Performance Evaluation Of Mutual Funds

Introduction:
Mutual fund performance can be affected by many different factors, including the individual
investments that are chosen by the mutual fund manager. The asset allocation of the fund also
plays a big role in mutual fund performance. While it is generally not cited as part of the
performance, the fees that are charged by the mutual fund company also can affect the true
performance of the fund.

A mutual fund is a type of investment vehicle that is managed by a professional money manager.
This mutual fund manager is in charge of making the individual investment decisions for the
fund. The manager will be in charge of researching all of the different investment options that
are available and then choosing ones to purchase. If the manager chooses the right investments,
the mutual fund performance will be positive. If the manager does not choose the right securities,
it will have a negative impact on the performance of the mutual fund.

One of the jobs of the manager is to provide a diversified mutual fund portfolio for investors.
This is accomplished by investing in multiple classes of assets such as stocks, bonds, and the
money market. The asset allocation of a fund is vitally important to the performance, and it deals
with how much money is allocated to each type of asset class. also the timing and selecting
mutual fund

When it comes to mutual fund performance, many investors underestimate the role of asset
allocation. The fund manager is in charge of deciding on the percentages that will be allocated to
each type of asset. For example, if the fund manager believes that the stock market will decline
in value in the near future, he or she may decide to devote a larger percentage of the portfolio to
bonds. If the stock market does decline, the manager will have made a big difference in the
mutual fund performance by preserving the capital in the fund.
The fees of the mutual fund also play a role in the performance for investors. Every mutual fund
typically charges an expense ratio that is taken out of the profits that are generated from trading.
These fees cover the costs of running the fund and paying for the fund manager's salary. Since
this is taken directly out of the profits from the fund, it has a negative impact on mutual fund
performance. Investors can find out information about the operating expenses in the mutual fund
prospectus.

Some research suggests the absence of support to managers with superior performance
(Athanassakos, Carayannopoulus and Racine, 2002), while Bello and Janjigian (1997) found a
positive relationship and significant influence on the ability of selecting and market timing for
633 mutual funds, whereas Andiel et al (1997) states that the type of aggressive growth mutual
funds in particular shows the results of which support the existence of selectivity ability but do
not support the ability of market timing.

Research question:
In the light of the above objectives, the study attempts to test the following question:
``The variables considered to analyses the company significantly decision on timming and
selecting mutual fund performance(where real economic variables are moderating relationship
between dependent &independent variable)``
Literature review:

Mutual Fund increased the growth of a nation's economy and capital market development.
Through investments in mutual funds, the public that does not have large enough capital can
invest in capital markets and obtain welfares from capital market progresses. The development of
mutual funds is also supported by growing investment products, so not everyone can recognize
the recent product investment and have the time to manage their investments. By using
professional investment manager who have knowledge of safekeeping, everybody can diminish
their lack of knowledge about investment.
Market timing in is defined as the ability of managers to react to estimated changes in the price
of a security by way of investing their funds or withdraw funds from an investment in a timely
manner. While security selection in this study is defined as the ability of investment managers to
identify and select mispriced securities and will provide potential benefits in the future.
The ability of managers in selecting securities in portfolios and / or pay attention to the ability of
managers in the entrance / exit the market (market timing) is very important. These conflicting
results encourage research on the performance of mutual funds in Indonesia by using the criteria
of market timing and security selection.
Jensen (1968) developed an absolute measure of performance based on the
Capital Asset Pricing Model and has also found that mutual funds are not able to
earn abnormal returns when transaction costs are included in the computation.
Jensen's research does not include the potential of market timing by fund managers
who make an active strategy, so the model assumes that the risk is stationary over
time. This assumption will have an impact on abnormal return estimates will tend to
bias when there is market timing strategies. Portfolio measurement techniques
developed by Treynor (1965), Sharpe (1966) and Jensen (1968) is an extension of
modern portfolio theory and the theory of capital asset pricing model.
Research model:
Independent variable:
mutual fund
Moderating variable:
The key economic variables included in the study are;
Bank Rate,
Domestic Savings,
Forex Reserves,
Gross Domestic Capital Formation (GDCF),
Gross Domestic Product (GDP),
Per-capita Gross National Product (GNP) and
Dependent variables:
1. Market timing
2. security selection










Research model:







Independent variable
Dependent variables

Conclusion:
From the descriptive results above, obtained results that the use of the method of Henriksson and
Merton and Treynor and Mazuy use of methods able to indicate the portfolio of mutual funds
that have good performance. The use of methods of Henriksson and Merton and Treynor and
Mazuy method, capable of recording a performance based on the ability of managers in selecting
the investment portfolio as well as managers to determine the right time to enter / exit the
market.
The use of both methods improve the portfolio performance assessment during the third tool is
based on a portfolio of measurement technique developed by Treynor (1965), Sharpe (1966) and
Jensen (1968).It is evident that the real economic variables considered during the period of study
are not significantly influencing the investment in mutual funds and even to predict the market
movements. The study has shown that, the state of the economy neither significant bearing on
the mutual fund market nor on the health of mutual funds. The study thus highlights the fact that
there are certain other macro-economic factors that might be exerting influence on the
investment of mutual funds.


MUTUAL FUND

MARKET TIMING

MARKET SELECTIVITY

Real economic
variables
References
Henriksson, R., 1984, Market timing and investment performance: An empiricalinvestigation,
Journal of Business 57(1), 73-96
Henriksson, Roy D., and Robert C. Merton, 1981, On Market Timing and Investment
performance II: Statistical procedures for Evaluating ForecastingSkills, Journal of Business.
Jensen, Michael C., 1968, The Performance of Mutual Funds in the period 1945-1964, Journal of
Finance, 23.