ANALYSIS OF MUTUAL FUNDS (2008)

THE CHOICE IS YOURS

  1. Introduction 2
  2. Mutual funds explained 3
  3. Grouping the Investor 8
  4. Grouping the funds 9
  5. Data analysis 13
  6. Conclusion 38
  7. Recommendations 39
  8. References 40

INTRODUCTION

This report is an attempt to understand about mutual funds in general and the analysis of the data given on the 838 mutual funds from the investor perspective. The report is divided broadly in to two sections. First section is about the general aspects of mutual funds, which should give an idea and understanding to a lay man investor, about mutual funds and its associated terms. The objective in the first part is to summarize the already accumulated knowledge from books websites etc.

The second section is the data analysis and its interpretation of the 838 mutual funds focusing on equipping the investor to make an informed decision about his investment. While there are cases in every day life where predictions, possibilities and probabilities can be made on various subjects, this report is not an attempt to do that. The main reason behind, is that the mutual funds which follow the stock market trajectory of highs and lows are extremely unpredictable and without an abstract understanding of the world economic situation cannot be predicted in short or long term. This is especially the case now due to the poor health of all stock markets around the world. Also the data given, while is extensive in the number of funds, is quite insufficient for a prediction of its future. Instead of attempting to be specific on identifying such and such mutual fund to invest, this report is going to analyze the historical data by grouping them in different permutations and combinations.

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Any investor will be much interested in knowing how much money he is going to make out of an investment which, here, are the returns. Also an investor will have certain characteristics like risk aversion or risk taking, time orientation (short and long terms of investment). Based on these human characteristics the investors are grouped into categories and then the data grouped accordingly in to various combinations, making them smaller entities from which average returns, standard deviations etc are calculated, tabulated, plotted in graphs which make easy reading and understanding. From this tables and graphs group patterns are identified and filtered so that a conclusion of the performance of subgroups can be made and certain recommendations for the future investor attempted.

MUTUAL FUNDS EXPLAINED.

The Definition

A mutual fund is nothing more than a number of stocks or bonds which have been put together. It is a company that brings together a number of people to invest in a collection of shares or stocks from different companies. Each person holds his own piece of share in that holding.

An investor can make money from a mutual fund in three different ways. 1) Income earned from dividends or Interest on bonds, 2) Money from capital gain, in which the share sells for a higher price and 3) Increase in holding price, in which case the company distribute the profit to the investor in the form of dividends

Types of Funds

There are many numbers of mutual funds which will suit each one’s requirements and capacity. It is also important to understand that each mutual fund has different risk and rewards. The higher the potential return is the higher the risk of loss. Basically there are three types of funds available. They are:

  1. Equity Funds or Stocks
  2. Fixed-Income Funds or Bonds
  • Money Market Funds
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All the mutual funds are derived from any of these three types.

  1. Equity Funds or Stocks

Funds that invest in stocks are the largest category of mutual funds. The basic objectives of such investments are long term capital gain and some interest from the investment. Equity funds can again be divided according to its size such as large, medium and size, and type such as growth, blend, and value.

  1. Fixed Income Funds

                  Their objective is to provide current income on a steady basis. These fund holdings may appreciate in value, their primary objective is to provide a stable cash flow to the investors. Therefore the customers of these funds are generally conservative investors and retirees.

III.            Money Market Funds

                  The money market consists of short term – low risk investments. They generally include Treasury bills etc. They will not have great returns since they are short term, but the risks involved in such investments are very less. A typical return in these funds is twice the amount one could earn over a normal savings account

  1. Balanced Funds

                  Balanced funds provide a balanced mixture of safety, income and capital growth. The strategy behind these funds is to invest in mixture of both fixed income and equities. They are balanced accordingly by 40% of fixed income and 60% of equity funds.

One way of describing the variety of equity funds is a style box based on the size of the companies invested in and the investment style of the manager.

http://www.investopedia.com/university/mutualfunds/mutualfunds1.asp

There are three sizes of companies invested in:

Large cap – Market capitalization $5 billion or more,

Mid Caps – Market capitalization – $1 billion to $5 billion,

Small Caps – Market capitalization $250 million to $1 billion.

