Value at Risk Methodology for Measuring Performance of Mutual Funds

Mutual fund performance is an unending area of interest both for academicians as well as fund managers for the simple reason as it is a product meant for retail investor. A set of performance measures like Sharpe ratio, Jensen's Alpha are widely used measures. But in today's volatile market environment investor's mind is inundated with one major question i.e. what is maximum downside risk, if investment is made in mutual funds. Performance measures that consider both upward and downwards volatility might not be very useful for investors. Rather performance measures that consider risk by taking into account only losses, such as Value-at-Risk (VaR), is more appropriate technique to evaluate the performance. In the present study, standard VaR (Value at Risk) has been used to analyze the performance of public and private sector mutual funds. The present study uses Historical simulation, Normal VaR and Modified VaR techniques for calculating value at risk