Compare Mutual Funds of these key statistics Comparison of mutual funds is quite simple when you have a good understanding of key statistics and know how to use them effectively. The key statistics listed below should serve you compare mutual funds.
Performance of mutual funds
* Average
Adjusted risk-free return *-
Risk investment fund
* Standard deviation
* Beta
Risk-return
Sharpe Ratio *
* Coefficient of variation
Treynor Ratio *
You will find these statistics readily available on Internet sites like Yahoo Finance. These key statistics are to be used in the order in which they are listed.
Risk and return should not be used independently to compare mutual funds. In effect, you must use one of the measures of risk to return to compare mutual funds on a relative basis.
Published annual reports are usually calculated by combining monthly returns and multi-year averages are generally calculated as the geometric mean of annual reports, giving a compound return and the metric that tells you how much you would have done if you had been invested in fund over the period of interest. However, the arithmetic mean, a simple average of annual averages, is the appropriate measure to assess the ability of a mutual fund to provide good yields. Returns made over different periods of time will give you a good idea of the ability of a fund to consistently deliver good returns. More weight should be given to longer periods.
The returns published by independent sources must be total return (they include dividends and distributions of capital gains) net of fees and expenses. Be sure to check it.
In investing, risk is measured in terms of volatility. Total risk is measured by the standard deviation of returns and it is the standard deviation should be used to compare mutual funds. Beta is a measure of residual risk, ie, the risk inherent in the overall market. Beta is a measure of the volatility of a stock relative to a broad market index like the S & P 500.
Even if we have a natural aversion to risk, the risk is what justifies getting a higher return than the risk-free securities such as Treasury bills, but the expected returns should be commensurate with the level of risk . If two mutual funds have equivalent returns, but we have a much wider gap standard, one that has the most deviation must be rejected in favor of another. If, on the other hand, two mutual funds have similar risk-adjusted returns, you may prefer the riskier of the two if you have a high tolerance for risk because it has the potential to offer higher yields .
The risk-adjusted return is calculated by dividing the return of a fund by its standard deviation, then multiplying by the standard deviation of a relevant index. For example, if you compare mutual funds emerging stock markets, an appropriate index is an index of emerging markets. Using a benchmark rather than the S & P 500 is not absolutely necessary, but it has the advantage of offering you the opportunity to compare different funds in the index. If you compare any of the funds can beat the index on a risk-adjusted basis, then you should look at other funds or to buy the index.
The final step in comparing the quantitative mutual funds is the use of a certain degree of risk and return. Here, the Sharpe ratio is the winner for use in comparing mutual funds, as calculated using the total risk. The coefficient of variation is a quick and dirty substitute for the Sharpe ratio. The Treynor ratio considers the degree of diversification in its calculation and is used to assess the competence of fund managers.
The Sharpe ratio is the excess.
Posted on January 13, 2010.