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Value mutual funds invest in mature companies that have reached their zenith of growth and use their earnings to pay dividends.

Growth mutual funds focus on companies which are experiencing significant earnings or revenue growth.

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Advantages of Mutual Funds:

  1. Professional Management

It is an essential requirement to have an experienced or skilled professional manager to take care of our valuable money which is invested in mutual funds, even under the best, stable market conditions. Professional expertise is important since they maintain a portfolio of all the securities and they have the skill and expertise to decide when to buy and sell one particular security based on the market study. They also monitor the investor’s securities time to time.

 

  1. Diversification

In mutual funds, the concept of diversification can effectively be used. The risk of investing in one particular security is reduced by investing in a number of small securities of different organizations. Since investments are diversified, the risk of loosing money is minimized.

III.            Variety

The investor has the freedom to choose from a wide variety of categories like stock, bonds etc.

  1. Low Costs

Since mutual funds contain a number of securities such as bonds and stocks, the fee, an investor pay for this services may vary according to the number of securities one hold in his account. The actual fee can vary since the fund industry is very competent and dynamic.

  1. Liquidity

This is one of the major advantages of Mutual funds. The money invested in mutual funds can be sold on any business day. The price per share investor can redeem is known as the Net Asset Value (NAV)

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  1. Convenience

We can buy or sell shares directly from a firm, broker, bank, fund. It is even possible to purchase them online. It is even possible to make the funds be automatically re invested and the dividends and capital gains are periodically being distributed. Many funds offer quarterly account statements, tax information and 24 hour customer service etc.

Risk and Reward Potential for Types of Funds

http://www.investopedia.com/university/mutualfunds/

Though the risk involved in Mutual funds are different, we can see that some of them are as risky as stocks. Therefore investing in mutual funds requires identifying the type of funds investing in, the potential growth rate, return rate and the time span of the funds. Many of the short term funds are said to be risk free, though the long term funds give more returns. Investing in mutual fund in a highly fluctuating market involves more risks, but the more risk involved in a fund the more potential return it provides. Therefore it is no wonder that the new era of investment will see rapid growth in mutual funds.

http://www.iloveindia.com/finance/mutual-funds/growth-funds.html

Disadvantages of mutual funds.

  1. The managers of mutual funds are not infallible and they have to be paid regardless of the performance of the funds.
  2. Too much diversification- Due to the diversification the returns are not spectacular as stocks.
  3. Taxes – The fund managers of mutual funds do not take into account the individual tax situation when making investment decisions
  4. Lack of control- The manager of the fund decides about the make up of the portfolio and hence the performance of the fund is the performance of the fund manager.

http://www.investopedia.com/university/mutualfunds/mutualfunds.asp .

Costs.

Returns from investing in mutual funds are affected by fees that can be divided into two categories.

  1. Ongoing yearly fees – This is the expense ratio or management fees which is composed of
    1. The cost of hiring the fund managers (between 0.5-1% of assets on average)
    2. Administrative costs
    3. 12B-1 (in The United States) covers brokerage commissions, the cost of advertising and promoting the fund
  2. Transaction fees paid to salesperson (broker) when investors buy or sell shares (loads)
    1. Front- end load- a fee paid by investors purchasing shares
    2. Back- end load- a fee paid by investors when selling share
    3. No load funds- investors do not need to pay fees in at inception or in the future

http://www.investopedia.com/university/mutualfunds/mutualfunds2.asp

Net Asset Value.

Net Asset Value is the value of mutual funds, calculated by total assets minus liabilities. Net Asset Value per share is the value per share in the mutual fund and the actual price of the mutual fund which fluctuates everyday.

Reading a mutual fund table.

http://www.investopedia.com/university/mutualfunds/mutualfunds4.asp

-Column 1&2 52 W high and low- these columns represent the highest and the lowest price over the last 52 weeks

– Column 3 -Fund name- this column lists the names of mutual funds

-Column 4 – Fund specifics –this column gives details about mutual funds i.e. N- no load, F- front load

-Column 5- Price change- this column represent the change in prices of mutual funds from the previous day‘s trading

– Column 6- % change – this column represent the change in prices in %

-Column 7- Week high- this column represents the highest price at the previous week

-Column 8- Week low- this column represents the lowest price at the previous week

-Column 9-Close- this column represents the last price at which a mutual fund was traded

-Column 10- Week price change-this represents the price change in money from the previous week

http://www.investopedia.com/university/mutualfunds/mutualfunds4.asp

 

 

 

GROUPING THE INVESTOR.

