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Tracking mutual fund scheme performance

Tracking Mutual Fund Scheme Performance


Submitted by

Rahul Kundanmal Bapana

Roll no.34

Institute of Financial Market (IFM 08-09)

Tracking mutual fund scheme performance

Sr.No. Particulars Pg.No.
1 Executive Summary 4

2 Introduction 5

3 History of Mutual Fund in INDIA 6

4 Terminology associated with MUTUAL FUNDS 7

5 Benefits of Investing in MUTUAL FUND 10

6 Drawback of Investing in MUTUAL FUND 13

7 Structure of MUTUAL FUND 14

8 Types of MUTUAL FUND Schemes 16

9 Performance Evaluation of Mutual Fund Scheme 21

a.) Concept of Return 21
b.) Concept of Risk 28
c.) Risk adjusted return 30
d.) Statement of the problem 33
e.) Objective of the Analysis 33
f.) Scope of Study 33
g.) Fund Features 34
h.) data Interpretation 34
i.) Performance Evaluation of Scheme for Different Period 37

10 Conclusion 41

11 References 42

Tracking mutual fund scheme performance


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.

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.

Tracking mutual fund scheme performance

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.

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
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.

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.

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.

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.

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

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.

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.

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.

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.

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

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.

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

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.

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

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

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.

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.

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, 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-in-
period 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

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.

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

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

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:

• 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.

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

• 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
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

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:

Year in Rs.
2004 5000
2005 10000
2006 15000
2007 20000
2008 25000

Tracking mutual fund scheme performance

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

Value of
Investment at the end
Year in RS Return of the year
2004 5000 -5.00% 4750
2005 10000 15.00% 12508
2006 15000 3.10% 28360.75
2007 20000 30.75% 632321.7
2008 25000 17.65% 103804.6

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 - 15000 - 20000 - 25000 + 103805

(1+R)^1 (1+R)^2 (1+R)^3 (1+R)^4 (1+R)^5

RWR= 14.25%

Tracking mutual fund scheme performance

What if we make contribution reverse?

Value of
Investment at the end
Year in RS Return of the year
2004 25000 -5.00% 23750
2005 20000 15.00% 37100
2006 15000 3.10% 53715.1
2007 10000 30.75% 83307.49
2008 5000 17.65% 103893.8

25000 = -25000 - 15000 - 10000 - 5000 + 103894

1+R)^1 (1+R)^2 (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.

Tracking mutual fund scheme performance

• Time –Weighted Return (TWR): To assist in inter fund comparison the time-
weighted 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

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.

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.

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

Tracking mutual fund scheme performance

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:

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

 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

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.

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
Treynor index (Ti) = (Ri - Rf)/Bi.
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


α represents Jensen alpha

Ex represents expected return

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

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.

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, 2006-
 For evaluating return daily NAV has been selected.
 Risk free rate is calculated by taking weighted average of yield on Treasury bill.

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

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

Tracking mutual fund scheme performance

• Data Interpretation

HDFC Franklin Sahara Birla Sundaram NIFTY

2006-2007 44.26 41.19 39.56 49.85 32.95 37.05
2006-2008 11.78 11.43 16.79 18.32 14.78 13.24
2006-2009 14.69 14.51 17.70 19.53 7.51 10.84

HDFC Franklin Sahara Birla Sundaram

2006-2007 0.83 0.91 0.81 0.86 0.94
2006-2008 0.81 0.88 0.90 0.71 1.00
2006-2009 0.80 0.85 0.79 0.78 0.91

HDFC Franklin Sahara Birla Sundaram

2006-2007 1.14 1.24 1.12 1.17 1.27
Standard deviation
2006-2008 1.52 1.61 1.65 1.65 1.89
2006-2009 1.94 1.99 1.87 2.01 2.18

HDFC Franklin Sahara Birla Sundaram

2006-2007 0.0038 0.0034 0.0035 0.0034 0.0035
Standard error
2006-2008 0.0048 0.0040 0.0044 0.0107 0.0064
2006-2009 0.0063 0.0043 0.0052 0.0095 0.0069

Risk free rate 2006-2007 7.0651

2006-2008 7.0972
2006-2009 6.7479

Tracking mutual fund scheme performance

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

Year Measures HDFC Franklin Sahara Birla Sundaram

2006-2007 Sharpe 32.49 27.57 29.00 36.48 20.32
2006-2007 Treynor ratio 45.09 37.50 39.95 49.88 27.64
2006-2007 Jensen Alpha 12.46 6.84 8.11 17.07 -2.20
2006-2007 Appraisal ratio 32.83 20.37 23.27 50.55 -6.36

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

Tracking mutual fund scheme performance

fund and while Franklin India blue chip fund and Sahara growth fund are on an
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.

Tracking mutual fund scheme performance

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

Year Measures HDFC Franklin Sahara Birla Sundaram

2006-2008 Sharpe 3.09 2.70 5.87 6.79 4.06
2006-2008 Treynor ratio 5.77 4.93 10.78 15.73 7.64
2006-2008 Jensen Alpha -0.30 -1.07 4.17 6.84 1.51
2006-2008 Appraisal ratio -0.63 -2.67 9.52 6.42 2.35

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.

Tracking mutual fund scheme performance

• Performance Evaluation of Schemes for the period 2006-2009

Year Measures HDFC Franklin Sahara Birla Sundaram

2006-2009 Sharpe 4.09 3.90 5.85 6.37 0.35
2006-2009 Treynor ratio 9.87 9.12 13.89 16.47 0.84
2006-2009 Jensen Alpha 4.65 4.28 7.72 9.60 -2.95
2006-2009 Appraisal ratio 7.35 9.89 14.77 10.14 -4.30

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.

Tracking mutual fund scheme performance

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.

Tracking mutual fund scheme performance

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