MINOR PROJECT REPORT

On

Mutual funds:
A Trade-off Between Risk And Return

In partial fulfilment of the requirement for the degree of

Master of Business Administration (International Business)

Project Supervisor: Submitted By:

Dr. Ashish Bajpayi Neha Sinha
Professor Roll No: 14382MA025
FMS-BHU Enrolment No: 364048
Batch: 2014-16

Faculty of Management Studies

Banaras Hindu University
DECLARATION

I, the undersigned, solemnly declare that the report of the project work entitled
Mutual Funds: A Trade-off between Risk and Return is based on my own
observations and analysis during the course of study under the supervision of
DR. Ashish Bajpai.

I assert that the statements made and the conclusions drawn are an outcome of
the project work. I further declare, to the best of my knowledge and belief, that
the project report does not contain any part of any work which has been
submitted for the award of any other degree/diploma/certificate in this
University or any other University.

NEHA SINHA
(Signature of the candidate)
CERTIFICATE BY GUIDE/SUPERVISOR

This is to certify that the project report entitled Mutual Funds: A Trade-off
between Risk and Return, carried out by Neha Sinha bearing Roll no. 23 as a
part of the award of Degree in Master of Business Administration (International
Business) - II semester of Faculty of Management Studies, embodies the
bonafide work done by her, under my supervision.

I also declare that this project report is an outcome of the candidates individual
efforts and no part of this has been published earlier or been submitted as a
project by her for any other degree or diploma for any Institute or University.

Date: DR. ASHISH BAJPAI

(Signature of Mentor)
ACKNOWLEDGEMENT

The satisfaction, which accompanies the successful completion of the project, is

incomplete without the mention of a few names. I take this opportunity to
acknowledge the efforts of many individuals who helped and supported me at
critical junctures during the completion of this project.

I would like to thank my mentor, DR. ASHISH BAJPAI, who gave me an

opportunity to do this project under his able guidance. It is with the help of his
valuable suggestions, guidance and encouragement, that I was able to complete
this report.

NEHA SINHA

ROLL NO-23

MBA IB- II
EXECUTIVE SUMMARY

This paper is the result of Descriptive study of Mutual Funds in India. A mutual
Fund is a trust that pools the savings of a number of investors who share a
common financial goal. It throws the light on how Mutual Funds really work,
how much risk involved in it and how they diversify themselves. Investing
involves risk of loss of principal and is more concerned on the return on
investment. This total risk, measured by standard deviation, can be divided into
two parts; Unsystematic risk and Systematic risk. Unsystematic risk is also
called diversifiable risk. Systematic risk may be called as non-diversifiable risk,
unavoidable risk or market risk and can be measured by Beta.

The main objective of the study is to give investors a basic idea of investing into
the mutual funds and encourage them to invest in those areas where they can
maximize the return on capital.

The Indian capital market has been increasing tremendously during last few
years. With the reforms of economy, reforms of industrial policy, reforms of
public sector and reforms of financial sector, the economy has been opened up
and many developments have been taking place in the Indian money market and
capital market. In order to help the small investors, mutual fund industry has
come to occupy an important place. This study helps me to understand how the
companies diversify themselves in different sectors and in different companies
to maximize the return and to maximize the risk involved in it.
TABLE OF CONTENTS:

CONTENTS PAGE
NO.
List of figures
List of tables
1.-Introduction

1.1 Overview

1.2 Objectives of the paper

1.3 Methodology

1.4 Literature review

2.-Conceptual analysis of Mutual Funds

2.1 understanding Mutual Fund

2.2 Types of Mutual Funds

2.3 Accounting and valuation(Portfolio analysis tools)

3.-Theoritical aspects of Risk and Return

3.1 Drivers of Return in a scheme

3.2 Risk available in Equity, Debt and Balanced funds

3.3 Measures of Returns

 CHAPTER-1

INTRODUCTION
 INTRODUCTION:

1.1 OVERVIEW

Prudent investing requires information of key financial concepts and an

understanding of ones investment profile and how these works together to
affect investing decisions and results. Savings and investing are often used
interchangeably. However, there are differences between the two. Saving refers
to funds kept for making specific purchases in the relatively near future (usually
three years or less) and for emergencies. Preservations of the principal and
liquidity of the funds are essential aspects of savings. Consequently, savings
generally yield a low rate of return and do not maintain purchasing power.
Investing on the other hand, focuses on increasing net worth and achieving
long-term financial goals. Investing involves risk and is to be considered only
after ones had an adequate savings and have done proper risk management. In
short, investing is more concerned on the return on investment, while saving is
on the return of capital. All investments involve some element of risk because
the future value of an investment is uncertain.

