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It is a recognized principle that diversification of investment reduces risk. An individual

may not have the time, expertise and resources to undertake such diversification For small
investors who do not have the time or the expertise to take direct investment decision in equities
successfully, the alternative is to invest in mutual funds. The performance of the mutual fund
products become more complex in context of accommodating both return and risk measurements
while giving due importance to investment objectives. Mutual fund is a trust that pools the
savings, which are then invested in capital market instruments such as shares, debentures and
other securities. Recently, the Capital Markets in Bangladesh is featured by a plethora of mutual
fund schemes consisting of varying portfolio mix, investment objectives and expertise of
professional fund management.

In Bangladesh ICB has pioneered Mutual Funds for the sake of investors and of the capital
market. Countrys first Mutual Fund the First ICB Mutual Fund was floated on 25th April
1980. Since then ICB has, over the years, floated 8 Mutual Funds with the total capital of Tk.
17.50 core. ICB Mutual Funds continued to command the confidence and attraction of
investors as lucrative and rewarding investment in terms of steady dividend performance.
ICB has been able to declare attractive dividends on its Mutual Fund during 2010-2011
as previous year. Among the 8 Mutual Fund the highest dividend of 500 taka was declared on the
First ICB Mutual Fund. Strong performance of the funds is reflected in the market prices of the
funds. All the Mutual Funds were traded significantly above par value in both the bourses.
The portfolios of all the Mutual Fund were managed with diligence and prudence to
ensure maximization of return of risk in the interest of investors.


Mutual Funds has been defined by different authors in different words meaning one & the same
thing i.e., it is a non-deposition or non-banking financial intermediary which acts as important
vehicle for bringing wealth holders & deficit units together indirectly.

Mutual Funds are corporation which accepts dollars from savers & then use these dollars to buy
stocks, long-term bonds, and short-term debt. Instruments issued by business or Govt. unit, these
corporations pool funds & thus reduce risk by diversification.

Mutual Funds sell equity shares to investors & use these funds to stocks and/ or bonds. They tend
to specialize in denomination & default risk intermediates. Mutual Funds sell relatively small
denomination securities to wealthy holders & use the proceeds to purchase the market securities
of deficit units. These also gain economics of scale, which lower the cost of analyzing securities
managing portfolio & trading in stocks & bonds.

Mutual Funds earned income by way of interest or dividend or both from the securities it holds.
It deducts fee, operating expenses & a management income & then passes the remainder to
wealth holder through dividends on the mutual fund share. The dividend fluctuates with the
income on Mutual Funds investment


Mutual Fund emerges into two forms.These are-

a) Open-end Mutual Funds
b) Close-end Mutual Funds

A. Open-end Mutual Funds:

The holders of the shares in fund can resell them to the issuing mutual fund company at anytime.
They receive in turn the net assets value (NAV) of the shares at the time of resale. Such Mutual
Funds companies place their funds in the secondary securities market. The open-end Mutual
Funds companies buy or sell their own shares. These companies sell new shares at NAV plus a
loading or management fee & redeem shares at NAV.

B. Close-end Mutual Funds:

Close-end fund Investment Company has a definite target amount for the Funds & cannot sell
more shares after its initial offerings. Its shares are issued like any other companys new issue
listed & quoted at stock exchange. The shares of close-end fund are not redeemable of their
NAV as are in open-end fund. These shares are traded in secondary market prices that may be
above or below their NVA. The objectives of close-end Funds may differ as compared to open-
end fund. The prices of close end Mutual Funds shares are denominated by demand & supply &
not by NAV. The examples of close-end Funds include can stock, can share, master-share etc.

There are three types of mutual funds returns:

I. Dividends: The dividend income to mutual funds company from investments in shares, both
equity & preference, are passed on to holders. Their dividends are subject to tax deduction as per
income Tax Laws.

II. Capital gains mutual funds holders or owners also get benefits of capital gain, which are
realized & distribute in cash or hand. There are subject to tax in the same way as gain or uses of
directly hold securities.

