Evaluation Performance of Equity Funds By Sharpe, Treynor, Jensen, Modigliani, Sortino, and Erov (Case Study Equity Funds Listed In Securitics and Exchange Commission (BAPEPAM) Period 2010-2012)

EVALUATION PERFORMANCE OF EQUITY FUNDS BY SHARPE,
TREYNOR, JENSEN, MODIGLIANI, SORTINO, AND EROV
(Case Study Equity Funds Listed in Securities and Exchange
Commission (BAPEPAM) Period 2010 – 2012)

By:
Arfian Fidya Utama
ID: 109081100003

MANAGEMENT DEPARTMENT
INTERNATIONAL CLASS PROGRAM
FACULTY OF ECONOMICS AND BUSINESSES
STATE ISLAMIC UNIVERSITY SYARIF HIDAYATULLAH
JAKARTA
1434 H /2013

EVALUATION PERFORMANCE OF EQUITY FUNDS BY SHARPE,
TREYNOR, JENSEN, MODIGLIANI, SORTINO, AND EROV
(Case Study Equity Funds Listed in Securities and Exchange
Commission (BAPEPAM) Period 2010 – 2012)
THESIS

Submitted to faculty of Economics and Business in Partial Recruirements for
Acquiring the Bachelor Degree of Economics

By:
Arfian Fidya Utama
ID: 109081100003

MANAGEMENT DEPARTMENT
INTERNATIONAL CLASS PROGRAM
FACULTY OF ECONOMICS AND BUSINESSES
STATE ISLAMIC UNIVERSITY SYARIF HIDAYATULLAH
JAKARTA
1434 H /2013

i

CURRICULUM VITAE

PERSONAL DATA
Name

: Arfian Fidya Utama

Date of Birth

: Tangerang, March 26th 1991

Address

: JL. Inpres VI / 29 RT/RW 001/001
Gaga,Larangan, Kota Tangerang

Religion

: Islam

Phone

: 0813-8641-5623

Email

: arfian_utama@yahoo.com

EDUCATIONAL BACKGROUND
1. 1996 – 1997

: TK Al- fiah

2. 1997 – 2003

: SDN Kreo 4

3. 2003 – 2006

: SMP Negeri 11 Tangerang

4. 2006 – 2009

: SMA Hang Tuah 1 Jakarta

5. 2009 – 2013

: UIN Syarif Hidayatullah Jakarta

iii

ABSTRACT

The aim of the research is about the performance evaluation on equity funds based on
Sharpe, Treynor, Jensen, Modigliani (M2), Sortino, and EROV measurement, it is
also to explain the performance of equity funds (or investment funds) so it can be a
consideration factor in the investment decision. To invest on equity funds, investors
should be compare composition of knowing their investment policy and measurement
of their performances.
The methods of measurement used in evaluating equity funds performances are 6
methods of Risk-Adjusted Ratio Performance Measures, they are The Sharpe
Measurement (RVAR), The Treynor Measurement (RVOL), Jensen's Differential
Return (Alpha), Modigliani (M2), Sortino, and Exceess Return on VaR (EROV).
Coefficient determination is used to know which equity fund has the best

diversification. The sample is in 44 mutual funds with 3 years periods from 2010 to
2012. Benchmark for equity funds is needed to be a performance comparison is JCI.
The results based on 6 methods shows the different appraisals and ranks. However, in
general, there's only one equity fund that has the best or optimal performance, which
Is Panin Dana Maksima.
Keyword: Performance evaluation, Equity Funds, Risk Adjusted Ratio Method.

iv

ABSTRAK
Tujuan dari penelitian ini adalah tentang evaluasi terhadap kinerja reksa dana
saham berdasarkan Sharpe, Treynor, Jensen, Modigliani (M2), Sortino, dan
pengukuran EROV, juga untuk menjelaskan kinerja reksa dana saham (atau dana
investasi) sehingga dapat menjadi faktor pertimbangan dalam pengambilan
keputusan investasi. Untuk berinvestasi di reksa dana saham, investor harus
membandingkan mengetahui kebijakan komposisi investasi dan pengukuran kinerja
mereka.
Metode pengukuran yang digunakan dalam mengevaluasi reksa dana saham adalah
6 metode Risk-Adjusted Pengukuran Kinerja, mereka adalah Sharpe (RVAR),
Treynor (RVOL), Jensen (Alpha), Modigliani (M2), Sortino, dan Exceess Return On

VaR (EROV). Koefisien determinasi digunakan untuk mengetahui reksa dana saham
mana yang memiliki diversifikasi terbaik. Sampel adalah 44 reksa dana dengan
periode 3 tahun 2010-2012. Benchmark untuk reksa dana saham yang dibutuhkan
untuk menjadi perbandingan kinerja IHSG.
Hasil berdasarkan 6 metode menunjukkan penilaian yang berbeda dan jajaran.
Namun, secara umum, hanya ada satu reksa dana saham yang memiliki yang terbaik
atau optimal kinerja yang adalah Panin Dana Maksima.
Kata Kunci : Evaluasi Performa, Reksa Dana Saham, Metode Risk-Adjusted Rasio.

