Chapter 10 Risk, Return and

Performance of Fund
Two broad categories of risks involved in mutual fund investments:

1. Standard/ General Risk Factors: These are common to all mutual funds,
regardless of the specific asset class or investment strategy.

2. Specific Risk Factors: These are unique to the individual asset categories
or types of investments within a particular fund.

The Scheme Information Document (SID) outlines these risks in detail and
provides a discussion on risk mitigation strategies.
KEY POINTS OF SID:

General Risk Factors (Standard Risk)

- Market and Value Fluctuations: The value of mutual fund investments can
fluctuate due to changes in interest rates, currency exchange rates,
government policies, political and economic developments, and market
volatility (e.g., Stock Exchange).

- Past Performance: Historical performance does not guarantee future

results. The performance of the sponsor, AMC, or mutual fund cannot
ensure future returns.

- Limited Liability of Sponsors: The sponsors' liability is limited to their

initial investment, and they are not responsible for any losses beyond that
contribution.
General Risk Factors
1. Liquidity Risk:
- Liquidity refers to how easily an asset can be bought or sold. Low trading volumes,
settlement delays, or lack of market development can make it difficult to sell securities, especially in
bond markets or less liquid debt securities.
- Even government securities, while generally more liquid, may face issues during periods of
extreme market volatility.

2. Interest Rate Risk:

- Fixed-income securities such as bonds are sensitive to changes in interest rates. When
rates rise, the price of existing bonds tends to fall, and vice versa. The impact depends on the
maturity and coupon rates of the securities.

3. Reinvestment Risk:
- This refers to the risk that cash flows (interest payments, for example) from investments will
be reinvested at lower rates than initially assumed, reducing the overall returns of the fund.
General Risk Factors
4. Political Risk:
- Political instability or changes in government policies can significantly affect the market and
investment conditions. Political changes at the central or state level can influence the economy
and impact the performance of mutual funds.
5. Economic Risk:
- A slowdown in economic growth or macroeconomic issues (e.g., fiscal deficits) can
negatively affect the market and investments, as it directly impacts new investments and
business conditions.
6. Foreign Currency Risk:
- For foreign investors, currency fluctuations between the Indian Rupee (INR) and their home
currency can impact returns when translated into their home currency. The fund does not manage
this risk for foreign investors.
7. Transaction Risk through Stock Exchanges:
- For mutual funds listed on stock exchanges, transactions depend on the order processing and
settlement mechanisms of the exchange (BSE/NSE). Any issues in these processes (e.g.,
delays or errors) can impact the investor’s ability to buy or redeem units.
SPECIFIC RISK

 Risk related to EQUITY AND EQUITY-RELATED SECURITIES

 Volatility: Equity securities are highly volatile and subject to frequent price fluctuations.
 Market risks: Changes in government policies, taxation, and political/economic conditions can
impact securities and sectors.
 Risk associated with SHORT SELLING AND STOCK LENDING
 Securities Lending: Risks include failure of the borrower to return securities, leading to
potential loss of collateral or corporate benefits.
 Short Selling: Risks include counterparty risk, liquidity risk, and price movement risk—if
the borrowed security becomes illiquid or the price rises unexpectedly, leading to losses.(Sell
without buying it)
 Risks associated with MID-CAP AND SMALL-CAP COMPANIES
 - Higher risk and volatility: Smaller companies tend to experience higher volatility and liquidity
risks compared to large-cap companies.
 - Growth potential: These companies have the potential for rapid growth but may fail to meet
earnings expectations, impacting investment returns.
Risk associated with DIVIDEND
- Dividend uncertainty: No assurance that companies will continue paying dividends,
even if they have done so in the past.
Risk associated with DERIVATIVES
- High leverage: Derivatives are highly leveraged instruments and can lead to
significant gains or losses.
- Counterparty and liquidity risk: Risks of counterparty defaults and lack of market
liquidity can impact derivatives trading.
- Model and basis risk: Model Risk- Valuation done wrong (Inappropriate model (Black Scholes
model), wrong assumption, wrong input (Volatility, Interest rate). Basis Risk- Risk that you hedge
does not move exactly in opposite direction of the underlying exposure. Eg:- Farmer growing some
crop hedges but future contract makes an impact.
- Execution uncertainty: Derivative strategies depend on the ability of the fund
manager to identify profitable opportunities.
Risks related to DEBT FUNDS

- Reinvestment risk: Risk of reinvesting interest payments at lower rates

than the original bond coupon.
- Rating migration risk: Changes in the credit rating of securities can lead to
price fluctuations.
- Interest rate risk: The value of fixed income securities changes in response
to interest rate movements.
- Credit risk: Issuer defaults on debt obligations can lead to losses; risk varies
depending on the security's credit rating.
RISK ASSOCIATED WITH FLOATING RATE SECURITIES

Spread risk: The spread over the benchmark rate may increase, reducing the security’s value.
Example: Consider a floating-rate bond issued by Company X, where the interest rate is set at LIBOR +
2%. Initially, LIBOR is 3%, so the bond pays 5% interest (3% + 2%). If LIBOR rises to 4%, the bond’s
interest rate increases to 6%. However, if Company X’s creditworthiness deteriorates and investors
start demanding a higher spread for its bonds, the spread might increase from 2% to 3%, even if
LIBOR remains at 4%. This would mean that the bond now pays 7% (4% + 3%).

Basis risk: The underlying benchmark might become inactive or cease to exist, leading to a
mismatch in expected returns.
Example:
Let’s say an investor holds a floating rate bond where the coupon is set at LIBOR + 3%. The bond’s
interest payments depend on the value of LIBOR. However, in 2021, LIBOR was officially
discontinued and replaced by SOFR (Secured Overnight Financing Rate), which is a new benchmark.
SOFR is generally lower than LIBOR, so if the bond’s coupon is still tied to LIBOR but recalculated
based on SOFR, the investor might experience lower interest payments than expected, even though
interest rates are generally rising in the market.
Risk factors associated with REPO TRANSACTIONS in Corporate Bonds
Counterparty risk: Risk of the counterparty failing to honour the repurchase agreement.
Collateral risk: If the counterparty defaults, the scheme may incur losses if the
collateral value falls below the repo amount.

