Description
This is a PPT explaining the mutual funds.
Mutual Fund
A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. The money collected is then invested in capital market instruments such as shares, debentures and other securities based on their objective. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by the investors.
Structure of a MF
Advantages
• • • • • • • • • • • Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated
Disadvantages
• • • • No control over costs Management risk Managing a portfolio of funds Restrictive gains
Types of MF
• • By Structure 1. Open Ended Schemes 2. Close Ended Schemes 3. Interval Schemes By Investment Objectives 1. Growth/Equity Oriented Schemes • Index • Diversified • Sectoral/Thematic • ELSS 2. Income/Debt Oriented Schemes • Income • MIP • STP • FMP 3. Balanced Schemes 4. Money Market Schemes 5. Others: ETF, FoF
Equity Portfolio Management
Instruments
• • • • Ordinary Shares Preference Shares Equity Warrants Convertible Debentures
Classification of Stocks
1. Based on Mkt Cap: Small, Mid and Large 2. Based on anticipated earnings: – Cyclical – Growth – Value
Fund Management Styles
1. Actively Managed Funds
– Growth Investment Style – Value Investment Style
2. Passively Managed Funds Risk Management (Hedging)
– Futures Contract – Options Contract
Debt Portfolio Management
Instruments
• • • • • • • • Certificate of Deposit (CD) Commercial Paper (CP) Corporate Debentures Floating Rate Bonds PSU Bonds Call/Notice Money G-Sec T-Bills
Fund Management Styles
• • • • Buy and Hold Duration Management Credit Selection Prepayment Prediction
Risks associated with MF
• • • • • • • • Market Risk Inflation Risk Credit or Default Risk Interest Rate Risk Call Risk Currency Risk Liquidity Risk Govt. Policy/External Environmental Risk
Tools for Portfolio Risk Analysis
1. Beta
Systematic or Market Risk Unsystematic or Unique Risk
• Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk.
ra = Return on asset rp = Return on portfolio
2. R-Squared • R-Squared is a statistical measure that represents the percentage of a fund movement that can be explained by movements in a benchmark index. • The value of R- squared ranges from 0 to 1. A high R- squared (more than 0.80) indicates that beta can be used as a reliable measure to analyze the performance of a fund. • Beta should be ignored when the r-squared is low as it indicates that the fund performance is affected by factors other than the markets.
3. Standard Deviation • Determines the volatility of a fund • Compare one standard deviation with the others among a fund's peers • High SD not necessarily a bad thing
4. Portfolio Turnover
• Measure of how frequently assets within a fund are bought and sold by the managers • Low turnover tends to indicate a longer-term investment orientation, high turnover the reverse • Influence on two aspects of investment performance: (1) the cost of managing the fund and (2) the realization of capital gains total amount of new securities purchased or the amount of securities sold over a particular period total net asset value (NAV) of the fund
5. Expense Ratio
• Expense ratio is a measure of what it costs an investment company to operate a mutual fund • Types of expenses – Fee paid to a fund's investment manager/advisor – Recordkeeping – Custodial services – Taxes – Legal expenses – Acounting and auditing fees • Fund's trading activity, the buying and selling of portfolio securities, is not included in the calculation of the expense ratio
6. Sharpe Ratio • Sharpe ratio is the returns generated over the risk free rate, per unit of risk • Fund with low returns but with a relatively mild standard deviation can end up with a high Sharpe ratio. • Higher the ratio better it is
7. Sortino Ratio • A variation of the Sharpe ratio which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility • It is thus a measure of risk-adjusted returns that treats risk more realistically than the Sharpe ratio
8. Treynor Ratio
• Risk-adjusted measure of return based on systematic risk • High and positive Treynor's Index shows a superior riskadjusted performance of a fund • Low and negative Treynor's Index is not necessarily a bad performance • Well diversified portfolios, the Sharpe and Treynor ratios will rank such funds in same order • Poorly diversified fund that ranks higher on Treynor measure, compared with another fund that is highly diversified, will rank lower on Sharpe Measure
9. Jensen/Alpha • Measures the excess returns generated over the expected returns for a given risk beta • Alpha is only as good as its beta, if the benchmark isn't appropriate to a fund in deriving its beta, then alpha, too, will be imprecise Alpha= R-Rf + Bi (Rm - Rf)
10. Fama/Net Selectivity • Represents the stock selection skill of the fund manager • Excess return over and above the return required to compensate for the total risk taken by the fund manager Fama = R – [Rf + Si/Sm*(Rm - Rf)] • Sharpe measure and Fama model consider the entire risk associated with fund are more suitable for small investors, as the ordinary investor lacks the necessary skill and resources to diversify.
Evaluating Debt Portfolios
• • • • • • Fund portfolio Credit Rating Profile Average maturity of the portfolio Duration of portfolio Yield Entry-Exit Loads
Investment Plans in MF
• • • • Growth Plan Dividend Payout Plan Dividend Reinvestment Plan Bonus Plan
Investment Strategies
• Systematic Investment Plan (SIP) • Systematic Transfer Plan (STP) • Systematic Withdrawal Plan (SWP)
doc_743193970.pptx
This is a PPT explaining the mutual funds.
