Comparative Performance Analysis of Microfinance Index vs. NEPSE Index
July 18, 2025 | Investopaper
This study performs a comprehensive analysis of the performance of the Microfinance Index, comprising stocks of microfinance companies, against the NEPSE Index, the benchmark stock market index of Nepal, over the period from November 2017 to April 2025. Through detailed statistical and visual analyses, we evaluate returns, volatility, risk-adjusted metrics, drawdowns, and correlations to assess the relative performance and risk characteristics of both indices. The findings offer insights into the investment potential and risk profiles of these indices, aiding investors in making informed decisions.
1. Introduction
The Microfinance Index represents a portfolio of stocks of microfinance institutions listed in Nepal Stock exchange, which play a critical role in Nepal’s financial sector by providing financial services to underserved populations. The NEPSE Index, the Nepal Stock Exchange’s benchmark, reflects the broader market performance. This study compares these indices using a dataset spanning from November 2017 to April 2025, analyzing returns, volatility, risk-adjusted metrics, drawdowns, and correlations to provide a overall view of their performance.
2. Data and Methodology
The dataset was sourced from Nepal Stock Exchange (NEPSE) website. Daily values of the Microfinance and NEPSE Indices were taken for the purpose of the study. Daily returns were calculated as the percentage change in index values, and cumulative returns were computed relative to the initial value. Statistical analyses along with visualizations were performed. Key metrics include mean returns, volatility, Sharpe Ratio, Calmar Ratio, maximum drawdown, and correlation. Drawdown periods were analyzed to assess risk exposure, and statistical tests (Shapiro-Wilk, F-test, and t-test) were conducted to evaluate return distributions and differences.
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3. Descriptive Statistics
The following table summarizes the key statistics for both indices and their daily returns:
Table 1: Descriptive Statistics of Indices and Returns
| Metric | Microfinance Index | NEPSE Index | Microfinance Return (%) | NEPSE Return (%) |
|---|---|---|---|---|
| Min | 1252.24 | 1100.58 | -9.54 | -6.04 |
| 1st Quartile | 1668.00 | 1303.00 | -0.88 | -0.74 |
| Median | 3653.51 | 1958.85 | -0.13 | -0.06 |
| Mean | 3392.69 | 1916.12 | 0.07 | 0.04 |
| 3rd Quartile | 4796.00 | 2464.00 | 0.79 | 0.67 |
| Max | 5982.97 | 3199.03 | 8.96 | 6.06 |
| Std Dev | 1489.32 | 590.39 | 1.68 | 1.39 |
| Skewness | -0.10 | 0.21 | – | – |
| Kurtosis | 1.47 | 1.78 | – | – |
The Microfinance Index exhibits a higher mean value (3392.69 vs. 1916.12) and greater volatility (standard deviation of 1489.32 vs. 590.39) compared to the NEPSE Index. The Microfinance Index shows slight negative skewness (-0.10), indicating a longer left tail, while the NEPSE Index has positive skewness (0.21). Both indices have kurtosis values below 3, suggesting flatter distributions than a normal distribution.
Figure 1: Distribution of Daily Returns of NEPSE Index and Microfinance Index
4. Performance Metrics
The following table compares key performance metrics for both indices:
Table 2: Performance Metrics Comparison
| Metric | Microfinance | NEPSE |
|---|---|---|
| Total Return (%) | 164.46 | 74.81 |
| Annualized Return (%) | 13.97 | 7.73 |
| Annualized Volatility (%) | 26.73 | 22.09 |
| Sharpe Ratio | 0.66 | 0.48 |
| Calmar Ratio | 0.38 | 0.25 |
| Maximum Drawdown (%) | -46.19 | -43.26 |
| Current Drawdown (%) | -19.63 | -16.78 |
| Average Drawdown (%) | -20.19 | -22.28 |
| Time in Drawdown (%) | 96.26 | 95.73 |
| Value-at-Risk (5%) | -2.20 | -1.98 |
| Positive Days (%) | 45.03 | 47.19 |
The Microfinance Index outperforms the NEPSE Index with a higher total return (164.46% vs. 74.81%) and annualized return (13.97% vs. 7.73%). However, it also exhibits higher volatility (26.73% vs. 22.09%). The Sharpe Ratio (0.66 vs. 0.48) and Calmar Ratio (0.38 vs. 0.25) indicate better risk-adjusted returns for the Microfinance Index. Both indices spent significant time in drawdown (96.26% and 95.73%), with the Microfinance Index experiencing a slightly larger maximum drawdown (-46.19% vs. -43.26).