Risks associated with INVESTMENTS IN SECURITIZED ASSETS

- Asset class risks: The underlying assets (e.g., commercial vehicles, home loans) are
subject to specific industry and economic risks.
Pool characteristics:
- Size of the loan: Larger loans may diversify risk, while smaller loans may be
harder to recover.
- Loan-to-Value (LTV) ratio: Lower LTV ratios typically lower default risk.
- Original maturity & seasoning: Longer maturity and greater seasoning improve the
pool’s creditworthiness.(Personal Loan -80% paid, less chance of default)
RISKS ASSOCIATED WITH INVESTMENTS IN SECURITIZED
ASSETS
Securitization involves the pooling of receivables (such as loans or other debts) and selling these to
investors through a special purpose vehicle (SPV), typically in the form of Pass-Through Certificates (PTCs).
While securitization can provide investors with diversified exposure and liquidity, there are various risks that
investors must consider. Some of the key risks associated with securitized assets include risks related to the
asset class, pool characteristics, credit enhancement, and other operational and market risks.

Let’s break down some of these risks with an example.

1. Risks Associated with Asset Class
The underlying assets in securitized debt can vary significantly, including auto loans, credit card receivables,
home loans, commercial vehicle loans, etc. The risks associated with these assets depend on factors like the
borrower’s creditworthiness, macroeconomic conditions, collateral quality, and documentation adequacy.
# Example:
- Suppose an SPV issues PTCs backed by auto loans. If the underlying borrowers face a downturn in the
economy (e.g., due to a recession), they may struggle to repay their loans, leading to defaults. This would affect
the cash flows to the SPV and, in turn, to the investors.
- If the collateral (i.e., the vehicles) has low resale value or is difficult to repossess due to legal or market
factors, the SPV might not recover enough funds from the sale of the asset, increasing the risk for investors.
 RISKS ASSOCIATED WITH INVESTMENTS IN SECURITIZED ASSETS

2. Risks Associated with Pool Characteristics (small loan many people)

The characteristics of the loan pool also influence the risk profile of the securitized asset.

- Size of the Loan Pool: A pool with a large number of small loans (e.g., a credit card
receivables pool) generally offers more diversification, lowering individual loan default risk.
However, a pool relying heavily on smaller loans might result in costly and difficult recoveries in
case of defaults.

- Loan-to-Value (LTV) Ratio: This ratio indicates the proportion of the loan compared to the value
of the underlying asset. Lower LTVs generally mean less risk for investors, as borrowers have
more "skin in the game" and are less likely to default.
# Example:
- If a truck loan pool has a lower LTV ratio (e.g., 50%), where the borrower contributes Rs. 10
lakh out of Rs. 20 lakh for a truck purchase, they have a higher incentive to repay the loan,
as defaulting would cause them to lose a valuable asset. On the other hand, a higher LTV (e.g.,
90%) would imply that the borrower has less equity in the asset, making them more likely to default
if they face financial difficulties.
 RISKS ASSOCIATED WITH INVESTMENTS IN SECURITIZED ASSETS

3. Risks Associated with Credit Enhancement

Credit enhancement is a mechanism used to improve the credit rating of the securitized asset
by adding layers of protection for investors, such as by setting aside a reserve fund or over-
collateralizing the pool. However, these enhancements can still be limited and may not be
sufficient in all cases.

# Example:
- Suppose an SPV issues Pass-Through Certificates (PTCs) backed by a pool of auto loans.
The SPV might have a credit enhancement mechanism, such as a reserve fund that covers 10% of
the pool’s value. If, however, the default rate rises above the expected levels and the reserve
fund is exhausted, investors might not receive the full payouts as initially promised.

- Credit Rating: The PTCs may be rated by credit rating agencies. However, there is always a
risk that the rating could be downgraded if the credit enhancement is insufficient, or if defaults
in the underlying assets exceed expectations.
4. Limited Liquidity & Price Risk

Securitized assets often have limited secondary market liquidity, meaning

investors might not be able to easily sell their holdings at a fair price. If the
secondary market is illiquid, investors may have to sell their securities at a
discount.

# Example:
- If an investor holds PTCs backed by home loans, but the market for such
securities is not deep, the investor might not find a buyer when they need
to liquidate. Even if they manage to sell, they might have to sell at a discount if
interest rates rise or if there is a downturn in the real estate market, affecting
the value of the underlying loans.
5. Risks Due to Possible Prepayments

Prepayment risk arises when borrowers repay their loans earlier than expected, often
due to favorable market conditions such as falling interest rates. This can change the
expected yield on the securities.

# Example:
- If a pool of home loans experiences high prepayments (e.g., borrowers refinance their
mortgages at lower rates), the SPV will receive back more principal earlier than
expected. This results in lower interest income for the investors, as they receive their
principal back sooner, reducing the overall return on their investment.
6. Bankruptcy of the Originator or Seller

A significant risk in securitization is the possibility that the originator (the entity that
originally provided the loans) might go bankrupt. If the court rules that the transfer of the
receivables to the SPV was not a "true sale," the assets may be reclaimed by the
bankruptcy estate.

# Example:
- If a bank that originated a pool of auto loans goes bankrupt, and the court determines
that the sale of the loans to the SPV wasn’t legally valid (i.e., it wasn't a true sale),
the loans may be considered part of the bank’s bankruptcy estate.
7. Risk of Co-Mingling
Co-mingling risk arises if the servicer (the entity responsible for collecting payments from
borrowers) delays or fails to deposit the collections into the designated collection
account for the SPV.

# Example:
- The servicer collects monthly payments from borrowers in a pool of commercial
vehicle loans but does not immediately deposit them into the SPV’s collection
account. If the servicer experiences a liquidity issue or bankruptcy, the investors
may not receive their payments on time. The funds could be mixed with the servicer's
own accounts, and the servicer might not be able to remit the full amount to the
SPV, leading to delays or losses for the investors.
Example : Co-Mingling in a Credit Card Receivables Pool
Scenario: A securitized asset pool is backed by credit card receivables, where the
payments from cardholders are collected by a servicer. These payments are then
transferred to a collection account that is used to pay the investors in the securitization.
Risk Event: The servicer, a third-party financial services company, faces a liquidity
crisis. Due to this, the servicer starts co-mingling payments from the credit card
borrowers with its own operational funds to cover immediate cash needs. As a
result, some of the payments from credit card borrowers are delayed in being transferred
to the collection account.
Outcome: The delayed payments affect the timely distribution of cash flows to the
investors. If the servicer is unable to remount the collection account on time or faces
insolvency, the investors could be exposed to potential losses, as they might not receive
their due payments for an extended period. This highlights how co-mingling risk can
affect the security of cash flows and disrupt payments to investors in securitized assets.
 Risk Factors Associated with Investments in REITs and
InvITs

Price Risk, Interest Rate Risk, liquidity and Marketability risk

and Credit Rate risk: REITs and InvITs are exposed to various
risks, including market price fluctuations, interest rate changes,
and credit risk. Additionally, there is a risk of lower-than-expected
distributions based on the cash flows from the underlying assets.
 RISK MANAGEMENT STRATEGIES THAT ARE EMPLOYED
TO MANAGE THE DIFFERENT TYPES OF RISKS.
Managing Market Liquidity Risk
Liquidity management: The investment manager ensures adequate liquidity by selecting high-
quality fixed income securities with expected good secondary market liquidity. Government
securities typically offer high liquidity.
Secondary market focus: The scheme focuses on investing in liquid securities and actively
manages market liquidity risk within portfolio limits.

