Knowing if fund is thrifty or wasteful.......

Investor needs to know how fairly the fund manager is compensated. A fund manager’s pay depends primarily upon tow factors:

1) the amount of assets under management and
2) performance of fund as measured against an investment benchmark, say BSE-200, sensex etc.
How much performance counts or which benchmark applies is not always clear, however public has a right to know things beforehand. While investor’s money is at stake, managers may get bonuses for not loosing as much as the indexes!!
Know if fund manager is investing in the fund he manages? Presumably, with his own money on the line, a manager has greater incentive to do well………………..

Thumb Rule 110

There is a very popular thumb rule called Rule of 110. The rule suggests that one should deduct one’s age from 110 to arrive at the percentage of exposure one should have to equities. In other words, a 30-year old can have an 80% exposure to equities; whereas an 80-year old can have 30% exposure to equities.

What you don't know can hurt you!!

At the very least, shareholders should be able to find out which stocks their funds own. The mutual fund industry however opposes more frequent disclosure, saying illogically that information about a fund’s holding will somehow reveal what the fund will buy in the future. And thereby funds may allow speculators to buy stocks earlier and drive up the price that the fund pays!!
Shareholders ate thus left to manage their portfolios blind. You might think you are well diversified across four different funds, but you may not realize that months ago, all were loaded up with same securities. Or u may know at the end of the story that u were really put at high risk more than u ever expected because ur fund is packed with the shares of firms growing feeble.

Sharp ratio & Standard deviation

The downside risk of investing is a reality that must be given due importance. As is widely accepted, high returns are generally associated with a high degree of volatility. For this purpose the performance of a portfolio must be viewed with respect to the risk assumed. It is here that the Sharpe Ratio comes in handy. For the Sharpe Ratio assesses the return generated by a portfolio, per unit of risk undertaken. Risk in this case is taken to be the portfolio's standard deviation. Standard deviation is used as it is indicative of the volatility in the fund. A lower standard deviation implies little fluctuation in the returns.
Mathematically, the Sharpe Ratio is the difference between the portfolio's returns over and above the return earned on a risk free investment divided by the standard deviation of the portfolio. A higher Sharpe Ratio is therefore better as it represents a higher return generated per unit of risk.Take for instance two portfolios A and B (see box). At first glance A has definitely performed better but what remains to be seen is the amount of risk assumed for that 15 per cent return. We have considered the bank deposit rate as the risk free rate of return at 3.5 per cent. The resultant Sharpe Ratio for portfolio A at 1.64 and that for B at 1.87 means that portfolio B is capable of delivering additional returns vis a vis portfolio A for any additional risk that may be assumed.

This process of comparing the risk adjusted returns of two portfolios, gives us an insight into the efficiency of fund management as well. Because a portfolio could deliver superlative returns by assuming significant risk, but a superior portfolio is arrived at when the manager is able to rationalize the amount of risk taken to deliver high returns.However, while looking at Sharpe ratio, please keep in mind that in isolation it has no meaning. It can only be used as a comparative tool. Thus the Sharpe ratio should be used to compare the performance of a number of portfolios or funds. In case of mutual funds, one can compare the Sharpe ratio of a fund with that of its benchmark index. If the only information available is that the Sharpe ratio of a fund is 1.2, no meaningful inference can be drawn as nothing is known about the peer group performance. Another aspect to look out for is that the ratio can be misleading at times. For example, a low standard deviation can unduly influence results. A fund with low returns but with a relatively mild standard deviation can end up with a high Sharpe ratio. Such a fund will have a very tranquil portfolio and not generate high returns.