Evaluating the Performance of Mutual Fund, by Applying Z-Score.

M. DA !E" #A$%&MA#, M'A., (Ph.D) #e*earch Scholar, Sathyabama Deemed &niver*ity, E-mail !d+ mdr,-.../yahoo.com Ph+ .44---,3..43 Ab*tract Selecting a mutual fund i* not an ea*y ta*5 a* there are nearly ,6 A**et Management companie* 7AM08 offering many fund*. 9he fir*t *tep for inve*tor* i* decided ha* ho: to *elect a fund. ;ith the ,6 active player* the mutual fund indu*try ha* mopped up nearly <6 billion through e=uity mutual fund *cheme* alone. 9hi* i* due to the attribute* of the indifferent performance player in the e=uity mar5et. 9he other important area for the mutual fund indu*try :ill be to deliver performance. #arely, :e find normal inve*tor*, :ho do *omething el*e for a living-have a *y*tematic chec5li*t of thing* that they *hould evaluate about a fund, :hich they are con*idering before buying the fund. A* an inve*tor :e :ant* a return on our inve*tment, mo*t inve*tor* tend to evaluate fund performance on a *hort-term ba*i*. 9here i* a need to educate inve*tor about ri*5-ad>u*ted return and al*o the total portfolio return. 9he 5ey to inve*tor* return :ill be the fund* ability to outperform the benchmar5 inde? on a con*i*tent ba*i* :ithout ta5ing lot of ri*5*. @ereA* ! prepared a blueprint for a *tructured approach to fund *election that i* Z-Score. !t i* u*ed on the ba*ed on the *tati*tic* on the group :ith *maller *ample *iBe, :hich mean* that almo*t *urely *toc5* :ith better trailing 2- month* performance e?perience higher net C change in number of *hare*, higher net ra: change in number of *hare*, and higher net individual :eight change compare to the :or*t performing *toc5*. Dr. S.S. #A& #egi*trar Sathyabama Deemed &niver*ity, 0hennai 1.. 223

Evaluating the Performance of Mutual Fund, by Applying Z-Score.

M. DA !E" #A$%&MA#, M'A., (Ph.D) #e*earch Scholar, Sathyabama Deemed &niver*ity, E-mail !d+ mdr,-.../yahoo.com Ph+ .44---,3..43 Dr. S.S. #A& #egi*trar Sathyabama Deemed &niver*ity, 0hennai 1.. 223

! 9#DD&09!D
9he mutual fund indu*try in !ndia ha* ta5en rapid *tride* during the pa*t fe: decade*. 9he 5ey challenge facing the indu*try i* that of educating the inve*tor. Mutual fund* are *till not regarded a* life cycle financial planning product* among the middle cla** in !ndia. 9he mutual fund indu*try need* to introduce innovative product* :hich can *ati*fy inve*torE* re=uirement*. ;e have *een *tandard product* being introduced by mo*t of the player*. 9he*e product* have met inve*torE* re=uirement in a bull mar5et but failed to cultivate a long-term *aving habit. Mutual fund* have become a 5ind of trading in*trument rather than inve*tment vehicle*. Dff late :e have *een the introduction of innovation product* in the form of floating #ate Fund*, !nternational !nve*tment plan*, E?change 9raded Fund* and Fold Fund. Selecting a mutual fund i* not an ea*y ta*5 :ith *o many fund*. ;e thin5 that the correct fir*t *tep to:ard* deciding i* to decide on a :ay of deciding. #arely do inve*tor*-normal inve*tor*, :ho do *omething el*e for a living-have a *y*tematic chec5li*t of thing* that they *hould evaluate about a fund, :hich they are con*idering buying. @ereA* our blueprint for a *tructured approach to fund *election. 9here are four ba*ic area* that you mu*t evaluate in a fund to decide :hether itA* a good inve*tment. 9he !ndian mutual fund indu*try ha* *tagnated at around #* 2, ..,...Gcrore a**et*, in the la*t t:o year*. 9hi* i* due to the attribute* of the indifferent performance player in the e=uity mar5et. 9he other important area for the mutual fund

