Financial Analysis on Mutual Fund Schemes

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Mutual fund is a trust that pools money from a group of investors (sharing common financial goals) and invest the money thus collected into asset classes that match the stated investment objectives of the scheme. Since the stated investment objectives of a mutual fund scheme generally form the basis for an investor’s decision to contribute money to the pool, a mutual fund can not deviate from its stated objectives at any point of time.

Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary research works ensures much better return than what an investor can manage on his/her own. The capital appreciation and other incomes earned from these investments are passed on to the investors (also known as unit holders) in proportion of the number of units they own. Although mutual funds and hedge funds can be analyzed using very similar metrics and processes, hedge funds require an additional level of depth to address their level of complexity and their asymmetric expected returns.

This article will address some of the critical metrics to understand when analyzing hedge funds, and although there are many others that need to be considered, the ones included in this article are a good place to start for a rigorous analysis of hedge fund performance. Performance Returns Similar to mutual fund performance analysis, hedge funds should be evaluated for both absolute and relative return performance. However, because of the variety of different hedge fund strategies and the uniqueness of each hedge fund, a good understanding of the different types of returns is necessary in order to identify them.

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Absolute returns give the investor an idea of where to categorize the fund in comparison to the more traditional types of investments. For example, a hedge fund with low and stable returns is probably a better substitute for fixed income than it would be for emerging market equity, which might be replaced by a high-return global macro fund. Relative returns, on the other hand, allow an investor to determine a fund’s attractiveness compared to other investments. The comparables can be other hedge funds, mutual funds or even certain indexes that an investor is trying to mimic.

The key to evaluating relative returns is to determine performance over several time periods, such as one-, three-, and five-year annualized returns. In addition, these returns should also be considered relative to the risk inherent in each investment, which we will consider in the next section. The best method to evaluate relative performance is to define a list of peers, which could include a cross section of traditional mutual funds, equity or fixed-income indexes and other hedge funds with similar strategies.

A good fund should perform in the top quartiles for each period being analyzed to effectively prove its alpha-generating ability. Risk Doing quantitative analysis without considering risk is akin to crossing a busy street while blindfolded. Basic financial theory states that outsized returns can be generated only by taking risks, so although a fund may exhibit excellent returns, an investor should incorporate risk into the analysis to determine the risk-adjusted performance of the fund and how it compares to other investments.

Below are several metrics used to measure risk. STATEMENT OF THE PROBLEM Savings are excess of income over expenditure for any economic unit. Savings flow into investment for a return but savings kept as cash are barren and did not earn anything savings are invested in assets depending on their risk and return perception of investors like returns but at the same time they dislike risks making an investment is an art which more people lack. There are different investment avenues. Mutual fund is one among them.

This is a pool of money collected from investors and it is invested in certain investment objectives for the efficient management of fund. The mutual fund companies appoint efficient and professional fund managers but the selection on the scheme lies in the hands of the investors himself/ herself . It requires adequate skills here comes the role of financial firms. These studies analysis various mutual fund schemes and it will help to evaluate which scheme is better. REVIEW OF LITERATURE

There is an extensive collection of literature which mainly focuses on US funds and investors but very limited work has been done on mutual funds that exist in emerging markets . This could be due to the difficulties in portfolio evaluation of these markets (Hwang and Satchell, 1998) Moreover , the literature available on behavioral finance is also limited both for developed and emerging markets and not much information is available about investor perception, preference, attitudes, and behavior. what ever is able to select a mutual fund which is able to offer high returns with acceptable risk is a complex task.

Elton and gruber, grindblatt and titman (1989) were Consistent with these findings that there is some empirical evidence that mutual fund investors make purchase decision on the basis of past performance et all 1990 Paterl et all 1992 . However other evidence suggests that consumers are influenced by factors other than return and risk. A consumer report(1990) server of ,mutual fund in investors found that although past performance and level of risk were relevant like amount of sale charge management fees fund manager reputation clarity of funds accounting statements recommendation from a financial magazine or newsletter.

