risk and return of mutual fund

1. Dr. Ankit Jain 1

2.  The returns from equity are linked to the earnings of
the business.
 Not all business are successful and manage to earn
return for its equity investors.
 It is therefore important to analyse the business and its
prospects before investing in its equity.
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3. There are two broad approaches for equity analysis :
 Fundamental Analysis
 Security Analysis
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4.  It is a review of Company’s Fundamental.
 Evaluation of earning capability of a stock on the basis
of Balance sheet and various ratio analysis.
 Judge whether the stock is undervalued or overvalued.
 It is also Known as EIC analysis.
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5.  Earning Per share
 Price Earning Ratio
 Dividend Yield Ratio
 Book value per share
 Market Price to Book value per share
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6.  It is the study and use of price and volume charts and
other technical indicators to make trading decisions.
 Technical analysis attempts to use past stock price and
volume information to predict future price movements.
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7.  Growth Investment Style
 Value Investment Style
 Passive Management Style
 Active Management Style
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8.  Growth investment style entails investing in high
growth stocks i.e. stocks of companies that are likely to
grow much faster than the economy.
 Many market players are interested in accumulating
such growth stocks. Therefore, valuation of these
stocks tends to be on the higher side.
 Further, in the event of a market correction, these
stocks tend to decline more.
 Growth Shares: Earnings are expected to grow at a rate
higher than the average growth rates in the economy.
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9.  It is an approach of picking up stocks, which are priced
lower than their intrinsic value, based on fundamental
style.
 The shares having certain value which has not been
recognized by most investors and therefore
undervalued.
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10.  Passive Management Style: It aims at tracking the
performance of a specified index by investing in shares
that are included in the index in the same proportion.
 Active Management Style: Stocks are selected on the
basis of research and analysis.
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11.  Top Down Approach: Start with global economy, local
economy, then industry and then company.
 For choosing sectors.
 Bottom up Approach: Starts with company, then
industry, local economy and then global economy.
 For choosing stock.
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12. Dr. Ankit Jain 12

