XI. MUTUAL FUND SCHEME PERFORMANCE

Benchmarks for Other Schemes:

1. 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 example, a hybrid scheme with 65% equity and the balance in debt can use a synthetic index calculated as 65% of S&P BSE Sensex and 35% of I-Bex.
   • CRISIL has created blended indices for hybrid funds (see Table 11.2).

CRISIL blended indices for hybrid funds

2. Gold ETF:
   • The benchmark for gold ETFs is the gold price.
3. Real Estate Funds:
   • Real estate funds may use real estate indices developed by real estate services companies, although these indices have shorter histories and less widespread acceptance compared to equity indices.
4. International Funds:
   • The benchmark for international funds depends on the country or region in which the scheme plans to invest.
   • For example, a scheme investing in China may use the Shanghai Composite Index as the benchmark, while a scheme investing in the US market may use the S&P 500.
   • A scheme investing across multiple countries can create a synthetic index that blends relevant indices from those countries.

Standard Benchmarks:

• To standardize benchmarking and facilitate comparison, schemes need to disclose returns in INR and Compound Annual Growth Rate (CAGR) for specific benchmarks.
• The benchmarks vary based on the scheme type, such as equity schemes using Sensex or Nifty as benchmarks and debt schemes using relevant government securities or T-Bills.
• Hybrid funds, retirement funds, index funds, and exchange-traded funds (ETFs) have their specific benchmarks based on asset allocations or underlying indices.

Guiding Principles for Benchmarks of Mutual Fund Schemes:

• SEBI has introduced guiding principles for uniformity in benchmarking mutual fund schemes.
• The benchmarks are divided into two tiers: Tier-1 reflective of the scheme category and Tier-2 demonstrative of the investment style/strategy of the fund manager within the category.
• Total Return Indices are used as benchmarks for all categories.
• The type of scheme determines the type of benchmark, ranging from broad market indices to bespoke benchmarks based on investment style/strategy.

Quantitative Measures of Fund Manager Performance:

1. Relative Return Comparisons:

• Comparing a scheme's returns with its benchmark or peer group to determine outperformance or underperformance.
• Periodic reviews of relative returns should be conducted by AMCs and trustees.

2. Risk-Reward Relationship:

• Evaluating the performance of a fund manager based on the risk-reward relationship.
• Return should be commensurate with the risk taken.
• Risk-adjusted returns are used for such evaluations.

3. Sharpe Ratio:

• Measures risk-adjusted returns.
• Compares the risk premium earned by a scheme with the risk taken.
• Calculated as (Rs - Rf) / Standard Deviation, where Rs is the scheme's return, Rf is the risk-free rate, and Standard Deviation is a measure of risk.
• Higher Sharpe Ratio indicates a better-performing scheme.
• Sharpe Ratio comparisons should be done for comparable schemes.

4. Treynor Ratio:

• Also measures risk-adjusted returns.
• Uses Beta as a measure of risk instead of Standard Deviation.
• Calculated as (Rs - Rf) / Beta, where Rs is the scheme's return, Rf is the risk-free rate, and Beta measures the scheme's risk compared to the market.
• Higher Treynor Ratio indicates a better-performing scheme.
• Treynor Ratio comparisons should ideally be restricted to diversified equity schemes.

5. Alpha:

• Measures the performance of a scheme compared to a suitable market index.
• Alpha is the difference between a scheme's actual return and its optimal return.
• Positive alpha indicates outperformance by the fund manager, while negative alpha suggests underperformance.
• Alpha evaluations should be done for diversified equity schemes.

Note: Quantitative measures provide useful insights into performance, but should not be solely relied upon. A deeper understanding of underlying factors is crucial, and scheme evaluation requires expertise and analysis.

Tracking Error:

• Beta of the market is defined as 1. An index fund that mirrors the index should also have a Beta of 1 and earn the same return as the market.
• The difference between an index fund's return and the market return is called the tracking error.
• Tracking error measures the consistency of the fund manager's outperformance relative to the benchmark.
• Previously, tracking error was used to assess how closely an index fund tracked the benchmark's returns, with a target of zero tracking error.
• Now, tracking error is used to gauge how consistently a fund is able to outperform its benchmark.
• Tracking error is calculated as the standard deviation of the excess returns generated by the fund.
• A consistently outperforming fund should have a low tracking error.

Note: Tracking error helps evaluate the consistency of a fund's outperformance but should not be the sole factor in assessing fund performance. Other factors, such as risk-adjusted returns and qualitative analysis, should also be considered.

Scheme Performance Disclosure:

• SEBI mandates disclosure of performance data by AMCs, which can be accessed through scheme documents and the fund house's website.
• The Scheme Information Document (SID) needs to be updated annually, including the scheme's performance numbers.
• Fund fact sheets play a vital role and are published monthly by all fund houses, providing performance and other relevant information (not a statutory requirement).
• Portals and product literature also provide access to scheme performance data and other performance measures.
• Performance disclosure includes information on suitability, returns, and portfolio description.
• Suitability highlights the scheme's objective, asset class, investment period, and risk level.
• Returns display cumulative returns, comparison with the benchmark, and discreet annual returns for assessing consistency.
• Portfolio description explains how assets will be allocated and securities selected, reflecting the scheme's risk and return characteristics.

Fund Factsheets:

• Fund factsheets are official sources of information issued by the fund house monthly.
• They provide details about the fund's objective, performance, portfolio, and basic investment requirements.
• Factsheets may also include the fund manager's views on the economy and markets, helping investors and other observers understand the fund's performance and market conditions.
• While not mandatory, most fund houses publish factsheets as a means of communicating with investors.

Metrics of Analysis in Factsheet:

• Factsheets include various metrics for analysis, such as market indices, corporate results, government spending, inflation levels, interest rate changes, investor activity, GDP numbers, overseas economic data, commodity prices, and input prices.
• These metrics help assess the performance of the scheme, evaluate market conditions, and anticipate the impact on companies and the economy.

Scheme Performance on AMFI Website:

• The Association of Mutual Funds in India (AMFI) website provides performance data for all mutual fund schemes.
• Investors can access the data for different periods and fund categories.
• Raw data of NAVs, dividends, etc., can be subscribed to and downloaded through various vendors for integration into investor-management systems.

Note: Scheme performance disclosure provides valuable information for investors to assess the performance and suitability of mutual fund schemes.