indu*try :ill be to deliver performance. 9he inve*tor :ant* a return on their inve*tment. Mutual fund* have *old performance in a bull mar5et but mi*erably failed during their bear mar5et. 0oncept of #i*5 Ad>u*ted #eturn and 9otal Portfolio #eturn are *till alien to inve*tor*. Mo*t inve*tor* tend to evaluate fund performance on a *hort-term ba*i*. 9here i* a need to educate inve*tor about ri*5-ad>u*ted return and al*o the total portfolio return. 9he empirical *tudie* in the !ndian mar5et have *ho:n that the fund* return tend* to have a huge variance :ith the average inve*torE* return. 9hi* i* mainly becau*e mo*t inve*tor* enter the fund after it ha* *ho:n top =uartile performance. !nve*tor* al*o tend to e?it :hen the fund* are *ho:ing bottom =uartile performance. 9he 5ey to inve*tor* return :ill be the fund* ability to outperform the benchmar5 inde? on a con*i*tent ba*i* :ithout ta5ing lot of ri*5*. !n thi* *tudy Z- te*t i* u*ed on the ba*ed on the *tati*tic* on the group :ith *maller *ample *iBe, :hich mean* that almo*t *urely *toc5* :ith better trailing 2- month* performance e?perience higher net C change in number of *hare*, higher net ra: change in number of *hare*, and higher net individual :eight change compare to the :or*t performing *toc5*..

9he*e product* produced inve*tor* :ith a choice of inve*tment. 9hey are niche product*, :hich an *ati*fy *pecific ri*5-return profile of an inve*tor and create a long-term inve*tment vehicle for him the mutual fund* indu*try ha* to bring many *uch innovative concept* to cater to inve*tor re=uirement*. 9he option could be on the @igh Hield 'ond* Fund*, Principal Protected Fund*, "ong Short Fund*, Arbitrage Fund*, Dynamic Fund* etc., 9he *ucce** of a portfolio manger in general i* mea*ure in term* of both timing ability and *electivity other:i*e called a* the micro and macro foreca*ting abilitie* re*pectively. Since return* from mo*t financial *ecuritie* are not uniformly *pread throughout the period, a lot of empha*i* i* being given on timing of inve*tment. !n other :ord* the fund manger* are not only re=uired to identify gro:th *toc5* but al*o deploy the limited re*ource at appropriate time and *:itch on *toc5 to other to reap ma?imum

return. 9hi* paper analy*e* performance of mutual fund* in !ndia on their ability to *elect right *toc5* and inve*t in them at right time. Objective of the Study: 9hi* paper analy*i* *ho:* ho: the Z-Score concept enhance* the revie: function :hich i* the underlying ob>ective in the application of Mutual fund !ndu*try. a8 9o help the inve*tor* to chec5 the technical *tability of the Particular *cheme Evolution of Z-Score: Specific return-rate thre*hold belo: :hich *urvival i* increa*ingly threatened. Accordingly, Z corre*pond* to the probability that the behavior :ill re*ult in a return rate belo: the thre*hold. Fiven the*e definition* not again :ith reference to e=uation that if the thre*hold, n i* belo: the mean, Z i* negative, that i* it i* a *mall, and that if n i* above the mean, Z i* po*itive that i* it i* large. 9hi* lead* to the generaliBation that to minimiBe the po**ibility of falling belo: the thre*hold, foraging behavior *hould minimiBe Z, thre*hold I *en*itive optimal forager* *hould be Z minimiBe*. 9he goal of minimiBing Z hold* *ome rather counterintuitive implication* for the manner in :hich variability in rate of return, here repre*ented by *tandard deviation, S affect* profitability of re*ource* *hortfall. Specifically, :hen mean return i* greater than the thre*hold 7i.e., :hen u J n8 B i* negative. Financial ratio i* u*eful not only to a**e** the pa*t or pre*ent condition of an enterpri*e, but al*o to reliability predict it* further *olvency or ban5ruptcy. 9hi* type of information i* of critical importance to pre*ent K potential creditor and inve*tor*. 9here are *everal different method* of analy*i* for obtaining thi* predictive information. 9he be*t-5no:n and mo*t time-te*ted i* the B-*core, developed for publicity traded manufacturing firm* by Profe**or Ed:ard Altman of e: Hor5 &niver*ity