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LIST OF CONTENNT

COVER PAGE IN .............................................................................................. i
SHEET STATEMENT AUTHENTICITY SCIENTIFIC WORKS ................... ii
CURICULUM VITAE ........................................................................................ iii
ABTSRACT ........................................................................................................ iv
ABSTRAK .......................................................................................................... v
PREFACE ........................................................................................................... vi
LIST OF CONTENT ..........................................................................................viii

LIST OF TABLE ................................................................................................ xi
LIST OF PICTURE ............................................................................................ xii
LIST OF APPENDIX ......................................................................................... xiii

CHAPTER I INTRODUCTION
1.1 Background ............................................................................................ 1
1.2 Problem Formulation ............................................................................. 10
1.3 Purpose of The Research ....................................................................... 10
1.4 The Benefits of This Research ............................................................... 11

CHAPTER II LITERATURE REVIEW
2.1 Investment.............................................................................................. 13
2.1.1 Understanding Mutual Funds ...................................................... 13
2.1.2 Type of Investment ...................................................................... 14
2.1.3 Purpose of Investment ................................................................. 15

viii

2.2. Mutual Funds ........................................................................................ 16
2.2.1 Understanding Mutual Funds ...................................................... 16

2.2.2 Form, Nature, and Types Mutual Funds ...................................... 18
2.2.2.1 Mutual Funds Based on Legal Forms .............................. 18
2.2.2.2 Mutual Funds Based on Character................................... 18
2.2.2.3 Mutual Funds by Type of Investment.............................. 21
2.2.3 Portfolio Management of Mutual Funds ..................................... 23
2.2.4 Benefits of Mutual Funds ............................................................ 23
2.2.5 Mutual Funds Investment Risk .................................................... 27
2.2.6 Mutual Fund Performance Measurement Model ......................... 31
2.2.7 Benchmark ................................................................................... 38
2.3 Previous Research .................................................................................. 38
2.4 Framework ............................................................................................. 42
2.5 Hypothesis ............................................................................................. 44

CHAPTER III RESEARCH METHODOLOGY
3.1 The Scope of Research .......................................................................... 45
3.2 Sampling Methods ................................................................................ 45
3.3 Data Collection Method ........................................................................ 48
3.4 Data Analysis Methods ......................................................................... 48
3.5 Theoritical Hypothesis ........................................................................... 54
3.6 Research Operational of Variables ....................................................... 56

CHAPTER IV ANALYSIS AND DISCUSSION
4.1 Descriptive Statistics Analysis .............................................................. 64

ix

4.2 Analysis Performance of Equity Funds ................................................. 69
4.3 Performance Comparisons Monthly Equity Funds with Risk-Adjusted
Return Methods .................................................................................... 92
4.4 Hypothesis Testing ................................................................................ 98
4.4.1 Normality Test Data ...................................................................... 99
4.4.2 Comparations Test Different Equity Funds Return with Benchmark
Return ..........................................................................................101
4.4.3 Comparations Test The Result of Performance of Equity Funds By
Measurement Model Index Sharpe, Treynor, Jensen, Modigliani,
Sortino, and EROV .....................................................................102

CHAPTER V CONCLUSIONS AND IMPLICATIONS
5.1 Conclusion ...........................................................................................105
5.2 Implication ...........................................................................................106

RERFERENCES .................................................................................................107
APPENDIX .........................................................................................................110

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LIST OF TABLE

Table 1.1 Type of NAV Mutual Funds on October 29th, 2010 ............................. 2
Table 1.2 Industrial Development of Mutual Funds 1996-2012 .......................... 5
Table 2.1 Summary of Previous Research ........................................................... 41
Table 3.1 Equity Funds to Study Sample ............................................................. 46
Table 3.2 Research Variable, Operational Definition and Formulation .............. 62
Table 4.1 Descriptive Statistics Average Monthly Equity Fund Indonesia Years
2010-2012 ........................................................................................... 66
Table 4.2 Performance Equity Funds Based Sharpe Ratio Method .................... 71
Table 4.3 Performance Equity Funds Based Treynor Ratio Method .................. 74
Table 4.4 Performance Equity Funds Based Jensen Alpha Ratio Method ......... 78
Table 4.5 Performance Equity Funds Based Modigliani Index .......................... 82
Table 4.6 Performance Equity Funds Based Sortino Ratio Method ................... 86

Table 4.7 Performance Equity Funds Based EROV Ratio Method .................... 90
Table 4.8 Performance Comparisons Monthly Equity Funds with Six Model of
Measurement Years January 2010 – December 2012 ......................... 92
Table 4.9 Testing by Kolmogorov-Smirnov Return of Equity Funds and Return
Benchmark .......................................................................................... 99
Table 4.10 Kolmogorov-Smirnov Test Performance Measurement Model........100
Table 4.11 Result of Mann-Whitney Test ...........................................................101
Table 4.12 Kruskall-Wallis Test .........................................................................103
Table 4.13 Chi- Square .......................................................................................103

xi

LIST OF PICTURE

Picture 2.1 Framework .......................................................................................... 43
Picture 4.1 Best ten Sharpe Ratio Method ............................................................ 72
Picture 4.2 Best ten Treynor Ratio Method .......................................................... 76
Picture 4.3 Best ten Jensen Ratio Method ............................................................. 80
Picture 4.4 Best ten Modigliani Ratio Method...................................................... 84
Picture 4.5 Best ten Sortino Ratio Method ........................................................... 87
Picture 4.6 Best ten EROV Ratio Method ............................................................ 91
Picture 4.7 Average Return of Performance of Six Indicators.............................. 94

xii

Table of Appendix
Appendix I List Sample of Equity Funds ........................................................110
Appendix II Descriptive Statistic of Equity Funds ..........................................112
Appendix III Comparisons Six Indicator Methods ...........................................114
Appendix IV Risk Adjusted Method Six Indicators .........................................116
Appendix V Result of Testing Hypothesis ......................................................124

xiii

CHAPTER I
INTRODUCTION

1.1.

