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Mf final
1. Mutual Funds & Term Deposits
Definition of a mutual fund…
A mutual fund is a pure intermediary which performs a basic function of buying and selling
securities on behalf of its unit holders, which later can also perform but not as easily, conveniently,
economically and profitably
Definition of a term deposit …
A deposit held at a financial institution that has a fixed term with maturities ranging anywhere from
15 days to a few years. Term deposits are an extremely safe investment and are therefore very
appealing to conservative, low-risk investors.
Benefits of a Mutual Fund How a Mutual Fund works
• Mutual funds are easily affordable
• Managed professionally by an
experienced fund
“fund manager”
• Due to diversification, risk reduces
substantially
• MFs allow liquidity on immediate basis
unlike
PPF or NSCs
2. Types of Mutual Funds & Fixed Deposits
Term
Deposits
Fixed Linked Fixed Recurring
Deposits Deposits Deposits
4. Comparison of Mutual Funds Returns with Fixed Dep
FD Returns: - Had taken the average Fixed Deposit Interest rate offered by Indian Banks, from RBI.
If a investor had invested Rs. 100000 in 2001, in 2010 his money had grown to Rs. 200730.
HDFC GILT Fund Returns:- Portfolio consist of GOI T Bill, Indian Government & State
Government Securities. If a investor had invested Rs. 100000 in 2001, in 2010 his money had grown
to Rs. 191465.
ICICI PRU Income Growth Fund Returns:- Its an open-ended debt fund The major difference
is that this fund don’t merely generate Interest Income but also gain by generating income through
changes in the value of capital. If a investor had invested Rs. 100000 in 2001, in 2010 his money had
grown to Rs. 230609.
• The Standard Deviation of FD is 0.014311, Of GILT FUND is 0.096747 of Income Fund is
0.080957. It is very clear from the data that the FD return in last ten years hadn’t deviated much.
• The Interest Risk is highest in GILT FUND, although the Default Risk is lowest for the GILT
fund.
• The good return of Income fund is because they don’t only generate Interest Income but also
generates Capital Gain by capitalizing on change in Security price.
5. Process of Identifying the Best Performing Fund
Best Performing fund can be identified based on relative performance
among the same category means the portfolio mix should be same (i.e.
equity fund should not be compared with debt fund).
Following are the factor’s to be considered for selecting best performing
fund in a given category :-
1. Superior Return Score: The relative measure of the return and the risk for the
schemes compared to their peer group. It will be calculated for a period of 5
years, with separate one year periods weighted differently with most recent
having the highest weight.
2. Mean Return and Volatility: Mean return is average of daily returns on funds
NAV and the volatility is Standard Deviation of these returns. It will be calculated
for a period of 5 years, with separate one year periods weighted differently with
most recent having the highest weight.
3. Portfolio Concentration Analysis: Concentration measures the risk arising out
of improper diversification. Diversity score is used as the parameter to measure
Industry & Company concentration for Equity securities. In case of Debt industry
concentration is analyzed only for any/over exposure in sensitive sectors based
on rating agency’s reports, individual specific limit will be 10%
4. Liquidity Analysis: It measures the ease with which the portfolio can be
liquidated. For equity we consider average of last 3 month Impact Cost
6. Process of Identifying the Best Performing Fund
5. Asset Quality: It measures the probability of default by a issuer of Debt security
to honour the debt obligation in time. In analysis we penalizes lower rated
security to a higher rated one.
6. Modified Maturity/ Average Maturity: Modified duration/ Average Maturity are
considered across all debt categories except Liquid to capture the Interest rate
risk of portfolio. Lower the value better it is.
7. Downside Risk Probability: DRP measures probability of an investment
getting lower returns than short tenor risk free securities. It is measured by
accessing how many times the funds return fall below the risk free return over
the period of analysis.
8. Asset Size: Considered only for Ultra short term debt and Liquid categories to
take into account the effect of large fund flows on fund performance and ability
of funds to manage such flows optimally. Higher the asset size better it is.
9. Tracking Error: Used only for Index Funds. It is estimation of variability in a
fund performance vis a vis Index that it tracks. Lower the tracking error better it
is.
10. Historic Performance : Captures last years performance. It will be calculated
for a period of 5-10 years, with separate one year periods weighted differently
with most recent having the highest weight.
CRISIL Report on identifying best performing MF