The z-score model 9he Z-*core model i* a =uantitative model developed in 2316 by Ed:ard Altman to predict ban5ruptcy financial di*tre** of a bu*ine** u*ing a blend of the traditional financial ratio and a *tati*tical method 5no: a* multiple di*criminate analy*i* 7MDA8.9he B-*core model ta5e* it* name from the *tati*tic, Z :hich a* many :ill recogniBe, i* the

*tandardiBed normal deviate of a normally di*tributed population :ith mean, L, and *tandard deviation, S fir any *uch population, Z de*cribe* a ratio bet:een the amount an individual mea*urement, *ay, n, depart* from the mean of the population relative to the *tandard deviation of the population. 9hu* Z varie* directly :ith n relative to LM it i* negative :hen n i* *maller than L and holding * con*tant from the*e decrea*e* 7become* more negative8 a* n decrea*e*. 0onver*ely, it i* po*itive :hen n i* larger than L, and from there increa*e* a* n doe*. !n formal term*. Z N 7n-u8 G * Every value of Z i* a**ociated :ith a probability corre*ponding to the amount of a normal curve :hich mean* L and *tandard deviation * that lie* on either *ide of it 7i.e., Z8. 9here probabilitie* are tabulated in the appendi?e* of mo*t elementary *tati*tic* te?t*. !n the B-*ore model, L K * corre*pond to the mean K *tandard deviation of the return rate for a given behavior K n corre*pond* to a *pecific

How is it used & a

lied!

9he MDA may be u*ed for one company on a group of companie*. 9he rece**ionary environment of the early 233.E* :itne**ed an increa*ing trend in ban5ruptcie*. 9he Z*core model could be u*ed to determine if an employer :a* on the verge of ban5ruptcy or it *ome other entity :ould go ban5rupt. A ma>or cu*tomerO An important *upplierO A borro:erO !f it can be predicted :ith rea*onable accuracy that a company in :hich one i* a participant i* in increa*ing financial di*tre** protection mea*ure K corrective action can be ta5en. Some *tep* might be to curtail capital e?pan*ion, cut bac5 on dividend*, or engage in refinancing. "ho uses it & when! #inancial mana$er & analyst+ Financial manger K analy*t apply the Z *core in numerou* :ay* including the follo:ing. #inancial mana$ement analysts: 9he *core can indicate :hether capital e?pan*ion K dividend* *hould be entailed to 5eep* needed fund* :ithin the bu*ine**. %er$er analysis+ the Z-*core can help identify potential problem :ith a merger candidate*. &oan & credit analysis: 'an5er and lender can u*e the B-*core to determine if they *hould e?tend a loan. Dther creditor* *uch a* vendor* can u*e it to determine :hether to e?tend credit. 'nvestment analysis+ 9he B-*core can help an inve*tor in *electing *toc5 of potentially troubled compote*. The (ower of Z A common *tati*tical :ay of *tandardiBing data on one *cale *o a compari*on can ta5e place i* u*ing a B-*core. 9he B-*core i* li5e a common yard *tic5 for all type* of data.

Each B-*core corre*pond* to a point in a normal di*tribution and a* *uch i* *ometime* called a normal deviate *ince a B-*core :ill de*cribe ho: much a point deviate* from a mean or *pecification point. !n Si? Sigma parlance, B-*core and proce** *igma are u*ed interchangeably and are *ometime* called B-e=uivalent*. Strictly *pea5ing, the proce** *igma and B-e=uivalent* are loo*ely tied to the *tati*tical B*core. 9he *tati*tical B-*core ha* very *trict definition* derived from the rule* of the normal di*tribution. For mo*t application* in Si? Sigma, ignoring *ome of tho*e con*traint* i* innocuou*. !n u*ability te*ting the benefit of the *tandardiBation from proce** *igma allo: u* to meaningfully compare di*parate mea*ure* li5e ta*5 completion and time on ta*5. 9he B*core Gproce** *igma i* calculated by *ubtracting your *ample mean from a target data point and dividing by the target *tandard deviation. 9hi* value i* a mea*ure of the di*tance in *tandard deviation* of a *ample from the mean and i* e?pre**ed u*ing the Free5 letter P. !f your *ample i* , *tandard deviation* from the *pec limit, you :ould de*cribe your proce** a* , *igma. or ,P9he further a:ay a *ample i* from the *pec limit the higher the B-*core and proce** *igma. A higher proce** *igma mean* a le** defective proce**. 9he term Si? Sigma originate* from the B-*core. 1P mean* that *i? *tandard deviation* lie bet:een the mean of a *ample and the neare*t *pecification limit.

