1. The returns and risks in a mutual fund scheme are affected by Asset Class (Equity/Debt), Market Sector, Selection Style and Portfolio Management Strategy.
  2. Equity schemes invest in equity shares of the company hence when market price of shares increases, it leads to an increase in NAV of the scheme. The market price of shares is affected by earnings of the business.
  3. The risks in an equity scheme are that Equity schemes do not give fixed returns and the returns are volatile.
  4. Two main approaches of security analysis are Fundamental Analysis and Technical Analysis. 
  5. A Fundamental Analyst will study Financial Parameters like EPS, PE Ratio, etc.to determine price target of a share.
  6. Under Fundamental Analysis of a security, Quality of Management and Competitive Position of Product and Services will be evaluated by the analyst.
  7. Under Technical Analysis,the analyst checks two things –Past Price behavior of the share over a period of time and Volume of Shares Traded.
  8. Technical analysts study Price Volume Chart to arrive at buy/ hold/ sell recommendation.
  9. The best approach is that long term investment decisions should be taken through fundamental analysis and short-term decisions should be taken through technical analysis. Even when fundamental analysis is being used, technical analysis will help in the timing of the investment.
  10. Earnings per Share (EPS) = Net profit after tax ÷ No. of Equity Shares Outstanding and Price to Earnings Ratio (P/E) = Market Price per Share ÷ Earnings per share hence Market price per share =PE Ratio x EPS
  11. Book Value per Share = Net Worth ÷ No. of Equity Shares Outstanding and Price to Book Value = Market Price per share ÷ Book Value per share
  12. Dividend Yield = Dividend per Share ÷ Market Price per Share
  13. A company will pay high dividend yield when there is a high dividend payout and/or the market price of share is low.
  14. There are two investment styles- Growth and Value. Under Growth Style, Investment is made in stocks whose price is expected to grow faster than the market whereas in Value style-investment is made in those stocks which analysts believe are priced lower than their intrinsic value.
  15. There are two approaches to portfolio building – 1. Top down approach 2. Bottom up approach. To analyse the factors that affect earnings of a company, analysts use EIC Framework. EIC stands for economy, industry and company specific factors.
  16. In Top Down Approach, the analyst first analyses the economic factors, then he shortlists the industries that are suitable for investment and finally, within the shortlisted industry, attempt is made to find the companies most suitable for investment.
  17. In Bottom Up Approach, first the companies are analyzed, then industry, and then the macro-economic
  18. The debt securities provide returns in the forms of Interest and Capital gains in value of security.
  19. The increase in the yield in the market will Decrease their value of existing debt securities.
  20. Money Market Securities mean Debt securities that mature within one year.
  21. various types of debt securities are Gilt or G-Sec or Government Security, Treasury Bill (Issued by RBI), Certificate of Deposit( issued by Banks/Financial Institutions),Commercial Paper/Bond/Debenture(Issued by Companies)
  22. The difference between the yield of Gilt and any other non-Government security for the same tenor is termed as the credit spread.
  23. The possibility of a non-Government issuer of a security failing to repay its obligation (defaulting on debt security) is called credit risk. Higher the credit risk, higher the yield.
  24. The credit risk is measured by companies called Credit Rating Agencies like CRISIL, ICRA, CARE, Fitch.
  25. Each agency has its own rating system and the rating is awarded to a security in the form of symbols E.g. when CRISIL gives “AAA” to a security, it means the security falls in the safest bracket possible. If “AA” is given then it means that this security is less safe than “AAA” securities.
  26. GILT Which is issued by the Government as a debt security has lowest default risk
  27. Higher the credit risk, higher the yield.
  28. Credit Rating is the most important factor that should concern the investor when he invests in debt security.
  29. Fixed Rate Security is the one where the interest rate on a security is fixed e.g. 6%. The security will continue to pay the same interest (i.e. @ 6% in our example) throughout its tenor.
  30. Floating rate security is linked to the interest rate of some other security in the market e.g. Gilt. So, a floating rate security (floater) will specify its interest rate as follows – Example – 5-year Gilt + 3 percent. This security will pay the interest equal to whatever the interest rate of the Gilt is at that time plus 3 percent.
  31. Longer the tenor of the security, higher will be the volatility in the market price / valuation of the security.
  32. Debt securities which have a longer tenor carry a higher possibility that interest rate will change before they mature.
  33. Modified duration is used to measure how much will the value of a debt security fluctuate in response to change in interest rate. Higher the modified duration of a security, greater the possibility of fluctuation in its value.
  34. If fund manager thinks that the interest rates will rise, he should move higher proportion of portfolio of the scheme to floating rate debt securities or fixed rate debt securities of short tenor
  35. If fund manager thinks that the interest rates will fall, his portfolio should include higher proportion of fixed rate debt securities of long tenor.
  36. In debt mutual fund schemes, fund manager’s decision on the likely interest rate scenario will determine the returns of the scheme.
  37. The value of Gold is affected by International Price of gold, Currency Exchange Rate and Import Duty.
  38. Gold is considered a very safe asset hence when there is political or economic uncertaintydemand for gold rises, and its price increases.
  39. Factors which affect the returns from real estate are certainty in Economy, Infrastructure, Interest Rate (When interest rates fall, real estate looks more favourable) and Nature of real estate (Whether the real estate is commercial, residential, industrial etc.).
  40. The formula of Simple Return is – (Later Value – Initial Value) × 100 ÷ Initial Value
  41. The formula of Annualized Return is Simple Return × 12 ÷ Period of Simple Return (in months).
  42. If an investor wants to compare returns from two schemes, where the investment period was different and less than one year, he should compare the Annualized return.
  43. Compounding- If an investment has been made for more than one year then the returns cannot be calculated using annualized return hence compounded returns are calculated with the Formula-
(LV 1÷n ÷ IV) – 1 LV – Later Value IV – Initial Value n – Period (in years)
  1. SEBI prescribes Compounded Annual Growth Rate (CAGR)as the technique to consider when – dividend is being paid and compounding is being taken into account. It assumes that the dividend would be re-invested in the same scheme at the ex-dividend NAV.
  2. Formula for calculating CAGR is
(LV 1÷n ÷ IV) – 1
  1. Factors other than returns that should be evaluated by an investor are Volatility in Returns, Asset Allocation of the scheme, how well does the scheme follow its stated asset allocation, Cash level of the scheme, Diversification across stocks and sectors, Credit Rating of debt, Duration of debt and Expense Ratio of the scheme.
  2. Mutual funds cannot guarantee returns except on only one condition – it is an assured returns scheme. This scheme requires a guarantor who will pay investors’ money, if the scheme does not earn assured returns.
  3. Scheme returns can be different from investor returns.
  4. Exit load can decrease investor return. Exit load is levied if the client redeems his investment before the end of a pre-specified period.
  5. Investor returns might also be different because of additional investment and redemption of a portion of the investment.

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