Risk is the possibility that the actual return on an investment will vary from the
anticipated return or that the initial principal will decline in value. It implies the
possibility of loss in an investment.

Mutual Fund is a fund managed by an investment company with the financial

objective of generating high rate of returns. It is an investment vehicle managed
by finance professionals that raise capital by selling shares (called units) in a
chosen and balanced set of securities to the public.

A mutual fund is a type of investment fund. An investment fund is a collection

of investments, such as bonds, stocks or other funds. Unlike most other types of
investment funds, mutual funds are open-ended, which means as more people
invest, the fund issues new units or shares. A mutual fund typically focuses on
specific types of investments. For example, a fund may invest mainly in
government bonds, stocks from a large companies or stocks from certain
countries. Some funds may invest in a mix of stocks and bonds, or other mutual
funds. These investment management companies collect money from investors
and invest that money in different Stocks, Bonds and other financial securities
in a diversified manner. Before investing they carry out thorough research and
detailed analysis on the market conditions and market trends of stock and bond
prices. These things help the fund managers to separate properly in the right
direction.

The investors, who invest their money in the Mutual Fund of any Investment
Management Company, receive an Equity Position in that particular mutual
fund. When after certain period of time, whether long term or short term, the
investors sell the shares of the mutual Fund, they receive the return according to
the market conditions. The interests of the investors are protected by the SEBI,
Which acts as a watchdog. Mutual funds are governed by the SEBI (Mutual
funds) regulations, 1993.

From its inception the growth of mutual funds is very slow and it took really
long years to evolve the modern day mutual funds. Mutual Funds emerged for
the first time in Netherlands in the18th century and then got introduced to
Switzerland, Scotland and then to United States in the 19th century. The main
motive behind mutual fund investments is to deliver a form of diversified
investment solution. Over the years the idea developed and people received
more and more choices of diversified investment portfolio through the mutual
funds. In India, the mutual fund concept emerged in 1960. The credit goes to
UTI for introducing the first mutual fund in India. Monetary Funds benefited a
lot from the mutual funds. Earlier investors used to invest directly in the stock
market and many times suffered from loss due to wrong speculation. But with
the coming up of mutual funds, which were handled by efficient fund managers,
the investment risks were lowered by a great extent.

FIGURE: Concept of Mutual Fund (Procedure):

Historical Aspect:

Mutual fund firstly was established in 1822 in the form of Society General De
Belguique. It mainly gains the progress in Switzerland & little in franc and
Germany in its initial days. The first investment trust The foreign and colonial
govt. trust Was founded in London in 1868.

Indian Scenario of Mutual Fund:

The origin of mutual fund industry in India is with the introduction of the
concept of by UTI in the year 1963. Through the growth was slow, but it
accelerated from the year 1987 when non-UTI players entered in industry. The
mutual fund industry goes through four phases:-

First phase 1964-87 (Establishment of UTI).

 Second phase 1987-93 (Entry of public sector funds).
Third phase 1993-2003 (Entry of a private sector funds).
Fourth phase since feb.2003 (Bifurcated of UTI).

In the first phase, UTI was established in 1963 by an act of parliament. In 1978
it was delinked from RBI & the IDBI took over the control of UTI.

In second phase, SBI entered as first non-UTI mutual fund provider then it was
followed by can bank (Dec. 87), PNB (Aug 89) & LIC in 1989.

In third phase, the private sector entered in it. The Erstwhile Kothari pioneer
(now merged with Franklin Templeton) was first registered in July 1993 in
mutual fund. In revised registration of SEBI I n 1993 the industry functions
under SEBI.

And the fourth phase had bitter experience for UTI. It was bifurcated into two
separate entities. One is the specified under taking of UTI with AUM of
29,835cr. The second is UTI mutual fund ltd. Sponsored by SBI, PNB, BOB
and LIC& it is registered with SEBI.

1.2 OBJECTIVES OF THE PAPER

To study about the benefits available from Mutual Fund investment
To study the types of mutual funds transactions and process.
To study the return adjusted risk associated with mutual funds
investments.

