Personal Finance: The Crisil Calculus

PERSONAL FINANCE: MUTUAL FUNDS
The Crisil Calculus

Poring through mutual funds' financial minutae can be an excruciating experience for investors. Crisil's indices map a way through the maze.

By Shilpa Nayak

Dissonance strikes when you least expect it to. Until a chance encounter with an old friend who ran an investment advisory service, Vaibhav Patel was a happy investor. A prudent man, he'd parked almost all his savings in mutual funds, and the missives he received regularly from them gave him no reason to complain. All his funds, it was evident from the numbers presented in excruciating detail in the newsletters, were out-performing the Sensex. ''That's no big deal,'' said the friend when Patel proudly shared this information with him, ''it isn't too difficult to out-perform the Sensex. What you should find out, is if the funds you've invested in perform better than other funds''. Patel was smart enough to know his friend had a point. But he was a private individual, brought up on the belief that a man's investments were a personal thing, best not shared. Actually, there's a simple way out of this predicament Patel finds himself in: CRISIL's mutual fund indices.

A Sensex for funds

That's just what the three mutual fund indices-CRISIL MF Equity Index, CRISIL MF Debt Index, and CRISIL MF Balanced Index-launched by CRISIL are. As the names suggest, the equity index will be indicative of the performance of all equity schemes, the debt index, of all debt schemes, and the balanced index, of all balanced schemes. Put simply, these indices will be to the mutual funds market what the mother of all indices, the Sensex, is to the stockmarket. Avers Santosh Kamath, Head (Capital Markets Group), CRISIL Advisory Services: ''Like an individual investor in stocks compares his portfolio performance with that of Sensex, a mutual fund investor can compare the performance of his equity/debt, or balanced scheme against the benchmark indices.''

To call the indices illuminating will be an understatement. An investment in equity funds would have, it turns out, yielded (annualised) returns of 30.97 per cent (on a CAGR basis) against the Sensex which yielded a return of 9.14 per cent a year over the last three years. The specifics for debt and balanced funds are 12.31 per cent and 32.21 per cent. These numbers are certain to shake up investors who have spent hours poring over market trends and company fundamentals before making an investment in Sensex-stocks. And, as even an investing ingenue can vouch, the risk associated with investing in mutual funds is far lower than that that goes with playing the market.

Comparing schemes

Reading the numbers is easy. Between January 1, 2000, and October 15, 2000, for instance, CRISIL's Equity Index fell 41 per cent. In the same period, Birla Advantage shed 44 per cent of its value, and Alliance Equity and Kothari Pioneer Bluechip, fell 25 per cent. Clearly, Birla Equity performed worse than the index, while the other two did better. Similarly, CRISIL's Balanced Index fell 21 per cent between January 1, and October 15. And Alliance 95 and Zurich India did better than the index (their value fell 17 per cent).

The mechanism of calculation

The index is calculated by a simple chain-line process: today's index value is based on the previous index value and the changes in the number of units and the Net Asset Value (NAV) of the constituent funds. Let's assume the market has just two equity schemes, a and b. a has 50 units and its NAV is Rs 15; b has 10 units, and a NAV of 25. The index's value would be (50*15)+ (10* 25), or 1,000. This will be the base index. Two months on, A's units rise to 75, and NAV, to Rs 22. And B's units rise to 125, and NAV to Rs 27. The new index's value would be 1,000* (75*22+ 125* 27)/(75* 15+125*25), or 1180.

CRISIL has made some assumptions while calculating these indices. The base date for market capitalisation is taken at April 1, 1997; entry and exit loads have been omitted since they vary, and are a minuscule part of NAV; the index's constituents are reviewed every quarter; only open-ended funds are considered for the equity index as close-ended funds quote at discount to the NAV; and close ended funds that convert into open ended ones are included on quarterly re-balancing.

All three indices factor in more than 80 per cent of the schemes, but those on whom data isn't available have been excluded (the us 64 isn't included as the UTI doesn't disclose NAVs). And open-ended funds with a lock-in period are not included.

What's in it for the investor?

The benefits are obvious. Investors can decide where their investments should go. Today, Patel can simply log on to www.crisil.com and find out how the various funds he has invested in have performed, as compared to the relevant index, and other funds of the same type (quarterly figures are available on-line, and CRISIL promises to make daily ones available on request). Says Vivek Reddy, CEO, Kothari Pioneer Mutual Fund: ''Such exercises are not only beneficial for an investor but valuable to a mutual fund, too. A fund would always try to over perform such a benchmark which in turn will give better returns to investors.''

Vaibhav Patel has already decided to reshuffle his fund-portfolio in favour of balanced schemes. Do you have some shuffling to do yourself?

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