Estimating the Risk of Mutual Funds in Indonesia by Employing Value at Risk (VaR)

Abstract

This research examines the performance of mutual funds in Indonesia by employing modified VaR and modified CVaR/ES from 2 January 2007 to 29 September 2008. VaR measures the worst expected loss that an institution can suffer over a given period of time under normal market conditions at a given confidence level. It is found that a majority of mutual funds In Indonesia have a VaR less than 2.97 per cent for fixed income funds and protected funds; and less than 6.98 per cent for mixed funds and equity funds. By giving an alternative for measuring the performance of funds, the manager will have a better perspective of risk, i.e. the mutual fund companies are able to acknowledge the risk to their investors in terms of rupiah. Moreover, Indonesia’s regulator can set a standard of financial market risk. An alternative method for measuring the performance of financial markets is proposed in this paper.
Keywords: Mutual Fund, Value at Risk