calculating and comparing mutual fund return

8/14/2019 Calculating and Comparing Mutual Fund Return

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TANVI MEHTA

PARAS SONI


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WHAT IS A MUTUAL FUNyA vehicle for investing in stocks and bonds

A mutual fund is not an alternative investmto stocks and bonds, rather it pools the mo

several investors and invests this in stocks,money market instruments and other typesecurities.

Buying a mutual fund is like buying a smalbig pizza. The owner of a mutual fund unitproportional share of the funds gains, lossand expenses.


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Managed by an Asset ManaCompany (AMC)

y The company that puts together a mutual f

called an AMC. An AMC may have several mschemes with similar or varied investment

y The AMC hires a professional money manabuys and sells securities in line with the funobjective.


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SOME BASICS OF MUTUAL Fy NAV

y Expense ratios

y Load

Entry load

Exit load


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Net Asset Value or NAVNAV is the total asset value (net of expenses)

the fund and is calculated by the AMC at thevery business day.


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How is NAV calculated?y The value of all the securities in the portfolio i

daily. From this, all expenses are deducted andresultant value divided by the number of unitsis the funds NAV.

NAVt = (MVAt - LIABt )/NSOtwhere NAV t is the firms net asset value

MVAt is the market value of firms ass

LIABt is the dollar value of firms liabi

NSOt

is the number of shares outstan


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Expense RatioyAMCs charge an annual fee, or expense rati

covers administrative expenses, salaries, adexpenses, brokerage fee, etc. A 1.5% expensmeans the AMC charges Rs1.50 for every Rsassets under management.

yA fund's expense ratio is typically to the sizfunds under management and not to the reearned. Normally, the costs of running a fuslower than the growth in the fund size - soassets in the fund, the lower should be its eratio


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Loady Some AMCs have sales charges, or loads, o

funds (entry load and/or exit load) to compdistribution costs. Funds that can be purch

without a sales charge are called no-load fu


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What is Entry Load?y Entry load is charged at the time an investo

the units of a scheme. The entry load perceadded to the prevailing NAV at the time of

of units


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What is Exit load?y Exit load is charged at the time of redeemin

transferring an investment between schemload percentage is deducted from the NAV

of redemption (or transfer between schemamount goes to the Asset Management Comnot into the pool of funds of the scheme.


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TYPES OF MUTUAL FUNDy Open-ended Funds

At any time during the scheme period, INVESTenter and exit the fund scheme (by buying/ sel

units) at its NAV (net of any load charge). IncrAMCs are issuing mostly open-ended funds.

y Close-Ended FundsRedemption can take place only after the perio

scheme is over. However, close-ended funds arthe stock exchanges and investors can buy/ selsecondary market (there is no load).


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y Whatare Growth Schemes?Growth Schemes are also known as equity scheaim of these schemes is to provide capital apprmedium to long term. These schemes normally

major part of their fund in equities and are wilshort-term decline in value for possible future y Whatare Interval Schemes?

Interval Schemes are those that combine the fopen-ended and close-ended schemes. The untraded on the stock exchange or may be open f

redemption during pre-determined intervals arelated prices.


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Calculating mutual fund ry MUTUAL FUND PERFORMANCE

y CALCULATING RETURNS:

A return is a measurement of how much an inve

increased or decreased in value over any given tparticular, an annual return is the percentage byincreased or decreased over any twelve-month p

Formula:

rt = {(NAVt- NAVt-1) +It + Gt}/ NAVt-1 where rt = return at time t

It = income

Gt = capital gain distribution attime t


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Key Points to Remember

y Returns show how your investment has incdecreased in value.

y Compounding earns returns on your return

y Compound average annual returns show hogrows over time.

y Transaction costs reduce returns.


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Tax benefits on Investment

Mutual Fundsy 1) 100% Income Tax exemption on all Mutual Fund

2) Equity Funds - Short term capital gains is taxed term capital gains is not applicable.Debt Funds - Short term capital gains is taxed as p

rates applicable to you. Long term capital gains tax-10% on the capital gains without factoring indexatiand20% on the capital gains after factoring indexation

3) Open-end funds with equity exposure of more th

(Revised from 50% to 65% in Budget 2006) are exepayment of dividend tax for a period of 3 years from


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Key Investment Consider

Forthe same liquidity- higherthe safety,lowerthe ret

Forthe same safety- higherthe liquidity,lowerthe ret

Safety

Your moneyis managedbyexperts

Liquidity

You getyour

Post-tax Returns

Howmuchis reallyleftforyou posttax?

Plus

How easyand adju

Mutual Fund investments are subject to market risks Please read the offer documents carefully before


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MFs offer all of the below

Liquidity

Convenience

Risk Diversification

Flexibility

Transparency

Regulated

Tax benefitsPlus

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Steps to evaluate mutualyAre you ready to invest in mutual funds?

y Determine your risk tolerance.

y Determine your investment objectives.

y Obtain the money you need to invest.

yA funds objective should match your invesobjective.

y Evaluate any mutual fund before buying or

y Consider managed funds vs. indexed funds


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Parameters to compare diffe

mutual fundsy Returns

Relative returns

Absolute returns

y Payment of dividend

y Comparison with benchmark returns

y Time period

y Market conditions


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Returnsy The most crucial factor

y Easiest to measure

y Can be compared across funds

y Return of a fund over a given period is justpercentage difference between starting Net

Value (NAV) and the ending Net Asset Valu


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Absolute ReturnsyAbsolute returns measure how much a fun

gained over a certain period

y But absolute returns by themselves dont se

purposey It actually doesnt serve the most basic func

calculating returns i.e. to make a comparis


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Relative Returnsy When returns of a particular fund is used t

against returns of another fund it is called relative returns.

y Comparison can be either between differentime periods

y One of the important thing to keep in minchoose the right funds for comparison. Donapple with oranges


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Payment of dividendy It is also of the important parameter of com

different funds

y Different funds declare different dividends

may choose not to declare dividends in ordinvest profits


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Comparison with benchmar

returnsy This is an important activity that one shoul

while comparing and selecting different fuinvestment

y

Benchmark returns is the overall market rey It basically indicates what the fund has ear

against what it should have earned

y If the fund has performed better than the omarket i.e. it has given better results than t

then the fund should be deemed to have doy SEBI has made it mandatory for funds to de

benchmark index


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Time Periody It is the most important parameter while co

measuring return

y The time period over which the returns sho

compared and evaluated has to be samey For equity funds it is basically 3 5 years re

y For cash funds the duration will be much le


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Market Conditionsy It is important for a fund to have a history l

to have seen all kind of market conditions

y If a fund has proved its mettle in the bearis

and has not dipped much below its benchmthe fund can be said to be a good fund in thof the term


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Average return

y Benchmark portfolio used tom compare theperformance of the investment company

y Composition of the benchmark portfolioy a market index is chosen (e.g. S&P500)

y a risk-free asset chosen (e.g. T-bills)

y an index to account for the difference in performchosen

y allows for high to low book-to-market price sto


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yAVERAGE RETURNy Style Analysis

y used to derive appropriate benchmark

y

Ex Post Alpha Derivedy formula:

Ep !arp - arbpwhere ar p = the average return on portfolio p

arbp = average return on the benchma


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Ep !arp - arbp

IfEp > 0, the portfolio has performed well


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ELSS RETURN COMPARIS


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calculating and comparing mutual fund return

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