Dr. Seema Dhawan (Research Supervisor)
Financial Analysis on Mutual Fund Schemes in SBI Mutual Fund INTRODUCTION
Mutual fund is a trust that pools money from a group of investors (sharing common financial goals) and invest the money thus collected into asset classes that match the stated investment objectives of the scheme. Since the stated investment objectives of a mutual fund scheme generally form the basis for an investor's decision to contribute money to the pool, a mutual fund can not deviate from its stated objectives at any point of time. Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary research works ensures much better return than what an investor can manage on his/her own. The capital appreciation and other incomes earned from these investments are passed on to the investors (also known as unit holders) in proportion of the number of units they own. Although mutual funds and hedge funds can be analyzed using very similar metrics and processes, hedge funds require an additional level of depth to address their level of complexity and their asymmetric expected returns. This article will address some of the critical metrics to understand when analyzing hedge funds, and although there are many others that need to be considered, the ones included in this article are a good place to start for a rigorous analysis of hedge fund performance.
Similar to mutual fund performance analysis, hedge funds should be evaluated for both absolute and relative return performance. However, because of the variety of different hedge fund strategies and the uniqueness of each hedge fund, a good understanding of the different types of returns is necessary in order to identify them. Absolute returns give the investor an idea of where to categorize the fund in comparison to the more traditional types of investments. For example, a hedge fund with low and stable returns is probably a better substitute for fixed income than it would be for emerging market equity, which might be replaced by a high-return global macro fund.
Relative returns, on the other hand, allow an investor to determine a fund's attractiveness compared to other investments. The comparables can be other hedge funds, mutual funds or even certain indexes that an investor is trying to mimic. The key to evaluating relative returns is to determine performance over several time periods, such as one-, three-, and five-year annualized returns. In addition, these returns should also be considered relative to the risk inherent in each investment, which we will consider in the next section.
The best method to evaluate relative performance is to define a list of peers, which could include a cross section of traditional mutual funds, equity or fixed-income indexes and other hedge funds with similar strategies. A good fund should perform in the top quartiles for each period being analyzed to effectively prove its alpha-generating ability.
Doing quantitative analysis without considering risk is akin to crossing a busy street while blindfolded. Basic financial theory states that outsized returns can be generated only by taking risks, so although a fund may exhibit excellent returns, an investor should incorporate risk into the analysis to determine the risk-adjusted performance of the fund and how it compares to other investments. Below are several metrics used to measure risk.
STATEMENT OF THE PROBLEM
Savings are excess of income over expenditure for any economic unit. Savings flow into investment for a return but savings kept as cash are barren and did not earn anything savings are invested in assets depending on their risk and return perception of investors like returns but at the same time they dislike risks making an investment is an art which more people lack. There are different...