Mutual fund Analysis

Mutual fund Analysis - Transcript

MUTUAL FUNDS
Presented by Group no 8 R EVOLUTION
Ankit Singal 81128 Bharat Nehra 81133 Gopal Krishan 81140 Pinkush Gupta 81159 Rahul Singhal 81167 Rohit Nagpal 81171

CONTENTS
Functional entities involved in Mutual Funds Operation Taxation Policy Major Risk Indicators SIP Various Risk Comparison of two Funds

Functional Entities involved in Mutual Funds Operation
Trust or Trustee Company Asset Management Company AMC
They form mutual funds under the existing Trust or Companies Acts Trust managed by the Trustees Trustee Companies are managed by the board of Directors

Undertakes the administration investment activities Of the fund

Custodian

He She is an independent entity who is Responsible for safekeeping the fund s assets i e stocks bonds and cash They handle sales and redemption related activities of the fund They also maintain records of the shareholders and send the payment cheques to the investors They are the fund distributors underwriters to handle the sales of units The underwriters act as an wholesale selling units to the brokers who in turn sell to the retail investors

Registrars Transfer Agents

Distributors

Taxation
Investor is taxed for
Capital Gains Security Transaction Tax

Also tax rules are different
Scheme wise Investor wise

Capital Gains Taxation

highest

Some of the main indicators of Mutual funds investment risk
alpha investment performance on a risk adjusted basis to a benchmark index beta investment performance on a risk adjusted basis to the market as a whole R squared represent age of a fund portfolio or security movement that can be explained in a benchmark index Standard Deviation how much the return on a fund is deviating from the expected return based on its historical performance

SIP
To make investment in small denominations at regular intervals of time Underlying intention benefit from the volatility stock market PROS lower average purchase cost more investment in disciplines manner no lack of monies make market timing irrelevant CONS not good in rising market poor managed funds

Performance Measure of Mutual Funds
Treynor Measure Sharpe Measure Sortino Ratio Expense Ratio Jenson Model Fama Model M M model Turnover Ratio

TREYNOR MEASURE
It calculates the ratio generated by the fund over and above risk free return during a given period systematic risk associated with it T I R I R F B
R I return on fund R F risk free return B beta of the fund

High and ve value shows superior risk adjusted performance low and ve shows unfavourable

SHARPE MEASURE
Same as Treynor only difference is that it covers total risk instead of systematic risk T I R I R F S I
S I standard deviation of the fund

B when evaluating well diversified portfolio S I when evaluating less than fully diversified portfolio or individual stocks For well diversified portfolio S I B

SORTINO RATIO
A financial ratio similar to the Sharpe ratio that measures the risk adjusted return of investments or portfolios Unlike the Sharpe ratio the Sortino uses downsidevolatility sometimes referred to as semi volatility as the denominator instead of standard deviation The use of downside volatility allows the Sortino ratio to measure the return of negative volatility

SORTINO RATIO
For example assume investment A has a return of 10 in year one and 10 in year two Investment B has a 0 return in year one and a 20 return in year two The total variance in these investments is the same 20 However investment B is obviously more favorable T I R I R F DV where DV Downside Volatility Large Sortino Ratios indicate a low risk of large losses occurring and should be considered more by risk conscious investors

Expense Ratio
The expense ratio of a stock or asset fund is the total percentage of fund assets used for administrative management advertising and all other expenses An expense ratio of 1 per annum means that each year 1 of the fund s total assets will be used to cover expenses The expense ratio does not include sales loads or brokerage commissions

JENSON MODEL
Jensen s alpha or Jensen s Performance Index is used to determine the excess return of a security or portfolio of securities over the security s theoretical expected return It measures evaluation of the returns that the funds has generated v s return actually expected out of the fund given the level of its systematic risk

Realised return

Expected Return Theoritical

JENSON MODEL
The basic idea is that to analyze the performance of an investment manager you must look not only at the overall return of a portfolio but also at the risk of that portfolio

High alpha superior performance Low alpha Lower performance

Limitations
It only considers systematic risk

FAMA MODEL
FAMA Model compares a portfolio to three distinct risks found in the equity market to assist in decomposing returns It says a portfolio s beta explains about 70 of its actual returns And the other 30 is due to other factors not related to beta