Managing Credit Risk

Credit risk management: Investments are made in high-quality issuers with good credit profiles. A
detailed in-house credit analysis is performed, and credit limits are set for each issuer, with
periodic reviews based on financial and operational strength.

Managing Term Structure of Interest Rates Risk

Duration management: The investment manager actively manages the portfolio's duration based
on market conditions. Since most fixed-income investments are of short duration, the
associated interest rate risk is expected to be low.
Managing Rating Migration Risk
High-grade securities: The strategy is to invest in high-grade securities and monitor them through regular credit
reviews, ensuring that rating migrations are managed effectively.

Managing Re-investment Risk

Re-investment risk mitigation: Although reinvestment risk is inherent in fixed-income securities, the impact is
minimized due to the short duration of the investments in the scheme.

Market Risk Related to Equity and Equity-Related Securities

- Equity market risk: The scheme focuses on investing in well-researched companies, with thorough due
diligence performed by the investment manager. This includes one-on-one meetings with company management
and independent research to assess financial health, growth potential, competitive edge, and governance quality.

Risk Associated with Floating Rate Securities

- Floating rate liquidity: Floating-rate securities tend to have low liquidity, which limits price discovery.
Consequently, incremental investments in floating-rate securities are likely to be limited (less investment).

Managing Risk Associated with Favourable Taxation of Equity-Oriented Scheme

- Taxation risk: The scheme regularly monitors its equity exposure to mitigate the risk of unfavorable changes in
taxation policies affecting equity-oriented schemes.
FACTORS THAT AFFECT MUTUAL FUND PERFORMANCE
Difference Between Market/Systematic Risk and Company-Specific Risk

- Company-Specific Risk (Unsystematic Risk):

- Risks that affect only a specific company (e.g., labour strike, management changes).
- Can be reduced through diversification across multiple companies.
- Also known as diversifiable risk.

- Systematic Risk (Market Risk):

- Risks that affect the entire economy or market (e.g., inflation, interest rate changes).
- Cannot be reduced through diversification.
- Also known as non-diversifiable risk.
Managing Risk:
- Unsystematic risk can be minimized through diversification.
- Systematic risk is broader and impacts all securities in the market, and fund managers can only
manage it by staying out of the market (though SEBI imposes limits on cash holdings).
- Some fund managers choose to stay fully invested, accepting the systematic risk.
- Active Management Strategy:
- Fund managers may take unsystematic risks to outperform a scheme’s
benchmark by selecting individual securities.

Mutual Fund Investments are Subject to Market Risks

Pass-through vehicle:
- Mutual funds pass on all investment risks to the investor, unlike (not like) fixed
deposits where returns are guaranteed unless the company defaults.

Market Risks:
- Mutual funds are subject to market risks because the value of the fund is directly
tied to the underlying assets it invests in.
 FACTORS AFFECTING PERFORMANCE OF EQUITY SCHEME
1. Equity as an Asset Class
Growth Investment: Equities offer growth through capital appreciation.
Risk: Equity investments are volatile, with no fixed returns, and are subject to business success.
Returns: Linked to company earnings and performance, requiring continuous analysis of the
business.

2. Fund Manager Strategies for Superior Returns

Security Selection: Focus on selecting high-quality securities expected to perform well in the
future.
Market Timing: Timing market entry and exit to capture gains and avoid losses.

3. Types of Analysis for Investment Decisions

Fundamental Analysis: Evaluates company financials (e.g., EPS, P/E ratio) to determine long-
term investment potential.
- Key Metrics: EPS, P/E ratio, P/B ratio, Dividend Yield.
Technical Analysis: Studies price movements and trading volumes to predict future stock prices
for short-term trading.
- Focuses on charts, trends, and support/resistance levels.
FACTORS AFFECTING PERFORMANCE OF EQUITY SCHEME

4. Investment Styles: Growth vs. Value

Growth Investing: Focus on high-growth companies with higher P/E ratios and lower
dividends. More volatile, suitable for bull markets.
Value Investing: Focus on undervalued stocks based on fundamental analysis, requiring a
longer investment horizon. Tends to perform better in later bull market stages.

5. Key Financial Ratios and Indicators

- EPS: Net profit after Tax / No of Equity share outstanding

- P/E Ratio: Measures how much investors are willing to pay for a company’s earnings. Low P/E
Ratio means share is cheap-buy.
- P/B Ratio: Compares market price to book value, indicating stock valuation.
- PEG Ratio: Adjusts P/E for expected earnings growth; helps assess fair valuation. (Ratio-1
means correctly valued, More than 1 –Overvalued.)
- Dividend Yield: Measures income return on investment, appealing to income-focused investors.
Price to Book Value: MP per share /BV per share
Book Value per share: Net worth / No. of Equity share outstanding.
Dividend Yield Ratio: Dividend per share / MP per share
FACTORS AFFECTING PERFORMANCE OF EQUITY SCHEME

6. Portfolio Building Approach: Top-Down vs. Bottom-Up Approaches

In analysing the factors that impact the earnings of company, analysts consider the EIC
framework i.e., the economy, the industry and the company-specific factors.
Economic factors include inflation, balance of payment etc. Industry factors - level of
competition, availability of raw materials and other inputs and cyclical nature of the
industry. Company- specific factors include management and ownership structure,
products and market shares and others.
Top-down approach minimizes the chance of being stuck with large exposure to a poor
sector. Bottom-up approach ensures that a good stock is picked, even if it belongs to a
sector that is not so hot.

7. Sector and Stock Selection

- Equity Returns depend on both sector performance and stock selection.
- A diversified mix of equities can benefit from a growing economy.
- Effective sector allocation and stock picking are key to maximizing returns.
FACTORS AFFECTING PERFORMANCE OF DEBT SCHEMES -
PRIMARILY INTEREST RATE RISK AND CREDIT RISK.

