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What is a Mutual fund?

Mutual fund is an investment company that


pools money from shareholders and invests in
a variety of securities, such as stocks, bonds
and money market instruments.
In Simple Words, Mutual fund is a mechanism
for pooling the resources by issuing units to
the investors and investing funds in securities
in accordance with objectives as disclosed in
offer document.
Why Mutual Fund?

Investments in securities are spread across a


wide cross-section of industries and sectors
and thus the risk is reduced.
Diversification reduces the risk because all
stocks may not move in the same direction in
the same proportion at the same time.
Mutual fund issues units to the investors in
accordance with quantum of money invested
by them.
The profits or losses are shared by the
investors in proportion to their investments.
Mutual fund is a suitable investment for the
common man as it offers an opportunity to
invest in a diversified, professionally managed
basket of securities at a relatively low cost.
ADVANTAGES OF MUTUAL FUNDS

Professional Management.
Diversification.
Convenient Administration
Costs Effectiveness
Liquidity.
Transparency.
Tax benefits.
Affordability
DISADVANTAGES OF MUTUAL FUND
Professional Management
Dilution
Taxes
ANALYSIS OF MUTUAL FUND
PERFORMANCE
Analysis based on ratios
Analysis based on style
Analysis based on portfolio attribution
Analysis based on returns
Analysis based on some other factors
Sharpe Ratio
The ratio measures the units of return received
per unit of risk, over and above the return that
would be achieved for taking no risk at all.
The Sharpe ratio uses standard deviation of
returns as its risk component. Therefore, the ratio
looks at both, returns and risk, and delivers a
single measure that is proportional to the risk-
adjusted returns.
Higher Sharpe ratio indicates better risk-adjusted
performances of the fund
INTERPRETATION
Mutual Fund Name 3 Years Avg.Return Riskfree rate Std. Deviation Sharpe Ratio
SBI Blue Chip Mutual Fund 9.78% 6.50% 22.66 0.34
ICICI Focused Blue Chip
Mutual Fund 10.82% 6.50% 13.75 0.53
Motilal Oswal Focused 25
Regular Fund 10.16% 6.50% 17.54 0.41

Here ICICI Blue Chip Fund is considered best among other funds.

As sharpe ratio is used to measure the portfolio risk and to identify


whether the portfolio lies in risk aversion range of investor.

Therefore, as we can see ICICI Blue Chip fund is performing well


compared to others in terms of sharpe ratio indicating the max risk
the fund can take without sacrificing returns.
Treynors ratio
This ratio is a risk-adjusted measure of return
based on systematic risk. It is similar to Sharpe
ratio, with the difference being that the
Treynor ratio uses beta () as a measure of
volatility.
Treynor (1965) introduced this measure in
which additional returns of the portfolio over
the risk-free return is expressed in relation to
portfolios systematic risk:
INTERPRETATION
Mutual Fund Name 3 Years Avg.Return Riskfree rate Beta Treynor Ratio
SBI Blue Chip Mutual Fund 9.78% 6.50% 0.9 6.12
ICICI Focused Blue Chip
Mutual Fund 10.82% 6.50% 0.97 6.99
Motilal Oswal Focused 25
Regular Fund 10.16% 6.50% 0.94 6.54

Here ICICI Blue Chip Fund has performed well compared to others in
terms of treynors ratio.

Treynors ratio helps in checking how the portfolio returns are


affected by systematic risk(i.e beta) as how market returns and its
movement affects portfolio returns.

If Rp>Rf and Beta of portfolio>0 then a large value of treynors ratio


is obtained indicating a better portfolio for all investors irrespective
of their individual risk preferences.
Alpha Measure

It is called the differential return method.


It involves evaluation of the returns that the fund
has generated against the returns actually
expected out of the fund given the level of its
systematic risk. The surplus between the two
returns is called alpha, which measures the
performance of a fund compared to the actual
returns over the period.
Higher the better.
INTERPRETATION
3 Years Riskfree Market Jensen's
Mutual Fund Name Avg.Return rate Return Beta Alpha
SBI Blue Chip Mutual
Fund 9.78% 6.50% 9.40% 0.9 0.19
ICICI Focused Blue
Chip Mutual Fund 10.82% 6.50% 9.40% 0.97 0.77
Motilal Oswal Focused
25 Regular Fund 10.16% 6.50% 6.80% 0.94 0.87

Jensens alpha tells us the excess returns that the fund is earning.
So, the higher it is the better.

Also, even if they are positive then you are earning excess returns.
Here in this case Motilal Oswal Fund fund has shown great potential
as its high value indicates good stock picking skills of fund.
Performance Attribution Analysis
The performance of a fund is usually expressed in
terms of its total returns.
This method analyses the excess return compared
to a benchmark and the ability of the fund manager
to select and effectively allocate the portfolios
assets to the right security.

Performance Attribution =
Allocation Effect + Selection Effect + Interaction
Effect
Allocation Effect
It measures the portfolio managers ability to
effectively allocate the portfolios assets to
various segments.
A segment refers to assets or securities that are
grouped within a certain classification such as
Equity, Fixed, or Technology.
Positive allocation occurs when the portfolio is
over weighted in a segment that outperforms
the benchmark and underweighted in a segment
that underperforms the benchmark and vice versa
for negative allocation.
Selection Effect
It measures the portfolio managers ability to
select securities within a given segment relative
to a benchmark.
The weight of the segment in the portfolio
determines the size of the effectthe larger the
segment, the larger the effect is, positive or
negative

It measures the combined impact of an


investment managers selection and allocation
decisions within a segment.
Basic Idea
Decomposing overall performance into components
Components are related to specific elements of performance
Example components
Broad Allocation
Industry
Security Choice
Up and Down Markets
Set up/Identify a Benchmark or Bogey portfolio
Calculate the return on the Bogey and on the managed portfolio
Explain the difference in return based on component weights or selection
Summarize the performance differences into appropriate categories
Performance Attribution Analysis
The performance of a fund is usually expressed in terms
of its total returns.
This method analyses the excess return compared to a
benchmark and the ability of the fund manager to
select and effectively allocate the portfolios assets to
the right security.

Performance Attribution =
Allocation Effect + Selection Effect + Interaction Effect
Allocation Effect
It measures the portfolio managers ability to
effectively allocate the portfolios assets to various
segments.
A segment refers to assets or securities that are
grouped within a certain classification such as Equity,
Fixed, or Technology.
Positive allocation occurs when the portfolio is over
weighted in a segment that outperforms the
benchmark and underweighted in a segment that
underperforms the benchmark and vice versa for
negative allocation.
Selection Effect
It measures the portfolio managers ability to select
securities within a given segment relative to a
benchmark.
The weight of the segment in the portfolio
determines the size of the effectthe larger the
segment, the larger the effect is, positive or negative
Interaction Effect
It measures the combined impact of an investment
managers selection and allocation decisions within
a segment.
Performance Attribution Analysis
Segment Weight Segment Returns

R(Portfolio)> R(Portfolio)<
R(Benchmark) R(Benchmark)

Wt(Portfolio)> + -
Wt(Benchmark)

Wt(Portfolio)< - +
Wt(Benchmark)
Example Performance of the
managed portfolio

Note a hypothetical example is considered here due to unavailability of the data required
for analysis
Performance Attribution
Sector Selection within the Equity
Market
Portfolio Attribution: Summary
THANK YOU

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