Three Factors
Beta The amount of value stock exposure in relation to the market
In the long run value stocks have generated higher returns than growth stocks albeit because value stocks have higher risk

Size
In the long run small stocks have generated higher returns than large stocks although the extra return is not free There is more risk in

FAMA MODEL
It is the extension of JENSON model Difference in this known as net selectivity Net selectivity represents stock selection skill of the fund manager as it is the excess return over and above the return reqd to compensate for the total manager

risk taken by the fund

R I R F S I S M R M R F S M represents std deviation of market returns

Turnover Ratio
The percentage of a fund s assets that have changed over the course of a given time period usually a year Turnover Ratio tracks the trading that goes on in a portfolio A turnover ratio of 100 means each security in the portfolio was sold throughout the year and news ones purchase A ratio of 150 means each security was sold once and 1 2 of them were sold a 2nd time It is number of times the holdings are being replaced with others over a specific period of time

Turnover Ratio
A higher or lower Portfolio Turnover Ratio doesn t matter as long as it s aligned with the funds investment philosophy A high turnover ratio can be good for equity funds though high trading costs bite into the returns A low turnover ratio can be good for Value funds as investments are usually long term

M M Model
Sharpe ratio may be too difficult for the average investor to understand This measure expresses a fund s performance relative to the market in percentage terms and they believe that the average investor would find the measure easier to understand The Modigliani measure can be expressed as follows
Modigliani measure R I R F S I S M R F where R I R F fund s average excess return S I standard deviation of fund s excess return S M standard deviation of index excess return

M M Model
The Modigliani measure is equivalent to the return the fund would have achieved if it had the same risk as the market index The fund with the highest Modigliani measure like the fund with the highest Sharpe ratio would have the highest return for any level of risk

CONCLUSION
S I used for small portfolio FAMA and SHARPE B used for large portfolio JENSON and TREYNOR

COMPARISON
UTI DIVIDEND YIELD V S BIRLA SUN LIFE DIVIDEND YIELD PLUS

SNAPSHOT
BIRLA SUN LIFE CATEGORY Equity Diversified Dividend Yield Funds TYPE INCEPTION BENCHMARK RATING EXPENSE RATIO FUND MANAGER ASSETS Jan 31 09 Open Ended Feb 03 S P CNX 500 2 35 Ankit Sancheti Rs 187 16 crores UTI DIVIDEND YIELD Equity Diversified Dividend Yield Funds Open Ended May 05 BSE 100 2 08 Swati Kulkarni Rs 877 57 crores 65 100 Greater then DY of Nifty

Allocation to High DY 65 100 stocks
Definition of high DY Twice the DY of the Sensex

PORTFOLIO CHARACTERSTICS
BIRLA SUN LIFE DIVIDEND YIELD PLUS UTI DIVIDEND YIELD

Total Stocks Average Market Cap Portfolio P B Ratio Portfolio P E Ratio 3 Y Earning Ratio Return

46 3920 2 79 8 55 Average

50 14547 2 94 10 65 Above Average

COMMON HOLDINGS
BIRLA SUN LIFE DIVIDEND YIELD PLUS
Bank of Baroda Clariant Chemicals Colgate Palmolive Glaxosmithkline Pharmaceuticals Great Eastern Shopping HUL Indian Oil Corp ONGC Power Finance Corp P G Hygiene Health Care Tata Steel Tata Chemicals Union Bank of India
2 49

UTI DIVIDEND YIELD
1 06

1 47 1 99 4 62 1 13 1 95 3 63 5 62 0 50 1 67 0 45 3 01 2 67

0 96 0 34 1 69 1 75 2 80 4 36 4 33 1 14 1 27 0 07 1 83 1 98

Risk Analysis
BIRLA SUN LIFE DIVIDEND YIELD PLUS
S D Sharpe Ratio Beta R Squared Alpha 28 76 0 2 0 79 0 74 2 86 Below Average

UTI DIVIDEND YIELD
28 90 0 02 0 87 0 89 3 63 Low

Fund Performance Vs S P CNX Nifty

UTI Dividend Yield

Birla Sun Life Dividend Yield Plus

Quarterly Returns Comparison

Birla Sun Life Dividend Yield

UTI Dividend Yield

FUND STYLE COMPARISON

Birla Sun Life Dividend Yield

UTI Dividend Yield

THANK YOU