CHAPTER 10: RISK, RETURN AND PERFORMANCE OF FUNDS

- The standard risk factors are the risks that all mutual fund investments are exposed to whereas there are certain risks specific to individual asset category.

- Risk in dividend is that, there is no assurance that a company may continue paying dividend in future.

- Counter party Risk occurs when a counter party fails to abide by its contractual obligations and therefore, the scheme is compelled to negotiate with another counter party, at the then prevailing (possibly unfavourable) market price.

- Market Liquidity Risk occurs where the derivatives cannot be transacted due to limited trading volumes and/or the transaction is completed with a severe price impact.

- Derivative products are leveraged instruments and can provide disproportionate gains as well as disproportionate losses to the investor / unit-holder.

- One notch downgrade of a AAA rated issuer to AA+ will have an adverse impact on the price of the security and vice-versa for an upgrade of aAA+ issuer.

- Among corporate bonds, bonds which are rated AAA are comparatively less risky than bonds which are AA rated.

- Investor holding units of segregated portfolio may not able to liquidate their holding till the time recovery of money from the issuer.

- The purpose of credit enhancement is to ensure timely payment to the investors, if the actual collection from the pool of receivables for a given period is short of the contractual pay-out on securitisation.

- ReITs and InvITs are exposed to price-risk, interest rate risk, credit risk, liquidity or marketability risk, reinvestment risk.

- The liquidity risk is managed by creating a portfolio which has adequate access to liquidity.

- Fund managers cannot reduce the systematic risk except by staying out of the market. Thus, some fund managers may tactically move between equity and cash depending on their view on the broader market.

- Fundamental analysis is a study of the business and financial statements of a firm in order to identify securities suitable for the strategy of the schemes as well as those with high potential for investment returns and where the risks are low.

- Technical Analysis is the study of price-volume charts of the company’s shares to decide support levels, resistance levels, break outs, and other triggers to base their buy/sell/hold recommendations for a share.

- Yield = Interest Income + Capital Gain /Capital Loss

- Earnings per Share (EPS): Net profit after tax ÷ No. of equity shares outstanding

- Price to Earnings Ratio (P/E Ratio): Market Price per share ÷ EPS

- Book Value per Share: Net Worth ÷ No. of equity shares outstanding

- Price to Book Value: Market Price per share ÷ Book Value per Share

- Dividend Yield: Dividend per Share ÷ Market price per Share

- In a top down approach, the portfolio manager evaluates the impact of economic factors first and narrows down through the industry specific factors and then onto the companies that are suitable for

investment.
 

- A bottom-up approach on the other hand analyses the company-specific factors first and then evaluates the industry factors and finally the macro-economic scenario and its impact on the

companies that are being considered for investment.

- Growth investment style entails investing in high growth stocks i.e. stocks of companies that are likely to grow much faster than the market.

- Value investment style is an approach of picking up stocks,which are priced lower than their intrinsic value, based on fundamental analysis.

- Debt securities that are to mature within a year are called money market securities.

- Securities issued by the Government are called Government Securities or G-Secs or Gilts.

- Treasury Bills are short term debt instruments issued by the Reserve Bank of India on behalf of the Government of India.

- Certificates of Deposit are issued by Banks (for 91 days to 1 year) or Financial Institutions (for 1 to 3 years)

- Commercial Papers are short term securities (up to 1 year) issued byCompanies.

- Bonds / Debentures are generally issued fortenors beyond a year.

- Governments and public sector companies tend to issue bonds, while private sector companies issue debentures.

- The difference between the yield on Gilt and the yield on a Non-Government Debt security (with highest safety, i.e. AAAor equivalent) is called its Yield Spread.

- Short maturity securities (lower modified duration) suffer lesser fluctuation in value, as compared to the ones with longer tenor (higher modified duration).

- The returns in a debt portfolio are largely driven by interest rates and credit spreads.

- When the rupee becomes stronger,it results in lower returns in the gold fund.

- When the interest rate is low, it results in higher real estate prices.

- Total Risk = Systematic Risk + Unsystematic Risk.

- CAGR = (Later Value / Initial Value)^(1/n) – 1

- A Beta is a measure of Systematic Risk. Beta of any Index will always be 1. Aggressive fund will have more than 1 beta.

- Un-systematic risk / Specific Risk can be reduced through diversification.

- The difference between an index fund’s return and the market return is theTracking Error.

- Interest rates and Market price of debt security are inversely related to each other.

- Variance as a measure of risk is relevant for both debt and equity schemes. It is calculated as =var(range of cells where the periodic returns are calculated)

- Standard deviation is a measure of total risk in an investment. Standard Deviation =stdev(range of cells where the periodic returns are calculated)

- Modified duration measures the sensitivity of value of a debt security to changes in interest rates. Higher the modified duration, higher is the interest sensitive risk in a debt portfolio.

- In the debt markets, the credit risk arises on account of three things, viz., default, delay in payments, or rating downgrade.

- The circumstances calling for restriction on redemption should be such that illiquidity is caused in almost all securities affecting the market atlarge, rather than in any issuer specific securities.

- When restriction on redemption is imposed, the following procedure shall be applied:

 No redemption requests upto Rs. 2 lakhs shall besubject to such restriction;

 When redemption requests are above Rs. 2 lakhs, AMCs shall redeem the first Rs. 2 lakhs without such restriction and remaining part, i.e. amounts over and above Rs. 2 lakhs shall be subject to the restriction.

- “Segregated portfolio” means a portfolio, comprising of debt or money market instrument affected by a credit event, that has been segregated in a mutual fund scheme.

- “Main portfolio” means the scheme portfolio excluding the segregated portfolio.

- Asset Management Company (AMC) were allowed to create segregated portfolio in a mutual fund scheme in case of a credit event at issuer level i.e. downgrade in credit rating by a SEBI registered Credit Rating Agency (CRA).

- AMC will not charge investment and advisory fees on the segregated portfolio. However, TER (excluding the investment and advisory fees) can be charged, on a pro-rata basis only upon recovery of the investments in segregated portfolio.