Background
The economic situation in Indonesia is still not stable, people are faced

with various options on how to invest their own funds in order to gain optimal
results. In Indonesia there are a variety of investment options with varying
degrees of risk and returns that can be given, but the obstacle is how to choose the
right investments according with the ability of each investor because not all
investors have the same knowledge, funds and time for each the investment
choices.
Mutual fund is one of the alternative investments in the capital market for
the society especially small investors. Mutual fund is designed as a place to
collect funds from the society who has limited capital, knowledge and time.
Mutual fund is the familiar instrument in the Indonesian capital market.
Understanding of mutual funds in the Capital Market Law No. 8 Years
1995 is a place used to collect funds from the public investors to be invested in
portfolio securities by investment managers. Portfolio itself is a collection of
securities such as stocks, bonds, SBI, time deposits, government securities and
money market securities. Before investing in mutual funds we need to know what
types of Mutual Funds in accordance with our investment objectives and needs.
The types of mutual funds available in Indonesia there are four categories based
1

insturment, namely money market funds, fixed income funds, equity funds and
balanced funds.
Each type of mutual fund has different cirteria. Fixed income funds 80
percent of its investment portfolio in effects in the form of debt securities such as
bonds. Money market mutual funds portfolio investment in money market
instruments such as SBI. Equity fund whose investment portfolio consists of
stock. Balanced funds are investment instruments can be shaped stock and bonds
or in combination with other instruments. Each type of mutual Funds also have
different performance as seen from the Net Asset Value (NAV) any type of
mutual fund. Performance for each type NAV of mutual fund seen from as at
October 29th, 2010 that is registered with Securities and Exchange Commission
(Bapepam) can be seen in Table 1.1 below:

Table 1.1
Type of NAV Mutual Funds on October 29th, 2010
No
Type of Mutual Funds
1
Fixed Income Funds
2
Money Market Funds
3
Equity Funds
4
Balanced Funds
Total
Source : Bapepam.go.id

Net Asset Value (NAV)
22.941.696.480.467,07
7.494.940.770.221,47
40.115.204.202.815,39
15.794.027.804.413,38
86.345.869.257.917,10

Phenomena in Table 1.1 shows each type of NAV mutual fund on
October 29th,2010. Tabel 1.1 shows that the highest NAV is the type of Equity
fund that have the highest risk among the types of Other Mutual funds. means
investors are more interested in investing into equity funds.

2

According Pratomo and Ubaidullah (2000:73), compared to money market
mutual funds and fixed-income funds, equity funds providing growth potential for
greater investment value, so does the risk. Equity funds become an attractive
alternative for investors who understand the potential for long-term stock
investments, so that the funds are used to invest in fund for long-term needs,
investors should also understand and be willing to accept the risks that accompany
investments.
Mutual funds were first introduced in Indonesia precisely on 7 September
1995 with a form of the Company and are covered by PT. BDNI. Prestige of
mutual funds in the publlic continues to grow as one of the prospective investment
alternatives. This is evidenced by the development of a number of mutual funds in
Indonesia amounted to only 25 mutual funds in 1996, and a decade later, exactly
september 2006 the number of mutual funds in Indonesia has reached 370 mutual
fund. The number of mutual fund is also supported by the growth of managed
funds that have been collected from people who are known with a total net asset
value (NAV). In 1996 it was noted that the total value of the NAV of mutual
funds in Indonesia amounted to 2.8 trillion rupiah. While at the end of September
2006 has reached 39.95 trillion rupiah. During this period, the total NAV of
mutual funds have reached the highest point in February 2005, reaching 113.7
trillion rupiah. However, after the mutual fund market in Indonesia experienced
significant turmoil due to mass redemptions by investors at the end of 2005
amounted to 29.41 trillion rupiah stay. Along the improving macro-economic

3

conditions of Indonesia, the total NAV of mutual funds returned to growth.
(Manurung, 2008: 10)
Development of mutual funds in recent years has increased making
investors to participate in advancing the industry. mutual funds became popular
and much in demand by investors, particularly small investors because mutual
funds have many benefits and convenience offered, among others, the mutual
fund is an alternative to diversify investments; income levels are usually higher
than the interest rate time deposits; period the expected level of income as well as
the risks that may arise can be tailored to the wishes and interests of the owner of
the funds; professional investment managers because it is managed by a
professional investment manager, and experienced in managing investment
portfolios; Investors do not have to think or make their own analysis to sort out
the type of portfolio, fairly deliver and receive the results. (Darmawi, 2006:203)
Development of mutual funds in Indonesia is relatively rapid due to some
benefits invest in mutual fund. The benefits include lower transaction costs, high
liquidity, investment diversification and is managed by professional management.
The advantages making a lot of investors who have limited time, energy, and
knowledge in the sector of investment in the capital market to prefer mutual funds
rather than directly involved in the capital market.
Table 1.2 below shows from 1996 to 2012 mutual funds grow rapidly and
continues significant growth. Development mutual funds in Indonesia in 19962012 can be seen in Table 1.2 as the following:

