Profitability and risks of the market

This research was conducted Yuri Lukashin to examine the mutual fund growth in Russia. The purpose of this paper is to describe development of Russian mutual fund (MF) market, to suggest and apply methodology of statistical analysis of management quality, to evaluate profitability and risks of the market. The purpose of this paper is to describe development of Russian mutual fund (MF) market, to suggest and apply methodology of statistical analysis of management quality, to evaluate

Profitability and risks of the market. The report was directed towards manager and professors.

The In recent years, mutual funds (MFs) have been rapidly developing in Russia, growing both in number and in the aggregate value of their net assets. This growth is accounted for by the fact that investors are showing constantly growing interest in investing in MF securities, purchasing the equities of different investment funds.

The main objective of the paper is to describe the Russian MF market, to investigate

Management quality, to evaluate profitability and risks of this market, to analyze

Correlations between profitability of MFs and stock indices, to estimate stability of

Profitability rating of different MFs, to construct the optimal portfolio, to classify MFs, to construct ratings on the basis of Sharpe ratio and investigate their stability.

As of 1 January 2007, the number of Russian MFs was 641, compared to 142 as of

Previously in January 2004, thus, having grown 4.51 times within the past three years.

The aggregate value of net assets during the same time-period has grown 5.58 times,

The number of stockholders reaching 330 thousand (Invest funds, 2007).

The writer classification into joint-stock investment fund and unit investment fund. The joint-stock investment fund is popular as well as unit investment fund. Their is not clear indication regarding the joint-stock investment fund are not popular as mentioned by our write. In simple English all unit investment fund are divided into open, closed and interval fund. The simple definition is open fund Are which don't have any restrictions on the number of shares issue. If the demand in the market is high there is continuous issuing of shares and you can also sell it back when you want to and the closed fund are just opposite of the open fund they are the fund which are issued when new fund come into the market there are really issues. The liquidity is very limited. The interval fund is the fund or shares which they buyback from shareholders. As per the writer the market for closed share mf is high at 35% but with no obvious reason as the IRR on the open shares are more then the closed one. The Russian market is dominant by oil industry and the closed shares in retail estate have really taken off. The mutual fund industry has good growth but it still accounts for very small part of the Russian financial market. The writer forgets to mention the poor state of financial education in Russia. The new private investors are investing in the market but its only accounts the 2% of Russia populations. The Russian equity market is not same as the rival countries like India, china or Brazil. Overall a very limited number of stocks are traded but the bulk of liquidity coming form company's like Gasport and RAO UES. The return is all depend on Russia risk and other factors which are very hard to quantify. Until know the authority effectively banned Russian funds from including foreign assets and derivatives in their portfolios. According to the report at the end of 2006 only 23% of the Russian mutual fund is open type. The remaining are Real estate and other illiquid assets.

The writer mentioned the rate of interest is calculation the writer is not very specific as the formula uses by writer have not taken risk factor the risk is very important if your are calculating the interest rate because its is widely expect that high risk high return and vice-versa so the formula is not very specific, and the about of some positive correlation between the profitability of mfs and stock market exist but how much its not always necessary but there is some possible some positive correlation between the funds and stock market as mentioned below

The green line represents the mutual fund (GAZP) and the red line is MICEX so it's not always a positive correlation as mentioned by our writer. The writer report on -300 to 300 % return on your fund by taking into just one mutual fund is not very accurate. As per the writer there are 641 mutual funds so I think the figure of 300% is not accurate. Annual return on the Russian mutual fund in year 2006 was 28.4% (

With so many mutual funds is their in market. It's always going to be impossible for the investors distinguishing one mutual fund from another fund. There is so many ways to analysis the mutual funds category. The correlation matrix shows the correlation of funds depending on time over 5, 10 or even 20 year's period. The correlation analysis is a historical measure. The data give you an indication of the relationship of 2 investments. There is no guarantee that the relationship will continue to be same in future. Managers can drift in their investment style so correlation is not you just do one and can be forgot, it should always be view on period basis .

Eg Federated High Yield fund (Fhytx) and FundX Aggressive Upgrader fund (Hotfx). You can see thatFhytxandHotfxare correlated.

Image 1

CORRELATION OF MUTUAL FUNDS.Here are two funds, HOTFX and FHYTX, and the S&P 500 with a 10-day moving average of FHYTX overlaid. Note that the two funds are highly correlated.

The high-yield fund frequently moves later, compared to the equity fund during price upturns, and trends downward earlier than the equity fund. The statistical measure beta shows a correlation of only 0.865 with the Standard & Poor's 500, so it is possible that the correlation of high-yield bonds versus equities is not exact. I use five- and 10-year average beta values and believe this is a good proxy for most equity trends.

Look at Figure 1 and imagine tradingHotfxduring periods when high-yield bonds are trending up in price. I add a 10-day simple moving average toFhytxto serve as a signal line so that a rise above the line indicates a buy and prices below the line serve as a sell signal. A select period shows the example with B (buy) and S (sell) labels at obvious crossovers. The entire period of six years is not present due to space constraints. Visual inspection indicates that a profit is possible.

Beta determines the risk and volatility of mutual fund to that of stock index. When the beta is <1 means the funds performance is positive correlation with index . A beta > 1 indicated greater risk than the overall market, and beta < 1 indicated a negative correlation. For the eg fund has beta of 1.02 in relation to RTS , the fund is moving 4% more than index. The RTS increased 14% the fund would raise to 14.75%, if fund with beta of 2.4 would be move to 2.5 times more then its index. If RTS raised 10% the fund would be increased 23% and if RTS decrease to 9% the fund would be loose 23%. Using this analysis investors expecting market to expecting a rise a prices may choose high betas. Which increase investor's chances of beating the market? If the market is going to bearish then the value of the fund may decline then the index . Beta is very limited it has lots of criticisms its does takes the market risk into account.

The rating system describe by writer is not very sufficient the approach is very limited. A rating should be based on mutual fund's performance relative to index or other mutual fund in the same category. The rating system is very specific and limited to the fund's based on just the past return. Sharpe ratio used by our writer is very weak and limited . Its doe's takes into the observed volatility may be poor for the risk in it of return. In order to measure mutual fund performance it should take the stock index, industry index as benchmark assets. The rating system should be based on performance but also other characteristics.

The risk, return and correlation method used by theory are on expected values which mean they are on mathematical statements about the future. In real investors must substitute people predictions are based on history measure of return on asset and volatility for these values in equations, more often predictions are wrong, past performance is not necessarily indicative of future results. Risk measuring is only useful to certain limit. Optimal is not always associated with more profit, it doesn't take the social, strategic, environmental into account . It is only based on maximize returns without regard to another thing.


The Russian mutual funds market date back to 1996 but it only in 2000 the market receive boost. The mutual fund market has immersive rate of growth in Russia but still it's only a small part of Russian financial market. The writer have explain very well the mutual fund growth in Russia but still it is only a small part of these vast industry .it is very important to have a independent assessment of the mutual funds . Which help people and give fund proper profit in mutual funds? the Russia still lack way behind the India , china and brazil in infrastructure Russia has no fund rating system The mutual funds are usually divided into three broad categories: equity, bond and mixed funds, even though such a breakdown does not adequately reflect the investment risks. As a rule, funds are rated according to raw returns, or at best according to the Sharpe ratio (i.e. return per unit of total risk) or Jensen's alpha (i.e. the component of a fund's return unrelated to the market index). However, given the specifics of the Russian financial market, these measures do not always reflect the true added value that a fund provides to investors. A new classification and rating system is needed to evaluate the performance of Russian funds properly.

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