Mfs Viable For Retail Investors

The inherent advantages of collective and professional investments bolstered by tax incentives make mutual funds a viable investment avenue for retail investors, says a Crisil study on performance evaluation of mutual funds.

The report was submitted to the Association of Mutual Funds (Amfi) recently. The study, contrary to expectations, is silent on the issue of which of the schemes are the best performers and which of them have underperformed consistently.

On the performance by mutual funds, the report has categorised them under three categories - a 10-year period, a five-year period and a three-year period.

Under the first category, Crisil has analysed the performance of UTI's Mastershare. The scheme has given a 35.52 per cent annualised return compared to the sensex that gave a return of 23.98 per cent during the same period. The fund has also outperformed almost every other available investment avenue.

 

The five-year analysis, according to the report, shows an average annualised return of 11.63 per cent compared to 9.89 per cent of Crisil 500. The average annualised return in case of balanced schemes was 11.41 per cent. "The results should, however, be interpreted with caution as the analysis is based on limited data", the report added.

In the three-year analysis, while the benchmark for growth schemes is the return on the Crisil 500 index, the benchmark for income schemes is the rate offered by corporate debentures.

The study has conceded that performance evaluation of mutual funds is a complex exercise. The parameters have to be interpreted with care, and the evaluation is based on past figures and does not guarantee the future performance.

The report adds that investors must take a central effort in choosing funds or schemes after a due process of evaluating their performances.

While appreciating the fact that the mutual fund industry has been increasingly showing greater transparency in terms of articulating investment objectives, disclosures and adopting more standardised valuation norms, the report stresses that there is scope for improvement.

While the current evaluation is based on figures provided by fund managers, "a complete evaluation has to look at the adequacy of accounting statements, transparency of disclosures, complete portfolio evaluation, affiliate transactions and investor service," the report added.

The report has advised mutual fund investors to determine his investment horizon and understand his risk profile in choosing the category of mutual fund.

The investor should also look at the credibility of the fund manager, the transparency and regularity of disclosures, response time in resolving investor grievances and general service level for the investor. The study also adds that due weightage should be given to performance evaluation released by an independent agency.

Investors have been also advised to ensure that the investment objectives of the fund continue to match his risk profile. In case of divergence, an exit may be considered. Also, investors have been advised to monitor the performance of the fund against an appropriate benchmark.