Concepts of Mutual Fund

7/28/2019 Concepts of Mutual Fund

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EXPENSE RATIO

Rules And Regulations


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INTRODUCTION

A measure of what it costs aninvestment company to operate a

mutual fund

The largest component of operatingexpenses is the fee paid to a fund's

investment manager/advisor.

Other costs include recordkeeping,custodial services, taxes, legal

expenses, and accounting and

auditing fees


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Mutual fund costs can be classifiedinto two broad categories: operation

expenses, which are paid out of the

fund's earnings, and sales charges,that are directly deducted from your

investment.

A fund's trading activity, the buyingand selling of portfolio securities, is

not included in the calculation of the

expense ratio.


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Example:

The average expense ratio for an

actively-managed fund is 1.25%, and

this is less for an index fund. The

expense ratio may be higher or lowerbased on the size of the fund and the

style of the fund. For instance, the

expense ratio is generally less for U.S.large company funds than for

emerging market funds.


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STANDARD DEVIATION

Standard deviation is a statisticalmeasurement that sheds light on

historical volatility.

For example, a volatile stock will havea high standard deviation while the

deviation of a stable blue chip stock

will be lower.


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EXAMPLE

For instance, a mutual fund that gained 1%each and every month over the past 36months would have a standard deviation ofzero, because its monthly returns didn't

change from one month to the next. But : A mutual fund that lost 1% each and

every month would also have a standarddeviation of zero. Why? Because, again, its

returns didn't vary. Meanwhile, a fund that gained 5% one

month, 25% the next, and that lost 7% thenext would have a much higher standard

deviation; its returns have been more varied


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SHARPE RATIO

The Sharpe ratio uses standarddeviation to measure a fund's risk-

adjusted returns.

The higher a fund's Sharpe ratio, thebetter a fund's returns.

Because it uses standard deviation,

the Sharpe ratio can be used tocompare risk-adjusted returns across

all fund categories.


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R-SQUARE

R-squared measures the relationshipbetween a portfolio and its

benchmark. It can be thought of as a

percentage from 1 to 100. It is simply a measure of the

correlation of the portfolio's returns to

the benchmark's returns.


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70-100% = good correlation betweenthe portfolio's returns and the

benchmark's returns

40-70% = average correlationbetween the portfolio's returns and the

benchmark's returns

1-40% = low correlation between theportfolio's returns and the

benchmark's returns


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BETA

BETA, with regard to mutual fundinvesting, is a measure of a particular

fund's movement (ups and downs)

compared to the overall market. Forreference, the market is given a beta of

1.00

A beta of less than 1.0 indicates that the

investment will be less volatile than the

market, and, correspondingly, a beta of

more than 1.0 indicates that the

investment's price will be more volatile


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FOR EXAMPLE,

if a fund's "best-fit index" is the S&P

500and the index has a return of 10%this year, the investor would expect thefund with a beta of 1.20 to have a returnof 12%. Conversely, if the S&P 500

index fell 10% during the given year, thefund with a beta of 1.20 would beexpected to fall 12% during that year.
http://mutualfunds.about.com/od/mutualfundglossary/g/sp500.htmhttp://mutualfunds.about.com/od/mutualfundglossary/g/sp500.htmhttp://mutualfunds.about.com/od/mutualfundglossary/g/sp500.htmhttp://mutualfunds.about.com/od/mutualfundglossary/g/sp500.htm


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ALPHA

Alpha is a measure of the differencebetween a portfolio's actual returnsand its expected performance, given

its level of risk as measured by beta

A measure of performance on a risk-adjusted basis. Alpha takes the

volatility (price risk) of a mutual fundand compares its risk-adjustedperformance to a benchmark index.
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