There is a dedicated chapter in NISM VA mutul fund distributor exam.
taking higher risk for return cannot compare to low risk high return fund.
- always use a benchmark Fund Performance vs Benchmark Performance
- Expense Ratio Total expense ratio (TER) not Price return
- Check Portfolio Turnover Ratio (PTR)
- Compare Risk-Adjusted Returns Sharp ratio
- Strength of the Portfolio
- Study Fund History
- Maturity Period
Fund Performance vs Benchmark Performance
if benchmark return higher than Mutual fund reutrn then fund underformed, provides fundmanager ability.
ex: Nifty 50 return last year 20%.
Nitfy 50 index etf is 18% then its underformed.
Total expense ratio
TER = (Total Costs Incurred / Total Net Assets) * 100
It cincludes
und manager’s fee
Marketing and distribution expenses
Legal and audit costs
Administrative fees
Transaction costs
Investment management fees
Registrar fees
Custodian fees
Shareholder communications
Financial statements
etc
Strength of the Portfolio
Asset allocation
Sector and industry exposure
Quality of holdings
Sharp ratio (risk-adjusted returns)
Sharpe Ratio can be calculated monthly or can be annualised.
FD return 6%, FUnd returns 10%
How to calucalate
- Substract risk free return from MF return 10-6 = 4% extra return in MF
- Divide by Standard deviation ex: price of a unit high 20 and low 10 in year which is no possible… 20% ok, 30% more aggressive.
4/2= 2 risk and return high
share ratio 1 means poor, 1-2 good, 2-3 great, 4+ excellent.
higher Sharpe ratio indicates better risk-adjusted performance.
beta volatality of fud compared to bench mark lower is better. alpha means return.
standard deviation: lower is better measures the volatility or mutuaf fund price fluctuation in a fund’s returns over a specific period. ex: 3 years or 5 years.
Treynor Ratio (reward for risk taken)
excess return is over and above the gains of a risk-free investment (ex. govt Treasury bills)
if Treasury bills have a rate of return of 9% and a portfolio provides a rate of return of 15%, then 6% is the excess gain
TR = (Portfolio’s returns – Risk-free return rate) / Beta value of the portfolio
It’s a measure of risk-reward
Raj is comparing between two mutual funds, X and Y. X is an equity fund, while Y is a fixed-income fund. The rate of return of X is 12%, and that of Y is 7%. Additionally, Y’s beta is 0.5, and X’s is 1.2. It denotes that X is 20% more volatile, and Y is 50% less volatile than the market.
Let’s assume the risk-free return rate is 2%.
Therefore, X’s Treynor Ratio = (12% – 2%) / 1.2
Or, X’s TR = 8.33
The Treynor ratio of Y = (7% – 2%) / 0.5
Or, Y’s TR = 10
sharpe ratio vs treynor ratio
- Both the Sharpe and Treynor Ratios are used to understand an investment’s risk-adjusted return.
- The Sharpe Ratio divides the excess return by the investment’s standard deviation. suitable for less diversified portpolio
- The Treynor Ratio instead divides excess returns by the investment’s Beta. suitable for well diversified portpolio
reference: BOB