Academic journal article Business: Theory and Practice

Performance Evaluation of Investment (Mutual) funds/Investiciniu Fondu Veiklos Vertinimas

Academic journal article Business: Theory and Practice

Performance Evaluation of Investment (Mutual) funds/Investiciniu Fondu Veiklos Vertinimas

Article excerpt

Introduction

In principle, investment funds may play a role in either stabilizing or destabilizing the financial system. Their provisioning of liquidity in the marketplace, coupled with their ability to provide effective risk diversification to a wide range of investors, certainly adds to their systemic robustness, as does their contribution to correct pricing through the frequent trading of management companies and monitoring financial assets. However, investment fund management companies, directly or via their clients, may also engage in herding behaviour thus pushing asset prices away from their fundamental values.

Mutual fund fees are paid for the services provided to investors by the fund. B ecause the main service provided by a mutual fund is portfolio management, fees should reflect fund risk-adjusted performance. It follows that there should be a positive relation between before-fee risk-adjusted expected returns and fees.

The target of the survey is the objects that are mutual funds registered in Lithuania or Lithuanian capital mutual funds and its' historical data for analysis; also for a theoretical part, scientific papers on investment management and mutual funds are used.

The article mainly focuses on establishing relations between the fees and performance of the mutual fund and on working out the best ratios for performance evaluation.

The major goal of the paper can be achieved by setting the following objectives:

--to analyse scientific papers on investment management and performance evaluation;

--to find and understand the principle of the main performance evaluation ratios;

--to analyse Lithuanian mutual funds using historical data;

--to find relations between price and performance;

--to describe the ratio closely related to the performance of the mutual fund.

The article suggests the answers to the following hypothesis:

--H1: Do mutual funds with high fees show better results in the market?

--H2: Are all main ratios of performance evaluation equal looking for an answer what mutual fund is the best one?

1. Study area

Mutual funds pool money from individuals and organizations to invest in stocks, bonds and other assets in different industry sectors and regions of the world.

The financial sector plays a crucial role in the economy where growth accelerates it as a whole and is imperative in the case of developing economies. The financial sector had witnessed a number of changes in the recent past. Financial markets have become more efficient by providing more promising solutions to investors. In this connection, mutual funds have made its own market (Raju 2013).

It can be difficult to profit from the predictability of most stock markets, because transaction costs such as bid-ask spreads and commissions prohibit investors from exploiting much of predictability by using individual securities (Mazumder, Miller 2008). When trying to manage transaction costs and commission payments, it is always better to invest in mutual funds or set it only from funds than manage personal investment portfolios by selecting securities. Mutual funds have become a vital investment vehicle for both individual and institutional investors. The recent integration of international markets has made it possible for international funds to grow at an increasing rate, especially after 1990.

Given the desire of investors to seek diversification in their asset portfolios and considering the modest performance of the US equity markets since 2000, it is no surprise that many investors have sought to diversify their holdings by investing in international equity funds (Arugaslan et al. 2008).

Mutual fund fees are paid for the services provided to investors by the fund. Because the main service provided by a mutual fund is portfolio management, fees should reflect fund risk-adjusted performance. …

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