An investor will have certain characteristics like risk aversion or risk taking, time orientation (short and long terms of investment) etc. It is also understood that the investor will be looking for returns on the investments made by him.

To advise the investor effectively the risk perception of the individual person is to identified first as,

  1. High risk
  2. Low risk

From the time orientation perspective there will be people investing for

  1. Long term (5 years),
  2. Medium term (3 years) and
  3. Short term (1 year)

Hence this report is a guide for investor in the following brackets

Long term High Risk Long term Low Risk
Medium term High Risk Medium term Low Risk
Short term High Risk Short term Low Risk

 

GROUPING THE FUNDS

The data given in the spread sheet is grouped in to sub categories for ease of analysis. Before grouping the data the following assumptions are made.

  1. The assets are in currency figures.
  2. The Expense ratio is in percentage. It will be the percentage of annual charge per investment. Eg- if the investment is 100 £ for a fund with an expense ratio of 1.2% the absolute value of annual expense is 1.2 £.
  3. The figures given under return are in percentages and net of expenses. I.e. the return values are after considering all the expenses.
  4. Figures under “Return 2005” are the percentage average return for the last 12 months ending December 2005.
  5. Figures under “3-Year Return” are the percentage average return for the last 36 months ending December 2005.
  6. Figures under “5-Year Return” are the percentage average return for the last 60 months ending December 2005.

As the returns values given for 12 months, 36 months and 60 months are not comparable values, two more sets of data values- the average for 2001-2 and 2003-4 are calculated from the average return figures from the table. The sample calculation is given below.

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Let

Year Yearly Average % return
2001 = A
2002 = B
2003 = C
2004 = D
2005 = E
5-Year Return =(A+B+C+D+E)/5

 

 

3-Year Return

=(C+D+E)/3

 

 

2005 Return

=E
Let
5-Year Return -3.7 =(A+B+C+D+E)/5
 

3-Year Return

10.2 =(C+D+E)/3
 

2005 Return

2.7 =E
=-3.7 x 5 =(A+B+C+D+E)
=10.2 x 3 =(C+D+E)
-18.5 =(A+B+C+D+E)
30.6 =(C+D+E)
Substituting E = 2.7
30.6 =(C+D+2.7)
=30.6-2.7 =(C+D)
27.9 =(C+D)
=27.9/2 =(C+D)/2
13.95 =(C+D)/2   Average of 2003 & 2004
Similarly (A+B)/2 = -24.55   Average of 2001 & 2002
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The above two values are found for all funds by using formula in Excel and is used in the analysis.

  1. To identify the Risk level of a mutual fund the following criteria is used.

If the returns over the various periods is fluctuating too much from the mean value i.e. if the standard deviation is too much it is high risk and vice versa.

For eg-

  1. An investor of Long term high risk, the data we will investigate will be whether the 5 year average return shows heavy fluctuations.
  2. An investor with Short term Low risk the data interesting will be consistent performance especially growth in last year.

The table and the graph next give the grouping of the mutual funds.

 

ANALYSIS

  1. Safety of the investment in mutual funds compared to other options.

Analysis of the data for finding the above is given in the below tables.