1.4 METHODOLOGY

RESEARCH DESIGN
Research design adopted is descriptive in nature and data obtained is subjected
to qualitative and quantitative analysis.
 SAMPLE DESIGN
Population Companies Listed in BSE
Sample Size 5 companies
Sampling Technique Purposive Sampling Technique
Data Collection Design Secondary Data
Data Collection Tool Annual Reports, Money control
website, AMFI
Data Analysis Tool Ratios ,Tables, Bar Graphs and Pie-
charts

1.4 LITERATURE REVIEW

It is bound to adapt the rich books, journals, periodicals, reports, etc. to measure
with quantity of collections. Lots of books, national and international level
magazines, websites are referred for the study. The previous research studies are
also be used as a guideline in preparing and designing the research work.
Dr. N.K. Sathya Pal Sharma in his Research Article titled Analysis of the risk
and return relationship of equity based Mutual Fund in India published in
the International Journal of Advancements in Research and Technology,
Volume 2, Issue 8, and August-2013. Using CAPM one can calculate the
expected rate of return for a portfolio, given its risk. The objective of the study
is to bring out a comparison between the performance of equity based mutual
funds of public and private sectors in India. So in this paper the first task is to
calculate the risk associated with a mutual fund. This is denoted by BETA in
CAPM. The research article found few things like, the overall analysis finds that
Reliance and UTI have been the best performers, Kotak an average performers
and SBI the worst performer which gave below-expected returns on the risk-
return relationship. It is concluded with the point that, though the market is
subjected to high risk \, by using derivatives the loss can be minimized to an
extent.
 CHAPTER 2
CONCEPT ANALYSIS OF
MUTUAL FUND
2.1 UNDERSTANDING MUTUAL FUND

Mutual Fund is a trust that pools money from a group of investors (sharing
common financial goal) and invest the money thus collected into asset classes
that match the stated investment objectives of a mutual fund scheme generally
form the basis for an investors decision to contribute money to the pool, a
mutual fund cannot deviate from its stated objectives at any point of time.
Every mutual fund is managed by a fund manager, who using his investment
management skills and necessary research works ensures much better return
than what an investor can manage on his own. The capital appreciation and
other incomes earned from these investments are passed on to the investors
(also known as unit holders) in proportion of the units they own. When an
investor subscribes for the units of a mutual fund, he becomes part owner of the
assets of the fund in the same proportion as his contribution amount put up with
the corpus (the total amount of the fund). Mutual fund investor is also known as
a mutual fund shareholder or a unit holder.
Any change in the value of investment made into capital market instruments
(such as shares, debentures, etc.) is reflected in the Net Asset Value (NAV) of
the scheme. NAV of scheme is calculated by dividing the market value of the
schemes assets by the total no of units issued to the investors.
ADVANTAGES OF MUTUAL FUND

1. Diversification
One rule of investing, for both large and small investors, is asset
diversification. Diversification involves the mixing of investments within
a portfolio and is used to manage risk. For example, by choosing to buy
stocks in the retail sector and offsetting them with stocks in the industrial
sector, one can reduce the impact of the performance of any one security
on your entire portfolio. To achieve a truly diversified portfolio, one may
have to buy stocks with different capitalizations from different industries
and bonds with varying maturities from different issuers. For the
individual investor, this can be quite costly.
2. Economies of Scale
 The easiest way to understand economies of scale is by thinking about
volume discounts; in many stores, the more of one product one buy, the
cheaper that product becomes. For example, when one buy a dozen
donuts, the price per donut is usually cheaper than buying a single one.
This also occurs in the purchase and sale of securities. If one buy only
one security at a time, the transaction fees will be relatively large.
3. Divisibility
Many investors don't have the exact sums of money to buy round lots of
securities. One to two hundred dollars is usually not enough to buy a
round lot of a stock, especially after deducting commissions. Investors
can purchase mutual funds in smaller denominations, ranging from $100
to $1,000 minimums. Smaller denominations of mutual funds provide
mutual fund investors the ability to make periodic investments through
monthly purchase plans. So, rather than having to wait until one have
enough money to buy higher-cost investments, one can get in right away
with mutual funds. This provides an additional advantage - liquidity.
4. Liquidity
Another advantage of mutual funds is the ability to get in and out with
relative ease. In general, one is able to sell his mutual funds in a short
period of time without there being much difference between the sale price
and the most current market value.
5. Professional Management
Fund manager undergoes through various research works and has better
investment management skills which ensure higher returns to the investor
than what one can manage on his own.
6. The Bottom Line
As with any investment, there are risks involved in buying mutual funds.
These investment vehicles can experience market fluctuations and
sometimes provide returns below the overall market. Also, the advantages
 gained from mutual funds are not free: many of them carry loads,
annual expense fees and penalties for early withdrawal.
7. Less Risk
Investors acquire a diversified portfolio of securities even with a small
investment in Mutual Fund. The risk in diversified portfolio is lesser than
investing in merely 2 or 3 securities.
8. Low Transaction Costs
Due to the economies of scale, mutual funds pay lesser transaction costs.
These benefits are passed on to the investors.

