MUTUAL FUND ANALYTICS
MUTUAL
FUND ANALYTICS
What is a Mutual Fund?
A
mutual fund is a professionally managed type of collective investment scheme
that pools money from many investors and invests it in stocks, bonds,
short-term money market instruments, and/or other securities.
Funds
are selected on quantitative parameters such as volatility, risk-adjusted
returns, and rolling returns coupled with a qualitative analysis of fund
performance and investment styles through regular due diligence processes.
Mutual
Fund products of all leading Asset Management companies are made available to
our valued customers through all major CBS branches across the country with the
help of our AMFI Certified Marketing Officers.
What is Mutual Fund Analytics?
Mutual
fund analytics is the process of evaluating mutual funds to determine their investment
potential. Analysts use a variety of factors to assess a fund's performance,
including its investment strategy, fees, and past performance.
How to Check Mutual Fund Performance? –
Mutual Fund Historical Performance, Analysis & Expense Ratio Check.
When
it comes to investing in mutual funds, you need to know how to analyze and pick
funds that are best suited for you. Most beginners look at returns, riskiness,
or ratings of a fund before investing. Here are a few more performance
indicators that will help you make the right decisions in mutual fund analysis.
We have covered the following in this article:
Compare
Mutual Fund Performance against a Benchmark
You
may start by comparing the performance of a fund against the benchmark. When
you compare, use a fair and appropriate benchmark. It should always be an
apple-to-apple comparison. Using the wrong yardstick will only give misleading
data.
Compare
Fund History
A
mutual fund’s real worth can be understood only during unfavorable market
phases, and a fund history can validate that. Look for a fund that has a
relatively longer fund history say 5 to 10 years. Compare fund performance
across different time intervals and business cycles.
Suppose
a fund has delivered a performance in line with the expected returns
consistently during a market rally is a good one. Moreover, during a slump, if
it lost 8% returns while the benchmark lost 10% returns, then the fund has done
well.
Compare
Fund Expense Ratio
The
expense Ratio is the annual fee charged by the fund for managing your
investment. As per SEBI guidelines, the fund houses cannot charge more than
2.5% of the fund’s average asset under management (AUM). You need to check the
expense ratio of mutual funds before finalizing a given fund.
Expense
ratios are charged out of the fund returns. So, the higher the expense ratio,
the lower would be your take-home returns. Always look for a fund that offers
similar returns at a relatively lower expense ratio.
The
same mutual fund is available as a direct plan and a regular plan. Direct plans
of mutual funds come at a lower expense ratio; which translates into higher
returns. Investing in direct plans of mutual funds, instead of regular plans,
can save you loads on commissions.
If
returns delivered by your expensive fund are not in line with the amount of fee
charged, you may try passive investing as well. Look for index funds that fit
your budget — these are relatively cheaper and deliver returns equal to the
underlying benchmark returns.
Compare
the fund’s Alpha and Beta
Alpha
measures the number of extra returns generated by the fund more than the
benchmark returns. Beta measures the riskiness of a fund. Moreover, it shows
whether the fund loses/gains more/less than the benchmark. If the beta value is
more than one, it shows that the fund gains/loses more than the benchmark.
A
beta value of one indicates that the mutual fund’s returns move the same as the
benchmark. If the beta is less than one, then the fund gains/loses less than
the benchmark. Consider two funds A and B which have the same level of beta,
i.e. 2. If the alpha of A and B is 2 and 1.75 respectively, then you may go for
fund A. It’s because, for the same level of risk, the fund manager can generate
higher returns than the benchmark.
Compare
Portfolio Turnover Ratio (PTR)
The
portfolio turnover ratio tells you how often the fund manager buys/sells
securities in the portfolio. In the case of equity funds, it shows the level of
trading taking place in the fund. You need to know that whenever an equity
share is bought/sold, it attracts transaction charges like the brokerage.
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Frequent
trading going on in a portfolio ultimately increases the expenses and is
reflected in a higher expense ratio. It might reduce your take-home returns
from the fund. Thus, PTR is an important criterion for fund selection.
While
choosing a fund, look for one with a lower PTR. If you want to go for a fund
with a high PTR, then check whether such a high PTR is being justified by way
of higher returns.
When
it comes to investing in mutual funds, you need to know how to analyze and pick
funds that are best suited for you. Most beginners look at returns, riskiness,
or ratings of a fund before investing. Here are a few more performance
indicators that will help you make the right decisions in mutual fund analysis.
We have covered the following in this article:
Compare
Mutual Fund Performance against a Benchmark
You
may start by comparing the performance of a fund against the benchmark. When
you compare, use a fair and appropriate benchmark. It should always be an
apple-to-apple comparison. Using the wrong yardstick will only give misleading
data.
Let’s
take the case of a Large-Cap Equity Fund. Compare its performance with a
broad-based index like Nifty 50.