13. The returns from an investment is calculated by
comparing the cost paid to acquire the asset to what is
earned from it.
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14.  SEBI mandatory for non Liquid fund return is shown as
absolute return for less than 1 year.
 Simple return is simply the change in the value of an
investment over a period of time.
 Absolute Return = NAV at the end – NAV at the
beginning/ NAV at the begin. * 100.
 The NAV of a fund was Rs 23.45 on 31 Jan 2009 and
27.65 on March 31 2010. Calculate absolute return ?
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15.  Absolute Return / Time Period(in months) * 12
 Absolute Return / Time Period (in years)
 Initial Investment 12,000
 Holding Period 7 years
 Worth of investment 32000
 Calculate Absolute and Annualized return.
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16.  CAGR is the year over year growth rate of an
investment over a specified period of time.
 CAGR = Ending Value/Beginning Value ^ 1/number of
year -1
 The NAV of a fund was Rs 23.45 on 1st April 2009 and
27.65 on 31 March 2012. Calculate CAGR
 Use Rate function of Excel
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17.  Risk is deviation from expected return.
 Standard deviation is a measure of total risk.
 A higher standard deviation means greater volatility in
return and greater risk.
 Standard deviation is the square root of variance.
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18.  More the S.D higher the risk.
 Lower the S.D less risk.
 Formula for calculating S.D in M.s excel.
 =stdev(range contain the return time series)
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19.  Market risk is a standard risk in Mutual Fund Product.
 Market risk in equity arises from changes in prices due
to change in underlying fundamental and technical
factors.
 In debt instruments, changes in macro economic factor,
that changes the market expectation for interest rates.
(Interest rate risk)
 Mutual Fund manages risk through Diversification.
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20.  Risk are of two types:
 Systematic and Unsystematic risk
 Systematic risk is not diversifiable, as it is caused by
market wide factors that may impact the performance
of a range of stocks.
 Unsystematic risk is a company specific and can be
reduce by diversification.
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21.  Beta is a measure of the systematic risk in an equity
portfolio.
 It measures the sensetivity of the funds return to
changes in the market Index.
 A beta of 1 means the fund is likely to move along with
the market.
 Funds with Beta less than 1 tend to less risky compare
to the market and are defensive funds.
 Funds with Beta greater than 1 are likely to be more
risky than the market and are aggressive funds.
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22.  The non-systematic risk in an equity portfolio can be
minimized by diversification across companies. For
example, risk arising out of change in management,
product obsolescence etc.
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23.  Liquidity risk may not enable to buying or selling as
may be required.
 Small and mid caps find it difficult to exit such stock
without impacting the price.
 Corporate Bonds of lower credit Quality are not very
liquid.
 Money market securities helps in ensuring sufficient
Liquidity.
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24.  Default in payment of Interest or principal by an issuer
of debt securities.
 Credit risk is assessed from the credit rating.
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25.  The investors investment may not have been made on
the dates used to calculate represented return.
 Fund represent pre-tax return.
 The published return is for the growth option. For
Dividend yield may have different return.
 Mutual Fund cannot promise or assure return to
investors.
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26.  Performance of mutual funds is measured on a relative
basis (Comparative basis)
 Absolute Return are meaningless.
 Every mutual fund product is mandatorily required to
specify the bench mark to which its performance could
be compared.
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27.  In 2012 SEBI mandatory to all AMC that they should
disclose the bench mark particular scheme.
 Benchmark is a standard rate of return on mutual fund.
 Portfolio that generates an independent level of return
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28.  Beta : Beta measure the sensitivity of mutual fund
scheme towards the market movement.
 Beta is always benchmarked to 1.It means market Beta
is 1.
 If the beta is 0.70 the fund is less volatile and
movement is less.
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29.  Beta of Mutual fund 1.2
 Beta is always benchmarked to 1
 It means fund is 20% more volatile to market.
 If 10 % market grows then fund grow by 12% and vice
versa.
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30.  Funds having Beta of less than 1 are considered to be
conservative than the benchmark or market.
 Funds having Beta is 1 than it is considered to equal to
the benchmark or market.
 Funds having Beta of more than 1 are considered to be
aggressive or risky than the benchmark or market.
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31.  In mutual fund the measure of alpha denotes the
performance of the fund manager.
 Positive alpha means fund perform better than
benchmark or market.
 Negative alpha means fund perform worse than the
benchmark or market.
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32.  The difference between a scheme’s actual return and its
optimal return is its Alpha.
Alpha = RP- (RF+(RM-RF) B)
RP= Actual Return or Return on Portfolio
RF= Risk Free return
RM= Benchmark return
B= Beta
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33. For e.g.
 Fund XYZ has given 25% return in last year having a
beta of 0.69. The market return remained at 18% and
risk free rate is 8%.
 Calculate Alpha .
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34.  Sharpe ratio is a ratio of return versus risk.
 Sharpe ratio is a measure of risk.
 It developed by Williams F. Sharpe
 Sharp ratio = Rp- Rf/ Standard deviation.
 Rp= Expected return
 Rf= Risk free return
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35.  Actual return 12%
 Risk Free return 5%
 Standard deviation 0.6
 Calculate Sharp ratio ?
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36.  Sharp ratio is use to compare mutual fund.
 Sharp ratio is also show the performance portfolio.
 High sharp ratio suggest that high performance of
mutual fund and vice versa.
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37.  Treynor ratio is a measure of risk.
 Treynor ratio = Rp- Rf/ Beta.
 Rp= Expected return
 Rf= Risk free return
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38.  Risk free return 5% and a scheme with beta of 1.2
earned a returned of 8%
Calculate Treynor ratio.
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39.  Standard deviation is a statistical measure of the range
of a funds performance.
 XYZ fund has a 12% Average rate of return and
standard deviation is 4%.
 Greater the standard deviation greater the volatility.
 It shows that consistency of return of particular fund.
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40. An investor is choosing between two investment
prepositions A & B. The return from both over the last
year is same 12%. But A has a standard deviation of 7%
and B has 4%. Calculate range of return and which mutual
fund is safe to invest.
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41. Q.1 Performance of Fund must always be measured
relative to the……..
A. Investment Objective
B. Index
C. Benchmark
D. Asset Class
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42. Q.2 Risk Adjusted return is measured by:
A. Standard Deviation
B. Sharpe Ratio
C. Treynor Ratio
D. Both 2 & 3
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43. Q.3 Risk can be measured by:
A. Standard Deviation
B. Variance
C. Beta
D. Any of the above
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44. Q.4 Which Fund has the highest risk?
A. Liquid
B. Fixed Maturity Plan
C. Dynamic Bond Fund
D. Monthly Income Plan
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45. Q.4 Which Fund has the highest risk?
A. Index Fund
B. Balanced Fund
C. Arbitrage Fund
D. Sector Fund
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46. Q.5 Benchmark of sectoral fund investing in banking
sector would be:
A. BSE Bankex
B. Nifty Junior
C. S&P 500
D. Nifty 50
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