DISADVANTAGES OF MUTUAL FUNDS

1. Dilution: Although diversification reduces the amount of risk involved in
investing in mutual funds, it can also be a disadvantage due to dilution. For
example, if a single security held by a mutual fund doubles in value, the
mutual fund itself would not double in value because that security is only
one small part of the fund's holdings. By holding a large number of different
investments, mutual funds tend to do neither exceptionally well nor
exceptionally poorly.
2. Poor Performance: Returns on a mutual fund are by no means guaranteed.
In fact, on average, around 75% of all mutual funds fail to beat the major
market indexes, like the S&P 500, and a growing number of critics now
question whether or not professional money managers have better stock-
picking capabilities than the average investor.
3. Loss of Control: The managers of mutual funds make all of the decisions
about which securities to buy and sell and when to do so. This can make it
difficult for one when trying to manage his portfolio. For example, the tax
consequences of a decision by the manager to buy or sell an asset at a certain
time might not be optimal for you. One also should remember that he/she is
trusting someone else with his/her money when one invest in a mutual fund.
4. Trading Limitations: Although mutual funds are highly liquid in general,
most mutual funds (called open-ended funds) cannot be bought or sold in the
middle of the trading day. One can only buy and sell them at the end of the
day, after they've calculated the current value of their holdings.
5. Too Many Choices: The advantages and disadvantages listed above apply to
mutual funds in general. However, there are over 10,000 mutual funds, and
these funds vary greatly according to investment objective, size, strategy,
and style. Mutual funds are available for virtually every investment strategy
(e.g. value, growth), every sector (e.g. biotech, internet), and every country
or region of the world. So even the process of selecting a fund can be
tedious.

2.2 TYPES OF MUTUAL FUNDS

Based on the maturity period
1. Open-ended Fund
An open-ended fund is a fund that is available for subscription and can be
redeemed on a continuous basis. It is available for subscription
throughout the year and investors can buy and sell units at NAV related
prices. These funds do not have a fixed maturity date. The key feature of
an open-ended fund is liquidity.
2. Close-ended Fund
A close-ended fund is a fund that has a defined maturity period, e.g. 3-6
years. These funds are open for subscription for a specified period at the
time of initial launch. These funds are listed on a recognized stock
exchange.
3. Interval Funds
Interval funds combine the features of open-ended and close-ended funds.
These funds may trade on stock exchanges and are open for sale or
redemption at predetermined intervals on the prevailing NAV.
 Based on investment objectives
1. Equity/Growth Funds
Equity/Growth funds invest a major part of its corpus in stocks and the
investment objective of these funds is long-term capital growth. When
you buy shares of an equity mutual fund, you effectively become a part
owner of each of the securities in your funds portfolio. Equity funds
invest minimum 65% of its corpus in equity and equity related securities.
These funds may invest in a wide range of industries or focus on one or
more industry sectors. These types of funds are suitable for investors with
a long-term outlook and higher risk appetite.
2. Debt/Income Funds
Debt/ Income funds generally invest in securities such as bonds,
corporate debentures, government securities (gilts) and money market
instruments. These funds invest minimum 65% of its corpus in fixed
income securities. By investing in debt instruments, these funds provide
low risk and stable income to investors with preservation of capital.
These funds tend to be less volatile than equity funds and produce regular
income. These funds are suitable for investors whose main objective is
safety of capital with moderate growth.
3. Balanced Funds
Balanced funds invest in both equities and fixed income instruments in
line with the pre-determined investment objective of the scheme. These
funds provide both stability of returns and capital appreciation to
investors. These funds with equal allocation to equities and fixed income
securities are ideal for investors looking for a combination of income and
moderate growth. They generally have an investment pattern of investing
around 60% in Equity and 40% in Debt instruments.
4. Money Market/Liquid Funds
 Money market/ Liquid funds invest in safer short-term instruments such
as Treasury Bills, Certificates of Deposit and Commercial Paper for a
period of less than 91 days. The aim of Money Market /Liquid Funds is to
provide easy liquidity, preservation of capital and moderate income.
These funds are ideal for corporate and individual investors looking for
moderate returns on their surplus funds.
5. Gilt Funds
Gilt funds invest exclusively in government securities. Although these
funds carry no credit risk, they are associated with interest rate risk.
These funds are safer as they invest in government securities.

