Mutual Fund Scheme Performance

NISM Series V-D | 5 marks | Official workbook pages 273-287

What this chapter is about

Evaluate performance against an appropriate benchmark using total return, risk-adjusted measures, tracking error and prescribed disclosure standards.

Core concepts

• A benchmark must match the scheme's objective, asset allocation and investment strategy. Past returns should not be used to choose the benchmark after the fact.
• A price return index captures only price movement. A total return index also includes dividends or distributions from index constituents.
• Absolute return, CAGR and point-to-point return answer different questions. Compare like periods and the same return convention.
• Sharpe ratio compares excess return with total volatility. Treynor uses beta. Jensen's alpha estimates return beyond that explained by market exposure.
• Tracking error measures how closely an index fund follows its benchmark. Lower tracking error generally means closer replication.
• Performance disclosure must follow prescribed periods, benchmark presentation and risk statements. A single top-performing period is not enough.

Exam focus

• Sharpe ratio is a risk-adjusted performance measure.
• Past returns are not an appropriate basis for selecting a benchmark.
• TRI includes dividends as well as capital gains.
• Tracking error is the key measure for benchmark replication by an index fund.

Quick revision - 60 second scan

• Choose benchmark from mandate, not outcome.
• Use TRI for fuller benchmark return.
• Sharpe uses total risk.
• Treynor uses beta.
• Tracking error evaluates passive replication.