An Evaluation of the Risk and Returns of Equity Mutual Funds in Kenya

Abstract

The study set out to evaluate the relationship between risk (as measured by both the standard deviation of total return and coefficient of variation) and net returns of equity mutual funds in Kenya. In addition, the study also sought to compare the performance of Kenyan equity mutual funds with the stock market as a whole using the NSE20 share index as the benchmark. The research study was done over the period 30th May 2003 to 1st july 2005. In order to achieve these objectives, secondary data was used to generate each mutual fund's returns and risk. Regression analysis was used to derive the beta. The coefficient of variation, Sharpe model, Treynor model and the jensen model were used to determine the relative performance of the sample mutual funds. The results of the study indicated that there exists a positive risk-return relationship which is consistent with the capital market theory and is an indication that the unit-holders in the equity mutual funds are risk averse. The risk. adjusted performance measures, showed that the Balanced Fund had the worst performance when compared to the Equity Fund and the market. However, both the coefficient of variation and the Sharpe Index indicated that the Equity Fundrperforrned worse than the market portfolio. While the Treynor index and the jensen alpha ranked the Equity Fund as having performed better than the market portfolio as represented by the NSE20 Index. The findings indicate that the investment manager of the Equity Fund, in an effort to select undervalued securities or to time the market, holds a portfolio that is less than fully diversified, and as such contains some diversifiable risk .