Each proce** *igma ha* t:o e=uivalent value* :hich provide a meaningful :ay to compare data and under*tand ho: defective a proce** i*+ 2. )(%O+ Each e?pre**e* the probability of a defect in term* of a defect per million opportunitie* or DPMD. 9hat i*, if a condition :ere to occur one million time*, ho: many time* out of that one million :ould a defect occurO A proce** *igma of .Q i* e=ual to ,.6,... defect* per million opportunitie*. And a proce** *igma of -.Q mean* that 1,-2. out of 2 million time* there :ill be a defect. For a *ample that i* 1P, the DPMD i* .....2. Some organiBation* prefer to thin5 in term* of

defect* per opportunitie* in*tead of the more ab*tract R*tandard deviation* above the *pec limit.R -. (robability of a )efect: 9he proce** *igma can al*o be de*cribed in term* of a probability of a defect. A B-*core of .Q mean* there i* a ,.C probability of encountering a defect. A B-*core of .-Q mean* there i* a 4.C probability of a defect. For a *ample that i* 1P, the probability of a defect i* .......2 ;hy u*e a Proce** SigmaO 9he proce** *igma i* helpful in three :ay*+ 2. !t allo:* you to compare di*parate type* of data 7*econd*, :hich are a continuou* mea*urement :ith ta*5 completion :hich i* binary :ith error* :hich are di*crete count data8 -. !t provide* you :ith a probability of a defect ,. Hou can meaningfully compare t:o different product* or proce**e*+ 2. 9he proce** *igma for one relea*e of a *oft:are product can be compared to *ub*e=uent ver*ion* -. Hou can compare t:o different product*E proce** *igma* ,. Hou can compare one module of the *ame product :ith a different module on the *ame product 4. Hou can u*e the propertie* of the normal di*tribution to aide in a**e**ing and improving your data *et. 9he benefit of u*ing a B-*core in u*ability metric* :a* e?plained in S :hatE* a Z-*core and :hy u*e it in &*ability 9e*ting O thi* article di*cu**e* different :ay* of calculating a B-*core. 9he *hort an*:er i*+ !t depend* on your data and :hat youAre loo5ing for. !f youAve encountered the B-*core in a *tati*tic* boo5 you u*ually get *ome formula li5e+

9he above formula i* for obtaining a B-*core for an entire population. &*ability te*ting obviou*ly *ample* a very *mall *ub*et of the population and thu* the follo:ing formula i* u*ed+

;here ?-bar and s are u*ed a* e*timator* for the populationA* true mean and *tandard deviation. 'oth formula* e**entially calculate the *ame thing+

%ethodolo$y: 9he *tudy :a* carried out in !ndian mutual fund indu*trie*. ;hen :e tal5 about the mutual fund :e can *ee there are lot of *cheme* i* available but in thi* *tudy ! had ta5en only mutual fund in e=uity. !n thi* *cheme the fund manger :ill decided to inve*t in the fund in particular *toc5 according to their performance. 9he primary data :a* collected from the companie* of the A**et management companie*. @ere a *ample of top return performed Mutual fund and poor return performed mutual fund :a* *elected from the reputed :eb*ite (value re*earch online). For ea*y collection of data ! had ta5en Q companie* in top return performed and 4 companie* in poor return performed companie*. @ere ! had ta5en the *um of mean value* of AT mo*tly form the evolution of the company. ! had al*o ta5en AT i* ta5en for all the year* :ere 9he even the *ale* price* of the fund from the *ame date. So the mea*ured to identify the efficiency of the fund. !n thi* paper ! had ta5en ? ha* pre*ent i* deciding factor of price in mutual fund.