1. Interest Rate Risk:

- Definition: Interest rate risk arises from changes in market interest rates, which inversely
affect the value of debt securities (like bonds).
- Impact on Value: When interest rates rise, the value of a fixed-rate debt security falls, and
vice versa. This is because investors can get a higher yield elsewhere when rates increase,
reducing the attractiveness of existing securities.
- Duration Sensitivity: Longer-term debt securities are more sensitive to interest rate changes
than shorter-term ones. The concept of modified duration measures this sensitivity — a higher
duration means greater price fluctuations in response to rate changes.
- Strategy: Fund managers adjust portfolios based on interest rate expectations. For rising
rates, they may increase exposure to floating-rate securities (which adjust with market rates)
or short-term bonds (which have lower duration). Conversely, they might favour long-term bonds if
they expect rates to fall, as long-term bonds benefit more from falling rates.
FACTORS AFFECTING PERFORMANCE OF DEBT SCHEMES-
PRIMARILY INTEREST RATE RISK AND CREDIT RISK.

2. Credit Risk:
- Definition: Credit risk is the likelihood of a debt issuer defaulting on its obligations. It
is more prominent in non-government securities, where the issuer may fail to repay.
- Credit Spread: The difference in yields between government securities (e.g., G-
Secs) and non-government debt reflects credit risk. Securities with higher credit risk
offer higher yields to compensate for this risk.
- Credit Ratings: Credit rating agencies (e.g., CRISIL, ICRA) assign ratings to debt
securities, such as ‘AAA’, to reflect their default risk. Securities with better ratings (e.g.,
AAA) have lower yields compared to riskier, lower-rated ones.
- Impact of Rating Changes: If a company’s credit rating improves, the value of its
debt securities rises because investors are willing to accept a lower yield (narrowing
the credit spread). Conversely, if the rating worsens, the bond value falls.
FACTORS AFFECTING PERFORMANCE OF DEBT SCHEMES-
PRIMARILY INTEREST RATE RISK AND CREDIT RISK.

3. Yield & Total Return:

- Yield to Maturity (YTM): This is the total return an investor expects to earn if the bond is held until maturity,
factoring in both coupon payments and any capital gain or loss.
- Holding Period Return (HPR): This is the actual return earned over a specific period, including both interest
income and any capital gains or losses from selling the security before maturity.
4. Types of Debt Securities:
- Debt securities include Government Securities (G-Secs), Treasury Bills, Certificates of Deposit (CDs),
Commercial Papers, and Bonds/Debentures.
- G-Secs (Government bonds) are considered risk-free with no credit risk, while non-government securities
(e.g., corporate bonds) carry credit risk, leading to higher yields.
- The credit spread is the difference in yield between a G-Sec and a non-government bond of the same
maturity. Higher credit risk leads to a wider spread.

5. Fixed vs. Floating Rate Debt:

- Fixed Rate Securities: These offer a fixed interest rate over the life of the bond. Their prices fall when market
interest rates rise and vice versa.
- Floating Rate Securities: These securities have interest rates that adjust periodically based on a benchmark
(e.g., G-Sec yield). This makes them less sensitive to changes in interest rates because their coupon rate adjusts
with market conditions.
FACTORS AFFECTING PERFORMANCE OF DEBT SCHEMES-
PRIMARILY INTEREST RATE RISK AND CREDIT RISK.
6. Portfolio Management & Strategy:
- Accrual vs. Capital Appreciation: Debt funds can focus on earning regular interest
(accrual) or on capital gains (from buying low and selling high). Money market funds,
for instance, typically focus on accrual, while funds like Dynamic bond funds aim to
benefit from both income and price appreciation.
- Duration Management: Fund managers may adjust the portfolio’s duration based
on interest rate expectations:
- If rates are expected to fall, they increase the portfolio’s duration by buying
long-term bonds (which benefit more from falling rates).
- If rates are expected to rise, they shorten the portfolio’s duration by favouring
short-term bonds or floating-rate securities.
- Credit Risk Strategy: Fund managers may also adjust their portfolios based on
expectations of changes in credit quality. Investing in bonds that are expected to be
upgraded can generate capital gains as the bond price rises with the rating upgrade.
FACTORS AFFECTING PERFORMANCE OF DEBT SCHEMES-
PRIMARILY INTEREST RATE RISK AND CREDIT RISK.

7. Fund Categories and SEBI Regulations:

- Overnight Funds: These funds invest in overnight securities, with no exposure to
interest rate risk as they invest in very short-term debt.
- Ultra-Short-Term Debt Funds & Floating Rate Funds: These focus on earning
interest income while maintaining low interest rate risk by investing in short-term
securities.
- Dynamic Bond Funds: These funds take an active approach by positioning the
portfolio based on the fund manager’s views on interest rate movements, adjusting the
maturity structure accordingly.
 Factors Affecting Performance of Gold Funds:
1. Gold as an Asset Class:
- No Current Income: Gold does not generate income like dividends or interest. Investors profit from
gold funds primarily through price appreciation—selling at higher prices than the purchase cost.
- Price Movement: Gold prices are influenced by global demand and supply dynamics, and the
general market sentiment regarding the asset.

2. Key Factors Affecting Gold Prices:

- Global Price of Gold: Gold is seen as a safe-haven asset, especially during political or economic
turmoil, which can drive up its price. Countries and institutions like the International Monetary Fund (IMF)
hold large gold reserves, and their buying/selling can influence prices.
- Strength of the Rupee:
- When the Indian Rupee strengthens, gold priced in foreign currency becomes more expensive in
rupee terms, lowering returns for gold fund investors.
- Conversely, a weaker rupee increases the rupee value of gold, thus boosting returns.
- Passive Nature of Gold Funds: Since gold funds are passive, the fund manager doesn't take active
decisions regarding gold prices. The fund simply tracks the price of gold, meaning there’s no managerial
risk involved.
Factors Affecting Performance of Real Estate Funds:
1. Real Estate as a Local Asset:
- Unlike gold, real estate is influenced by local factors (e.g., economy, infrastructure, interest
rates) and cannot be transported or standardized globally.
2. Key Factors Affecting Real Estate Prices:
- Economic Scenario: In times of economic uncertainty (e.g., during a recession), real estate
demand weakens as people postpone purchases, leading to lower prices. During economic
recovery or growth, real estate prices generally rise.
- Infrastructure Development: Improved local infrastructure (roads, public services, etc.)
tends to increase real estate values in the area.
- Interest Rates: Low interest rates make borrowing cheaper, encouraging more people to
buy real estate and driving prices up. Rising interest rates can dampen the market as borrowing
becomes more expensive.
3. Types of Real Estate:
- The performance of real estate investments can also differ by sector, e.g., residential,
commercial, industrial, retail, or hotel real estate, with each affected differently by the broader
economic and interest rate environment.
4. Investment Returns:
- Rental Income: Real estate can generate regular income from renting properties.
- Capital Appreciation: This refers to the increase in the value of real estate over time, but this is
harder to predict and typically occurs over longer periods.

