Page 267 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes investments. There were rather no choices apart from holding the cash or to further continue
investing in shares. One more thing to be noted, since only closed-end funds were floated in the
market, the investors disinvested by selling at a loss in the secondary market.
The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandals,
the losses by disinvestments and of course the lack of transparent rules in the where about
rocked confidence among the investors. Partly owing to a relatively weak stock market
performance, mutual funds have not yet recovered, with funds trading at an average discount of
1020 percent of their net asset value.
The supervisory authority adopted a set of measures to create a transparent and competitive
environment in mutual funds. Some of them were like relaxing investment restrictions into the
market, introduction of open-ended funds, and paving the gateway for mutual funds to launch
pension schemes.
The measure was taken to make mutual funds the key instrument for long-term saving. The
more the variety offered, the quantitative will be investors. At last to mention, as long as mutual
fund companies are performing with lower risks and higher profitability within a short span of
time, more and more people will be inclined to invest until and unless they are fully educated
with the dos and don'ts of mutual funds.
Mutual Fund performance can be analysed through performance measurement ratios that are
used in portfolio analysis. In case of a well-diversified portfolio the standard deviation could be
used as a measure of risk, but in case of individual assets and not-so-well diversified portfolios
the relevant measure of risk could be the systematic risk.
There are three popular measures to estimate the return per unit of risk from a portfolio. They
are

(a) Sharpe's Ratio
(b) Treynor's Measure
(c) Jensen's Differential Returns

Sharpe's Ratio

A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance.
It is calculated by subtracting the risk-free rate - such as that of the 10-year US Treasury bond -
from the rate of return for a portfolio and dividing the result by the standard deviation of the
portfolio returns.
Sharpe's measure is called the "Reward-to-Variability" Ratio. The returns from a portfolio are
initially adjusted for risk-free returns. These excess returns attributable as reward for investing
in risky assets are validated in terms of return per unit of risk. Sharpe's ratio is as follows:
E[R] R f
Or S =

r p  r f
=

p
Where:

r p = Expected portfolio return

r = Risk free rate
f
sp = Portfolio standard deviation

262 LOVELY PROFESSIONAL UNIVERSITY