2.3 ACCOUNTING AND VALUATION (PORTFOLIO ANALYSIS

TOOLS)

Risk Analysis:
Risk in investment exists because of the inability to make perfect or accurate
forecasts. Risk in investment is defined as the variability that is likely to occur
in future cash flows from an investment. The greater variability of these cash
flows indicates greater risk.
Variance or standard deviation measures the deviation about expected cash
flows of each of the possible cash flows and is known as the absolute measure
of risk; while co-efficient of variation is a relative measure of risk.
For carrying out risk analysis, following methods are used:-
Payback [How long will it take to recover the investment]
Certainty equivalent [The amount that will certainly come to you]
Risk adjusted discount rate [Present value i.e. PV of future inflows with
discount rate]
However in practice, sensitivity analysis and conservative forecast techniques
being simpler and easier to handle, are used for risk analysis. Sensitivity
analysis [a variation of break-even analysis] allows estimating the impact of
change in the behaviour of critical variables on the investment cash flows.
Conservative forecasts include using short payback or higher discount rates for
discounting cash flows.

Types of Risk:

Unfortunately, the concept of risk is not a simple concept in finance. There are
many different types of risk identified and some types are relatively more or
relatively less important in different situations and applications. In some
theoretical models of economic or financial processes, for example, some types
of risks or even all risk may be entirely eliminated. For the practitioner
operating in the real world, however, risk can never be entirely eliminated. It is
ever-present and must be identified and dealt with. In the study of finance, there
are a number of different types of risk has been identified. It is important to
remember, however, that all types of risks exhibit the same positive risk-return
relationship.
A. Systematic Risk Vs Unsystematic Risk
There is one more way to classify financial risk is risk will impact whole
economy or particular company or a sector.
Systematic Risk It is also known as market risk or economic risk or non-
diversifiable risk & it impacts full economy or share market. Lets say if interest
rate will increase whole economy will slow down & there is no way to hide
from this impact. As such there is no way to reduce systematic risk other than
investing your money in some other country. Beta can be helpful in
understanding this.
Unsystematic Risk It affects a small part of economy or sometime even
single company. Bad management or low demand in some particular sector will
impact a single company or a single sector such risks can be reduced by
diversifying once investments. So this is also called Diversifiable Risk.
Systematic risk:

1. Interest Rate Risk:

The uncertainty associated with the effects of changes in market interest rates.
There are two types of interest rate risk identified; price risk and reinvestment
rate risk. The price risk is sometimes referred to as maturity risk since the
greater the maturity of an investment, the greater the change in price for a given
change in interest rates. Both types of interest rate risks are important in
investments, corporate financial planning, and banking.
a) Price Risk: The uncertainty associated with potential changes in

the price of an asset caused by changes in interest rate levels and

rates of return in the economy. This risk occurs because changes in
interest rates affect changes in discount rates which, in turn, affect
the present value of future cash flows. The relationship is an
inverse relationship. If interest rates (and discount rates) rise, prices
fall. The reverse is also true.
Interest Rates Present Value
Interest Rates Present Value
Since interest rates directly affect discount rates and present values of future
cash flows represent underlying economic value, we have the following
relationships.
Discount Rates Economic Values
Discount Rates Economic Values

b) Reinvestment Rate Risk: The uncertainty associated with the

impact that changing interest rates have on available rates of return
when reinvesting cash flows received from an earlier investment. It
is a direct or positive relationship.
Interest Rates Reinvestment Rates
 Interest Rates Reinvestment Rates

