Risk in Fund

Variance measures the fluctuation in periodic returns of a scheme, as compared to its own average
return.

var(range of cells where the periodic returns are calculated)

Standard Deviation too measures the fluctuation in periodic returns of a scheme in

relation to its own average return.

stdev(range of cells where the periodic returns are calculated)

A high standard deviation indicates greater volatility in the returns and greater risk.

Beta

based on the Capital Asset Pricing Model (CAPM),

states that there are two kinds of

risk in investing in equities – systematic risk and non-systematic risk.

Systematic risk is integral to investing in the market

risks arising
out of inflation, interest rates, political risks etc.

Non-systematic risk
risk arising out of change in
management, product obsolescence etc.

in an equity portfolio can be

minimized by diversification across companies

This systematic risk is measured by its Beta.

Beta measures the fluctuation in periodic returns in a scheme, as compared to fluctuation in periodic
returns of a diversified stock index (representing the market) over the same period.

The diversified stock index, by definition, has a Beta of 1.

Companies or schemes, whose beta is

more than 1, are seen as more risky than the market. Beta less than 1 is indicative of a company or
scheme that is less risky than the market. An investment with a beta of 0.8 will move 8 percent when
markets move by 10 percent. This applies to increase as well as fall in values. An investment with a beta
of 1.2 will move by 12 percent both on the upside and downside when markets move (up/ down) by 10
percent
Modified Duration and Weighted Average Maturity
Modified duration measures the sensitivity of value of a debt security to changes in interest rates.
A professional investor would rely on modified duration as a better measure of sensitivity to interest
rate changes
Weighted average maturity of debt securities in a scheme’s portfolio is indicative of the
interest rate sensitivity of a scheme.

Credit Rating
credit or default risk in a scheme.
Government securities do
not have a credit risk. Similarly, cash and cash equivalents do not have a credit risk. Investments in
corporate issuances carry credit risk. Higher the credit rating, lower is the default risk

Benchmarks and Performance

An approach to assess the performance is to pre-define a comparable – a benchmark –
against which the scheme can be compared.
It should be in sync with (a) the
investment objective of the scheme (i.e. the securities or variables that go into the calculation of
the benchmark should be representative of the kind of portfolio implicit in the scheme’s
investment objective); (b) asset allocation pattern; and (c) investment strategy of the scheme
Most benchmarks are constructed by stock exchanges, credit rating
agencies, securities research houses or financial publications.

For an index fund

That index would then be the benchmark for the scheme.
Mutual fund schemes are required to disclose the name(s) of benchmark index/indices with which
the AMCs and trustees would compare the performance of the scheme
With effect from February 1, 2018, the mutual fund schemes are benchmarked to the Total Return
variant of an Index (TRI).
Total Return variant of an Index (TRI).
The Total Return variant of an index takes into account all dividends/interest payments that are
generated from the basket of constituents that make up the index in
addition to the capital gains.
Benchmarks for equity schemes
The following aspects of the investment objective (scheme type, choice of investment universe,
portfolio concentration, underlying exposure) drive the choice of benchmark in equity schemes:
A sector fund
sectoral
/ thematic funds select sectoral / thematic indices such as S&P BSE Bankex, S&P BSE FMCG Index,
Nifty Infrastructure Index and Nifty Energy Index.
Diversified funds
diversified funds need to have a diversified index as a benchmark index, like S&P BSE
Sensex or Nifty 50 or S&P BSE 200 or S&P BSE 500 or Nifty 100 or Nifty 500 as a benchmark;
Choice of Portfolio Concentration
1. Some diversified equity funds prefer to have fewer stocks in their portfolio. For such schemes,
appropriate benchmarks are narrow indices such as S&P BSE Sensex and Nifty 50, which are
calculated based on fewer stocks.
2. Schemes that propose to invest in more number of companies
will prefer broader indices like S&P BSE 100 / Nifty 100 (based on 100 stocks), S&P BSE 200 / Nifty
200 (based on 200 stocks) and S&P BSE 500 / Nifty 500 (based on 500 stocks).
Choice of Investment Universe
1. Invest in large companies-Large cap
S&P BSE Sensex and Nifty 50 indices are calculated based on 30 (in
the case of Sensex) / 50 (in the case of Nifty) large companies.

2. Midcap stocks
mid cap indices such as Nifty Midcap 50 or S&P
BSE Midcap are considered as better benchmarks.

3. Small cap stocks

Benchmarks for Debt Schemes

CRISIL, ICICI Securities and NSE havedeveloped various such indices.

NSE’s MIBOR (Mumbai Inter-Bank Offered Rate) is based on short term money market
NSE similarly has indices for the Government Se
ICICI Securities’ Sovereign Bond Index (I-Bex) is again calculated based on government securities.curities
Market.
o Si-Bex (1 to 3 years),
o Mi-Bex (3 to 7 years) and
o Li-Bex (more than 7 years