Table 1.1. Average returns over periods

2005 Average 3 Year Average 5 Year Average 2001-2 Average 2003-4 Average
7.3 17.8 3.4 -18.3 23.0

 

Table 1.2. Standard deviations over the periods

2005 Standard Deviation 3 Year Standard Deviation 5 Year Standard Deviation 2001-2 Standard Deviation 2003-4 Standard Deviation
4.5 4.9 7.0 14.2 6.8

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Table 1.3. Maximum returns over the periods

2005 Maximum Return 3 Year Maximum Return 5 Year Maximum Return 2001-2 Maximum Return 2003-4 Maximum Return
25.3 42.3 26.5 22.7 58.6

 

Table 1.4. Minimum returns over the periods

 

2005 Minimum Return 3 Year Minimum Return 5 Year Minimum Return 2001-2 Minimum Return 2003-4 Minimum Return
-5.1 6.7 -26.5 -113.2 9.8

 

Table 1.5. Percentage of funds with above 10 % returns

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%age of MFs with more than 10% return in 2005 %age of MFs with more than 10% return in 3 Years %age of MFs with more than 10% return in 5 Years %age of MFs with more than 10% return in 2001-2 %age of MFs with more than 10% return in 2003-4
26.85 96.66 18.38 1.91 99.88

 

Table 1.6. Percentage of funds with above 20 % returns.

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%age of MFs with more than 20% return in 2005 %age of MFs with more than 20% return in 3 Years %age of MFs with more than 20% return in 5 Years %age of MFs with more than 20% return in 2001-2 %age of MFs with more than 20% return in 2003-4
0.84 32.58 1.43 0.48 59.90

 

 

From the above tables it is clear that the mutual funds have not been giving a steady return over the years. High standard deviation in 2001-2 suggests that there is a high proportion of funds with varying returns. On average funds performed badly in 2001-2 and in the next 2 years improved performance. This could be due to market conditions in at the times, as most of the stock markets across the world were down in 2001 due to the “IT Bubble Burst”. Hence mutual funds are not the safest option to invest money in adverse market conditions since they follow the stock market fluctuations.

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  1. Performance of high risk, average risk and low risk mutual funds.

For analyzing the risk aspect the standard deviation of the data is examined. A high standard deviation indicates that there are a high proportion of funds with varying returns in the positive and negative side of the average.

The data is split into risk groups and analyzed in Minitab software for the generating the graph and summary as shown below.

Graph 2.1. Five years performance – low risk

 

 

 

 

 

Graph 2.2. Five years performance- average risk

Graph 2.3. Five year performance – high risk

Table 2.1. Summary –average return and standard deviation

  5 year
Average Risk Avg Risk MF Mean Return 3.64
Standard Deviation for Avg Risk 5.44
High Risk High Risk MF Mean Return -0.89
Standard Deviation for High Risk 5.79
Low Risk Low Risk MF Mean Return 9.08
Standard Deviation for Low Risk 5.53

 

Graph 2.4. Risk factor – average returns

Graph 2.5 Risk factor- standard deviations

 

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For calculation of the risk associated with the returns the returns under the 5 year period is taken as it is the average of longer term. Below is the analysis.

 

  1. From the table and the charts above it can be found that the average return for low risk investment is the highest and the standard deviation is about 5.5.
  2. For the high risk mutual funds the average return is in the negative and the standard deviation is the highest which indicates that there are a high proportion of mutual funds with the returns considerably different on both sides of the average.
  3. It can be summarised that the mutual funds termed as high risk in the data are indeed of higher risk.
  4. As the SD of average risk mutual funds is the lowest and hence it has the lowest risk associated in investment.
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  1. Performance of funds with and without fees.

 

Table 3.1. Averages comparison fee and no fee

No of Funds Mutual Fund 2005 Average 3 Year Average 5 Year Average
317 Yes 7.3 17.2 2.3
521 No 7.4 18.2 4.0

 

From the analysis of the averages it can be seen that the mutual funds with no fees performed slightly better.

 

Table 3.2. Standard deviation comparison fee and no fee

Mutual Fund 2005 Standard Deviation 3 Year Standard Deviation 5 Year Standard Deviation
Yes 4.6 4.7 6.3
No 4.5 5.0 7.3

 

The analysis on standard deviation indicates that the risk associated with mutual funds divided into Fees and no fees categories are similar. There is a slightly higher risk associated with the mutual funds with no fees for the 5 year period. This is also evident from the below analysis of the maximum and minimum return values below.