Figure 2: Cumulative Returns Comparison of NEPSE Index and Microfinance Index
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5. Correlation Analysis
The correlation coefficient between the daily returns of the Microfinance and NEPSE Indices is 0.814, indicating a strong positive relationship. This suggests that the indices tend to move in tandem, likely influenced by similar macroeconomic factors. The scatter plot of daily returns confirms this relationship, with a linear regression line highlighting the positive correlation.
Figure 3: Return Correlation of NEPSE Index and Microfinance Index
6. Drawdown Analysis
Drawdowns represent peak-to-trough declines, providing insight into downside risk. The following table summarizes key drawdown metrics:
Table 3: Comprehensive Drawdown Analysis
| Metric | Microfinance | NEPSE |
|---|---|---|
| Maximum Drawdown (%) | -46.19 | -43.26 |
| Current Drawdown (%) | -19.63 | -16.78 |
| Average Drawdown (%) | -20.19 | -22.28 |
| Time in Drawdown (%) | 96.26 | 95.73 |
| Calmar Ratio | 0.38 | 0.25 |
| Recovery Factor | 2.61 | 1.67 |
The Microfinance Index experienced a larger maximum drawdown (-46.19% vs. -43.26%) and a higher current drawdown (-19.63% vs. -16.78%) as of April 2025. However, its recovery factor (2.61 vs. 1.67) indicates a stronger recovery relative to its maximum drawdown. Both indices spent over 95% of the time in drawdown.
Figure 4: Underwater Chart
6.1 Major Drawdown Periods
Microfinance Index: Experienced 23 drawdown periods, with the most significant from August 2021 to April 2025, reaching a maximum drawdown of -46.19% and lasting 1348 days without full recovery.
NEPSE Index: Had 26 drawdown periods, with the largest from August 2021 to April 2025, reaching -43.26% over 1333 days.
Figure 5: Distribution of Drawdown Values of NEPSE Index and Microfinance Index
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7. Statistical Tests
Statistical tests provide insights into the distribution and differences in returns:
Shapiro-Wilk Test for Normality: Both indices’ returns are non-normal (Microfinance: p-value = 4.08e-26, NEPSE: p-value = 4.31e-22), indicating non-normal distributions.
F-test for Equal Variances: The variances of returns differ significantly (p-value = 4.00e-15), with the Microfinance Index showing higher volatility.
T-test for Equal Means: No significant difference in mean returns (p-value = 0.592), suggesting similar average daily performance.
8. Visual Analysis
Normalized Performance: Shows the Microfinance Index significantly outperforming the NEPSE Index over time.
Figure 6: Normalized Performance Comparison of NEPSE Index and Microfinance Index
Daily Returns: Highlights higher volatility in the Microfinance Index, with larger positive and negative daily returns.
Figure 7: Daily Returns Comparison of NEPSE Index and Microfinance Index
Risk-Return Profile: Positions the Microfinance Index as having higher returns but also higher volatility.
Figure 8: Risk Return Profile of NEPSE Index and Microfinance Index
Price Vs. Peak Analysis:
Figure 9: Price Vs Peak Analysis of NEPSE Index and Microfinance Index
Drawdown Risk Metrics Comparison:
Figure 1: Drawdown Risk Metrics Comparison of NEPSE Index and Microfinance Index
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Conclusions and Recommendations
The Microfinance Index demonstrates superior performance compared to the NEPSE Index, with higher total and annualized returns. Its risk-adjusted metrics (Sharpe Ratio: 0.66, Calmar Ratio: 0.38) are more favorable than those of the NEPSE Index (Sharpe Ratio: 0.48, Calmar Ratio: 0.25). However, the Microfinance Index exhibits higher volatility (1.68% vs. 1.39%) and a larger maximum drawdown (-46.19% vs. -43.26%).
The strong correlation (0.814) suggests that both indices are influenced by similar market dynamics, limiting diversification benefits when combined in a portfolio. The non-normal return distributions and significant variance differences highlight the need for careful risk management.
The Microfinance Index is preferable due to its superior returns and risk-adjusted metrics, but investors must tolerate higher volatility and drawdown risks. The NEPSE Index offers lower volatility and maximum drawdown, making it suitable for conservative portfolios.
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This analysis is based on historical data from November 2017, to April 2025, and past performance does not guarantee future results. Investment decisions should consider individual risk tolerance, investment objectives, and current market conditions.