4

Table 1.2
Industial Development of Mutual Funds 1996-2012
Years

Number of Funds

Net Asset Value

1996

25

2,782

1997

77

4,916

1998

81

29,992

1999

83

4,974

2000

94

5,515

2001

108

8,003

2002

131

46,613

2003

186

69,477

2004

246

104,037

2005

328

29,405

2006

403

51,620

2007

473

92,190

2008

567

74,065

2009

610

112,983

2010

612

149,087

2011

646

168,236

2012

652

168,568

Source : Bapepam.go.id
From Table 1.2 above the Mutual Fund industry in 2004 showed the rapid
growth in 2004 there were 246 products mutual fund. Since the introduction of
mutual funds in Indonesia in 1995 mutual funds experienced rapid growth from
the year 1996-2012 there were 652 number of mutual funds in 2012. Can be seen
that happen NAV increase from 2000 to 2004 but decline again in 2005 and in
5

2012 occurred the highest NAV during the year 1996-2012 amount Rp.168.568
Trillion. This phenomenon showed that the NAV in mutual funds has increased
and decreased which shows instability on the performance of mutual funds each
year suspected because of the instability of mutual fund performance.
The portfolio performance evaluation primarily refers to the determination
of how a particular investment portfolio has performed relative to some
comparison benchmark. The evaluation can indicate the extent which the portfolio
has outperformed or under-performed, or whether it has performed at par with the
benchmark.
The evaluation of portfolio performance is important for several reasons.
First, the investor, whose funds have been invested in the portfolio, needs to know
the relative performance of the portfolio. The performance review must generate
and provide information that will help the investor to assess any need for
rebalancing of his investments. Second, the management of the portfolio needs
this information to evaluate the performance of the manager of the portfolio and
to determine the manager’s compensation, if that is tied to the portfolio
performance. The performance evaluation methods generally fall into two
catagories, namely conventional and risk-adjusted methods. (Samarakoon et al,
2005)
Conventional methods, Benchmark Comparison. The most straightforward
conventional method involves comparison of the performance of an investment
portfolio against a broader market index. The most widely used market index in
the U.S. is the S&P 500 index, which measures the price movements of 500 U.S.
6

stocks compiled by the Standard and Poor’s Corporation. If the return on the
portfolio exceeds that of the benchmark index, measured during identical time
periods, then the portfolio is said to have beaten the benchmark index. While this
type of comparison with a passive index is very common in the investment world,
this creates a particular problem. The level of risk of the investment portfolio
may not be the same as that of the benchmark index portfolio. Higher risk should
leads to commensurately higher returns, in the long-term. This means if the
investment portfolio has performed better than the benchmark portfolio it may be
due to the investment portfolio being more risky than the benchmark portfolio.
Therefore, a simple comparison of the return on an investment portfolio with that
of a benchmark portfolio may not produce valid results. (Samarakoon et al, 2005).
In Indonesia the most widely used market index is the JCI index (IHSG), which
measures the price movements of Indonesian stocks listed in IDX.
The risk-adjusted methods make adjustments to returns in order to take
account of the differences in risk levels between the managed portfolio and the
benchmark portfolio. While there are many such methods, the most notables are
the Sharpe ratio (S), Treynor ratio (T), Jensen’s alpha (α), Modigliani and
2

Modigliani (M ), Sortino ratio, and EROV.
Investors in determining investment options in mutual funds certainly do
research on its performance. Performance is an interesting object for research,
especially for investors who want to invest through mutual funds. Mutual fund
performance measurement can be performed using a model or parameter that can
be universally accepted premises which are often associated with return and risk
7

(risk-adjusted performance). This is because the measurement of the performance
of mutual funds without taking into account the element of risk would likely result
in misleading information to investors. (Samarakoon et al, 2005)
Therefore, this question come to mind whether these companies could
obtain the excess return on their investment operation or not? By applying
obtained results of this research, investors are able to make the portfolio
individually and gain better results then that of the past. It is obvious that each
investor tries to gain more return with less risk. So, with respect to the importance
evaluation, it is necessary to introduce and employ efficient methods for
investment decision. The aim of this research is to assist with a specialized active
institution in the market. Other ambitions of the paper are followed as: help to
increase the efficiency of the market, help to increase intellectual decision,
creation of better opportunity for operational and financial investment. In regard
to the financial crisis of previous years, it's importance has been evident more than
ever (Ataie, 2012).
Previous research on mutual funds has been done by other researchers,
such as that conducted by Siagian (2006) states that individually are only three of
seven mutual funds that have outperformed performance against the performance
of the market. Khan (2010) in which measurement methods in use, namely
Sharpe, Treynor and Jensen has a good performance, while Fama net selectivity
has a poor performance.
Anik (2001) conducted a study evaluating the performance of the Mutual
Fund stated that Jensen's method is the best measurement methods used during the