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Table 3.3. Maximum/ Minimum returns fee and no fee

Mutual Fund 2005 Maximum Return 2005 Minimum Return 3 Year Maximum Return 3 Year Minimum Return 5 Year Maximum Return 5 Year Minimum Return
Yes 20.9 -3.6 40.5 6.7 24.1 -11.9
No 25.3 -5.1 42.3 6.7 26.5 -26.5

 

Table 3.4. Comparison of above 10% fee and no fee

Mutual Fund Percentage of above 10 % return in 2005 Percentage of above 10 % return in 3 Years Percentage of above 10 % return in 5 Years Percentage of above 10 % return in 2001-2 Percentage of above 10 % return in 2003-4
Yes 26.5 96.2 13.6 0.6 99.7
No 27.1 96.9 21.3 2.7 100.0
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Table 3.5. Comparison of above 20% fee and no fee

Mutual Fund Percentage of above 20 % return in 2005 Percentage of above 20 % return in 3 Years Percentage of above 20 % return in 5 Years Percentage of above 20 % return in 2001-2 Percentage of above 20 % return in 2003-4
Yes 0.6 28.4 0.9 0.3 54.3
No 1.0 35.1 1.7 0.6 63.3

 

The above are the percentages of the mutual funds which gave above 10% and 20% return over the different periods. The analysis indicates better performance of the funds with no fees.

 

  1. The above analysis of different forms of data brings us to the conclusion that there is no special performance associated with the mutual funds with fees.
  2. Moreover they perform slightly worse than the funds with no fees even though the risk factor is more in funds with no fees over long term.
  3. The investor should not get carried away by the fees charged by the mutual fund to invest. The fees charged by a mutual fund should not be a main consideration for investing. Rather the investor should prefer the funds with no fees.
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  1. Performance connected Expense ratio.

 

Table 4.1. Comparison of expense ratios and returns

 

Mutual Fund Expense ratio range % No of mutual funds Average return 2005 % Average 3 Yr return % Average 5 Yr return % Average 2001-2 return % Average 2003-4 return %
Large Cap Exp ratio Less than 1.2% 257.0 6.74 14.85 1.11 -19.5 18.90
Exp ratio above 1.2% 186.0 6.7 14.9 -0.4 -23.2 19.0
Small Cap Exp ratio Less than 1.2% 72.0 7.61 22.66 11.20 -6.0 30.18
Exp ratio above 1.2% 157.0 6.4 21.4 7.6 -13.0 28.9
Mid Cap Exp ratio Less than 1.2% 70.0 10.30 20.13 4.12 -19.9 25.05
Exp ratio above 1.2% 95.0 9.4 20.2 3.5 -21.7 25.6

 

Graph 4.1. Comparison of expense ratios and returns

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  1. The above analysis shows that there is not much relation between expense ratio and superior performance, but the mutual funds with lower expense ratios performed slightly better.
  2. This also corroborates the general market sentiment that the expense ratios and the returns have no relation.
  3. The funds with large expense ratios might just have higher overheads which they are covering by charging higher fees as expenses.
  4. The general conclusion is that the investor should consider the expense ratio as a secondary factor when making investment decisions. Since the objective is to get better returns, it is recommended to invest in funds with lower expense ratios.

Relationship between asset size and returns.

 

Table 5.1. Comparison of asset sizes and returns

No of Mutual funds Average 2005 Return Standard Deviation Average 3 Yr Return Standard Deviation Average 5 Yr Return Standard Deviation
Asset range
>=0 125.0 6.33 4.97 16.97 5.39 2.05 6.35
<100 >=100 135.0 7.00 4.49 17.81 4.84 1.50 6.30
<175 >=175 131.0 8.04 4.78 18.32 5.18 3.13 7.50
<350 >=350 134.0 7.44 4.52 18.63 4.99 5.35 7.60
<600 >=600 132.0 7.21 4.44 17.15 4.44 2.97 6.65
<1300 >=1300 124.0 7.87 4.01 18.18 5.03 5.21 7.24
<5000 >=5000 57.0 7.70 3.94 17.13 4.12 3.59 5.05

 

Graph 5.1. Comparison of asset sizes and returns

The above table gives the average returns for each period classified on different asset ranges. From the table and graph above it can be seen that there is no direct correlation between the asset size and the rate of return. In other words it can be said that there are mutual funds with low asset sizes which give similar returns with those ones with high assets. Hence it may be safely concluded that the assert size should also be of secondary importance when considering investment factors.