Compare
Fund History
A
mutual fund’s real worth can be understood only during unfavorable market
phases, and a fund history can validate that. Look for a fund that has a
relatively longer fund history say 5 to 10 years. Compare fund performance
across different time intervals and business cycles. Suppose a fund has
delivered a performance in line with the expected returns consistently during a
market rally is a good one. Moreover, during a slump, if it lost 8% returns
while the benchmark lost 10% returns, then the fund has done well.
Compare
Fund Expense Ratio
The
expense Ratio is the annual fee charged by the fund for managing your
investment. As per SEBI guidelines, the fund houses cannot charge more than
2.5% of the fund’s average asset under management (AUM). You need to check the
expense ratio of mutual funds before finalizing a given fund.
Expense
ratios are charged out of the fund returns. So, the higher the expense ratio,
the lower would be your take-home returns. Always look for a fund that offers
similar returns at a relatively lower expense ratio.
The
same mutual fund is available as a direct plan and a regular plan. Direct plans
of mutual funds come at a lower expense ratio; which translates into higher
returns. Investing in direct plans of mutual funds, instead of regular plans,
can save you loads on commissions.
If
returns delivered by your expensive fund are not in line with the amount of fee
charged, you may try passive investing as well. Look for index funds that fit
your budget — these are relatively cheaper and deliver returns equal to the
underlying benchmark returns.
Compare
Risk-Adjusted Returns
Instead
of looking at just annualized returns, look for risk-adjusted returns of the
fund. As per the risk-return tradeoff, a higher degree of risk should be
compensated by a higher level of returns. The risk is measured with the help of
standard deviation.
Using
the Sharpe ratio helps to ascertain whether the fund is giving higher returns
on every additional unit of risk taken. The fund had a Sharpe ratio higher than
the category average showing that the fund manager delivered higher returns for
the extra risk taken.
Consider
two equity funds A and B having a standard deviation, i.e. 12% and 15%
respectively. If the Sharpe Ratio of A and B is 0.48 and 0.60, then go for fund
B because it’s a better bet for the risk taken. However, if B’s Sharpe Ratio
was around 0.50, then you could even have gone for A. It is because a mere 0.02
extra return isn’t worth it for assuming an extra 3% risk.
You
may compare the performance of different equity mutual funds against the
benchmark index using the Sharpe Ratio. It helps you gauge the risk-adjusted
return of equity funds. Sharpe Ratio may be used as a comparative tool to
measure the performance of a mutual fund or a portfolio. It measures the excess
portfolio return over the risk-free rate relative to the standard deviation of
the portfolio return. Sharpe Ratio Formula: Sharpe Ratio = (Portfolio return –
Risk-free rate of return) / Standard deviation of the portfolio. If two
different mutual funds offer similar returns the one with the higher Sharpe
Ratio has a better risk-adjusted return.
|
Sharpe Ratio |
Inference |
|
<1 |
Bad |
|
1-1.99 |
Good |
|
2-2.99 |
Very Good |
|
>3 |
Excellent |
Average
maturity and duration are both measures of the time until a bond matures and repays
its principal. However, they are calculated differently and have different
implications for investors.
Average
maturity is the weighted average of the maturities of all the bonds in a
portfolio. It is calculated by taking the total face value of each bond and
dividing it by the total face value of all the bonds in the portfolio. For
example, if a portfolio has two bonds, one with a maturity of 10 years and a
face value of $100,000 and the other with a maturity of 5 years and a face
value of $50,000, the average maturity would be 7.5 years.
Duration
is a measure of the sensitivity of a bond's price to changes in interest rates.
It is calculated by taking the present value of all the bond's future cash
flows and dividing it by the bond's price. For example, if a bond has a price
of $1,000 and pays a coupon of $50 per year for 10 years, and the yield to
maturity is 6%, the duration would be 8.66 years.
In
general, longer-dated bonds have higher average maturities and durations. This
is because they have more time to pay out interest and principal, and are
therefore more sensitive to changes in interest rates.
Investors
who are looking for income and stability may prefer bonds with longer average
maturities and durations. Investors who are looking to protect their portfolios
from interest rate risk may prefer bonds with shorter average maturities and
durations.
Here
is a table summarizing the key differences between average maturity and
duration:
|
Feature |
Average Maturity |
Duration |
|
Calculation |
A weighted average of maturities |
Present value of future cash flows/price |
|
Sensitivity to interest rates |
Low |
High |
|
Preferred by investors |
Income and stability seekers |
Interest rate risk seekers |
It
is important to note that average maturity and duration are not the same thing.
However, they are both important measures that investors should consider when
making investment decisions.
Conclusion
Mutual
fund analytics can be a complex process, but it is an important part of the
investment process. By carefully analyzing mutual funds, investors can make
more informed decisions about where to invest their money.
Reference
1. https://cleartax.in/s/mutual-fund-analysis
HITANSH LAKKAD
Business Analytics intern at
Hunnarvi Technologies Pvt Ltd in collaboration with Nanobi Analytics.
VIEWS ARE PERSONAL
#mutualfunds #mutualfundanalytics
#businessanalytics #investments #hunnarvi #nanobi #isme
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