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Wealth Management Assignment 9: Guest Lecture Summary

The document discusses myths and truths about mutual funds, benefits of mutual funds like diversification and professional management, reasons for investing early like power of compounding, risks of mutual funds like market and interest rate risk, and indicators for measuring mutual fund risk and performance like standard deviation, beta, Jensen's alpha, Sharpe ratio, and Treynor ratio. Investors are advised to use these ratios to evaluate risk-adjusted performance and select funds with higher ratios.

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Darshan Shah
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65 views2 pages

Wealth Management Assignment 9: Guest Lecture Summary

The document discusses myths and truths about mutual funds, benefits of mutual funds like diversification and professional management, reasons for investing early like power of compounding, risks of mutual funds like market and interest rate risk, and indicators for measuring mutual fund risk and performance like standard deviation, beta, Jensen's alpha, Sharpe ratio, and Treynor ratio. Investors are advised to use these ratios to evaluate risk-adjusted performance and select funds with higher ratios.

Uploaded by

Darshan Shah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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WEALTH MANAGEMENT ASSIGNMENT 9

Guest Lecture Summary


1. Mutual Funds Myths and Truths

Myths Truths
They are for Experts Experts suggest, guide or invest on our
behalf
Same as direct equity It ranges from equity to debt
You need a large amount of money to Investments can be as low as 1000 or 500
invest
They are only for long term Some of the debt schemes can be od 1
day to a few weeks
More funds, better diversification Diversification depends on your
objectives

2. Benefits of Mutual Funds


 Diversification
 Professional Management
 Transparency
 Rupee cost Averaging
 Regulations
 Liquidity
3. 5 reasons you should invest when you are still young:
 You can start small
 Power of compounding
 Improve your spending habits
 Accumulate a large corpus amount
 Higher risk taking ability
4. Risks Associated with mutual funds
 Market risk
 Industry risk
 Country risk
 Currency risk
 Interest rate risk
 Credit risk
 Principal risk
5. Indicators for measuring mutual funds Risk
 Standard Deviation
 Beta
 R-Squared
 Duration

6. Jensen’s Alpha: The ratio is the performance ratio which evaluates the returns of the
fund over its index. This helps investors examine the risk adjusted performance of the
portfolio and determine risk reward profile of mutual fund.

Jensen’s Alpha= [(Fund return-Risk free return)-(funds beta)*(Index return-risk


free return)]

A positive alpha represents the outperformance of the fund vice versa negative alpha
represents the underperformance.

7. Sharpe Ratio: Sharpe ratio evaluates the performance of the fund with the risk taken by
it. Therefore, the Sharpe ratio is also known as risk to variability ratio. It is nothing but
the excess returns over the risk-free returns divided by the standard deviation.

Sharpe Ratio= (Total Returns-Risk free rate)/Standard deviation of the fund

Greater the Sharpe ratio of the fund represents the higher risk adjusted performance. So
the investors are advised to pick the investment with higher Sharpe ratio.

8. Treynor ratio: Treynor ratio evaluates the additional returns generated by a fund over
and above the risk-free returns. The ratio is quite similar to the sharp ratio but it considers
the Beta as volatility measure.

Treynor Ratio = Portfolio Return-Risk free rate/portfolio’s Beta

Higher Treynor ratio suggests the better performance of the fund. So investor are advised
to pick the investment with treynor ratio

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