III. Increase or decrease in net assets value: The increase or decreases in net assets value are the
results of unrealized gains & losses on portfolio holdings. They are not tax until released.


- Mutual fund substantially lowers the investment risks of lower investors through
diversification in which fund are spread out into various sectors, companies, securities as well as
entirely different market.

- Mutual fund mobilizes the savings of small investors & channels them into lucrative
investment opportunities. As a result, Mutual fund adds liquidity to the market. Moreover, given
that the funds are long-term investment vehicles, they reduce market volatility by offerings
support to scrip price.

- Mutual fund provides the small investors access to the whole market that, at an individual
level, would be difficult if not impossible to achieve.

- Mutual funds are one of the most strictly regulated investment vehicles. The laws governing
fund require exhaustive disclosure to the SEC as well as the general public. The laws also entail
continuous regulations of fund operations by the Trustee.

- Mutual fund is the only vehicle which operates simultaneously both at the demand as well as
the supply side of the market. One the supply side, the Mutual fund being itself a listed security
at the SEC, introduces a good & reliable instrument in the capital market for the small investor.

- The investor can pick & chase a Mutual fund to match his or her particulars needs.

- The investors save a great deal in transaction cost given that he /she has access to a large
number of securities by purchasing single share of a Mutual fund.


There are various measures of return / risk and portfolio performance models are presented below:
Return: The returns are computed on the basis of the NAV of the different schemes and returns
in the market index are calculated on basis of DSI (DSE all share Index) on the respective date.

Total Return =

Relative Return =

Mean Return = Arithmetic Mean return - Geometric Mean return

Risk-Free Rate of Return (R
): The risk-free interest rate is the theoretical rate of return
of an investment with zero risk, including default risk. The risk-free rate represents the
interest an investor would expect from an absolutely risk-free investment over a given period of
time. In this study, the monthly yields on 91-day Treasury bills have been used as risk free rate.
The monthly interest rate of 91- day Treasury bill is derived from the official website of

Risk: The risk is calculated on the basis of month-end NAV. The following measures of risk are
associated with mutual funds:
Standard Deviation: The standard deviation ( ) is an important measure of investment
risk. It measures the tightness or variability of a set of outcome over a certain period. The smaller
the standard deviation the lower will be the degree of risk of the stock. The formula for
calculating the standard deviation is:

Variance: The variance can also be used to measure risk, which is the square of the standard
deviation. The formula is given below:


Coefficient of Variation: The variance and standard deviation are absolute measures of
dispersion. That is, it can be influenced by the magnitude of the original numbers. To compare
series with different values, you need a relative measure of dispersion. A measure of relative
dispersion is the Coefficient of variation, which is formulated as:

Coefficient of Correlation and Determination: Coefficient of correlation measures the
relationship between two variables. The value ranges from +1 to -1, i.e it determines the
direction of correlation. Again the Coefficient of determination is the square of Coefficient of
correlation. It tells us that fraction of variability in the return on one investment that can be
associated with the variability in the return of the others.

Beta Coefficient Factor: It is a measure which reflects the tendency of the return on a given
stock with the stock market/market portfolio. The beta coefficient ( ), a measure of systematic
Stocks can be classified as aggressive or defensive or average depending on the value of beta
Table: Beta Coefficient and Nature of Stock
Beta coefficient Stocks classification Degree of risk
Exactly 1 Average stock Equally risky as the market
Greater than 1 Aggressive stock More risky than the market
Less than 1 defensive stock
Less risky than the market

Beta coefficient can also be related with the CAPM equation to determine the required rate of
return of a given stock. The expected rate of return (K
) is the risk free rate of return (K

plus a
risk premium (Rpm=K
- K

based on the beta of the stock ( ). The formula is given by:
+ ( K
- K

Measuring Performance of Mutual Funds:
For further evaluating the performance of mutual funds, the risk- return relation models given
by Sharpe (1966), Treynor (1965) and Jensen (1968) have been applied.
Sharpes Performance Index:
The Sharpe measure provides the reward to volatility trade-off. It is the ratio of the fund
portfolio's average excess return divided by the standard deviation of returns and is
given by following equation:

= Average return on portfolio
= Average risk free return over the sample period

= Portfolio standard deviation

This formula suggests that Sharpe prefers to compare portfolios to the capital market line(CML)
rather than the security market line(SML). Sharpe index, therefore, evaluates funds performance
based on both rate of return and diversification (Sharpe 1967). For a completely diversified
portfolio Treynor and Sharpe indices would give identical rankings.

