on what basis are performance of indian mutual funds evaluated?

Question

the basis should be based on risk & return. and what are the benchmarks. please send me as fast as possible. it is urgent.

Answer 1

Mutual Fund performance evaluation -- Not by return and risk alone



THAT risk and return are two sides of the same coin is an old cliche.

Investment textbooks suggest that in assessing the performance of mutual funds (MFs), both risk and return may be taken into account. But can MFs be evaluated purely on the criterion of returns alone? And would a risk-adjusted assessment alter the order of funds ranked on returns?

As it happens, a risk-adjusted assessment does indeed change the ranking order, though not substantially. For example, Birla Advantage Fund, ranked No: 4 in terms of returns between April 26, 1999 and September 29, 2000, is ranked lower, at No: 6, when portfolio risks are taken into account (see Table). But Kothari Pioneer Bluechip, ranked No: 5 in terms of returns, is ranked higher when the risks are factored in.

Adjusting for risks

For evaluating the performance of mutual funds, Business Line assessed the risk-adjusted returns of 17 diversified equity schemes between January 1999 and September 2000. Two measures were used -- the `Sharpe ratio' and `Treynor's measure'. To calculate the Sharpe ratio, the daily returns of the BSE-200 were deducted from the daily returns from a mutual fund equity scheme. The average of this series of daily differential returns was divided by the standard deviation of the series to arrive at the Sharpe ratio.

In calculating the Treynor's measure, a trend line was fitted using the daily returns on BSE-200 as the independent variable, and taking the daily returns from the mutual fund equity scheme as the dependent variable. The beta coefficient, called the `b value', which was obtained, was used to divide the returns to arrive at the risk-adjusted performance.

The `beta' co-efficient is the measure of risk assumed by the fund compared to the market. The `alpha' value, also obtained in the calculation, represents the value added by the fund manager. The rankings based on Sharpe ratio and Treynor's measure were not identical. However, the composition of top-order and bottom-order funds did not vary too widely.

For the assessment, the growth options of equity schemes were considered. In Alliance Capital Tax Relief, Zurich India Top 200, Sundaram Growth, DSP Merrill Lynch Equity, Templeton India Growth and Birla Equity Plan, which do not have growth plans, the dividends were assumed to be re-invested at the ex-dividend NAV. The absolute returns for these funds were also calculated assuming that the dividends were re-invested.


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Ranking funds

Generally, there was no linear relationship between risk and return vis-a-vis fund performance. That is, funds that took higher risks did not always record higher returns. This phenomenon does provide the rationale for risk-adjusting the performance of a fund in ranking it.

An assessment of the risk-adjusted performance of funds between April 26, 1999 and September 29, 2000 puts Alliance Equity, Alliance Capital Tax Relief, Kothari Pioneer Bluechip, Birla Equity Plan and Templeton India Growth at the top of the charts. The period was considered as it encompassed both a bull phase -- April 26, 1999 to February 21, 2000 -- and a bearish period -- February 22 to September 29. At the bottom of the league for the period were JM Equity, Zurich India Top 200 Fund, DSP Merrill Lynch Equity, Sun F&C Value and KP Prima.

Mutual fund managers say performance assessment should be based not only on how much a fund gains in a bull phase, but also on how gradually it falls in a bear market. In the risk-adjusted performance assessment, it is quite clear that funds which better managed the fall in equity values since February 2000 came out on top.

For example, Kothari Pioneer Bluechip Fund and Templeton India Growth Fund, which did not generate extraordinarily high returns during the bull phase between April 26, 1999 and February 21, 2000, were able to ascend the ladder because of their superior performance during the bearish phase between February 22 and September 29.

Also, funds such as Kothari Pioneer Prima, Kothari Pioneer Primaplus and Prudential ICICI Growth, which generated higher returns during the bull phase and fared poorly during the bearish period, descended to the bottom of the rung in the assessment for the entire period. Among funds that generated superior returns during the bull phase, Alliance Capital Tax Relief stands out. The fund stayed on top of the charts in the bearish period too.

Alliance Equity, Birla Equity Plan and Birla Advantage, despite a poor performance during the bearish period, stayed on top. This is because of the extraordinary returns they generated during the bull phase. DSP Merrill Lynch Equity, Sundaram Growth and Zurich India, which have a policy of booking profits and thereby lowering risks, did not do as well as Kothari Pioneer Bluechip and Templeton India Growth in the bearish period. As such, these funds, which were at the bottom of the ladder on a risk-adjusted basis during the bull phase, remain there on an overall reckoning too.

Managing risks

Funds that maintained a higher risk profile in the bearish period were affected considerably. Among funds such as ING Growth, Prudential ICICI Growth, Alliance Equity and JM Equity -- which maintained a beta of more than one during both the bull and bear phases -- only Alliance Equity did well. Others had to bite the dust.

Funds such as Kothari Pioneer Bluechip and Templeton India Growth Fund, which performed well during the bearish period, were successful in reducing the beta. The Templeton India's beta fell from 0.89 in the bull phase to 0.66 in the bear period. Similarly, the Bluechip beta came down to 0.82 from 0.89.

The performance of these funds does throw light on the importance of reducing risks in a falling market. However, what is quite clear is that for improving the performance of the fund, it is not enough to reduce the beta of a portfolio. The fund manager has to add value. Indeed, the role of fund managers in enhancing the fund performance has been highlighted during this bearish period.

A fund manager who reduces risks by booking profits has also to be careful in reinvesting. If the reinvesting is badly managed, the returns may not be superior. Then, despite a lower beta, the performance may be flat.

The measure `Alpha' indicates the value added by a fund manager. In Kothari Pioneer Bluechip and Templeton India Growth, apart from reducing the beta, the fund manager also added value. This helped the fund scale the ranking ladder. The value added by a fund manager is also important for a high beta fund. For example, in the case of Alliance Capital Tax Relief and Alliance Equity, the higher alpha value indicates that the fund manager has been able to mitigate the adverse impact of a higher beta in a falling market.

In Sundaram Growth, DSP Merrill Lynch Equity, Zurich India Equity and Kothari Pioneer Prima, the fund performance adjusted for risk remained relatively poor despite a lower beta. This is because the value added by the fund manager did not compensate for the lower beta, which is essential to enhance performance.

These issues indicate that it is not advisable to evaluate fund performance on returns alone. It may not also be wise to evaluate a fund on risk alone. A lower-beta fund is not necessarily a better fund to invest in. It is in this backdrop that a risk-adjusted performance measure and parameters such as `alpha' can provide a deeper perspective on the performance of equity schemes to a mutual fund investor.

Answer 2

mutual funds performance is determined by how it has performed in both up markets and down markets and in relation to its benchmark. It is also evalulated in relationship to its expense ratio and its portfolio turnover. The lower expense ratio the more that is left for the investor. The lower the turnover, the less the tax man gets.

Answer 3

as far as i recognize, SBI Mutual Fund...... even extra probability-free than UTI.... yet you ask each and every MF guy.... this why not I make investments in the different mutual money.... Then he will inform you the draw backs about others..... and soon... you'll learn about all the MFs and also you may recognize the finest one your self. no human being is completely the finest or worst.

Answer 4

Individual fund has different bench marks and almost all the funds are benchmarked.

Answer 5

By its NAV - Net Asset Value in short time - 3 years.