MUTUAL FUNDS KNOWLEDGE SERIES

Returns, Risks & Investing in Mutual Funds

Table of Contents

Returns in Mutual Funds

Types of Returns in Mutual Funds

Calculating Returns in Mutual Funds

Risk in Mutual Funds

Measuring Mutual Fund Risk

Ways to invest in/redeem from Mutual Funds

Parameters for Selecting Mutual Funds

Riskometer in mutual funds

Returns in Mutual Funds

Returns are the key indicators of the investment performance in mutual fund and are calculated from the historical NAVs. By comparing returns, the investor will get the fair idea about the fund whether it is suitable for achieving his financial goals

Types of Returns in Mutual Funds

• Unit holders earn dividends on mutual funds, which are declared from distributable income

Dividends

• Investors get capital gains on mutual funds. If the fund sells securities that have appreciated in value, it earns capital gains. Most funds distribute these capital gains also to investors

Capital Gains

Calculating Returns in Mutual Funds

Point to Point

Returns• Returns are

calculated by considering the NAVs at two points in time-entry date and exit date

• Most common method to interpret the investment performance

Rolling Return

• Rolling returns measure the consistency of the returns of the funds

• Returns are calculated on a continuous basis for each defined interval

XIRR• XIRR is an excel

calculation method which is used to measure the SIP performance of the schemes

Risk in Mutual Funds

• Investments in shares, debentures and deposits are not always risk-free. • A very important risk involved in mutual fund investments is the market risk. When

the market is in doldrums, most of the equity funds will also experience a downturn• Some of the other risks include Industry risk, Credit Risk, Inflation risk, Interest rate

risk, Fund Manager Risk, Country risk, Currency Risk, etc

Measuring Mutual Fund Risk

Standard Deviation• Measures the fluctuation in periodic returns of a

scheme in relation to its own average returnBeta• Measures compares a mutual fund's volatility with

that of a benchmarkSharpe Ratio• Quantifies how a fund performs relative to the risk it

takesAlpha• Measures the performance of the fund manager on

generating excess returns than the benchmark

Ways to invest in/redeem from Mutual Funds

Systematic Investment

Plans

• In SIP, one can invest a fixed sum of money in a particular scheme at predetermined periodical intervals of time

Systematic Withdrawal

Plans

• SWPs can be used to regularly disinvest either fixed amounts or some or all of the appreciation that is generated from your investment in the scheme

Systematic Transfer

Plans

• Through STPs you can transfer fixed amounts of money at regular intervals (monthly or quarterly) from one scheme to another

Parameters for Selecting Mutual Funds

Investment Objective Risk profile

Fund performance

& managemen

t

Fund size

Fund costs

Riskometer in Mutual Funds

The SEBI introduced a pictorial meter named "Riskometer" and this meter would appropriately depict the level of risk in any specific scheme. The mutual funds would need to mention the risk level of a scheme through that Riskometer

For any further queries, visit www.hdfcsec.com