Treynors performance index:
Treynor (1965) was the first researcher developing a composite measure of portfolio
performance. He measures portfolio risk with beta, and calculates portfolios market risk
premium relative to its beta:

Ti = Treynors performance index
Rp = Portfolios actual return during a specified time period
Rf = Risk-free rate of return during the same period
p = beta of the portfolio

Whenever Rp> Rf and p > 0 a larger T value means a better portfolio for all investors
regardless of their individual risk preferences. In two cases we may have a negative T value:
when Rp < Rf or when p < 0. If T is negative because Rp < Rf, we judge the portfolio
performance as very poor. However, if the negativity of T comes from a negative beta, funds
performance is superb. Finally when Rp- Rf, and p are both negative, T will be positive, but in
order to qualify the funds performance as good or bad we should see whether Rp is above or
below the security market line pertaining to the analysis period (Reilly, 1992).





Jensen Alpha:
The Jensen alpha measure is the intercept form the Sharpe-Litner CAPM regression of portfolio
excess returns on the market portfolio excess returns over the sample period. Jensen's alpha is the
arithmetic difference of the portfolio's return from the return of a portfolio on the securities market
line with the same beta. Jensen defines his measure of portfolio performance as the
difference between the actual returns on a portfolio in any particular hol ding peri od and t he
expect ed returns on t hat port folio conditional on the risk-free rate, its level of "systematic
risk',' and the actual returns on the market portfolio. Jensen's Alpha measure is given by the
Equation- as shown below.

Jensen uses as his performance measure. A superior portfolio manager would have a
significant positive j value because of the consistent positive residuals.
Inferior managers, on the other hand, would have significant negative . Average portfolio
managers having no forecasting ability but, still, cannot be considered inferior would earn as
much as one could expect on the basis of the CAPM.
Jensen performance criterion, like the Treynor measure, does not evaluate the ability of portfolio
managers to diversify, since the risk premiums are calculated in terms of .

If the value is positive, then the portfolio is earning excess returns. In other words, a positive
value for Jensen's alpha means a fund manager has beat the market with his or her stock picking

There are 35 mutual funds in Bangladesh.
Most of the funds are closed-end funds.
In govt. sector there are two companies-
I. Investment Corporation of Bangladesh(ICB)
II. Bangladesh Shilpo Rin Sangsta (BSRS)
Rests are in private sectors.
There are to be four parties for constitution of a Mutual Fund, namely:
The asset Management company
The sponsor of the fund provides the primary capital for launching the fund. As a result, the
sponsor sets the policies and guidelines of the Mutual fund. The constitution of the mutual fund
is set on a trust deed and it is executed by the sponsor in favor of the trustee of the fund (usually
named in the trust deed). Sponsors of the fund can invest at least 10% or more. The number of
sponsors in any fund can be more than one.
The trustee is considered to be the guardian of the fund and ensures compliance of SEC and
other rules and oversees the implementation of the trust deed. The Trustee also safeguards the
properties of the fund for all its stake holders.

Inter Relationship between parties Concerned in a Mutual Fund

Asset Manager
The asset management company makes the day-to-day investment decisions for the Mutual Fund
and is responsible for the performance of the fund.
The asset manager also ensures that no investment activity is done contrary to the provisions
delineated in the policies, guidelines and the trust deed. The function of the asset manager also
Activities relating to regulatory protection and reporting,
Preparation and distribution of prospectus, annual and periodic report of the Mutual Fund and
other papers for the investors,
Accounting activities and preparation of tax return and
Insurance and other services
Custodians are financial institutions that keep the securities of the mutual fund in safe custody. It
also retains the following documentation for the clients:
Statement of receipt and distribution of Securities & money;
Detailed statement relating to the right of the clients on the Securities possessed on behalf of
the clients;
Detailed statement of registration of securities;
Ledger of Accounts for each Client and
Detailed statement of order received & given from the clients
Board of

