Ch.10 · Risk, Return and Performance of Funds

Risk Measures and Ratios

50 practice questions on this topic

What is 'Total Return' in mutual fund performance and how does it differ from NAV appreciation?

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EXPLANATION

Total return includes both NAV appreciation and any IDCW (dividends) paid to investors, assuming reinvestment of dividends. For growth option investors, total return equals NAV appreciation since all income is retained in the scheme. For IDCW investors, total return adds reinvested distributions to NAV changes. The growth option's NAV inherently reflects total return.

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What does 'since inception' return for a mutual fund scheme tell an investor?

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EXPLANATION

Since inception return is the CAGR from the scheme's launch date to the present. It shows the scheme's long-term track record but must be interpreted carefully — a scheme launched during a market low will show inflated since-inception returns, and vice versa. It should be compared with the benchmark's since-inception return for context.

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What is 'standard deviation' as a measure of risk in mutual funds?

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EXPLANATION

Standard deviation measures how much a scheme's returns vary from its average return over a period. A higher standard deviation means returns are more volatile (spread widely above and below the average), indicating higher risk. For example, a fund with 15% average return and 20% standard deviation has experienced returns between -5% and 35% frequently.

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What is 'loss aversion' bias and how does it affect mutual fund investor behaviour?

A.Investors' reluctance to invest in funds with any historical losses

B.The psychological tendency to feel losses more acutely than equivalent gains — causing investors to hold losing investments too long and sell winners too early

C.The legal term for AMCs avoiding loss-making scheme launches

D.SEBI's policy of protecting investors from schemes likely to make losses

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What is 'R-squared' (R²) in mutual fund analysis?

A.The rating squared — a mathematical amplification of fund star ratings

B.A measure of how much of a fund's performance can be explained by its benchmark — ranges from 0 to 1 (or 0% to 100%)

C.The ratio of return to risk in SEBI's performance assessment

D.The square of the rolling return standard deviation

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What is 'weighted average market capitalisation' of a mutual fund portfolio?

A.The total market capitalisation of the AMC company

B.The average market cap of the portfolio's stocks weighted by their portfolio allocation — indicates whether the fund is large, mid, or small cap oriented

C.The maximum market cap of stocks permitted in the portfolio

D.The market cap of the fund itself based on AUM

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What is CAGR (Compound Annual Growth Rate) and when is it used?

A.A method of measuring daily NAV changes in mutual funds

B.The year-on-year growth rate that, if compounded, would produce the same result as the actual investment — used for returns over periods greater than 1 year

C.The average of annual returns over a period

D.The return guaranteed by the AMC at a fixed rate per year

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What is 'liquidity risk' in mutual funds?

A.The risk that investors cannot withdraw money from a liquid fund

B.The risk that a security in the portfolio cannot be sold quickly at or near its fair value

C.The risk that the AMC will run out of cash to pay redemptions

D.The risk of NAV being incorrectly calculated

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A mutual fund has a beta of 0.8. What does this mean?

A.The fund will generate 0.8% return for every 1% market rise

B.The fund is 20% less volatile than its benchmark — it rises and falls less than the market

C.80% of the fund's portfolio is invested in the benchmark stocks

D.The fund has underperformed the market by 20%

Q10

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What is 'free cash flow' (FCF) and why is it an important indicator for equity fund managers?

A.Cash flow earned by investors after deducting exit load and tax

B.Cash remaining after a company funds its operations and capital expenditures — a key indicator of financial health and ability to pay dividends or buy back shares

C.The portion of the scheme portfolio held in cash equivalents

D.The tax-free cash returns from ELSS investments

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