Performance Measurement Definition Of Performance Measurement Finance Essay - Free Essay Example

Sample details Pages: 3 Words: 815 Downloads: 9 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? A multiplicity of definitions have been attributed to the term performance measurement as there is a lack of agreement on a single definition among various ones proposed by academics from different disciplines, according to a study made by Franco-Santos et al. (2007). For instance, Simons (2000) defines a performance measurement an information system that managers use to track the implementation of business strategy by comparing actual results against strategic goals and objectives. Don’t waste time! Our writers will create an original "Performance Measurement Definition Of Performance Measurement Finance Essay" essay for you Create order A performance measurement system typically comprises systematic methods of setting business goals together with periodic feedback reports. Performance measurement can also be defined as the set of metrics used to quantify both the efficiency and effectiveness of actions (Neely, Gregory and Platts (1995)). According to Maisel (2001), it is a system which enables an enterprise to plan, measure and control its performance and helps ensure that sales and marketing initiatives, operating practices, information technology resources, business decisions, and peoples activities are aligned with business strategies to achieve desired business results and create shareholder value. The above definitions of performance measurement extracted from previous literature make obvious the lack of consensus on a definition. Each of the mentioned authors provides from a different perspective by using different types of characteristics to derive their definition. For the purpose of our study, the defini tion of Simons (2000) will be used as this study is based on performance evaluation of mutual funds. Performance measurement techniques There are several statistical measures which have been developed by academics so as to be able to have an indication of mutual fund performances. The most widely used ones are: the Jensen Index, the Treynor Index and the Sharpe Ratio. The concept of mutual funds What is a mutual fund? Mutual funds are open-ended investment funds, playing a vital function of channelizing and optimal allocation of idle resources available in the economy of the individual as well as institutional investors . A proper definition of a mutual fund can be said to be a company that pools money from shareholders so as to invest the funds in a variety of assets for the purpose of diversification. Mutual funds act as a connecting bridge or a financial intermediary that enable a group of investors to pool their money together which is invested in a diversified portfolio of securities so as to minimize asset specific risks. These types of funds are largely provided through banks, brokerage firms, trust companies, credit unions, financial planning firms and other investment firms. Structure of mutual funds Mutual funds have a distinctive organizational structure consisting of shareholders, a board of directors, the fund advisor and the portfolio manager. The shareholders are the owners of the fund and possess voting rights. They select those funds that meet with their underlying investment objectives and purchase shares through diverse channels such as brokerage accounts, insurance policies and retirement plans. The board of directors are entrusted the duty to represent interests of shareholders, the approval of the contract with the management company and certain other service providers. The portfolio managers are employees of the fund advisors and their compensation is at the advisors discretion. The different types of mutual funds Mutual funds are usually classified according to their investment objectives. Some funds concentrate on bonds, others on stocks, money market instruments or other securities. There are even those who focus on the local market while others go international or specialized in countries or specific industries. The willingness to invest in riskier securities can also be considered as a distinguishing feature of mutual funds. The common types of mutual funds are as follows: Money market funds investment is made for short-term corporate government and government debt securities such as treasury bills, corporate notes and bankers acceptances. These funds are characterized by their low-risk exposure leading to low returns. Growth or equity funds such a fund invest in the equities in local or foreign companies and some growth funds focus on large blue chip companies, while others invest in smaller or riskier companies. Objective is long term growth as value of the asset held increase s over time. Fixed income funds these types of funds invest mainly in debentures, bonds and mortgages. The objective is typically to provide investors with a regular income stream in terms of interest payments or dividend payments. Balanced funds it consists of a balanced portfolio of mix of equities, debt securities and money market instruments with the aim of providing investors a with reasonable returns with low to moderate risk. Index funds the fund invests in a portfolio of securities selected so as to represent a specified target index or a benchmark. The advantages of investing in mutual funds Diversification Investing in a well diversified portfolio of securities help to reduce the impact of a single investment. Mutual funds provide the benefit of diversification by holding a wide variety of securities . Professional management Low cost Liquidity Convenience