5. SEBI Regulations: Currently, SEBI mandates mutual funds to use independent valuation
agencies for determining real estate valuations.
Measures of Returns

Inflows could include periodic income like interest or dividends, as well as capital gains or losses
resulting from price changes. These returns are calculated to help investors assess the success of their
investment and make comparisons across different options.

Simple Return
Definition: Simple Return measures the percentage change in the value of an investment over a period of time.
Formula:
Simple Return = Ending Value - Beginning Value / Beginning Value * 100
Example:
Let’s assume you invested in a scheme where the Net Asset Value (NAV) at the time of purchase was Rs. 12, and
the NAV later grew to Rs. 15.
- Beginning Value (NAV at the start): Rs. 12
- Ending Value (NAV at the end): Rs. 15

Solution: Now, applying the formula:

Simple Return = 15 – 12 / 12 *100 = 3/12 * 100 = 25%
Annualized Return

Two investment options have indicated their returns since inception as 5 percent and 3
percent respectively. If the first investment was in existence for 6 months, and the
second for 4 months, then the two returns are obviously not comparable. Annualisation
helps us compare the returns of two different time periods.
The Annualized Return can be calculated as:
Investment 1 Investment 2

i.e., 10 i.e., 9
COMPOUNDED RETURN

To calculate the compounded return of a mutual fund where no dividends are paid, you essentially need to
compute the Compound Annual Growth Rate (CAGR), which represents the rate at which the investment
would have grown if it had grown at the same rate every year over a specific period of time.
Here’s how you can calculate it:

Step-by-Step Calculation:
[Link] the initial investment value (Beginning
Value).
[Link] the final investment value (Ending
Value) after the investment period.
[Link] the time period in years (n).
[Link] the CAGR formula to find the compounded
return.
Example:
Let’s say you invested Rs 10,000 in a mutual fund 5 years ago, and the investment is now worth Rs 15,000.
•Beginning Value = Rs 10,000
•Ending Value = Rs 15,000
•Time period (n) = 5 years
Now, putting these values into the CAGR formula:

Interpretation:
The compounded annual growth rate (CAGR) is approximately 8.45%, meaning that your investment in the
mutual fund has grown by an average of 8.45% per year over the past 5 years, with no dividends being
paid out.
Compounded Annual Growth Rate (CAGR)
How to calculate the CAGR, especially with reinvestment of dividends:
# Scenario:
You invested Rs. 10,000 in a scheme at Rs. 10 per unit on June 30, 2022.
- January 1, 2023: The scheme paid out a dividend of Re. 1 per unit, and the ex-dividend NAV was Rs. 12.50.
-January 1, 2024: The scheme paid another dividend of Re. 1 per unit, and the ex-dividend NAV was Rs. 15.
Now, let’s break down the calculation:

1. Initial Investment:
- You invest Rs. 10,000 at Rs. 10 per unit, so you get 1,000 units (Rs. 10,000 / Rs. 10).
2. First Dividend (January 1, 2023):
- Dividend per unit = Re. 1.
- Total dividend received = Rs. 1 × 1,000 units = Rs. 1,000.
- Reinvest Rs. 1,000 at the ex-dividend NAV of Rs. 12.50, so you get 80 additional units (Rs. 1,000 / Rs.
12.50).
Now, your total units = 1,000 + 80 = 1,080 units.
3. Second Dividend (January 1, 2024):
- Dividend per unit = Re. 1.
- Total dividend received = Rs. 1 × 1,080 units = Rs. 1,080.
- Reinvest Rs. 1,080 at the ex-dividend NAV of Rs. 15, so you get 72 additional units (Rs. 1,080 / Rs. 15).
Now, your total units = 1,080 + 72 = 1,152 units.
4. Final Value:
- At Rs. 15 per unit, the value of your 1,152 units = Rs. 1,152 × Rs. 15 = Rs. 17,280.
5. Investment Period:
- From June 30, 2019, to January 1, 2021, the investment period is 551 days, which is
approximately 1.51 years (551 days / 365).
6. CAGR Formula:
The formula for CAGR is: CAGR = ( Ending Value/ Beginning Value right)^1/n - 1
Substituting the values
CAGR = ( 17,280 / 10,000)^1 / 1.51 - 1
CAGR = ( 1.728) ^ 0.662 - 1 = 1.4365 - 1 = 0.4365 = 43.65%
So, the CAGR of your investment is 43.65% over the period of 1.51 years, which captures
both the capital appreciation and the reinvested dividends.

Scheme Returns vs Investor Returns

Scheme Returns typically reflect the performance of a mutual fund or other investment scheme
based on its Net Asset Value (NAV). However, Investor Returns can differ from Scheme
Returns due to factors like entry/exit loads, taxation, and investment timing.
Scheme Returns and Investor Returns because of presence of Exit Load:
- If there’s an exit load of 1% on redemption, you receive only 99% of the final NAV. So, instead of receiving
Rs. 15 per unit when redeeming, you receive Rs. 14.85.

So, the amount you get when redeeming would be:

Redemption Amount = 1,152 units * 14.85 = Rs 17,097.20
This reduces your final return compared to what the scheme would report without considering the load.
In this case, your actual return would be lower than the scheme's reported return because of the exit loads.
CAGR = ( 17,097 / 10,000)^1 / 1.51 – 1= 42.62%
Holding Period Returns (HPR) and Rolling Returns

- Holding Period Return is calculated for a fixed period, like 1 month, 3 months, or 1 year. It’s useful for
understanding short-term performance but may not fully reflect long-term trends.

