ZOHRA JANNAT ALI - Head of Mutual Funds Research
Mar 24 - 30, 2008

Mutual funds are emerging as a diversified financial product for investment and despite being "simple to understand", one can be overwhelmed by the task of selecting a fund that fits individual investment criteria. Here is where "Al Falah Fund Mart (AFM) comes in.

AFM, based on quality research recognized by all investment managers, assists clients in selecting the right mutual fund, which fits in with their risk-return profile without costing an additional rupee.

In an effort to become better mutual fund advisors, we have come up with comprehensive in-depth research which is the first product of its kind. Our research analysis includes the following:

* Comparative Return Analysis of the funds and their benchmarks

* Asset Mix

* Sector Mix (except Income & Money market Funds)

* Equity Mix (except Income & Money market Funds) &

* Important ratios


A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

Alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return.

A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.


A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market.


A measure of the dispersion of a set of data from its mean. The more spread apart the data is, the higher the deviation. In mutual funds, the standard deviation tells us how much the return on the fund is deviating from the expected normal returns.


A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

The Sharpe ratio tells us whether the returns of a portfolio are due to smart investment decisions or a result of excess risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.


The excess returns of the portfolio over the predefined benchmark divided by the standard deviation of those excess returns, also called the tracking error. Where tracking error is an indication of how far an investment's performance is from its benchmark. However, the tracking error by itself does not indicate whether a portfolio is outperforming or underperforming its benchmark.


A concept that refines an investment's return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating. Risk-adjusted returns are applied to individual securities and investment funds and portfolios.

Note: The entire Glossary is taken from "Investopedia"

The above mentioned statistical tools have their own importance. However there are other more important aspects to evaluate mutual fund performance. For example, for equity related funds, the average market capitalization of the portfolio's holdings is very important; this helps investors protect themselves against any liquidity issues which the fund might face in case it is overly invested in illiquid stocks.

On the other hand, in gauging fixed income funds, credit quality of the portfolio is of prime importance. Normally a Risk Adjusted Return is used as tool to evaluate a fixed income fund. This tool helps an investor know which fund has given the highest return per unit of risk or in other words, which fund managed to give the highest return with lowest volatility.

It must be noticed that volatility is a very important element in selecting a fund as it is a measure of risk. However without considering credit quality the results may be misleading. For example investing in low grade fixed income instruments like low ranked TFCs will give higher return and may give lower volatility because of the valuation method used. Therefore different funds having same investment instrument can have differing volatilities due to different pricing of the instrument.

Debt security are usually valued at the average rate quoted by top three brokers, in terms of volume traded during last three months in that debt security; so if no trade has taken place, the price remains unchanged and so no volatility. Furthermore price is dependent on brokers making it more volatile & influential. Due to different pricing methods of three brokers, different fund managers were having different prices for the same debt security. This issue was resolved with the SECP step issuing NBFC rules that a debt security shall be valued at the average rate, notified by the Mutual Funds Association of Pakistan based on the average rates quoted by top three brokers, in terms of volume traded during last three months in that debt security.

Performance cannot only be judged on the asset allocation of the fund but actually the asset quality of the fund. This can be determined either through detailed breakup of the portfolio of a fund which is available on quarterly basis or disclosure from a fund manager in their Fund manager report. Even if we consider detailed breakup of the portfolio, clean placements, TDRs & bank deposits which hold a larger portion of an income fund, we may not find the bank wise breakup to know the actual aggregate asset quality for this asset class of the fund. Therefore, we have only one way out to this, and that is a proper disclosure from the fund managers themselves.

Policy of greater disclosure has already been adopted by few funds but the % age is very low. Even though, this gives more transparent & clear picture there is still an ambiguity regarding CFS & Ready Future products. These products have not been rated by either of the rating agencies and it is dependent on the fund's management. Therefore, a large portion of the fund which comprises of CFS & Ready Future (Spread Transaction) remains unclear in respect of the asset quality; few funds rate the companies they are investing in through CFS & Ready Future and few rate these products as "not rated". This can be one of the reasons for the fund managers not mentioning the asset quality.

Likewise, there are some more aspects with which a mutual fund should be evaluated before investment. Here AFM can help you choose the fund which best fit in to your risk & return profile.

Happy Investing!