2. Market risk
This is the risk that the value of a portfolio, either an investment portfolio
or a trading portfolio, will decrease due to the change in market risk
factors. The four standard market risk factors are stock prices, interest
rates, foreign exchange rates, and commodity prices:
I. Equity risk is the risk that stock prices in general (not related to a
particular company or industry) or the implied volatility will change.
II. Interest rate risk is the risk that interest rates or the implied volatility
will change.
III. Currency risk is the risk that foreign exchange rates or the implied
volatility will change, which affects, for example, the value of an asset
held in that currency.
IV. Commodity risk is the risk that commodity prices (e.g. corn, copper,
crude oil) or implied volatility will change.

3. Inflation Risk (Purchasing Power Risk)

Inflation risk is the loss of purchasing power due to the effects of inflation.
When inflation is present, the currency loses its value due to the rising price
level in the economy. The higher the inflation rate, the faster the money loses its
value.

Unsystematic risk
1. Business risk
The uncertainty associated with a business firm's operating environment and
reflected in the variability of earnings before interest and taxes (EBIT). Since
this earnings measure has not had financing expenses removed, it reflects the
risk associated with business operations rather than methods of debt financing.
This risk is often discussed in General Business Management courses.
2. Financial risk

The uncertainty brought about by the choice of a firms financing methods and
reflected in the variability of earnings before taxes (EBT), a measure of
earnings that has been adjusted for and is influenced by the cost of debt
financing. This risk is often discussed within the context of the Capital Structure
topics.
Total Risk
While there are many different types of specific risk, we said earlier that in the
most general sense, risk is the possibility of experiencing an outcome that is
different from what is expected. If we focus on this definition of risk, we can
define what is referred to as total risk. In financial terms, this total risk reflects
the variability of returns from some type of financial investment.
Measures of Total Risk:
The standard deviation is often referred to as a "measure of total risk" because it
captures the variation of possible outcomes about the expected value (or mean).
In financial asset pricing theory the Capital Asset Pricing Model (CAPM)
separates this "total risk" into two different types of risk (systematic risk and
unsystematic risk). Another related measure of total risk is the "coefficient of
variation" which is calculated as the standard deviation divided by the expected
value. It is often referred to as a scaled measure of total risk or a relative
measure of total risk.

Measurement of risks
Statistical measures, which are historical predictor of investment risk and
volatility and major components in Modern Portfolio Theory (MPT). MPT is a
standard financial and academic methodology for assessing the performance of
a stock or a stock fund compared to its benchmark index.
There are five principal risk measures:
Alpha: Measures risk relative to the market or benchmark index
Beta: Measures volatility or systemic risk compared to the market or the
benchmark index
R-Squared: Measures the percentage of an investment's movement that
are attributable to movements in its benchmark index
Standard Deviation: Measures how much return on an investment is
deviating from the expected normal or average returns
Sharpe Ratio: An indicator of whether an investment's return is due to
smart investing decisions or a result of excess risk.
Each risk measure is unique in how it measures risk. When comparing two or
more potential investments, an investor should always compare the same risk
measures to each different potential investment to get a relative performance.

Definition of 'Beta'
A measure of the volatility, or systematic risk of a security or a portfolio in
comparison to the market as a whole. Beta is used in the capital asset pricing
model (CAPM), a model that calculates the expected return of an asset based on
its beta and expected market returns. Also known as "beta coefficient".
Beta is calculated using regression analysis; beta can be treated as the tendency
of a security's returns to respond to swings in the market. A beta of 1 indicates
that the security's price will move with the market. If beta is less than 1 means
that the security will be less volatile than the market. A beta of greater than 1
indicates that the security's price will be more volatile than the market. For
example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the
market.
Many utilities stocks have a beta of less than 1. Conversely, most high-tech
Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a
higher rate of return, but also posing more risk.
Definition of 'Alpha'
1. A measure of performance on a risk-adjusted basis. Alpha takes the volatility
(price risk) of a mutual fund and compares its risk-adjusted performance to a
benchmark index. The excess return of the fund relative to the return of the
benchmark index is a fund's alpha.
2. The abnormal rate of return on a security or portfolio in excess of what would
be predicted by an equilibrium model like the capital asset pricing model
(CAPM).
3. Alpha is one of five technical risk ratios; the others are beta, standard
deviation, R-squared, and the Sharpe ratio. These are all statistical
measurements used in modern portfolio theory (MPT). All of these indicators
are intended to help investors determine the risk-reward profile of a mutual
fund. Simply stated, alpha is often considered to represent the value that a
portfolio manager adds to or subtracts from a fund's return.
A positive alpha of 1.0 means the fund has outperformed its benchmark index
by 1%.
Correspondingly, a similar negative alpha would indicate an underperformance
of 1%.
4. If a CAPM analysis estimates that a portfolio should earn 10% based on the
risk of the portfolio but the portfolio actually earns 15%, the portfolio's alpha
would be 5%. This 5% is the excess return over what was predicted in the
CAPM model.