8

study compared with the Sharpe and Treynor methods. Kuolis et al (2011) The
results showed that the ranking of Sharpe and Treynor same calculation. Kolbadi
(2011) conducted a study there is a meaning full different between result of
performance evaluation by using Sterling, Sortino and Sharpe in investment
companies. Ataie (2012) in her study that the performance with EROV ratio has
better results compared to the performance of the M3 measure and Sortino ratio.
Differences were found in this study with previous studies is the study
Siagian (2006) the method of measurement used in this study more while Siagian
only one. The research conducted by Khan (2010) used the method of Sharpe,
Treynor, Jensen and Fama Net selectivity whereas in this study using Sharpe,
Treynor, Jensen, Modigliani, Sortino, and EROV. Study by Anik(2001), the
different in this study is adding Modigliani, Sortino,and EROV methods. The
conducted by Kuolis,et al (2011) used the Sharpe and Treynor only, and data
using Greek equity fund whereas in this study using Sharpe, Treynor, Jensen, M2,
Sortino, and EROV and using different data. Kolbadi (2011) the methods
measurement used Sharpe, Sortino and Sterling, but in this study using six
methods measurement are Sharpe, Treynor, Jensen, Modigliani, Sortino, and
EROV. Ataie (2012) used different data listed in Tehran Stock Exchange whereas
in this study using data listed in Securities and Exchange Commision
(BAPEPAM). Overall difference with previous studies is that the data used in this
study uses the most recent period is January 2010 - December 2012.

9

Realizing this, the authors are interested in conducting research entitled:
"Evaluation Performance of Equity Funds by Sharpe, Treynor, Jensen,
Modigliani (M2), Sortino, and EROV (Case Study Equity Funds Listed in
Securities and Exchange Commision (BAPEPAM) Period 2010 – 2012)."

1.2.

Problem Formulation
Based on the background, the problem formulations in this research are:

1. Is there difference between returns of Equity Funds with returns of
Benchmark index market JCI (Jakarta Composite Index)?
2. What the result of evaluating the performance of equity funds through Sharpe,
Treynor, Jensen, Modigliani, Sortino, and EROV measures are equal?
1.3.

Purpose of The Research
The purposes of this research are:

1. Describing there is difference in returns of Equity funds with return of
benchmark index market JCI (Jakarta Composite Index).
2. Comparing the result of evaluation the performance of equity funds through
Sharpe, Treynor, Jensen, Modigliani, Sortino, and EROV measures are equal.

10

1.3.

The Benefits of This Research
The benefits of this research are:

1. Theoretical
Theoretically this study can contribute in the sector of management, especially
concerning Financial Management of mutual funds performance measurement
analysis with measurement risk-adjusted performance methods Sharpe,
Treynor, Jensen, Modigliani, Sortino, and EROV.
2. Practical
a. For Authors
Applying financial management especially in the areas that have been
acquired during college, particularly in analyzing the performance
measurement of equity funds in Indonesia.
b. For Practitioners
This research is useful to give an overview on the performance of
equity funds in Indonesia that can be used as a reference for people to
invest their money in mutual funds that maximize income from invested
funds and be able to select investment managers who are able to
manage their funds properly. with the information about the
performance of equity fund is expected to support the efforts of
empowering the public and disclosure of information to public on the
performance, risk, and return of equity funds.

11

c. For Investment Managers
The results of this study are expected to provide an overview of the
performance of equity funds as they do in managing. This study also
provides information to the Investment Manager of the influences of the
variables in this study on the performance of equity funds that they
manage.

12

CHAPTER II
LITERATURE REVIEW

2.1.

Investment

2.1.1. Understanding Investment
Investments are generally divided into two investments in financial assets
and real assets. Real assets (tangible assets) in the form of land, buildings,
machinery, while knowledge and financial assets (Intangible assets) in the form of
stocks or bonds. Real assets to produce goods and services, while explaining the
allocation of financial assets or earnings on investor wealth (Bodie et al, 2005:4).
"Mutual funds are simply a means of combining or pooling the funds of a
large group of investors. The buy and sell decisions for the resulting pool are then
made by a fund manager ". (Bradford and Jordan 2002: 135).
According Husnan (2005:47) the general investment activities are all
activities of the fund by individuals and companies to obtain a larger income than
the sacrifices that have been made. The activities of diverse kinds, starting with a
simple investment activities such as buying gold or deposits to the most complex
and intricate as a multidisciplinary activity which is worth billions of dollars.

13

Basically the goal of investing is to make some money. Another
investment objectives are more specifically is to get a better life in the future,
reducing inflationary pressure and the urge to save on taxes (Tandelilin, 2001:3).
2.1.2. Types of Investment
According Jogiyanto (2008:6) Investments in financial assets can be in the
form of direct investment and indirect investment. Direct investment made by
purchasing directly from a company's financial assets either through
intermediaries or in other ways. on the contrary, indirect investments made by
buying shares of an investment company which has a portfolio of financial assets
from other companies.
a. Direct Investment
According Jogiyanto (2008:6) direct investment can be done by
purchasing financial assets that can be traded in the money market,
capital market, or derivatives market. Direct investment can also be
done with the purchase of financial assets that can not be traded.
b. Indirect Investment
According Jogiyanto (2008:6) indirect investments made by
buying securities from the investment firm. Investment company is a
company that provides financial services by selling shares to the
public and use the proceeds to be invested into the portfolio.