- Rolling Returns take into account the returns for overlapping periods, like calculating the 1-year return for
every month within a 3-year period. This smoothens out anomalies and gives a more comprehensive view of
performance. (PTO)
 Example: 3-Year Period with 1-Year Rolling Returns
Let’s assume you have a mutual fund with the following
annual returns over 3 years: Year Fund Return
1 10%
2 15%
3 5%

Step 1: Calculate the Rolling 1-Year Return for Each Period

For a 1-year rolling return, you'd calculate the return for each possible 1-year period within the 3-year period.
That means you will calculate the return starting from each year and extending for 1 year.
Rolling 1-Year Returns:
1.1st Rolling Period: Year 1 to Year 2
1. From the start of Year 1 to the end of Year 2, the return is 10% for Year 1 and 15% for Year 2.
2. The total return for this period: (1 + 0.10) × (1 + 0.15) - 1 = 1.10 × 1.15 - 1 = 1.265 - 1 = 26.5%
2.2nd Rolling Period: Year 2 to Year 3
1. From the start of Year 2 to the end of Year 3, the return is 15% for Year 2 and 5% for Year 3.
2. The total return for this period: (1 + 0.15) × (1 + 0.05) - 1 = 1.15 × 1.05 - 1 = 1.2075 - 1 = 20.75%
Step 2: Analyze the Results
•1st Rolling Return (Year 1 to Year 2): 26.5%
•2nd Rolling Return (Year 2 to Year 3): 20.75%
You now have two rolling returns: 26.5% and 20.75%. By looking at multiple overlapping periods, you get a
sense of the consistency of the fund's performance, rather than relying on a single "snapshot" like a 3-year
return or a 1-year return.

Step 3: Average the Rolling Returns (if needed)

If you wanted to get a general sense of the "typical" return over this 3-year period, you could average these two
rolling returns:
Average Rolling Return=26.5%+20.75% /2 =23.625%.
Why Rolling Returns Matter?
Smoothing Anomalies: If you just looked at the return from Year 1 to Year 3, you might get a distorted view of
performance. For example, if the mutual fund had a great Year 1 (+10%) but a poor Year 3 (+5%), the fixed return
for the entire period might look weaker than what you’d want to see in a consistent performer. Rolling returns
smooth out the effects of one bad year by including all the overlapping periods.
Better Assessment of Risk and Return: Rolling returns give you more insight into how an investment behaves
over time, capturing different market conditions. They help you see whether strong performance is sustainable or
if it's due to just a few good years.
Consistency: Rolling returns help investors see whether the fund has consistently performed well over time, or if
it only performed well during certain periods.
Pros and Cons of Evaluating Funds only on the Basis of Return
Performance
# Pros:
- Simple comparison: Return performance is straightforward and helps you quickly compare multiple funds.
- Historical perspective: Past returns can offer insights into a fund's ability to generate profits.

# Cons:
- No risk factor consideration: High returns may come with high risk. Volatility and risk-adjusted returns (like
Sharpe Ratio) should also be considered.
- Lack of consistency: A fund with high returns in one year may not perform consistently in future years, especially
in different market conditions.
- Market conditions: Funds may outperform during bull markets but underperform during downturns.
SEBI Norms Regarding Representation of Returns by Mutual Funds in India

1. No Promise of Returns
•Mutual funds are not allowed to promise any returns unless the scheme is an "assured
returns scheme."
•Assured returns schemes are those where the scheme guarantees a certain return to
investors. However, there must be a named guarantor in the Scheme Information
Document (SID), and if the scheme fails to meet its obligations, the guarantor is
required to make up for the shortfall.

2. Advertisement Code and Disclosure Guidelines

Measures of Risk
Variance
Definition: Variance measures the dispersion of periodic returns from the average return. It calculates how much
the returns of a scheme fluctuate around the mean return.

Formula: Variance = (Sum of (Return in each period - Average Return)²) / (Number of periods)

Example: Consider two schemes with monthly returns over 4 months:

Step 1: Calculate the average return for each scheme.

•Scheme 1: (5 + 4 + 5 + 6) / 4 = 5%
•Scheme 2: (5 - 5 + 10 + 5) / 4 = 3.75%
Step 2: Calculate the squared deviations from the average for each scheme.
•Scheme 1:
•(5 - 5)² = 0
•(4 - 5)² = 1
•(5 - 5)² = 0
•(6 - 5)² = 1
•Sum of squared deviations = 2
•Variance = 2 / 4 = 0.67
•Scheme 2:
•(5 - 3.75)² = 1.5625
•(-5 - 3.75)² = 70.5625
•(10 - 3.75)² = 39.0625
•(5 - 3.75)² = 1.5625
•Sum of squared deviations = 112.75
•Variance = 112.75 / 4 = 39.58

Conclusion: Scheme 1 has lower variance (0.67), meaning its returns fluctuate less compared to Scheme
2, which has a much higher variance (39.58). Scheme 2 is riskier due to its higher fluctuations.
Standard Deviation
Definition: Standard deviation is the square root of variance and provides a more intuitive measure of risk. It
quantifies how much the returns of a scheme deviate from the average return, with higher values indicating
more volatility.
Formula: Standard Deviation = √(Variance)
Example:
•From the above example, the variance for Scheme 1 is 0.67, and for Scheme 2 is 39.58.
• Standard deviation for Scheme 1 = √0.67 ≈ 0.82%
• Standard deviation for Scheme 2 = √39.58 ≈ 6.29%
Annualized Standard Deviation: To annualize the standard deviation, use the following formulas based on the
frequency of data points:
•For weekly data, multiply by √52.
•For monthly data, multiply by √12.
•For daily data, multiply by √252 (since there are 252 trading days in a year).
For weekly data, if the standard deviation of Scheme 1 is 0.82%:
•Annualized Standard Deviation = 0.82 × √52 ≈ 5.72%
This means that over a year, the return for Scheme 1 could vary by 5.72% from the average return.
Beta
Definition: Beta measures the volatility (or risk) of a scheme in comparison to the market
(represented by a diversified stock index). A Beta greater than 1 indicates that the scheme is
more volatile than the market, while a Beta less than 1 indicates that the scheme is less
volatile than the market.

Formula: Beta = Covariance of the scheme's returns with the market's returns / Variance of
the market’s returns

Example:
•Scheme A has a Beta of 1.5, while Scheme B has a Beta of 0.8.
• If the market goes up by 10%, Scheme A is expected to go up by 15% (1.5 × 10%).
• If the market goes down by 10%, Scheme A is expected to go down by 15%.
• Scheme B will move only 8% in the same market move (0.8 × 10%).
Conclusion: Scheme A is riskier than Scheme B because its returns are more sensitive to market
movements (higher Beta).
Modified Duration

Definition: Modified Duration measures the sensitivity of the price of a debt

instrument (like a bond) to changes in interest rates. The higher the modified
duration, the more sensitive the debt security is to interest rate changes.

