NISM Series V-A | Chapter 10: Risk, Return and Performance | Study Notes

The Core Truth: Risks are Passed On A mutual fund is a pass-through vehicle. This means all investment risks—from market fluctuations to defaults—are ultimately borne by you, the investor, because you are the owner of the fund.

1. Types of Investment Risks

  • Systematic Risk: Risks that impact the entire economy (e.g., political changes, global recessions). You cannot avoid these through diversification.

  • Unsystematic Risk (Company-Specific): Risks unique to a specific firm. These can be reduced by holding a diversified portfolio.

  • Inflation Risk: The risk that rising prices will erode your real purchasing power.

  • Liquidity Risk: The danger of not being able to sell an asset quickly at a fair price (common in real estate or thinly traded bonds).

  • Interest Rate Risk: The inverse relationship where rising interest rates cause bond prices to fall, and vice versa.

2. Equity Performance Drivers

  • Fundamental Analysis: Studying a firm's financial statements to find high-potential, low-risk stocks.

  • Technical Analysis: Studying past price trends and volumes to predict future movements.

  • Key Ratios: * P/E Ratio: Market Price ÷ Earnings Per Share. Shows how much investors pay for each rupee of profit.

    • PEG Ratio: PE ÷ Earnings Growth. A ratio less than 1 suggests a stock is undervalued.

    • Dividend Yield: Dividend Per Share ÷ Market Price. A measure of the actual cash payout percentage.

3. Portfolio Styles: Growth vs. Value

  • Growth Style: Investing in companies expected to grow much faster than the market.

  • Value Style: Picking "cheap" stocks priced lower than their intrinsic value, hoping the market will eventually realize their worth.

  • Top-Down vs. Bottom-Up: Top-down starts with the economy, then industry, then stock. Bottom-up starts with the specific company first.

4. Measuring Risk (The Math Section)

  • Standard Deviation: Measures total risk. It shows how much returns fluctuate around the average. High deviation = High volatility.

  • Beta: Measures systematic risk compared to the market index. A Beta of 1.2 means the fund is 20% more volatile than the market.

  • Modified Duration: Measures a debt fund's sensitivity to interest rate changes. Higher duration means higher risk if rates rise.

5. Calculating Returns

  • Simple Return: (Sale Value - Cost Value) / Cost Value.

  • CAGR (Compounded Annual Growth Rate): The best measure for long-term performance as it accounts for the "time" factor of your investment.

Dhaval Visariya

AMFI Registered Distributor (ARN-327925) | Software Developer & Finance Enthusiast

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Disclaimer: I am an AMFI Registered Mutual Fund Distributor. Views expressed here are for educational purposes. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
📧 Contact: info.apollofinancialservices@gmail.com

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