HOW TO INVEST IN MUTUAL FUNDS?

By Neha Varma 07MBI062

OPTIMAL PORTFOLIO THEORY

OPTIMAL PORTFOLIO THEORY

Relationship between portfolio returns and risk is the EFFICIENT FRONTIER. Plotting return and risk indicated by volatility, which is represented by standard deviation. According to the modern portfolio theory, funds lying on the curve yield maximum return possible given the amount of volatility.

 Step One : Identify your investment needs

What are my investment objectives?
Regular income, Buy home, wedding

HOW TO INVEST IN MUTUAL FUNDS??

How much risk am I willing to take?

Min Risk, Max Risk

What are my cash flow requirements?

Regular Cash flow, Lump Sum Amount

Step Two : Select ideal mix of schemes

Investor may invest in one mutual fund or a combination of them

 Step Three: Choose the Right Mutual Fund

Track record of performance in comparison with other funds Conduct Performance Analysis

Step four : Invest regularly Step five : Keep taxes in mind Step Six : Start early

PERFORMANCE ANALYSIS OF MUTUAL FUND

There are various indicators of the investment risk and return that can apply to stocks, bonds and mutual fund portfolios.
Standard Deviation Jensen Alpha Sharpe Ratio Treynor Ratio

Standard Deviation
Measures the volatility of the returns of a mutual fund scheme over a particular period. How much the fund's return can deviate from the historical mean return of the scheme.

SHARPE RATIO
This measures how well the fund has performed when compared to the risk taken by it It is the excess return over risk-free return (usually return from treasury bills or government securities) divided by the standard deviation. The higher the Sharpe Ratio, the better the fund has performed in proportion to the risk taken by it. A negative Sharpe ratio indicates

that a risk-less asset would perform better than the security being analyzed.

TREYNOR RATIO
measurement of a portfolios return earned in excess of what would be earned on a risk-free investment used to calculate returns over and above what would be generated by a risk-free investment The higher the Treynor , the better is the performance of the portfolio or stock being analyzed also known as the "reward-to-volatility ratio"

JENSENS ALPHA
The simplest definition of an alpha would be the excess return of a fund compared to its benchmark index. HDFC Infra having the highest Alpha - has outperformed the benchmark by 4.04% which is better than all other funds, most of them being negative return.

By Neha Varma 07MBI062