14

2.1.3. Purpose of Investment
Husnan (2005:48) investment objective is basically to make some money.
but that statement seems too simple, so it needs to look for a more precise answer
about the purpose of investing. as mentioned above, the broader investment
objective is monetary welfare, which can be measured by the sum of current
income plus the value of future income.
According Rodoni (2009:47), the reason for investing is:
a. To Obtain a Better Life in The Future
Everyone wants a better life in the future. To that, investors make
investments for the purpose of profit in order to earn a better living in the
future.
b. Reduce Inflation Pressures
With investing, a person or investor can avoid the falling value of their
wealth from inflation.
c. The urge to save on taxes
Government policies to increase investment tax facilities one of which is
given to person or company that invests.

15

2.2.

Mutual Funds

2.2.1. Understanding Mutual Funds
A mutual fund is an investment company that issue shares to the public.
The money it receives from shareholders is pooled and invested in a wide range of
stock, bonds, or money market securities to meet specific objectives. (Hirschey
and Nofsinger, 2008 : 454)
According Williams (2001) a mutual fund is an investment company that
pools the funds of many investors in a large portfolio. Each investor who
purchases shares of the mutual fund owns a portion of a profesionally managed,
diversified investment portfolio. As the prices of the investments in the portfolio
change, the shares will fluctuate in value.
Manurung (2008) cites Giles et al (2003) stated that, Fund is a pool of
money contributed by a range of investors who may be individuals or companies
or other organizations, which is managed and investedas a whole, on behalf of
those investors. Meanwhile, according Pozen (1998) stated that, A mutual fund is
an investment company that pools money from shareholders and invests in a
diversified of securities.
Understanding of mutual funds in the Capital Market Law No. 8 Years
1995 is a place used to collect funds from the public investors to be invested in
portfolio securities by investment managers. Portfolio itself is a collection of
securities such as stocks, bonds, SBI, time deposits, government securities and
money market securities.
16

Definition outlined clearly stated that the Mutual Fund has the
characteristics, namely (Manurung, 2008: 2):
1. Collection of funds and the owner, where the owner is the owner of a mutual
fund that invested parties or put their money into mutual funds with different
variations.
2. Invested to the effect known as an investment instrument. The funds collected
from the community invested in investment instruments such as checking
accounts, time deposits, REPO, commercial paper, bonds, stocks, options,
futures, and so on.
3. Mutual funds are managed by investment managers. The investment manager
can be considered from two sides, namely as an institution and as individuals.
As an institution must have permission to manage the fund company, where
such permission is obtained from the Securities and Exchange Commission (the
Capital Market Supervisory Agency) for companies and business in Indonesia.
4. Mutual fund is an investment instrument medium and long term.
5. Mutual funds are risky investment products. Risky mutual fund because its
portfolio instruments prices change all the time.

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2.2.2. Form, Nature, and Types of Mutual Funds
2.2.2.1. Mutual Funds Based on Legal Form
In Indonesia, there are two legal forms of the Fund, the Investment Funds
Limited Liability Company (Ltd. Mutual Funds) and Mutual Funds of investment
contracts Collective (CIC). In terms of ownership, PT. Mutual Fund will issue
shares that may be purchased by investors. Thus, by having the right to ownership
of the shares of PT. The. Meanwhile, CIC Fund issued investment units. By
having units of Mutual Funds CIC, then investors have ownership of wealth
Mutual funds net assets. Investment Funds Company is a company (in this case
the limited liability company) is engaged in the management of the investment
portfolio securities is available in the investment market. Of these activities PT
Fund will benefit in the form of an increase in the value of corporate assets (as
well as the value of its shares), which then would also be enjoyed by the investors
who own shares in the company. (Huda and Nasution 2007:96).
Some characteristics of the Mutual Fund are identical to the other
companies in the form of Ltd. are following: (Rodoni, 2006:171)
1. Have wealth.
2. Have management.
3. Have costs, such operating costs and others.

18

4. The company has an obligation in accordance with the general provisions set
out in the company law (in particular for corporate mutual fund type),
including obligations under capital licensing and taxation.
5. Responsible for shareholders (shareholders).
6. Has a wealth of operational or personnel.
Meanwhile, Mutual Fund Investment Contracts Colective is a contract
made between the Investment Manager and the Custodian Bank also bind holders
of units as investors. Through this contract the investment manager is authorized
to manage portfolios and collective investment Custodian Bank to carry out care
and administration of collective investment. Function of collective investment
contracts as well as the Articles of Association and By laws in a company.
Currently, all Mutual Funds in Indonesia is the CIC Investment Fund (Huda and
Nasution 2007:97).
2.2.2.2. Mutual Funds Based on Character
The two types of mutual funds available are open- and close-end funds.
Open-end funds, the largest catagory, continously sell shares to the public and
redeems shares for anyone wishing to sell. In contrast, close-end funds sell a fixed
number of shares in an initial offering and all subsequent buying and selling of
shares takes place in secondary market between shareholders. Unless otherwise
noted, all reference to mutual funds will be to open-end funds. (Williams,
2001:267)

