Mutual Fund Scheme Performance

Mutual Fund Scheme Performance (Part 1)

Definition: Mutual fund schemes invest in the market for the benefit of unit-holders, and their performance is assessed by comparing it to a pre-defined benchmark.
Details: A credible benchmark should meet the following requirements:
- It should be in sync with the investment objective of the scheme.
- It should be in sync with the asset allocation pattern of the scheme.
- It should be in sync with the investment strategy of the scheme.
- It should be calculated by an independent agency in a transparent manner and published regularly.

Key Concepts

Benchmarks: Most benchmarks are constructed by stock exchanges, credit rating agencies, securities research houses, or financial publications.
Choice of Benchmark: The choice of benchmark is simplest for an index fund, as the investment objective is clear on the index that the scheme would track.
Total Return Index (TRI): With effect from February 1, 2018, mutual fund schemes are benchmarked to the Total Return variant of an Index (TRI), which takes into account all dividends/interest payments generated from the basket of constituents that make up the index, in addition to capital gains.

Basis of Choosing an Appropriate Performance Benchmark

Selection Criteria: The selection of the benchmark for performance comparison must be done keeping in mind the investment objective, asset allocation pattern, and investment strategy of the scheme.
SEBI Guidelines: SEBI has mandated that the performance of the schemes of a mutual fund should be benchmarked to the Total Return variant of the Index chosen as a benchmark.

Benchmarks for Equity Schemes

Scheme Type: The choice of benchmark for equity schemes depends on the scheme type, such as sector funds or diversified funds.
Choice of Investment Universe: The choice of benchmark also depends on the choice of investment universe, such as large-cap, mid-cap, or small-cap stocks.
Portfolio Concentration: The choice of benchmark also depends on the portfolio concentration, such as narrow indices or broader indices.

Benchmarks for Debt Schemes

Scheme Type: The choice of benchmark for debt schemes depends on the scheme type, such as liquid schemes or non-liquid schemes.
Choice of Investment Universe: The choice of benchmark also depends on the choice of investment universe, such as government securities or a diverse mix of debt securities.
CRISIL Indices: CRISIL has developed various indices for debt schemes, such as the CRISIL Liquid Fund Index or the CRISIL Ultra Short-Term Debt Index.

Benchmarks for Other Schemes

Hybrid Funds: The benchmark for hybrid funds is a blend of an equity and debt index.
Gold ETF: The gold price would be the benchmark for such funds.
Real Estate Funds: The benchmark for real estate funds is not specified in the provided text.

Mutual Fund Scheme Performance (Part 2)

International Funds: The benchmark for international funds depends on the region where the scheme proposes to invest. For example, a scheme investing in China might use the Shanghai Composite Index, while a scheme investing in the US market might use the S&P 500.
Standard Benchmarks: To standardize benchmarking, schemes must disclose returns in INR and by way of CAGR for specific benchmarks, including:
- Equity scheme: Sensex or Nifty
- Debt schemes with duration/maturity up to 1 year and arbitrage funds: 1 year T-Bill
- Debt schemes not covered in point 2: 10 years dated GoI security
- Conservative Hybrid Fund: 10 years dated GoI security
- Balanced Hybrid Fund / Aggressive Hybrid Fund / Dynamic Asset Allocation / Balanced Advantage / Multi Asset Allocation: Sensex / Nifty
- Equity Savings: 10 years dated GoI security
- Retirement Fund / Children's Fund: Sensex / Nifty
- Index Funds / ETFs & FoFs (Overseas/Domestic): Appropriate benchmark based on underlying asset allocation
Principles concerning Benchmarks: SEBI has introduced a two-tiered structure for benchmarking certain categories of schemes, with a Tier-1 benchmark reflecting the category and a Tier-2 benchmark demonstrating the investment style/strategy of the fund manager.
Quantitative Measures of Fund Manager Performance: These measures include:
- Relative Return Comparisons: Comparing a scheme's return to its benchmark or peer group.
- Risk-Adjusted Returns: Evaluating performance based on the risk taken, including metrics such as:
  - Sharpe Ratio: Measures risk-adjusted returns using Standard Deviation as a measure of risk.
  - Treynor Ratio: Measures risk-adjusted returns using Beta as a measure of risk.
  - Alpha: Measures the difference between a scheme's actual return and its optimal return.
  - Information Ratio: Measures the risk-adjusted return of a portfolio relative to a benchmark.
- Tracking Error: Measures the deviation of a scheme's return from its benchmark return.

Mutual Fund Scheme Performance (Part 3)

Tracking Error: The difference between an index fund's return and the market return, measured as the standard deviation of the excess returns generated by the fund.
Scheme Performance Disclosure: SEBI mandates disclosure of performance data by all asset management companies (AMCs) through scheme documents and websites.
Scheme Information Document (SID): Updated annually, it includes scheme performance numbers.
Fund Factsheet: Published monthly, it provides information on the fund's objective, performance, portfolio, and investment requirements.

Key Performance Indicators

Suitability: Assessed through product labels, which identify the scheme's objective, asset class, and suitable investment holding period.
Returns: Cumulative returns over different holding periods, compared to the scheme's benchmark, help assess the fund's ability to meet investment objectives.
Portfolio Description: Describes how the portfolio will be managed, including asset allocation and security selection, to help investors assess the scheme's suitability.

Fund Factsheets and Performance Data

Fund Factsheets: Official source of information on the fund's objective, performance, portfolio, and investment requirements, issued by the fund house each month.
SEBI Guidelines: Fund factsheets and product literature are subject to SEBI's advertising guidelines.
AMFI Website: Carries performance data of all mutual fund schemes, accessible for various periods and fund categories.
Data Vendors: Investors and distributors can subscribe to data from vendors, such as Morningstar or Value Research, to access raw data on NAVs, dividends, etc.

Evaluating Scheme Performance

Metrics of Analysis: Include level of market indices and yields, corporate results, government spending, inflation level, interest rates, and GDP numbers.
Purpose: To help investors understand scheme performance, make informed investment decisions, and plan for their investments based on expectations for different asset classes.