Rate of return:
The compounded annual total return (expressed as percent per annum) in a mutual fund scheme represents the return to investors from a scheme, since the date of issue. It includes reinvestment of dividends and makes adjustments for bonus and rights. It is calculated on NAV basis or price basis. On NAV basis, it reflects the return generated by the fund manager on NAV. In this calculation, it is assumed that the dividend is reinvested at the NAV prevailing on the day it is paid. On price basis, it reflects the return to investors by way of market or repurchase price. In this calculation, it is assumed that the dividend is reinvested at the prevailing market or reissue price.
The standard deviation of returns, a measure of dispersion, is the square root of the mean of the square of deviations around the arithmetic average. Generally, standard deviation, Ex-Mark, and beta are computed taking monthly returns into account for a period of three to five years.
Ex Mark: This is a term coined by John C Bogle to define the extent to which a return of a mutual fund is explained by a particular financial Market. This concept is designated in statistics as R-squared. The Ex-Mark of a typical mainstream equity fund is 80-90 percent.
Beta of a fund measures its past price volatility relative to a particular stock market index. It is a measure of risk that provides useful statistical information particularly when applied to portfolios (as distinct from individual stocks). Most main stream equity funds have betas in the range of 0.85 to 1.05.
Gross Dividend Yield:
The gross dividend yield is an important indicator of the investment characteristics of a mutual fund. Among equity funds, value oriented funds tend to have a higher gross dividend yield and growth oriented funds tend to have a lower gross dividend yield. The gross dividend yield is a reliable differentiator of a fund’s investment philosophy.
Portfolio Turnover Ratio:
Portfolio turnover represents the churn in the portfolio. It is measured as follows:
Portfolio turnover ratio = Lower of purchase or sales during a given period / Average daily net assets
Expense ratio refers to the annual recurring costs as a percentage of the net assets of the scheme.
Rating of Mutual Schemes:
Mutual fund schemes are periodically evaluated by independent institutions. CRISIL, Value Research India, and Economic Times are three such institutions whose rankings or evaluations are currently very popular.
Credit Rating and Information Services of India Limited (CRISIL) carries out Composite Performance Rankings that cover all open ended schemes that disclose their entire portfolio composition and have NAV information for at least two years. It currently ranks schemes in five categories, viz., Equity Schemes, Debt Schemes, Gilt Schemes, Balanced Schemes, and Liquid Schemes. Its ranking is based on four criteria, viz., risk adjusted return of the scheme’s NAV, diversification of the portfolio, liquidity and asset size. The weights assigned to these criteria vary from category to category. Within each category, the top 10 percent are considered very good, the next 20 percent good, the next 40 percent average, the next 20 percent below average and at last 10 percent poor.
Value Research India:
Like CRISIL, Value Research India rates schemes in different categories. Each scheme is assigned a risk grade and a return grade and a composite measure of performance is calculated by subtracting the risk grade from the return grade. Within each category, the top 10 percent are considered five star, the next 22.5 percent four star, the next 35 percent three star, the next 22.5 percent two star, and the last 10 percent one star.
Economic Times Lipper:
The Economics Times, powered by Lipper, evaluates mutual fund schemes using a return risk ratio which is defined as average return divided by standard deviation of return. The Economic Times periodically reports the return risk ratio for top performing mutual fund schemes along with a few other parameters.