THE QUARTERLY MUTUAL FUND RETURNS AND THE PERFORMANCE EVALUATION TECHNIQUES

Abstract

ABSTRACT: Most investment professionals agree that it's smarter to own a variety of stocks and bonds than to gamble on the success of a few. But diversifying can be tough because buying a portfolio of individual stocks and bonds may be expensive. And knowing what to buy-and when-can be a full-time job. Mutual funds, also known as a unit trust that offers one solution; when investors put money into a fund, it's pooled with money from other investors to create greater buying power than they would have been investing individually. Since a fund can own hundreds of different securities, its success doesn't dependent on how one or two holdings do. And the fund's managers keep constant tabs on the markets, adjusting the portfolio to reflect changing conditions. A mutual fund has two distinct yet intertwined businesses: making a profit and providing services to its clients. Each fund, or closely related group of funds, is run by a professional manager responsible for both its day-to-day operations and for its successful performance. In fact, the skill of the manager is so closely linked to the success of a fund that many experts advise investors to pick a fund based on the manager-and even to drop a fund if a star manager leaves. The most important investment result is the periodic performance evaluation of the fund. Having different evaluation techniques and different benchmarks, the selection of the technique and the benchmark may end with different results. In the performance evaluation of the fund, a number of aspects are considered; i.e., the evaluation techniques together with the benchmark used. Different techniques may result to different evaluation results beside different benchmarks may result to different results. To validate the results found by Grinblatt and Titman (1994) that techniques of similar inferences result to same results if the same benchmark is used. However, techniques of similar inferences may vary when using different benchmarks. This paper empirically contrasts the Sharpe Measure and the Treynor Measure on a sample of four Mutual Funds using a variety of benchmark portfolios. The study finds that the measures generally of similar inferences when using the same benchmark and that the inferences can vary, even with the same measure, when using different benchmarks.