To evaluate the performance of 1
ICB MF & 4
ICB MF following
measures are used:

Table: Return Earned by the Schemes

Name of the Schemes Total Return (%) in the year
2011 as on 31 March
Total Return (%) in the year
MF 56.25 14.89
ICB 2nd MF 60.03 -1.38
ICB 3rd MF 49.25 8.4
ICB 4th MF 46.72 -8.53

It is observed that ICB 2nd MF is the highest return earning scheme in year 2011. The next highest
return is found in ICB 1st MF. ' -
There is negative return in ICB 2nd MF & ICB 4
MF in the year 2010. Thus it can be said that
these schemes is worst performer.

Table : Sharpe ratio, Treynor ratio

Name of
Total Risk Systematic
Rank Treynor

35.57 4.9578070889 0.046342 6.166 I 659.66 I
ICB 2nd
29.325 4.678696874 0.038312 5.199 III 634.91 II
ICB 3rd
28.825 4.385414808 -0.077000 5.433 II -309.41 III
ICB 4th
19.095 3.894523415 0.096516 3.619 IV 146.037 IV
*Average rate on T-Bills(5%) for 15 months is taken as proxy of risk free rate of return

The second and third columns of Table depict the values of Sharpe ratio (Reward to Variability
Ratio) for the schemes and the market index. Sharpe ratio is an excess returns earned over risk-
free return (Rf ) per unit of risk i.e., per unit of standard deviation Positive values of schemes
indicate better performance. Higher value of Sharpe Ratio found in ICB 1
MF and ICB 3
is in 2
position. Thus, the investors of these schemes have been rewarded well on t heir
invested money.
Treynor ratio measures the excess return earned over risk-free return per unit of systematic risk
i.e., beta. The fourth and fifth column of Table 3 presents the Treynor ratio values for the
individual mutual fund schemes and the market portfolio, respectively. The highest performance
is found inICB 1


From the above measure we can say that among the four schemes of ICB mutual funds
1STICB mutual fund is performing better than others three schemes but it is not a good
scenario of ICB mutual funds. ICB should give more concentration on all the schemes.
Otherwise they may lose public confidence on their schemes. As a result there will be
negative impact on price of ICB mutual funds.
Most of the mutual fund in Bangladesh is operated and owned by ICB. 35 mutual funds are
now prevailing in the market. Among which 16 that is almost 62% schemes is either directly
owned or indirectly managed by ICB and its subsidiaries. So the public mutual funds
possess a significant position in the capital market of Bangladesh. So investing the
performance of mutual fund, in turn, leads to the measuring performance of ICB. However,
according to study, it is clear that public sector mutual fund don't performing
satisfactorily. But selected sample contains only 4 ICB mutual funds and there is no private
sector mutual fund. So it cannot be said conclusively that private sector mutual funds are
in a superior position. But it is expected that private sector mutual fund will perform better
than those of public sector. Again it is also optimistic that our present government is
encouraging the initiation of mutual fund and providing necessary support.


ICB is a unique name in our country as an investment bank. It is playing a pivotal role to
develop the country's capital Market, ICB as the National Investment house, is the organization
to per from the activities by creating demand for securities and on the other hand to ensure the
supply of securities in the Capital Market. ICB investor's scheme helps to boost up domestic
economy through facilitating to invest into the capital market. At a stage, this made an important
effect on the capital market and excellent response from the investor's. The floatation of mutual
funds and issuance of unit certificates by the ICB strengthens the supply of attractive securities
in Bangladesh capital market. Mutual fund management can manage the activities of mutual

Mutual fund department should be innovative, explorative and dynamism. ICB should specially
emphasize on the operations and management of mutual fund because most of the small
investors are key clients of mutual fund.

So, ICB should concentrate to increase the performance of its mutual fund and way to find out
the path for overcoming the problems.


Annual reports of ICB