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  1. Performance of growth and value mutual funds

Table 6.1. Comparison of growth and value

No of Growth Mutual Funds – 480 Average 2001-2 Average 2003-4 Average 5 Yr Average 3 Yr Average 2005
Growth -26.4 22.0 -0.2 17.2 7.6
Value -7.4 24.4 8.2 18.6 6.9
Standard Deviation 2001-2 Standard Deviation 2003-4 Standard Deviation 5 Year Standard Deviation 3 Year Standard Deviation 2005
No of Value Mutual Funds – 358 Growth 11.7 6.6 5.6 4.8 4.8
Value 9.2 6.8 5.6 5.1 4.2
Lowest Return Highest Return Lowest Return Highest Return Lowest Return Highest Return Lowest Return Highest Return Lowest Return Highest Return
Growth -113.2 20.5 9.8 48.5 -26.5 26.5 6.7 34.0 -5.1 22.2
Value -41.6 22.7 10.1 58.6 -4.7 25.0 7.6 42.3 -5.0 25.3

 

Table 6.2. Comparison of above 10% return – growth and value

Mutual Fund No of Funds Percentage of above 10 % return in 2005 Percentage of above 10 % return in 3 Years Percentage of above 10 % return in 5 Years
Growth 480.0 30.2 95.6 4.2
Value 358.0 22.3 98.0 37.4

 

Graph 6.1. Comparison of returns- growth and value

Graph 6.2. Comparison of standard deviations – growth and value

The funds are divided into two groups of growth and value and they were analyzed for the rate of returns by taking the averages and the risk factors by taking the standard deviation. The analysis of the average returns suggests that the value funds performed better over the different periods and especially in the long term. From the analysis of standard deviation it can be seen that the risk associated with investing is comparable for value and growth funds.

  1. Performance of Large, Mid and Small Cap Mutual funds.

Table 7.1. Comparison of returns for categories

Nos Mutual Fund 2005 Average 3 Year Average 5 Year Average
443 Large cap 6.7 14.9 0.5
166 Mid Cap 9.8 20.1 3.7
229 Small Cap 6.8 21.8 8.7

 

Graph 7.1. Comparison of returns for categories

 

Table 7.2. Comparison of standard deviations for categories

Mutual Fund 2005 Standard Deviation 3 Year Standard Deviation 5 Year Standard Deviation
Large cap 4.1 3.6 4.9
Mid Cap 4.7 4.1 6.6
Small Cap 4.6 4.1 7.4

 

Graph 7.2. Comparison of standard deviations for categories

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Table 7.3. Minimum and maximum returns for categories

Mutual Fund 2005 Maximum Return 2005 Minimum Return 3 Year Maximum Return 3 Year Minimum Return 5 Year Maximum Return 5 Year Minimum Return
Large cap 21.6 -5.1 31.3 6.7 26.5 -26.5
Mid Cap 25.3 -3.6 40.5 11.8 24.1 -13.2
Small Cap 20.5 -5.0 42.3 12.1 25.0 -11.9

 

Graph 7.3. Minimum and maximum returns for categories

 

Table 7.4. Comparison of above 10 % return for categories

Mutual Fund %age of above 10 % return in 2005 %age of above 10 % return in 3 Years %age of above 10 % return in 5 Years %age of above 10 % return in 2001-2 %age of above 10 % return in 2003-4
Large cap 19.2 93.7 1.4 0.2 99.8
Mid Cap 51.2 100.0 19.3 0.0 100.0
Small Cap 24.0 100.0 50.7 6.6 100.0

 

Graph 7.4. Comparison of above 10 % return for categories

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Table 7.5. Comparison of above 20 % return for categories

Mutual Fund %age of above 20 % return in 2005 %age of above 20 % return in 3 Years %age of above 20 % return in 5 Years %age of above 20 % return in 2001-2 %age of above 20 % return in 2003-4
Large cap 0.5 7.0 0.2 0.2 32.5
Mid Cap 2.4 51.8 0.6 0.0 84.3
Small Cap 0.4 68.1 4.4 1.3 95.2

 

Graph 7.5. Comparison of above 20 % return for categories

From the above analysis it can be seen that

  1. The large cap funds performed poorly over the different periods.
  2. The Mid and small cap funds were the better performers.
  3. Small cap funds performed much better over the two in the long term.
  4. Although the risk associated with investing in the small cap mutual funds was higher investing in the small cap mutual funds was the most profitable for the periods of 3 and 5 years ending December 2005.

