Funds are required by regulations to state the
benchmark in the OD against which scheme performance
will be compared
• Investors expect Fund Performance better than the
benchmark
Types of Benchmarks :
• Relative to Market as a whole
• Relative to other Mutual Funds
• Relative to other comparable financial products
Benchmarks for Equity Funds
Type of Equity Fund Name of Benchmark

Index Funds BSE Sensex Index or S&P CNX


Nifty Index

Diversified Equity Funds BSE 200 Index

Sector Funds Sector Specific Index

Growth Funds with over 60% in Equity should use Broad Equity
Index ( BSE 200 Index)
Benchmarks For Debt Funds & Money
Market Funds
Type of Debt Fund Name of Benchmark

Gilt Fund Government Security Index

Debt Fund Corporate Bond Index


Money Market MIBOR reflecting inter bank call
Fund money market interest rates.

Bond Funds with over 60% in Bonds to use Bond Market Index
Balanced Funds should use Tailor made Index
Benchmarks For Debt Funds & Money
Market Funds
• There are various Indices for benchmarking of Debt Funds
• I-Bex Index of I-SEC is used for tracking Govt. Security
performance
• CRISIL has 8 Debt Indices for tracking performance of
Corporate Bond Market & Money Market
• NSE has Govt. Security Index & Treasury Bill Index
Benchmarking against other Mutual
Funds
Peer Group Comparisons :

• Performance of Fund can be compared with similar schemes


of other Mutual funds
• Criteria for Peer Group Comparison would be similarity in
 Investment objectives and rating profile of portfolios
 Average maturity of debt portfolios
 Size of fund (big or small)
• Higher Expense Ratio of a Debt Fund hurts long term debt
investors
Benchmarking with other Financial
Products
Comparison with other comparable Financial Products

• Risk Return Relationship to be considered


• Liquidity factors to be considered
• Average Annualized compound returns to be compared
Fund Performance Ranking

• Fund performance evaluation & ranking by CRISIL


• Fund house rating by CRISIL
Sources for tracking Mutual Fund
Performance
Following sources of information can be used to track performance
of Mutual Fund Schemes
• Mutual Funds Annual periodic Reports
• Mutual Funds website.
• AMFI website
• Daily Financial News Papers
• Fund Tracking Agencies – Credence, Value Research & Lipper
India
• Newsletters from brokers
• Offer Document of the Fund
• Analytical Articles

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