Mind The Gap Study: Methodology

Oct 13, 2022
 

Morningstar's Mind the Gap (India) study is designed to compare rupee-weighted internal rate-of-return calculations with time-weighted total returns to see how large the gap, or difference, has been over time.

The dataset only captures net assets, cash flows, and returns for funds that were created at least three years ago until June 2022.

For the purposes of our analysis we have excluded the following categories, arbitrage funds, Fund of Funds (Domestic), liquid funds, ultra-short duration funds, overnight funds, equity savings funds, money market funds, retirement funds, children funds and low duration funds. We have only considered share classes which are not closed to investors (except for global category). We have excluded funds where the data for estimated monthly flows is not calculated for more than 5% of the desired period of three-years, five-years and 10-year period.

Once the monthly cash flows are available for the period in question, we calculate investor returns. The calculation is similar to an internal rate of return, or IRR, and measures the compound growth rate of the value of all rupees invested in the fund over the evaluation period. As with an IRR calculation, investor return is the constant monthly rate of return that makes the beginning assets equal to the ending assets with all monthly cash flows accounted for. We derive investor returns by using an iterative process, running a program that attempts to solve for the constant rate of return and adjusting the estimate up and down until it converges on a solution. After calculating investor returns for each month, we link them together to calculate an annualized return for the three year, five-year and 10-year period.

We use time-weighted total returns, weighted by asset size, as a benchmark for comparison with investor returns. (The asset-weighted return average weights each fund’s return based on its average asset size over a specific period of three-years, five-years and 10-years as of June 2022 separately as per the category and broad asset classes).

We refer to the difference between investor returns and total returns as the gap or investor return gap.

The study includes investor returns and total returns surviving mutual funds schemes with regular share class.

Morningstar calculates estimated net cash flows for global open-end funds and ETFs, an estimate of the money put in or withdrawn by fund investors, accounting for reinvestment of distributions. We use total net assets and returns as a basis of the calculation. Flows are computed monthly and daily if the data affords it.

Because investor returns over shorter periods aren't as meaningful, we focus the study on long-term results. The aggregate numbers shown in the study are based on the three-year, five-year and 10-year period ended June 30, 2022. We run the data based on category groups as well as broad asset classes, which allows for a more detailed view of investor return patterns across different types of funds.

Add a Comment
Please login or register to post a comment.
© Copyright 2024 Morningstar, Inc. All rights reserved.
Terms of Use    Privacy Policy
© Copyright 2024 Morningstar, Inc. All rights reserved. Please read our Terms of Use above. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
As of December 1st, 2023, the ESG-related information, methodologies, tools, ratings, data and opinions contained or reflected herein are not directed to or intended for use or distribution to India-based clients or users and their distribution to Indian resident individuals or entities is not permitted, and Morningstar/Sustainalytics accepts no responsibility or liability whatsoever for the actions of third parties in this respect.
Company: Morningstar India Private Limited; Regd. Office: 9th floor, Platinum Technopark, Plot No. 17/18, Sector 30A, Vashi, Navi Mumbai – 400705, Maharashtra, India; CIN: U72300MH2004PTC245103; Telephone No.: +91-22-61217100; Fax No.: +91-22-61217200; Contact: Morningstar India Help Desk (e-mail: helpdesk.in@morningstar.com) in case of queries or grievances.
Top