 

  1. Which type of funds performed better than the rest over the 5 year period?

The table below gives the average 5 year return for various mutual funds divided into groups along with the percentage of such number of funds.

Table 8.1. Comparison of 5 years returns

Mutual Fund Group. Percentage of total Nos Average 5 Yr Return
Large Cap Growth Average Risk 10.74 -0.72
Large Cap Growth High Risk 17.90 -3.45
Large Cap Low Risk 0.84 1.24
Large Cap Value Average Risk 8.71 2.70
Large Cap Value High Risk 0.36 1.77
Large Cap Value Low Risk 14.32 4.91
Small Cap Growth Average Risk 1.67 9.66
Small Cap Growth High Risk 11.69 2.05
Small Cap Growth Low Risk 0.84 14.34
Small Cap Value Average Risk 3.70 12.98
Small Cap Value High Risk 0.72 10.22
Small Cap Value Low Risk 8.71 15.09
Mid Cap Growth Average Risk 3.34 4.88
Mid Cap Growth High Risk 10.02 -1.40
Mid Cap Growth Low Risk 0.24 8.80
Mid Cap Value Average Risk 1.07 9.39
Mid Cap Value High Risk 0.60 12.12
Mid Cap Value Low Risk 4.53 11.20

 

Graph 8.1. Comparison of 5 years returns

  1. From the above table and graph it can be seen that Small Cap Value Low Risk mutual funds which constitute 8.71% of the total 838 mutual funds has an average 5 year return of 15.09%.
  2. The closest mutual fund with high average return is Small Cap Growth Low Risk which has gave 14.34%.
  3. But since this constitutes only 0.34% of the total funds this cannot be taken as consistent.
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  1. Which type of funds performed better than the rest over the 3 year period?

The table below gives the average 3 year return for various mutual funds divided into groups along with the percentage of such number of funds.

Table 9.1. Comparison of 3 years returns

Mutual Fund Group. Percentage of total Nos Average 3 Yr Return
Large Cap Growth Average Risk 10.74 13.69
Large Cap Growth High Risk 17.90 14.91
Large Cap Low Risk 0.84 11.10
Large Cap Value Average Risk 8.71 15.86
Large Cap Value High Risk 0.36 15.00
Large Cap Value Low Risk 14.32 15.28
Small Cap Growth Average Risk 1.67 21.73
Small Cap Growth High Risk 11.69 20.49
Small Cap Growth Low Risk 0.84 23.61
Small Cap Value Average Risk 3.70 23.12
Small Cap Value High Risk 0.72 22.70
Small Cap Value Low Risk 8.71 22.74
Mid Cap Growth Average Risk 3.34 19.90
Mid Cap Growth High Risk 10.02 19.65
Mid Cap Growth Low Risk 0.24 19.65
Mid Cap Value Average Risk 1.07 21.02
Mid Cap Value High Risk 0.60 27.24
Mid Cap Value Low Risk 4.53 20.31

 

Graph 9.1. Comparison of 3 years returns

 

  1. From the above data it can be concluded that small and mid cap funds gave better returns..
  2. Looking more closely the Large cap Value Low risk mutual funds were the best performers over the period of three years.
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  1. Which type of funds performed better than the rest over the 12 months period of 2005?

The table below gives the average 3 year return for various mutual funds divided into groups along with the percentage of such number of funds.