Some studies reveal that there is only a slight positive relationship or no relationship at all between previous performance and current returns (Blake et al 1993 Bogle 1992 Brown and Goetz man 1995:beown at 1992) raised the question of why poorly performing funds still survive Harless and Peterson (1998 ) they explain that investors tend to choose funds based on previous performance but stick to these funds despite their poor return in a recent study of consumers rationally and the mutual fund purchase decision. Capon et al 1992 explored the extent to which investors make purchase decision inconsistent with modern finance theory .

The theory suggested that purchase decisions for financial assets should be made on the basis of investors beliefs regarding the future return and risk of those assets. Markowitz 1959 study results offered support the mutual fund investment decision is better considered in a multi attribute framework where return and risk are merely two aspects of a set of attributes whose importance varies across consumers however one might hypothesize intuitively that as mutual fund purchase value increases investors would behave in a more rational manner simply because of the magnitude of potential gains and losses.

OBJECTIVES OF THE STUDY With a view to find out the solutions for the problem raised above,the following objectives have been framed. 1. To find out the Performance of different schemes in relation with market performance. 2. To identify investment of funds which have generated high returns and low risk. 3. To analysis the risk involved in the selected scheme and 4. To analysis the performance of selected scheme using different models of performance evaluation. DATA COLLECTION The secondary data has been used in the data collection process through fact sheets of the equity funds.

The net asset values (NAV) of the various funds of the different mutual fund schemes under study are obtained from fact sheets and websites. The benchmarks used for the analysis is also obtained from the website. The risk-free rate i. e. rate of return of the 365-days Treasury bill is obtained from the website. SAMPLING METHOD The convenience sample was employed for this present study. TOOLS USED FOR ANALYSIS (i) STANDARED DEVIATION It is measure of the value of the variable around its mean or it is as squire root of the sum of the squared deviations from the mean divided by the number of observance.

The arithmetic mean of the return may be same for two companies but the returns may vary widely SHARPE’S INDEX This is a measure of risk-adjusted return on a portfolio. It is a ratio of excess return to the standard deviation of portfolio is not combined with other risky portfolios. It is relevant for performance evaluation when comparing mutually portfolios. The sharp measure of performance denoted by S is given by S = Ri-Rf ?i Where, Ri = the average rate or return on portfolio ‘i’ during a specified period.

Rf = the average rate of return on a risk free investment during the same period ? – Standard deviation TREYNOR RATIO Developed by Jack Treynor, this performance measure evaluates funds based on Treynor’s index. This ratio of return generated by the fund over and above risk free rate of return (generally taken to be the return on the securities backed by the government, as there is no credit risk associated), during a given period and systematic risk associated with it (beta). The formula is: TREYNOR’S INDEX (Ti) = (Ri-Rf)/Bi Where Ri is the average annual rate of return

Rf is the best available rate of return of a “risk-free” security Bi is the beta of the fund. While a high and positive treynor’s index shows a superior risk- adjusted performance of a fund, a low and negative treynor’s index is an indication of unfavorable performance. The Sharpe ratio can be used to compare stock or fund to add to a well- diversified portfolio. SBI Mutual Funds was started in the year 1987. It is one of the leading fund houses in the country with an investor base of over 4. 6 million and over 20 years of rich experience in fund management. The State Bank of India’, one of India’s largest banking enterprises, and Societe Generale Asset Management (France). One of the world’s leading fund management companies that manages over US$ 500 Billion worldwide. Five funds have been selected from the SBI Mutual Funds for the purpose of analysis of performance. The five funds have been selected with criteria which have more than one years of track record. The funds taken for the analysis are 1) Magnum balanced fund 2) Magnum COMMA fund 3) MSFU – Contra fund 4) Magnum global fund 5) Magnum Tax gain scheme – 1993