Summary of "NISM VA Mutual Fund Chapter 11 - Mutual Fund Scheme Performance | 2024 - New Syllabus| #nism5a #nism"
Summary: NISM VA Mutual Fund Chapter 11 - Mutual Fund Scheme Performance | 2024
Key Topics Covered
- Benchmarking Mutual Fund Performance
- Types of Benchmarks (Price Return Index vs Total Return Index)
- Benchmark Selection Criteria
- Benchmarking for Different Fund Types (Equity, Debt, Hybrid, Sector)
- Quantitative Measures of Fund Performance
- Risk-Adjusted Return Metrics
- Tracking Error and Its Causes
- Exam-related Questions and Concepts
Finance-Specific Content
1. Benchmark Definition and Importance
A benchmark is a standard index against which mutual fund performance is measured. For example, Nifty 50 or BSE Sensex are commonly used for large-cap or diversified equity funds. The benchmark must align with the fund’s:
- Investment objective
- Strategy
- Asset allocation
Mutual fund managers’ returns are compared to the benchmark to assess outperformance or underperformance.
2. Benchmark Selection Process
- Decided by the Mutual Fund Company (MC) in consultation with trustees.
- Must be documented in the Scheme Information Document (SID).
- Benchmark can be changed with proper justification and trustee approval.
- Benchmark indices are typically from NSE (Nifty) or BSE.
3. Price Return Index (PRI) vs Total Return Index (TRI)
- Price Return Index (PRI): Measures only price appreciation. Example: Nifty moving from 10,000 to 12,000 reflects a 20% return.
- Total Return Index (TRI): Includes price appreciation plus dividends and interest payments, providing a more accurate performance picture.
- Since February 1, 2018, mutual funds benchmark using TRI for transparency and accurate reflection of returns.
4. Benchmarking Different Mutual Fund Categories
-
Diversified Equity Funds (≥65% equity, diversified across sectors): Benchmarked against BSE Sensex, Nifty 50, or BSE 200.
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Sector Funds (focused on one sector, e.g., banking, FMCG, infrastructure): Benchmarked against sector-specific indices like BSE Bankex, Nifty Bank, BSE FMCG, Nifty Infrastructure, etc.
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Large Cap Funds: Invest in top 100 companies by market capitalization (market cap > ₹20,000 crore). Benchmarked against Nifty 50 or BSE Sensex (both large cap indices).
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Mid and Small Cap Funds: Benchmarked against indices covering mid/small cap companies (e.g., Nifty Midcap 150, BSE 200).
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Debt Funds: Invest ≥65% in debt securities (bonds, government securities, commercial papers). Benchmarked against indices created by CRISIL, ICRA, or NSE (e.g., CRISIL Overnight Index, CRISIL Liquid Fund Index).
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Hybrid Funds (mix of equity and debt):
- Aggressive Hybrid: ~75% equity, 25% debt
- Balanced Hybrid: ~50% equity, 50% debt
- Conservative Hybrid: ~25% equity, 75% debt Benchmarks are composite indices weighted accordingly (e.g., CRISIL Hybrid 25+75 Aggressive Index).
-
Gold Funds: Benchmarked against gold price indices (physical or digital gold price).
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International Funds: Benchmarked against relevant international indices (e.g., S&P 500 for US funds, Chinese indices for China funds).
5. Portfolio Concentration and Benchmarking
Benchmark selection depends on portfolio concentration:
- If fund holds ≤30 stocks, BSE Sensex (30 stocks) is appropriate.
- If >30 and ≤50 stocks, Nifty 50 (50 stocks) is more suitable.
- For >50 stocks, broader indices like BSE 200 or Nifty 200 should be used.
6. Quantitative Measures of Performance
Performance evaluation should consider risk-adjusted returns, not just absolute returns. Important metrics include:
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Sharpe Ratio: Excess return over risk-free rate divided by standard deviation (total risk).
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Treynor Ratio: Excess return over risk-free rate divided by beta (systematic risk).
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Jensen’s Alpha: Measures excess return over expected return predicted by CAPM (Capital Asset Pricing Model).
Formula Highlights
- Excess Return = Fund Return (Rs) - Risk-Free Rate (Rf)
- Sharpe Ratio denominator = Standard Deviation (total risk)
- Treynor Ratio denominator = Beta (market risk)
- Jensen’s Alpha = Actual Return - [Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)]
7. Tracking Error
- Tracking error = standard deviation of the difference between fund returns and benchmark returns.
- Lower tracking error indicates closer tracking of the benchmark (desirable for index funds).
Causes of Tracking Error
- Fund expenses
- Cash holdings (fund manager may keep some cash instead of full investment)
- Corporate actions and trading inefficiencies
8. Exam Focus and Practice
- Numerical problems on Sharpe and Treynor ratios are common.
- Understanding benchmark selection criteria is crucial.
- Tracking error and risk-adjusted return concepts are important.
- Several example MCQs discussed related to benchmark changes, performance metrics, and index types.
Important Tickers / Indices Mentioned
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Equity Indices: Nifty 50, BSE Sensex, BSE 200, Nifty Bank, BSE Bankex, Nifty Infrastructure, BSE FMCG, Nifty Midcap 150
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Debt Indices: CRISIL Overnight Index, CRISIL Liquid Fund Index, Nifty Government Bond Index
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Hybrid Indices: CRISIL Hybrid 25+75 Aggressive Index, CRISIL Hybrid 50+50 Balanced Index
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Gold: Gold price index (digital/physical)
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International: S&P 500 (US), Chinese indices
Methodology / Framework for Benchmark Selection
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Match benchmark with:
- Investment objective of the scheme
- Investment strategy of the scheme
- Asset allocation pattern of the scheme
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Ensure benchmark reflects the scheme’s investment universe and portfolio concentration.
- Use sector-specific indices for sector funds.
- Use composite indices weighted by asset allocation for hybrid funds.
- Benchmarks must be approved by trustees and disclosed in SID.
- Any change in benchmark requires justification and trustee consultation.
Disclaimers / Notes
- This content is educational and aligned with the NISM VA exam syllabus.
- It is not financial advice for actual investing.
- Emphasis is on exam preparation and understanding concepts for mutual fund performance evaluation.
Presenter / Source
- Presenter: Unnamed instructor from the Finance Nobita YouTube channel
- Content based on NISM VA Mutual Fund Certification syllabus, Chapter 11 (Mutual Fund Scheme Performance)
Summary prepared based on auto-generated subtitles of the video titled “NISM VA Mutual Fund Chapter 11 - Mutual Fund Scheme Performance | 2024 - New Syllabus | #nism5a #nism”.
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