Definition of 'Standard Deviation'

1. A measure of the dispersion of a set of data from its mean. The more spread
apart the data, the higher the deviation. Standard deviation is calculated as the
square root of variance.
2. In finance, standard deviation is applied to the annual rate of return of an
investment to measure the investment's volatility. Standard deviation is also
known as historical volatility and is used by investors as a gauge for the amount
of expected volatility.
Standard deviation is a statistical measurement that sheds light on historical
volatility. For example, a volatile stock will have a high standard deviation
while the deviation of a stable blue chip stock will be lower. A large dispersion
tells us how much the return on the fund is deviating from the expected normal
returns.
Definition of 'R-Squared'
It is a statistical measure that represents the percentage of a fund or security's
movements that can be explained by movements in a benchmark index. For
fixed-income securities, the benchmark is the T-bill. For equities, the
benchmark is the S&P 500.
R-squared values range from 0 to 100. An R-squared of 100 means that all
movements of a security are completely explained by movements in the index.
A high R-squared (between 85 and 100) indicates the fund's performance
patterns have been in line with the index. A fund with a low R-squared (70 or
less) doesn't act much like the index.
A higher R-squared value will indicate a more useful beta figure. For example,
if a fund has an R-squared value of close to 100 but has a beta below 1, it is
most likely offering higher risk-adjusted returns. A low R-squared means you
should ignore the beta.
When most people think of investments they think of stocks or mutual funds.
An investment is more than this. An investment requires one to set aside an
amount today with the expectation of receiving a larger sum in the future.
Risk and return trade off:
Investors make investment with the objective of earning some tangible benefit.
This benefit in financial terminology is termed as return and is a reward for
taking a specified amount of risk.
Risk is defined as the possibility of the actual return being different from the
expected return on an investment over the period of investment. Low risk leads
to low returns. For instance, in case of government securities, while the rate of
return is low, the risk of defaulting is also low. High risks lead to higher
potential returns, but may also lead to higher losses. Long-term returns on
stocks are much higher than the returns on Government securities, but the risk
of losing money is also higher.
Rate of return on an investment can be calculated using the following formula-
Return = (Amount received - Amount invested) / Amount invested
The risk and return trade off says that the potential rises with an increase in risk.
An investor must decide a balance between the desire for the lowest possible
risk and highest possible return.

Risk-Return relationship
By now it is understood that even with the most conservative investments, one
faces some element of risk. However, not investing money is also risky. For
example, putting money under the mattress invites the risk of theft and the loss
in purchasing power if prices of goods and services rise in the economy. When
one recognizes the different levels of risk for each type of investment asset,
he/she can better manage the total risk in his/her investment portfolio.
A direct correlation exists between risk and return and is illustrated in Figure.
The greater the risk, the greater is the potential return. However, investing in
securities with the greatest return and, therefore, the greatest risk can lead to
financial ruin if everything does not go according to plan.
A wide range of returns is associated with each type of security. For example,
the many types of common stocks, such as blue-chip stocks, growth stocks,
income stocks, and speculative stocks, react differently. Income stocks
generally are lower risk and offer returns mainly in the form of dividends,
whereas growth stocks are riskier and usually offer higher returns in the form of
capital gains. Similarly, a broad range of risks and returns can be found for the
different types of bonds. One should be aware of this broad range of risks and
returns for the different types of securities so that he/she can find an acceptable
level of risk.
OBJECTIVES:

To study about the benefits available from Mutual Fund investment

To study the types of mutual funds transactions and process.
To study the return adjusted risk associated with mutual funds
investments.
To examine the different schemes and methods to select a better scheme
of an AMC.