Example:
•Suppose Bond X has a modified duration of 5 years, and Bond Y has a modified
duration of 2 years.
• If interest rates increase by 1%, Bond X's price will decrease by approximately
5%.
• Bond Y, with a lower modified duration, will decrease by only 2%.
Conclusion: A higher modified duration indicates greater interest rate risk. Bond X
is more sensitive to interest rate changes than Bond Y.
Weighted Average Maturity (WAM)
Example: Consider a debt fund with the following investments:
•70% in a 4-year bond
•30% in a 1-year bond
The WAM is calculated as:
•WAM = (70% × 4 years) + (30% × 1 year) = 3.1 years

Conclusion: A higher WAM indicates a higher interest rate sensitivity. In this

case, the debt fund with a WAM of 3.1 years will have more sensitivity to
interest rate changes than a fund with a lower WAM.
Understanding Provisions with Respect to Credit Risk in
Mutual Funds

Credit risk arises in the debt markets due to three main factors: default, delay in payments, and
rating downgrades. A credit event occurs when any of these factors cause the value of a debt
security to fall. This, in turn, can lead to liquidity issues for mutual funds holding those securities,
as investors may rush to redeem their investments, forcing the fund manager to sell other assets.
Example of Credit Risk in a Mutual Fund:
Let’s assume a mutual fund scheme has a total portfolio worth Rs. 10,000 crores and holds 8%
exposure in a single corporate bond (debenture 'M') worth Rs. 800 crores.
•Initial Situation:
• The scheme holds 8% of its portfolio in the debenture 'M', worth Rs. 800 crores.
• The total scheme size is Rs. 10,000 crores.
•Event of Downgrade:
• Suppose debenture 'M' is downgraded due to a deteriorating credit rating, which leads to
a fall in its market value. This downgrade makes investors in the scheme worried about
the security’s future and the potential for further losses.
•Redemptions Triggered:
• Investors, fearing more losses, decide to redeem Rs. 2,000 crores (20% of the scheme size).
• To meet the redemption demand, the fund manager might be forced to sell other securities,
potentially at unfavorable prices, reducing the total size of the scheme to Rs. 8,000 crores.
•Impact on Exposure to Debenture 'M':
• With the scheme’s size now reduced, the value of the exposure to debenture 'M' (which remains
at Rs. 800 crores) becomes 10% of the portfolio instead of the original 8%. This increased
exposure to a downgraded bond means higher risk for the remaining investors.
•Escalating Risk:
• If more investors panic and redeem their investments, the scheme size could further shrink. For
example, if the scheme's size is reduced by 50%, debenture 'M' would now represent 20% of the
portfolio, increasing the risk exposure even more.( 800 / 4000 *100)
•Regulatory Limits:
• To mitigate such risks, regulations limit the exposure to any single issuer. According to SEBI
(Securities and Exchange Board of India) guidelines, a mutual fund can hold a maximum of 10%
of its portfolio in securities issued by a single issuer. If the exposure exceeds this limit, the
fund could face regulatory actions.
Provisions to Handle Such Risks:
To deal with such risks and prevent a liquidity crisis in these scenarios, SEBI has introduced two
important provisions:
[Link] or Restriction on Redemption:
This allows the mutual fund to impose limits on redemptions when there are severe liquidity
issues, such as a systemic market crisis or other exceptional circumstances that affect the
liquidity of most securities, not just those from a single issuer.

2. Segregated Portfolios (Side-Pocketing):

This involves separating the distressed securities into a different portfolio, so that investors
who redeem their units are not affected by the poor performance of those specific securities.
Gating/Redemption Restrictions - Example:
•Circumstances for Gating:
Redemption restrictions can only be imposed in situations where there is a widespread liquidity
crisis. For example, during a market-wide crisis (e.g., economic recession, sudden political
instability), or in cases of market failure (e.g., exchange closure, operational issues). They cannot
be imposed in cases of poor liquidity in a single security.
•Restriction Process:
• For Redemptions up to Rs. 2 Lakhs: No restriction will apply.
• For Redemptions above Rs. 2 Lakhs: The first Rs. 2 Lakhs will be redeemed normally,
but any redemption amount exceeding Rs. 2 Lakhs will be subject to the restriction.
•This means that in a situation where a mutual fund faces a liquidity crisis, an investor wishing to
redeem a large amount (say, Rs. 5 Lakhs) would only be able to redeem Rs. 2 Lakhs
immediately, with the remaining Rs. 3 Lakhs subject to further restriction.
•Any imposition of restriction would require specific approval of Board of AMCs and Trustees
and the same is required to be informed to SEBI immediately.
•Duration of Restriction:
Redemption restrictions can only last for a maximum of 10 working days within a 90-day period.
This helps prevent indefinite restriction and ensures that the liquidity crisis is addressed in a timely
manner.
•Disclosure to Investors:
Investors are required to be informed in advance through scheme documents (SID) that their
ability to redeem their investments may be restricted in extreme scenarios and the time limit for
which it can be restricted.
This system helps prevent panic selling of assets at depressed prices and gives the
mutual fund manager time to manage the liquidity crisis effectively.
Conclusion:
Through provisions like gating and segregated portfolios, mutual funds aim to mitigate the
impact of credit risk events (such as downgrades) and ensure that liquidity issues are
handled in a way that protects investors' interests, even during times of market stress. These
measures help ensure that the mutual fund’s portfolio remains well-managed and stable during
periods of volatility, providing some protection to investors from forced asset sales and sharp
declines in NAV.
Key Concept of Segregated Portfolio
A segregated portfolio helps protect investors by isolating the negative impact of a
credit event, such as a credit downgrade or default in a debt instrument, while still
allowing the scheme to continue operating with the unaffected portion of the
portfolio.
•Main Portfolio: The remaining part of the portfolio that is unaffected by the credit
event.
•Segregated Portfolio: The specific portion that contains the affected security (due to
credit event), segregated from the main portfolio.
How the Segregated Portfolio Works
In December 2018, SEBI (Securities and Exchange Board of India) allowed mutual
funds to create segregated portfolios in case a credit event occurs at the issuer level
(for example, a downgrade by a credit rating agency like CRISIL). This provision was
designed to address the issue of liquidity risk arising when a credit event impacts the
value of a debt security held by the fund.
Key Features of Segregated Portfolio Creation
[Link] Due to a Credit Event: A segregated portfolio can be created if a debt instrument experiences a
credit event, such as a downgrade by a SEBI-registered credit rating agency or default by the issuer.
[Link] Process:
1. The AMC (Asset Management Company) must obtain approval from the Board of Trustees before
creating a segregated portfolio.
2. The AMC must issue a press release informing investors about the segregated portfolio and must also
ensure that the NAV (Net Asset Value) of both the main portfolio and the segregated portfolio are
disclosed.
[Link] Calculation: After the credit event, the AMC will calculate and disclose separate NAVs for both the main
portfolio and the segregated portfolio.
[Link] Redemption in Segregated Portfolio: Redemption requests cannot be processed for the segregated
portfolio. Investors can only redeem based on the NAV of the main portfolio unless they choose to transfer their
holdings in the segregated portfolio to the stock market, where they may be traded.
[Link] Fees: The AMC can charge only limited fees for managing the segregated portfolio, excluding
investment and advisory fees. Any other expenses are subject to a maximum limit in accordance with the Total
Expense Ratio (TER).
[Link] Subscription in Segregated Portfolio: New investors can only buy units in the main portfolio. The
segregated portfolio is meant to handle existing distressed securities and not to attract fresh capital.
[Link] Recovery: Any legal costs associated with recovering the value of the segregated portfolio's securities
may be charged to the segregated portfolio, but these costs should remain within the approved TER limits.
Example of Segregated Portfolio Creation