Stati*tical formulae to calculate the Z-Score i* given belo:. AT value of mutual fund, and U i* the mean of *elling price of all the year*, and P? i* the *tandard deviation of AT value* ha* the AT

*esult and +nalysis+ !n thi* paper ! had ta5en both top and poor performed mutual fund *cheme* for analyBing it* performance through B-*core. ;hen the B-*core i* in negative the inve*tor :ill thin5 before inve*ting and if the B-*core i* po*itive then the inve*tor can inve*t the money boldly, thin5ing that the not only the inve*tment but al*o the return :ill be more. To return erformed %utual fund , E-uity for ast . years till )ecember /001

2ame of the schemes

*eturn ercenta$e

%ean

Standard )eviation

Z-score

Q4.,.44 Magnum 9a?-gain V,.,6 Q 2V..4.2 #eliance Fro:th V2.-6 V ,6.1.-3 Magnum Flobal Sundaram ' P Pariba* Select Mid-cap 9auru* Star *hare 13..V 1V.1V 1Q.V3 2 QQ.-1V6 -Q.,

V.,

2.66

2...Q3

-.3.-

2..62

-.Q63

,4..4 21.211

-.V4, ,.-Q3

Top return performed Mutual fund Equity for past 5 years till December 2007 Z-score !.5 ! 2.5 2 .5 0.5 0 Ma"num Ta#"ain $eliance %ro&t' Ma"num %lobal (undaram )*+ +aribas (elect Midcap Taurus (tar s'are

(oor return erformed %utual fund , E-uity for ast . years till )ecember /001

2ame of the schemes

*eturn ercenta$e

%ean

Standard )eviation

Z-score

Fran5lin !nfotech &9! Pharma K @ealthcare &9! Soft:are %ota5 9ech

2 .. .., .2 0.. 0.0., 0.2 0 /ran0lin 1nfotec'

-2.V -,.,3 -,.V-4.V6

-V.-,-2.VV, --.62. Q.V.6

24.-33 2.V-1 4.4-

2.,Q 2.Q. ..,VV 2.626

+oor return performed Mutual fund Equity for past 5 years till December 2007 Z-score

-.V46

2T1 +'arma 3 4ealt'care

2T1 (oft&are

5ota0 Tec'

From the above table :e can able to *ee the though the return of the mutual fund i* varying, there i* a *teady in their technical field :hich :e can been *ee it through Z*core tool. 3onclusion: 9oday the inve*tor* are confu*ed to *elect the be*t *cheme and do not 5no: :here to inve*t their money. 9hi* *tudy i* done becau*e, it not ea*y to earn money in todayE* competition, if at all :e earn :e *hould 5no: to inve*t money in a better *cheme. 9hi* tool i.e., Z-*core :ill *ay :hether the company i* technically *trong or not.

9hi* failure cla**ification model 7Z-*core8 other:i*e called ha* ZE9A model i* u*ed for a**e**ing ban5ruptcy ri*5 of corporation* demon*trate* improved accuracy over e?i*ting failure. Perhap* more importantly, thi* model i* ba*e on the data :hich *hould be relevant to current condition* and to a larger number of indu*trial firm*. 9he inve*tor* call it ha* ZR model. ;e are concerned :ith refining e?i*ting di*tre** cla**ification techni=ue* by the u*e of the mo*t relevant data combined :ith development* in the application of di*criminate analy*i* to finance. ;e have a**e**ed the effect of *everal element* involved :ith the application of di*criminate analy*i* to financial problem*. 9he potential application* of the ZE9A ban5ruptcy identification model are in the *ame *pirit a* previou*ly developed model*. 9he*e include credit :orthine** analy*i* of firm* for financial and non-financial in*titution*, identification of unde*irable inve*tment ri*5 for portfolio manager* and individual inve*tor* and to aid in more effective internal and e?ternal audit* of firm* :ith re*pect to going-concern con*ideration*, among other*. *eference: 45 @unter-gatherer*+ Archaeological and Evolutionary 9heory - 6y *obert &5 6ettin$er a$e 4475 /5 9he Portable M'A in Finance and Accounting 6y 8ohn &eslie &ivin$stone9 Theodore :rossman a$e ;/5 ;5 SchaumA* Wuic5 Fuide to 'u*ine** Formula* -.2 Deci*ion-ma5ing 9ool* for bu*ine** 6y 8oel : Sie$el9 8ae < Shim9 Ste hen a$e ;/=5 >5 www5valueresearchonline5com? .5 www5amfiindia5com? @5 www5indiastocAmarAet5com

15 +nneBture 4 & / in eBcel format

=5 htt :??www5sysurvey5com?ti s?statistics?zscore5htm 75 htt :??www5measurin$usability5com?z5htm