19

Based on the operational character, the Mutual Fund may be divided into
the Open-end Funds and Closed-end funds. Some differences can both be
explained as follows. Open-end Fund to sell its shares in a public offering to so
listed on the stock exchanges. Investors can not sell back their shares to other
investors through a stock exchange where the trading price is determined by
market mechanisms (Huda and Nasution 2007:97).
Open-end funds are always ready to redeem or issue of units at their net
asset value (although it will involve the purchase and redemption of sales
materials (Bodie, et al 2006:142).
Closed-end funds do not redemption or issuance of fund units. Closed
mutual fund units traded in organized exchanges and can be purchased through
brokers such other shares (Bodie, et al 2006: 142).
Meanwhile, the closed-end fund its shares sell shares or units continuously
throughout an investor is buying. This stock does not need to be listed on the
stock exchange and the price is determined based on the Net Asset Value (NAV) /
Net Asset Value (NAV) per share is computed by the Custodian Bank (Huda and
Nasution 2007:97).
There are several perceived benefits to purchasing close-end funds. One is
that managers of close-end funds may invest all of their available funds without
leaving a cash cushion for investor redemptions. Another is that the price of a
close-end fund may vary significantly from its NAV. (Williams, 2001:269)

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2.2.2.3. Mutual Funds by Type of Investment
When we want to start investing, we should already know what kind of
mutual funds in accordance with our investment objectives and needs. In terms of
Bapepam-LK, mutual funds in Indonesia is divided into four (4) categories, are
following: (Pratomo and Ubaidillah, 2009:474)
1. Money Market Fund
Money market funds are defined as funds that invest 100% in money market
securities, the debt securities with a maturity of less than one year. Eg deposits,
SBI, bonds, and so on. This type of mutual fund is a type of mutual fund with the
lowest level of risk. The purpose of investing in this type of mutual fund that is
for the protection of capital and provide liquidity. Types of mutual funds can earn
interest tuku level higher than the individual investor with limited funds, in
addition to the money market funds can diversify investments. (Pratomo and
Ubaidillah, 2009:68-71).
2. Fixed Income Fund
Fixed income mutual fund is a mutual fund that invests at least 80% of the
portfolio under management to the debt securities primarily on the instrument
bonds. Advantage of the income fund tetan where capital investment is very light
and spread risk through diversification. Fixed income funds have the potential
characteristics of the larger investment returns, but the risk is also higher than the
public hearing. Investment in mutual fund type is suitable for medium-term
investment goals and long (>3 years) with moderate risk. Generally, Fixed Income

21

Funds provide profit sharing in the form of cash (dividends) are paid regularly (3
monthly, 6 monthly or annual). (Pratomo and Ubaidillah, 2009: 71-73).
3. Equity Fund
Equity funds are mutual funds that invest at least 80% of the portfolio under
management in equity securities (stocks). In mutual funds of this type generally
gives a higher yield potential in the form of capital gains and dividends through
growth in stock prices. In addition, the equity fund also provides the potential
growth of the investment value, so the risk. (Pratomo and Ubaidillah, 2009: 7374).
4. Balanced Fund
Balanced Fund investments can mix both debt and equity securities and a portion
of the allocation that is more flexible. Seeing good flexibility in choosing the type
of investment (stocks or bonds or other securities) as well as the composition of
its allocation, the balanced funds can be oriented to stocks, bonds or money
market. In terms of investment management, this flexibility can be used to switch
from stocks to bonds or deposits, depending on market conditions by trading
activity, or often called the effort doing market timing. Potential results of
Balanced funds risk can be in the middle between Fixed Income Funds and Equity
Funds so that investors who lacked the courage to accept the risk is too great but
would like to get the results "a little bigger" can choose the type of mutual fund as
an alternative to the Equity Funds. (Pratomo and Ubaidillah, 2009: 74-75).

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2.2.3. Portfolio Management of Mutual Funds
Investment management is a process of managing money or also often
called portfolio management. Investment concept that has temporarily delayed
consumption. Fabozi stated that there are five stages in the investment
management (Manurung, 2008:83):
1. The determination of the investment policy
2. Establishment of investment policy
3. Portfolio strategy selection
4. The selection of assets
5. Measurement and evaluation of performance
2.2.4. Benefits of Mutual Fund
Basically any investment contains two elements, namely the return (profit)
and risk. Here are some of the benefits in investing through mutual funds (Huda
and Nasution, 2007: 100).
1. Liquidity levels are good, which is a liquidity here is the ability to manage
money in and out of mutual funds. In this case the most appropriate is a mutual
fund for stocks that were listed on the exchange in which transactions take
place every day, unlike time deposits or certificates of deposit a certain period.
In addition, investors can relisted shares / units in accordance with any

23

provision made by each mutual fund making it easier for investors to manage
cash.
2. Professional managers, mutual funds managed by the Investment Manager is
powerful, he is looking for the best investment opportunities for the fund. In
principle, investment managers are working hard to investigate thousands of
investment opportunities for shareholders / mutual fund units. While the
investment option itself is affected by the investment objective of the mutual
fund.
3. Diversification, is a term that you do not put all your money in an investment
opportunity, with the intention of dividing the risks. Investment managers
choose a variety of stocks, so that does not affect the performance of the
overall stock mutual fund. In general, mutual funds have about 30 to 60 types
of shares of various companies.
4. Low cost, because the mutual fund is a collection of many investors that the
magnitude of the ability to invest will result in low transaction costs.
According Williams (2001: 267-269) Benefit of mutual fund are following:
1. Professional Management
In today’s complex,volatile investment environment, many individuals feel
overwhelmed by the prospect of making investment decisions, but do not
want to hire expensive professionals. Mutual funds can solve this problem.