Table 10.1. Comparison of 12 months 2005 returns

Mutual Fund Group. Percentage of total Nos Average Return in 2005
Large Cap Growth Average Risk 10.74 7.27
Large Cap Growth High Risk 17.90 6.82
Large Cap Low Risk 0.84 5.60
Large Cap Value Average Risk 8.71 6.63
Large Cap Value High Risk 0.36 7.07
Large Cap Value Low Risk 14.32 6.32
Small Cap Growth Average Risk 1.67 8.07
Small Cap Growth High Risk 11.69 6.37
Small Cap Growth Low Risk 0.84 8.06
Small Cap Value Average Risk 3.70 5.73
Small Cap Value High Risk 0.72 3.92
Small Cap Value Low Risk 8.71 7.62
Mid Cap Growth Average Risk 3.34 11.05
Mid Cap Growth High Risk 10.02 9.81
Mid Cap Growth Low Risk 0.24 12.00
Mid Cap Value Average Risk 1.07 7.29
Mid Cap Value High Risk 0.60 11.82
Mid Cap Value Low Risk 4.53 8.94

 

Graph 10.1. Comparison of 12 months 2005 returns

 

  1. From the above data it can be seen again that the the returns are mostly comparale
  2. Large cap funds has lower performance.
  3. The most profitable was investing in Mid cap growth high risk mutual funds.

  1. Which type of funds gave consist return over the 5 year period?

Table 11.1. Consistency of returns -5 years period

Mutual Fund Average 2001-2 Return Average 2003-4 Return Average 3 Yr Return Average 5 Yr Return Average Return 2005
Large Cap Growth -27.34 18.06 14.36 -2.32 6.95
Large Cap Value -13.13 20.01 15.49 4.04 6.45
Small Cap Growth -22.05 27.89 20.82 3.67 6.67
Small Cap Value 1.32 30.82 22.84 14.23 6.89
Mid Cap Growth -28.76 24.49 19.71 0.32 10.15
Mid Cap Value -4.20 27.18 21.10 10.98 8.93

 

Graph 11.1. Consistency of returns -5 years period

Even though the graph is plotted with incomparable data it can be seen that overall the Small Cap growth funds average returns stands over all the rest over all the periods.

 

CONCLUSION

In the present climate of market uncertainty where even the bank deposit rates has plummeted to the lowest the mutual funds stands out as an investment option. The returns are not spectacular as an investment in stocks can get. But it does not have the high risk associated with the stock option. But it should also be noted that investing in mutual funds doesn’t assure steady positive returns. Making an investment in mutual funds does not require an investor to have specific knowledge about markets and economic climate. Looking at the 5 year returns for Long Term growth funds the range of returns is in between -26.5% to 26.5 %. So it would recommendable to be familiar with some basic information about mutual funds and their different types. It is also very important to find out about past performance of mutual funds which would be a good guide to make the first investment steps. While an analysis of data will give an insight into the past performance this does not mean that the growth will take the same trajectory taken by the historic values. Hence, even though an attempt is made to project some recommendations this does not mean that it is a guide to the future performance of the fund.

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RECOMMENDATIONS

From all the above analysis the following recommendations are made:

  • When selecting a mutual fund an investor should not consider the fees aspect and the expense ratio as fundamentals. Paying more fees or high expense ratio of a fund does not mean that he or she is put in to a better fund. As seen from the data there is no correlation between mutual funds performance with the expenses.
  • It is also better not to use the asset size as an indicator of profitability since there is no direct correlation between asset sizes and the rates of return.
  • When the period of investment is not fixed i.e if the investor is not sure about the time factor it is recommended to invest in Small cap or Mid Cap Value funds as they show better performance over the different periods especially in the period of 5 years.
  • When investing for 5 years period it is recommended to select one from the Small Cap Value or Growth Low Risk mutual funds.
  • When investing for 3 years period it is recommended to invest in the Large cap value Low risk funds.
  • When investing for one year period it is recommended to invest in the Mid cap growth high risk mutual funds.

 

 

REFERENCES

 

http://www.investopedia.com/university/mutualfunds/mutualfunds1.asp

http://www.investorwords.com

http://www.investopedia.com/university/mutualfunds/

http://www.investopedia.com/university/mutualfunds/mutualfunds.asp

The rise of mutual funds : an insider’s view By Matthew P. Fink-Oxford University Press, 2008

The Financial Times guide to using the financial pages By Romesh Vaitilingam