Relative Return =
Mean Return = Arithmetic Mean return  Geometric Mean return
RiskFree Rate of Return (R
f
): The riskfree interest rate is the theoretical rate of return
of an investment with zero risk, including default risk. The riskfree rate represents the
interest an investor would expect from an absolutely riskfree investment over a given period of
time. In this study, the monthly yields on 91day 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
Bangladesh.
Risk: The risk is calculated on the basis of monthend 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:
2
=
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:
CV=
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
risk.
Stocks can be classified as aggressive or defensive or average depending on the value of beta
coefficients.
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
i
) is the risk free rate of return (K
RF
)
plus a
risk premium (Rpm=K
m
 K
RF
)
based on the beta of the stock ( ). The formula is given by:
K
i
=K
RF
+ ( K
m
 K
RF
)
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 tradeoff. 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:
Where,
R
p
= Average return on portfolio
R
f
= Average risk free return over the sample period
p
= 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:
Where:
Ti = Treynors performance index
Rp = Portfolios actual return during a specified time period
Rf = Riskfree 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).
P
f
R
P
R
Sharpe
o

.

\

=
P
f
R
P
R
Treynor


.

\

=
Jensen Alpha:
The Jensen alpha measure is the intercept form the SharpeLitner 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 riskfree 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.
Y=+x+
i
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
skills
STRUCTURE OG MUTUAL FUNDS IN BANGLADESH:
There are 35 mutual funds in Bangladesh.
Most of the funds are closedend 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.
Some areAIMS, GFs,EBL,TBMF,EXIM MF, PHP MF etc.
There are to be four parties for constitution of a Mutual Fund, namely:
Sponsors
Trustee
The asset Management company
Custodian
Sponsor
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.
Trustee
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 daytoday 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
includes:
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
Custodian
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
Fund
Manager
Board of
trustee
Custodian
General
Investor
Sponsors
PERFORMANCE EVALUATION OF MUTUAL FUNDS:
To evaluate the performance of 1
ST
ICB MF, 2
ND
ICB MF, 3
RD
ICB MF & 4
TH
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
2010
ICB 1
ST
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
th
MF in the year 2010. Thus it can be said that
these schemes is worst performer.
Table : Sharpe ratio, Treynor ratio
Name of
the
Schemes
Return
(%)
Total Risk Systematic
risk
Sharpe
ratio
Rank Treynor
Ratio
Rank
ICB 1
ST
MF
35.57 4.9578070889 0.046342 6.166 I 659.66 I
ICB 2nd
MF
29.325 4.678696874 0.038312 5.199 III 634.91 II
ICB 3rd
MF
28.825 4.385414808 0.077000 5.433 II 309.41 III
ICB 4th
MF
19.095 3.894523415 0.096516 3.619 IV 146.037 IV
*Average rate on TBills(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
ST
MF and ICB 3
rd
MF
is in 2
nd
position. Thus, the investors of these schemes have been rewarded well on t heir
invested money.
Treynor ratio measures the excess return earned over riskfree 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
ST
MF.
POLICY IMPLECATION:
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.
CONCLUTION:
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
fund.
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.
REFERENCE:
http://www.icb.gov.bd/zindex.php
http://www.dsebd.org/
http://www.bangladeshbank.org/
Annual reports of ICB