24

With an investment as small as $250, you can leave the buy and sell decisions
to the trained professionals who are supported by extensive research staffs.
2. Diversification
Diversification means buying many different securities to reduce the risk of
any spesific security.
While the theory of diversifying to reduce risk is widely accepted, it can be
time consuming and expensive interms of commissions to own a large
portfolio of different investments. Mutual funds can invest with much lower
commissions due to their large dollar volume of trading and can spread out
the work required to follow a large portfolio.
3. Convenience in Buying and Selling Shares
Mutual Fund shares are easy to buy and sell. You may use a broker or
purchase shares directly from the investment company by mail, or by phone
or internet if you have an established account. The sahre price

of any

purchase or sale transaction is based on the net asset value (NAV) of each
share. The NAV is computed at the end of each trading day by taking the total
value of the portfolio at the day’s closing prices and dividing it by the number
of mutual funds shares outstanding. Purchases may take place at NAV (noload funds) or NAV plus a commision (load funds).

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4. Low Initial Investments
Initial investments in many mutual funds are as low as $1,000, with
minimums for subsequent investments often in the $250 range. Many
companies have lower minimums for IRA purchases, typically $250 to open
an account and $50 thereafter. Automatic invetment programs, in which you
invest periodically through an electronic funds transfer from your bank, may
have even lower minimum investment amounts, some beginning at $25.
5. Variety and Flexibility in Choosing Investment Objectives
Mutual funds have become such a popular investment vehicle that thousands
of different funds are now available, with investment objectives that run the
entire range of possibilities. Stated investment objectives usually include both
the risk level of the portfolio and the types of securities that can be inckuded.
6. Regulation
Mutual funds are regulated by the Securities and Exchange Commission
(SEC), which requires that investors receive a prospectus when purchasing a
fund. The SEC also regulates much of the information provided in the
prospectus and required that it be presented in a standardized format. When
disclosing annual returns, funds must give 1-, 5-, and 10-year annual returns
which include dividends, capital gains, and changes in net asset value. This
prevents a fund company from presenting only the attractive informationto
entice investors to buy.

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2.2.5. Mutual Funds Investment Risk
The context of investment management, risk is the magnitude of the
deviation between the expected return with actual return. the greater the deviation
means that the greater the level of risk. when the risk is expressed as the extent to
which the results obtained can deviate from the expected results, then used the
size of the spread. statistical tool that is used as a measure of the spread is the
variance or standard deviation. the greater the value, the greater the mean
deviation (meaning the higher the risk). (Halim, 2005 : 4)
In the context of the portfolio, the risk can be divided into two, are
following:
1. Systematic risk
Risks caused by macro factors affecting all securities that can not
be eliminated by diversification.
Systematic risk is measured by β in the CAPM, the return of an
asset is expressed in the form of the relationship between risk free rate plus
the market risk premium
E (r) = Rf + (Rm-Rf) β
Portfolio return is also stated as follows:
E (Rp) = Rf + (Rm - Rf) βp
where:
27

Ri = rate of return that investors demand
Rf = risk-free rate of return on investment
Rm = rate of return on the market
Β = Systematic risk
2.

Unsystematic risk
Risks caused by factors unique to the securities, and can be

eliminated by diversifying (Rodoni Ahmad, 2009:28).
According to Manurung (2008:42) Mutual fund investors are being sought
to replace the investment of other instruments as interest rate of Bank Indonesia
Certificates (SBI) hold Bank Indonesia lowered to levels below 10%. Mutual
funds provide higher returns than deposits, mutual funds but also a risky
investment, there are four aspects that would explain why mutual funds are a risky
investment:
1. The proceeds of the portfolio invested in the securities. Securities portfolio, a
collection of effects (more than one effect) that deliver results to its owner.
2. The securities portfolio is very varied so that each instrument has a rate of
return that varies. The rate of return of the investment instruments of the
securities portfolio is subject to change at any time and cause can not be
determined from the rate of return on the overall portfolio. As a result,

28

investment managers can not determine or guarantee the portfolio rate of
return.
3. Cash flows are fluctuations. Cash flows are referred to in the case of mutual
funds, namely the difference between incoming and outgoing funds. Incoming
funds are investors who buy mutual funds, while the exit is an investment fund
that sells mutual funds are concerned, the investment manager expects cash
flow is constant and predictable so that investment managers to manage
portfolios well. Therefore, mutual funds have a cash flow that changes every
time because of the incoming investors to invest into mutual funds can not be
set any time. Changes in cash flows will affect the risk of the portfolio and also
affect the risk of the portfolio and at the same time also affects the rate of
return and rate of return is uncertain.
4. Investment manager skill. Investment manager to manage the portfolio of
expertise is also one incidence risk of the portfolio as well as certainty returns.
Known investment manager has asset allocation (asset allocation), the ability of
the selection of investment instruments (stock selection) and the ability to
judge time selling at the market (market timing). The third skill will determine
the rate of return on the portfolio managed by the investment manager.
In addition to the benefits they w