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    NISM Series 5A Chapter 11

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    sachinaman.2016
    1) Choosing an appropriate benchmark is important for evaluating a mutual fund scheme's performance. The benchmark should align with the scheme's investment objective, asset allocation, and strategy. 2) Total return indices, which include dividends and interest, are now used for benchmarking mutual fund schemes instead of price return indices. 3) Benchmarks are chosen based on the scheme type, investment universe, and portfolio concentration for equity, debt, hybrid, gold, international, and other schemes. Standard benchmarks are also used for performance evaluation metrics like Sharpe ratio, Treynor ratio, alpha, and tracking error.

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    NISM Series 5A Chapter 11

    Uploaded by

    sachinaman.2016
    51 views16 pages
    1) Choosing an appropriate benchmark is important for evaluating a mutual fund scheme's performance. The benchmark should align with the scheme's investment objective, asset allocation, and strategy. 2) Total return indices, which include dividends and interest, are now used for benchmarking mutual fund schemes instead of price return indices. 3) Benchmarks are chosen based on the scheme type, investment universe, and portfolio concentration for equity, debt, hybrid, gold, international, and other schemes. Standard benchmarks are also used for performance evaluation metrics like Sharpe ratio, Treynor ratio, alpha, and tracking error.

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    1) Choosing an appropriate benchmark is important for evaluating a mutual fund scheme's performance. The benchmark should align with the scheme's investment objective, asset allocation, and strategy. 2) Total return indices, which include dividends and interest, are now used for benchmarking mutual fund schemes instead of price return indices. 3) Benchmarks are chosen based on the scheme type, investment universe, and portfolio concentration for equity, debt, hybrid, gold, international, and other schemes. Standard benchmarks are also used for performance evaluation metrics like Sharpe ratio, Treynor ratio, alpha, and tracking error.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    51 views16 pages

    NISM Series 5A Chapter 11

    Uploaded by

    sachinaman.2016
    1) Choosing an appropriate benchmark is important for evaluating a mutual fund scheme's performance. The benchmark should align with the scheme's investment objective, asset allocation, and strategy. 2) Total return indices, which include dividends and interest, are now used for benchmarking mutual fund schemes instead of price return indices. 3) Benchmarks are chosen based on the scheme type, investment universe, and portfolio concentration for equity, debt, hybrid, gold, international, and other schemes. Standard benchmarks are also used for performance evaluation metrics like Sharpe ratio, Treynor ratio, alpha, and tracking error.

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    of 16

    Chapter 11

    Mutual Fund Scheme Performance


    Benchmarks

    • A credible benchmark should meet the following requirements: It should be in sync with
    i. the investment objective of the scheme
    ii. asset allocation pattern
    iii. Investment strategy of the scheme.
    • The benchmark should be calculated by an independent agency. Most benchmarks are
    constructed by stock exchanges, credit rating agencies, securities research houses or financial
    publications.
    • Choice of benchmark is simplest for an index fund.
    • The Scheme Information Document has to mention the benchmark.
    Price Return Index or Total Return Index

    • PRI only captures capital gains of the index constituents. With effect from
    February 1, 2018, the mutual fund schemes are benchmarked to the Total
    Return variant of an Index (TRI).
    • The Total Return variant of an index takes into account all
    dividends/interest payments that are generated from the basket of
    constituents that make up the index in addition to the capital gains.
    • The gap between the returns between PRI and TRI is the amount of
    dividend.
    Basis of choosing an appropriate performance benchmark

    • Alignment with the investment objective, asset allocation pattern and


    investment strategy of the scheme.
    • Benchmarked to the Total Return variant of the Index chosen as a
    benchmark
    Benchmarks for equity schemes

    1. Scheme type
    2. Choice of investment universe
    3. Portfolio concentration
    Benchmarks for Debt Schemes

    • Scheme Type
    • Liquid schemes invest in securities of up to 91 days maturity. Therefore, a
    short term money market benchmark such as NSEs MIBOR or CRISIL
    Liquid Fund Index is suitable.
    • Choice of Investment Universe
    • Gilt funds invest only in Government securities .Indices based on
    Government Securities are appropriate.
    Benchmarks for Other Schemes
    • Hybrid Funds
    • Hybrid funds invest in a mix of debt and equity. The benchmark for a hybrid fund is a blend of an equity and debt
    index.
    • For instance, a hybrid scheme with asset allocation of about 65 percent in equity and balance in debt, can use a
    synthetic index that is calculated as 65 percent of S&P BSE Sensex and 35 percent of I-Bex.
    • Gold ETF
    • Gold price would be the benchmark for such funds.
    • Real Estate Funds
    • A few real estate services companies have developed real estate indices.
    • International Funds
    • The benchmark would depend on where the scheme proposes to invest. Thus, a scheme seeking to invest in China
    might have the Hang Seng Index (Chinese index) as the benchmark.
    Standard benchmarks
    Example
    • If risk free return is 5 percent, and a scheme with standard deviation of
    0.5 percent earned a return of 7 percent, its Sharpe Ratio would be (7
    percent - 5 percent) ÷ 0.5 percent i.e. 4.
    • Sharpe Ratio is effectively the risk premium generated by assuming per
    unit of risk. Higher the Sharpe Ratio, better the scheme is considered to
    be.
    • Sharpe Ratio comparisons can be undertaken only for comparable
    schemes.
    Example
    • if risk free return is 5 percent, and a scheme with Beta of 1.2
    earned a return of 8 percent, its Treynor Ratio would be (8
    percent - 5 percent) ÷ 1.2 i.e., 2.5.
    • Higher the Treynor Ratio, better the scheme is considered to
    be.
    Alpha

    • The difference between a schemes actual return and its optimal return is
    its Alpha. Alpha, therefore, measures the performance of the investment
    in comparison to a suitable market index. Positive alpha is indicative of
    out performance by the fund manager; negative alpha might indicate
    under-performance.
    • These quantitative measures are based on historical performance, which
    may or may not be replicated.
    Tracking Error

    • The Beta of the market, by definition is 1. An index fund mirrors the


    index. Therefore, the index fund too would have a Beta of 1, and it ought
    to earn the same return as the market. The difference between an index
    funds return and the market return is the tracking error.
    • Tracking error is calculated as the standard deviation of the excess returns
    generated by the fund. The tracking error has to be low for a consistently
    out-performing fund.
    Fund Factsheets

    • AMCs may also provide periodic updates on markets and the economy.
    • An official source of information of the funds objective, performance, portfolio and
    basic investment requirements issued by the fund house each month.
    • It is not mandatory for fund houses to publish factsheets. But most fund houses do so
    as a way to reach out to the existing and new investors.
    • The information disclosed in the factsheets and other product literature is subject to
    the advertising guidelines of SEBI.
    • The purpose of these updates is to help investors understand the performance of
    their schemes.
    Thank you

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