Seminar on “Style Analysis of Mutual Funds”

Date: 27th December 2010
Speaker: Mr. Deepesh Periwal, CFA
Designation: Head Advisor – Strategic Financial Planning, Sampatpoorni

The Mutual fund industry in India has grown from strength to strength since its birth with the creation of Unit trust of India act in 1963. Throughout this period regulations had been changed to allow new entities to enter the industry and to expand the reach and market of the mutual fund industry. Year 1987 saw the entry of public sector MFs whereas private sector funds entered into Indian market in the year 1993 and with the repeal of the original ACT in 2003 all MFs were given a level playing field and have been guided by he same set of regulations formulated by SEBI.

A planning of investment or financial goals is very important before expecting optimum results and the necessity pf having the right money available at the right time to fulfill the underlying objectives. Various investment goals could be retirement planning, education or marriage of children, a dream house, a vacation, medical emergencies and charitable or philanthropic objectives.

But achieving these goals by investing in traditional instruments like Bank FDs, post office schemes, life insurance, gold, etc is highly unlikely as the returns on these investments have come down drastically and can hardly surpass inflation.

Equity as an asset class has consistently beaten inflation over longer investment horizons and an allocation to equity is a must in any diversified portfolio which can help to create long term wealth and maintain an ever demanding lifestyle.

Mutual Funds offer both equity and debt asset class funds to build a diversified portfolio. But choice of funds should not solely be based on past returns. A ‘good’ fund giving high returns may be comparatively taking much more risk than a relatively ‘bad’ fund giving lower returns. It needs to be seen that whether the extra risk is justified by generating extra returns. Thus various parameters are needed to be considered carefully before finalizing a fund.

These parameters are:

1. Standard Deviation – measures the volatility of returns around its mean
2. Beta – measures the volatility relative to the funds benchmark
3. Sharp Ratio – measures returns per unit of total risk taken
4. Treynor’s Ratio – measures returns per unit of systematic risk taken.

For debt funds, an additional parameter would be the modified duration of the fund.  It helps in matching right fund to the investment horizon.

Other parameters could be

1. Size of the fund
2. Expense ratio

Various strategies available to rebalance portfolio are:

1. Switching between Equity and debt funds and vise versa
2. Systematic Transfer plans
3. Dividend transfer plan
4. Capital Appreciation transfer plan
5. Trigger options
6. Asset allocation funds

Strategies for creating wealth in the long term:

• Rupee cost averaging – Systematic investment Plan
• Value Averaging