MF analysis, the Crisil way
Total returns has been the criteria for measuring the performance of Mutual Funds. Often in this methodology, factors like volatility, liquidity and portfolio composition are ignored, which then may not give the right picture of performance. An answer to this drawback is CRISIL's Composite Performance Ranking (CPR), which measures performance for each of the open ended scheme types - equity, debt and balanced funds.
The approach of this exercise is very scientific. The schemes are separated into categories like all equity, balanced or debt funds. Then ranks are assigned to the schemes compared to the performance of the competing schemes within the category. The basic criteria for qualifying for this kind of a ranking exercise is that the scheme should be at least two years old. Secondly, the scheme should disclose 100 percent of its portfolio.
If the above two criteria are met, there are four parameters considered - Risk-adjusted returns of the scheme's NAVs, Diversification of the portfolio, Liquidity and Asset Size. Emphasis has been given to all these factors keeping in mind the fact that the mutual funds market in India is still not mature. In mature markets, just a measure of volatility gives a sufficient good picture of the performance.
The Risk-adjusted Return of a scheme is measured by adjusting the average weekly returns on NAV over the previous two years by the volatility over this period, using the Sharpe ratio. The assumption is that the dividend payouts are reinvested at NAVs for calculation of weekly returns. By this method, the ups and downs of any day is averaged out and the returns thus generated are an average representative.
Next comes the diversification risk of the portfolio. This becomes more important in the case of equity schemes. This factor is applied to all the equity portfolios. There are two points considered here. One, the exposure of a scheme to a particular industry vis-a-vis the S&P CNX 500. Two, the percentage share of a single equity in the total portfolio - for which the excess of 10 percent is considered. This kind of a study gives a picture of where the risk is concentrated in the portfolio.
Measurement of Liquidity risk is done in two ways : One, internal risk and two, external risk. Internal risk is a measure of the investment in a stock as compared to its turnover in the market. The weighted average turnover of a scrip during the last four quarters is calculated. This is compared to the investment volume of the scheme in that security. For example, if the weighted average turnover of a scrip is 1000 and the scheme holds 200 shares, then it can be considered highly liquid.
In the case of external risk, an equity's annual average turnover (in terms of value) is measured against its annual average market capitalization. For example, if the annual average turnover is Rs.1,00,000 and the annual average market capitalization is Rs.1,50,000, then the influence of external factors on the price of the scrip can be considered to be less. In the case of debt portfolios, the current credit rating given by a credit rating agency is a measure of liquidity.
Finally comes the asset size. Since larger sized funds are more difficult to manage as compared to smaller funds, a higher rank is given based on the same.
The methodology is no doubt very well structured. Based on the quarterly data of June 30, 2000 of the 36 mutual funds that met the criteria, Birla Advantage, Zurich India Equity and Kothari Pioneer Bluechip are the leaders among the equity funds. In the balanced funds section, Alliance '95, Tata Balanced and Zurich India Prudence are the toppers. Jardine Fleming India Bond Fund, Sundaram Bond Saver and JM Liquid have led the Debt funds. These rankings will be updated quarterly.
Tanuja R Nemivant