Performance Analysis of Mutual Fund vs. NEPSE Index
July 1, 2025 | Investopaper
This study evaluates the performance of the Mutual Fund Index against the NEPSE Index, representing the broader Nepalese stock market, from July 16, 2020, to April 13, 2025. Using a dataset, we assess returns, volatility, risk-adjusted performance, and correlations. Key findings indicate that the NEPSE Index slightly outperformed the Mutual Fund Index with a total return of 90.86% compared to 84.56%. However, the Mutual Fund Index exhibited lower volatility (19.29% vs. 23.23%) and a higher Sharpe ratio (0.0452 vs. 0.0396), suggesting better risk-adjusted returns. The moderate correlation (0.476) between the indices highlights the diversification benefits of mutual funds.
Data Overview
The dataset covers daily observations from July 16, 2020, to April 13, 2025. The Mutual Fund Index ranged from 10.41 to 22.38 points, while the NEPSE Index ranged from 1,381 to 3,199 points.
The dataset for the analysis was taken from Nepal Stock Exchange (NEPSE). Daily trading data of Nepse Index and Mutual Fund Index were used for the purpose of the study.
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Key Findings
1. Performance Comparison
The NEPSE Index achieved a total return of 90.86% over the period, slightly higher than the Mutual Fund Index’s 84.56%. A normalized time series plot (Figure 1) shows both indices scaled to their maximum values, revealing similar trends but with the NEPSE Index displaying more pronounced fluctuations.
Figure 1: Performance of Mutual Fund Vs Nepse Index
2. Correlation Analysis
The Mutual Fund Index and NEPSE Index have a moderate correlation of 0.476, indicating some alignment with market movements but also significant divergence. The correlation between daily returns is lower at 0.3972, suggesting that mutual funds respond differently to daily market changes (Figure 2).
Figure 2: Scatter Plot of Mutual Fund and Nepse Index
The 30-day rolling correlation (Figure 5) fluctuates between approximately 0.2 and 0.8, reflecting varying degrees of co-movement over time.
Figure 5: 30-Day Rolling Correlation
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3. Returns Distribution
Daily returns, calculated as logarithmic percentage changes, show that the Mutual Fund Index has a mean daily return of 0.0087% (annualized) compared to the NEPSE Index’s 0.0092%. The daily returns comparison (Figure 3) and returns scatter plot (Figure 4) indicate that mutual fund returns are less volatile, with fewer extreme movements compared to the NEPSE Index.
Figure 3: Daily Returns Comparison
Figure 4: Returns Scatter Plot
4. Volatility and Risk Metrics
Annualized volatility, based on daily returns, is lower for the Mutual Fund Index (19.29%) than the NEPSE Index (23.23%). The Mutual Fund Index’s beta of 0.3298 indicates it is less sensitive to market movements, offering a degree of stability. The maximum drawdown for the Mutual Fund Index (-29.12%) is significantly lower than the NEPSE Index’s (-43.26%), underscoring lower downside risk. The Sharpe ratio, assuming a zero risk-free rate, is higher for the Mutual Fund Index (0.0452) than the NEPSE Index (0.0396), suggesting better risk-adjusted returns.
5. Stress Period Performance
During 68 stress periods (days with NEPSE returns below -2%), the Mutual Fund Index averaged a return of -1.16%, compared to the NEPSE Index’s -2.77%. This resilience highlights the defensive characteristics of mutual funds during market downturns.
6. Annual and Monthly Performance
Yearly performance (Table 1) shows mixed results:
-
2020: Mutual Fund Index returned 9.88%, underperforming NEPSE’s 49.7%.
-
2021: Mutual Fund Index outperformed with 29.4% vs. NEPSE’s 16.0%.
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2022: Both indices declined, with Mutual Fund Index at -7.77% and NEPSE at -21.5%.
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2023: Mutual Fund Index led with 37.2% vs. NEPSE’s 1.11%.
-
2024: NEPSE outperformed with 25.1% vs. Mutual Fund’s 7.61%.
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2025 (partial): Mutual Fund Index declined by -4.38%, while NEPSE gained 3.12%.
Table 1: Comparative Annual Return of Mutual Fund and NEPSE
| Year | Mutual Fund Annual Return (%) | NEPSE Annual Return (%) |
|---|---|---|
| 2020 | 9.88 | 49.70 |
| 2021 | 29.40 | 16.00 |
| 2022 | -7.77 | -21.50 |
| 2023 | 37.20 | 1.11 |
| 2024 | 7.61 | 25.10 |
| 2025 | -4.38 | 3.12 |
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Monthly returns (Figure 6) show periods of outperformance and underperformance, with mutual funds often exhibiting smaller losses during negative months.
Figure 6: Monthly Returns Comparison
Performance Summary Table
Table 2: Performance Summary Table
|
Metric |
Mutual Fund |
NEPSE |
|---|---|---|
|
Total Return (%) |
84.56 | 90.86 |
|
Annualized Volatility (%) |
19.29 | 23.23 |
|
Sharpe Ratio |
0.0452 | 0.0396 |
|
Beta |
0.3298 | 1.00 |
|
Maximum Drawdown (%) |
-29.12 | -43.26 |
|
Correlation with NEPSE |
0.4760 | 1.00 |
Implications for Investors
-
Diversification Benefits: The moderate correlation (0.476) and low beta (0.3298) suggest that mutual funds provide diversification, reducing exposure to market volatility.
-
Risk-Adjusted Returns: The higher Sharpe ratio and lower maximum drawdown make mutual funds attractive for risk-averse investors seeking stable returns.
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Resilience in Downturns: Mutual funds performed better during stress periods, making them a safer choice during market declines.
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Investment Strategy: While NEPSE offers slightly higher returns, mutual funds balance growth with lower risk, suitable for conservative portfolios.
Conclusion
The Mutual Fund Index offers a compelling alternative to the NEPSE Index, with competitive returns (84.56% vs. 90.86%) and significantly lower risk metrics. Its lower volatility, smaller maximum drawdown, and better performance during market stress periods make it an attractive option for investors prioritizing stability and diversification. While the NEPSE Index may appeal to those seeking higher returns, the Mutual Fund Index’s risk-adjusted performance supports its role in a balanced investment strategy.
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Disclaimer: This analysis is based on historical data, and past performance does not guarantee future results. Investment decisions should consider individual risk tolerance, investment objectives, and current market conditions.