Portfolio on the date of credit event

Price Per
Market Value(INR)
Unit
Security Rating Type of security Qty (INR)
8.00 % XYZ Ltd.* (A) CRISIL A- Non-Convertible Debenture 25000 49.552 12,38,800
7.80% AVC Ltd. (B) CRISIL AAA Non-Convertible Debenture 25000 101.021 25,25,525

7.65% UYV Ltd. (C) CRISIL AAA Non-Convertible Debenture 21000 100.022 21,00,462

8.10% MNO Ltd. (D) CRISL A- Non-Convertible Debenture 30000 99.548 29,86,440

Cash and Cash Equivalent (E) 11,50,000

Net Assets (A+B+C+D+E) 1,00,01,227
Unit Capital (no. of units) 10,000
NAV per unit (INR) 1000.1227
*Downgraded security
Example of Segregated Portfolio Creation
Downgrade event date: 30 September 2019
Downgrade Security: 8 percent XYZ ltd. from A- to C
Valuation marked down: 50 percent
Before marked down, the security was valued at Rs.99.105/- per unit.
On the date of credit event i.e., on 30 September 2019, NCD of 8 percent XYZ Ltd will be moved to a segregated
portfolio.
Main portfolio as on 30th September
2019
Price PerUnit
(INR) Market
Rating Type of security Qty Value(INR)
Security
7.80% AVC Ltd. (B) CRISIL AAA Non-Convertible Debenture 25,000 101.021 25,25,525
7.65% UYV Ltd. (C) CRISIL AAA Non-Convertible Debenture 21,000 100.022 21,00,462
8.10% MNO Ltd. (D) CRISL A- Non-Convertible Debenture 30,000 99.548 29,86,440
Cash and Cash Equivalent (E) 11,50,000
Net Assets (B+C+D+E) 87,62,427
Unit Capital (no. of units) 10,000
NAV per unit (INR) 876.2427
After the Credit Event (Creation of Segregated Portfolio):
Segregated Portfolio as on 30th September 2019
8.00 % XYZ Ltd.# (A) CRISIL C Non-Convertible 25,000 49.552 12,38,800
Debenture
Net Assets (A only since this
comprises of only this security) 12,38,800
Unit Capital (no. of units) 10,000
NAV per unit (INR) 123.88

This security was marked down by 50 percent on the date of credit event.

Total Portfolio value after creation of segregated portfolio

Total Value
Particular Main Portfolio Segregated Portfolio (INR lakhs)
Number of Units 10,000 10,000
Total Value 87,62,427 1,238,800 1,00,01,227
NAV per unit (INR) 876.2427 123.88 1000.1227
Risks Associated with Segregated Portfolios
[Link]: Investors holding units in the segregated portfolio may find it difficult to
liquidate their holdings until the distressed securities are recovered or sold. This
could result in prolonged illiquidity.
[Link] Zero Value: The securities in the segregated portfolio may not recover any
value, or their recovery might take a long time, meaning the NAV of the segregated
portfolio could remain very low or even become zero.
[Link] Market Liquidity: While the units of the segregated portfolio can be listed on
a stock exchange to allow for trading, there may be limited market liquidity, meaning
that investors may not find buyers for their units easily. Additionally, the price of these
units could be significantly lower than the NAV.
Risk Mitigation in Mutual Fund Investments
•For Equity Investments: A long-term holding period helps mitigate market volatility. Historical
data shows that holding equities over longer periods (e.g., 5-10 years) generally reduces the risk of
negative returns, as market cycles tend to balance out over time.
•For Debt Investments: The credit risk can be assessed based on the credit rating of the
securities in the portfolio. Government securities or high-rated corporate bonds offer relatively
lower risk. For interest rate risk, aligning the holding period with the maturity of the portfolio is a
good strategy. For example, holding a bond fund for a period that matches the fund’s average
maturity can help reduce the impact of interest rate fluctuations.
Conclusion
The segregated portfolio or side-pocketing is a crucial tool that helps protect mutual fund investors
from the risks associated with credit events. By isolating distressed securities in a separate portfolio,
investors are shielded from the impact of their devaluation, while still allowing the main portfolio to function
normally. However, it comes with the risk of illiquidity and the possibility of no recovery of value from the
affected securities.
For risk mitigation, mutual fund investors should consider their investment horizon, risk tolerance, and
the quality of the securities in their portfolio, especially when investing in debt funds.
 Sample Questions
1. Government securities can be considered to be completely risk-free from defaults. State whetherTrue or False.
a. True
b. False
2. Unsystematic risk can be reduced through diversification. State whether True or False.
a. True
b. False
3. Which of the following type of analysis tracks the price and volume data related totrading in the security?
a. Quantitative analysis
b. Fundamental analysis
c. Technical analysis
d. Situation analysis
4. An investor invested in scheme A when the scheme’s NAV was Rs. 120 per unit. The investor redeemed the
investments at the NAV of Rs. 135. Calculate the simple return.
a. 10.00 percent
b. 11.11 percent
c. 12.50 percent
d. 15.00 percent
5. Which of the following is a measure of fluctuation in periodic returns in an equity mutual fund scheme?
a. Variance
b. Sharpe ratio
c. Modified duration
d. Jensen’s Alpha