Since the privatization of the MF industry 15 years ago, several new players like AIG, AXA, Fidelity and Lotus have entered the industry. Last year, assets in the industry grew by 60%. At present, out of 32 fund houses in the country, 18 have assets in excess of Rs. 10,000 cr. (Refer Figure 1). Profits of various Asset Management Companies (AMCs) have also soared because of the booming equity markets.
UTI, ICICI Prudential and HDFC are expected to end finacial year 2007-2008 with profits in excess of Rs. 100 cr.
However, the current quarter of this financial year is expected to be crucial for the industry because equity markets have corrected sharply. Further, the abolition of entry loads by the Sebi has pushed up the marketing expenses for AMCs. In such a situation, investors face a greater challenge in evaluating a fund's performance. It is important to know whether fund managers add value to the portfolio or merely incur wasteful transaction costs. It is generally presumed that the fund managers know more than the retail investor and are better equipped to collect and interpret information that helps to predict fund's security.
But the question here is-how do we discriminate between a manager who is truly skilful and one who is merely lucky?
While evaluating a fund and comparing its performance with other funds in the same category, the returns should be measured taking into account the risks involved in achieving those returns. The volatility of an equity portfolio comes from:
Generally, past volatility is taken as an indicator of future risk. The standard deviation for a fund is a measure of how the actual performance of the fund deviates from its average performance over a period of time. Since standard deviation measures risk, a low value of standard deviation is good.
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