Mutual Fund
A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. The money collected is then invested in capital market instruments such as shares, debentures and other securities based on their objective. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by the investors.
Structure of a MF
Advantages
• • • • • • • • • • • Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated
Disadvantages
• • • • No control over costs Management risk Managing a portfolio of funds Restrictive gains
Types of MF
• • By Structure 1. Open Ended Schemes 2. Close Ended Schemes 3. Interval Schemes By Investment Objectives 1. Growth/Equity Oriented Schemes • Index • Diversified • Sectoral/Thematic • ELSS 2. Income/Debt Oriented Schemes • Income • MIP • STP • FMP 3. Balanced Schemes 4. Money Market Schemes 5. Others: ETF, FoF
Equity Portfolio Management
Instruments
• • • • Ordinary Shares Preference Shares Equity Warrants Convertible Debentures
Classification of Stocks
1. Based on Mkt Cap: Small, Mid and Large 2. Based on anticipated earnings: – Cyclical – Growth – Value
Fund Management Styles
1. Actively Managed Funds
– Growth Investment Style – Value Investment Style
2. Passively Managed Funds Risk Management (Hedging)
– Futures Contract – Options Contract
Debt Portfolio Management
Instruments
• • • • • • • • Certificate of Deposit (CD) Commercial Paper (CP) Corporate Debentures Floating Rate Bonds PSU Bonds Call/Notice Money G-Sec T-Bills
Fund Management Styles
• • • • Buy and Hold Duration Management Credit Selection Prepayment Prediction
Risks associated with MF
• • • • • • • • Market Risk Inflation Risk Credit or Default Risk Interest Rate Risk Call Risk Currency Risk Liquidity Risk Govt. Policy/External Environmental Risk
Tools for Portfolio Risk Analysis
1. Beta
Systematic or Market Risk Unsystematic or Unique Risk
• Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk.
ra = Return on asset rp = Return on portfolio
2. R-Squared • R-Squared is a statistical measure that represents the percentage of a fund movement that can be explained by movements in a benchmark index. • The value of R- squared ranges from 0 to 1. A high R- squared (more than 0.80) indicates that beta can be used as a reliable measure to analyze the performance of a fund. • Beta should be ignored when the r-squared is low as it indicates that the fund performance is affected by factors other than the markets.
3. Standard Deviation • Determines the volatility of a fund • Compare one standard deviation with the others among a fund's peers • High SD not necessarily a bad thing
4. Portfolio Turnover
• Measure of how frequently assets within a fund are bought and sold by the managers • Low turnover tends to indicate a longer-term investment orientation, high turnover the reverse • Influence on two aspects of investment performance: (1) the cost of managing the fund and (2) the realization of capital gains total amount of new securities purchased or the amount of securities sold over a particular period total net asset value (NAV) of the fund
5. Expense Ratio
• Expense ratio is a measure of what it costs an investment company to operate a mutual fund • Types of expenses – Fee paid to a fund's investment manager/advisor – Recordkeeping – Custodial services – Taxes – Legal expenses – Acounting and auditing fees • Fund's trading activity, the buying and selling of portfolio securities, is not included in the calculation of the expense ratio
6. Sharpe Ratio • Sharpe ratio is the returns generated over the risk free rate, per unit of risk • Fund with low returns but with a relatively mild standard deviation can end up with a high Sharpe ratio. • Higher the ratio better it is
7. Sortino Ratio • A variation of the Sharpe ratio which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility • It is thus a measure of risk-adjusted returns that treats risk more realistically than the Sharpe ratio
8. Treynor Ratio
• Risk-adjusted measure of return based on systematic risk • High and positive Treynor's Index shows a superior riskadjusted performance of a fund • Low and negative Treynor's Index is not necessarily a bad performance • Well diversified portfolios, the Sharpe and Treynor ratios will rank such funds in same order • Poorly diversified fund that ranks higher on Treynor measure, compared with another fund that is highly diversified, will rank lower on Sharpe Measure
9. Jensen/Alpha • Measures the excess returns generated over the expected returns for a given risk beta • Alpha is only as good as its beta, if the benchmark isn't appropriate to a fund in deriving its beta, then alpha, too, will be imprecise Alpha= R-Rf + Bi (Rm - Rf)
10. Fama/Net Selectivity • Represents the stock selection skill of the fund manager • Excess return over and above the return required to compensate for the total risk taken by the fund manager Fama = R – [Rf + Si/Sm*(Rm - Rf)] • Sharpe measure and Fama model consider the entire risk associated with fund are more suitable for small investors, as the ordinary investor lacks the necessary skill and resources to diversify.
Evaluating Debt Portfolios
• • • • • • Fund portfolio Credit Rating Profile Average maturity of the portfolio Duration of portfolio Yield Entry-Exit Loads
Investment Plans in MF
• • • • Growth Plan Dividend Payout Plan Dividend Reinvestment Plan Bonus Plan
Investment Strategies
• Systematic Investment Plan (SIP) • Systematic Transfer Plan (STP) • Systematic Withdrawal Plan (SWP)
doc_743193970.pptx